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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-11778
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ACE LIMITED
(Exact name of registrant as specified in its charter)
Cayman Islands 98-0091805
(Jurisdiction of (I.R.S. Employer
Incorporation) Identification No.)
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM 08
Bermuda
(441) 295-5200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Each Class on which Registered
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Ordinary Shares, par value $0.041666667 per share New York Stock Exchange
ACE Capital Trust I 8.875 percent Trust
Originated Preferred Securities mature 2029 New York Stock Exchange
Capital Re LLC 7.65 percent Trust Preferred
Securities of Subsidiary Trust (and registrant's
guaranty with respect thereto) mature 2044 New York Stock Exchange
ACE Limited 8.25 percent FELINE PRIDES mature 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of February 28, 2002, there were 260,988,375 Ordinary Shares par value
$0.041666667 of the Registrant outstanding and the aggregate market value of
voting stock held by non-affiliates at such date was approximately $11.4
billion. For the purposes of this computation, shares held by directors and
officers of the registrant have been excluded. Such exclusion is not intended,
nor shall it be deemed, to be an admission that such persons are affiliates of
the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of registrant's definitive proxy statement relating to its
Annual General Meeting of Shareholders scheduled to be held on May 16, 2002,
are incorporated by reference to Part III of this report and certain portions
of the 2001 Annual Report to Shareholders are incorporated by reference into
Parts II and IV of this report.
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ACE LIMITED
INDEX TO 10-K
Page
----
PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 25
Item 3. Legal Proceedings.................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.................................. 26
PART II
Item 5. Market for the Registrant's Ordinary Shares and Related Stockholder Matters.......... 28
Item 6. Selected Financial Data.............................................................. 29
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 29
Item 7A Quantitative and Qualitative Disclosures about Market Risk........................... 29
Item 8. Financial Statements and Supplementary Data.......................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 29
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 30
Item 11. Executive Compensation............................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 30
Item 13. Certain Relationships and Related Transactions....................................... 30
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.................... 31
PART I
Item 1. Business
Safe Harbor Disclosure
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Any written or oral statements made by
or on behalf of the Company may include forward-looking statements, which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain
uncertainties and other factors that could cause actual results to differ
materially from such statements. These uncertainties and other factors (which
are described in more detail elsewhere herein and in other documents filed by
the Company with the Securities and Exchange Commission) include, but are not
limited to:
(i) the impact of the September 11th tragedy and its aftermath on ACE's
insureds and reinsureds, on the insurance and reinsurance industry and
on the economy in general and uncertainties relating to governmental
responses to the tragedy,
(ii) the ability to collect reinsurance recoverables and any delays with
respect thereto,
(iii) the occurrence of catastrophic events or other insured or reinsured
events with a frequency or severity exceeding the Company's estimates,
(iv) the uncertainties of the loss reserving process, including the
difficulties associated with assessing environmental damage and latent
injuries,
(v) uncertainties relating to government and regulatory policies such as
subjecting the Company to insurance regulation or taxation in
additional jurisdictions or amending, revoking or enacting any laws,
regulations or treaties affecting the Company's current operations and
other legal, regulatory and legislative developments,
(vi) the actual amount of new and renewal business and market acceptance of
the Company's products,
(vii) risks associated with the introduction of new products and services,
(viii) the competitive environment in which the Company operates, related
trends and associated pricing pressures, market perception, and
developments,
(ix) actions that rating agencies may take from time to time,
(x) developments in global financial markets, which could affect the
Company's investment portfolio and financing plans,
(xi) changing rates of inflation and other economic conditions,
(xii) losses due to foreign currency exchange rate fluctuations,
(xiii) loss of the services of any of the Company's executive officers,
without suitable replacements being recruited in a reasonable time
frame,
(xiv) the ability of technology to perform as anticipated,
(xv) the amount of dividends received from subsidiaries, and,
(xvi) management's response to these factors.
The words "believe", "anticipate", "estimate", "project", "should", "plan",
"expect", "intend", "hope", "will likely result" or "will continue" and
variations thereof and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company undertakes no
obligation to publicly update or review any forward-looking statements, whether
as a result of new information, future events or otherwise.
1
General
ACE Limited ("ACE") is a holding company incorporated with limited liability
under the Cayman Islands Companies Law. ACE maintains its business office in
Bermuda. ACE, through its various subsidiaries, provides a broad range of
insurance and reinsurance products to insureds worldwide through operations in
the United States and almost 50 other countries. In addition, ACE, through ACE
Global Markets, provides funds at Lloyd's, primarily in the form of letters of
credit, to support underwriting capacity for Lloyd's syndicates managed by
Lloyd's managing agencies which are wholly owned subsidiaries of ACE. At
December 31, 2001, the Company had total assets of $37.1 billion and
shareholders' equity of $6.1 billion. The Company derives its revenue
principally from premiums, fees and investment income. ACE operates through six
business segments: ACE Bermuda, ACE Global Markets, ACE Global Reinsurance
(includes both property and casualty reinsurance business and life reinsurance
business), ACE USA, ACE International and ACE Financial Services. Unless the
context otherwise indicates, the term "Company" refers to one or more of ACE
and its consolidated subsidiaries.
The Company's long-term business strategy focuses on achieving underwriting
profits and providing value to its clients and shareholders through the
utilization of its substantial capital base within the insurance and
reinsurance markets. As part of this strategy, the Company has continued to
review and expand, where appropriate its product portfolio. In addition, the
Company has made a number of strategic acquisitions and entered into strategic
alliances to diversify its product lines, both geographically and by product
type.
On July 2, 1999, the Company acquired the international and domestic
property and casualty businesses of CIGNA Corporation ("CIGNA"). Under the
terms of the agreement the Company, through a U.S. holding company, ACE INA
Holdings Inc. ("ACE INA"), acquired CIGNA's domestic property and casualty
insurance operations including its run-off business and also its international
property and casualty insurance companies and branches, including most of the
accident and health business written through those companies. In connection
with the acquisition CIGNA agreed to provide a guarantee to ACE to indemnify
against unanticipated increases in recorded reserves for losses and loss
adjustment expenses of certain subsidiaries being acquired by ACE. CIGNA had
the option to replace its guarantee with reinsurance obtained from a mutually
agreed upon third party reinsurer. CIGNA exercised this option and replaced its
guarantee with reinsurance by directing certain subsidiaries being acquired to
transfer $1.25 billion of investments to National Indemnity Company, a
subsidiary of Berkshire Hathaway Inc., for aggregate coverage of $2.5 billion.
On December 30, 1999, the Company acquired Capital Re Corporation. Following
the acquisition, Capital Re Corporation was renamed ACE Financial Services.
This transaction added significant depth and expertise to ACE's financial
reinsurance capabilities and represents a strategic complement to the Company's
diversified portfolio by fully establishing ACE as a key financial guaranty
reinsurer.
Information About Segments
Presentation: The business segments presented in this document have been
determined under the Statement of Financial Accounting Standard ("FAS") No 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). These segments are structured on a geographic basis. Following recent
management changes, the Company is reassessing the manner in which it presents
its segments.
Competition: Competitive forces in the international property and casualty
insurance and reinsurance business are substantial. Results are a function of
underwriting and investment performance, direct costs associated with the
delivery of insurance products, including the costs of regulation, the
frequency and severity of both natural and man-made disasters, as well as
inflation (actual, social and judicial), which impact loss costs. Decisions
made by insurers concerning their mix of business (offering certain types of
coverage but declining to write other types), their methods of operations and
the quality and allocation of their assets (including any
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reinsurance recoverable balances) will all affect their competitive position.
The relative size and reputation of insurers may influence purchasing decisions
of present and prospective customers and will contribute to both geographic and
industrial sector market penetrations. Oversupply of available capital has
historically had the effect of encouraging competition and depressing prices.
The Company's competitive position in the property and casualty insurance
industry is influenced by all of these factors. Individual competitive
information by segment is presented in the segment presentations.
Segment Analysis of Gross Premiums Written: The following table sets forth
an analysis of gross premiums written by segment for the years ended December
31, 2001, 2000 and 1999:
Years ended December 31
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2001 2000 1999
Gross Premiums Gross Premiums Gross Premiums
Written Percent Written Percent Written Percent
-------------- ------- -------------- ------- -------------- -------
(in millions of U.S. dollars)
ACE Bermuda.................. $ 1,145 11% $ 598 8% $ 553 14%
ACE Global Markets........... 1,300 13% 1,064 14% 635 16%
ACE Global Reinsurance....... 740 7% 191 2% 182 5%
ACE USA(1)................... 4,428 44% 3,380 45% 1,567 41%
ACE International(2)......... 2,260 22% 2,027 27% 932 24%
ACE Financial Services(3).... 292 3% 327 4% -- --
------- --- ------ --- ------ ---
$10,165 100% $7,587 100% $3,869 100%
======= === ====== === ====== ===
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(1) Gross premiums written for fiscal 1999 include premiums from ACE US
Holdings and six months of premium from the domestic operations of ACE INA
acquired on July 2, 1999.
(2) ACE International's gross premiums written for 1999 reflect premiums from
July 2, 1999, the date of acquisition.
(3) As ACE Financial Services was acquired on December 30, 1999, no statement
of operations information for ACE Financial Services is reflected in the
ACE results for the year ended December 31, 1999.
Analysis of Gross Premiums Written by Geographic Region: The following
table sets forth an analysis of gross premiums written by geographic region for
the years ended December 31, 2001, 2000 and 1999:
Australia
North & New Asia Latin
America Europe Zealand Pacific America Other Total
------- ------ --------- ------- ------- ----- -----
2001......................... 63% 21% 2% 9% 5% -- 100%
2000......................... 63% 20% 7% 5% 4% 1% 100%
1999......................... 59% 18% 4% 9% 3% 7% 100%
ACE Bermuda
Principal Business
ACE Bermuda provides property and casualty insurance and reinsurance
coverage including: excess liability, professional lines, financial solutions,
satellite, excess property and political risk. The nature of coverage provided
by these lines is generally expected to result in low frequency but high
severity of individual losses. The reinsurance market is an integral part of
the risk management strategy of ACE Bermuda and coverage has been secured on
most major lines of business.
The financial solutions division, ACE Financial Solutions, ("ACE FSI") at
December 31, 2001 accounted for approximately 75 percent of ACE Bermuda's gross
premiums written. This group provides a variety of non-traditional insurance
and finance-related solutions that conventional insurance does not address.
These solutions are individually tailored to meet the needs of the insured and
have the following common characteristics: multi-
3
year contract terms; broad coverage that includes stable capacity and pricing
for the insured; insured participation in the results of their own loss
experience; and aggregate limits.
ACE FSI also enters into loss portfolio transfer contracts from time to
time. These contracts, which meet the established criteria for reinsurance
accounting, are recorded in the statement of operations when written and
generally result in large one-time written and earned premiums with comparable
incurred losses.
Sovereign Risk Insurance Ltd., ACE Bermuda's joint venture in the political
risk area, provides insurance to financial institutions and major corporations,
and reinsurance to multilateral development banks and national export agencies.
Marketing and Underwriting
ACE Bermuda emphasizes quality of underwriting rather than volume of
business to obtain a suitable spread of risk. This enables the company to
operate with a relatively small number of employees and, together with the
reduced costs of operating in favorable regulatory and tax environments,
results in a significantly lower administrative expense ratio relative to other
companies in the industry.
Policyholders are generally obtained through non-U.S. insurance brokers who
typically receive a brokerage commission on any business accepted and bound by
the company. All policy applications to ACE Bermuda (both for renewals and new
policies) are subject to underwriting and acceptance by ACE Bermuda in its
Bermuda office. A substantial number of policyholders meet with the company
outside of the United States each year to discuss their insurance coverage. ACE
Bermuda believes that conducting its operations through its offices in Bermuda
has not materially or adversely affected its underwriting and marketing
activities to date.
ACE Bermuda receives business from approximately 38 brokers of which 2
produced approximately 41 percent of the company's business in 2001. The
following table sets forth the percentage of the company's insurance business
placed through each broker and its affiliates placing more than 10 percent of
the company's business.
Years Ended
December 31
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Name 2001 2000 1999
---- ---- ---- ----
Benfield Group Plc(1)............................ 22% 4% 1%
Aon Corporation.................................. 19% 33% 23%
Marsh and McLennan Companies, Inc.(2)............ 8% 26% 22%
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(1) During the year, the Benfield Group acquired EW Blanch. The percentages
shown in the table reflect the business placed by the combined entities and
their affiliates.
(2) In 1999, Marsh and McLennan Companies, Inc. acquired Sedgwick. The
percentages shown in the table reflect the business placed by the combined
entities and their affiliates.
Competition
ACE Bermuda operates in a highly competitive worldwide market and competes
with most major U.S. and non-U.S. insurers, which may differ across product
lines. ACE Bermuda's key marketing advantage is its experienced underwriting
staff, its strong capital base, and its ability to market and cross market a
number of insurance products to its existing and potential client base. The
ability to be flexible in providing contracts, which extend coverages for
periods in excess of one year, also enhances its ability to compete in
worldwide insurance markets.
4
Claims Administration
Claims arising under policies issued by ACE Bermuda are managed by ACE
Bermuda's claims department. This department maintains a claims database into
which all notices of loss are entered. If the claims department determines that
a loss is of sufficient severity, it makes a further inquiry of the facts
surrounding the loss and, if deemed necessary, retains outside claims counsel
to monitor claims. Based upon its evaluation of the claim, the claims
department may recommend that a case reserve in a specified amount is
established or that all or part of a claim is paid. The claims department
monitors all claims and, where appropriate, will recommend the establishment of
a new case reserve or the increase or decrease of an existing case reserve with
respect to a claim.
With the exception of certain aviation coverages bound before August 1,
2000, ACE Bermuda does not undertake to defend its insureds. It has, in certain
instances, provided advice to insureds with respect to the management of
claims. ACE Bermuda believes that its experience in resolving large claims and
its proactive approach to claims management has contributed to the favorable
resolution of several cases. ACE Bermuda does not do business in the U.S.,
therefore it must often rely on U.S. counsel to assist it in evaluating
liability and damages confronting its insureds in the U.S. ACE Bermuda believes
that the procedures it follows have not materially or adversely affected its
ability to identify, review or settle claims.
ACE Global Markets
Principal Business
ACE Global Markets primarily encompasses the Company's operation in the
Lloyd's market, including for segment purposes, the Lloyd's operations owned by
ACE Financial Services. ACE Global Markets provides funds at Lloyd's to support
underwriting by the ACE managed Lloyd's syndicate. Following the mergers of the
ACE managed syndicates for the 2000 year of account, these syndicates comprised
Syndicate 2488, the largest syndicate in Lloyd's, and Syndicate 1171, a life
syndicate acquired as part of the ACE Financial Services acquisition. Syndicate
1171 ceased underwriting as of December 31, 2000. Syndicate 2488, provides
property and casualty insurance and reinsurance as well as accident and health
coverage on a worldwide basis through the Lloyd's worldwide licenses. The
property and casualty business includes aviation, marine, property,
professional lines, inward reinsurance and political risk. The 2488 syndicate
is a lead underwriter on a high proportion of the business it transacts in the
Lloyd's market. A lead underwriter is involved in setting the terms and
conditions of the policies written. ACE Global Markets is an established lead
underwriter in the aviation and marine product lines.
For the 2001 year of account, the Company's participation in the
underwriting capacity of the ACE managed syndicate was approximately $943
million out of the total $1.1 billion of capacity.
