Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NO. 1-11778
----------------
ACE LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS NOT APPLICABLE
(JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
THE ACE BUILDING
30 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)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Ordinary Shares, par value $0.125 per share New York Stock Exchange
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
----------------
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 December 13, 1996, there were 58,139,285 Ordinary Shares par value
$0.125 of the Registrant outstanding and the aggregate market value of voting
stock held by non-affiliates at such date was approximately $3.34 billion. For
the purposes of this computation, shares held by directors (and shares held by
any entities in which they serve as officers) 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 February 7,
1997, are incorporated by reference into Part III of this report and certain
portions of the 1996 Annual Report to Shareholders are incorporated by
reference into Parts II and IV of this report.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ACE LIMITED
INDEX TO 10-K
PAGE
----
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 20
Item 3. Legal Proceedings.............................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............ 20
PART II
Market for the Registrant's Ordinary Shares and Related
Item 5. Stockholder Matters............................................ 22
Item 6. Selected Financial Data........................................ 23
Management's Discussion and Analysis of Results of Operations
Item 7. and Financial Condition........................................ 23
Item 8. Financial Statements and Supplementary Data.................... 23
Changes and Disagreements with Accountants on Accounting and
Item 9. Financial Disclosure........................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant............. 23
Item 11. Executive Compensation......................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management. 23
Item 13. Certain Relationships and Related Transactions................. 23
PART IV
Exhibits, Financial Statements, Schedules and Reports on Form
Item 14. 8-K............................................................ 24
PART I
ITEM 1. BUSINESS
Certain terms used below are defined in the "Glossary of Selected Insurance
Terms" appearing on page 20.
General
ACE Limited ("ACE") is a holding company incorporated with limited liability
under the Cayman Islands Companies Law and maintains its principal business
office in Bermuda. The Company, through its Bermuda-based operating
subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Insurance"), Corporate
Officers & Directors Assurance Ltd. ("CODA") and Tempest Reinsurance Company
Limited ("Tempest"), provides insurance and reinsurance for a diverse group of
international clients. In addition, the Company provides funds at Lloyd's of
London ("Lloyd's") to support underwriting by syndicates managed by Methuen
Underwriting Limited ("MUL"). The term "the Company" refers to ACE and its
subsidiaries excluding the Lloyd's operations carried out by Methuen Group
Limited ("Methuen") and its subsidiaries and Ockham Worldwide Holdings plc
("Ockham Worldwide") and its subsidiaries (see "Recent Developments").
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 growing capital base within the insurance and reinsurance
markets. As part of this strategy, the Company diversified its product
portfolio from excess liability insurance and directors and officers liability
insurance to accommodate the needs of its expanding, global client base of
multinational corporations by adding satellite insurance, aviation insurance,
excess property insurance and financial lines products during 1994 and 1995.
This diversification added balance to the risk of the existing portfolio of
insurance products and enhanced the Company's overall profit potential while
utilizing its existing capital base. The Company continued its strategic
diversification with the acquisitions in March 1996 of Methuen Group Limited
("Methuen"), the holding company for MUL, a leading Lloyd's managing agency,
and in July 1996 of Tempest, a leading Bermuda-based property catastrophe
reinsurer. The acquisition of Tempest provided the Company with a unique
opportunity to expand into the property catastrophe reinsurance business
through an established and well known reinsurance company.
The following table sets forth the percentage of net premiums written by
line of business for each of the years ended September 30, 1996, 1995 and
1994:
1996 1995 1994
------ ------ ------
Excess liability..................................... 33.6% 56.3% 69.2%
Financial lines...................................... 19.8 2.2 --
Directors and officers liability..................... 16.2 24.7 27.9
Satellite............................................ 14.1 10.6 3.7
Property catastrophe (Tempest) (1)................... 5.8 -- --
Aviation............................................. 4.5 1.7 --
Excess property...................................... 2.3 1.2 --
First Line........................................... 2.0 3.3 --
Lloyd's syndicates................................... 1.6 -- --
Other................................................ 0.1 -- (0.8)
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
- --------
(1) Tempest was acquired on July 1, 1996 and thus net premiums written for
Tempest only relate to the three month period since acquisition.
Recent Developments
On July 1, 1996, the Company completed the acquisition of Tempest. Tempest
underwrites property catastrophe reinsurance on a worldwide basis, emphasizing
excess layer coverages, and has large aggregate
1
exposures to man-made and natural disasters. The short-tail nature of the
property catastrophe business and shorter loss payout patterns complement the
generally longer-tail nature of the Company's existing product lines.
On March 27, 1996, the Company acquired a controlling interest in Methuen.
On November 26, 1996, the Company acquired the remaining 49 percent interest
in Methuen. MUL manages six syndicates with total underwriting capacity for
the 1996 year of account of (Pounds)366 million (approximately $555 million).
For the 1996 year of account, the Company has, through a corporate subsidiary,
ACE Capital Limited ("ACE Capital"), provided funds at Lloyd's of
(Pounds)12.25 million (approximately $18 million), which was primarily in the
form of a letter of credit, supporting (Pounds)24.5 million (approximately $37
million) of underwriting capacity on syndicates managed by MUL. For the 1997
year of account, the Company has agreed to provide funds at Lloyd's of
approximately (Pounds)62 million (approximately $93 million) to support up to
approximately (Pounds)124 million (approximately $186 million) of underwriting
capacity on syndicates managed by MUL (see "Lloyd's of London").
On November 26, 1996 the Company acquired Ockham Worldwide Holdings PLC
("Ockham Worldwide"), a wholly owned subsidiary of Ockham Holdings PLC. Ockham
Worldwide owns two Lloyd's managing agencies, ACE London Aviation Limited
("ALVL") (formerly Ockham Sturge Aviation Agency Ltd.) and ACE London
Underwriting Limited ("ALUL") (formerly Ockham Worldwide Agency Ltd). Together
these two agencies manage seven syndicates with total underwriting capacity
for the 1996 year of account of (Pounds)349 million (approximately $524
million). Ockham Worldwide also owns a Lloyd's corporate member which provides
funds at Lloyd's to support underwriting on these syndicates. The Company
expects to provide approximately (Pounds)15 million (approximately $23
million) of underwriting capacity to the syndicates managed by Ockham
Worldwide for the 1997 year of account.
Insurance Operations
The Company, through ACE Insurance and CODA, provides property and casualty
insurance coverage, including excess liability insurance, directors and
officers liability insurance, satellite insurance, aviation insurance, excess
property insurance and financial lines products, to industrial, commercial and
other enterprises.
The nature of the insurance coverages provided by the Company are generally
expected to result in low frequency but high severity of individual losses.
This loss pattern is particularly evident in the Company's excess liability
insurance due to the high attachment points and large limits offered. The
Company does purchase limited excess of loss clash reinsurance with respect to
its excess liability policies and has also purchased reinsurance designed to
limit its exposure on the satellite, aviation and excess property lines of
business.
At September 30, 1996 approximately 73 percent of the Company's written
premiums came from North America with approximately 20 percent coming from the
United Kingdom and continental Europe and approximately 7 percent from other
countries.
Excess Liability
The Company seeks to provide to the world's largest industrial enterprises
the highest layer of excess liability coverage in their insurance programs and
requires that at least a portion of its coverage be the highest layer in a
policyholder's insurance program. The Company writes excess liability
coverage, on an occurrence first reported stand alone form, generally in
excess of a minimum attachment point of $100 million per occurrence and with a
minimum limit of $10 million and a maximum limit of $200 million per
occurrence, subject to an annual aggregate limit in the same amount for all
covered occurrences of which notice is given during such year. Effective on or
after December 15, 1994 the Company has imposed an annual aggregate sublimit
for integrated occurrences of $100 million for all new and renewal business
that purchases limits greater than $100 million. During 1994, the Company
reduced the minimum attachment point to $50 million (or the
2
foreign currency equivalent) from $100 million for certain classes of non-U.S.
domiciled excess liability risks. In this instance, the Company offers limits
up to twice the reduced attachment point with a minimum limit of $25 million.
In general, the excess liability policies cover occurrences causing
unexpected and unintended personal injury, property damage and/or advertising
liability arising from events or conditions which commence at or subsequent to
the inception date (or retroactive date, if applicable, but typically not prior
to November 1, 1985), provided proper notice is given to the Company during the
term of the policy or any applicable discovery period. Unlike traditional
insurance policy forms, disputes under the Company's policies are required to
be settled by arbitration in Bermuda or London, depending on the policy. Either
the Bermuda Arbitration Act of 1986, as amended, or the English Arbitration Act
of 1950, as amended, governs the arbitration.
The Company maintains excess of loss clash reinsurance on a calendar year
basis which provides the Company with certain protection from losses arising
from a single set of circumstances (occurrence) under more than one excess
liability insurance policy. The clash reinsurance agreements do not cover all
occurrences covered by the Company's policies and, in particular, do not cover
integrated occurrences involving one insured or similar occurrences in which
multiple insureds are found liable (e.g., similar defective products
manufactured or sold by multiple insureds).
Directors and Officers Liability
The Company offers up to $75 million of directors and officers liability
insurance with a maximum of $50 million being provided for corporate
reimbursement coverage. The Company believes this to be the largest amount of
directors and officers liability insurance available from a single underwriting
source. The directors and officers liability insurance is written on a claims
made form and is provided to large industrial corporations, not-for-profit
corporations, financial institutions and others. As with the excess liability
form, disputes are required to be settled by arbitration in Bermuda or London.
Satellite
The Company began satellite insurance operations in February 1994. Until
February 15, 1996, the Company offered separate limits of up to $25 million per
risk for launch insurance, including ascent to orbit and/or initial testing,
and up to $25 million per risk for in-orbit insurance. This risk was fully
retained by the Company. Effective for all business written on or after
February 15, 1996, the Company has entered into a surplus treaty arrangement,
which provides for up to $25 million of reinsurance for each risk. This
reinsurance arrangement has enabled the Company to raise the gross limits
offered for satellite insurance to $50 million per risk. The Company believes
its commitment represents one of the world's largest net lines. The Company
also believes that this stable capacity and the financial security offered by
the Company's asset base provide distinct competitive advantages and have
resulted in the Company becoming a significant provider of satellite insurance.
