UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______________ to _____________
Commission File No. 1-11778 I.R.S. Employer Identification No. 98-0091805
ACE LIMITED
(Incorporated in the Cayman Islands)
The ACE Building
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
Telephone 441-295-5200
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 period 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
------ -----
The number of registrant's Ordinary Shares ($0.041666667 par value)
outstanding as of May 11, 2001 was 231,402,343.
ACE LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
- ------------------------------ Page No.
--------
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2001 (Unaudited) and December 31, 2000 3
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Three Months Ended March 31, 2001 and 2000 5
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended March 31, 2001 and 2000 6
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2001 and 2000 7
Notes to Interim Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 22
Part II. OTHER INFORMATION
- ---------------------------
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
2
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31 December 31
2001 2000
------------- ------------
(Unaudited)
(in thousands of U.S. dollars,
except share and per share data)
Assets
Investments and cash
Fixed maturities available for sale, at fair value
(amortized cost - $11,152,162 and $10,640,937) $ 11,356,614 $ 10,721,309
Equity securities, at fair value (cost - $489,492 and $495,049) 459,881 532,046
Short-term investments, at fair value
(amortized cost - $1,068,918 and $1,369,784) 1,068,918 1,369,784
Other investments, at fair value (cost - $538,542 and $518,130) 560,517 531,116
Cash 683,072 608,069
------------- --------------
Total investments and cash 14,129,002 13,762,324
Accrued investment income 195,960 183,011
Insurance and reinsurance balances receivable 2,319,146 2,095,573
Accounts and notes receivable 333,087 388,996
Reinsurance recoverable 9,382,942 8,994,940
Deferred policy acquisition costs 621,060 572,757
Prepaid reinsurance premiums 1,101,324 857,745
Goodwill 2,827,039 2,846,709
Deferred tax assets 1,138,876 1,144,261
Other assets 841,037 843,210
------------- --------------
Total assets $ 32,889,473 $ 31,689,526
============= ==============
Liabilities
Unpaid losses and loss expenses $ 17,945,386 $ 17,388,394
Unearned premiums 3,604,637 3,035,288
Premiums received in advance 70,803 63,123
Insurance and reinsurance balances payable 1,424,852 1,319,091
Contract holder deposit funds 122,809 139,056
Accounts payable, accrued expenses and other liabilities 1,198,980 1,316,449
Dividends payable 33,145 33,127
Short-term debt 371,612 364,509
Long-term debt 1,424,383 1,424,228
Trust preferred securities 875,000 875,000
------------- --------------
Total liabilities 27,071,607 25,958,265
------------- --------------
Commitments and contingencies
Mezzanine equity 311,050 311,050
------------- --------------
Shareholders' equity
Ordinary Shares ($0.041666667 par value, 300,000,000 shares authorized;
231,383,700 and 232,346,579 shares issued and outstanding) 9,641 9,681
Additional paid-in capital 2,624,351 2,637,085
Unearned stock grant compensation (44,914) (29,642)
Retained earnings 2,792,451 2,733,633
Accumulated other comprehensive income 125,287 69,454
------------- --------------
Total shareholders' equity 5,506,816 5,420,211
------------- --------------
Total liabilities, mezzanine equity and shareholders' equity $ 32,889,473 $ 31,689,526
============= ==============
See accompanying notes to interim consolidated financial statements
3
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2001 and 2000
(Unaudited)
Three Months Ended
March 31
2001 2000
------------- -------------
(in thousands of U.S. dollars,
except per share data)
Revenues
Gross premiums written $ 2,561,638 $ 1,996,960
Reinsurance premiums ceded (826,520) (539,938)
------------ -------------
Net premiums written 1,735,118 1,457,022
Change in unearned premiums (366,002) (352,216)
------------ -------------
Net premiums earned 1,369,116 1,104,806
Net investment income 204,430 182,935
Net realized gains (losses) on investments (19,375) 56,740
------------ -------------
Total revenues 1,554,171 1,344,481
------------ -------------
Expenses
Losses and loss expenses 951,946 715,483
Policy acquisition costs 166,690 150,642
Administrative expenses 193,293 194,008
Amortization of goodwill 19,880 19,646
Interest expense 54,324 57,189
------------ -------------
Total expenses 1,386,133 1,136,968
------------ -------------
Income before income tax and cumulative effect of
adopting a new accounting standard 168,038 207,513
Income tax expense 26,974 33,000
------------ -------------
Income before cumulative effect of adopting a new
accounting standard 141,064 174,513
Cumulative effect of adopting a new accounting
standard (net of income tax) (22,670) -
------------ -------------
Net income $ 118,394 $ 174,513
============ =============
Basic earnings per share before cumulative effect of
adopting a new accounting standard $ 0.58 $ 0.80
============ =============
Basic earnings per share $ 0.48 $ 0.80
============= ============
Diluted earnings per share before cumulative effect of
adopting a new accounting standard $ 0.55 $ 0.80
============ =============
Diluted earnings per share $ 0.46 $ 0.80
============ =============
See accompanying notes to interim consolidated financial statements
4
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 2001 and 2000
(Unaudited)
Three Months Ended
March 31
2001 2000
-------------- --------------
(in thousands of U.S. dollars)
Ordinary Shares
Balance - beginning of period $ 9,681 $ 9,061
Ordinary shares issued 1 3
Exercise of stock options 14 2
Issued under Employee Stock Purchase Plan (ESPP) 4 -
Cancellation of Shares (15) (28)
Repurchase of Shares (44) -
-------------- --------------
Balance - end of period 9,641 9,038
-------------- --------------
Additional paid-in capital
Balance - beginning of period 2,637,085 2,214,989
Ordinary Shares issued 487 735
Exercise of stock options 6,931 557
Issued under Employee Stock Purchase Plan (ESPP) 2,806 -
Cancellation of Ordinary Shares (10,870) (18,950)
Repurchase of Ordinary Shares (12,088) -
-------------- --------------
Balance - end of period 2,624,351 2,197,331
-------------- --------------
Unearned stock grant compensation
Balance - beginning of period (29,642) (28,908)
Stock grants awarded (17,294) (1,750)
Stock grants forfeited 59 -
Amortization 1,963 2,300
-------------- --------------
Balance - end of period (44,914) (28,358)
-------------- --------------
Retained earnings
Balance - beginning of period 2,733,633 2,321,570
Net income 118,394 174,513
Dividends declared on Ordinary Shares (30,080) (23,859)
Dividends declared on FELINE PRIDES (6,348) -
Repurchase of Ordinary Shares (23,148) -
-------------- --------------
Balance - end of period 2,792,451 2,472,224
-------------- --------------
Accumulated other comprehensive income (loss)
Net unrealized appreciation (depreciation) on
investments
Balance - beginning of period 102,335 (83,327)
Change in period, net of income tax 52,078 (242)
-------------- --------------
Balance - end of period 154,413 (83,569)
-------------- --------------
Cumulative translation adjustments
Balance - beginning of period (32,881) 17,175
Net adjustment for period, net of income tax 3,755 (15,447)
-------------- --------------
Balance - end of period (29,126) 1,728
-------------- --------------
Accumulated other comprehensive income (loss) 125,287 (81,841)
-------------- --------------
Total shareholders' equity $ 5,506,816 $ 4,568,394
============== ==============
See accompanying notes to interim consolidated financial statements
5
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2001 and 2000
(Unaudited)
Three Months Ended
March 31
2001 2000
-------------- -------------
(in thousands of U.S.