For the 2002 year of account, the Company increased the capacity of the
syndicate by 24 percent to $1.3 billion. In addition, for the 2002 year of
account ACE will provide 99.6 percent of the capacity of syndicate 2488
compared to 90 percent in 2001.
All syndicates at Lloyd's are managed by managing agencies that receive fees
and profit commissions in respect of the underwriting and administrative
services they provide to the syndicates. The Company currently owns four
managing agencies. As the Company's participation in the syndicates under
management has grown, the amount of third party fees and profit commissions
received by the Company's managing agencies has decreased substantially.
Marketing and Underwriting
ACE Global Markets differentiates itself in the Lloyd's market by developing
and maintaining close, long-term relationships with clients. Lloyd's syndicates
generally access business through Lloyd's brokers. For certain
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lines of business, however, it is possible to utilize a service company to
access and service business from both Lloyd's and non-Lloyd's brokers. The
Company's service company, ACE Underwriting Services Limited ("AUS") continues
to support and provide an underwriting platform to both syndicate 2488 and ACE
Europe.
Competition
Not withstanding the improvement in market conditions seen in 2001, there
remains significant competition in all lines of business written by the
syndicates. Depending on the line of business, competition comes from the
London market, other Lloyd's syndicates and Institute of London Underwriters
("ILU") Companies, and major international insurers and reinsurers. On
international risks, competition also comes from the domestic insurers in the
country of origin of the insured.
Claims Administration
With respect to claims arising in Lloyd's syndicates, a claims database is
maintained into which all notices of loss are entered. The Lloyd's Claims
Office ("LCO"), through a daily electronic data interchange message, notifies
the syndicate of claims activity. When a syndicate is a "leading" syndicate on
a Lloyd's policy, it acts through its underwriters and claims adjusters, on its
own behalf and in conjunction with the LCO, in dealing with the broker and/or
insured for any particular claim. This may involve the appointment of attorneys
and/or loss adjusters. The LCO advises all syndicates participating on the risk
as to movements in case reserves.
All information received with respect to case reserves, whether on "lead
business" or on "following business", is monitored and recorded by the
syndicates. The syndicates' claims department can vary the case reserves
carried from those advised by the LCO and can carry reserves for claims not
processed by the LCO. Any such adjustments and entries are specifically
identifiable within the claims system.
ACE Global Reinsurance
The ACE Global Reinsurance segment includes both the property catastrophe
and casualty reinsurance business and the life reinsurance business. The life
reinsurance business completed its first full year of operations in 2001.
Property and Casualty
Principal Business
The principal business of the ACE Global Reinsurance segment is the
operations of ACE Tempest Re, which primarily includes property catastrophe
reinsurance provided worldwide to insurers of commercial and personal property.
Property catastrophe reinsurance protects a ceding company against an
accumulation of losses covered by the insurance policies it has issued arising
from a common event or "occurrence." ACE Tempest Re underwrites reinsurance
principally on an excess of loss basis. Other property reinsurance written by
ACE Tempest Re on a limited basis for select clients, includes proportional
property and per risk excess of loss treaty reinsurance.
In early 2000, ACE Tempest Re initiated plans to expand its operations to
become a multiline global reinsurer. This expansion is expected to reduce
volatility and enable ACE Tempest Re to diversify its business and offer a
broad range of products to satisfy client demand. An expanded product offering
is considered vital to capturing an increasing share of the future reinsurance
market. In April 2000, ACE Tempest Re U.S.A. Inc. ("ACE Tempest U.S".) was
established in the U.S. ACE Tempest U.S. is wholly owned by ACE INA and acts as
an underwriting agency on behalf of two of the U.S. companies in the ACE Group.
Its initial focus has been on writing property per risk and casualty
reinsurance.
6
Marketing and Underwriting
ACE Tempest Re markets its reinsurance products worldwide through
reinsurance brokers. The underwriting teams build relationships with key
brokers and clients by explaining their approach and demonstrating
responsiveness to customer needs.
ACE Tempest Re will leverage the strengths of its client relationships,
underwriting expertise, rational pricing and capital base in developing its new
lines of business which it expects to add in accordance with its strategy to
offer risk protection across all lines of reinsurance.
ACE Tempest Re receives business from approximately 28 brokers. The
following table sets forth the percentage of ACE Tempest Re's business written
through each broker and its affiliates that placed more than 10 percent of ACE
Tempest Re's business:
Years Ended
December 31
-------------
2001 2000 1999
---- ---- ----
Marsh and McLennan Companies, Inc.(1)............ 36% 38% 37%
Benfield Group plc(2)............................ 28% 26% 19%
Aon Corporation.................................. 9% 8% 11%
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(1) In 1999, Marsh and McLennan Companies Inc., acquired Sedgwick. The
percentages shown in the table reflect the business placed by the combined
entities and their affiliates.
(2) During the year, the Benfield Group acquired EW Blanch. The percentages
shown in the table reflect the business placed by the combined entities and
their affiliates.
Rates, limits, retention and other reinsurance terms and conditions are
generally established in a worldwide competitive market that evaluates exposure
and balances demand for property catastrophe coverage against the available
supply. ACE Tempest Re believes it is perceived by the market as being a "lead"
reinsurer and is typically involved in the negotiation and quotation of the
terms and conditions of the majority of the contracts in which it participates.
Because ACE Tempest Re underwrites property catastrophe reinsurance and has
large aggregate exposures to natural and man-made disasters, ACE Tempest Re's
claims experience generally will involve infrequent events of considerable
severity. ACE Tempest Re seeks to diversify its property catastrophe
reinsurance portfolio to moderate the impact of this severity. The principal
means of diversification are by geographic coverage and by varying attachment
points and imposing coverage limits per program. ACE Tempest Re also
establishes zonal accumulation limits to avoid concentrations of risk within
particular geographic areas.
ACE Tempest Re applies an underwriting process for property catastrophe
risks based on models that use exposure data submitted by prospective
reinsureds in accordance with requirements set by ACE Tempest Re's
underwriters. The client data is then analyzed using a selection from several
available catastrophe analysis tools, including externally developed event
based models licensed from leading vendors as well as proprietary models
developed in house.
The output from the catastrophe analysis tools is also used for portfolio
risk management, enabling ACE Tempest Re to extensively simulate possible
combinations of events affecting the portfolio. This analysis also supports the
decision making with regard to purchasing retrocessional coverages.
Competition
ACE Tempest Re competes worldwide with major U.S. and non-U.S. reinsurers as
well as reinsurance departments of numerous multi-line insurance organizations.
The Company also competes with other Bermuda based property catastrophe
reinsurers. ACE Global Reinsurance competes effectively because of the strong
7
capital position of the ACE Group; the quality of service provided to
customers; the leading role it plays in setting the terms, pricing and
conditions in negotiating contracts; and its customized approach to risk
selection.
Claims Administration
Claims arising under contracts written by ACE Tempest Re are maintained in a
claims database into which all notices of loss are entered. Those claims are
then reviewed and case reserves are established for ACE Tempest Re's portion of
the loss. Case reserves are adjusted based on receipt of further notifications
from brokers.
Claims handling activities for ACE Tempest Re USA will be managed by the
division where the contract is written. Loss notices are received directly from
brokers.
Life Reinsurance
Principal Business
The principal business of the ACE Global Life Reinsurance division ("ACE
Life Re") is to provide reinsurance coverage to other life insurance companies.
These reinsurance transactions will typically help clients (ceding companies)
to manage mortality, morbidity, and/or lapse risks embedded in their book of
business. In addition to managing these risks and as a by-product, clients may
also benefit by locking in and monetizing future profits, releasing capital
and/or reduce earnings volatility. Calendar year 2001 represents the first full
year of operations for ACE Life Re. The strategic focus of ACE Life Re is to
differentiate itself as a niche player in its targeted lines of business:
blocks of individual life insurance, annuities (fixed and variable) and group
long-term disability. It does not intend to compete on a "traditional" basis
for pure mortality business but, instead, it will seek to assist clients as a
capital and strategic partner with customized solutions for the management of
their risks.
Marketing and Underwriting
ACE Life Re markets its reinsurance products directly to clients as well as
through reinsurance intermediaries. The marketing plan seeks to capitalize on
the relationships developed by the company's executive officers and
underwriters with members of the actuarial profession and executives at client
companies. ACE Life Re targets potential ceding insurers that it believes would
benefit from its reinsurance products based on analysis of publicly available
information and other industry data. In addition, reinsurance transactions are
often placed by reinsurance intermediaries and consultants. The company will
work with such third party marketers in an effort to maintain a high degree of
visibility in the reinsurance marketplace.
ACE Life Re's strategy and business does not depend on a single client or a
few clients. To date, it has entered into reinsurance agreements with over 20
clients. However, like most start-up operations, a single large transaction can
account for a significant percentage of total revenue. It is anticipated that
as business continues to grow, ACE Life Re will have a reasonably diversified
source of revenue by number of clients, by revenue and by lines of business.
ACE Life Re underwrites transactions on a qualitative and quantitative
basis. Underwriting guidelines have been developed with the objective of
controlling the risks of the reinsurance policies written as well as to
determine appropriate pricing levels. The guidelines may be amended from time
to time in response to changing industry conditions, market developments,
changes in technology and other factors.
In implementing the underwriting guidelines, an experienced underwriting
team is utilized to select opportunities with acceptable risk/return profiles.
Reinsurance business is assumed only after considering many factors, including
the type of risks to be covered, actuarial evaluations, historical performance
data for the client and the industry as a whole, the client's retention, the
product to be reinsured, pricing assumptions, underwriting
8
standards, reputation and financial strength of the client, the likelihood of
establishing a long term relationship with the client and the market share of
the client. Pricing of reinsurance products is based on ACE Life Re's
sophisticated actuarial and investment models which incorporate a number of
factors including assumptions for mortality, morbidity, expenses, demographics,
persistency and investment returns as well as certain macroeconomic factors,
such as inflation, and certain regulatory factors, such as taxation and surplus
requirements.
Competition
The reinsurance industry is highly competitive. Most of the reinsurance
companies are well established, have significant operating histories, strong
claims paying ability ratings, and have established long-standing client
relationships through existing treaties with ceding companies. ACE Life Re's
senior management believe primary competitors include major life reinsurers
(e.g., Swiss Re and Hannover Re) and smaller specialty companies (e.g., Annuity
and Life Re, Scottish Annuity & Life, and Max Re). ACE Life Re competes
effectively by leveraging the strength of its client relationships,
underwriting expertise, capacity, and the brand name and capital position of
the ACE Group.
ACE USA
Principal Business
The principal business of ACE USA is the combined business of ACE US
Holdings, which was acquired by the Company January 2, 1998, and the domestic
operations of ACE INA acquired on July 2, 1999. The operations of ACE USA
include ongoing domestic operations as well as the run-off operations of
Brandywine Holdings, Inc. ("Brandywine"), which does not write new policies and
"other" operations. The "other" operations include the run-off of Commercial
Insurance Services ("CIS"), residual market worker's compensation business,
pools and syndicates not attributable to a single business group, the run-off
of open market facilities and the run-off results of other various exited lines
of business.
During 2001 the ongoing insurance operations, which provide specialty
property and casualty products, were organized into seven distinct business
groups. The Westchester Specialty Group is comprised of the Westchester
specialty business including property, inland marine, specialty casualty,
excess casualty, and diversified products, which includes the agri-business and
specialty programs. ACE USA's Specialty Property and Casualty ("P&C") Group
serves the global property, energy, power products and commercial marine
markets, in addition to offering international casualty products for U.S. based
companies. The ACE Risk Management Group ("ARM"), which was formerly known as
Special Risk Facilities, provides coverage solutions for national accounts
casualty and excess business, as well as group casualty and wrap up programs
which relate to general liability and worker's compensation coverage for large
single or multi-location construction projects. The Professional Risk Group
provides insurance policies that protect against management liability and
professional liability as well as surety, aviation and satellite risks. The
Financial Solutions Group develops non-traditional alternative risk products,
which protect clients from financial, operational and enterprise risks.
Solutions for these difficult to insure risks might include products that serve
to stabilize a client's earnings, provide credit protection or resolve
accounting or regulatory issues. During 2001, ACE USA launched the Consumer
Solutions Group, which consolidated the existing consumer businesses including
warranty, recreational marine and disaster mortgage protection, with the
national call center and the direct specialist group to take better advantage
of cross selling products, and concentrate marketing and sales efforts in the
consumer marketplace. ACE USA will be looking at new opportunities to expand
its product offerings in the consumer area. The Accident and Health ("A&H")
Group was launched in 2001 to develop opportunities and expand into the U.S.
specialty accident and health area. This newly established U.S. group will
capitalize on the global accident and health market expertise developed over
many years by the ACE International segment.
ACE USA's on-going insurance related operations include those of ESIS Inc.
("ESIS"), the company's in-house third party claims administrator, which
provides its clients with claim management and loss cost reduction
9
services including comprehensive medical managed care and pre-loss control and
risk management services. Additional insurance related services are offered by
Recovery Services International, which sells salvage and subrogation and health
care recovery services. ACE USA also holds a majority ownership interest in
several warranty administrators, who distribute warranty insurance products.
During 2001 the Consumer Solutions Group acquired YouDecide.com, Inc., which
provides client companies an Internet platform where their employees are
offered a broad selection of non-employer sponsored financial products,
including insurance.
Following the acquisition of the domestic operations of ACE USA on July 2,
1999, the Company made substantial structural and operational changes to
enhance profitability and operating controls in the segment. These changes
included restructuring the operating divisions from three large groups to the
business groups discussed above. These operational changes were made to enhance
the Company's ability to better focus on profitable underwriting and
cross-market its products between domestic operating groups and other ACE
segments. The Company also consolidated locations and closed offices throughout
the U.S., outsourced the IT function, and reduced staff by approximately 2,000
people. These cost reduction efforts had a positive impact in both 2001 and
2000 on both the expense ratio and the loss ratio, due to a reduction in
unallocated loss adjustment expenses.
As part of the restructuring of the operating divisions, ACE USA critically
evaluated all lines of business and has exited contracts and lines of business
that did not have a long-term strategic fit. This effort continued into 2001
with the sale of the Company's Financial Institution Specialists Division to
SAFECO Corporation. During the year ended December 31, 2000, the culling of
unprofitable and non-strategic business amounted to a reduction of gross
premiums written of approximately $160 million. The focus on profitable
business together with a commitment to continually promote cost reduction
efforts enabled ACE USA to operate for the years ended December 31, 2001 and
2000 at a combined ratio under 100 percent.
In addition to the exited business discussed above, ACE USA sold the renewal
rights for all of its CIS business in 1999 and planned to sell the assets and
liabilities pertaining to the historical book of business as well as the
in-force book of business which it still owned. As of December 31, 2001, the
remaining business of CIS continues to run-off and has not been sold.
The Brandywine run-off operation, was created in 1995, before the
acquisition by ACE, by the restructuring of ACE INA's domestic operations into
two separate operations, ongoing and run-off. Brandywine contains substantially
all of ACE INA's asbestos and environmental exposures as well as various
run-off insurance and reinsurance businesses. The run-off operations do not
actively sell insurance products, but are responsible for the management of
run-off policies and related claims including those for asbestos-related and
environmental pollution exposures. Certain competitors and policyholders of
CIGNA have challenged the regulatory approvals resulting in the creation of
Brandywine. In July 1999, the Pennsylvania Supreme Court upheld the action of
the Pennsylvania Insurance Commissioner in granting such approvals. In December
1999, competitors of ACE filed an action in the Superior Court of California
alleging that the restructuring did not meet the requirements of certain
California statutes. The case is in the preliminary stages of litigation.
