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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-11778
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ACE LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS 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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Ordinary Shares, par value $0.041666667 per share New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
As of December 15, 1998, there were 193,656,476 Ordinary Shares par value
$0.041666667 of the Registrant outstanding and the aggregate market value of
voting stock held by non-affiliates at such date was approximately $5.35
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 5,
1999, are incorporated by reference into Part III of this report and certain
portions of the 1998 Annual Report to Shareholders are incorporated by
reference into Parts II and IV of this report.
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ACE LIMITED
INDEX TO 10-K
PAGE
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PART I
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 24
Item 3. Legal Proceedings..................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................................... 24
PART II
Item 5. Market for the Registrant's Ordinary Shares and Related Stockholder Matters........... 25
Item 6. Selected Financial Data............................................................... 26
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. 26
Item 7A Quantitative and Qualitative Disclosures about Market Risk............................ 27
Item 8. Financial Statements and Supplementary Data........................................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 27
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 27
Item 11. Executive Compensation................................................................ 27
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 27
Item 13. Certain Relationships and Related Transactions........................................ 27
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K..................... 27
PART I
ITEM 1. BUSINESS
Certain terms used below are defined in the "Glossary of Selected Insurance
Terms" appearing on page 23.
SAFE HARBOR DISCLOSURE
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Any written or oral statements made by
or on behalf of the Company may include forward-looking statements which
reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
uncertainties and other factors that could cause actual results to differ
materially from such statements. These uncertainties and other factors (which
are described in more detail elsewhere in documents filed by the Company with
the Securities and Exchange Commission) include, but are not limited to, (i)
uncertainties relating to government and regulatory policies (such as
subjecting the Company to insurance regulation or taxation in additional
jurisdictions), (ii) the occurrence of catastrophic events with a frequency or
severity exceeding the Company's estimates, (iii) the legal environment, (iv)
the uncertainties of the reserving process, (v) loss of the services of any of
the Company's executive officers, (vi) changing rates of inflation and other
economic conditions, (vii) losses due to foreign currency exchange rate
fluctuations, (viii) ability to collect reinsurance recoverables, (ix) the
competitive environment in which the Company operates, (x) the impact of
mergers and acquisitions, (xi) the impact of Year 2000 related issues, (xii)
developments in global financial markets which could affect the Company's
investment portfolio, and (xiii) risks associated with the introduction of new
products and services. The words "believe," "anticipate," "project," "plan,"
"expect," "intend," "will likely result," or "will continue" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of their dates. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
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 Bermuda"), Corporate
Officers & Directors Assurance Ltd. ("CODA"), Tempest Reinsurance Company
Limited ("Tempest Re") and CAT Limited ("CAT") and its Dublin, Ireland based
subsidiaries, ACE Bermuda Company Europe Limited ("AICE") and ACE Reinsurance
Company Europe Limited ("ARCE"), provides a broad range of insurance and
reinsurance products for a diverse group of international clients. Through its
U.S. based subsidiary, ACE USA, Inc. (formerly Westchester Specialty Group,
Inc.) ("ACE USA"), the Company provides commercial property, umbrella
liability, specialty program business, warranty, errors and omissions and
directors and officers coverages as well as a captive management reinsurance
facility to a broad range of clients in the United States. In addition, the
Company provides funds at Lloyd's to support underwriting by Lloyd's
syndicates managed by Methuen Underwriting Limited ("MUL"), ACE London
Aviation Limited ("ALA"), ACE London Underwriting Limited ("ALU") and Charman
Underwriting Agencies Ltd. ("CUAL"), each indirect wholly owned subsidiaries
of ACE. Unless the context otherwise indicates, the term "Company" refers to
one or more of ACE and its consolidated subsidiaries. The operations of the
Company in the Lloyd's market are collectively referred to herein as "ACE
Global Markets."
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 acquired CODA in 1993, and
diversified its product portfolio in ACE Bermuda 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
1
diversification with the acquisition in March 1996 of Methuen Group Limited
("Methuen"), the holding company for MUL, and in July 1996 of Tempest Re, a
leading Bermuda-based property catastrophe reinsurer. The short-tail nature of
the property catastrophe business and shorter loss payout patterns
complemented the generally longer-tail nature of the Company's other product
lines.
Also in November 1996, the Company acquired Ockham Worldwide Holdings plc
which was renamed ACE London Holdings Limited ("ACE London"). ACE London owns
two Lloyd's managing agencies, ALA and ALU.
In March 1997, the Company, together with two other insurance companies,
formed Sovereign Risk Insurance Limited ("Sovereign"), a Bermuda-based
managing general agency, to provide underwriting services to the three
organizations for political risk insurance coverage. Sovereign issues
subscription policies with the Company assuming 50 percent of each risk
underwritten.
On September 30, 1997, the Company announced the incorporation of AICE, as
part of the International Financial Services Centre in Dublin, Ireland. AICE
has been granted a license to write all 18 classes of non-life insurance in
all member states of the European Union. The Company also operates ARCE, a
Dublin-based reinsurance company. ARCE provides flexibility mainly to European
corporations that wish to access the Company's products using different
structures.
On January 2, 1998, the Company acquired ACE USA, through its newly-created
U.S. holding company, ACE US Holdings, Inc ("ACE US"). In connection with the
acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, provided
$750 million (75 percent quota share of $1 billion) of reinsurance protection
to ACE USA with respect to its loss reserves for the 1996 and prior accident
years.
On April 1, 1998, the Company acquired CAT Limited, a privately held,
Bermuda-based property catastrophe reinsurer. This acquisition increased the
Company's already significant participation in the international property
catastrophe reinsurance market.
On July 9, 1998, the Company completed the acquisition of Tarquin Limited
("Tarquin"), a UK-based holding company which owns Lloyd's managing agency
CUAL and Tarquin Underwriting Limited, its corporate capital provider. The
CUAL managed syndicates, 488 and 2488, are leading international underwriters
of short-tail marine, aviation, political risk and specialty property-casualty
insurance and reinsurance.
The following table sets forth an analysis of gross premiums written by
subsidiary for each of the years ended September 30, 1998, 1997 and 1996:
FOR THE YEARS ENDED SEPTEMBER 30,
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GROSS GROSS GROSS
1998 1997 1996
PREMIUMS PREMIUMS PREMIUMS
WRITTEN PERCENT WRITTEN PERCENT WRITTEN PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS)
ACE Bermuda............... $ 521.6 42% $523.2 55% $581.6 68%
ACE Global Markets (1).... 436.3 35% 316.5 33% 243.6 28%
Tempest Re (2)............ 124.1 10% 119.6 12% 34.8 4%
ACE USA (3)............... 160.2 13% -- -- -- --
-------- ---- ------ ---- ------ ----
$1,242.2 100% $959.3 100% $860.0 100%
======== ==== ====== ==== ====== ====
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(1) On July 9, 1998, the Company completed the acquisition of Tarquin. All
amounts included for ACE Global Markets for 1998, 1997 and 1996 have been
restated to reflect the gross written premiums of Tarquin as the
transaction has been accounted for on a pooling-of-interests basis.
2
(2) Tempest Re was acquired on July 1, 1996 and thus gross premiums written
for Tempest Re in fiscal 1996 only relate to the three month period since
acquisition. CAT was acquired on April 1, 1998 and thus gross premiums
written for Tempest Re in fiscal 1998 include gross premiums written for
CAT for the six month period since acquisition.
(3) ACE USA was acquired on January 2, 1998 and thus gross premiums written
for ACE USA in fiscal 1998 only relate to the nine month period since
acquisition.
ACE Bermuda
ACE Bermuda primarily 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 a diverse group of industrial, commercial and
other enterprises. The nature of the insurance coverages provided by ACE
Bermuda are generally expected to result in low frequency but high severity of
individual losses. ACE Bermuda uses the reinsurance market as an integral part
of its risk management process and has secured reinsurance on all of its major
lines of business.
At September 30, 1998 approximately 66 percent of written premiums in ACE
Bermuda came from companies headquartered in North America with approximately
14 percent coming from companies headquartered in the United Kingdom and
continental Europe and approximately 20 percent from companies headquartered
in other countries.
Excess Liability
ACE Bermuda seeks to provide the highest layer of excess liability coverage
in the insurance programs of the world's major corporations and requires that
at least a portion of its coverage be the highest layer in a policyholder's
insurance program. ACE Bermuda 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 and in the
aggregate for all covered occurrences of which notice is given during such
year. Such limit is subject to reinstatement at the insureds election for
incidents post reinstatement. ACE Bermuda imposes an annual aggregate sublimit
of $100 million for integrated occurrences for all business that purchases
limits greater than $100 million. For certain classes of non-U.S. domiciled
excess liability risks, the minimum attachment point is $50 million (or the
foreign currency equivalent). In this instance, ACE Bermuda offers limits up
to twice the reduced attachment point. ACE Bermuda maintains quota-share and
excess of loss reinsurance to reduce net exposures to a maximum of $100
million.
Directors and Officers Liability
ACE Bermuda offers up to $75 million of directors and officers liability
insurance with a maximum of $50 million being provided for corporate
reimbursement coverage. 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.
Satellite
ACE Bermuda's satellite insurance operations offer separate gross limits of
up to $80 million per risk for launch insurance, including ascent to orbit
and/or initial testing and up to $80 million per risk for in-orbit insurance.
The Company has entered into a surplus treaty arrangement which provides for
up to $40 million of reinsurance on each risk. 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
3
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.
Financial Lines
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, ineffective terms, or
inefficient pricing being provided by traditional insurance markets.