Satellite insurance falls within a small, well defined market characterized
by a limited number of brokers, underwriters and international clients. There
are also a limited number of satellite and launch vehicle manufacturers in the
world. The growing worldwide demand for satellite communications capabilities
by both governments and private enterprises has resulted in an increase in the
number of satellites per annum requiring launch and/or in-orbit insurance
coverage. The typical satellite insurance policy is written on a quota-share
basis, rather than on an excess of loss basis. The insured value of a
commercial satellite now ranges from approximately $150 million to $300
million.
The Company is at risk, under the terms of a typical launch insurance policy,
from the point of intentional ignition of the launch vehicle and for a period
of approximately 90 to 365 days to allow for initial operations of the
satellite. In-orbit coverage incepts on termination of the launch insurance
policy, which usually occurs on completion of the initial operations testing of
the satellite. In-orbit insurance is generally written on an annual basis,
although policy periods can be as long as 36 months.
3
Financial Lines
The Company introduced its financial lines product group in January 1995.
Financial lines utilizes transactions which combine the concepts of finance
with the principles of insurance. Typically, clients purchasing these products
are seeking insurance or reinsurance for exposures which are difficult to
place because of limited or nonexistent capacity or inefficient terms or
pricing being provided by traditional insurance markets. Alternatively, they
may use these insurance or reinsurance products to cover loss exposures which
are not efficiently handled by current products available.
Unlike certain traditional insurance, each financial lines contract is
individually tailored to meet the needs of the insured. Financial Lines
programs typically have the following common characteristics: multi-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. The specific product types offered by
financial lines include the various forms of finite risk insurance. Examples
of finite risk products include the combination of self-insurance with an
excess program, the combination of various coverages subject to a single
retention and insured limit or programs that insure large loss exposure or a
portfolio of losses over a period of years. Other product types offered are
specialty insurances which cover financial exposures or involve financial
instruments.
Financial lines products were created by the need to service the more
complex risks of today's corporations. The Company anticipates drawing on the
strong franchise the Company maintains with its current client base by
providing a policy which will further enhance a client's risk management
program. Using both insurance and reinsurance brokers and investment bankers,
it also anticipates attracting new clients for the Company.
The Company believes it has a competitive advantage in the marketplace
because of the financial strength of the Company and its ability to offer
significant risk transfer while still allowing the insured to retain some of
its own exposures. Risk transfer is important to the insured thereby enabling
it to meet the accounting and regulatory requirements related to the purchase
of insurance or reinsurance.
Financial lines has a flexible approach to limits offered, attachment points
and coverages provided primarily due to the risk sharing feature and use of
funding mechanisms which are generally included in the contract. Each contract
is unique because it is tailored to the insurance needs, specific loss history
and financial strength of the client. Premium volume, as well as the number of
contracts written, can vary significantly from period to period due to the
nature of the contracts being written. Profit margins may vary from contract
to contract depending on the amount of underwriting risk and investment risk
assumed on each contract.
Aviation
The Company commenced writing aviation insurance in April 1995 and offers
limits of up to $100 million per insured, with no minimum attachment point.
The Company reduces its net exposure per policy to approximately $50 million
with a dedicated reinsurance program. Classes of business written include
aviation product liability, aviation manufacturers (including hull and all
risks and products liability); aviation refuellers; and airport and airport
contractors, together with certain aircraft risks.
Generally, the Company will write aircraft liability in conjunction with one
or more of the other aviation products, and where the aircraft (owned or non-
owned) is used for corporate purposes. Coverage will include third party
bodily injury, property damage and passenger legal liability.
Excess Property
The Company entered the excess property insurance business in June 1995.
Primary target markets are chemical, energy, electronics, forest products,
heavy manufacturing, mineral, oil and gas, and utilities. Coverage is also
available to select manufacturing, industrial and institutional risks. Excess
property insurance coverage is offered with limits of up to $50 million per
risk, above a minimum attachment point of $25 million. In certain
4
circumstances, the Company uses reinsurance to establish the retained net
limit per risk. Attachment levels, terms and pricing for each risk are derived
from the Company's property underwriters' independent assessment of "probable
maximum loss", a benchmark of risk frequency and severity. The Company has
purchased catastrophe reinsurance to control the possible effects of
cumulative natural peril exposure.
Marketing and Underwriting
The Company, through ACE Insurance and CODA, markets its insurance products
through brokers and seeks to maintain a competitive advantage by providing
insurance coverages which require utilization of technical skills to
underwrite individual risks, emphasizing quality 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 a favorable regulatory and tax environment,
results in significantly lower administrative expenses relative to other
companies in the industry.
Policyholders are obtained through non-U.S. insurance brokers who generally
receive a brokerage commission on any business accepted and bound by the
Company. The Company is not committed to accept any business from any
particular broker and brokers do not have the authority to bind the Company.
All policy applications (both for renewals and new policies) are subject to
approval and acceptance by the Company 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. The Company does not believe
that conducting its operations through its offices in Bermuda has materially
affected its underwriting and marketing activities to date.
The Company receives business from approximately 75 non-U.S. brokers of
which 7 produced approximately 80 percent of the Company's business in 1996.
The following table sets forth the percentage of the Company's insurance
business placed in 1996, 1995 and 1994 through each broker placing more than
10 percent of the Company's business.
YEAR ENDED
SEPTEMBER 30,
--------------
NAME U.S. AFFILIATE 1996 1995 1994
- ---- -------------- ---- ---- ----
Bowring (Bermuda) Limited......... Marsh & McLennan, Incorporated 31% 43% 41%
J&H Intermediaries Limited........ Johnson & Higgins 11 16 17
At September 30, 1996, approximately 28 percent of the Company's
policyholders were not based in North America. The Company has experienced an
increase in the number of submissions in non-North American business as a
result of the activities of its London representative office since its opening
in September 1994 and expects further growth as a result of its activities.
The London representative office assists brokers throughout the United
Kingdom, the rest of Europe, the Middle East, South Africa, the Far East and
Australia in gaining access to the Company's underwriting capacity in Bermuda.
All underwriting activity continues to take place in Bermuda.
The Company employs underwriting staff with substantial industry experience.
The underwriter's primary objective is to assess the potential for an
underwriting profit, a process complicated in some cases by the limited amount
of data for claims which would have been covered by the Company's policy form
and which would have exceeded its policy's attachment point. The risk
assessment process undertaken by the Company involves a comprehensive analysis
of historical data and estimates of future value of losses which may not be
evident in the historical data. The factors which the Company considers
include the type of risk, the attachment point and coverage limits, the type,
size, complexity and location of the potential insureds operations, financial
data, the industry in which the potential insured operates, details of the
underlying insurance coverage provided, loss history and future corporate
plans.
Competition
Competitive forces in the international property and casualty insurance
business are substantial. Results are a function of underwriting and
investment performance, direct costs associated with the delivery of insurance
5
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 reinsurance recoverable balances) will all
affect their competitive position. Some insurers continue to incur liability
for business written decades earlier covering gradual pollution and certain
product liability exposures. 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 penetration.
Oversupply of available capital has historically had the effect of encouraging
competition and depressing prices. Capital accumulation to support large
excess liability policies and the availability of suitably experienced
underwriters are partial barriers to entry, but insurance pricing will
continue to be influenced by supply. The Company's competitive position in the
casualty insurance industry is influenced by all of these factors. The Company
believes it has a number of competitive advantages in the insurance products
which it provides. Among the advantages are its strong capital base, its
ability to market a number of insurance products to its existing client and
potential client base and its ability to be flexible in providing contracts
which extend coverage for periods in excess of one year.
The Company believes that it is unique in that it offers up to $200 million
of excess liability coverage and that its coverage is generally the highest
layer of a client's insurance program. There are a small number of insurers
that compete with the Company, including American International Group, Inc.
("AIG"), several large European insurers, Exel Limited ("EXEL"), certain
Lloyd's syndicates and Starr Excess Liability Insurance Co. Ltd. ("Starr").
The Company has continued to experience increased competition during 1996 in
this line of business.
There is a small group of dominant insurers in the directors and officers
liability insurance area and the Company faces strong competition in that area
from competitors such as Executive Risk Insurance Company, AIG, Chubb Group of
Insurance Cos., CNA, EXEL, certain Lloyd's syndicates and Starr. The Company
has continued to experience increased competition throughout fiscal 1996.
However, the Company has been successfully marketing its products through the
London representative office, resulting in a number of new non-North American
accounts.
The Company believes that the available limits, stable capacity and
financial security offered by the Company provide a competitive advantage in
the satellite insurance market. There are currently a limited number of
underwriters available to service the satellite insurance market, however, the
amount of capacity available in the market place has grown substantially and
there now appears to be excess capacity in this market. The Company believes
that there will be continued demand for its services, as evidenced by
commitments already provided by the Company for future satellite insurance
coverage. Other major firms offering satellite coverage include Assicuraziona
Generali S.p.A., International Technology Underwriters, Inc., La Reunion
Aerienne, The Marchant Space Consortium, Munich Reinsurance and United States
Aviation Insurance Group.
There are a number of companies in the insurance market which form the
competition for financial lines, including Centre Reinsurance (Bermuda)
Limited and several of the major international insurance companies, such as
AIG and American Reinsurance. The demand for individually tailored insurance
products, such as those offered by financial lines is growing due to the ever-
changing and more complex risks facing today's corporations. The Company
believes it has a competitive advantage in the marketplace because of the
financial strength of the Company and its ability to offer significant risk
transfer in its contracts while still allowing the insured to retain some of
its own exposures.
In providing coverage for aviation insurance exposures, the Company faces
significant competition from a small number of specialty firms, including
certain Lloyd's syndicates and several large European insurers. The Company
believes that the limited number of underwriters available to service the
aviation insurance market, particularly in areas such as product manufacturers
liability and airport liability, and the commitment of significant capital to
this long-tail type of business are barriers to entry. The Company believes
that the demand for this type of specialty coverage is growing, as evidenced
by the volume of submissions received and the number of accounts written by
the Company to date.
6
There are a diverse number of companies providing excess property insurance
coverage for increasingly complex multi-site, multi-national risks. Although
the market is very competitive, the Company believes that it has several
competitive advantages in offering global excess "all risk" coverage,
including its experienced underwriting team, access to the latest technology
and analytical methods, a precise market focus and a capital base that is
unburdened by historic unprofitability and/or uncontrolled accumulation of
exposures.
The Company expects that a significant portion of the future growth in most
of its lines of business will continue to come from new non-U.S. accounts.