Marketing and Underwriting
ACE USA primarily distributes its insurance products through a limited group
of brokers and wholesale brokers with whom long-term relationships have been
forged. ACE USA's management believes the match between its expertise and that
of its brokers is one of the key reasons brokers place business with it.
Certain products are also distributed through alternative distribution channels
such as general agents, independent agents and direct marketing operations.
Internet distribution channels have been established for certain product
offerings. Through its acquisition of YouDecide.com, Inc, the Consumer
Solutions Group is in the process of developing additional e-commerce
distribution opportunities.
10
The following table sets forth the percentage of ACE USA's business written
through brokers placing more than 10 percent of ACE USA's business:
Years ended
December 31
-------------
Name 2001 2000 1999
---- ---- ---- ----
Rain & Hail Insurance Services(1)................ 16% 11% 14%
Marsh and McLennan Companies, Inc.(2)............ 14% 14% --
Aon Corporation.................................. 10% -- --
- --------
(1) Rain & Hail Insurance Services is a managing agency that specializes in
crop insurance, most of which is federally reinsured.
(2) In 1999, Marsh and McLennan Companies, Inc. acquired Sedgwick. The
percentage shown in the table reflects the business placed by the combined
entities and their affiliates.
Operating in a market in which capacity and price adequacy for its products
can change dramatically, ACE USA's underwriting strategy is to employ
consistent, disciplined pricing and risk selection in order to maintain an
attractive book of business. Management's priority is to ensure that criteria
for risk selection are closely adhered to by its underwriting professionals
through maintaining high levels of experience and expertise in its underwriting
staff. In addition, ACE USA has established a business review structure that
ensures control of risk quality and conservative use of policy limits, terms
and conditions. Additionally, ACE USA employs sophisticated catastrophe loss
and risk modeling techniques to ensure that risks are well distributed and that
loss potentials are well within the company's financial capacity. In this
regard, ACE USA is also a sophisticated purchaser of reinsurance, which
provides the means for greater diversification of risk and serves to further
limit the net loss potential of catastrophes and large or unusually hazardous
risks. Reinsurers utilized by ACE USA must meet certain financial and
experience requirements and are put through a stringent financial review
process in order to be pre-approved by a Reinsurance Security Committee,
comprised of senior management. As a result of these controls, reinsurance is
placed with what ACE USA believes is a select group of only the most
financially secure and experienced companies in the reinsurance industry.
ACE USA has the ability to write business on an admitted basis using forms
and rates as filed with state insurance regulators and on a non-admitted, or
surplus lines basis using flexible forms and rates not filed with state
insurance regulators. Having access to non-admitted carriers provides the
flexibility to write non-standard coverage.
An integral part of the ACE USA operating strategy is to maximize the
efficiency and effectiveness of its operations while reducing operating costs.
As part of this strategy, ACE USA is in the process of investing in technology,
which will replace numerous existing policy issuance and claims systems with an
integrated product currently being utilized by other ACE segments. This action
is expected to further facilitate the streamlining of ACE USA's underwriting
and claims processing operations.
Competition
ACE USA operates in a highly competitive industry and faces competition from
both domestic and foreign insurers. The markets in which ACE USA competes are
subject to significant cycles of fluctuating capacity and wide disparities in
price adequacy. The domestic operations pursue a specialist strategy and focus
on market opportunities where they can compete effectively based on service
levels and product design, while still achieving an adequate level of
profitability. ACE USA offers experienced claims handling, loss control and
risk management staff with proven expertise in specialty fields, including
large-risk property and casualty, recreational and ocean marine, aviation,
professional risk and workers' compensation. A competitive advantage is also
achieved through ACE USA's innovative product offerings such as Risk Management
Group bundled business, which combines tailored coverage solutions for large
insureds with expert claim management and loss reduction functions provided by
ESIS, a nationally recognized leader in the third party claims management
field. An additional competitive strength of all the domestic commercial units
is the ability to deliver global products and coverages to customers in concert
with other ACE Group segments. ACE USA has only just started to leverage cross
marketing opportunities with other members of the ACE Group and take advantage
of the ACE organization's global presence.
11
Claims Administration
ACE USA's claims organization supports both the national accounts (Risk
Management Group) and the specialty insurance businesses with a national
network of claims and risk management services. The Brandywine claim
professionals have the unique expertise and experience to manage specialized
coverage and coordination issues that arise in asbestos, environmental and
other latent exposure claims.
A team of risk control professionals supports each business line to
effectively manage loss costs for the risk exposures underwritten by the
businesses of ACE USA. Specialized loss cost containment programs are in place
for marine risk, aerospace risk, global property risk, warranty programs,
excess risk, inland marine risk, diversified products and professional risk
services.
The Risk Management Group is supported by ESIS, ACE USA's in-house third
party claims administrator. ESIS markets loss control, risk and loss data
information management, claims settlement and loss cost reduction services to
large corporate customers on a fee-for-service basis.
ACE International
Principal Business
ACE International is a global franchise with a presence in nearly 50
countries. This franchise was created in 1984 through the merger of the
Insurance Company of North America ("INA"), which started its international
operations over 100 years ago, and the American Foreign Insurance Association
("AFIA").
ACE International's operations provide insurance coverage on a worldwide
basis excluding the United States. The principal business operations are
focused on property and casualty, accident and health, and consumer-oriented
products. Operating management is carried out through four regional teams:
Europe, Far East, Asia Pacific and Latin America.
The international property and casualty operations are conducted through a
specialist insurance organization offering capacity and technical expertise in
the underwriting and servicing of large and unique risks for targeted
commercial customer segments, as well as individual coverages in selected
markets. Property insurance products include traditional commercial fire
coverage as well as energy industry-related and other technical coverages.
Principal casualty products are commercial general liability and liability
coverage for multinational organizations. Marine cargo and hull coverages are
written in the London market as well as in marine markets throughout the world.
The operations also design and implement risk-financing alternatives for
customers whose approach to risk management includes some form of
self-insurance.
The international accident and health insurance operations provide products
that are designed to meet the insurance needs of individuals and groups outside
of U.S. insurance markets. These products include accidental death, medical,
hospital indemnity and income protection coverages.
The consumer products segment provides specialty products and services
designed to meet the needs of specific target markets, and is distributed
through non-traditional distribution channels. These products include warranty,
auto, homeowners, motor homes, real estate-related services, personal umbrella,
recreational marine and other coverages specific to personal risk exposures.
For the year ended December 31, 2001, gross premiums written from accident
and health and consumer products accounted for 27 percent of ACE
International's premiums.
In conducting its non-U.S. business, ACE International reduces the risks
relating to currency fluctuations by maintaining investments in those foreign
currencies in which the operation transacts business, with
12
characteristics of those investments similar to the related liabilities in
those currencies. The net asset or liability exposure to the various foreign
currencies is regularly reviewed.
Marketing and Underwriting
ACE International maintains a sales or operational presence in major
insurance markets around the world. Its property and casualty business is
generally written, on both a direct and assumed basis, through major
international, regional and local brokers. Accident and health and other
consumer lines products are distributed through brokers, agents, financial
institutions and various direct marketing channels including e-commerce.
ACE International's operations are diversified by line of business and
geographic spread of risk. A global approach to risk management allows each
local operation to underwrite and accept large insurance accounts. Centrally
coordinated reinsurance mechanisms facilitate appropriate risk transfer and
efficient, cost-effective use of external reinsurance markets.
Competition
ACE International's primary competitors include U.S.-based companies with
global operations, as well as other, non-U.S. global carriers and indigenous
companies in regional and local markets. For the accident and health lines of
business, locally based competitors include financial institutions and
bank-owned insurance subsidiaries.
The principal competitive factors that affect the international operations
are underwriting and pricing, relative operating efficiency, product
differentiation, producer relations and the quality of claims and policyholder
services. A competitive strength of the international operations is its global
network and breadth of insurance programs, which assist individuals and
business organizations to meet their risk management objectives.
Claims Administration
ACE International's claims service operations are decentralized, with
management of most aspects of claim administration occurring at an individual
country level. The claims organization structure in each country is driven by
the composition of the business portfolio. The outsourcing of claims
settlement, adjusting services, or other claims functions may occur if and when
appropriate.
ACE Financial Services
Principal Business
The companies in the ACE Financial Services segment offer value-added
insurance, reinsurance and financial derivative products to the insurance and
capital markets, which provide protection from credit or financial risks. ACE
Financial Services writes municipal and non-municipal financial guaranty
reinsurance, single-name and portfolio credit default swaps, mortgage guaranty
reinsurance, trade credit reinsurance, title reinsurance and residual value
reinsurance.
The ACE Financial Services segment primarily carries out its business
through the following legal vehicles: ACE Guaranty Re Inc. ("AGR"), ACE Capital
Re International Ltd. ("ACRI"), ACE Capital Mortgage Reinsurance Company
("ACMR"), ACE Capital Re Overseas Ltd. ("ACRO"), ACE Financial Overseas Ltd.
("AFOL") and ACE Capital Title Reinsurance Company ("ACTR").
ACE Financial Services' financial guaranty business is conducted primarily
through AGR. AGR serves the U.S. domestic and international financial guaranty
reinsurance markets. It is a leading reinsurer (by market share)
13
of financial guaranties of investment grade debt obligations-principally of
municipal and non-municipal obligors. ACRI and ACRO are primarily focused on
providing highly structured solutions to problems of financial and risk
management through reinsurance and other forms of credit enhancement. ACMR and
ACTR are New York regulated monoline reinsurance companies providing mortgage
guaranty reinsurance and title reinsurance respectively. AFOL is a company
organized under the laws of the United Kingdom, and is registered as a
"Category D" company with the UK Financial Services Authority arranging
transactions in credit derivatives and other financial swaps.
Financial guaranty insurance is a type of credit enhancement, similar to a
surety, which is regulated under the insurance laws of various jurisdictions.
Financial guaranty insurance provides an unconditional and irrevocable guaranty
that indemnifies the insured against nonpayment of principal and interest on an
insured debt obligation when due. Additionally, ACE Financial Services'
financial guaranty business provides municipal and non-municipal credit risk
protection on a facultative basis to a wide variety of counterparties through
both single-name and portfolio credit default swap transactions.
Mortgage guaranty insurance is a specialized class of credit insurance,
providing protection to mortgage lending institutions against the default of
borrowers on mortgage loans. Title insurance essentially provides the acquirer
or the mortgagee of real property with two forms of coverage. The first assures
that the search and examination of the real estate records, upon which the
acquirer or mortgagee is relying for good and clean title, was properly
performed. The second form of coverage assures that all previously existing
mortgages and liens will be paid off from the proceeds of the sale or
refinancing of the property. Trade credit insurance protects sellers of goods
and services from the risk of non-payment of trade receivables and is a large,
well-established specialty insurance product, particularly in Western Europe.
Policyholders are generally covered for short-term exposures (generally less
than 180 days and averaging 60-90 days) to insolvency or payment defaults by
domestic and/or foreign buyers. Some export credit policies also cover
political events, which can disrupt either the flow of goods and services or
payment for goods and services. Residual value reinsurance is generally
provided to the captives of motor vehicle manufacturers or lessors, whereby the
coverage effectively guarantees the residual value of portfolios of leased
vehicles at the termination of the lease term.
Marketing and Underwriting
ACE Financial Services has established and maintains relationships with the
major U.S. primary financial guaranty insurers, mortgage guaranty insurers and
title insurers, major European trade credit insurers and primary mortgage
guaranty insurers in the U.K. and Australia. Major U.S. and European investment
banks act as counterparties on credit default swaps.
A portion of ACE Financial Services' reinsurance business is developed
through relationships with brokers and reinsurance intermediaries. The title
reinsurance business has developed substantially all of its business
opportunities through direct contacts with primary title insurers, while the
financial guaranty business has been developed through direct contacts with
U.S. primary companies and major investment banks in the U.S. and Europe.
For the majority of ACE Financial Services' business the underwriting
process is premised on reinsuring investment grade credit risks and risk remote
or finite financial risks. The underwriting process is based on multiple levels
of credit review, actuarial analysis, stress-based modeling and legal review.
Underwriters minimize correlation and aggregation through diversification of
exposures by geography, industry sector, credit enhancement/attachment point
and rating category of underlying credits.
Competition
ACE Financial Services faces direct and indirect competition from
equivalently rated financial institutions on all lines of business.
Differentiating factors include pricing, customer service, market perception
and historical performance.
14
In its financial guaranty business, ACE Financial Services faces competition
indirectly from other highly rated financial institutions that provide capital
substitutes to the primary financial guaranty insurance companies. Competition
is also a function of the ease with which primary insurers can raise capital in
the private or public equity markets. Increased primary capital increases the
ability of insurers to retain risk and the need for reinsurance in general is
diminished.
For mortgage reinsurance business, competition comes from some non-U.S.
mortgage reinsurers and, in a minor way, from U.S. multiline insurers. In the
title business, the large title insurers have traditionally provided
reinsurance capacity.
In its trade credit business, the segment faces a high degree of competition
from traditional participants in these markets, including large multiline
insurers and reinsurers.
Claims Administration
ACE Financial Services operates an internal claims management,
administration and payment function. Use of external actuarial and legal
consultants is made where this is deemed prudent by management.
Unpaid Losses and Loss Expenses
The Company establishes reserves for unpaid losses and loss expenses, which
are estimates of future payments of reported and unreported claims for losses
and related expenses, with respect to insured events that have occurred. The
process of establishing reserves for property and casualty claims continues to
be a complex and imprecise process, requiring the use of informed estimates and
judgments. The Company's estimates and judgments may be revised as additional
experience and other data become available and are reviewed, as new or improved
methodologies are developed or as current laws change. Any such revisions could
result in future changes in estimates of losses or reinsurance recoverables,
and would be reflected in the Company's results of operations in the period in
which the estimates are changed.
The Company has considered asbestos and environmental claims and claims
expenses in establishing the liability for unpaid losses and loss expenses. The
Company has developed reserving methods, which incorporate new sources of data
with historical experience to estimate the ultimate losses arising from
asbestos and environmental exposures. The reserves for asbestos and
environmental claims and claims expenses represent management's best estimate
of future loss and loss expense payments and recoveries which are expected to
develop over the next several decades. The Company continuously monitors
evolving case law and its effect on environmental and latent injury claims.
While reserving for these claims is inherently uncertain, the Company believes
that the reserves carried for these claims are adequate based on known facts
and current law.
The Company continually evaluates its estimates of reserves in light of
developing information and in light of discussions and negotiations with its
insureds. While the Company is unable at this time to determine whether
additional reserves, (which could have a material adverse effect upon the
financial condition, results of operations and cash flows of the Company) may
be necessary in the future, the Company believes that its reserve for unpaid
losses and loss expenses are adequate as of December 31, 2001.
The Company engages independent actuarial firms to review the methods and
assumptions used by the Company in estimating the unpaid losses and loss
expenses. As stated in their actuarial reviews, the firms believe that the
methods and assumptions used by the Company are reasonable and appropriate for
use in setting loss reserves at December 31, 2001.
Losses and loss expenses are charged to income as incurred. The reserve for
unpaid losses and loss expenses represents the estimated ultimate losses and
loss expenses less paid losses and loss expenses and is comprised of case
reserves, loss expense reserves and IBNR loss reserves. During the loss
settlement period, which can be
15
many years in duration, additional facts regarding individual claims and trends
often will become known. As these become apparent, case reserves may be
adjusted by allocation from the IBNR loss reserve without any change in the
overall reserve. In addition, application of statistical and actuarial methods
may require the adjustment of the overall reserves upward or downward from time
to time. The final liability, nonetheless, may be significantly greater than or
less than the prior estimates.