Alternatively, they may use these insurance or reinsurance products to cover
loss exposures which are not appropriately addressed 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 insurance that cover financial exposures or involve financial
instruments.
ACE Bermuda believes it has a competitive advantage in the marketplace
because of its financial strength 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
ACE Bermuda's aviation insurance group offers limits of up to $150 million
per insured, with no minimum attachment point. ACE Bermuda 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, ACE Bermuda 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.
Excess Property
ACE Bermuda also offers excess property insurance. Its primary target
markets are chemical, energy, electronics, mineral, oil and gas, and
utilities. Property insurance coverage is offered with limits of up to $50
million per risk, typically above an attachment point of $25 million. In
certain circumstances, ACE Insurance uses reinsurance to establish the
retained net limit per risk.
Other
In March 1997, ACE Bermuda, together with two other insurance companies,
formed Sovereign Risk Insurance Limited ("Sovereign"), a Bermuda-based
managing general agency, to provide underwriting services
4
to these three organizations for political risk insurance coverage. Sovereign
issues subscription policies with ACE Bermuda assuming 50 percent of each risk
underwritten.
On March 11, 1998, ACE Bermuda formed a joint venture, ACE Capital Re
Limited, with Capital Re Corporation ("Capital Re"). ACE Capital Re Limited, a
Bermuda-domiciled insurance company, writes both traditional and custom-
designed programs covering financial guaranty, mortgage guaranty and a broad
range of financial risks. Operations are underwritten and managed in Bermuda
by a joint venture managing agency, ACE Capital Re Managers Ltd. ACE Bermuda
and Capital Re each have a 50 percent economic interest in ACE Capital Re
Limited and ACE Capital Re Managers Ltd.
ACE Global Markets
The Company's participation in the Lloyd's market is twofold. The Company
owns four managing agencies at Lloyd's, having completed its acquisitions of
MUL, ALA and ALU during calendar 1996 and CUAL in 1998. These managing
agencies receive fees and profit commissions in respect of the underwriting
and administrative services they provide to the syndicates. For the calendar
1998 year of account, these managing agencies manage 11 syndicates with total
capacity under management of $1.55 billion.
For calendar 1998, the Company, through six corporate members, participated
on ten of the ACE managed syndicates with an underwriting capacity of
approximately $935 million out of the $1.55 billion of the ACE managed
capacity referred to above. Included in the ten syndicates is Syndicate 2488,
a dedicated corporate syndicate whose capital is provided solely by the
Company, which underwrites in parallel with Syndicate 488 which comprises
names and other corporate members.
For the 1999 year of account, the ACE Global Markets operations have been
reorganized with the result that four ACE managed syndicates will be active in
1999. This reorganization is part of ACE Global Market's strategy to combine
all its underwriting operations into a single capital base in 2000. These
syndicates, which will focus on broad classes of business, are Syndicates 219
(Non-Marine) managed by ALU; 960 (Aviation) managed by ALA; and 488/2488
(Marine) managed by CUAL. As a consequence, MUL will not have any active
syndicates for the 1999 year of account.
In addition, following a de-emption in managed capacity (a process whereby
unutilized underwriting capacity is removed from the syndicates), the Company
will participate on all four of the ongoing ACE managed syndicates for 1999
with an anticipated underwriting capacity of approximately $700 million, out
of an anticipated $1 billion of ACE managed capacity.
Tempest Re
The Company's reinsurance activities are principally conducted through
Tempest Re, which was acquired in July 1996. On April 1, 1998, the Company
acquired CAT, another Bermuda-based property catastrophe reinsurer.
Underwriting operations have been combined with the group's existing
catastrophe reinsurance subsidiary, Tempest Re, and going forward the combined
entity will operate under the Tempest Re name. CAT specialized in providing
customized coverages, particularly multi-year contracts, to regional accounts.
Two thirds of CAT's business was non-traditional versus one third at Tempest
Re. Due to the different marketing focus there is only a limited overlap of
clients and programs between Tempest Re and CAT.
Tempest Re 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;
5
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 Re'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. The 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 Re's property catastrophe reinsurance contracts generally exclude
certain risks such as war, nuclear contamination, and radiation.
Tempest Re underwrites reinsurance principally on an excess of loss basis.
Other property reinsurance written by Tempest Re on a limited basis for select
clients, includes proportional property and per risk excess of loss treaty
reinsurance.
Tempest Re 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 Re's gross
premiums written allocated by territory of coverage:
YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1997 1996
----- ----- -----
United States........................................ 79.1% 68.4% 64.0%
United Kingdom....................................... 8.9% 12.8% 13.3%
Australia & New Zealand.............................. 4.6% 6.3% 6.0%
Asia................................................. 4.0% 3.6% 3.8%
Other................................................ 3.4% 8.9% 12.9%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
ACE USA
ACE USA's insurance subsidiaries are Westchester Fire Insurance Company,
Westchester Surplus Lines Insurance Company and Industrial Underwriters
Insurance Company (collectively, "US Insurance Subsidiaries"). The US
Insurance Subsidiaries write property and casualty insurance primarily within
the US commercial specialty lines market. ACE USA's non-insurance subsidiaries
are Westchester Specialty Insurance Services, Inc. and Industrial Excess and
Surplus Insurance Brokers, both brokerage companies. In addition, ACE USA owns
60 percent of automobile warranty administrator, CRC Creditor Resources Canada
Limited and other affiliated companies, which it purchased in June 1998.
The acquisition of ACE USA provides the Company with the opportunity to
continue its strategic diversification by gaining access to the U.S. direct
insurance market through an established company with a solid distribution
network. The Company believes that prior to the acquisition, uncertainty
regarding ACE USA's ownership and loss reserve adequacy adversely affected
that company's premium volume. The elimination of ownership uncertainty,
combined with ACE USA's reduced net exposure to reserve uncertainty as a
result of the National Indemnity reinsurance protection, has enhanced ACE
USA's market profile in the competitive US operating environment. Management
believes ACE USA's association with the Company following the acquisition has
increased its ability to attract staff with the requisite experience to gain
immediate access to these new markets.
To maintain the quality of its insured profile, ACE USA sets strict
underwriting and pricing guidelines and has established a structure that
ensures control of risk quality and conservative use of policy limits, terms,
and conditions. ACE USA's niche is highly cyclical and as a result, management
emphasizes the continual review of market conditions to identify trends and
opportunities to underwrite attractive coverages.
6
During 1998, ACE USA primarily wrote specialty property, umbrella, and
excess casualty business coverages. ACE USA's principal focus has been on
excess and surplus lines business which are either difficult to place or have
complex risk profiles which require greater underwriting and claims expertise
than that generally found in the standard market.
Property Division
ACE USA's property business, which encompasses both the catastrophe and non-
catastrophe market segments, includes coverages for fire, allied lines, inland
marine, and commercial multi-peril. The catastrophe segment focuses on
customers whose primary purpose in obtaining coverage is to secure financial
protection against the perils of hurricane or earthquake. ACE USA employs
catastrophe management tools to optimize the geographic spread of catastrophe
exposures and determine adequate product pricing levels. The non-catastrophe
segment focuses on unique and difficult to place risks by developing coverages
for specific industry groups through tailored products. During 1998, the non-
catastrophe segment's areas of concentration included lumber products, low
value dwellings, railroad and builders' risk. Property business accounted for
72 percent of ACE USA's total gross premium volume for the nine months ended
September 30, 1998.
Casualty Division
Within its casualty business, ACE USA specializes in writing umbrella and
excess liability products. These products provide coverage over an underlying
insurance program of at least $1 million on both a per occurrence and
aggregate basis. The focus is on medium to large accounts with a moderate risk
profile, primarily in manufacturing, construction and service/retail
businesses.
New Divisions
Since the acquisition of ACE USA on January 2, 1998, ACE USA has established
and staffed five new operating divisions and opened a new marketing and
underwriting office in New York City. The new divisions are the Specialty
Division, the Warranty Division, the Directors' and Officers' Liability
Division, the Errors and Omissions Division and the Captive Reinsurance
Division. To date, these new divisions have focused on the hiring of
experienced industry professionals to staff the new divisions, developing
business plans and strategies, identifying of business partners, developing of
policy forms and language and various state regulatory filings and other
requirements.
Specialty Division--The program business requires more up front investment
of time and development costs than other property and casualty business lines
as it must establish distribution networks with desirable program
administrators and managing general agents. Thus a longer period of operation
is required to achieve profitability on any particular program when compared
to other areas of the property and casualty business. The specialty division's
strategy is to focus on selected general agents or brokers with a specialty or
distinguishable advantage. In order to keep transaction costs lower, business
associated with low frequency and moderate to high severity losses is being
targeted. Additional opportunities are also under review from both reinsurers
and close coordination with other divisions of the Company.
Warranty Division--The Warranty division offers extended service contracts
for a broad range of products. This division intends to provide warranty
administrative services as well as underwriting, to gain greater access to the
marketplace. This division has the advantage of being able to obtain business
directly through large retailers and buying group networks, or through forming
strategic alliances with large independent third party administrators. In June
1998, ACE USA purchased a controlling interest in CRC Creditor Resources
Canada Limited Group of Companies, in order to enter the Canadian automobile
warranty business through a well-established marketing and administrative
service organization.
7
Directors' and Officers' Liability Division--This division offers directors
and officers liability ("D&O") and associated coverages to specific segments
of the Fortune 1000 group of companies in the U.S. The primary method of
product distribution is through major retail brokers in the D&O market. The
D&O division is also targeting business through wholesale brokers that
specialize in the D&O business.