dollars)
Net income $ 118,394 $ 174,513
Other comprehensive income (loss)
Net unrealized appreciation on investments
Unrealized appreciation on investments 76,386 72,229
Less: reclassification adjustment for net realized gains
included in net income (9,925) (63,059)
--------- ----------
66,461 9,170
Cumulative translation adjustments 1,860 (22,418)
--------- ----------
Other comprehensive income (loss), before income tax 68,321 (13,248)
Income tax expense related to other
comprehensive income items (12,488) (2,441)
--------- ----------
Other comprehensive income (loss) 55,833 (15,689)
--------- ----------
Comprehensive income $ 174,227 $ 158,824
========= ==========
See accompanying notes to interim consolidated financial statements
6
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2001 and 2000
(Unaudited)
Three Months ended
March 31
2001 2000
------------ -------------
(in thousands of U.S. dollars)
Cash flows from operating activities
Net income $ 118,394 $ 174,513
Adjustments to reconcile net income to net cash provided by
operating activities:
Unearned premiums 574,914 344,193
Unpaid losses and loss expenses, net of
reinsurance recoverable 181,035 574,116
Prepaid reinsurance premiums (243,579) (4,050)
Deferred income taxes (7,750) (4,094)
Net realized (gains) losses on investments 19,375 (56,740)
Amortization of premium/discounts on fixed maturities (3,626) 393
Amortization of goodwill 19,880 19,646
Deferred policy acquisition costs (50,057) (54,906)
Insurance and reinsurance balances receivable (226,991) (304,004)
Premiums received in advance 7,680 3,571
Insurance and reinsurance balances payable 120,025 (472,242)
Accounts payable, accrued expenses and other liabilities (118,490) (270,080)
Net change in contract holder deposit funds (14,903) (8,006)
Cumulative effect of adopting a new accounting standard 22,670 -
Other (9,898) (26,318)
---------- -----------
Net cash flows from (used for) operating activities $ 388,679 $ (84,008)
---------- -----------
Cash flows from investing activities
Purchases of fixed maturities (4,319,684) (2,712,024)
Purchases of equity securities (36,028) (146,166)
Sales of fixed maturities 4,019,993 2,800,521
Sales of equity securities 50,949 492,175
Maturities of fixed maturities 73,558 4,094
Net realized gains (losses) on financial future contracts (28,220) 8,877
Other investments (19,412) (114,900)
---------- -----------
Net cash from (used for) investing activities $ (258,844) $ 332,577
---------- -----------
Cash flows from financing activities
Dividends paid on Ordinary Shares $ (29,995) $ (23,917)
Dividends paid on FELINE PRIDES (6,415) -
Net proceeds from (repayment of) short-term debt 7,103 (316,522)
Proceeds from exercise of options for Ordinary Shares 6,945 559
Proceeds from shares issued under
Employee Stock Purchase Plan 2,810 -
Repurchase of Ordinary Shares (35,280) -
Proceeds from issuance of trust preferred securities - 300,000
---------- -----------
Net cash used for financing activities $ (54,832) $ (39,880)
---------- -----------
Net increase in cash 75,003 208,689
Cash - beginning of period 608,069 599,232
---------- -----------
Cash - end of period $ 683,072 $ 807,921
========== ===========
See accompanying notes to interim consolidated financial statements
7
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The interim consolidated financial statements, which include the accounts
of the Company and its subsidiaries, have been prepared on the basis of
accounting principles generally accepted in the United States of America
and, in the opinion of management, reflect all adjustments (consisting of
normally recurring accruals) necessary for a fair presentation of results
for such periods. The results of operations and cash flows for any interim
period are not necessarily indicative of results for the full year. These
financial statements should be read in conjunction with the consolidated
financial statements, and related notes thereto, included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
ACE Limited ("ACE" or "the Company") is a holding company incorporated with
limited liability under the Cayman Islands Companies Law and maintains its
business office in Bermuda. The Company, through its various subsidiaries,
provides insurance and reinsurance for a diverse group of customers
worldwide. ACE operates through six business segments: ACE Bermuda, ACE
Global Markets, ACE Global Reinsurance, ACE USA, ACE International and ACE
Financial Services.
The analysis of gross premiums written by geographic regions is as follows:
- --------------------------------------------------------------------------
Three Months ended March 31
2001 2000
---- ----
North America 55% 57%
Europe 30 22
Australia and New Zealand 1 6
South America 8 3
Asia Pacific 5 4
Other (1) 1 8
---------- ----------
100% 100%
========== ==========
(1) includes world wide coverages
- --------------------------------------------------------------------------
2. Significant Accounting Policies
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133"). FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the consolidated balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value, cash flow or foreign currency hedge.
The accounting for changes in the fair value of a derivative (that is, gains
and losses) depends on the intended use of the derivative and the resulting
designation. Upon initial application of FAS 133, hedging relationships must be
designated anew and documented pursuant to the provisions of this statement.