Accordingly, the Company is promoting its products overseas, particularly to
large industrial companies in Latin America, Europe, the Middle East, South
Africa, Australia and the Far East.
The Company has received a group rating of A (Excellent) from A.M. Best
Company, a leading insurance rating company ("A.M. Best"). The most current
rating covers the Company, together with its operating subsidiaries ACE
Insurance and CODA. A.M. Best assigns an A rating to companies which, in its
opinion, have demonstrated excellent overall performance when compared to the
standards established by A.M. Best and have a strong ability to meet their
obligations to policyholders over a long period of time. An A.M. Best rating
is based upon factors relevant to policyholders, agents and intermediaries and
are not directed toward the protection of investors. Such ratings are not
recommendations to buy, sell or hold securities.
Reinsurance Operations
The Company's reinsurance activities are principally conducted through
Tempest, its wholly owned subsidiary, which was acquired on July 1, 1996. In
addition, through ACE Insurance, the Company offers financial lines
reinsurance products (see discussion in "Insurance Operations") and
participates in the reinsurance of "First Line".
The Company participates in the reinsurance of a program referred to as
"First Line" which provides financial guarantees required by the U.S. Coast
Guard to issue Certificates of Financial Responsibility, under the Oil
Pollution Act of 1990, to owners of vessels operating in U.S. waters. The
Company has purchased excess of loss reinsurance to limit its exposure in this
line.
Tempest provides property catastrophe reinsurance worldwide to insurers of
commercial and personal property, typically under treaties having a duration
of one year. 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." Ceding companies may
purchase reinsurance to achieve a number of results, including: reduction of
net exposure on individual risks or groups of risks, which enables the ceding
company to underwrite larger risks, or accept more business than its own
capital resources would ordinarily support; diversification of risks;
protection against the effect of major catastrophic losses, such as losses
involving an accumulation of single retentions; stabilization of a ceding
company's operating results by smoothing its loss experience to protect its
financial position; and maintenance by a ceding company of acceptable surplus,
reserve and other financial ratios.
Tempest's property catastrophe reinsurance contracts cover unpredictable
natural or man-made disasters, such as hurricanes, windstorms, hail storms,
earthquakes, volcanic eruptions, conflagrations, freezes, floods, fires and
explosions. Tempest's predominant exposure under such coverage is to property
damage. However, other risks, such as business interruption may also be
covered when arising from a covered peril. In accordance with market practice,
Tempest's property catastrophe reinsurance contracts generally exclude certain
risks such as war, nuclear contamination, and radiation.
Tempest underwrites reinsurance principally on an excess of loss basis, with
attachment points designed to minimize claims from relatively high frequency
and low severity events. During the ten month period ended
7
September 30, 1996, approximately 96 percent of premiums were written on an
excess of loss basis. Other property reinsurance written by Tempest on a
limited basis for select clients, includes proportional property and per risk
excess of loss treaty reinsurance. At September 30, 1996, Tempest had 233
programs in force with 200 clients.
Tempest underwrites a substantial portion of its business in currencies
other than U.S. dollars and may from time to time experience exchange gains
and losses and incur significant underwriting losses in currencies other than
U.S. dollars. The following table sets forth the amount of Tempest's premiums
written allocated by territory of coverage:
YEARS ENDED
NOVEMBER 30,
TEN MONTHS ENDED -------------
SEPTEMBER 30, 1996 (1) 1995 1994
---------------------- ------ ------
United States........................ 64.0% 55.7% 69.8%
United Kingdom....................... 13.3 15.9 8.1
Australia & New Zealand.............. 6.0 11.3 7.5
Japan................................ 3.8 7.2 7.9
Other................................ 12.9 9.9 6.7
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
- --------
(1) Tempest has a November 30 fiscal year-end.
Marketing and Underwriting
Tempest markets its reinsurance products worldwide through reinsurance
brokers. Tempest also opened a representative office in London, England in
August 1996. Tempest's underwriting team builds relationships with key brokers
and clients by explaining Tempest's approach and demonstrating responsiveness
to customer needs. Tempest's approach to the business of reinsurance takes a
long-term perspective. Management believes that continual strengthening of the
relationships between Tempest, its producing brokers and their clients will
continue to contribute to a stable portfolio necessary to achieve continuity.
By retaining clients, Tempest seeks to build up extensive knowledge of them
and gain additional insight to enable a more accurate assessment of their
exposures.
Tempest receives business from approximately 40 brokers. The following table
sets forth the percentage of Tempest's business written through each broker
and its affiliates placing more than 10 percent of Tempest's business:
YEARS ENDED
NOVEMBER 30,
TEN MONTHS ENDED --------------
SEPTEMBER 30, 1996 1995 1994
------------------ ------ ------
Marsh & McLennan, Incorporated.......... 26% 30% 29%
Greig Fester International Limited...... 7% 16% 8%
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. Tempest 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 Tempest underwrites property catastrophe reinsurance and has large
aggregate exposures to natural and man-made disasters, Tempest's claims
experience generally will involve infrequent events of great severity. Tempest
seeks to diversify its 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
8
per program. Tempest also establishes zonal accumulation limits to avoid
concentrations of risk within particular geographic areas.
Tempest applies an underwriting process based on models that use exposure
data submitted by prospective reinsureds in accordance with requirements set
by Tempest's underwriters. The account review process includes an analysis of
exposures both by line of business and geographic location. The underwriting
models used by Tempest have been created and continue to be developed in-
house. Tempest believes that these risk analysis tools provide greater utility
and flexibility in comparison with external vendor catastrophe modeling
products, especially when confronted with unique exposures or non-standard
coverage.
Tempest analyses its exposure in more detail using simulation modeling of
loss scenarios and their effects on Tempest's overall portfolio. This approach
enables Tempest to assess the portfolio risk, in particular to account for the
risk of a combination of multiple events worldwide in a single year.
Competition
The property catastrophe reinsurance industry is highly competitive. Tempest
competes worldwide with major U.S. and non-U.S. property catastrophe
reinsurers, other Bermuda-based property catastrophe reinsurers and
reinsurance departments of numerous multi-line insurance organizations.
Tempest competes effectively because of its strong capital position, the
quality of service provided to customers, the leading role Tempest plays in
setting the terms, pricing and conditions in negotiating contracts, its
customised approach to risk selection and the sponsorship and support of its
parent, ACE.
Tempest has also received an A (Excellent) rating from A.M. Best.
Lloyd's of London Operations
Lloyd's of London ("Lloyd's") is a long established insurance marketplace
where many varied forms of insurance are sold by syndicates, which are annual
joint ventures of participating capital providers known as "Names".
Participation as a Name on a syndicate carries with it unlimited liability for
the Name's share of any insurance losses incurred by the syndicate (each Name
participated severally). In 1994, the rules surrounding participation were
changed to allow limited liability "corporate names" to enter the Lloyd's
marketplace as capital providers.
Several of the underwriting years of the late 1980's and early 1990's proved
to be particularly unprofitable for many of the syndicates operating at
Lloyd's. This proved to be financially disastrous for some of the Names on the
affected syndicates due to the unlimited liability of their participation.
During the last three years, Lloyd's governing body has been seeking to
implement a reconstruction and renewal plan to allow the market to continue.
In August 1996 this plan was formally approved by the required parties and a
new company, Equitas, was authorized to underwrite the liabilities of the 1992
and prior years of account of all syndicates at Lloyd's. The funding for this
solution came from a variety of sources including the premiums on the
liabilities assumed by Equitas as well as a series of levies charged to
entities that had historically provided services to the Lloyd's insurance
market (including managing agencies and insurance brokers).
Participation in selective syndicates in the Lloyd's insurance market
provides the Company with new lines of business in the aviation, marine and
non-marine markets as well as the opportunity to diversify its insurance risk
profile through markets to which it would otherwise not have access. This
syndicate participation is through a dedicated corporate capital vehicle thus
limiting the liability of the Company.
In order to more closely monitor its syndicate participation the Company has
acquired Methuen, the holding company for MUL, and Ockham Worldwide, the
holding company for two other managing agencies, ALVL and ALUL. These three
agencies provide accounting, reporting and ancillary insurance services to the
syndicates in which the Company participates or will participate for the 1997
year of account.
9
For the 1996 year of account the Company has committed (Pounds)12.25 million
(approximately $18 million) of capital spread amongst the six syndicates
managed by MUL, which will support up to (Pounds)24.5 million (approximately
$37 million) of premium writing capacity. For the 1997 year of account the
Company has agreed to provide funds at Lloyd's of approximately (Pounds)62
million (approximately $93 million) to support up to approximately (Pounds)124
million (approximately $186 million) of underwriting capacity on syndicates
managed by MUL.
On November 26, 1996, the Company acquired Ockham Worldwide Holdings PLC
("Ockham Worldwide"), a wholly owned subsidiary of Ockham Holdings PLC
("Ockham"). Ockham Worldwide owns two Lloyd's managing agencies, ACE London
Aviation Limited ("ALVL") (formerly Ockham Sturge Aviation Agency Ltd.) and
ACE London Underwriting Limited ("ALUL") (formerly Ockham Worldwide Agency
Ltd.). Together these two agencies manage seven syndicates with total
underwriting capacity for the 1996 year of account of (Pounds)349 million
(approximately $524 million). Ockham Worldwide also owns a Lloyd's corporate
member which provides funds at Lloyd's to support underwriting on these
syndicates. The Company expects to provide approximately (Pounds)15 million
(approximately $23 million) of underwriting capacity to the syndicates managed
by Ockham Worldwide for the 1997 year of account.
The syndicates managed by MUL, ALVL and ALUL underwrite an extensive range
of insurance and reinsurance risks worldwide. Risks underwritten include most
classes of aviation and space, property and liability, marine and energy
business. All business is underwritten through registered Lloyd's insurance
brokers either on a direct basis or as facultative or treaty reinsurance.
There is significant competition in all classes of business transacted by
the syndicates and emanates from a number of different markets worldwide.
Depending on the class of business concerned competition comes from the London
market; other Lloyd's syndicates and ILU Companies (Institute of London
Underwriters), major international insurers and reinsurers. On international
risks, competition also comes from the domestic insurers in the country of
origin of the insured.
The syndicates are able to compete successfully by developing and
maintaining close, long term relationships with clients through a high quality
service and an ability to deliver innovative solutions tailored to the
client's needs.