Errors and Omissions Division--This division offers miscellaneous errors and
omissions ("E&O") products for certain selected segments of the market. The
E&O market is currently very competitive and this book of business is expected
to grow slowly. The division is initially targeting distribution through
wholesale brokers as the division's strategy is to capitalize on current
relationships ACE USA has with the wholesale market.
Captive Reinsurance Division--The captive reinsurance division offers
insurance and reinsurance products to clients who are willing to assume some
amount of risk in order to benefit from underwriting gain. As the trend
towards self insurance in the U.S. over the past several years has expanded,
ACE USA believes there is a growing market demand for this division's
products. Potential sources of business include captive insurers, risk
retention groups, rent-a-captives, agency captives, public entity risk pools,
charitable trusts, policyholder owned mutual insurers and self insured
organizations. The division will focus on casualty exposures and seek to take
lead positions in order to control terms and conditions. The primary
distribution network is through reinsurance intermediaries.
MARKETING AND UNDERWRITING
ACE Bermuda
ACE Bermuda 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 favorable
regulatory and tax environments, 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. ACE Bermuda 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 to ACE Bermuda and CODA (both for renewals and new
policies) are subject to approval and acceptance by ACE Bermuda in its Bermuda
office. A substantial number of policyholders meet with the Company outside of
the United States each year to discuss their insurance coverage. ACE Bermuda
does not believe that conducting its operations through its offices in Bermuda
has materially affected its underwriting and marketing activities to date.
Policy applications may also be approved and accepted by the Company through
the Dublin-based insurance and reinsurance subsidiaries. AICE undertakes
marketing and underwriting activities with particular emphasis on the European
Union.
ACE Bermuda receives business from approximately 150 non-U.S. brokers of
which seven produced approximately 72 percent of the Company's business in
1998. The following table sets forth the percentage of the Company's insurance
business placed through each broker and its affiliates placing more than 10
percent of the Company's business.
YEAR ENDED
NAME SEPTEMBER 30,
---- ----------------
1998 1997 1996
---- ---- ----
J&H, Marsh & McLennan, Incorporated (1) (3)................ 35% 42% 42%
Aon Corporation (2) (3).................................... 19% 16% 16%
8
(1) During 1997, Marsh & McLennan, Incorporated acquired Johnson & Higgins.
For fiscal 1996, the percentage of business placed by Marsh & McLennan,
Incorporated was 31 percent and the percentage of business placed by
Johnson & Higgins was 11 percent.
(2) During 1997, Aon Corporation acquired Alexander & Alexander Services, Inc.
For fiscal 1996, the percentage of business placed by Aon Corporation was
10 percent and the percentage of business placed by Alexander & Alexander
Services, Inc. was 6 percent.
(3) The percentages shown in the table for fiscal 1997 reflect the business
placed by the combined entities and their affiliates for the entire year.
ACE Bermuda 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 ACE Bermuda 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 ACE
Insurance 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.
ACE Global Markets
In the ordinary course of events, Lloyd's syndicates may only access
business through Lloyd's brokers. However, for certain lines of business, it
is possible to utilize a service company to access and service business from
both Lloyd's and non-Lloyd's brokers.
ACE Underwriting Services Limited ("AUS") was established in 1998 as such a
Lloyd's service company to market and service, on behalf of ACE managed
syndicates, a broad range of products in the small business, industrial and
commercial markets. AUS deals predominantly with Lloyd's brokers but also
accesses business from regional (non-Lloyd's) brokers.
Tempest Re
Tempest Re markets its reinsurance products worldwide through reinsurance
brokers. Tempest Re's underwriting team builds relationships with key brokers
and clients by explaining Tempest Re's approach and demonstrating
responsiveness to customer needs. Tempest Re's approach to the business of
reinsurance takes a long-term perspective. Management believes that continual
strengthening of the relationships between Tempest Re, its producing brokers
and their clients will continue to contribute to a stable portfolio necessary
to achieve continuity. By retaining clients, Tempest Re seeks to build up
extensive knowledge of them and gain additional insight to enable a more
accurate assessment of their exposures.
Tempest Re receives business from approximately 34 brokers. The following
table sets forth the percentage of Tempest Re's business written through each
broker and its affiliates placing more than 10 percent of Tempest Re's
business:
TEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- -------------
1998 1997 1996
------------- ------------- -------------
J&H, Marsh & McLennan,
Incorporated (1).............. 31% 34% 30%
E.W. Blanch Co. ............... 16% 15% 7%
Sedgwick....................... 16% 8% 7%
9
(1) During 1997, Marsh & McLennan, Incorporated acquired Johnson & Higgins.
For 1996, the percentage of business placed by Marsh & McLennan,
Incorporated was 26 percent and the percentage of business placed by
Johnson & Higgins was 4 percent. The percentage shown in the table for
fiscal 1997 reflect the business placed by the combined entity and its
affiliates for the entire fiscal 1997 year.
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 Re believes it is perceived by the market as being a
"lead" reinsurer and is typically involved in the negotiation and quotation of
the terms and conditions of the majority of the contracts in which it
participates.
Because Tempest Re underwrites property catastrophe reinsurance and has
large aggregate exposures to natural and man-made disasters, Tempest Re's
claims experience generally will involve infrequent events of great severity.
Tempest Re 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 per
program. Tempest Re also establishes zonal accumulation limits to avoid
concentrations of risk within particular geographic areas.
Tempest Re applies an underwriting process based on models that use exposure
data submitted by prospective reinsureds in accordance with requirements set
by Tempest Re's underwriters. The client data is then analysed using a
selection from several available catastrophe analysis tools, including
externally developed event based models licensed from leading vendors as well
as proprietary models developed in house.
The output from the catastrophe analysis tools is also used for portfolio
risk management, enabling Tempest Re to extensively simulate possible
combinations of events affecting the portfolio. This analysis also supports
the decision making with regard to purchasing retrocession. During 1998,
Tempest Re has significantly increased its use of retrocessional coverages.
ACE USA
ACE USA primarily distributes its insurance products through a limited group
of wholesale brokers with whom long-term relationships have been forged. ACE
USA's management believes the match between its expertise and that of its
wholesalers is one of the key reasons wholesalers place business with it. ACE
USA currently utilizes approximately 207 wholesale brokers across the U.S. The
majority of premium volume is currently derived from a limited number of
wholesalers with whom ACE USA has established mutually significant
relationships. For the nine-month period ending September 30, 1998, the top
ten producers accounted for 62 percent of direct premium volume.
Operating in a market in which capacity and price adequacy for its products
can change dramatically, ACE USA's underwriting strategy is to employ
consistent, disciplined pricing and risk selection in order to maintain an
attractive book of business. Management's priority is to ensure that criteria
for risk selection are closely adhered to by its underwriting professionals
and to maintain sufficient experience and expertise in its underwriting staff.
ACE USA has the ability to write business on an admitted basis using forms
and rates as filed with state insurance regulators and on a non-admitted, or
surplus lines basis using flexible forms and rates not filed with state
insurance regulators. Having access to a non-admitted carrier provides the
flexibility to write non-standard coverage.
COMPETITION
Competitive forces in the international property and casualty insurance and
reinsurance business are substantial. Results are a function of underwriting
and investment performance, direct costs associated with the
10
delivery of insurance products, including the costs of regulation, the
frequency and severity of both natural and man-made disasters, as well as
inflation (actual, social and judicial), which impact loss costs. Decisions
made by insurers concerning their mix of business (offering certain types of
coverage but declining to write other types), their methods of operations and
the quality and allocation of their assets (including any reinsurance
recoverable balances) will all affect their competitive position. The relative
size and reputation of insurers may influence purchasing decisions of present
and prospective customers and will contribute to both geographic and
industrial sector market penetration. Oversupply of available capital has
historically had the effect of encouraging competition and depressing prices.
The Company's competitive position in the property and casualty insurance
industry is influenced by all of these factors.
All of the Company's operating subsidiaries have received ratings from A.M.
Best Company ("A.M. Best") and Standard & Poors Corporation ("S&P") except for
AICE and ARCE which have an A.M. Best rating only. The Lloyd's market has also
received ratings from A.M. Best and S&P. These ratings are 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.
ACE Bermuda
ACE Bermuda operates in a highly competitive worldwide market and competes
with most major U.S. and non-US insurers which may differ across product
lines. ACE Bermuda utilizes its experienced underwriting staff, 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 coverages for periods in excess of one year
to compete in the worldwide insurance markets.
ACE Bermuda has received a group rating of A+ from A.M. Best. The most
current rating covers ACE, together with its operating subsidiaries, ACE
Bermuda and CODA. ACE Insurance and CODA have also received A+ claims paying
ratings from S&P. AICE and ARCE have a rating of A+ from A.M. Best.
ACE Global Markets
There remains significant competition in all classes of business transacted
by the syndicates emanating from a number of different markets world-wide.
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. The establishment of AUS as described above is an
example of this.
The Lloyd's market has received a rating of A from A.M. Best and a claims
paying ability rating of A+ from S&P.
Tempest Re
The property catastrophe reinsurance industry is highly competitive. Tempest
Re competes worldwide with major U.S. and non-U.S. property catastrophe
reinsurers, including other Bermuda-based property catastrophe reinsurers, as
well as reinsurance departments of numerous multi-line insurance
organizations. Tempest Re competes effectively because of its strong capital
position, the quality of service provided to customers, the leading role
Tempest Re plays in setting the terms, pricing and conditions in negotiating
contracts and its customised approach to risk selection.
11
Tempest Re has received a rating of A from A.M. Best and a claims paying
ability rating of A+ from S&P.