The terrorist attacks on September 11, 2001 ("the September 11th
tragedy") resulted in the largest insured loss in history and had a substantial
impact on the results of the Company. The Company recorded losses of
$650 million relating to the September 11th tragedy. The Company believes that
its current estimate for September 11, 2001 claims are reasonable and accurate
based on information currently available. The Company continues to evaluate its
total potential liability based upon individual insurance and reinsurance
policy language, legal and factual developments in underlying matters involving
its insureds as well as legislative developments in the U.S. involving the
terrorist attack. If the Company's current assessments of future developments
are proved wrong, the financial impact of any of them, singularly or in the
aggregate, could be material. For example, business interruption insurance
claims could materialize in the future with greater frequency than the Company
anticipated or provided for in its estimates; or, insureds that the Company
expects will not be held responsible for injuries resulting from the attack,
are ultimately found to be responsible at a financial level that impacts its
insurance or reinsurance policies.
The "Analysis of Losses and Loss Expenses Development" shown below presents
the subsequent development of the estimated year-end liability for net unpaid
losses and loss expenses at the end of each of the years in the eight year
period ended September 30, 1998 as well as for the fifteen month period ended
December 31, 1999 and the two years ended December 31, 2001 and 2000. Prior to
December 31, 1999, the net unpaid losses and loss expenses are in respect of
annual periods ending on September 30 of each year. The table also presents as
of December 31, 2001, the cumulative development of the estimated year-end
liability for gross unpaid losses and loss expenses for the years 1994 through
2000. The top lines of the table shows the estimated liability for gross and
net unpaid losses and loss expenses recorded at the balance sheet date for each
of the indicated periods. This liability represents the estimated amount of
losses and loss expenses for claims arising from all prior years' policies and
agreements that were unpaid at the balance sheet date, including IBNR loss
reserves. The upper (paid) portion of the table presents the net amounts paid
as of subsequent periods on those claims for which reserves were carried as of
each balance sheet date. The lower portion of the table shows the re-estimated
amount of the previously recorded net liability as of the end of each
succeeding period. The bottom lines of the table show the re-estimated amount
of previously recorded gross liability at December 31, 2001 together with the
change in reinsurance recoverable. Several aspects of the Company's operations,
including the low frequency and high severity of losses in the high excess
layers in which the Company provides insurance, complicate the actuarial
reserving techniques utilized by the Company. Accordingly, the Company expects
that ultimate losses and loss expenses attributable to any single underwriting
year will be either more or less than the incremental changes in the lower
portion of the following table. The "cumulative redundancy/deficiency" shown in
the table below represents the aggregate change in the reserve estimates over
all subsequent years. The amounts noted are cumulative in nature; that is, an
increase in loss estimate for prior year losses generates a deficiency in each
intermediate year.
16
Analysis of Losses and Loss Expenses Development
Years ended September 30th
----------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998
---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands of U.S. dollars)
Gross unpaid..................... $1,176,215 $1,492,336 $1,977,620 $2,111,670 $3,737,869
Net unpaid....................... $ 470,832 $ 813,849 $ 766,402 $1,176,215 $1,489,293 $1,892,302 $2,006,873 $2,678,341
Net paid (Cumulative) As Of:
1 year later.................... 149,493 340,836 126,566 66,888 80,080 358,713 337,422 1,017,822
2 years later................... 490,116 465,074 183,439 121,628 414,419 663,087 925,361 1,480,173
3 years later................... 590,847 517,366 228,638 451,746 696,470 1,247,652 1,066,253 1,655,945
4 years later................... 611,133 551,887 558,625 725,799 1,259,344 1,372,345 1,171,247
5 years later................... 627,691 881,198 837,515 1,285,599 1,379,586 1,465,149
6 years later................... 764,607 1,150,628 1,398,270 1,368,664 1,467,519
7 years later................... 843,283 1,672,772 1,481,328 1,449,762
8 years later................... 988,087 1,755,791 1,562,344
9 years later................... 1,067,055 1,836,807
10 years later.................. 1,140,570
Fifteen Month Years ended
Period ended December 31st
December 31st ------------------------
1999 2000 2001
------------- ----------- -----------
Gross unpaid..................... $16,460,247 $17,388,394 $20,728,122
Net unpaid....................... $ 8,908,817 $ 9,330,950 $10,339,014
Net paid (Cumulative) As Of:
1 year later.................... 2,445,490 2,430,655
2 years later................... 3,810,768
3 years later...................
4 years later...................
5 years later...................
6 years later...................
7 years later...................
8 years later...................
9 years later...................
10 years later..................
Net Liability Re-estimated As Of:
End of year..................... $ 470,832 $ 813,849 $ 766,402 $1,176,215 $1,489,293 $1,892,302 $2,006,873 $2,678,341
1 year later.................... 706,960 813,849 966,402 1,177,292 1,489,293 1,892,302 1,989,744 2,753,017
2 years later................... 706,960 1,085,012 1,067,987 1,227,538 1,489,293 1,881,403 1,914,936 2,746,608
3 years later................... 874,368 1,234,462 1,211,424 1,386,571 1,480,426 1,824,449 1,853,078 2,721,731
4 years later................... 888,387 1,412,495 1,429,990 1,401,329 1,495,443 1,852,466 1,833,312
5 years later................... 940,513 1,666,770 1,442,523 1,472,394 1,588,975 1,931,845
6 years later................... 1,113,662 1,703,103 1,580,022 1,530,195 1,678,535
7 years later................... 1,099,102 1,852,125 1,642,465 1,606,416
8 years later................... 1,142,511 1,916,405 1,712,654
9 years later................... 1,207,260 1,986,594
10 years later.................. 1,274,153
Cumulative redundancy/
(deficiency).................... (803,321) (1,172,745) (946,252) (430,201) (189,242) (39,543) 173,561 (43,390)
Net Liability Re-estimated As Of:
End of year..................... $ 8,908,817 $ 9,330,950 10,339,014
1 year later.................... 8,848,453 9,425,420
2 years later................... 8,850,879
3 years later...................
4 years later...................
5 years later...................
6 years later...................
7 years later...................
8 years later...................
9 years later...................
10 years later..................
Cumulative redundancy/
(deficiency).................... 57,938 (94,470)
Gross unpaid losses and loss expenses end of year..................... 1,176,215 1,492,336 1,977,620 2,111,670 3,737,869
Reinsurance recoverable on unpaid losses.............................. -- 3,043 85,318 104,797 1,059,528
---------- ---------- ---------- ---------- ----------
Net unpaid losses and loss expenses................................... 1,176,215 1,489,293 1,892,302 2,006,873 2,678,341
---------- ---------- ---------- ---------- ----------
Gross liability re-estimated.......................................... 1,606,416 1,681,578 2,029,465 1,937,100 3,897,590
Reinsurance recoverable on unpaid losses.............................. -- 3,043 97,620 103,788 1,175,860
---------- ---------- ---------- ---------- ----------
Net liability re-estimated............................................ 1,606,416 1,678,535 1,931,847 1,833,312 2,721,731
---------- ---------- ---------- ---------- ----------
Cumulative redundancy/(deficiency) on gross unpaid.................... (430,201) (189,242) (51,845) 174,570 (159,721)
Gross unpaid losses and loss expenses end of year..................... 16,460,247 17,388,394 20,728,122
Reinsurance recoverable on unpaid losses.............................. 7,551,430 8,057,444 10,389,108
----------- ----------- -----------
Net unpaid losses and loss expenses................................... 8,908,817 9,330,950 10,339,014
----------- ----------- -----------
Gross liability re-estimated.......................................... 17,596,917 18,018,757
Reinsurance recoverable on unpaid losses.............................. 8,746,039 8,593,337
----------- -----------
Net liability re-estimated............................................ 8,850,879 9,425,420
----------- -----------
Cumulative redundancy/(deficiency) on gross unpaid.................... (1,136,670) (630,363)
Notes to Analysis of Losses and Loss Expenses
- --------
(1) On July 2, 1999, the Company changed its fiscal year-end from September 30
to December 31. As a result, the information provided above for the 1999
year is actually for the 15-month period from October 1, 1998, through
December 31, 1999. All prior periods represent years ending on September 30.
(2) The Company does not consider it appropriate to extrapolate future
deficiencies or redundancies based upon the above tables, as conditions and
trends that have affected development of the liability in the past may not
necessarily occur in the future.
(3) In 1992, the Company began applying actuarial and statistical methods to
estimate ultimate expected losses and loss expenses for all of the
Company's business since inception. This methodology was applied
retroactively to all prior years.
(4) On November 1, 1993, the Company acquired CODA, on July 1, 1996, the
Company acquired ACE Tempest Re and on July 9, 1998, the Company acquired
Tarquin. The table has been restated to include CODA, ACE Tempest Re and
Tarquin's loss experience as if each of these companies had been wholly
owned subsidiaries of the Company from their inception. On January 2, 1998,
the Company acquired ACE US Holdings, on April 1, 1998, the Company
acquired CAT Limited and on July 2, 1999, the Company acquired ACE INA. The
unpaid loss information for ACE US Holdings, CAT Limited and ACE INA has
been included in the table commencing in the year of acquisition. As a
result, 1999 includes net reserves of $6.8 billion related to ACE INA at
the date of acquisition and subsequent development thereon.
17
The cumulative gross redundancy (deficiency) is the difference between the
gross loss reserves originally recorded and the re-estimated liability at
December 31, 2001. The Company utilized little or no reinsurance for the 1997
and prior years. In 1999, ACE INA acquired the CIGNA property and casualty
insurance operations and the acquired loss reserves for 1999 and prior years
were included in the table commencing in 1999. As of December 31, 2001, the
cumulative deficiency for 1999 is $1.13 billion. This relates primarily to U.S.
liabilities including asbestos and environmental liabilities for 1995 and prior
that are included in the run-off division of ACE INA. A significant portion of
this business had been reinsured on a facultative basis prior to the
acquisition by ACE INA and reinsurance coverage on the net reserves for the
run-off division as of the acquisition date was purchased from National
Indemnity Company ("NICO"). These reinsurance coverages have the effect of
substantially reducing the net loss as follows. Of the total $1.13 billion of
cumulative deficiency for the 1999 and prior years, approximately $500 million
was covered by reinsurance placed when the risks were originally written and
the remaining liability of $600 million has been ceded to NICO. Of the
cumulative deficiency of $1.13 billion noted for 1999, approximately $500
million was identified and recorded in fiscal 2000 and the remaining $630
million was identified and recorded in fiscal 2001.
Net loss and loss expenses for the year ended December 31, 2001 were
impacted by $94 million of prior year development principally in the ACE
International segment. This development was reflected during the fourth quarter
of 2001 when the Company recorded additional reserves to strengthen its
casualty loss reserves.
Reconciliation of Unpaid Losses and Loss Expenses
Year Ended Year Ended Year Ended
December 31 December 31 December 31
2001 2000 1999
----------- ----------- -----------
(in thousands of U.S. dollars)
Gross unpaid losses and loss expenses at beginning of period........ $17,388,394 $16,460,247 $ 3,678,269
Reinsurance recoverable on unpaid losses............................ (8,057,444) (7,551,430) (1,100,464)
----------- ----------- -----------
Net unpaid losses and loss expenses at beginning of period.......... 9,330,950 8,908,817 2,577,805
Unpaid losses and loss expenses assumed in respect of reinsurance
business acquired................................................. 300,204 169,537 183,774
Unpaid losses and loss expenses in respect of formerly discontinued
operations........................................................ -- 1,269,914 --
Unpaid losses and loss expenses assumed in respect of acquired
companies (net of reinsurance recoverable of $6,345,679 in 1999).. -- 6,940,593
----------- ----------- -----------
Total........................................................ 9,631,154 10,348,268 9,702,172
=========== =========== ===========
Net losses and loss expenses incurred in respect of losses occurring in:
Current period................................................... 4,457,986 2,996,429 1,601,278
Prior periods.................................................... 94,470 (60,364) 38,265
----------- ----------- -----------
Total........................................................ 4,552,456 2,936,065 1,639,543
=========== =========== ===========
Net losses and loss expenses paid in respect of losses occurring in:
Current period................................................... 1,345,699 1,205,110 916,848
Prior periods.................................................... 2,430,655 2,631,171 1,509,638
----------- ----------- -----------
Total........................................................ 3,776,354 3,836,281 2,426,486
=========== =========== ===========
Foreign currency revaluation........................................ (68,242) (117,102) (6,412)
=========== =========== ===========
Net unpaid losses and loss expenses at end of period................ 10,339,014 9,330,950 8,908,817
Reinsurance recoverable on unpaid losses............................ 10,389,108 8,057,444 7,551,430
----------- ----------- -----------
Gross unpaid losses and loss expenses at end of period.............. $20,728,122 $17,388,394 $16,460,247
=========== =========== ===========
18
As discussed above, net loss and loss expenses for the year ended December
31, 2001 were impacted by $94 million of prior year development principally in
the ACE International segment. During the fourth quarter of 2001, the Company
recorded additional reserves to strengthen its casualty loss reserves.
Net loss and loss expenses for the year ended December 31, 2000, were
impacted by favorable development of reserves from prior periods primarily from
ACE Tempest Re, ACE USA and ACE Bermuda partially offset by unfavorable
development in ACE Financial Services.
Net losses and loss expenses for the year ended December 31, 1999 include
incurred losses for ACE INA from July 2, 1999, the date of acquisition. With
respect to the analysis of incurred and paid losses for the 1999 period, all
losses incurred and paid, on losses occurring in the period January 1, 1999,
through December 31, 1999, have been included as current year activity in 1999.
Investments
The Company's principal investment objective is to ensure that funds will be
available to meet its primary insurance and reinsurance obligations. Within
this broad liquidity constraint, the investment portfolio's structure seeks to
maximize return subject to specifically approved guidelines of overall asset
classes, credit quality, liquidity, and volatility of expected returns. As
such, the Company's investment portfolio is invested primarily in fixed income
securities of the highest credit quality.
In June of 2000, the Company formed ACE Asset Management Inc., an operating
group replacing the more traditional role of Chief Investment Officer. The
formation of this group underscores the importance the Company places on the
growth and complexity of ACE's international investment activity. ACE Asset
Management operates principally to guide and direct the investment process of
the ACE Group of Companies. In this regard, the Asset Management Group:
. Conducts formal asset allocation modeling for each of the ACE
subsidiaries, providing formal recommendations for the portfolio's
structure
. Establishes recommended investment guidelines that are appropriate to the
prescribed asset allocation targets
. Provides the analysis, evaluation, and selection of external investment
advisors to the ACE Group
. Establishes and develops investment related analytics to enhance portfolio
engineering and risk control
. Monitors and aggregates the correlated risk of the overall investment
portfolio
. Provides governance over the investment process for each of the ACE
operating companies to ensure consistency of approach and adherence to
investment guidelines
For the investment portfolio, the Company determines allowable targeted
asset allocation and ranges for each of the operating segments. These asset
allocation targets are derived from sophisticated asset and liability modeling
that measures correlated histories of returns and volatility's of returns.
Allowable investment classes are further refined through analysis of the
Company's operating environment, including expected volatility of cash flows,
overall capital position, regulatory and rating agency considerations.
The Finance Committee of the Board of Directors approves asset allocation
targets and reviews the Company's investment policy to ensure that it is
consistent with the Company's overall goals, strategies and objectives. Overall
investment guidelines are approved by the Finance Committee to ensure
appropriate levels of portfolio liquidity, credit quality, diversification, and
volatility are maintained. In addition, the Finance Committee systematically
reviews the portfolio's exposures to capture any potential violations of
investment guidelines.