Claims Administration
Claims arising under policies issued by ACE Insurance and CODA are managed
in Bermuda by the Company's claims department. The Company 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 required, retains outside
claims counsel to monitor claims. Based upon its evaluation of the claims
file, the Company's claims department may recommend that a case reserve in a
specified amount be established or that all or part of a claim be paid. The
Company's claims department monitors all claims files 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, the Company does not
undertake to defend its insureds. It has, in certain instances, provided
advice to insureds with respect to the management of claims. The Company
believes that its experience in resolving large claims and its proactive
approach to claims management has contributed to the favourable resolution of
several cases.
Because the Company does not do business in the U.S., it must often rely on
U.S. counsel to assist it in evaluating liability and damages confronting its
insureds in the U.S. The Company does not believe that the information
received or the procedures followed have materially or adversely affected its
ability to identify, review or settle claims.
10
Claims arising under contracts written by Tempest are managed in Bermuda by
Tempest. Tempest also maintains a claims database into which all notices of
loss are entered. Loss notices are received from brokers. They are reviewed and
case reserves are established for Tempest's portion of the loss in excess of
the contract's attachment point. Case reserves are then adjusted based on
receipt of further notifications from brokers.
With respect to claims arising in Lloyd's syndicates, each syndicate
maintains a claims database into which all notices of loss are entered. These
are primarily notified by various central market bureaux, such as, through a
daily electronic data interchange message. Where a syndicate is a "leading"
syndicate on a Lloyd's policy, then it acts through its underwriters and claims
adjusters, on behalf of itself and the following market, in dealing with the
broker and/or insured for any particular claim. This may involve the
appointment of attorneys and/or loss adjusters. The leading syndicates,
together with the claims bureaux, advise movements in case reserves to all
syndicates participating on the risk.
All information received with respect to case reserves, whether on "lead
business" or on "following business", are screened, validated and recorded by
the syndicates. The syndicates' claims departments can vary the case reserves
carried from those advised by the bureaux and can carry reserves for claims not
processed by the bureaux. Any such adjustments and entries are specifically
identifiable within the claims system.
Unpaid Losses and Loss Expenses
The Company is required to make provisions in its financial statements for
the estimated unpaid liability for losses and loss expenses for claims made
against it under the terms of its policies and agreements. Estimating the
ultimate liability for losses and loss expenses is an imprecise science subject
to variables that are influenced by both internal and external factors. This is
true because claim settlements to be made in the future may be impacted by
changing rates of inflation and other economic conditions, changing
legislative, judicial and social environments and changes in the Company's
claims handling procedures. In many cases, significant periods of time, ranging
up to several years or more, may elapse between the occurrence of an insured
loss, the reporting of the loss to the Company and the settlement of the
Company's liability for that loss. In other cases, the period between first
notice and final payment can be relatively short, even less than one year.
Several aspects of the Company's operations exacerbate the inherent
uncertainties in estimating its losses as compared to more conventional
insurance companies. Primary among these aspects are the limited amount of
statistically significant historical data regarding losses, particularly of the
type intended to be covered by the Company's excess liability policies and the
expectation that losses in excess of the attachment level of the policies will
be characterized by low frequency and high severity, limiting the utility of
claims experience of other insurers for similar claims. Accordingly, the
ultimate claims experience of the Company cannot be as reliably predicted as
may be the case with more traditional insurance companies, and there can be no
assurance that losses and loss expenses will not exceed the reserves.
A number of the Company's insureds have given notice of claims relating to
breast implants or components or raw material thereof that had been produced
and/or sold by such insureds. Lawsuits, including class actions, involving
thousands of implant recipients have been filed in both state and federal
courts throughout the United States. Most of the federal cases have been
consolidated pursuant to the rules for Multidistrict Litigation to a Federal
District Court in Alabama. At June 30, 1994, the Company increased its then
existing reserves relating to breast implant claims. Although the reserve
increase was partially satisfied by an allocation from existing IBNR, it also
required an increase in the Company's total reserve for unpaid losses and loss
expenses at June 30, 1994 of $200 million. The increase in reserves was based
on information made available in conjunction with the Global I settlement
(including information relating to opt-outs) and information made available
from the Company's insureds and was predicated upon an allocation between
coverage provided before and after the end of 1985 (when the Company commenced
underwriting operations). No additional reserves relating to breast implant
claims have been added since June 30, 1994. The Company continually evaluates
its reserves in light of developing information and in light of discussions and
negotiations with its insureds. In August 1996, the Company settled with one of
its insureds, a breast implant manufacturer, for a sum of money to be paid out
over
11
a number of years in the future. The settlement is consistent with the
Company's belief that its reserves are adequate. Significant uncertainties
continue to exist with regard to the ultimate outcome and cost of Settlement II
and the number and value of the opt-out claims. 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. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Breast Implant Litigation" in the 1996 Annual Report to shareholders filed with
this Form 10-K.
After a claim is reported to the Company, a case reserve is established for
the estimated ultimate losses and loss expenses, if any, with respect to the
reported claim. The amount and timing of the reserve reflects the judgment of
the claims personnel, based upon general corporate reserving practices and on
the experience and knowledge of the claims personnel (including, where
appropriate, outside counsel and claim consultants) regarding the nature and
value of the specific type of claim.
The process in estimating ultimate liability employed by the Company is set
forth in an actuarial report (the "Actuarial Report") prepared annually by the
Company's Chief Actuary. The Company engages an independent actuarial firm to
review the Actuarial Report on an annual basis. As stated in its actuarial
review, such firm believed that the methods and assumptions contained in the
Actuarial Report were reasonable and appropriate for use in setting loss
reserves at September 30, 1996. Such Actuarial Report contains a number of
qualifications with respect to the complications and relative uncertainty that
exists in establishing reserves for the Company's lines of business, which
qualifications are substantially similar to those discussed above.
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 composed of case
reserves, loss expense reserves and IBNR loss reserves. During the loss
settlement period, which can be 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
the statistical and actuarial method 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.
At September 30, 1996, the reserve for unpaid losses including IBNR loss
reserves was $1,806.3 million and the reserve for loss expenses was $29.8
million. The Company believes that its reserves for unpaid losses and loss
expenses including those arising from breast implant claims are adequate as of
September 30, 1996.
The "Analysis of Loss and Loss Expense Development" shown below presents the
subsequent development of the estimated year-end liability for unpaid losses
and loss expenses since the Company's inception at the end of each of the years
in the eleven-year period ended September 30, 1996. The top line of the table
shows the estimated liability for unpaid losses and loss expenses recorded at
the balance sheet date for each of the indicated years. 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 amounts paid as of subsequent years on those claims for which
reserves were carried as of each specified year. The lower portion of the table
shows the re-estimated amount of the previously recorded liability as of the
end of each succeeding year. 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. Management believes, however, that the losses
and loss expenses which have been recorded through September 30, 1996,
including those arising from breast implant claims, are adequate to cover the
ultimate cost of losses and loss expenses incurred through September 30, 1996
under the terms of the Company's policies and agreements. Since such provisions
are necessarily based on estimates, the ultimate losses and loss expenses may
be significantly greater or less than such amounts. See "Management's
Discussion and Analysis of Results of
12
Operations and Financial Condition--Breast Implant Litigation" in the 1996
Annual Report to Shareholders filed with this Form 10-K. It should be noted
that as of July 1, 1996 the Company acquired Tempest and as of November 1, 1993
the Company acquired CODA.
ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993
------- -------- -------- -------- -------- -------- ---------- ----------
(IN THOUSANDS)
Unpaid........... $ 250 $ 5,600 $ 22,500 $ 78,009 $319,230 $470,832 $ 813,849 $ 766,402
Paid (Cumulative)
As Of:
1 year later.... 80 167 431 26,190 181,525 149,493 340,836 126,566
2 years later... 192 469 1,195 82,715 207,587 490,116 465,074 183,439
3 years later... 250 672 21,307 108,689 531,502 590,847 517,366 228,638
4 years later... 250 674 42,450 432,541 601,811 611,113 551,887
5 years later... 250 674 182,110 459,183 622,097 627,691
6 years later... 250 674 182,110 476,570 631,371
7 years later... 250 674 195,939 484,475
8 years later... 250 674 196,207
9 years later... 250 674
10 years later.. 250
Liability
Reestimated
As Of:
End of year..... $ 250 $ 5,600 $ 22,500 $ 78,009 $319,230 $470,832 $ 813,849 $ 766,402
1 year later.... 250 5,643 57,682 267,674 475,647 706,960 813,848 966,402
2 years later... 250 35,765 105,503 346,022 665,533 706,960 1,085,012 1,067,987
3 years later... 250 19,901 134,227 516,763 665,533 874,368 1,234,462 1,211,424
4 years later... 250 19,672 333,869 516,783 663,480 888,387 1,412,495
5 years later... 250 139,674 333,869 487,911 680,119 940,513
6 years later... 46,250 139,674 189,332 489,556 711,671
7 years later... 46,250 674 176,889 479,306
8 years later... 250 674 174,837
9 years later... 250 674
10 years later.. 250
Cumulative
redundancy/
(deficiency).... 0 4,926 (152,337) (401,297) (392,441) (469,681) (598,646) (445,022)
---------------------------------
1994 1995 1996
---------- ---------- ----------
Unpaid........... $1,176,215 $1,474,924 $1,836,113
Paid (Cumulative)
As Of:
1 year later.... 66,888 68,482
2 years later... 121,628
3 years later...
4 years later...
5 years later...
6 years later...
7 years later...
8 years later...
9 years later...
10 years later..
Liability
Reestimated
As Of:
End of year..... $1,176,215 $1,474,924 $1,836,113
1 year later.... 1,177,292 1,474,924
2 years later... 1,227,538
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).... (51,323) 0
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 liability in the past may not
necessarily occur in the future.
In 1994, the Company recorded an additional reserve of $200 million, related
primarily to developments in breast implant litigation, in respect of years
prior to 1994.
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. As at September 30, 1994 the Company changed its
method of allocating IBNR to accident and balance sheet years. This allocation
assigns IBNR to years based upon various risk factors including immaturity of
year, amount of earned premium in that year, and development of known claims.
As the Company's loss experience is characterized as low frequency, and high
severity, IBNR is considered a bulk reserve, and is therefore available for
loss development from which ever year it may arise. Prior to 1994, the
allocation of IBNR to accident and balance sheet years was based upon a loss
distribution indicated by the expected loss method employed by the Company.