The Company adopted FAS 133, as amended, as of January 1, 2001.
The Company maintains investments in derivative instruments such as
futures, option contracts and foreign currency forward contracts for which
the primary purposes are to manage duration and foreign currency exposure,
yield enhancement or to obtain an exposure to a particular financial market.
The Company has historically recorded the changes in market value of these
instruments as realized gains or losses in the consolidated statements of
operations and, accordingly, has estimated that FAS 133, as amended, will not
have a significant impact on the results of operations, financial condition or
liquidity in future periods as it relates to these instruments.
Certain products (principally credit protection oriented) issued by the
Company have been determined to meet the definition of a derivative under
FAS 133. These products consist primarily of credit default swaps,
index-based instruments and certain financial guarantee coverages.
Effective January 1, 2001, the Company records these products at their fair
value.
8
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
To reflect the adoption of FAS 133 on January 1, 2001, the Company recorded
an expense related to the cumulative effect of adopting this standard of
$23 million, net of income tax of $12 million. The Company has recorded in
net realized gains (losses) on investments, pretax income of $4 million to
reflect the change in the fair value of derivatives for the quarter. The
level of gains and losses resulting from changes in the fair value of
derivatives on a prospective basis will be dependent upon a number of
factors including changes in interest rates, credit spreads and other
market factors. The Company's involvement with derivative instruments and
transactions is primarily to offer protection to others or to mitigate its
own risk and is not considered speculative in nature.
3. Commitments and contingencies
The Company has considered asbestos and environmental claims and claims
expenses in establishing the liability for unpaid losses and loss expenses.
The Company has developed reserving methods, which incorporate new sources
of data with historical experience to estimate the ultimate losses arising
from asbestos and environmental exposures. The reserves for asbestos and
environmental claims and claims expenses represent management's best
estimate of future loss and loss expense payments and recoveries which are
expected to develop over the next several decades. The Company continuously
monitors evolving case law and its effect on environmental damage and latent
injury claims. While reserving for these claims is inherently uncertain,
the Company believes that the reserves carried for these claims are
adequate based on known facts and current law.
4. Restricted stock awards
Under the Company's long-term incentive plans, 484,300 restricted Ordinary
Shares were awarded during the three months ended March 31, 2001, to
officers of the Company and its subsidiaries. These shares vest at various
dates through February 2005.
At the time of grant the market value of the shares awarded under these
grants is recorded as unearned stock grant compensation and is presented as
a separate component of shareholders' equity. The unearned compensation is
charged to income over the vesting period.
5. Discontinued Operations
As part of the ACE INA Acquisition in July 1999, the Company planned to dispose
of the operations of Commercial Insurance Services ("CIS"), a division of
ACE INA. Following the acquisition, the Company sold the renewal rights for all
of its CIS business and planned to sell the assets and liabilities pertaining
to the in-force book of business which it still owned. Therefore, in accordance
with Emerging Issues Task Force ("EITF") 87-11, "Allocation of Purchase Price
to Assets to Be Sold," and EITF 90-6, "Accounting for Certain Events Not
Addressed in Issue No. 87-11 Relating to an Acquired Operating Unit to Be
Sold," the Company presented CIS as a discontinued operation, with effect from
July 2, 1999.
On July 2, 1999, the Company reduced the consolidated balance sheet for all
items that pertained specifically to CIS, together with the estimated proceeds
on sale and estimated operating results over the twelve months from
July 2, 1999, through July 1, 2000, into a net liability of approximately $170
million, which was recorded in accounts payable, accrued expenses and other
liabilities.
As the CIS business was not sold within the allotted time period, the
Company was required, as of July 2, 2000, to record the CIS balance sheet
into its constituent parts in the balance sheet and to record any resulting
income or loss from CIS in its statement of operations
prospectively from July 2, 2000. The results of the CIS operations from
July 2, 2000 are reflected in the ACE USA segment.
9
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
6. Earnings per share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31
2001 2000
---------------- -------------
(in thousands of U.S. dollars, except
share and per share data)
Numerator:
Net income before cumulative effect of adopting a new accounting standard $ 141,064 $ 174,513
Dividends on FELINE PRIDES (6,348) -
------------ ------------
Net income available to holders of Ordinary Shares before cumulative effect 134,716 174,513
Cumulative effect of adopting a new accounting standard (22,670) -
------------ ------------
Net income available to holders of Ordinary Shares $ 112,046 $ 174,513
============ ============
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 232,473,310 216,882,344
Dilutive effect of FELINE PRIDES 3,396,241 -
Effect of other dilutive securities 7,197,415 2,103,927
-------------- ------------
Denominator for diluted earnings per share:
Adjusted weighted average shares outstanding and assumed conversions 243,066,966 218,986,271
============== ============
Basic earnings per share before cumulative effect of adopting a new
accounting standard $ 0.58 $ 0.80
============== ============
Basic earnings per share $ 0.48 $ 0.80
============== ============
Diluted earnings per share before cumulative effect of adopting a new
accounting standard $ 0.55 $ 0.80
============== ============
Diluted earnings per share $ 0.46 $ 0.80
============== ============
7. Credit Facilities
In April 2001, the Company renewed its $800 million, 364-day revolving
credit facility. This facility together with the Company's $250 million,
five-year revolving credit facility which was last renewed in May 2000, is
available for general corporate purposes and each of the facilities may also be
used as commercial paper back-up facilities. The five-year facility also
permits the issuance of letters of credit. Under these facilities the Company
and various subsidiaries are named borrowers and guarantors. Each facility
requires that the Company and/or certain of its subsidiaries maintain specific
covenants, including a consolidated tangible net worth covenant and a maximum
leverage covenant.
10
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
8. Debt
The following table sets forth the Company's consolidated debt position at
March 31, 2001 and December 31, 2000.