ACE USA
ACE USA operates in a highly competitive industry and faces competition from
both domestic and foreign insurers, many of which are larger and have greater
financial, marketing and management resources. Competition in the U.S.
property and casualty market is based on many factors including financial
strength of the insurer, ratings assigned by rating companies, premiums
charged, policy terms and conditions, reputation, services offered and broker
commissions. The markets in which ACE USA competes are subject to significant
cycles of fluctuating capacity and wide disparities in price adequacy. ACE
USA's strategy in its competitive environment has been to grow when conditions
are favorable for a particular product line and to reduce writings and
preserve capital when competitive pricing prevents adequate returns.
During 1998, the ratings issued by A.M. Best, to the US Insurance
Subsidiaries were raised from A- to A following the acquisition by the
Company. In addition, in June 1998, ACE USA's S&P claims paying ability rating
was raised two increment levels from A- to A+.
CLAIMS ADMINISTRATION
ACE Bermuda
Claims arising under policies issued by ACE Bermuda and CODA are managed in
Bermuda by ACE Bermuda's claims department. This department maintains a claims
database into which all notices of loss are entered. If the claims department
determines that a loss is of sufficient severity, it makes a further inquiry
of the facts surrounding the loss and, if deemed necessary, retains outside
claims counsel to monitor claims. Based upon its evaluation of the claim, the
claims department may recommend that a case reserve in a specified amount be
established or that all or part of a claim be paid. The claims department
monitors all claims and, where appropriate, will recommend the establishment
of a new case reserve or the increase or decrease of an existing case reserve
with respect to a claim.
AICE subscribes to the group claims database and interacts with the ACE
Bermuda legal and claims department, and where appropriate, with outside
counsel. Case reserves are established using the same criteria as ACE Bermuda.
With the exception of certain aviation coverages, ACE Bermuda does not
undertake to defend its insureds. It has, in certain instances, provided
advice to insureds with respect to the management of claims. ACE Bermuda
believes that its experience in resolving large claims and its proactive
approach to claims management has contributed to the favourable resolution of
several cases.
Because ACE Bermuda 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. ACE Bermuda does not believe that the information
received or the procedures followed have materially or adversely affected its
ability to identify, review or settle claims.
ACE Global Markets
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 the Lloyd's Claims Office ("LCO") 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 its own behalf and with the LCO for the following
12
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 LCO, 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,' screened and recorded by the syndicates.
The syndicates' claims department can vary the case reserves carried from
those advised by the LCO and can carry reserves for claims not processed by
the LCO. Any such adjustments and entries are specifically identifiable within
the claims system.
Tempest Re
Claims arising under contracts written by Tempest Re are managed in Bermuda
by Tempest Re. Tempest Re 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 Re's portion of the
loss. Case reserves are then adjusted based on receipt of further
notifications from brokers.
ACE USA
The claims handling process is critical to ACE USA given that its specialty
property and umbrella coverages are written on an excess coverage basis. As a
result, losses arise from significant events that tend to present complex
claim issues. Although the claims volume of the US Insurance Subsidiaries has
been historically low compared to premium volume, individual casualty claims
usually involve injuries or damages that amount to more than $1 million. ACE
USA's claims professionals average over 19 years of claims handling
experience. Management believes that this level of experience provides ACE USA
with stability and consistency in its claims handling process.
Recognizing the unique claim handling characteristics of construction defect
claims, ACE USA has a dedicated unit to manage them. The asbestos and
environmental claims arising from policies issued by the US Insurance
Subsidiaries had been subcontracted to Envision Claims Management Corporation
("Envision"), a separate service company that is part of The Resolution Group,
Inc., a former affiliate of ACE USA. Subsequent to September 30, 1998, this
arrangement was discontinued and these claims are now directed by in-house
claim handlers trained to manage specialized coverage and coordination issues
that arise in asbestos and environmental claims.
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 liability 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.
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.
13
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 judgement 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.
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 ("MDL") to a
Federal District Court in Alabama, although cases are in the process of being
transferred back to federal courts or remanded to state courts. 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
the pending lawsuits and information 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.
Significant uncertainties continue to exist with regard to the ultimate
outcome and cost of the breast implant litigation and value of the opt-out
claims related to it. While the Company is unable at this time to determine
whether additional reserves, which could have a material adverse effect upon
the financial condition, results of operations and cash flows of the Company,
may be necessary in the future, the Company believes that its reserve for
unpaid losses and loss expenses including those arising from breast implant
claims are adequate as at September 30, 1998. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Breast Implant
Litigation" in the 1998 Annual Report to Shareholders filed with this Form 10-
K.
The Company engages an independent actuarial firm to review the methods and
assumptions used by the Company in estimating the unpaid loss and loss
expenses. As stated in its actuarial review, such firm believes that the
methods and assumptions used by the Company are reasonable and appropriate for
use in setting loss reserves at September 30, 1998.
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 statistical and actuarial methods may require the adjustment of
the overall reserves upward or downward from time to time. The final liability
nonetheless may be significantly greater than or less than the prior
estimates.
At September 30, 1998, the reserve for unpaid losses including IBNR loss
reserves was $2,484.6 million and the reserve for loss expenses was $193.7
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, 1998.
The "Analysis of Loss and Loss Expense Development" shown on page 15
presents the subsequent development of the estimated year-end liability for
unpaid losses and loss expenses at the end of each of the years in the eleven-
year period ended September 30, 1998. 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
14
(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, 1998, are adequate to cover the ultimate
cost of losses and loss expenses incurred through September 30, 1998 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 Operations and Financial Condition--Breast Implant
Litigation" in the 1998 Annual Report to Shareholders filed with this Form 10-
K.
ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
--------- -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Unpaid........... $ 22,500 $ 78,009 $319,230 $ 470,832 $ 813,849 $ 766,402 $1,176,215 $1,489,293 $1,892,302 $2,006,873
Paid (Cumulative)
As Of:
1 year later.... 431 26,190 181,525 149,493 340,836 126,566 66,888 80,080 358,713 337,422
2 years later... 1,195 82,715 207,587 490,116 465,074 183,439 121,628 414,419 663,087
3 years later... 21,307 108,689 531,502 590,847 517,366 228,638 451,746 696,470
4 years later... 42,450 432,541 601,811 611,133 551,887 558,625 725,799
5 years later... 182,110 459,183 622,097 627,691 881,198 837,515
6 years later... 182,110 476,570 631,371 764,607 1,150,628
7 years later... 195,939 484,549 641,060 843,283
8 years later... 196,207 493,326 664,896
9 years later... 196,861 505,976
10 years later.. 201,588
Liability Re-
estimated
As Of:
End of year..... $ 22,500 $ 78,009 $319,230 $ 470,832 $ 813,849 $ 766,402 $1,176,215 $1,489,293 $1,892,302 $2,006,873
1 year later.... 57,682 267,674 475,647 706,960 813,849 966,402 1,177,292 1,489,293 1,892,302 1,989,744
2 years later... 105,503 346,022 665,533 706,960 1,085,012 1,067,987 1,227,538 1,489,293 1,881,403
3 years later... 134,227 516,783 665,533 874,368 1,234,462 1,211,424 1,386,571 1,480,426
4 years later... 333,869 516,783 663,480 888,387 1,412,495 1,429,990 1,401,329
5 years later... 333,869 487,911 680,119 940,513 1,666,770 1,442,523
6 years later... 185,332 489,556 711,671 1,113,662 1,703,103
7 years later... 176,889 479,306 768,935 1,099,102
8 years later... 179,837 484,041 771,018
9 years later... 177,624 488,646
10 years later.. 181,147
Cumulative
Redundancy/
(deficiency).... (158,647) (410,637) (451,788) (628,270) (889,254) (676,121) (225,114) 8,867 10,899 17,129
Net unpaid losses
and loss
expenses........
Reinsurance
recoverables on
unpaid losses...
Gross unpaid
losses and loss
expenses........
1998
----------
Unpaid........... $2,678,341
Paid (Cumulative)
As Of:
1 year later....
2 years later...
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 Re-
estimated
As Of:
End of year..... $2,678,341
1 year later....
2 years later...
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).... 0
Net unpaid losses
and loss
expenses........ 2,678,341
Reinsurance
recoverables on
unpaid losses... 1,059,528
----------
Gross unpaid
losses and loss
expenses........ 3,737,869
----------
15
- --------
(1) 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.
(2) 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.
(3) In 1992, the Company began applying actuarial and statistical methods to
estimate ultimate expected losses and loss expenses for all of the
Company's business since inception. 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
whichever 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 $26.0 million,
which is expected to be recovered from an insured.
(4) It should be noted that on November 1, 1993, the Company acquired CODA, on
July 1, 1996, the Company acquired Tempest Re and on July 9, 1998, the
Company acquired Tarquin. The table has been re-stated to include CODA's,
Tempest Re's and Tarquin's loss experience as if each of these companies
had been wholly-owned subsidiaries of the Company from their inception. On
January 2, 1998, the Company acquired ACE USA, and on April 1, 1998, the
Company acquired CAT Limited. The unpaid loss information for these
companies has been included in the table only for the period ending
September 30, 1998. For the period through September 30, 1997, reinsurance
recoverables were not material to the Company's financials, and the table
was prepared on a net basis. For the year ended September 30, 1998, gross,
ceded and net unpaid liabilities are shown at the bottom of the table.