19
Within the guidelines and asset allocation parameters established by the
Company, individual investment committees of the operating segments determine
tactical asset allocation. Additionally, these committees review all investment
related activity that effects their operating company, including the selection
of outside investment advisors, proposed asset allocations changes, and the
systematic review of investment guidelines.
For additional information regarding the investment portfolio, including
breakdowns of the sector and maturity distributions, see Note 4 of the
Consolidated Financial Statements included in the 2001 Annual Report to
Shareholders.
Regulation
ACE Limited's insurance and reinsurance subsidiaries are subject to
regulation and supervision by the local authority in the countries or states in
which they do business. The extent of such regulation most commonly has its
source in statutes, which delegate regulatory, supervisory and administrative
power to a department of insurance.
Bermuda Operations
In Bermuda, the Company's insurance subsidiaries are regulated by the
Insurance Act 1978 (as amended by the Insurance Amendment Act 1995) and related
regulations (the "Act"). The Act imposes on Bermuda insurance companies
solvency and liquidity standards; auditing and reporting requirements; and
grants the Minister of Finance powers to supervise, investigate and intervene
in the affairs of insurance companies. Significant requirements include the
appointment of an independent auditor and the appointment of a loss reserve
specialist.
United Kingdom and Lloyd's Regulation
The Company, certain of its UK subsidiaries and some staff employed within
the Lloyd's operations are currently subject to the regulatory jurisdiction of
the Council of Lloyd's (the "Council") and the Financial Services Authority
("FSA"). This jurisdiction arises by virtue of the Company being a controller
of each of the Lloyd's managing agencies and the Corporate Members in which it
has an interest and these entities themselves being subject to the UK
regulatory regime. Certain other subsidiaries have also been approved as
controllers, and are similarly subject to Lloyd's jurisdiction. On December 1,
2001, pursuant to the implementation of the Financial Services and Markets Act
2000, the FSA became the single UK statutory regulator to supervise securities,
banking and insurance business. The FSA has wide powers to make rules, and
these have largely replaced the existing statutory and self-regulatory
arrangements relevant to these areas and certain changes to the financial
reporting and solvency regime have already been introduced. Lloyd's (which has
itself become a regulated entity under the FSA regime) has also been delegated
certain self-regulatory responsibilities by the FSA under the terms of certain
supervision and enforcement arrangements made between Lloyd's and the FSA. The
Company and its subsidiaries will benefit from grandfathering provisions under
transitional arrangements.
Under English law, pursuant to the Lloyd's Act 1982 and certain bylaws
promulgated by Lloyd's itself, there are restrictions on the ownership of or
the holding of an interest in Lloyd's brokers or parties connected to Lloyd's
brokers by Lloyd's Managing Agencies or certain of their related entities and
vice versa. However, departures from this general principle may apply and can
be implemented subject to their disclosure to Lloyd's and to Lloyd's
non-objection to the structures proposed.
Furthermore, in July 2000, responsibility for the regulatory oversight of
Lloyd's brokers passed to the General Insurance Standards Council ("GISC"). In
December 2001, the UK Government announced that the FSA will be the authority
to carry out statutory regulation of insurance intermediaries. There will thus
be a transition period (two years anticipated) whereby registered entities will
be regulated by the GISC. This includes certain subsidiaries of ACE Limited
additionally operating within the Lloyd's regulatory framework. Lloyd's has
introduced an accreditation scheme for brokers with effect from January 1,
2001, which effectively opens up the
20
Lloyd's broker franchise. Lloyd's will continue to maintain a register of
Lloyd's brokers and the restrictions outlined above will pertain for the
foreseeable future. However, the requirement to use Lloyd's brokers to place
substantially all classes of business has been relaxed such that, subject to
certain criteria, the need to use Lloyd's brokers for the placement of outwards
reinsurance may be eliminated.
Regulation of Lloyd's Entities in the United States
Generally direct insurance business can be written on either a licensed or a
non-admitted (which includes surplus lines) basis. Licensed insurers are
subject to regulation of both solvency margin and business practices such as
premium rate and policy form control. Non-admitted insurers are not subject to
rate and form control in most states, but regulators still manage the entry to
the surplus lines market by imposing minimum solvency and trust requirements
for insurers wishing to be deemed "eligible" surplus lines insurers. Certain
states also impose additional qualification criteria.
In most states, surplus lines insurers undergo a vetting procedure and with
respect to Lloyd's underwriters this is being made increasingly on a syndicate
by syndicate basis.
Insurer licensing requirements do not apply to reinsurers and as a result
both licensed and non-admitted reinsurers may write reinsurance in the U.S.
The trading status of underwriters at Lloyd's in the U.S. is supported by a
unique trust fund structure. The trust funds were reviewed and restructured in
August 1995 in consultation with the New York Insurance Department, which acts
as the domiciliary commissioner for Lloyd's U.S. trust funds held in the state
of New York.
Prior to August 1995, all U.S. dollar premiums were deposited and held in
the Lloyd's American Trust Fund ("LATF"), regardless of the actual situs of the
risk. The LATF continues to support risks for U.S. business incepting prior to
August 1995, but the trust fund and accounting arrangements have changed for
U.S. dollar business incepting after August 1, 1995. These include the creation
of a Lloyd's Dollar Trust Fund in the UK and a series of deposit trust funds in
the U.S. to support U.S. surplus lines and U.S. reinsurance business. There are
additional deposit trust fund arrangements in certain U.S. states. Lloyd's and
the U.S. regulators continue to review the basis of Lloyd's syndicate U.S.
trading arrangements.
ACE International
The extent of insurance regulation varies significantly among the countries
in which ACE International conducts its operations. While all such countries
impose requirements for licensing, solvency, auditing and financial reporting,
such requirements in these and other areas can differ substantially. For
example:
. In some jurisdictions insurers are required to prepare and file quarterly
financial reports, and in others only annual reports;
. Some jurisdictions require broker or agent involvement in the sales of
insurance products, whereas in others such involvement is optional;
. Restrictions on use of foreign reinsurers vary;
. In some jurisdictions policy forms and rates are regulated and must be
filed for certain lines of business, whereas in others they are
unregulated;
. Some jurisdictions require periodic on-site examinations by insurance
authorities, whereas others do not; and
. The ability to remit dividends is restricted more in some jurisdictions
than in others.
21
Significant variations can also be found in the size, structure and
resources of the local regulatory departments that oversee insurance
activities. There can also be notable differences among similar departments in
the rigor of regulatory enforcement.
ACE International operates through both subsidiaries and branches, the
latter of which generally have reduced local capital requirements, and certain
ACE International companies are jointly owned due to legal requirements for
local ownership. Regardless of the corporate structure, ACE International
companies can face greater restrictions than their domestic competitors, due to
multinational application of U.S. laws and otherwise. Operational challenges
can include discretionary licensing procedures, compulsory cessions of
reinsurance, local retention of funds and records, and foreign exchange
controls.
The complex regulatory environments in which ACE International operates are
subject to change and are regularly monitored.
The largest insurance operations within ACE International are ACE Insurance
S.A. - N.V. ("ACE Europe") and ACE Insurance in Japan ("ACE Japan"). ACE Europe
conducts its insurance business in the European Economic Area ("EEA") under the
laws and regulations of the EEA, in particular the local laws passed by EEA
member states following the European Third (or "Framework") Non-Life Directive
of 1992. The Framework Directive is the basis of the European single market in
non-life insurance. It provides for the harmonization of technical reserves,
matching and localization of assets, solvency margins and regulation and
control of management. Under the Directive, ACE Europe has established
operations in 14 EEA jurisdictions, and also conducts cross-border business on
a freedom of service basis. ACE Europe's home member state regulatory authority
is Belgium.
ACE Japan is regulated by the Financial Services Agency ("FSA"). In
accordance with the Insurance Business Law in Japan, the FSA focuses on
protecting policyholders' interests by ensuring the sound management of
insurance companies and their operations, including licensing, product filings
and approval, distribution of insurance products, investment of insurance
premiums and other assets, etc. FSA staff conduct on-site inspections when
deemed necessary. Insurance companies must submit an annual business report
regarding its operations and assets. Deregulation and liberalization of the
Japanese non-life insurance market has placed more emphasis on insurers'
independence of operation and compliance requirements.
Operations in the United States of America
Although at the present time there is limited federal regulation of the
insurance business in the U.S., the U.S. insurance subsidiaries are subject to
extensive regulation in the states in which they do business. The laws of the
various states establish supervisory agencies with broad authority to regulate,
among other things: licenses to transact business, soliciting business,
advertising, rates for certain business, policy language, underwriting and
claims practices, transactions with affiliates, reserve adequacy, dividends,
investments and insurer solvency. In addition, the U.S. insurance subsidiaries
are subject to judicial decisions that define the risks and benefits for which
insurance is sought and provided. These include judicial interpretations of the
nature of the insured risk in such areas as product liability and environmental
coverages.
Regulation varies from state to state but generally requires that each
primary insurance company obtain a certificate of authority from the department
of insurance of a state to conduct business in that state. Regulations
generally require insurance and reinsurance companies to furnish information
concerning activities, which may materially affect the operations, management
or financial condition and solvency of the company. For a U.S. ceding company
to obtain financial statement credit for reinsurance ceded, the reinsurer must
obtain an insurance license or accredited status from the cedent's state of
domicile or must post collateral to support the liabilities ceded. In addition,
regulations for reinsurers vary somewhat from primary insurers in that
reinsurers are typically not subject to regulator approval of insurance policy
forms or the rates agreed to between ceding insurers and their reinsurers.
22
The U.S. insurance subsidiaries are required to file detailed annual and
quarterly reports with state insurance regulators in each of the states in
which they do business. Such annual and quarterly reports are required to be
prepared on a calendar year basis. In addition, the U.S. insurance
subsidiaries' operations and accounts are subject to examination at regular
intervals by state regulators. The respective reports filed in accordance with
applicable insurance regulations with respect to the most recent periodic
examinations of the U.S. insurance subsidiaries contained no material adverse
findings.
Statutory surplus is an important measure utilized by the regulators and
rating agencies to assess the Company's U.S. insurance subsidiaries' ability to
support business operations and provide dividend capacity. The Company's U.S.
insurance subsidiaries are subject to various state statutory and regulatory
restrictions that limit the amount of dividends that may be paid without prior
approval from regulatory authorities. These restrictions differ by state, but
are generally based on calculations incorporating statutory surplus, statutory
net income, and/or investment income.
State insurance regulators have also adopted Risk Based Capital ("RBC")
requirements that are applicable to the U.S. insurance subsidiaries. These RBC
requirements are designed to monitor capital adequacy and to raise the level of
protection that statutory surplus provides for policyholders. The RBC formula
provides a mechanism for the calculation of an insurance company's Authorized
Control Level ("ACL") RBC amount. The initial RBC level which triggers
regulatory action is known as the Company Action Level. Failure to achieve this
level of RBC, which occurs if policyholders' surplus falls below 200 percent of
the ACL, requires the insurance company to submit a plan of corrective action
to the relevant insurance commissioner. Based on the RBC formula, at December
31, 2000, the policyholders' surplus of each of the ongoing U.S. insurance
subsidiaries was higher than the Company Action Level.
There are additional progressive RBC failure levels, which trigger more
stringent regulatory action. An insurance commissioner may allow a property and
casualty company at or below the mandatory control level that is writing no
business and is running off its existing business to continue its run-off. The
Company's Brandywine subsidiary is running off its liabilities consistent with
the terms of an Order by the Commissioner of Pennsylvania which includes
periodic reporting obligations to the Pennsylvania Insurance Department, as the
Commission has determined that these subsidiaries have sufficient assets to
meet their obligations.
In November 1999, the U.S. Congress passed the Gramm-Leach-Bliley Act
("GLBA"), financial modernization legislation that reshapes the regulation of
the financial services industry in the United States. GLBA repeals provisions
of the Glass-Steagall Act and Bank Holding Company Act that had prevented
affiliation between banks, broker-dealers and insurers. This legislation
defines regulatory supervisory responsibility for newly created Financial
Holding Companies. The law purports largely to preserve functional regulation
of insurance companies and agents by state insurance departments. However,
until a number of Federal agencies finish issuing regulations implementing
their new regulatory authority over Financial Holding Companies, it is not
possible to predict the exact magnitude of the impact of GLBA on ACE. Further,
until the full extent of the integration of banking, securities and insurance
businesses is known, it is impossible to predict the impact of this law on
competition in the markets in which ACE operates.
Regulations regarding Non-U.S. Operations in the United States
Each state in the U.S. licenses insurers and prohibits, with some
exceptions, the sale of insurance by non-admitted, non-U.S. insurers within its
jurisdictions. The Company and its non-U.S. insurance subsidiaries, excluding
its Lloyd's operations, are not licensed to do business as admitted insurers in
any jurisdiction in the U.S.
Many states impose a premium tax (typically 2 percent to 4 percent of gross
premiums) on insureds who obtain insurance from non-admitted foreign insurers,
such as ACE Bermuda. The premiums charged by the non-U.S. insurer do not
include any U.S. state premium tax. Each insured is responsible for determining
whether it is subject to any such tax and for paying such tax as may be due.
23
The U.S. Internal Revenue Code also imposes on policyholders an excise tax
on insurance and reinsurance premiums paid to foreign insurers or reinsurers
with respect to risks located in the United States. The rates of tax applicable
to premiums paid to Bermuda domiciled companies are 4 percent for insurance
premiums and 1 percent for reinsurance premiums.
There can be no assurance that new or additional legislation in the U.S.
will not be proposed and enacted that has the effect of subjecting the
Company's non-U.S. insurance subsidiaries, including its Lloyd's operations, to
regulation in the U.S.
Tax Matters
Corporate Income Tax
ACE Limited is a Cayman Islands corporation that operates as a holding
company with offices only in Bermuda and does not pay U.S. corporate income
taxes (except certain withholding taxes) on the basis that it is not engaged in
a trade or business in the U.S. However, there can be no assurance that the
Internal Revenue Service (''IRS'') will not contend to the contrary. If ACE
Limited were subject to U.S. income tax, there could be a material adverse
effect on the Company's shareholders' equity and earnings. ACE Limited and its
Bermuda-based insurance and reinsurance subsidiaries do not file U.S. income
tax returns reporting income subject to U.S. income tax since they do not
conduct business within the U.S. However, ACE Limited and its Bermuda-based
insurance and reinsurance subsidiaries have filed protective tax returns
reporting no U.S. income to preserve their ability to deduct their ordinary and
necessary business expenses should the IRS successfully challenge their
contention that none of their income is subject to a net income tax in the U.S.
Under current Cayman Islands law, ACE Limited is not required to pay any
taxes on its income or capital gains. ACE Limited has received an undertaking
that, in the event of any taxes being imposed, ACE Limited will be exempted
from taxation in the Cayman Islands until the year 2013.
Under current Bermuda law, ACE Limited and its Bermuda subsidiaries are not
required to pay any taxes on its income or capital gains. ACE Limited and the
Bermuda subsidiaries have received an undertaking from the Minister of Finance
in Bermuda that, in the event of any taxes being imposed, the Company will be
exempt from taxation in Bermuda until March 2016.