- --------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
-------------- -----------------
(in millions of U.S. dollars)
Short-term debt
ACE INA commercial paper $ 347 $ 340
ACE Financial Services note 25 25
------- --------
$ 372 $ 365
======= ========
Long-term debt
ACE Financial Services Debentures due 2002 $ 75 $ 75
ACE INA Notes due 2004 400 400
ACE INA Notes due 2006 299 299
ACE US Holdings Senior Notes due 2008 250 250
ACE INA Subordinated Notes due 2009 300 300
ACE INA Debentures due 2029 100 100
------- -------
$ 1,424 $ 1,424
======= =======
Trust Preferred Securities
ACE INA RHINO Preferred Securities due 2002 $ 400 $ 400
Capital Re LLC Monthly Income
Preferred Securities due 2044 75 75
ACE INA Trust Preferred Securities due 2029 100 100
ACE INA Capital Securities due 2030 300 300
------- -------
$ 875 $ 875
======= =======
-----------------------------------------------------------------------------------------------
Commercial paper and money market facilities
In June 1999, the Company arranged certain commercial paper programs. The
programs use revolving credit facilities as back-up facilities and provide
for up to $2.8 billion in commercial paper issuance (subject to the
availability of back-up facilities, which currently total $1.05 billion) for
ACE and for ACE INA. At March 31, 2001, short-term debt consisted of $347
million of commercial paper issued by ACE INA and $25 million in bank
borrowings by ACE Financial Services. Commercial paper rates during the
quarter ended March 31, 2001 averaged 5.75 percent.
9. Reinsurance
The Company purchases reinsurance to manage various exposures including
catastrophe risks. Although reinsurance agreements contractually obligate
the Company's reinsurers to reimburse it for the agreed upon portion of its
gross paid losses, they do not discharge the primary liability of the
Company. The amounts for net premiums written and net premiums earned in
the statements of operations are net of reinsurance. Direct, assumed and
ceded amounts for these items for the three months ended March 31, 2001 and
2000 are as follows:
11
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
Three Months Ended
March 31
2001 2000
------------------- -------------------
(in thousands of U.S. dollars)
Premiums written
Direct $ 1,806,099 $ 1,468,667
Assumed 755,539 528,293
Ceded (826,520) (539,938)
------------ ------------
Net premiums written $ 1,735,118 $ 1,457,022
============ ============
Premiums earned
Direct $ 1,478,423 $ 1,063,108
Assumed 493,688 401,923
Ceded (602,995) (360,225)
------------ ------------
Net premiums earned $ 1,369,116 $ 1,104,806
============ ============
The Company's provision for reinsurance recoverable at March 31, 2001 and
December 31, 2000, is as follows:
March 31 December 31
2001 2000
---------------- ----------------
(in thousands of U.S. dollars)
Reinsurance recoverable on paid losses and loss expenses $ 973,808 $ 937,496
Reinsurance recoverable on unpaid losses and loss expenses 9,130,736 8,767,111
Provision for uncollectible balances on reinsurance recoverable (721,602) (709,667)
------------ ------------
Reinsurance recoverable $ 9,382,942 $ 8,994,940
============ ============
10. Taxation
Under current Cayman Islands law, the Company is not required to pay any
taxes in the Cayman Islands 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. Under current Bermuda law, the Company and its Bermuda subsidiaries
are not required to pay any taxes in Bermuda 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.
Income from the Company's operations at Lloyd's are subject to United
Kingdom corporation taxes. Lloyd's is required to pay U.S. income tax on
U.S. connected income ("U.S. income") written by Lloyd's syndicates.
Lloyd's has a closing agreement with the IRS whereby the amount of tax due
on this business is calculated by Lloyd's and remitted directly to the IRS.
These amounts are then charged to the personal accounts of the
Names/Corporate Members in proportion to their participation in the
relevant syndicates. The Company's Corporate Members are subject to this
arrangement but, as 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.
ACE INA, ACE US Holdings and ACE Financial Services are subject to income
taxes imposed by U.S. authorities and file U.S. tax returns. Certain
international operations of the Company are also subject to income taxes
imposed by the jurisdictions in which they operate.
12
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
There can be no assurance that there will not be changes in applicable
laws, regulations or treaties, which might require the Company to change
the way it operates or become subject to taxation.
The income tax provision for the three months ended March 31, 2001 and 2000
is as follows:
Three Months Ended
March 31
2001 2000
--------------- --- ---------------
(in thousands of U.S. dollars)
Current tax expense $ 34,724 $ 8,728
Deferred tax expense (benefit) (7,750) 24,272
----------- ------------
Provision for income taxes $ 26,974 $ 33,000
=========== ============
The components of the net deferred tax asset as of March 31, 2001 and
December 31, 2000 are as follows:
March 31 December 31
2001 2000
----------- ---------------
(in thousands of U.S. dollars)
Deferred tax assets
Loss reserve discount $ 530,987 $ 536,005
Foreign tax credits 146,198 137,765
Uncollectible reinsurance 28,297 28,297
Net operating loss carryforward 511,960 500,916
Other 176,940 199,689
----------- ------------
Total deferred tax assets 1,394,382 1,402,672
----------- ------------
Deferred tax liabilities
Deferred policy acquisition costs 59,765 62,080
Unrealized appreciation on investments 27,433 25,861
Other 31,833 32,064
----------- ------------
Total deferred tax liabilities 119,031 120,005
----------- ------------
Valuation allowance 136,475 138,406
----------- ------------
Net deferred tax asset $ 1,138,876 $ 1,144,261
=========== ============
11. Subsidiary issuer information
The following tables presents the condensed consolidating financial information
for ACE Limited (the "Parent Guarantor"), ACE INA Holdings, Inc. and ACE
Financial Services, Inc. (formerly Capital Re Corporation), (the "Subsidiary
Issuers") as of March 31, 2001 and December 31, 2000 and for the three months
ended March 31, 2001 and 2000. The Subsidiary Issuers are direct or indirect
wholly-owned subsidiaries of the Parent Guarantor. Investments in
subsidiaries are accounted for by the Parent Guarantor and the Subsidiary
Issuers under the equity method for purposes of the supplemental
consolidating presentation. Earnings of subsidiaries are reflected in the
Parent Guarantor's investment accounts and earnings. The Parent Guarantor
fully and unconditionally guarantees certain of the debt of the Subsidiary
Issuers (see Note 8).