(5) 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 1992 to 1994, the year
the loss was recognized, yet the deficiency would be reflected 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
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
Gross unpaid losses and loss expenses at
beginning of year......................... $2,111,670 $1,977,680 $1,455,342
Reinsurance recoverable.................... (104,797) (85,378) (3,043)
---------- ---------- ----------
Net unpaid losses and loss expenses at
beginning of year......................... 2,006,873 1,892,302 1,452,299
Unpaid losses and loss expenses assumed in
respect of acquired companies............. 731,949 -- 34,735
Unpaid losses and loss expenses assumed in
respect of reinsurance business acquired.. 6,403 50,326 --
---------- ---------- ----------
Total.................................. 2,745,225 1,942,628 1,487,034
---------- ---------- ----------
Losses and loss expenses incurred in
respect of losses incurring in:
Current year............................. 534,021 486,140 520,277
Prior years.............................. (17,129) -- --
---------- ---------- ----------
Total.................................. 516,892 486,140 520,277
---------- ---------- ----------
Losses and loss expenses paid in respect of
losses incurred in:
Current year............................. 246,354 63,182 41,602
Prior years.............................. 337,422 358,713 73,407
---------- ---------- ----------
Total.................................. 583,776 421,895 115,009
---------- ---------- ----------
Net unpaid losses and loss expenses at end
of year................................... 2,678,341 2,006,873 1,892,302
Reinsurance recoverable on unpaid losses... 1,059,528 104,797 85,378
---------- ---------- ----------
Gross unpaid losses and loss expenses at
end of year............................... $3,737,869 $2,111,670 $1,977,680
========== ========== ==========
16
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 consolidated investment portfolio is divided 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, maintain credit quality, and limit volatility within approved
asset allocation guidelines. The use of financial futures, forwards 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 approved asset allocation targets 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 target 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 predominantly in U.S. dollar
fixed income securities. Prior to January 1, 1998, the portfolio had a 5
percent allocation to international bonds. 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. Those fixed income
investment managers with authorization to invest a portion of their portfolios
in non-U.S. dollar securities are required to hedge a minimum of 75 percent of
their total non-U.S. dollar exposure. Previously, currency hedging of fixed
income securities was permitted at the discretion of the manager. The
Company's investment guidelines limit investments in high yield and
convertible bonds rated B or better to 5 percent each of the consolidated
investment 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 asset allocation target allows 5 percent of the consolidated investment
portfolio to be invested in alternative investments.
For additional information regarding the investment portfolio, including
breakdowns of the sector and maturity distributions, see note 5 to the
consolidated financial statements included in the 1998 Annual Report to
Shareholders.
The trading status of underwriters at Lloyd's in the U.S. is supported by a
unique trust fund structure. The trust funds were reviewed and restructured in
August 1995 in consultation with the New York Insurance Department ("NYID"),
which acts as the domiciliary commissioner for Lloyd's US trust funds held in
the state of New York.
17
REGULATION
Bermuda
In Bermuda, the businesses of ACE Bermuda, CODA, Tempest Re and CAT 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. Under the Act, ACE Bermuda, Tempest Re and CAT are required to
maintain capital and surplus in excess of $100 million. CODA requires capital
and surplus in excess of $1 million. 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. Each company must also
appoint a loss reserve specialist to review and report on the loss reserves of
the insurer on an annual basis.
United Kingdom
United Kingdom and Lloyd's Regulation
The Company has established for marketing purposes, a representative office
in London, England. However, all underwriting operations continue to be
conducted in Bermuda.
The Company, certain of its UK subsidiaries and substantially all staff
employed within the Lloyd's operations are currently subject to the regulatory
jurisdiction of the Council of Lloyd's (the "Council"). This jurisdiction
arises by virtue of the Company's being a controller of each of the four
Lloyd's managing agencies referred to above and the six Corporate Members in
which it has an interest. Certain other subsidiaries have also been approved
as controllers, and are similarly subject to Lloyd's jurisdiction.
Under English law, there are restrictions on the interests Lloyd's brokers
or their holding companies may have in Lloyd's managing agents or their
holding companies.
The UK government has announced the establishment of the Financial Services
Authority ("FSA") as a single regulator to supervise securities, banking and
insurance business, including Lloyd's. The FSA will have wide powers to make
rules, and it is envisaged these will replace the existing statutory and self
regulatory arrangements relevant to these areas. A consultation process has
commenced in relation to Lloyd's regulatory framework. The Company and the
appropriate subsidiaries will seek any necessary authorizations and
permissions in relation to its Lloyd's operations.
Regulation of Lloyd's Entities in the United States
Direct business can be written on either a licensed or a non-admitted (which
includes surplus lines) basis. Licensed insurers are subject to regulation of
both solvency margin and business practices such as premium rate and policy
form control. Non-admitted insurers are not subject to rate and form control
in most states, but regulators manage the entry to the surplus lines market by
imposing minimum solvency and trust requirements for insurers wishing to be
deemed "eligible" surplus lines insurers.
Insurer licensing requirements do not apply to reinsurers and as a result
both licensed and non-admitted reinsurers may write reinsurance in the U.S.
Lloyd's underwriters operate as licensed insurers in Illinois, Kentucky and
the U.S. Virgin Islands and as eligible surplus lines insurers in all states
except Kentucky and the U.S. Virgin Islands. Underwriters are approved for
credit for reinsurance purposes in all states except Michigan, Kansas and
Arizona. Cedents in these states may require underwriters to provide
alternative funding (such as a letter of credit) to enable them to take credit
for reinsurance placed with underwriters at Lloyd's. Similarly, life, accident
and health cedents domiciled in New York may require such funding in order to
allow them to take credit for reinsurance ceded.
18
Prior to August 1995, all US dollar premiums were deposited and held in the
Lloyd's American Trust Fund ("LATF"), regardless of the actual of the risk.
The LATF continues to support risks for US business incepting prior to August
1995, but the trust fund and accounting arrangements have changed for US
dollar business incepting after August 1, 1995. These include the creation of
a Lloyd's Dollar Trust Fund in the UK and a series of deposit trust funds in
the US. There are additional trust fund arrangements in certain US states.
United States of America
Non-U.S. Operations
The Company and its non-U.S. 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 insurance 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 insurance
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 Bermuda 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 Bermuda and CODA are 4 percent for 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. The Company's primary defense to such action is that
it'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. It is
also possible that an arbitration panel, if the issues were properly
presented, could make an extra-contractual award for bad faith damage.
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.
19
U.S. Operations
Although at the present time there is limited federal regulation of the
insurance business in the US, the US insurance subsidiaries are subject to
extensive regulation in the states in which they do business. The laws of the
various states establish supervisory agencies with broad authority to
regulate, among other things, licenses to transact business, insurance rates
for certain business, policy language, underwriting and claims practices,
transactions with affiliates, reserve adequacy, dividends and insurer
solvency. In addition, the US insurance subsidiaries are subject to
legislative measures and judicial decisions that define the risks and benefits
for which insurance is sought and provided. These include redefinitions of
insured risk in such areas as product liability and environmental coverages.
The US Insurance Subsidiaries are required to file detailed annual reports
with state insurance regulators in each of the states in which they do
business. Such annual reports are required to be prepared on a calendar year
basis. In addition, the US Insurance Subsidiaries' operations and accounts are
subject to examination at regular intervals by state regulators. The
respective reports made referring to the most recent periodic examinations of
the US Insurance Subsidiaries, contained no material adverse findings. The US
Insurance Subsidiaries are domiciled in the states of New York, Georgia and
Texas.
Statutory surplus is an important measure utilized by the regulators and
rating agencies to assess the Company's US Insurance Subsidiaries' ability to
support business operations and provide dividend capacity. The Company's US
Insurance Subsidiaries are subject to various state statutory and regulatory
restrictions that limit the amount of dividends that may be paid without prior
approval from regulatory authorities. These restrictions differ by state, but
are generally based on calculations incorporating statutory surplus, statutory
net income, and/or investment income.
Insurance company state regulators have adopted Risk Based Capital ("RBC")
requirements for the US Insurance Subsidiaries. These RBC requirements are
designed to monitor capital adequacy and to raise the level of protection that
statutory surplus provides for policyholders. The RBC formula provides a
mechanism for the calculation of an insurance company's Authorized Control
Level (the "ACL") RBC amount. The initial RBC level which triggers regulatory
action is known as the Company Action Level. Failure to achieve this level of
RBC, which occurs if policyholders' surplus falls below 200 percent of the
ACL, requires the insurance company to submit a plan of corrective action to
the relevant insurance commissioner. There are several additional progressive
RBC failure levels, which trigger more stringent regulatory action. Based on
the RBC formula, at December 31, 1997, which is the most recent RBC
calculation, the policyholders' surplus of each of the US Insurance
Subsidiaries was higher than the Company Action Level and, as a result, no
regulatory action or response is required.
Ireland
The Companies were established and operate as limited liability companies
under the Laws of Ireland. The relevant Irish Company Law applies to both
companies. ACE Bermuda Company Europe Limited must also comply with European
Union Insurance Regulations in respect of the 18 Classes of Insurance it is
authorised to provide as supervised by the Irish Department of Enterprise,
Trade and Employment.
20
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 Bermuda-based insurance and reinsurance subsidiaries do
not file U.S. income tax returns reporting income subject to U.S. income tax
since they do not conduct business within the U.S. except that the Company and
its Bermuda-based insurance and reinsurance subsidiaries have filed protective
tax returns reporting no U.S. income to preserve their ability to deduct their
ordinary and necessary business expenses should the IRS successfully challenge
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,
1998, 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/Corporate Members in proportion to their
participation in the relevant syndicates.
21
The Company's Corporate Members are subject to this arrangement but, as UK
domiciled companies, 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.
All the subsidiaries of the Company, which are registered in the UK are
subject to UK corporation tax, Value Added Tax and capital gains tax. In
addition, the respective Managing Agents are required, on behalf of
underwriting members participating on ACE managed syndicates, to account, via
Lloyd's, to the UK Tax Authorities for Insurance Premium Taxes.