Income from the Company's operations at Lloyd's is subject to United Kingdom
corporation taxes. Lloyd's is required to pay U.S. income tax on U.S. connected
income ("U.S. income") written by Lloyd's syndicates. Lloyd's has a closing
agreement with the IRS whereby the amount of tax due on this business is
calculated by Lloyd's and remitted directly to the IRS. These amounts are then
charged to the personal accounts of the Names/Corporate Members in proportion
to their participation in the relevant syndicates. The Company's Corporate
Members are subject to this arrangement but, as U.K. domiciled companies, will
receive U.K. corporation tax credits for any U.S. income tax incurred up to the
value of the equivalent U.K. corporation income tax charge on the U.S. income.
ACE INA, ACE US Holdings and ACE Financial Services are subject to income
taxes imposed by U.S. authorities and file U.S. tax returns. Certain
international operations of the Company are also subject to income taxes
imposed by the jurisdictions in which they operate.
Related Person Insurance Income
Each U.S. person who beneficially owns Ordinary Shares of the Company
(directly or through foreign entities) on the last day of a non-U.S. insurance
company subsidiary's fiscal year will have to include in such person's gross
income for U.S. tax purposes a proportionate share (determined as described
herein) of the related person insurance income ("RPII") of such insurance
company subsidiary if the RPII of such insurance company
24
subsidiary, determined on a gross basis, is 20 percent or more of that
insurance company subsidiary's gross insurance income in such fiscal year. RPII
is income attributable to insurance policies where the direct or indirect
insureds are U.S. shareholders or are related to U.S. shareholders of the
Company. RPII may be includible in a U.S. shareholder's gross income for U.S.
tax purposes regardless of whether or not such shareholder is an insured.
For the calendar year ended December 31, 2001, the Company believes that
gross RPII of each of its insurance company subsidiaries was below 20 percent
for the year. Although no assurances can be given, the Company anticipates that
gross RPII of each of its non-U.S. insurance company subsidiaries will be less
than 20 percent of each such subsidiary's gross insurance income for subsequent
years and the Company will endeavor to take such steps as it determines to be
reasonable to cause its gross RPII to remain below such level.
The RPII provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), have never been interpreted by the courts. Regulations interpreting
the RPII provisions of the Code exist only in proposed form, having been
proposed on April 16, 1991. It is not certain whether these regulations will be
adopted in their proposed form or what changes or clarifications might
ultimately be made thereto or whether any such changes, as well as any
interpretation or application of RPII by the IRS, the courts, or otherwise,
might have retroactive effect.
Employees
At December 31, 2001, the Company employed a total of 7,676 persons.
Approximately 1,100 of the Company's employees are represented by various
collective bargaining agreements, all of which are outside the U.S., United
Kingdom and Bermuda. Of these employees 385 are employed in Asia Pacific and
560 in Europe. The remaining employees are in various countries in Latin
America.
Australia
North & New Asia Latin
Bermuda America Europe Zealand Pacific America Total
------- ------- ------ --------- ------- ------- -----
244 4,299 1,418 193 1,084 438 7,676
Item 2. Properties
The Company operates in the United States and in almost 50 countries around
the world. During 2001, ACE Limited and ACE Bermuda moved into the new ACE
Global Headquarters building in Hamilton, Bermuda. The Company continues to
lease offices in Bermuda from a joint venture company in which the Company has
a 40 percent interest. As part of the Company's acquisition of ACE INA, ACE
assumed the lease of Two Liberty Place, in Philadelphia, which consists of
approximately 1.25 million total square feet, and various other leases and
properties in the U.S. and other countries. It is the Company's intention
during 2002 to bring together all of the London-based staff of ACE Global
Markets and ACE Europe in a new headquarters in London. The majority of all
office facilities throughout the world that are occupied by the Company and its
subsidiaries are leased. The Company is not dependent on its facilities to
conduct business.
Item 3. Legal Proceedings
The Company's insurance subsidiaries are subject to claims litigation
involving disputed interpretations of policy coverages and in some
jurisdictions, direct actions by allegedly injured persons seeking damages from
policyholders. These lawsuits involving claims on policies issued by the
Company's subsidiaries which are typical to the insurance industry in general
and in the normal course of business, are considered in the Company's loss and
loss expense reserves which are discussed in the unpaid losses and loss
expenses discussion. In addition to claims litigation, the Company and its
subsidiaries are subject to lawsuits and regulatory actions in the normal
course of business that do not arise from or directly relate to claims on
insurance policies. This
25
category of business litigation typically involves, inter alia, allegations of
underwriting errors or misconduct, employment claims, regulatory activity or
disputes arising from the Company's business ventures. While the outcomes of
the business litigation involving ACE cannot be predicted with certainty at
this point, ACE is disputing and will continue to dispute allegations against
it that are without merit and believes that the ultimate outcomes of matters in
this category of business litigation will not have a material adverse effect on
its financial condition, future operating results or liquidity.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year covered by this report. A proxy statement was mailed
to stockholders in December 2001 with respect to an Extraordinary Meeting of
Shareholders ("EGM"). The EGM was held on January 22, 2002 at which time the
stockholders voted on the following matters:
a) Proposal to increase the number of authorized Ordinary Shares of the
Company from 300 million shares to 500 million shares.
The holders of 213,465,370 shares voted in favour, 1,828,531 voted
against and 87,957 abstained.
b) Proposal to increase the number of authorized Other Shares of the
Company from 10 million shares to 20 million shares.
The holders of 156,032,346 shares voted in favour, 38,547,831 voted
against and 94,659 abstained.
EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages, positions and business
experience of the executive officers of the Company.
Name Age Position
- ---- --- --------
Brian Duperreault............ 54 Chairman, Chief Executive Officer & Director
Donald Kramer................ 64 Vice Chairman and Director
Dominic J. Frederico......... 48 President, Chief Operating Officer & Director, ACE Limited, Chairman,
ACE INA
Evan G. Greenberg............ 47 Vice Chairman, ACE Limited and Chief Executive Officer, ACE Tempest
Reinsurance Company Limited
Philip V. Bancroft........... 41 Chief Financial Officer
Peter N. Mear................ 57 General Counsel & Secretary
Robert A. Blee............... 39 Chief Accounting Officer
Brian Duperreault has been a director of ACE since October 1994. Mr.
Duperreault has served as Chairman and Chief Executive Officer of ACE since
November 1999 and as Chairman, President and Chief Executive Officer of ACE
from October 1994 through November 1999. Prior to joining ACE, Mr. Duperreault
had been employed with American International Group ("AIG") since 1973 and
served in various senior executive positions with AIG and its affiliates from
1978 until September 1994, most recently as Executive Vice President, Foreign
General Insurance and, concurrently, as Chairman and Chief Executive Officer of
American International Underwriters Inc., a subsidiary of AIG, from April 1994
to September 1994. Mr. Duperreault was President of American International
Underwriters Inc. from 1991 to April 1994, and Chief Executive Officer of AIG
affiliates in Japan and Korea from 1989 until 1991.
26
Donald Kramer has been a director and Vice Chairman of ACE since July 1996,
following the acquisition of ACE Tempest Re. Mr. Kramer served as Chairman or
Co-Chairman of the Board of Tempest from its formation in September 1993 until
July 1996 and was President of ACE Tempest Re from July 1996 until 1999. ACE
Tempest Re was acquired by the Company on July 1, 1996. Prior to the formation
of ACE Tempest Re, he was President of Kramer Capital Corporation (venture
capital investments) from March to September 1993, President of Carteret
Federal Savings Bank (banking) from August 1991 to March 1993, Chairman of the
Board of NAC Re Corporation (reinsurance) from June 1985 to June 1993, Chairman
of the Board and Chief Executive Officer of KCP Holding Company (insurance)
from July 1986 to August 1991 and of its affiliates, KCC Capital Managers
(insurance investments) and Kramer Capital Consultants, Inc. (insurance
investments), as well as Chairman of the Board of its subsidiary, National
American Insurance Company of California (insurance) from September 1988 to
August 1991.
Dominic J. Frederico has served as President and Chief Operating Officer of
ACE and Chairman of ACE INA since November 1999. On November 16, 2001, Mr.
Frederico was appointed to the Board of Directors. Mr. Frederico has also
served as Chairman, President and Chief Executive Officer of ACE INA from May
1999 through November 1999. Mr. Frederico previously served as President of ACE
Bermuda since July 1997, Executive Vice President, Underwriting since December
1996, and as Executive Vice President, Financial Lines from January 1995 to
December 1996. Mr. Frederico served in various capacities at AIG in Europe and
the U.S. from 1982 to January 1995, most recently as Senior Vice President and
Chief Financial Officer of an AIG subsidiary, with multi-regional general
management responsibilities.
Evan G. Greenberg joined the ACE Group of Companies as Vice Chairman, ACE
Limited, and Chief Executive Officer, ACE Tempest Re in November 2001. Mr.
Greenberg was most recently President and Chief Operating Officer of AIG, a
position he held from 1997 until 2000. From 1975 until 1997, Mr. Greenberg held
a variety of senior management positions at AIG including Chief Operating
Officer of AIU, AIG's Foreign General Insurance Organization, and President and
Chief Executive Officer of AIU.
Philip V. Bancroft was appointed to the position of Chief Financial Officer
of ACE Limited in January 2002. For nearly 20 years, Mr. Bancroft worked for
PricewaterhouseCoopers LLP. Most recently he served as partner-in-charge of the
New York Regional Insurance Practice. Mr. Bancroft has been a Partner with
PricewaterhouseCoopers LLP for 10 years.
Peter N. Mear has served as General Counsel and Secretary of ACE since April
1996. Mr. Mear served as Vice President and Claims Counsel of Aetna Casualty
and Surety Company from February 1991 to April 1996 and Counsel and Litigation
Section Head of Aetna Life & Casualty from September 1977 to February 1991.
Robert A. Blee has served as Chief Accounting Officer of ACE since October
1998. Mr. Blee served as Group Controller of ACE from January 1997 to October
1998, Vice President, Finance of ACE from July 1996 to January 1997, Assistant
Vice President and Assistant Controller from October 1994 to July 1996 and
Chief Accountant from August 1993 to October 1994.
27
PART II
Item 5. Market for the Registrant's Ordinary Shares and Related Stockholder
Matters
(a) The Company's Ordinary Shares, par value $0.041666667 per share, have
been listed on the New York Stock Exchange since March 25, 1993. The ticker
symbol was changed to ACE from ACL on March 30, 2001. On January 22, 2002, the
Company held an Extraordinary General Meeting whereby the shareholders of ACE
Limited approved a proposal to increase the number of authorized Ordinary
Shares from 300 million shares to 500 million shares. At the meeting, the
shareholders also approved a proposal increasing the number of authorized Other
Shares from 10 million shares to 20 million shares. The Other Shares may be
issued in one or more classes or series with the terms, such as the dividend
rates, voting rights, conversion rates, rights and terms of redemption and
other rights, preferences and restrictions, established by the Board of
Directors of the Company.
The following table sets forth the high and low closing sales prices of the
Company's Ordinary Shares per fiscal quarters, as reported on the New York
Stock Exchange Composite Tape for the periods indicated:
2001 2000
------------- -------------
High Low High Low
------ ------ ------ ------
Quarter ending March 31................ $41.25 $33.10 $22.88 $14.69
Quarter ending June 30................. $39.89 $31.72 $30.44 $20.50
Quarter ending September 30............ $38.71 $20.50 $39.75 $27.56
Quarter ending December 31............. $40.27 $28.90 $43.56 $33.56
The last reported sale price of the Ordinary Shares on the New York Stock
Exchange Composite Tape on February 28, 2002 was $43.90.
(b) The approximate number of record holders of Ordinary Shares as of
February 28, 2002 was 1,886.
(c) The following table represents dividends paid per share to shareholders
of record on each of the following dates:
Shareholders of Record as of: Shareholders of Record as of:
March 30, 2001.......... $0.13 March 31, 2000.......... $0.11
June 29, 2001........... $0.15 June 30, 2000........... $0.13
September 28, 2001...... $0.15 September 30, 2000...... $0.13
December 31, 2001....... $0.15 December 29, 2000....... $0.13
On September 12, 2000, the Company completed the sale of 12.25 million
Ordinary Shares for net proceeds of approximately $400 million. On October 25,
2001, the Company completed the sale of 32.89 million Ordinary Shares for net
proceeds of approximately $1.1 billion.
ACE is a holding company whose principal source of income is investment
income and dividends from its operating subsidiaries. The ability of the
operating subsidiaries to pay dividends to ACE and the Company's ability to pay
dividends to its shareholders are each subject to legal and regulatory
restrictions. The declaration and payment of future dividends will be at the
discretion of the Board of Directors and will be dependent upon the profits and
financial requirements of the Company and other factors, including legal
restrictions on the payment of dividends and such other factors as the Board of
Directors deems relevant. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition Liquidity and Capital Resources" in the
2001 Annual Report to Shareholders filed with this Form 10-K.
28
Item 6. Selected Financial Data
Selected financial data for the three years ended December 31, 2001, 2000
and 1999, the three month period ended December 31, 1998, and the two years
ended September 30, 1998 and 1997, is incorporated by reference to page 1 of
the 2001 Annual Report to Shareholders filed in Exhibit 13.1 filed with this
Form 10-K.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This item is incorporated by reference to pages 30 through 51 of the 2001
Annual Report to Shareholders filed in Exhibit 13.1 filed with this Form 10-K.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
This item is incorporated by reference to page 50 of the 2001 Annual Report
to Shareholders filed in Exhibit 13.1 filed with this Form 10-K.
Item 8. Financial Statements and Supplementary Data
This item is incorporated by reference to pages 52 through 100 of the 2001
Annual Report to Shareholders filed in Exhibit 13.1 filed with this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in nor any disagreements with accountants on
accounting and financial disclosure within the two years ended December 31,
2001.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
This item is incorporated by reference to the sections entitled "Election of
Directors-Nominees for Election to Terms Expiring in 2005" and "Election of
Directors-Directors Whose Terms of Office Will Continue After This Meeting" of
the definitive proxy statement for the Annual General Meeting of Shareholders
to be held on May 16, 2002, which involves the election of directors and will
be filed with the Securities and Exchange Commission not later than 120 days
after the close of the fiscal year pursuant to regulation 14A.
Item 11. Executive Compensation
This item is incorporated by reference to the section entitled "Executive
Compensation" of the definitive proxy statement for the Annual General Meeting
of Shareholders to be held on May 16, 2002, which will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the fiscal year pursuant to regulation 14A.
Item 12. Security Ownership and Certain Beneficial Owners and Management
This item is incorporated by reference to the section entitled "Beneficial
Ownership of Ordinary Shares" of the definitive proxy statement for the Annual
General Meeting of Shareholders to be held on May 16, 2002, which will be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the fiscal year pursuant to regulation 14A.
Item 13. Certain Relationships and Related Transactions
This item is incorporated by reference to the section entitled "Election of
Directors-Certain Business Relationships" of the definitive proxy statement for
the Annual General Meeting of Shareholders to be held on May 16, 2002, which
will be filed with the Securities and Exchange Commission not later than 120
days after the close of the fiscal year pursuant to regulation 14A.
30
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
The following is a list of financial statements filed as part of this
Report, all of which have been incorporated by reference to the material in the
2001 Annual Report to Shareholders as described under Item 8 of this Report
-- Report of Independent Accountants
-- Consolidated Balance Sheets at December 31, 2001 and 2000
-- Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999
-- Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999
-- Consolidated Statements of Comprehensive Income for the years ended
December 31, 2001, 2000 and 1999
-- Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
-- Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Included in Part IV of this report.
Schedule
Number Page
-------- ----
- -- Report of Independent Accountants on financial statement schedules included in
Form 10-K.......................................................................... 37
- -- Summary of Investments............................................................. I 38
- -- Condensed financial information of the Registrant as of December 31, 2001 and 2000,
and for the years ended December 31, 2001, 2000 and 1999................. II 39
- -- Supplemental information concerning Reinsurance.................................... IV 42
- -- Supplemental information concerning Property/Casualty Operations................... VI 43
Other schedules have been omitted as they are not applicable to the Company,
or the required information has been included in the financial statements and
related notes.