Losses paid for the year ending September 30, 1988 include an amount of $23.4
million, which is expected to be recovered from an insured.
The table has been re-stated to include CODA's and Tempest's loss experience
as if both companies had been wholly owned subsidiaries of the Company from
their inception.
13
The "cumulative redundancy/(deficiency)" shown in the table 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. For
instance, a deficiency recognized in 1994 relating to losses incurred during
the year ending September 30, 1992 would be included in the cumulative
deficiency amount for each year from September 30, 1992 to the year the loss
was recognized (1994), yet the deficiency would be reflective in operating
results only in 1994. An analysis of the changes in aggregate reserves for
losses and loss expenses under GAAP is presented below. Since reserves are
necessarily based upon estimates, the ultimate net costs may vary from the
original estimates. As adjustments to these estimates become necessary, they
are reflected in current operations.
RECONCILIATION OF UNPAID LOSSES AND LOSS EXPENSES
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Unpaid losses and loss expenses at
beginning of year......................... $1,437,930 $1,160,392 $ 650,180
Unpaid losses and loss expenses assumed in
respect of acquired companies............. 34,735 -- 116,222
---------- ---------- ----------
1,472,665 1,160,392 766,402
---------- ---------- ----------
Losses and loss expenses incurred in
respect of losses occurring in:
Current year............................. 464,824 350,653 320,556
Prior years.............................. -- -- 200,000
---------- ---------- ----------
Total.................................. 464,824 350,653 520,556
---------- ---------- ----------
Losses and loss expenses paid in respect of
losses occurring in:
Current year............................. 39,567 14,394 --
Prior years.............................. 61,809 58,721 126,566
---------- ---------- ----------
Total.................................. 101,376 73,115 126,566
---------- ---------- ----------
Unpaid losses and loss expenses at end of
year...................................... $1,836,113 $1,437,930 $1,160,392
========== ========== ==========
Investments
The Finance Committee of the Board of Directors is responsible for the
establishment of the Company's investment policy consistent with the Company's
strategies, goals and objectives. The investment policy is reviewed with, and
approved by, the Board of Directors.
The Company's primary investment objectives are to ensure that funds will be
available to meet its insurance and reinsurance obligations and then, to
maximize its rate of return on invested funds within specifically approved
constraints as to credit quality, liquidity and volatility. Accordingly, the
Company's investment portfolio is invested primarily in fixed income
instruments of high credit quality.
The Company has divided the consolidated investment portfolio into three
segments. Assets which are required to match and offset certain specifically
identified liabilities are segregated in an asset-liability management ("ALM")
segment. The second segment, the core portfolio, supports the current general
insurance exposures and is structured to have low to moderate investment risk.
The remainder of the portfolio, the discretionary segment, is invested to
enhance total return and return on equity by taking on additional investment
risks within prudent limits. The core and discretionary portfolios are managed
by professional outside managers whose performance is measured against certain
recognized broad market indices. Written investment guidelines, approved by the
Finance Committee, document standards to ensure portfolio liquidity and
diversification,
14
maintain credit quality, and limit volatility within approved asset allocation
guidelines. The use of financial futures and options contracts, as well as
certain mortgage derivative securities which do not provide a planned stable
structure of principal and interest payments, require prior approval from the
Finance Committee.
Funds are invested in both U.S. and non-U.S. dollar denominated high-quality
fixed maturity and equity securities. The asset strategy allocates 20 percent
of the consolidated investment portfolio to have an exposure to equities, with
international equities limited to no more than 35 percent of total equities.
This represents an increase from the period January 1995 to May 1996, when the
equity allocation was 15 percent, with international equities limited to no
more than 20 percent of total equities. The remainder of the consolidated
portfolio is to be invested in fixed income securities, with international
bonds limited to 5 percent of the total portfolio. Currency hedging is
permitted and used at the discretion of the investment managers. Prior to the
first quarter of fiscal 1995, all investments were denominated in U.S. dollars,
and total equity exposure was limited to 10 percent of the consolidated
investment portfolio.
The fixed maturity portion of the Company's investment portfolio includes
U.S. and non-U.S. government obligations, corporate bonds, mortgage-backed
securities, and other investment grade securities. The Company's investment
guidelines do not permit investments in non-investment grade securities and
limit the total "BBB" exposure of the portfolio. To ensure diversity and limit
concentrations of credit risk, no more than 5 percent of the portfolio may be
invested in the obligations of any one issuer (other than the U.S. government).
The Company includes its investment in Centre Reinsurance Holdings Limited, a
privately held Bermuda-domiciled reinsurer specializing in finite risk
reinsurance, as "other investments" in the consolidated financial statements.
This investment was originally made as part of a strategic business decision
and is not governed by the objectives and investment guidelines established for
the consolidated investment portfolio.
Applicable insurance laws and regulations do not restrict the Company's
investments except that certain types of investments (such as unquoted equity
securities, investments in affiliates, real estate and collateral loans) may
not qualify as a "relevant asset" for purposes of satisfying Bermuda statutory
requirements. See "Regulation--Bermuda."
For additional information regarding the investment portfolio, including
breakdowns of the sector and maturity distributions, see note 4 to the
consolidated financial statements included in the 1996 Annual Report to
Shareholders.
Regulation
Bermuda
The businesses of ACE Insurance, CODA and Tempest 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 and auditing and reporting requirements and
grants the Minister of Finance (the "Minister") powers to supervise,
investigate and intervene in the affairs of insurance companies. The Act
provides for four classes of insurance company. ACE Insurance and Tempest have
been designated as Class 4 insurers, which is the designation for the largest
companies requiring capital and surplus in excess of $100 million. CODA has
been designated a Class 3 insurer requiring capital and surplus in excess of
$1million. Each registered insurer must appoint an independent auditor to audit
and report on the Statutory Financial Statements and Statutory Financial Return
on an annual basis. The independent auditor must be approved by the Minister.
Each Class 3 and Class 4 insurer must appoint a loss reserve specialist, who
must also be approved by the Minister, to review and report on the loss
reserves of the insurer on an annual basis. Class 3 and Class 4 companies are
required to file their Statutory Financial Return and Statutory Financial
Statements with the Registrar of Companies in Bermuda (the "Registrar"), who is
the chief administrative officer under the Act, no later than four months from
the insurer's fiscal year end. The Statutory Financial Return includes, among
other matters, the report of the approved independent auditor; the actuarial
opinion on loss
15
reserves prepared by the approved loss reserve specialist; a declaration of
statutory ratios; and a solvency certificate. Both the declaration of
statutory ratios and the solvency certificate must be signed by at least two
directors of the insurer.
United Kingdom
London Representative Office
The Company has established for marketing purposes, representative offices
in London, England. However, all underwriting operations continue to be
conducted in Bermuda.
Lloyd's
The Company and its relevant UK subsidiaries are subject to the regulatory
jurisdiction of the Council of Lloyd's (the "Council") as a result of the
acquisition by the Company of a majority interest in Methuen and the
establishment of ACE Capital Limited ("ACE Capital"), a UK limited liability
corporate member of Lloyd's formed in connection with the Methuen acquisition.
In addition, as part of the acquisition of Ockham Worldwide, the Company
acquired a separate UK limited liability corporate member of Lloyd's, ACE
London Ltd ("ACE London"), which is subject to the same regulations as ACE
Capital. Unlike other financial markets in the UK, Lloyd's is not subject to
direct UK government regulation through the UK Financial Services Act 1986
but, instead, is self regulating by virtue of the Lloyd's Act 1982 through
bye-laws, regulations and codes of conduct made by the Council, which governs
the market. Under the Council there are two Boards, the Market Board and the
Regulatory Board. The former is led by working members of the Council and is
responsible for strategy and the provision of services such as premium and
claims handling, accounting and policy signing. The Regulatory Board is
responsible for the regulation of the market, compliance and the protection of
policyholders. Under the regulations, the approval of Council has to be
obtained before any person can be a "major shareholder" or "controller" of a
corporate member or a managing agency. The Company has been approved as a
"controller".
A person would be viewed by Lloyd's as a "major shareholder" of ACE Capital
or ACE London if such person owns 15 percent or more of the Company's
outstanding capital stock and as a "controller" if it owns 30 percent or more
of the Company's outstanding capital stock. Therefore, any person that becomes
the owner of 15 percent or more of the Company's stock may be required to
deliver a declaration and undertaking to Lloyd's, in the form prescribed by
Lloyd's, unless Lloyd's exempts such person from this requirement. Lloyd's
current practice is to require from a corporate member notification of
information concerning any person that becomes a "major shareholder" but only
to require such a declaration and undertaking to be given if the shareholders'
interest exceeds 20 percent. Lloyd's has stated that this undertaking does not
make such person liable for the Lloyd's business of ACE Capital or ACE London.
The Company is seeking an exemption from this requirement from Lloyd's for
certain categories of investors, but there is no assurance that such an
exemption will be obtained.
As a "controller", the Company is required to give certain undertakings,
directed principally towards ensuring that there is no direct interference in
the conduct of the business of the managing agency, but there are no
provisions in the Lloyd's Act 1982, the bye-laws or the regulations which
provide for any liabilities of ACE Capital or Methuen to be met by the
Company. In addition, a managing agency is required to comply with various
capital and solvency requirements, and to submit to regular monitoring and
compliance procedures. ACE Capital and ACE London, as corporate members of
Lloyd's, are each required to commit an amount broadly equal to 50 percent of
their underwriting capacity on the syndicates to support its underwriting on
those syndicates.
Under English law, if any person that holds or subsequently becomes the
holder of more than 5 percent of the Company's stock also owns any interest in
a Lloyd's broker or is a partner or a director of a Lloyd's broker, that
Lloyd's broker risks losing its Lloyd's license. For these purposes "Lloyd's
broker" includes the holding company of a corporate Lloyd's broker, any
company which controls (a test based on one-third voting rights or
16
control of the board) such a Lloyd's broker or its holding company or if the
Lloyd's broker is a partnership any person who controls (on a similar test)
such a Lloyd's broker or one of its partners.
United States of America
The Company and its insurance subsidiaries, excluding its Lloyd's
operations, are not admitted to do business as insurers in any jurisdiction in
the U.S. Each state in the U.S. licenses insurers and prohibits, with some
exceptions, the sale of insurance products by non-admitted insurers within
their applicable jurisdictions.