Bermuda
Under current Bermuda law, the Company and its Bermuda subsidiaries are not
required to pay any taxes on its income or capital gains. The Company has
received an undertaking from the Minister of Finance in Bermuda that, in the
event of any taxes being imposed, the Company will be exempt from taxation in
Bermuda until March 2016.
Ireland
Both companies have received approval from the Irish Government to operate
their facilities in the International Financial Services Centre, Dublin (IFSC)
and have obtained clearance to have their income arising from trading
activities covered under their tax license taxed at 10 percent. This
concession is scheduled to apply to both companies until December 31, 2005.
Corporation Tax will be levied at the standard rate in Ireland on January 1,
2006 and thereafter to all IFSC companies.
Cayman Islands
Under current Cayman Islands law, the Company is not required to pay any
taxes on its income or capital gains. The Company has received an undertaking
that, in the event of any taxes being imposed, the Company will be exempted
from taxation in the Cayman Islands until the year 2013.
EMPLOYEES
At September 30, 1998, the Company employed a total of 642 persons, 208 of
whom were located in Bermuda, 199 in London, 233 in the United States and 2 in
Dublin. None of these employees are represented by a labor union.
22
GLOSSARY OF SELECTED INSURANCE TERMS
Catastrophe Excess of Loss Reinsurance....... Catastrophe excess of loss reinsurance
provides coverage to a primary insurer when
aggregate claims and claim expenses from a
single occurrence of a peril covered under
a portfolio of primary insurance contracts
written by the insurer exceed the
attachment point specified in the
reinsurance contract with the insurer.
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, condition,
cause, defect or hazard or failure to warn
of such which are added together and
treated as one occurrence under an
insured's policy.
Occurrence first reported.................... Manuscripted form of stand-alone insurance
coverage offered by the Company, 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 percentage of the risk
exposure under a portfolio of primary
insurance contracts written by the ceding
insurer and receive an equal percentage of
the premium received by the ceding insurer.
Risk Excess of Loss Reinsurance.............. Property per risk excess of loss
reinsurance 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.
Stand alone basis............................ A term referring to an insurance policy
which is governed by its own terms,
conditions, exclusions and retention and
does not incorporate the terms, conditions
or exclusions of underlying policies.
23
ITEM 2. PROPERTIES
The Company operates from offices in Bermuda, the United Kingdom, the United
States and Ireland. In Bermuda, the Company leases its principal offices from
a joint venture company 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. The Company
is currently building new corporate headquarters in Bermuda that will house
its Bermuda-based operations. It is expected that this facility will be
available by the end of 2000.
All other office facilities, including those occupied by Tempest in Bermuda,
ACE USA in Atlanta, Georgia; New York, New York; Los Angeles and San
Francisco, California; ACE Global Markets in London, England and ACE Europe in
Dublin, Ireland are leased. During 1998, ACE Global Markets consolidated the
operations of Methuen and ACE London into its current office space and
disposed of the two existing leases.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries, in common with the insurance industry in
general, are subject to litigation in the normal course of its business.
Although the policies issued by the Company's Bermuda-based insurance
subsidiaries generally provide for resolution of disputes by arbitration in
Bermuda or London, one of these subsidiaries 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, that same Bermuda subsidiary is
occasionally named as a party in Louisiana "direct action" suits by insureds.
That subsidiary has sought dismissal of these actions as well and decisions
are pending in these actions. At September 30, 1998, the Company and its
subsidiaries were not 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
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 Duperreault 51 Chairman, President and Chief Executive Officer &
Director
Donald Kramer 61 Vice Chairman and Director; President and Chief
Executive Officer of Tempest Reinsurance Company
Limited
John Charman 46 Chief Executive Officer of ACE UK Limited
Dominic J. Frederico 45 President of A.C.E. Insurance Company, Ltd.
William J. Loschert 59 Chairman of ACE UK Limited
Dennis B. Reding 50 President and Chief Executive Officer of ACE USA
Christopher Z. Marshall 42 Chief Financial Officer
Peter N. Mear 54 General Counsel & Secretary
John C. Burville 51 Chief Actuary
Robin J.W. Masters 43 Chief Investment Officer
Keith P. White 55 Chief Administration Officer
24
Brian Duperreault has been a director and Chairman, President and Chief
Executive Officer of the Company since October 1994. Prior to joining the
Company, Mr. Duperreault had been employed with American International Group
("AIG") since 1973 and served in various senior executive positions with AIG
and its affiliates from 1978 until September 1994, most recently as Executive
Vice President, Foreign General Insurance and, concurrently, as Chairman and
Chief Executive Officer of American International Underwriters Inc., a
subsidiary of AIG, from April 1994 to September 1994. Mr. Duperreault was
President of American International Underwriters Inc. from 1991 to April 1994,
and chief executive officer of AIG affiliates in Japan and Korea from 1989
until 1991.
Donald Kramer has been a director and Vice Chairman of the Company and
President of Tempest Reinsurance Company Limited ("Tempest") since July 1996.
Mr. Kramer served as Chairman or Co-Chairman of the Board of Tempest from its
formation in September 1993 until July 1996. Tempest was acquired by the
Company on 1 July 1996. Prior to the formation of Tempest, he was President of
Kramer Capital Corporation (venture capital investments) from March to
September 1993, President of Carteret Federal Savings Bank (banking) from
August 1991 to March 1993, Chairman of the Board of NAC Re Corporation
(reinsurance) from June 1985 to June 1993, Chairman of the Board and Chief
Executive Officer of KCP Holding Company (insurance) from July 1986 to August
1991 and of its affiliates, KCC Capital Managers (insurance investments) and
Kramer Capital Consultants, Inc. (insurance investments), as well as Chairman
of the Board of its subsidiary, National American Insurance Company of
California (insurance) from September 1988 to August 1991.
John Charman has served as Chief Executive Officer of ACE UK Limited since
July 1998, and continues to act as Active Underwriter to Lloyd's Syndicate
488/2488. Mr. Charman has been the Active Underwriter of Syndicate 488 since
July 1986. Mr. Charman previously served as Managing Director of Charman
Underwriting Agencies Limited, and since 1994, as Chief Executive of Tarquin
Underwriters Limited, the corporate capital provider of Syndicate 2488.
Dominic J. Frederico has served as President of A.C.E. Insurance Company,
Ltd. since July 1997. Mr. Frederico previously 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.
Dennis B. Reding has served as President and Chief Executive Officer of ACE
USA since January 1998. Mr. Reding previously served as President and Chief
Executive Officer of Westchester Specialty Group, Inc. ("WSG"), a position he
held since July 1993. Prior to joining WSG, Mr. Reding served in various
senior positions at Fireman's Fund Insurance Company.
Christopher Z. Marshall has served as 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 General Counsel and Secretary 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 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.
25
Robin J. W. Masters has served as Chief Investment Officer since July 1,
1997. Ms. Masters previously served as Senior Vice President since February
1995 and as Treasurer of the Company since October 1992.
Keith P. White has served as Chief Administration Officer since July 1,
1997. Mr. White previously served as Senior Vice President, Administration of
the Company since January 1990.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S ORDINARY SHARES AND RELATED STOCKHOLDER
MATTERS
(a) The Company's Ordinary Shares, par value $0.041666667 per share, have
been listed on the New York Stock Exchange since March 25, 1993, under the
symbol ACL. On November 13, 1997, the Company declared a three-for-one split
of the Company's stock. The stock split was voted on and approved by the
shareholders of the company on February 6, 1998. The record date for
determining those shareholders entitled to receive certificates representing
additional shares pursuant to the stock split was as of close of business on
February 17, 1998. Certificates representing the additional shares of stock
were mailed on March 2, 1998.
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 1998 FISCAL 1997
----------------- -----------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First Quarter......................... 33 31/64 29 43/64 20 3/64 17 29/64
Second Quarter........................ 40 15/16 30 27/64 22 5/64 18 7/8
Third Quarter......................... 40 5/16 34 7/16 24 7/8 19 27/64
Fourth Quarter........................ 42 1/8 26 15/16 32 11/64 24 1/2
The last reported sale price of the Ordinary Shares on the New York Stock
Exchange Composite Tape on December 15, 1998 was $27 11/16.
(b) The approximate number of record holders of Ordinary Shares as of
December 15, 1998 was 439.
(c) The Company paid quarterly dividends of $0.06 per share to shareholders
of record on December 29, 1996 and March 31, 1997, quarterly dividends of
$0.0733 per share to shareholders of record on June 30, 1997 and September 30,
1997 and a quarterly dividend of $0.08 per share to shareholders of record on
December 13, 1997. Following the approval by the shareholders of the three-
for-one stock split the Company paid quarterly dividends of $0.08 per share to
shareholders of record on March 31, 1998 and $0.09 per share to shareholders
of record on June 30, 1998 and September 30, 1998. On November 13, 1998 the
Company declared a quarterly dividend of $0.09 per Ordinary Share, payable on
January 16, 1999 to shareholders of record on December 15, 1998.
The Board of Directors had authorized the repurchase from time to time of
the Company's Ordinary Shares in open market and private purchase
transactions. On May 9, 1997 the Board of Directors terminated the then
existing share repurchase program and authorized a new share program for up to
$300 million of the Company's Ordinary Shares. During the first two quarters
of fiscal 1998, the Company repurchased 3,521,100 Ordinary Shares under the
share repurchase program for an aggregate cost of $107.6 million. No shares
were repurchased after March 31, 1998. On July 6, 1998 the Executive Committee
of the Board of Directors rescinded all existing authorizations for the
repurchase of the Company's Ordinary Shares. During 1997 the Company
repurchased 9,093,000 Ordinary Shares under share repurchase programs for an
aggregate cost of $182.6 million.
