- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 ---------------- ACE LIMITED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CAYMAN ISLANDS NOT APPLICABLE (JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) THE ACE BUILDING 30 WOODBOURNE AVENUE HAMILTON HM 08 BERMUDA (441) 295-5200 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: <TABLE> <CAPTION> NAME OF EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- <S> <C> Ordinary Shares, par value $0.041666667 per share New York Stock Exchange </TABLE> ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. (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. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
ACE LIMITED INDEX TO 10-K <TABLE> <CAPTION> PAGE -------------------------------------------------------------------------------------- ---- PART I <S> <C> <C> 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 </TABLE>
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: <TABLE> <CAPTION> FOR THE YEARS ENDED SEPTEMBER 30, -------------------------------------------------- GROSS GROSS GROSS 1998 1997 1996 PREMIUMS PREMIUMS PREMIUMS WRITTEN PERCENT WRITTEN PERCENT WRITTEN PERCENT -------- ------- -------- ------- -------- ------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> 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% ======== ==== ====== ==== ====== ==== </TABLE> - -------- (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: <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, ------------------- 1998 1997 1996 ----- ----- ----- <S> <C> <C> <C> 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% ===== ===== ===== </TABLE> 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. <TABLE> <CAPTION> YEAR ENDED NAME SEPTEMBER 30, ---- ---------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> J&H, Marsh & McLennan, Incorporated (1) (3)................ 35% 42% 42% Aon Corporation (2) (3).................................... 19% 16% 16% </TABLE> 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: <TABLE> <CAPTION> TEN MONTHS YEAR ENDED YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- ------------- 1998 1997 1996 ------------- ------------- ------------- <S> <C> <C> <C> J&H, Marsh & McLennan, Incorporated (1).............. 31% 34% 30% E.W. Blanch Co. ............... 16% 15% 7% Sedgwick....................... 16% 8% 7% </TABLE> 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 <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, --------------------------------------------------------------------------------------------------------------- 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 --------- -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 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........ <CAPTION> 1998 ---------- <S> <C> 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 ---------- </TABLE> 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 <TABLE> <CAPTION> 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) <S> <C> <C> <C> 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 ========== ========== ========== </TABLE> 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 <TABLE> <S> <C> 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. </TABLE> 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. <TABLE> <CAPTION> NAME AGE POSITION ---- --- -------- <C> <C> <S> 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 </TABLE> 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: <TABLE> <CAPTION> FISCAL 1998 FISCAL 1997 ----------------- ----------------- HIGH LOW HIGH LOW -------- -------- -------- -------- <S> <C> <C> <C> <C> 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 </TABLE> 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. <TABLE> <CAPTION> SCHEDULE NUMBER PAGE -------- ---- <S> <C> <C> --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 </TABLE> 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 <TABLE> <C> <S> 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. </TABLE> 28
<TABLE> <C> <S> 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)). </TABLE> 29
<TABLE> <C> <S> 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). </TABLE> 30
<TABLE> <C> <S> 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. </TABLE> - -------- *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 <TABLE> <CAPTION> AMOUNT AT COST OR WHICH SHOWN AMORTIZED IN THE COST FAIR VALUE BALANCE SHEET ---------- ---------- ------------- (IN THOUSANDS OF U.S. DOLLARS) <S> <C> <C> <C> 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 ========== ========== ========== </TABLE> 33
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT ACE LIMITED AND SUBSIDIARIES BALANCE SHEETS (PARENT COMPANY ONLY) SEPTEMBER 30, 1998 AND 1997 <TABLE> <CAPTION> 1998 1997 ---------- ---------- (IN THOUSANDS OF U.S. DOLLARS) <S> <C> <C> 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 ========== ========== </TABLE> 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 <TABLE> <CAPTION> 1998 1997 1996 -------- -------- -------- (IN THOUSANDS OF U.S. DOLLARS) <S> <C> <C> <C> 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 ======== ======== ======== </TABLE> 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 <TABLE> <CAPTION> 1998 1997 1996 --------- --------- --------- <S> <C> <C> <C> 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 ========= ========= ========= </TABLE> 36
SCHEDULE VI ACE LIMITED AND SUBSIDIARIES SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY OPERATIONS <TABLE> <CAPTION> 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) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 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 </TABLE> 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. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> /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 </TABLE> 38
<TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> /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 </TABLE> 39