The Company conducts its business from its offices in Bermuda. All of the
Company's insurance clients are obtained through non-U.S. insurance brokers
and non-U.S. affiliates of U.S. insurance brokers. All policies are issued and
delivered and premiums are received in Bermuda. Based on, among other things,
the foregoing, the Company does not believe it is in violation of the
insurance laws of any state in the U.S.
Many states impose a premium tax (typically 2 percent to 4 percent of gross
premiums) on insureds obtaining insurance from nonadmitted foreign insurers,
such as ACE Insurance and CODA. The premiums charged by the Company do not
include any American 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.
The U.S. 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 ACE Insurance and CODA are 4 percent or insurance premiums and 1
percent for reinsurance premiums.
The Company has from time to time received inquiries from certain U.S. state
insurance regulators regarding the Company's activities in a particular
jurisdiction. To date only the State of Nevada Department of Insurance has
formally challenged the insurance activities of the Company and that challenge
was resolved in favor of the Company by legislation. There can be no assurance
that additional challenges will not be raised in the future or that the
Company will be able to successfully defend against such challenges. Such
challenges may arise, among other things, in connection with actions seeking
the payment of state premium taxes from insureds.
In the event that the Company is not able to successfully defend against
challenges by certain U.S. jurisdictions, the Company's business could be
adversely affected in the short term. However, should this occur, the Company
could elect to qualify as a surplus lines insurer in such U.S. jurisdictions
as were necessary. Were it necessary to do so, the Company believes that
generally it could meet and comply with the prescribed legislative
requirements, and such compliance would not have a material impact on the
ability of the Company to conduct its business or its results of operations.
If the Company is unable to defend successfully against challenges of U.S.
jurisdiction, it is possible that a policyholder could attempt to sue the
Company in a U.S. court. Although the Company's policies have a mandatory
arbitration clause for coverage disputes, courts in some states can impose
damages in excess of policy limits if an insurer is found to have improperly
and in bad faith declined coverage. If a U.S. court took jurisdiction of such
a claim, it is possible that the Company's exposure could be significantly
greater than policy limits.
There can be no assurance that new or additional legislation will not be
proposed and enacted that has the effect of subjecting the Company to
regulation in the U.S.
17
Tax Matters
United States of America
Corporate Income Tax
ACE is a Cayman Islands corporation and has never paid U.S. corporate income
taxes (other than withholding taxes on dividend income) 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 the Company were subject to U.S. income tax, there could be a
material adverse effect on the Company's shareholders' equity and earnings.
The Company and its 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. except that the Company and its insurance 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 the Company's contention that none of its income is
subject to a net income tax in the U.S.
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 an 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 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 fiscal year ended September 30,
1996, 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 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. For a more detailed discussion of RPII and
other tax matters pertaining to an investment in the Company's shares,
reference is hereby made to the section entitled "Taxation of Ace and its
Shareholders" in the Company's Registration Statement on Form S-4 (No. 333-
04153), which section is incorporated by reference herein.
United Kingdom
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 in proportion to their participation in the
relevant syndicates. ACE Capital is subject to this arrangement but, as a UK
domiciled company, will receive UK corporation tax credits for any U.S. income
tax incurred up to the value of the equivalent UK corporation income tax
charge on the U.S. income.
Methuen and Ockham Worldwide are subject to UK corporation tax and value
added tax. The Company's corporate subsidiary which has acquired Methuen and
Ockham Worldwide and ACE Capital and ACE London Ltd., the Lloyd's corporate
members participating in the managed by MUL, ALVL and ALUL syndicates are also
subject to UK corporation tax and value added tax.
18
Although the Company has representative offices in London, it has been
advised that it is not deemed to be doing insurance business in the UK and
therefore is subject only to minimal tax in the UK.
With effect from October 1, 1994, the UK imposed an insurance premium tax on
that portion of policies related to certain UK risks. ACE has registered to
collect and pay this tax on behalf of UK domiciled policyholders.
Bermuda
Under current Bermuda law, the Company is not required to pay any taxes on
its income or capital gains. The Company has received an undertaking from the
Minister of Finance that, in the event of any taxes being imposed, the Company
will be exempt from taxation in Bermuda until March 2016.
Employees
At September 30, 1996, the Company employed a total of 256 persons, 118 of
whom were located in Bermuda and 138 in London. Of the 118 persons employed in
Bermuda, 14 are employed by Tempest. Of the 138 persons employed in London, 134
are employed by Methuen. None of these employees is represented by a labor
union.
19
GLOSSARY OF SELECTED INSURANCE TERMS
Catastrophe Excess of Loss Catastrophe excess of loss reinsur-
Reinsurance............................ ance provides coverage to a primary
insurer when aggregate claims and
claim expenses from a single occur-
rence of a peril covered under a
portfolio of primary insurance con-
tracts written by the insurer exceed
the attachment point specified in the
reinsurance contract with the insur-
er.
Claims made form....................... Insurance coverage which is dependent
upon the filing of a claim, which
must normally fall within the policy
period.
IBNR loss reserves..................... The reserves included in the
Company's financial statements under
the caption "Unpaid Losses and Loss
Expenses" for the estimated ultimate
unpaid liability which the Company
has incurred under the terms of the
Company's policies and agreements,
less case reserves.
Integrated occurrence.................. All losses attributable directly or
indirectly to the same event, condi-
tion, cause, defect or hazard or
failure to warn of such which are
added together and treated as one oc-
currence under an insured's policy.
Occurrence first reported.............. Manuscripted form of stand-alone in-
surance coverage offered by the Com-
pany, which generally ties the limits
available and other policy terms to
the date on which an occurrence is
first reported to the Company.
Proportional Property Reinsurance...... Proportional property reinsurance
treaties assume a specified percent-
age of the risk exposure under a
portfolio of primary insurance con-
tracts written by the ceding insurer
and receive an equal percentage of
the premium received by the ceding
insurer.
Stand alone basis...................... A term referring to an insurance pol-
icy which is governed by its own
terms, conditions, exclusions and re-
tention and does not incorporate the
terms, conditions or exclusions of
underlying policies.
Reinsurance............................ A form of insurance in which the re-
insurer, in consideration for a pre-
mium paid to it, agrees to indemnify
the reinsured ("the ceding company")
for part or all of the liability as-
sumed by the ceding company.
Risk Excess of Loss Reinsurance........ Property per risk excess of loss re-
insurance responds to a loss of the
reinsured in excess of its retention
level on a single "risk", rather than
to aggregate losses for all covered
risks. A risk in this context might
mean the insurance coverage on one
building or a group of buildings.
Treaty Reinsurance..................... A reinsurance agreement whereby the
ceding company is obligated to offer
and the reinsurer is obligated to ac-
cept a specified portion of all such
type or category of risks originally
insured by the ceding company.
20
ITEM 2. PROPERTIES
The Company leases office space in Hamilton, Bermuda for its principal
offices. The lessor is a joint venture in which the Company has a 40 percent
interest and there is an agreement with the joint venture partner which
ensures the Company's ability to occupy a portion of the building until 2011.
Tempest also leases office space in Hamilton, Bermuda for its principle
offices under a non-cancelable lease expiring in 1998 with a three year
renewal option. Methuen leases office space at 122 Leadenhall Street, London,
England for its principal offices. The lease expires in June 2012. Methuen
also leases an office in the 1986 Lloyd's Building in London. The lease has
termination dates of September 2001 and 2006.
ITEM 3. LEGAL PROCEEDINGS
The Company, in common with the insurance industry in general, is subject to
litigation in the normal course of its business. Although all of the Company's
policies provide for resolution of disputes by arbitration in Bermuda or
London, the Company has been sued by insureds several times in the United
States and, with one exception which is currently on appeal, has been
successful in either being dismissed from such suits or in having such suits
dismissed on procedural grounds or stayed pending the results of arbitration.
In addition, the Company is occasionally named as a party in Louisiana "direct
action" suits by insureds. The Company has sought dismissal of these actions
as well and decisions are pending in these actions. At September 30, 1996, the
Company was not a party to any material litigation other than as encountered
in claims activity and none of such litigation is expected by management to
have a materially adverse effect on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Other then the Extraordinary General Meeting held on July 1, 1996 which was
reported in the Company's June 30, 1996 Form 10-Q, no matters were submitted
to a vote of stockholders during the fourth quarter of the fiscal year covered
by this report.
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 49 Chairman, President and Chief Executive Officer and Director
Duperreault
Donald 59 Vice Chairman and Director;
Kramer President and Chief Executive Officer of
Tempest Reinsurance Company Limited
Dominic J. 43 Executive Vice President, Underwriting
Frederico
William J. 57 Executive Vice President; Chairman of ACE UK Limited
Loschert
Christopher 40 Executive Vice President and Chief Financial Officer
Z. Marshall
Peter N. 52 Executive Vice President, Claims and General Counsel
Mear
John C. 49 Senior Vice President and Chief Actuary
Burville
Robin J.W. 41 Senior Vice President and Treasurer
Masters
Keith P. 53 Senior Vice President, Administration and Assistant Secretary
White
George Rivaz 33 Executive Vice President and Chief Underwriter of
Tempest Reinsurance Company Limited
Leslie D. 50 Chief Executive of Methuen Underwriting Limited
Goodman
21
Brian Duperreault has served as Chairman, President and Chief Executive
Officer and as a director of the Company since October 1, 1994. Mr. Duperreault
joined AIG in 1973 and served in various senior executive positions with AIG
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, from April 1994 to September
1994. Mr. Duperreault was President of American International Underwriters, an
affiliate of AIG, from 1991 to 1994, and Chief Executive Officer of AIG
companies in Japan and Korea, from 1989 until 1991.
Donald Kramer has served as Vice Chairman and a director of the Company and
Chairman and Chief Executive Officer of Tempest since July 1996. Mr. Kramer
previously served as Chairman of Tempest and was instrumental in the formation
of Tempest in September 1993. Mr. Kramer was previously Chief Executive Officer
of Kramer Capital Corp., North American Insurance Company of California and was
the founder and Chairman of NAC Re Corp. where he served until his retirement
in June 1993.
Dominic J. Frederico has served as Executive Vice President, Underwriting
since December 1, 1996, and as Executive Vice President, Financial Lines from
January 1995 to December 1, 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.
William J. Loschert was appointed as Chairman of ACE UK Limited with effect
from December 1, 1996 to oversee the Company's insurance operations at Lloyd's.