On April 14, 1998, the Company sold 16.5 million Ordinary Shares for net
proceeds of approximately $606 million (For further discussions, see
"Management's Discussion and Analysis--Liquidity and Capital Resources").
26
ACE is a holding company whose principal source of income is investment
income and dividends from its operating subsidiaries. The ability of the
operating subsidiaries to pay dividends to ACE and the Company's ability to
pay dividends to its shareholders are each subject to legal and regulatory
restrictions. The declaration and payment of future dividends will be at the
discretion of the Board of Directors and will be dependent upon the profits
and financial requirements of the Company and other factors, including legal
restrictions on the payment of dividends and such other factors as the Board
of Directors deems relevant. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Capital
Resources" in the 1998 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, 1998 is
incorporated by reference to page 16 of the 1998 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 through 38 of the 1998
Annual Report to Shareholders filed with this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is incorporated by reference to page 35 and 36 of the 1998 Annual
Report to Shareholders filed with this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item is incorporated by reference to pages 40 through 76 of the 1998
Annual Report to Shareholders filed with this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in nor any disagreements with accountants on
accounting and financial disclosure within the 24 months ended September 30,
1998.
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 2000," "Election of
Directors--Nominees for Election to Terms Expiring in 2001" and "Election of
Directors--Directors Whose Terms of Office Will Continue After This Meeting"
of the definitive proxy statement for the Annual General Meeting of
Shareholders to be held on February 5, 1999, 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 5, 1999, 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.
27
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 5, 1999, 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 5, 1999,
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 1998 Annual Report to Shareholders as described
under item 8 of this Report:
--Report of Independent Accountants
--Consolidated Balance Sheets at September 30, 1998 and 1997
--Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996
--Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1998, 1997 and 1996
--Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996
--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 32
--Summary of Investments I 33
--Condensed financial information of the Registrant as
of September 30, 1998 and 1997 and for the years ended
September 30, 1998, 1997 and 1996 II 34
--Supplemental information concerning Property/Casualty
Insurance Operations VI 37
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 Amalgamation, dated as of March 14, 1996,
by and among ACE Limited, TRCL Acquisition Limited and Tempest
Reinsurance Company Limited (incorporated by reference to
Exhibit 2.1 to Form S-4 of the Company (No. 333-04153)).
2.2 Stock Purchase Agreement, dated September 18, 1997 by and
between ACE Limited and Talagen Holdings, Inc.
28
2.3 Tax Allocation and Indemnification Agreement, dated September
18, 1997 by and among Xerox Financial Services, Inc., Talagen
Holdings, Inc., Westchester Specialty Group and ACE Limited.
2.4 Stock Purchase Agreement dated as of March 25, 1998, by and
among ACE Limited, CAT Limited and the selling shareholders
named therein (incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-3 of the Company (No. 333-
49257)).
2.5 Share Purchase Agreement dated June 15, 1998, by and among J.R.
Charman & Others, Chairman Group Limited, Tarquin Limited and
ACE Limited (incorporated by reference to Exhibit 2.1 to Form 8-
K current report (date of earliest event reported: July 9, 1998)
pertaining to the completion of the acquisition of Tarquin
Limited).
3.1 Memorandum of Association of the Company.
3.2 Articles of Association of the Company.
4.1 Memorandum of Association of the Company (see Exhibit 3.1).
4.2 Articles of Association of the Company (see Exhibit 3.2).
4.3 Specimen certificate representing Ordinary Shares, (incorporated
by reference to Exhibit 3.1 to the Registration Statement on
Form S-1 of the Company (No. 33-57206)).
10.1* Employment Agreement dated December 23, 1985, between ACE
Limited, A.C.E. Insurance 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, between ACE Limited,
A.C.E. Insurance 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 Performance Incentive Plan, (incorporated by
reference to Exhibit 10.13 to the Registration Statement on Form
S-1 of the Company (No. 33-57206)).
10.4* ACE Limited Equity Linked Incentive Plan, (incorporated by
reference to Exhibit 10.14 to the Registration Statement on Form
S-1 of the Company (No. 33-57206)).
10.5* Amendment to ACE Limited Equity Linked Incentive Plan,
(incorporated by reference to Exhibit 10.15 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.6* ACE Limited Employee Retirement Plan, (incorporated by reference
to Exhibit 10.21 to the Registration Statement on Form S-1 of
the Company (No. 33-57206)).
10.7* First Amendment to ACE Limited Employee Retirement Plan,
(incorporated by reference to Exhibit 10.22 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.8* Second Amendment to ACE Limited Employee Retirement Plan,
(incorporated by reference to Exhibit 10.23 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.9* Third Amendment to ACE Limited Employee Retirement Plan,
(incorporated by reference to Exhibit 10.24 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.10* ACE Limited Supplement Retirement Plan, (incorporated by
reference to Exhibit 10.25 to the Registration Statement on Form
S-1 of the Company (No. 33-57206)).
10.11* First Amendment to ACE Limited Supplement Retirement Plan,
(incorporated by reference to Exhibit 10.26 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.12* Second Amendment to ACE Limited Supplement Retirement Plan,
(incorporated by reference to Exhibit 10.27 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
29
10.13* Form of restricted stock award dated August 24, 1993 to ACE
Limited Directors, (incorporated by reference to Exhibit 10.39
to Form 10-K of the Company for the year ended September 30,
1993).
10.14* Employment Agreement, dated October 1, 1994, between ACE Limited
and Brian Duperreault, (incorporated by reference to Exhibit
10.42 to Form 10-K of the Company for the year ended September
30, 1994).
10.15* Option and Restricted Share Agreement, dated October 1, 1994,
between ACE Limited and Brian Duperreault, (incorporated 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
Limited and Walter A. Scott, (incorporated by reference to
Exhibit 10.44 to Form 10-K of the Company for the year ended
September 30, 1994).
10.17* Employment Agreement, dated January 9, 1995, between ACE Limited
and Dominic J. Frederico, (incorporated by reference to Exhibit
10.45 to Form 10-K of the Company for the year ended September
30, 1995).
10.18* Second amendment to ACE Limited Equity Linked Incentive Plan,
(incorporated by reference to Exhibit 10.45 to Form 10-K of the
Company for the year ended September 30, 1995).
10.20* Employment Agreement, dated April 1, 1996, between ACE Limited
and Peter N. Mear, (incorporated by reference to Exhibit 10.48
to Form 10-Q of the Company for the quarter ended June 30,
1996).
10.21* ACE Limited 1995 Long Term Incentive Plan, (incorporated 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, (incorporated
by reference to Exhibit 10.24 to Form 10-K of the Company for
the year ended September 30, 1996).
10.25 Credit Agreement between the Company and a syndicate of banks
dated November 15, 1996.
10.26 Reimbursement Agreement and Pledge Agreement between the Company
and a syndicate of banks dated November 22, 1996.
10.27* First Amendment of ACE Limited 1995 Long Term Incentive Plan,
(incorporated by reference to Exhibit 10.27 to Form 10-K of the
Company for the year ended September 30, 1996).
10.28* Third Amendment to Equity Linked Incentive Plan--Stock
Appreciation Right Plan, (incorporated by reference to Exhibit
10.28 to Form 10-Q of the Company for the quarter ended March
31, 1997).
10.29* First Amendment of ACE Limited 1995 Outstanding Directors Plan,
(incorporated by reference to Exhibit 10.29 to Form 10-Q of the
Company for the quarter ended June 30, 1997).
10.30 364 day Credit Agreement dated as of December 11, 1997 among ACE
Limited, A.C.E. Insurance Company Ltd., Corporate Officers &
Directors Assurance Ltd, and Tempest Reinsurance Company
Limited, the Banks listed on the signature pages hereof and
Morgan Guaranty Trust Company of New York, as Administrative
Agent, (incorporated by reference to exhibit 10.30 to form 10-K
of the Company for the year ended September 30, 1997).
30
10.31 Five year Credit Agreement dated as of December 11, 1997 among
ACE Limited, A.C.E. Insurance Company Ltd., Corporate Officers &
Directors Assurance Ltd, and Tempest Reinsurance Company
Limited, the Banks listed on the signature pages hereof and
Morgan Guaranty Trust Company of New York, as Administrative
Agent, (incorporated by reference to exhibit 10.31 to form 10-K
of the Company for the year ended September 30, 1997).
10.32 Amended and Restated Reimbursement Agreement dated as of
December 11, 1997 among A.C.E. Insurance Company Ltd., the Banks
listed on the signature pages hereof and Morgan Guaranty Trust
Company of New York, as Issuing Bank and Administrative Agent,
(incorporated by reference to exhibit 10.32 to form 10-K of the
Company for the year ended September 30, 1997).
10.33 Term Loan Agreement dated as of December 11, 1997 among ACE US
Holdings, Inc., ACE Limited, the Banks listed on the signature
pages hereof and Morgan Guaranty Trust Company of New York, as
Administrative Agent, (incorporated by reference to exhibit
10.33 to form 10-K of the Company for the year ended September
30, 1997).
10.34* ACE Limited Elective Deferred Compensation Plan, (incorporated
by reference to Exhibit 10.1 to Form 10-Q of the Company for the
quarter ended December 31, 1997).
10.35* ACE Limited Rules of the Approved U.K. Stock Option Program,
(incorporated by reference to Exhibit 10.1 to Form 10-Q of the
Company for the quarter ended December 31, 1997).
10.36* ACE Limited 1998 Long-Term Incentive Plan.