13
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Balance Sheet as at March 31, 2001
(in thousands of U.S. dollars)
ACE INA
ACE Limited Holdings, Inc ACE Financial Other ACE Limited
(Parent Co. (Subsidiary Services, Inc. Subsidiaries and Consolidating ACE Limited
Guarantor) Issuer) (Subsidiary Issuer) Eliminations (1) Adjustments (2) Consolidated
----------- ------- ------------------- ---------------- --------------- ------------
Assets
Total investments and cash $ 458,105 $6,513,393 $940,835 $6,216,669 $ - $ 14,129,002
Reinsurance recoverable - 7,841,298 69,371 1,472,273 - 9,382,942
Insurance and reinsurance balances
receivable - 1,666,704 10,357 642,085 - 2,319,146
Goodwill - 2,226,228 99,877 500,934 - 2,827,039
Investments in subsidiaries 5,067,487 - 152,000 (152,000) (5,067,487) -
Due from subsidiaries and
affiliates, net 326,196 (99,430) 1,198 98,232 (326,196) -
Other assets 29,525 3,202,524 173,912 825,383 - 4,231,344
---------------------------------------------------------------------------------------------
Total assets $5,881,313 $21,350,717 $1,447,550 $9,603,576 $(5,393,683) $32,889,473
=============================================================================================
Liabilities
Unpaid losses and loss expenses $ - $13,145,765 $ 264,873 $4,534,748 $ - $17,945,386
Unearned premiums - 1,946,731 289,869 1,368,037 - 3,604,637
Trust preferred securities - 800,000 75,000 - - 875,000
Short-term debt - 346,612 25,000 - - 371,612
Long-term debt - 1,099,431 74,952 250,000 - 1,424,383
Other liabilities 63,447 2,459,546 110,029 217,567 - 2,850,589
---------------------------------------------------------------------------------------------
Total liabilities 63,447 19,798,085 839,723 6,370,352 - 27,071,607
---------------------------------------------------------------------------------------------
Mezzanine equity 311,050 - - - - 311,050
---------------------------------------------------------------------------------------------
Total shareholders' equity 5,506,816 1,552,632 607,827 3,233,224 (5,393,683) 5,506,816
---------------------------------------------------------------------------------------------
Total liabilities, mezzanine
equity and shareholders'
equity $5,881,313 $21,350,717 $1,447,550 $9,603,576 $(5,393,683) $32,889,473
=============================================================================================
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
14
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Balance Sheet as at December 31, 2000
(in thousands of U.S. dollars)
ACE INA
ACE Limited Holdings, Inc ACE Financial Other ACE Limited
(Parent Co. (Subsidiary Services, Inc. Subsidiaries and Consolidating ACE Limited
Guarantor) Issuer) (Subsidiary Issuer) Eliminations (1) Adjustments (2) Consolidated
----------- ------- ------------------- ---------------- --------------- ------------
Assets
Total investments and cash $ 479,969 $ 6,655,182 $ 919,181 $ 5,707,992 $ - $ 13,762,324
Reinsurance recoverables - 7,603,352 76,087 1,315,501 - 8,994,940
Insurance and reinsurance balances
receivable - 1,616,027 9,832 469,714 - 2,095,573
Goodwill - 2,240,505 100,928 505,276 - 2,846,709
Investments in subsidiaries 4,975,663 - 152,000 (152,000) (4,975,663) -
Due from subsidiaries and
affiliates, net 318,806 (111,131) 1,596 109,535 (318,806) -
Other assets 27,404 3,069,648 154,687 738,241 - 3,989,980
---------------------------------------------------------------------------------------------
Total Assets $5,801,842 $21,073,583 $ 1,414,311 $ 8,694,259 $(5,294,469) $ 31,689,526
=============================================================================================
Liabilities
Unpaid losses and loss expenses $ - $13,126,965 $ 246,174 $ 4,015,255 $ - $ 17,388,394
Unpaid premiums - 1,680,166 293,618 1,061,504 - 3,035,288
Trust preferred securities - 800,000 75,000 - - 875,000
Short-term debt - 339,509 25,000 - - 364,509
Long-term debt - 1,099,417 74,942 249,869 - 1,424,228
Other liabilities 70,581 2,497,734 78,874 223,657 - 2,870,846
---------------------------------------------------------------------------------------------
Total liabilities 70,581 19,543,791 793,608 5,550,285 - 25,958,265
---------------------------------------------------------------------------------------------
Mezzanine equity 311,050 - - - - 311,050
---------------------------------------------------------------------------------------------
Total shareholders' equity 5,420,211 1,529,792 620,703 3,143,974 (5,294,469) 5,420,211
---------------------------------------------------------------------------------------------
Total liabilities,
mezzanine equity and $5,801,842 $21,073,583 $ 1,414,311 $ 8,694,259 $ (5,294,469) $ 31,689,526
shareholders' equity =============================================================================================
----------------------------------------------------------------------------------------------------------------------------------
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
15
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Operations
For the three months ended March 31, 2001
(in thousands of U.S. dollars)
ACE INA
ACE Limited Holdings, Inc ACE Financial Other ACE Limited
(Parent Co. (Subsidiary Services, Inc. Subsidiaries and Consolidating ACE Limited
Guarantor) Issuer) (Subsidiary Issuer) Eliminations (1) Adjustments (2) Consolidated
----------- ------- ------------------- ---------------- --------------- ------------
Net premiums written $ - $ 600,180 $ 15,267 $ 1,119,671 $ - $ 1,735,118
Net premiums earned - 504,706 18,860 845,550 - 1,369,116
Net investment income 13,669 98,946 12,178 86,267 (6,630) 204,430
Equity in earnings of subsidiaries 116,728 - - - (116,728) -
Net realized gains (losses)
on investments - (3,153) 6,304 (22,526) - (19,375)
Losses and loss expenses - 345,800 2,816 603,330 - 951,946
Policy acquisition costs and
administrative expenses 12,845 165,480 10,049 171,609 - 359,983
Interest expense (2,831) 48,903 3,371 5,886 (1,005) 54,324
Amortization of goodwill - 14,490 1,051 4,339 - 19,880
Income tax expense 1,989 13,806 7,204 3,975 - 26,974
----------------------------------------------------------------------------------------------
Income before cumulative effect
of adopting a new accounting
standard 118,394 12,020 12,851 120,152 (122,353) 141,064
Cumulative effect of adopting
a new accounting standard
(net of income tax) - (50) (22,800) 180 - (22,670)
----------------------------------------------------------------------------------------------
Net income (loss) $ 118,394 $ 11,970 $ (9,949) $ 120,332 $ (122,353) $ 118,394