3. Exhibits
2.1 Amended and Restated Agreement and Plan of Merger, dated as of October 26, 1999, among Capital Re Corporation, ACE
Limited and CapRe Acquisition Corp. (Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-4
(No. 333-90927))
2.2 First Amendment to Amended and Restated Agreement and Plan of Merger, dated as of November 29, 1999, among Capital
Re Corporation, ACE Limited and CapRe Acquisition Corp. (Incorporated by reference to Exhibit 2.5 to Registration
Statement on Form S-4 (No. 33-90927))
2.3 Acquisition Agreement, dated as of January 11, 1999, among CIGNA Corporation, CIGNA Holdings, Inc. and ACE Limited
(Incorporated by reference to Exhibit 2.1 of the Form 8-K current report (Date of earliest event reported: July 2, 1999))
2.4 Amendment No. 1 to Acquisition Agreement, dated as of July 2, 1999, CIGNA Corporation, CIGNA Holdings, Inc. and ACE
Limited (Incorporated by reference to Exhibit 2.2 of the Form 8-K current report (Date of earliest event reported: July 2,
1999))
2.5 Amendment No. 2 to Acquisition Agreement, dated as of July 2, 1999, CIGNA Corporation, CIGNA Holdings, Inc. and ACE
Limited (Incorporated by reference to Exhibit 2.3 of the Form 8-K current report (Date of earliest event reported: July 2,
1999))
3.1 Memorandum of Association of the Company (Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended
September 30, 1998)
31
3.2 Articles of Association of the Company (Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended
September 30, 1998)
3.3 Special Resolutions adopted January 22, 2002 increasing the number of authorized Ordinary Shares and Other Shares
4.1 Memorandum of Association of the Company (see Exhibit 3.1)
4.2 Articles of Association of the Company (see Exhibit 3.2)
4.3 Specimen certificate representing Ordinary Shares
4.4 Form of the Declaration of Terms of Capital Re LLC 7.65% Cumulative Monthly Income Preferred Shares, Series A,
January 24, 1994 (Incorporated by reference to Exhibit 4.2 to Capital Re's Registration Statement on Form S-3 (Reg.
No. 33-72090))
4.5 Form of Liability Assumption Agreement dated as of January 24, 1994, between Capital Re Corporation and Capital Re LLC
(Incorporated by reference to Exhibit 99.2 to Capital Re's Registration Statement on Form S-3 (Reg. No. 33-72090))
4.6 Form of Loan Agreement dated as of January 24, 1994, between Capital Re Corporation and Capital Re LLC (Incorporated
by reference to Exhibit 99.1 to Capital Re's Registration Statement on Form S-3 (Reg. No. 33-72090))
4.7 Form of Payment and Guarantee Agreement dated as of January 24, 1999, by Capital Re Corporation and Capital Re LLC
(Incorporated by reference to Exhibit 4.1 to Capital Re's Registration Statement on Form S-3 (Reg. No. 33-72090))
10.1* ACE Limited Annual Performance Incentive Plan (Incorporated by reference to Exhibit 10.13 to the Registration Statement
on Form S-1 of the Company (No. 33-57206))
10.2* ACE Limited Equity Linked Incentive Plan (Incorporated by reference to Exhibit 10.14 to the Registration Statement on
Form S-1 of the Company (No. 33-57206))
10.3* Amendment to ACE Limited Equity Linked Incentive Plan (Incorporated by reference to Exhibit 10.15 to the Registration
Statement on Form S-1 of the Company (No. 33-57206))
10.4* Form of restricted stock award dated August 24, 1993, to ACE Limited Directors (Incorporated by reference to Exhibit 10.39
to Form 10-K of the Company for the year ended September 30, 1993)
10.5* Employment Agreement, dated October 1, 1994, between ACE Limited and Brian Duperreault (Incorporated by reference to
Exhibit 10.42 to Form 10-K of the Company for the year ended September 30, 1994)
10.6* Employment Agreement, dated January 9, 1995, between ACE Limited and Dominic J. Frederico (Incorporated by reference
to Exhibit 10.45 to Form 10-K of the Company for the year ended September 30, 1995)
10.7* Second amendment to ACE Limited Equity Linked Incentive Plan (Incorporated by reference to Exhibit 10.45 to Form 10-K
of the Company for the year ended September 30, 1995)
10.8* Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.36 to Form 10-Q of the Company for the quarter
ended March 31, 1996)
10.9* ACE Limited 1996 Tempest Replacement Option Plan (Incorporated by reference to Exhibit 10.24 to Form 10-K of the
Company for the year ended September 30, 1996)
10.10* Third Amendment to Equity Linked Incentive Plan-Stock Appreciation Right Plan (Incorporated by reference to
Exhibit 10.28 to Form 10-Q of the Company for the quarter ended March 31, 1997)
10.11* ACE Limited Elective Deferred Compensation Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company
for the quarter ended December 31, 1997)
10.12* ACE Limited Rules of the Approved U.K. Stock Option Program (Incorporated by reference to Exhibit 10.1 to Form 10-Q of
the Company for the quarter ended December 31, 1997)
10.13 ACE US Holdings, Inc. Credit Sensitive Senior Notes due 2008 Indenture dated as of October 27, 1998 (Incorporated by
reference to Exhibit 10.37 of Form 10-K of the Company for the year ended September 30, 1998)
10.14* ACE Limited Rules of the Approved U.K. Stock Option Program (Incorporated by reference to Exhibit 10.1 to Form 10-Q of
the Company for the quarter ended December 31, 1997)
10.15 Information Technology Services Agreement, dated as of June 29, 1999, among ACE INA Holdings Inc. and International
Business Machines Corporation (Incorporated by reference to Exhibit 99.1 of the Form 8-K current report (Date of earliest
event reported: July 2, 1999))
32
10.16 Remarketing and Contingent Purchase Agreement, dated June 30, 1999, among ACE Limited, ACE INA Holdings Inc., ACE RHINOS
Trust and Banc of America Securities LLC (Incorporated by reference to Exhibit 99.2 of the Form 8-K current report (Date
of earliest event reported: July 2, 1999))
10.17 Indenture, dated as of June 15, 1999, between ACE RHINOS Trust, Holdings and The First National Bank of Chicago, as
Trustee (Incorporated by reference to Exhibit 99.4 of the Form 8-K current report (Date of earliest event reported: July
2, 1999))
10.18 Supplemental Indenture, dated as of June 30, 1999, between ACE RHINOS Trust, Holdings and The First National Bank of
Chicago, as Trustee (Incorporated by reference to Exhibit 99.5 of the Form 8-K current report (Date of earliest event
reported: July 2, 1999))
10.19 Senior Indenture, dated as of August 1, 1999, among ACE INA Holdings, Inc., ACE Limited and Bank One, NA (formerly The
First National Bank of Chicago), as trustee (Incorporated by reference to Exhibit 4.5 to registration statement on
Form S-1 of the Company (No. 333-78841))
10.20* ACE Limited 1999 Replacement Long Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the
Company for the quarter ended September 30, 1999)
10.21 Indenture, dated as of November 30, 1999, among ACE INA Holdings, Inc. and Bank One Trust Company, N.A., as trustee
(Incorporated by reference to Exhibit 10.38 to Form 10-K of the Company for the year ended December 31, 1999)
10.22 Supplemental Indenture No. 1, dated as of December 6, 1999, among ACE INA Holdings, Inc. and Bank One Trust Company,
N.A., as trustee (Incorporated by reference to Exhibit 10.39 to Form 10-K of the Company for the year ended December 31,
1999)
10.23 Amended and Restated Trust Agreement, dated December 20, 1999, among ACE INA Holdings, Inc., Bank One Trust Company,
National Association, as property trustee, Bank One Delaware Inc., as Delaware trustee and the administrative trustees
named therein (Incorporated by reference to Exhibit 10.40 to Form 10-K of the Company for the year ended December 31,
1999)
10.24 Indenture, dated as of December 1, 1999, among ACE INA Holdings, Inc., ACE Limited and Bank One Trust Company, National
Association (Incorporated by reference to Exhibit 10.41 to Form 10-K of the Company for the year ended December 31, 1999)
10.25 Common Securities Guarantee Agreement, dated as of December 20, 1999 (Incorporated by reference to Exhibit 10.42 to Form
10-K of the Company for the year ended December 31, 1999)
10.26 Preferred Securities Guarantee Agreement, dated as of December 20, 1999 (Incorporated by reference to Exhibit 10.43 to
Form 10-K of the Company for the year ended December 31, 1999)
10.27* Consulting Agreement dated as of January 1, 2000, between Kramer Capital Corp. and the Company (Incorporated by reference
to Exhibit 10.46 to Form 10-K of the Company for the year ended December 31, 1999)
10.28* Promissory note from Dominic Frederico (Incorporated by reference to Exhibit 10.47 to Form 10-K of the Company for the
year ended December 31, 1999)
10.29 $75 million Credit Facility (subsequently amended to $100 million) between Capital Re Company, Various Banks and Deutsche
Bank AG, as Agent (Incorporated by reference to Exhibit 4.09 to the Annual Report on Form 10-K for Capital Re Corporation
for the fiscal year ended December 31, 1994 (Comm. File No. 1-10995))
10.30 Reimbursement Agreement dated as of September 8, 1999, among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest
Reinsurance Ltd., (formerly known as Tempest Reinsurance Company Limited), as account parties, various banks, financial
institutions and other institutional lenders, Mellon Bank, N.A., as issuing bank, Deutsche Bank of AG, New York and/or
Cayman Islands Branches and Fleet National Bank as documentation agents, and Mellon Bank, N.A. as administrative agent
(Incorporated by reference to Exhibit 10.52 to Form 10-K of the Company for the year ended December 31, 1999)
10.31* ACE Limited 1999 Replacement Stock Plan (Incorporated by reference to Exhibit 10.54 to Form 10-K of the Company for the
year ended December 31, 1999)
10.32 Amendment dated as of January 27, 1998, to $100 Million Credit Facility between Capital Reinsurance Company, Various
Banks and Deutsche Bank AG, as Agent (Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended December
31, 1997 for Capital Re Corporation (Comm. File No. 1-10995))
10.33 Amendment dated as of March 22, 1999, to $100 Million Credit Facility between Capital Reinsurance Company, Various Banks
and Deutsche Bank AG, as Agent (Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended December 31,
1998 for Capital Re Corporation (Comm. File No. 1-10995))
33
10.34 Purchase Contract Agreement, dated as of April 12, 2000, between ACE Limited and The Bank of New York, acting as
purchase contract agent for the Holders of Securities (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the
Company for the quarter ended March 31, 2000)
10.35 Remarketing Agreement, dated as of April 12, 2000, among ACE Limited, The Bank of New York and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company
for the quarter ended March 31, 2000)
10.36 Pledge Agreement, dated as of April 12, 2000, among ACE Limited; The Bank of New York, as Collateral Agent, Custodial
Agent and Securities Intermediary; and The Bank of New York, as Purchase Contract Agent (Incorporated by reference to
Exhibit 10.4 to Form 10-Q of the Company for the quarter ended March 31, 2000)
10.37* ACE USA Officer Deferred Compensation Plan (as amended through January 1, 2000) (Incorporated by reference to
Exhibit 10.5 to Form 10-Q of the Company for the quarter ended March 31, 2000)
10.38* ACE USA Supplemental Employee Retirement Savings Plan (Incorporated by reference to Exhibit 10.6 to Form 10-Q of the
Company for the quarter ended March 31, 2000)
10.39 Amendment to Reimbursement Agreement dated as of March 15, 2000, among ACE Limited, ACE Bermuda Insurance Ltd.,
ACE Tempest Reinsurance Ltd. (formerly known as Tempest Reinsurance Company Limited), Deutsche Bank AG, New
York and/or Cayman Islands Branches and Fleet National Bank as Documentation Agents, and Mellon Bank, as Issuing Bank
and Administrative Agent. (Incorporated by reference to Exhibit 10.9 to Form 10-Q of the Company for the quarter ended
March 31, 2000)
10.40 Amended and Restated Five Year Credit Agreement among ACE Limited, ACE Bermuda Insurance Company Ltd., ACE
INA Holdings, Inc. and ACE Financial Services, Inc., Mellon Bank, N.A., Bank of America, N.A. and The Chase Manhattan
Bank, dated May 8, 2000 (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended
June 30, 2000)
10.41 Amended and Restated 364 Day Credit Agreement among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest
Reinsurance Ltd. (formerly known as Tempest Reinsurance Company Limited). ACE INA Holdings Inc., ACE Guaranty Re
Inc., Bank of America, N.A., The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York dated May 8,
2000 (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended June 30, 2000)
10.42 Third Amendment to Reimbursement Agreement amends the Reimbursement Agreement, dated as of September 8, 1999, and
amended as of November 30, 1999 and as of March 15, 2000, among ACE Limited, ACE Bermuda Insurance Ltd., ACE
Tempest Reinsurance Ltd. (formerly known as Tempest Reinsurance Company Limited), Deutsche Bank AG, New York and/
or Cayman Islands Branches and Fleet National Bank, as Documentation Agents, and Mellon Bank, N.A dated September 1,
2000 (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended September 30, 2000)
10.43 Fourth Amendment to Reimbursement Agreement which amends the Reimbursement Agreement, dated as of September 8,
1999, and amended as of November 30, 1999, as of March 15, 2000 and as of September 1, 2000, among ACE Limited, ACE
Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd. (formerly known as Tempest Reinsurance Company Limited),
Deutsche Bank AG, New York and/or Cayman Islands Branches and Fleet National Bank, as Documentation Agents, and
Mellon Bank, N.A., as Issuing Bank and Administrative Agent dated as of October 5, 2000 (Incorporated by reference to
Exhibit 10.3 to Form 10-Q of the Company for the quarter ended September 30, 2000)
10.44 The first amendment which amends the Amended and Restated Five Year Credit Agreement dated as of May 8, 2000, among
ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd. (formerly known as Tempest Reinsurance
Company Limited), ACE INA Holdings Inc. and ACE Financial Services, Inc., various financial institutions, and Morgan
Guaranty Trust Company of New York, as administrative agent dated as of October 23, 2000 (Incorporated by reference to
Exhibit 10.4 to Form 10-Q of the Company for the quarter ended September 30, 2000)
10.45 The first amendment which amends the Amended and Restated 364-Day Credit Agreement dated as of May 8, 2000, among
ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd. (formerly known as Tempest Reinsurance
Company Limited), ACE INA Holdings Inc. and ACE Guaranty Re Inc., various financial institutions and Morgan Guaranty
Trust Company of New York ("MGT"), as administrative agent dated as of October 23, 2000 (Incorporated by reference to
Exhibit 10.5 to Form 10-Q of the Company for the quarter ended September 30, 2000)
10.46* First Amendment to ACE Limited Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.59 to Form 10-K
of the Company for the year ended December 31, 2000)
10.47 Amendment and Restatement Agreement relating to a Letter of Credit Facility Agreement dated November 17, 2000 among
ACE Limited, ACE Bermuda Insurance Ltd., Citibank, N.A., as arranger, Barclays Bank plc and ING Barings, as
co-arrangers and Citibank International plc, as agent (Incorporated by reference to Exhibit 10.61 to Form 10-K of the
Company for the year ended December 31, 2000)
34
10.48* Promissory Note dated January 9, 2001 from Dominic J. Frederico (Incorporated by reference to Exhibit 10.1 to Form 10-Q of
the Company for the quarter ended March 31, 2001)
10.49 Amended and Restated Credit Agreement dated as of April 6, 2001 among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest
Reinsurance Ltd., ACE INA Holdings, Inc. and ACE Guaranty Re Inc., certain lenders, JP Morgan, a division of Chase
Securities, Inc., as Lead Arranger and Bookrunner, Bank of America, N.A., Barclays Bank PLC and Fleet National Bank, as
Co-Syndication Agents and Morgan Guaranty Company of New York, as Administrative Agent. (Incorporated by reference to
Exhibit 10.2 to Form 10-Q of the Company for the quarter ended March 31, 2001)
10.50* ACE Limited 1998 Long-Term Incentive Plan (as amended through the Second Amendment) (Incorporated by reference to Exhibit
10.3 to Form 10-Q of the Company for the quarter ended March 31, 2001)
10.51* The Compromise Agreement dated May 16, 2001 between ACE and John Charman (Incorporated by reference to Exhibit 10.1 to
Form 10-Q of the Company for the quarter ended June 30, 2001)
10.52* The ACE Limited 1995 Outside Directors Plan (as amended through the Fourth Amendment) (Incorporated by reference to
Exhibit 10.2 to Form 10-Q of the Company for the quarter ended June 30, 2001)
10.53* The ACE Limited 1995 Long Term Incentive Plan (as amended through the Second Amendment) (Incorporated by reference to
Exhibit 10.3 to Form 10-Q of the Company for the quarter ended June 30, 2001)
10.54* ACE Limited Supplemental Retirement Plan (as amended and restated effective July 1, 2001) (Incorporated by reference to
Exhibit 10.1 to Form 10-Q of the Company for the quarter ended September 30, 2001)
10.55 Reimbursement Agreement dated August 24, 2001 among ACE Limited, certain subsidiaries, various lenders and First Union
National Bank (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended September 30,
2001)
10.56 Second Amendment dated as of October 23, 2001, amending the Amended and Restated 364-day Credit Agreement dated as of May
8, 2000, as amended as of October 23, 2000 and amended and restated as of April 6, 2001 among ACE Limited, certain
subsidiaries, various lenders and Morgan Guaranty Trust Company of New York (Incorporated by reference to Exhibit 10.3 to
Form 10-Q of the Company for the quarter ended September 30, 2001)
10.57 Second Amendment dated as of October 23, 2001, amending the Amended and Restated Five Year Credit Agreement dated as of
May 8, 2000, and as amended as of October 23, 2000 among ACE Limited, certain subsidiaries, various lenders and Morgan
Guaranty Trust Company of New York (Incorporated by reference to Exhibit 10.4 to Form 10-Q of the Company for the quarter
ended September 30, 2001)
10.58 First Amendment dated as of October 23, 2001 amending the Reimbursement Agreement dated as of August 24, 2001 among ACE
Limited, certain subsidiaries, various lenders and First Union National Bank (Incorporated by reference to Exhibit 10.6 to
Form 10-Q of the Company for the quarter ended September 30, 2001)
10.59 Amended and Restated Rights Agreement between ACE Limited and Mellon Investor Services LLC, Rights Agent, dated as of
December 20, 2001
10.60* First Amendment to ACE Ltd. Elective Deferred Compensation Plan, effective as of January 1, 2001
10.61* ACE Limited Employee Retirement Plan, as amended and restated effective July 1, 2001 and further amended through December
28, 2001
10.62 Second Amendment and Restatement dated as of November 21, 2001 amending and restating a letter of credit facility
agreement dated as of November 19, 1999 and amended November 17, 2000 (and further amended as of October 23, 2001) among
ACE Limited, ACE Bermuda Insurance Ltd., Citibank, N.A. as arranger, Barclays Bank plc and ING Barings, as co-arrangers,
and Citibank International plc, as agent and trustee and certain financial institutions
10.63 Reimbursement Agreement for $500,000,000 Secured Letter of Credit Facility dated as of December 20, 2001 among ACE
Limited, certain subsidiaries, various lenders and First Union National Bank
13.1 Pages 1 and 30 through 100 of the 2001 Annual Report to Shareholders
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
* Management Contract or Compensation Plan
35
(b) Reports on Form 8-K
The Company filed a Form 8-K current report (date of earliest event
reported: December 20, 2001) pertaining to ACE Limited's announcement that it
will change its transfer agent for Ordinary Shares from The Bank of New York to
Mellon Investor Services LLC, effective as of the close of business on
December 31, 2001.