Mr. Loschert previously served as Executive Vice President, Underwriting of the
Company since January 1986.
Christopher Z. Marshall has served as Executive Vice President and Chief
Financial Officer of the Company since November 1992 and as Senior Vice
President, Finance of the Company from January 1990 to November 1992.
Peter N. Mear has served as Executive Vice President, Claims and General
Counsel of the Company 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.
John C. Burville has served as Senior Vice President and Chief Actuary of the
Company since January 1992. Mr. Burville served as managing actuarial
consultant with Tillinghast, Nelson & Warren (Bermuda) Ltd. (management
consulting and actuaries) from March 1986 to December 1991.
Robin J. W. Masters has served as Senior Vice President since February 1995,
as Treasurer of the Company since October 1992 and as Assistant Treasurer from
February 1990 to October 1992.
Keith P. White has served as Senior Vice President, Administration of the
Company since January 1990. Mr. White served as Manager of the International
Operations of The Bermuda Fire and Marine Insurance Company Ltd. from 1973 to
1989.
George Rivaz has served as Executive Vice President and Chief Underwriter of
Tempest since July 1996. Prior to joining the company, Mr. Rivaz served as a
senior underwriter with General Re Underwriting Services Limited from September
1993. General Re Underwriting Services Limited provided underwriting services
to Tempest. Previously, Mr. Rivaz was with Syndicate 1095 (managed by the
Wellington Underwriting Agency) at Lloyd's.
Leslie D. Goodman has served as Chief Executive of MUL since October 1, 1994.
Prior to joining MUL, Mr. Goodman served as Chief Executive of Jardine Lloyd's
Advisors Limited, a Lloyd's agency representing the interests of capital
providers to the Lloyd's market.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S ORDINARY SHARES AND RELATED STOCKHOLDER
MATTERS
(a) The Company's Ordinary Shares, par value $0.125 per share, have been
listed on the New York Stock Exchange since March 25, 1993, under the symbol
ACL.
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.
FISCAL 1996 FISCAL 1995
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter................................. 39 3/4 33 25 1/4 20 3/4
Second Quarter................................ 48 3/4 38 25 7/8 22 1/8
Third Quarter................................. 49 1/4 41 3/4 30 5/8 24 3/8
Fourth Quarter................................ 52 7/8 41 3/4 34 3/8 28 1/2
The last reported sale price of the Ordinary Shares on the New York Stock
Exchange Composite Tape on December 13, 1996 was $59 3/4.
(b) The approximate number of record holders of Ordinary Shares as of
December 13, 1996 was 202.
(c) The Company paid two quarterly dividends of $0.14 per share to all
shareholders of record on December 29, 1995 and March 29, 1996, and two
quarterly dividends of $0.18 per share to all shareholders of record on June
14, 1996 and September 30, 1996. On November 15, 1996 the Company declared a
quarterly dividend of $0.18 per Ordinary Share, payable on January 17, 1997 to
shareholders of record on December 31, 1996.
During 1996, the Company repurchased 1,268,600 Ordinary Shares under share
repurchase programs for an aggregate cost of $57.8 million. On August 9, 1996,
the Board of Directors authorized a new program for up to $100.0 million of
the Company's Ordinary Shares. This program superceded and replaced the
balance of the February 3, 1995 authorization. At September 30, 1996, $65.8
million of the Board authorization had not been utilized. During 1995 the
Company repurchased 1,332,300 Ordinary Shares under share repurchase programs
for an aggregate cost of $33.5 million. As of December 13, 1996 the remaining
$63.6 million of the Board authorization had not been utilized.
The Company 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 the Company 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 1996 Annual Report to Shareholders
filed with this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended September 30, 1996 is
incorporated by reference to pages 16 and 17 of the 1996 Annual Report to
Shareholders 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 18 and 27 of the 1996 Annual
Report to Shareholders.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item is incorporated by reference to pages 28 and 46 of the 1996 Annual
Report to Shareholders.
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 24 months ended September 30,
1996.
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 1999", "Election of
Directors--Nominees for Election to Terms Expiring in 2000" and "--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
February 7, 1997, 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 February 7, 1997, 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 February 7, 1997, 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 February 7, 1997,
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(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 Annual Report to Shareholders as described under
item 8 of this Report
--Report of Independent Accountants
--Consolidated Balance Sheets at September 30, 1996 and 1995
24
--Consolidated Statements of Operations for the years ended
September 30, 1996,1995 and 1994
--Consolidated Statements of Shareholders' Equity for the years
ended September 30,1996, 1995 and 1994
--Consolidated Statements of Cash Flows for the years ended
September 30, 1996,1995 and 1994
--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 24
--Summary of Investments I 25
--Condensed financial information of the Registrant as
of September 30, 1996 and 1995, and for the years
ended September 30, 1996, 1995 and 1994 II 26
--Supplemental information concerning Property/Casualty
Insurance Operations VI 29
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 Agreement and
Plan of Amal-
gamation,
dated as of
March 14,
1996, by and
among ACE
Limited, TRCL
Acquisition
Limited and
Tempest Rein-
surance Com-
pany Limited
(incorporated
by reference
to Exhibit
2.1 to Form
S-4 of the
Company (No.
333-04153)).
3.1 Memorandum of
Association
of the Compa-
ny, (incorpo-
rated by ref-
erence to Ex-
hibit 3.1 to
the Registra-
tion State-
ment on Form
S-1 of the
Company (No.
33-57206)).
3.2 Articles of
Association
of the Compa-
ny, (incorpo-
rated by ref-
erence to Ex-
hibit 3.2 to
the Registra-
tion State-
ment on Form
S-1 of the
Company (No.
33-57206)).
4.1 Memorandum of
Association
of the Com-
pany (see Ex-
hibit 3.1).
4.2 Articles of
Association
of the Com-
pany (see Ex-
hibit 3.2).
4.3 Specimen cer-
tificate rep-
resenting Or-
dinary
Shares, (in-
corporated by
reference to
Exhibit 3.1
to the Regis-
tration
Statement on
Form S-1 of
the Company
(No. 33-
57206)).
10.1 Employment
Agreement
dated Decem-
ber 23, 1985,
between ACE
Limited,
A.C.E. Insur-
ance Company
Ltd., and
William J.
Loschert,
(incorporated
by reference
to Exhibit
10.8 to the
Registration
Statement on
Form S-1 of
the Company
(No. 33-
57206)).
10.2 Employment
Agreement
dated January
1, 1986, be-
tween ACE
Limited,
A.C.E. Insur-
ance Company
Ltd., and
Christopher
Z. Marshall,
(incorporated
by reference
to Exhibit
10.9 to the
Registration
Statement on
Form S-1 of
the Company
(No. 33-
57206)).
10.3 ACE Limited
Annual Per-
formance In-
centive Plan,
(incorporated
by reference
to Exhibit
10.13 to the
Registration
Statement on
Form S-1 of
the Company
(No. 33-
57206)).
10.4 ACE Limited
Equity Linked
Incentive
Plan, (incor-
porated by
reference to
Exhibit 10.14
to the Regis-
tration
Statement on
Form S-1 of
the Company
(No. 33-
57206)).
25
10.5 Amendment to ACE Limited
Equity Linked Incentive
Plan, (incorporated by
reference to Exhibit
10.15 to the Registra-
tion Statement on Form
S-1 of the Company (No.
33-57206)).
10.6 ACE Limited Employee Re-
tirement Plan, (incorpo-
rated by reference to
Exhibit 10.21 to the
Registration Statement
on Form S-1 of the Com-
pany (No. 33-57206)).
10.7 First Amendment to ACE
Limited Employee Retire-
ment Plan, (incorporated
by reference to Exhibit
10.22 to the Registra-
tion Statement on Form
S-1 of the Company (No.
33-57206)).
10.8 Second Amendment to ACE
Limited Employee Retire-
ment Plan, (incorporated
by reference to Exhibit
10.23 to the Registra-
tion Statement on Form
S-1 of the Company (No.
33-57206)).
10.9 Third Amendment to ACE
Limited Employee Retire-
ment Plan, (incorporated
by reference to Exhibit
10.24 to the Registra-
tion Statement on Form
S-1 of the Company (No.
33-57206)).
10.10 ACE Limited Supplemental
Retirement Plan, (incor-
porated by reference to
Exhibit 10.25 to the
Registration Statement
on Form S-1 of the Com-
pany (No. 33-57206)).
10.11 First Amendment to ACE
Limited Supplemental Re-
tirement Plan, (incorpo-
rated by reference to
Exhibit 10.26 to the
Registration Statement
on Form S-1 of the Com-
pany (No. 33-57206)).
10.12 Second Amendment to ACE
Limited Supplemental Re-
tirement Plan, (incorpo-
rated by reference to
Exhibit 10.27 to the
Registration Statement
on Form S-1 of the Com-
pany (No. 33-57206)).
10.13 Form of restricted stock
award dated August 24,
1993 to ACE Limited Di-
rectors, (incorporated
by reference to Exhibit
10.39 to Form 10-K of
the Company for the year
ended September 30,
1993).
10.14 Employment Agreement,
dated October 1, 1994,
between ACE Limited and
Brian Duperreault (in-
corporated by reference
to Exhibit 10.42 to Form
10-K of the Company for
the year ended September
30, 1994).
10.15 Option and Restricted
Share Agreement, dated
October 1, 1994, between
ACE Limited and Brian
Duperreault (incorpo-
rated by reference to
Exhibit 10.43 to Form
10-K of the Company for
the year ended September
30, 1994).
10.16 Consulting Agreement,
effective October 1,
1994, between ACE Lim-
ited and Walter A. Scott
(incorporated by refer-
ence to Exhibit 10.44 to
Form 10-K of the Company
for the year ended Sep-
tember 30, 1994).
10.17 Employment Agreement,
dated January 9, 1995,
between ACE Limited and
Dominic J. Frederico
(incorporated by refer-
ence to Exhibit 10.45 to
Form 10-K of the Company
for the year ended Sep-
tember 30, 1995).
10.18 Second amendment to ACE
Limited Equity Linked
Incentive Plan (incorpo-
rated by reference to
Exhibit 10.45 to Form
10-K of the Company for
the year ended September
30, 1995).
10.19 Loan Agreement between
the Company and a syndi-
cate of banks dated No-
vember 17, 1995 (incor-
porated by reference to
Exhibit 10.47 to Form
10-K of the Company for
the year ended September
30, 1995).