==============================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
16
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Operations
For the three months ended March 31, 2000
(in thousands of U.S. dollars)
ACE INA
ACE Limited Holdings, Inc ACE Financial Other ACE Limited
(Parent Co. (Subsidiary Services, Inc. Subsidiaries and Consolidating ACE Limited
Guarantor) Issuer) (Subsidiary Issuer) Eliminations (1) Adjustments (2) Consolidated
----------- ------- ------------------- ---------------- --------------- ------------
Net premiums written $ - $ 663,129 $ 20,490 $ 773,403 $ - $ 1,457,022
Net premiums earned - 602,498 18,679 483,629 - 1,104,806
Net investment income 10,921 93,945 11,680 74,895 (8,506) 182,935
Equity in earnings of subsidiaries 145,721 - - - (145,721) -
Net realized gains (losses)
on investments 43,703 28,263 (45,548) 30,322 - 56,740
Losses and loss expenses - 410,554 1,403 303,526 - 715,483
Policy acquisition costs and
administrative expenses 15,083 192,491 9,691 127,385 - 344,650
Interest expense 8,383 43,663 3,307 5,166 (3,330) 57,189
Amortization of goodwill - 14,125 1,052 4,469 - 19,646
Income tax expense 2,366 23,387 3,789 3,458 - 33,000
------------------------------------------------------------------------------------------------
Net income (loss) $ 174,513 $ 40,486 $ (34,431) $ 144,842 $ (150,897) $ 174,513
================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
17
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2001
(in thousands of U.S. dollars)
ACE INA
ACE Limited Holdings, Inc ACE Financial Other ACE Limited
(Parent Co. (Subsidiary Services, Inc. Subsidiaries and Consolidating ACE Limited
Guarantor) Issuer) (Subsidiary Issuer) Eliminations (1) Adjustments (2) Consolidated
----------- ------- ------------------- ---------------- --------------- ------------
Net cash flows from (used for)
operating activities $ (29,805) $ (85,460) $ 15,963 $ 487,981 $ - $ 388,679
----------------------------------------------------------------------------------------------
Cash flow from investing activities
Purchases of fixed maturities (8,622) (443,617) (399,604) (3,467,841) - (4,319,684)
Purchases of equity securities - (27,701) - (8,327) - (36,028)
Sales of fixed maturities - 553,529 375,013 3,091,451 - 4,019,993
Sales of equity securities - 44,649 - 6,300 - 50,949
Maturities of fixed maturities - - 4,500 69,058 - 73,558
Net realized gains (losses) on -
financial futures contracts - - - (28,220) - (28,220)
Other investments - (183) (578) (18,651) - (19,412)
----------------------------------------------------------------------------------------------
Net cash from (used for)
investing activities $ (8,622) $ 126,677 $ (20,669) $ (356,230) $ - $ (258,844)
----------------------------------------------------------------------------------------------
Cash flow from financing activities
Dividends paid on Ordinary
Shares (29,995) - - - - (29,995)
Dividends paid on FELINE PRIDES (6,415) - - - - (6,415)
Proceeds from short-term debt - 7,103 - - - 7,103
Advances to affiliate (898) - 898 -
Proceeds from exercise of
options for Ordinary Shares 6,945 - - - - 6,945
Proceeds from shares issued
under Employee Stock Purchase
Plan 2,810 - - - - 2,810
Repurchase of Ordinary Shares (35,280) - - - - (35,280)
Dividends received from
subsidiaries 65,000 - - (65,000) - -
----------------------------------------------------------------------------------------------
Net cash used for financing
activities $ 2,167 $ 7,103 $ - $ (64,102) $ - $(54,832)
----------------------------------------------------------------------------------------------
Net increase (decrease) in cash (36,260) 48,320 (4,706) 67,649 - 75,003
Cash - beginning of period 46,516 253,447 26,576 281,530 - 608,069
----------------------------------------------------------------------------------------------
Cash - end of period $ 10,256 $ 301,767 $ 21,870 $ 349,179 $ - $ 683,072
==============================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes all other subsidiaries of ACE Limited and intercompany
eliminations.
(2) Includes ACE Limited parent company eliminations.
18
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2000
ACE INA ACE Financial
ACE Limited Holdings, Inc. Services, Inc. Other ACE Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Limited
Guarantor) Issuer) Issuer) Eliminations (1) Adjustments (2) Consolidated
----------- ------------- -------------- ------------------ --------------- ------------
Net cash flows from (used for)
operating activities $ (20,749) $ (437,986) $ 16,826 $ 357,901 $ - $ (84,008)
--------------------------------------------------------------------------------------------
Cash flow from investing activities
Purchases of fixed maturities (52,764) (621,066) (77,686) (1,960,508) - (2,712,024)
Purchases of equity securities - (93,792) - (52,374) - (146,166)
Sales of fixed maturities 55,620 983,714 48,903 1,712,284 - 2,800,521
Sales of equity securities - 307,636 - 184,539 - 492,175
Maturities of fixed maturities - - 2,000 2,094 - 4,094
Net realized gains (losses) on
financial futures contracts - - (7) 8,884 - 8,877
Intercompany sale of subsidiaries 82,244 - 10,200 (10,200) (82,244) -
Other investments - 3,708 - (118,608) - (114,900)
--------------------------------------------------------------------------------------------
Net cash from (used for)
investing activities $ 85,100 $ 580,200 $ (16,590) $ (233,889) $ (82,244) $ 332,577
--------------------------------------------------------------------------------------------
Cash flow from financing activities
Dividends paid on Ordinary Shares (23,917) - - - - (23,917)
Repayment of bank debt, net (16,413) (295,832) - (4,277) - (316,522)
Proceeds from issuance of trust
preferred securities - 300,000 - - - 300,000
Advances from affiliates (25,035) - - 25,035 - -
Proceeds from exercise of
options for Ordinary Shares 559 - - - - 559
--------------------------------------------------------------------------------------------
Net cash used for financing
activities $ (64,806) $ 4,168 $ - $ 20,758 $ - (39,880)
--------------------------------------------------------------------------------------------
Net increase (decrease) in cash (455) 146,382 236 144,770 (82,244) 208,689
Cash - beginning of period 15,942 282,426 231 300,633 - 599,232
--------------------------------------------------------------------------------------------
Cash - end of period $ 15,487 $ 428,808 $ 467 $ 445,403 $ (82,244) 807,921
============================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes all other subsidiaries of ACE Limited and intercompany
eliminations.