The Company filed a Form 8-K current report (date of earliest event
reported: January 8, 2002) pertaining to the announcement of an earnings
advisory on fourth quarter results and the appointment of Philip V. Bancroft as
Chief Financial Officer of ACE Limited.
36
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT
SCHEDULES INCLUDED IN FORM 10-K
Our report on the consolidated financial statements of ACE LIMITED AND
SUBSIDIARIES has been incorporated by reference in this Form 10-K from page 53
of the 2001 Annual Report to Shareholders of ACE Limited. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedules listed in item 14 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as whole,
present fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 13, 2002
37
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
ACE LIMITED AND SUBSIDIARIES
December 31, 2001
Amount at
Cost or which shown
Amortized in the balance
Cost Fair Value sheet
----------- ----------- --------------
(in thousands of U.S. dollars)
Fixed maturities:
Bonds:
U.S. Treasury and agency......................... $ 1,314,524 $ 1,344,076 $ 1,344,076
Non-U.S. governments............................. 1,403,053 1,428,977 1,428,977
Corporate securities............................. 6,687,887 6,743,090 6,743,090
Mortgage-backed securities....................... 2,272,111 2,322,951 2,322,951
States, municipalities and political subdivision. 1,116,869 1,161,071 1,161,071
----------- ----------- -----------
Total fixed maturities....................... 12,794,444 13,000,165 13,000,165
=========== =========== ===========
Equity securities:
Common stock:
Public utilities................................. 164,108 163,931 163,931
Banks, trust and insurance companies............. 50,698 48,094 48,094
Industrial, miscellaneous and all other.......... 298,470 253,396 253,396
Non redeemable preferred stock...................... 2,752 2,145 2,145
----------- ----------- -----------
Total equity securities...................... 516,028 467,566 467,566
----------- ----------- -----------
Other investments................................... 569,045 591,006 591,006
----------- ----------- -----------
Short-term investments and cash..................... 1,877,176 1,877,176 1,877,176
----------- ----------- -----------
Total investments and cash................... $15,756,693 $15,935,913 $15,935,913
=========== =========== ===========
38
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACE LIMITED AND SUBSIDIARIES
BALANCE SHEETS (Parent Company Only)
December 31, 2001 and 2000
2001 2000
---------- ----------
(in thousands of U.S. dollars)
Assets
Investments and cash
Investments in subsidiaries and affiliate on equity basis. $5,621,604 $4,975,663
Fixed maturities.......................................... 335,909 402,491
Short-term investments.................................... 120,892 3,247
Other investments, at cost................................ 270 27,715
Cash...................................................... 32,525 46,516
---------- ----------
Total investments and cash............................ 6,111,200 5,455,632
Due from subsidiaries and affiliates, net.................... 348,372 318,806
Other assets................................................. 64,570 27,404
---------- ----------
Total assets.......................................... $6,524,142 $5,801,842
========== ==========
Liabilities
Accounts payable and accrued liabilities..................... $ 64,341 $ 37,454
Dividends payable............................................ 42,044 33,127
---------- ----------
Total liabilities..................................... 106,385 70,581
---------- ----------
Mezzanine equity............................................. 311,050 311,050
---------- ----------
Shareholders' equity
Ordinary Shares.............................................. 10,828 9,681
Additional paid-in capital................................... 3,710,698 2,637,085
Unearned stock grant compensation............................ (37,994) (29,642)
Deferred compensation obligation............................. 16,497 14,597
Retained earnings............................................ 2,321,576 2,733,633
Accumulated other comprehensive income....................... 101,599 69,454
Ordinary shares issued to employee trust..................... (16,497) (14,597)
---------- ----------
Total shareholders' equity............................ 6,106,707 5,420,211
---------- ----------
Total liabilities, mezzanine equity and shareholders' equity. $6,524,142 $5,801,842
========== ==========
39
SCHEDULE II (Cont'd.)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACE LIMITED AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (Parent Company Only)
For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------- -------- --------
(in thousands of U.S. dollars)
Revenues
Investment income, including intercompany interest income. $ 70,075 $ 36,841 $ 33,877
Equity in net income of subsidiaries and affiliate........ (136,456) 575,032 400,623
Net realized loss on investments.......................... (13,524) (1,623) (9,354)
--------- -------- --------
(79,905) 610,250 425,146
Expenses
Administrative and other expenses......................... (66,509) (67,268) (60,183)
--------- -------- --------
Net income (loss)..................................... $(146,414) $542,982 $364,963
========= ======== ========
40
SCHEDULE II (Cont'd.)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACE LIMITED AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (Parent Company Only)
For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- --------- -----------
(in thousands of U.S. Dollars)
Cash flows from operating activities
Net income (loss)................................................. $ (146,414) $ 542,982 $ 364,963
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in net income of subsidiaries and affiliate............ 136,456 (575,032) (400,623)
Net realized gains (losses) on investments.................... 13,524 1,623 9,354
Amortization of premium/discounts on fixed maturities......... (432) (764) (3,176)
Amounts due to subsidiaries and affiliate, net................ 153,553 (6,914) (113,634)
Accounts payable and accrued liabilities...................... 26,887 (5,525) 37,808
Accrued interest on advances from affiliate................... (31,846) (14,831) (15,353)
Other......................................................... (38,300) 9,437 (19,430)
----------- --------- -----------
Net cash flows from (used for) operating activities........ 113,428 (49,024) (140,091)
----------- --------- -----------
Cash flow from investing activities
Purchases of fixed maturities................................. (125,733) (618,049) (402,079)
Sales of fixed maturities..................................... 94,689 449,766 467,010
Other investments............................................. (1,009) 135 (6,837)
Dividends received from subsidiaries.......................... 338,873 101,147 966,000
Capitalization of subsidiaries................................ (1,101,000) (27,103) (1,160,351)
Advances to affiliate......................................... (1,320,100) (157,435) (400,000)
Repayment of advances to (from) affiliate..................... 625,000 307,435 (20,039)
Intercompany sale of subsidiaries............................. -- 82,244 --
----------- --------- -----------
Net cash from (used for) investing activities.............. (1,489,280) 138,140 (556,296)
----------- --------- -----------
Cash flows from financing activities
Dividends paid on Ordinary Shares............................. (128,745) (106,459) (77,836)
Dividends paid on FELINE PRIDES............................... (25,666) (15,254)
Proceeds from bank debt....................................... -- 289,008 424,886
Proceeds from exercise of options for shares.................. 32,666 31,335 5,672
Repayment of bank debt........................................ -- (713,894) --
Proceeds from shares issued under ESPP........................ 6,074 1,234 1,151
Advances from affiliates...................................... 945,100 125,000 330,513
Proceeds from issuance of FELINE PRIDES....................... -- 311,050 --
Net proceeds from issuance of Ordinary Shares................. 1,135,878 400,320 --
Loan repayments............................................... (424,000) (370,513) --
Issuance costs of FELINE PRIDES............................... -- (9,884) --
Repurchase of Ordinary Shares................................. (179,446) -- --
----------- --------- -----------
Net cash from (used for) financing activities.............. 1,361,861 (58,057) 684,386
----------- --------- -----------
Net increase (decrease) in cash...................................... (13,991) 31,059 (12,001)
Cash-beginning of year............................................... 46,516 15,457 27,458
----------- --------- -----------
Cash-end of year..................................................... $ 32,525 $ 46,516 $ 15,457
=========== ========= ===========
41
SCHEDULE IV
ACE LIMITED AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING REINSURANCE
For the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Premiums Written
Ceded to other Assumed from
Direct Amount companies other companies Net Amount
------------- -------------- --------------- ----------
2001 $7,629,233 $3,801,748 $2,536,129 $6,363,614
2000 $6,093,151 $2,707,417 $1,493,620 $4,879,354
1999 $3,015,176 $1,373,809 $ 853,981 $2,495,348
42
SCHEDULE VI
ACE LIMITED AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY OPERATIONS
For the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Net Losses and Loss
Net Reserves Expenses Incurred Amortization
Deferred for Unpaid Related to of Deferred Net Paid
Policy Losses and Net Net ------------------- Policy Losses and Net
Acquisition Loss Unearned Premiums Investment Current Prior Acquisition Loss Premiums
Costs Expenses Premium Earned Income Year Year Costs Expenses Written
----------- ------------ ---------- ---------- ---------- ---------- -------- ------------ ---------- ----------
2001....... $677,776 $10,339,014 $3,852,019 $5,510,897 $776,461 $4,457,986 $ 94,470 $776,812 $3,776,354 $5,995,924
2000....... $572,757 $ 9,330,950 $3,035,288 $4,534,763 $770,855 $2,996,429 $(60,364) $650,741 $3,836,281 $4,879,354
1999....... $514,425 $ 8,908,817 $2,428,828 $2,485,737 $493,337 $1,601,278 $ 38,265 $338,076 $2,426,486 $2,495,348
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ACE LIMITED
By:
/S/ PHILIP V. BANCROFT
---------------------------------
Philip V. Bancroft
Chief Financial Officer
March 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ BRIAN DUPERREAULT Chairman, Chief Executive March 15, 2002
- ----------------------------- Officer; Director
Brian Duperreault
/S/ PHILIP V. BANCROFT Chief Financial Officer March 15, 2002
- ----------------------------- (Principal Financial
Philip V. Bancroft Officer)
/S/ ROBERT A. BLEE Chief Accounting Officer March 15, 2002
- ----------------------------- (Principal Accounting
Robert A. Blee Officer)
/S/ DONALD KRAMER Vice Chairman; Director March 15, 2002
- -----------------------------
Donald Kramer
/S/ DOMINIC J. FREDERICO President, Chief Operating March 15, 2002
- ----------------------------- Officer; Director
Dominic J. Frederico
/S/ MICHAEL G. ATIEH Director March 15, 2002
- -----------------------------
Michael G. Atieh
/S/ BRUCE L. CROCKETT Director March 15, 2002
- -----------------------------
Bruce L. Crockett
/S/ ROBERT M. HERNANDEZ Director March 15, 2002
- -----------------------------
Robert M. Hernandez
/S/ JOHN A. KROL Director March 15, 2002
- -----------------------------
John A. Krol
/S/ ROBERTO G. MENDOZA Director March 15, 2002
- -----------------------------
Roberto G. Mendoza
/S/ PETER MENIKOFF Director March 15, 2002
- -----------------------------
Peter Menikoff
44
Signature Title Date
--------- ----- ----
/S/ THOMAS J. NEFF Director March 15, 2002
- -----------------------------
Thomas J. Neff
/S/ ROBERT RIPP Director March 15, 2002
- -----------------------------
Robert Ripp
/S/ WALTER A. SCOTT Director March 15, 2002
- -----------------------------
Walter A. Scott
/S/ DERMOT F. SMURFIT Director March 15, 2002
- -----------------------------
Dermot F. Smurfit
/S/ ROBERT W. STALEY Director March 15, 2002
- -----------------------------
Robert W. Staley
/S/ GARY M. STUART Director March 15, 2002
- -----------------------------
Gary M. Stuart
/S/ SIDNEY F. WENTZ Director March 15, 2002
- -----------------------------
Sidney F. Wentz
45