10.20 Employment Agreement,
dated April 1, 1996, be-
tween ACE Limited and
Peter N. Mear (incorpo-
rated by reference to
Exhibit 10.48 to Form
10-Q of the Company for
the quarter ended June
30, 1996).
26
10.21 ACE Limited 1995 Long
Term Incentive Plan (in-
corporated by reference
to Exhibit 10.35 to Form
10-Q of the Company for
the quarter ended March
31, 1996).
10.22 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).
10.23 1995 Outside Directors
Plan (incorporated by
reference to Exhibit
10.37 to Form 10-Q of
the Company for the
quarter ended March 31,
1996).
10.24 ACE Limited 1996 Tempest
Replacement Option Plan.
10.25 Credit Agreement between
the Company and a syndi-
cate of banks dated No-
vember 15, 1996.
10.26 Reimbursement Agreement
and Pledge Agreement be-
tween the Company and a
syndicate of banks dated
November 22, 1996.
10.27 First Amendment of ACE
Limited 1995 Long Term
Incentive Plan.
11.1 Statement regarding com-
putation of per share
earnings.
13.1 Pages 16 through 45 of
the 1996 Annual Report
to Shareholders.
21.1 Subsidiaries of the Com-
pany.
23.1 Consent of Coopers &
Lybrand L.L.P.
27.1 Financial Data Schedule
99.1 Extracts from the
Company's Registration
Statement on Form S-4
(No. 333-04153)
concerning taxation of
ACE and its Sharehold-
ers.
(b) REPORTS ON FORM 8-K
The Company has filed no reports on Form 8-K for the fourth quarter ended
September 30, 1996.
27
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 28
of the 1996 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.
Coopers & Lybrand L.L.P
New York, New York
November 7, 1996
28
SCHEDULE I
ACE LIMITED AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
SEPTEMBER 30, 1996
AMOUNT AT WHICH
COST OR FAIR SHOWN IN THE
AMORTIZED COST VALUE BALANCE SHEET
-------------- --------- ---------------
(IN THOUSANDS OF U.S. DOLLARS)
FIXED MATURITIES:
Bonds:
U.S. Treasury and agency.......... 971,615 973,362 973,362
Non-U.S. governments.............. 191,727 190,999 190,999
Corporate securities.............. 948,694 950,532 950,532
Mortgage-backed securities........ 1,282,401 1,274,869 1,274,869
--------- --------- ---------
Total fixed maturities.......... 3,394,437 3,389,762 3,389,762
--------- --------- ---------
EQUITY SECURITIES:
Common stock:
Public utilities.................. 21,275 27,987 27,987
Banks, trust and insurance
companies........................ 22,756 27,149 27,149
Industrial, miscellaneous and all
other............................ 208,415 262,824 262,824
Non redeemable preferred stock...... 4,603 5,045 5,045
--------- --------- ---------
Total equity securities......... 257,049 323,005 323,005
--------- --------- ---------
Other investments................... 12,453 12,453 12,453
--------- --------- ---------
Short-term investments and cash..... 430,054 430,054 430,054
--------- --------- ---------
Total investments and cash...... 4,093,993 4,155,274 4,155,274
========= ========= =========
29
SCHEDULE II
ACE LIMITED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (PARENT COMPANY ONLY)
SEPTEMBER 30, 1996 AND 1995
1996 1995
---------- ----------
(IN THOUSANDS OF U.S.
DOLLARS)
ASSETS
Investments and cash
Investments in subsidiaries and affiliate on
equity basis.................................... $2,252,319 $1,542,126
Other investments, at cost ...................... 12,453 12,453
Cash............................................. 2,297 55
---------- ----------
Total investments and cash..................... 2,267,069 1,554,634
Other assets....................................... 11,435 11,951
---------- ----------
Total assets................................... $2,278,504 $1,566,585
========== ==========
LIABILITIES
Due to subsidiaries and affiliate, net............. $ 6,944 $ 10,980
Advances from affiliate............................ -- 96,299
Accounts payable and accrued liabilities........... 16,812 10,187
Dividend payable................................... 10,470 6,456
---------- ----------
Total liabilities.............................. 34,226 123,922
---------- ----------
SHAREHOLDERS' EQUITY
Ordinary shares.................................... 7,271 5,764
Additional paid-in capital......................... 1,156,194 548,513
Unearned stock grant compensation.................. (1,299) (1,796)
Net unrealized appreciation on investments......... 61,281 94,694
Cumulative translation adjustment.................. 131 --
Retained earnings.................................. 1,020,700 795,488
---------- ----------
Total shareholders' equity..................... 2,244,278 1,442,663
---------- ----------
Total liabilities and shareholders' equity..... $2,278,504 $1,566,585
========== ==========
30
SCHEDULE II--(CONTINUED)
ACE LIMITED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF U.S.
DOLLARS)
Revenues
Management fees................................ $ 21,081 $ 17,580 $ 6,600
Investment income, including intercompany
interest income (expense)..................... (6,881) (9,034) 2,036
Equity in net (loss) income of subsidiaries and
affiliate..................................... 313,359 254,901 (95,551)
Net realized gains on investments.............. -- -- 57,678
-------- -------- --------
327,559 263,447 (29,237)
Expenses
Administrative expenses........................ (37,826) (25,881) (16,441)
-------- -------- --------
Net income (loss)............................ $289,733 $237,566 $(45,678)
======== ======== ========
31
SCHEDULE II--(CONTINUED)
ACE LIMITED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS OF U.S.
DOLLARS)
Cash flows from operating activities
Net income (loss)........................... $ 289,733 $ 237,566 $ (45,678)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities
Equity in net income of subsidiaries and
affiliate................................ (313,359) (254,901) 95,551
Realized gains on investments............. -- -- (57,678)
Amounts due to subsidiaries and affiliate,
net...................................... (4,036) (475) (23,628)
Accounts payable and accrued liabilities.. 6,625 2,414 (942)
Accrued interest on advances to affiliate. (9,729) 8,682 49,713
Other..................................... (3,957) (2,935) (2,188)
--------- --------- ---------
Net cash flows from (used for) operating
activities............................. (34,723) (9,649) 15,150
--------- --------- ---------
Cash flows from investing activities
Sale of equity securities................... -- -- 128,382
Capitalization of subsidiary................ 74,123 -- (200,000)
Capital contributions to subsidiary......... -- -- (100,000)
Dividends received from subsidiaries........ 135,000 -- 40,000
Advances to affiliate....................... (284,620) (300) (165,546)
Repayment of advances to affiliate.......... -- -- 345,023
--------- --------- ---------
Net cash from (used for) investing
activities............................. (75,497) (300) 47,859
--------- --------- ---------
Cash flows from financing activities
Proceeds from exercise of options for
shares..................................... 28 168 5
Repurchase of Ordinary Shares............... (57,931) (33,514) (65,312)
Dividends paid.............................. (27,685) (22,058) (19,900)
Proceeds from loans......................... -- -- 166,000
Loan payments............................... -- -- (166,000)
Advances from affiliate..................... 198,050 63,350 23,520
--------- --------- ---------
Net cash from (used for) financing
activities............................. 112,462 7,946 (61,687)
--------- --------- ---------
Net increase (decrease) in cash............... 2,242 (2,003) 1,322
Cash--beginning of year....................... 55 2,058 736
--------- --------- ---------
Cash--end of year............................. $ 2,297 $ 55 $ 2,058
========= ========= =========
32
SCHEDULE VI
ACE LIMITED AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY OPERATIONS
LOSSES AND LOSS
EXPENSES
RESERVES INCURRED RELATED
FOR UNPAID TO AMORTIZATION PAID
DEFERRED LOSSES NET ----------------- OF DEFERRED LOSSES NET
ACQUISITION AND LOSS UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION AND LOSS PREMIUMS
COSTS EXPENSES PREMIUM PREMIUM INCOME YEAR YEARS COSTS EXPENSES WRITTEN
----------- ---------- -------- -------- ---------- -------- -------- ------------ -------- --------
(IN THOUSANDS OF U.S. DOLLARS)
1996.............. $34,546 $1,836,113 $398,731 $587,245 $206,524 $464,824 -- $52,954 $101,376 $602,707
1995.............. $34,428 $1,437,930 $309,722 $428,661 $181,375 $350,653 -- $46,647 $ 73,115 $424,756
1994.............. $37,444 $1,160,392 $309,473 $391,117 $142,677 $320,556 $200,000 $45,849 $126,566 $385,926
33
SIGNATURE
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
Christopher Z. Marshall
By: _________________________________
Christopher Z. Marshall
Executive Vice President and
Chief Financial Officer
December 19, 1996
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
--------- ----- ----
Brian Duperreault
- ------------------------------------
Brian Duperreault Chairman, President and
Chief Executive Officer;
Director December 19, 1996
Christopher Z. Marshall
- ------------------------------------
Christopher Z. Marshall Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) December 19, 1996
Donald Kramer
- ------------------------------------
Donald Kramer Vice Chairman; Director December 19, 1996
Michael G. Atieh
- ------------------------------------
Michael G. Atieh Director December 19, 1996
Bruce L. Crockett
- ------------------------------------
Bruce L. Crockett Director December 19, 1996
Jeffrey W. Greenberg
- ------------------------------------
Jeffrey W. Greenberg Director December 19, 1996
Meryl D. Hartzband
- ------------------------------------
Meryl D. Hartzband Director December 19, 1996
Robert M. Hernandez
- ------------------------------------
Robert M. Hernandez Director December 19, 1996
34
SIGNATURE TITLE DATE
--------- ----- ----
Andrew J. Markey
- ------------------------------------
Andrew J. Markey Director December 19, 1996
Peter Menikoff
- ------------------------------------
Peter Menikoff Director December 19, 1996
Glen M. Renfew
- ------------------------------------
Glen M. Renfew Director December 19, 1996
Robert Ripp
- ------------------------------------
Robert Ripp Director December 19, 1996
Walter A. Scott
- ------------------------------------
Walter A. Scott Director December 19, 1996
Robert W. Staley
- ------------------------------------
Robert W. Staley Director December 19, 1996
Gary M. Stuart
- ------------------------------------
Gary M. Stuart Director December 19, 1996
Sidney F. Wentz
- ------------------------------------
Sidney F. Wentz Director December 19, 1996
35