(2) Includes ACE Limited parent company eliminations.
19
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
12. Segment information
The following tables summarize the operations by segment for the three
months ended March 31, 2001 and 2000. Net realized gains (losses) have been
presented net of related income taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2001
ACE ACE
ACE Global Global ACE ACE Financial ACE
ACE Bermuda Markets Reinsurance USA International Services Other(1) Consolidated
----------- ------- ----------- --- ------------- -------- ----- ------------
(in thousands of U.S. Dollars)
Operations Data
Gross premiums written $ 376,603 $ 302,436 $ 166,434 $ 943,290 $ 620,767 $ 152,108 $ - $ 2,561,638
Net premiums written 358,766 200,557 161,787 455,950 411,551 146,507 - 1,735,118
Net premiums earned 268,976 169,127 54,441 385,549 363,914 127,109 - 1,369,116
Losses and loss expenses 236,877 98,493 13,491 276,693 226,992 99,400 - 951,946
Policy acquisition costs 4,715 48,684 9,554 34,713 57,101 11,923 - 166,690
Administrative expenses 8,695 16,562 5,003 70,115 64,423 9,463 19,032 193,293
---------------------------------------------------------------------------------------------------------
Underwriting income 18,689 5,388 26,393 4,028 15,398 6,323 (19,032) 57,187
Net investment income 39,653 9,174 15,833 90,010 22,121 24,518 3,121 204,430
Amortization of goodwill (225) 926 3,503 135 - 1,051 14,490 19,880
Interest expense - 794 - 9,281 - 3,371 40,878 54,324
Income tax expense
(benefit) 669 4,427 - 26,007 6,548 5,213 (19,284) 23,580
---------------------------------------------------------------------------------------------------------
Income (loss) excluding
net realized gains
(losses) 57,898 8,415 38,723 58,615 30,971 21,206 (51,995) 163,833
Net realized gains
(losses) (net of
income tax) (7,391) 2,190 (19,809) (7,370) 5,367 4,244 - (22,769)
---------------------------------------------------------------------------------------------------------
Net income before
cumulative effect 50,507 10,605 18,914 51,245 36,338 25,450 (51,995) 141,064
Cumulative effect of
adopting a new
accounting standard
(net of income tax) - 510 470 (50) - (23,600) - (22,670)
---------------------------------------------------------------------------------------------------------
Net income (loss) $ 50,507 $ 11,115 $ 19,384 $ 51,195 $ 36,338 $ 1,850 $ (51,995) $ 118,394
=========================================================================================================
---------------------------------------------------------------------------------------------------------
Total Assets $3,265,786 $2,268,878 $1,445,804 $16,837,878 $4,035,924 $2,314,140 $2,721,063 $32,889,473
=========================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
20
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2000
ACE ACE
ACE Global Global ACE ACE Financial ACE
ACE Bermuda Markets Reinsurance USA International Services Other(1) Consolidated
----------- ------- ----------- --- ------------- -------- ----- ------------
(in thousands of U.S. Dollars)
Operations Data
Gross premiums written $ 173,079 $ 319,918 $ 104,866 $ 738,895 $ 512,600 $ 147,602 $ - $ 1,996,960
Net premiums written 138,048 237,191 103,477 459,998 376,160 142,148 - 1,457,022
Net premiums earned 82,485 133,008 32,196 382,814 343,292 131,011 - 1,104,806
Losses and loss expenses 58,904 72,184 9,798 277,205 198,520 98,872 - 715,483
Policy acquisition costs 3,085 36,560 5,950 34,436 56,180 14,431 - 150,642
Administrative expenses 7,460 17,585 1,253 69,192 74,647 7,525 16,346 194,008
---------------------------------------------------------------------------------------------------------
Underwriting income 13,036 6,679 15,195 1,981 13,945 10,183 (16,346) 44,673
Net investment income 36,172 8,188 15,000 83,422 21,514 22,360 (3,721) 182,935
Amortization of goodwill (208) 1,040 3,502 135 - 1,052 14,125 19,646
Interest expense 684 1,205 - 8,269 - 3,307 43,724 57,189
Income tax expense
(benefit) 627 2,855 - 23,192 6,503 6,333 (15,775) 23,735
---------------------------------------------------------------------------------------------------------
Income (loss) excluding
net realized gains
(losses) 48,105 9,767 26,693 53,807 28,956 21,851 (62,141) 127,038
Net realized gains
(losses) (net of
income tax) 35,219 (774) (2,120) (4,398) 22,327 (1,052) (1,727) 47,475
---------------------------------------------------------------------------------------------------------
Net income (loss) $ 83,324 $ 8,993 $ 24,573 $ 49,409 $ 51,283 $ 20,799 $ (63,868) $ 174,513
=========================================================================================================
---------------------------------------------------------------------------------------------------------
Total Assets $2,850,072 $2,013,472 $1,367,114 $15,642,160 $3,705,901 $2,080,716 $2,585,863 $30,245,298
=========================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
21
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a discussion of the Company's results of operations,
financial condition, liquidity and capital resources as of and for the
three months ended March 31, 2001. The results of operations and cash flows
for any interim period are not necessarily indicative of results for the
full year. This discussion should be read in conjunction with the
consolidated financial statements, related notes thereto and the
Management's Discussion and Analysis of Results of Operations and Financial
Condition included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
Safe Harbor Disclosure
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Any written or oral statements made
by or on behalf of the Company may include forward-looking statements which
reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to
certain uncertainties and other factors that could cause actual results to
differ materially from such statements. These uncertainties and other
factors (which are described in more detail elsewhere herein and in other
documents filed by the Company with the Securities and Exchange Commission)
include, but are not limited to:
(i) uncertainties relating to government and regulatory policies (such
as subjecting the Company to new insurance regulation or taxation in
additional jurisdictions or amending or revoking or enacting any
laws, regulations or treaties affecting the Company's current
operations),
(ii) the occurrence of catastrophic events or other insured or
reinsured events with a frequency or severity exceeding the
Company's estimates,
(iii legal, regulatory, and legislative developments,
(iv) the uncertainties of the loss reserving process including the
difficulties associated with assessing environmental damage and
latent injuries,
(v) the actual amount of new and renewal business and market acceptance
of the Company's products,
(vi) loss of the services of any of the Company's executive officers,
(vii) changing rates of inflation and other economic conditions,
(viii) losses due to foreign currency exchange rate fluctuations,
(ix) the ability to collect reinsurance recoverable,
(x) the competitive environment in which the Company operates,
related trends and associated pricing pressures, market
perception, and developments,
(xi) the impact of mergers and acquisitions and new initiatives,
including the ability to successfully integrate acquired, new or
expanded businesses and achieve cost savings, reduce volatility of
earnings, competing demands for ACE's capital and the risk of
undisclosed liabilities,
(xii) developments in global financial markets, including interest rate
changes which could affect the Company's investment portfolio and
financing plans,
(xiii) risks associated with the introduction of new products and services,
(xiv) the ability of technology to perform as anticipated,
(xv) the amount of dividends received from subsidiaries,
(xvi) and management's response to these factors.