10.37 ACE US Holdings, Inc. Credit Sensitive Senior Notes due 2008
Indenture dated as of October 27, 1998.
13.1 Pages 16 through 76 of the 1998 Annual Report to Shareholders.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
99.1 Summary of taxation of ACE, its subsidiaries and shareholders.
- --------
*Management Contract or Compensation Plan
(b) REPORTS ON FORM 8-K
Other than as previously reported in the Form 10-Q of the Company for the
quarter ended June 30, 1998, there were no reports on Form 8-K filed
during the quarter.
31
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 43
of the 1998 Annual Report to Shareholders of ACE Limited. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedules listed in item 14 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as whole,
present fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers llp
New York, New York
November 4, 1998
32
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
ACE LIMITED AND SUBSIDIARIES
SEPTEMBER 30, 1998
AMOUNT AT
COST OR WHICH SHOWN
AMORTIZED IN THE
COST FAIR VALUE BALANCE SHEET
---------- ---------- -------------
(IN THOUSANDS OF U.S. DOLLARS)
FIXED MATURITIES:
Bonds:
U.S. Treasury and agency............... $ 771,678 $ 796,535 $ 796,535
Non-U.S. governments................... 122,233 126,998 126,998
Corporate securities................... 2,265,755 2,339,786 2,339,786
Mortgage-backed securities............. 1,710,591 1,751,769 1,751,769
States, municipalities and political
subdivision........................... 40,535 41,719 41,719
---------- ---------- ----------
Total fixed maturities............... 4,910,792 5,056,807 5,056,807
---------- ---------- ----------
EQUITY SECURITIES:
Common stock:
Public utilities....................... 7,248 5,753 5,753
Banks, trust and insurance companies... 33,531 30,490 30,490
Industrial, miscellaneous and all
other................................. 157,422 153,349 153,349
Non redeemable preferred stock........... 246 125 125
---------- ---------- ----------
Total equity securities.............. 198,447 189,717 189,717
---------- ---------- ----------
Other investments........................ 156,758 156,646 156,646
Short-term investments and cash.......... 797,950 797,904 797,904
---------- ---------- ----------
Total investments and cash........... $6,063,947 $6,201,074 $6,201,074
========== ========== ==========
33
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACE LIMITED AND SUBSIDIARIES
BALANCE SHEETS (PARENT COMPANY ONLY)
SEPTEMBER 30, 1998 AND 1997
1998 1997
---------- ----------
(IN THOUSANDS OF U.S.
DOLLARS)
ASSETS
Investments and cash
Investments in subsidiaries and affiliate on equity
basis............................................... $3,635,641 $2,850,585
Other investments, at cost........................... 33,465 33,151
Cash................................................. 6,057 17,770
---------- ----------
Total investments and cash......................... 3,675,163 2,901,506
Due from subsidiaries and affiliates, net.............. 56,857 14,272
Other assets........................................... 6,719 10,891
---------- ----------
Total assets....................................... $3,738,739 $2,926,669
========== ==========
LIABILITIES
Advances from affiliate................................ $ -- $ 122,270
Accounts payable and accrued liabilities............... 6,776 6,807
Dividend payable....................................... 17,693 12,436
Due to subsidiaries and affiliates, net................ -- --
---------- ----------
Total liabilities.................................. 24,169 141,513
---------- ----------
SHAREHOLDERS' EQUITY
Ordinary Shares........................................ 8,066 7,508
Additional paid-in capital............................. 1,765,261 1,177,954
Unearned stock grant compensation...................... (6,181) (1,993)
Net unrealized appreciation on investments............. 127,845 196,655
Cumulative translation adjustment...................... (275) 1,568
Retained earnings...................................... 1,819,554 1,403,464
---------- ----------
Total shareholders' equity......................... 3,714,270 2,785,156
---------- ----------
Total liabilities and shareholders' equity......... $3,738,739 $2,926,669
========== ==========
34
SCHEDULE II--(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACE LIMITED AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1998 1997 1996
-------- -------- --------
(IN THOUSANDS OF U.S.
DOLLARS)
Revenues
Management fees................................ $ -- $ 26,601 $ 21,081
Investment income, including intercompany
interest income............................... (12,514) (17,348) (6,881)
Equity in net income of subsidiaries and
affiliate..................................... 616,658 522,368 351,245
Net realized losses on investments............. (6) (16) --
-------- -------- --------
604,138 531,605 365,445
Expenses
Administrative expenses........................ (43,987) (28,880) (37,826)
-------- -------- --------
Net income................................... $560,151 $502,725 $327,619
======== ======== ========
35
SCHEDULE II--(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACE LIMITED AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities
Net income.................................. $ 560,151 $ 502,725 $ 327,619
Adjustments to reconcile net income to net
cash provided by operation activities
Equity in net income of subsidiaries and
affiliate................................ (616,658) (522,368) (351,245)
Realized losses on investments............ 6 16 --
Amounts due to subsidiaries and affiliate,
net...................................... (41,585) (6,944) (4,036)
Accounts payable and accrued liabilities.. (33) (10,004) 6,625
Accrued interest on advance to affiliate.. (18,250) 3,978 (9,729)
Other..................................... 2,405 (6,804) (3,957)
--------- --------- ---------
Net cash flows used for operating
activities............................. (114,966) (39,401) (34,723)
--------- --------- ---------
Cash flow from investing activities
Dividends received from subsidiaries........ 365,000 190,000 135,000
Capitalization of subsidiary................ (856,477) -- 74,123
Advances to affiliate....................... -- (241,000) (284,620)
Repayment of advances to affiliate.......... -- (19,817) --
Other....................................... (314) -- --
--------- --------- ---------
Net cash used for investing activities.. (491,791) (70,817) (75,497)
--------- --------- ---------
Cash flows from financing activities
Repurchase of Ordinary Shares............... (107,644) (182,648) (57,931)
Dividends paid.............................. (54,389) (43,028) (27,685)
Net proceeds from issuance of Ordinary
Shares..................................... 605,899 -- --
Proceeds from bank debt..................... 635,000 -- --
Repayment of bank debt...................... (385,000) -- --
Proceeds from exercise of options for
shares..................................... 4,243 2,191 28
Proceeds from shares issued under ESPP...... 955 -- --
Proceeds from shares issued under SAR Plan.. -- 4,156 --
Advances from affiliate..................... 504,600 525,020 198,050
Loan Repayments............................. (608,620) (180,000) --
--------- --------- ---------
Net cash from financing activities...... 595,044 125,691 112,462
--------- --------- ---------
Net increase (decrease) in cash............... (11,713) 15,473 2,242
Cash--beginning of year....................... 17,770 2,297 55
--------- --------- ---------
Cash--end of year............................. $ 6,057 $ 17,770 $ 2,297
========= ========= =========
36
SCHEDULE VI
ACE LIMITED AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY OPERATIONS
LOSSES AND LOSS
RESERVES EXPENSES
FOR UNPAID INCURRED RELATED 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 YEAR COSTS EXPENSES WRITTEN
----------- ---------- -------- -------- ---------- ------------------- ------------ -------- --------
(IN THOUSANDS OF U.S. DOLLARS)
1998............ $76,445 $2,678,341 $773,702 $894,303 $324,254 $ 534,021 $ (17,129) $105,654 $583,776 $880,973
1997............ $51,191 $2,006,873 $510,231 $805,372 $253,440 $ 486,140 -- $ 85,762 $421,895 $789,773
1996............ $56,313 $1,892,302 $515,962 $755,840 $213,701 $ 520,277 -- $ 96,518 $115,009 $781,884
37
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
/s/ Christopher Z. Marshall
By: _________________________________
Christopher Z. Marshall
Chief Financial Officer
December 17, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Brian Duperreault
- ------------------------------------
Brian Duperreault Chairman, President and
Chief Executive Officer;
Director December 17, 1998
/s/ Christopher Z. Marshall
- ------------------------------------
Christopher Z. Marshall Chief Financial Officer
(Principal Financial and
Accounting Officer) December 17, 1998
/s/ Donald Kramer
- ------------------------------------
Donald Kramer Vice Chairman; Director December 17, 1998
/s/ Michael G. Atieh
- ------------------------------------
Michael G. Atieh Director December 17, 1998
/s/ Bruce L. Crockett
- ------------------------------------
Bruce L. Crockett Director December 17, 1998
/s/ Jeffrey W. Greenberg
- ------------------------------------
Jeffrey W. Greenberg Director December 17, 1998
/s/ Meryl D. Hartzband
- ------------------------------------
Meryl D. Hartzband Director December 17, 1998
/s/ Robert M. Hernandez
- ------------------------------------
Robert M. Hernandez Director December 17, 1998
38
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Peter Menikoff
- ------------------------------------
Peter Menikoff Director December 17, 1998
/s/ Thomas J. Neff
- ------------------------------------
Thomas J. Neff Director December 17, 1998
/s/ Glen M. Renfrew
- ------------------------------------
Glen M. Renfrew Director December 17, 1998
/s/ Robert Ripp
- ------------------------------------
Robert Ripp Director December 17, 1998
/s/ Walter A. Scott
- ------------------------------------
Walter A. Scott Director December 17, 1998
/s/ Dermot F. Smurfit
- ------------------------------------
Dermot F. Smurfit Director December 17, 1998
/s/ Robert W. Staley
- ------------------------------------
Robert W. Staley Director December 17, 1998
/s/ Gary M. Stuart
- ------------------------------------
Gary M. Stuart Director December 17, 1998
/s/ Sidney F. Wentz
- ------------------------------------
Sidney F. Wentz Director December 17, 1998
39