22
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd)
The words "believe", "anticipate", "estimate", "project", "plan", "expect",
"intend", "hope", "will likely result" or "will continue" and variations
thereof and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
General
The Company, through its various subsidiaries, provides a broad range of
insurance and reinsurance for a diverse group of customers worldwide. ACE
operates through six business segments: ACE Bermuda, ACE Global Markets,
ACE Global Reinsurance, ACE USA, ACE International and ACE Financial
Services.
On July 2, 1999, the Company, through a U.S. holding company, ACE INA
Holdings, Inc. ("ACE INA"), acquired CIGNA Corporation's domestic
property and casualty insurance operations including its run-off business
and also its international property and casualty insurance companies and
branches, including most of the accident and health business written
through those companies for $3.45 billion in cash (the "ACE INA
Acquisition").
On December 30, 1999, the Company acquired Capital Re Corporation, which is
engaged in the financial guaranty reinsurance business. Following the
acquisition, Capital Re Corporation was renamed ACE Financial Services, Inc.
Under the terms of the acquisition agreement, the Company paid aggregate
consideration of $110.3 million in cash and issued approximately 20.8
million ACE Ordinary Shares.
The Company expects to continue evaluating potential new product lines and
other opportunities in the insurance and reinsurance markets. In addition,
the Company evaluates potential acquisitions of other companies and
businesses and holds discussions with potential acquisition candidates. As
a general rule, the Company publicly announces such acquisitions only after
a definitive agreement has been reached.
Results of Operations - Three months ended March 31, 2001 and 2000
Net Income
- --------------------------------------------------------------------------------
Three Months Ended
March 31
2001 2000
---- ----
(in millions of U.S. Dollars)
Income excluding net realized gains (losses)
on investments and cumulative effect of adopting $ 164 $ 127
a new accounting standard
Net realized gains (losses) on investments
(net of income tax) (23) 48
Cumulative effect of adopting a new accounting
standard (net of income taxes) (23) -
---------- ---------
Net income $ 118 $ 175
========== =========
- --------------------------------------------------------------------------------
Income excluding net realized gains (losses) on investments and the
cumulative effect of adopting a new accounting standard increased by 29
percent to $164 million for the three months ended March 31, 2001, compared
with $127 million for the three months ended March 31, 2000. This increase
is due primarily to growth in net premiums earned together with a small
decrease in the combined ratio for the group and an increase in net investment
income.
23
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
Net realized losses on investments (net of income tax) were $23 million for
the three months ended March 31, 2001 compared with net realized gains of
$48 million for the three months ended March 31, 2000. The net realized losses
were generated primarily in as a result of losses realized on the financial
futures and option contracts.
As discussed later in this report, the Company implemented FAS 133 on
January 1, 2001, which required all derivatives to be recognized as either
assets or liabilities in the consolidated balance sheet and to measure
those instruments at fair value. The Company recorded an expense relating
to the cumulative effect of adopting this standard of $23 million, net of
income tax of $12 million. The cumulative effect of adopting this standard
primarily related to market value adjustments on the credit default swap
portfolio held by ACE Financial Services. The market value adjustment for
the quarter ended March 31, 2001, as a result of FAS 133, resulted in a
pre-tax gain of $4 million and is reflected in net realized gains
(losses) on investments.
- -------------------------------------------------------------------------------
Three Months Ended Percentage
March 31 Change
From Prior Year
2001 2000
---------------------- -------------
(in millions of U.S. Dollars)
Gross premiums written:
ACE Bermuda $ 377 $ 173 118%
ACE Global Markets 302 320 (5)
ACE Global Reinsurance 166 105 59
ACE USA 943 739 28
ACE International 621 512 21
ACE Financial Services 152 148 3
-------- -------- -------
Consolidated $ 2,561 $ 1,997 28%
======== ======== =======
Net premiums written:
ACE Bermuda $ 359 $ 138 160%
ACE Global Markets 200 237 (15)
ACE Global Reinsurance 162 104 56
ACE USA 456 460 (1)
ACE International 412 376 9
ACE Financial Services 146 142 3
-------- -------- -------
Consolidated $ 1,735 $ 1,457 19%
======== ======== =======
Net premiums earned:
ACE Bermuda $ 269 $ 83 226%
ACE Global Markets 169 133 27
ACE Global Reinsurance 54 32 69
ACE USA 386 383 1
ACE International 364 343 6
ACE Financial Services 127 131 (3)
-------- -------- -------
Consolidated $ 1,369 $ 1,105 24%
======== ======== =======
- -------------------------------------------------------------------------------
Premiums: Gross premiums written for the quarter ended March 31, 2001,
increased by $564 million to $2.6 billion from $2.0 billion for the same
quarter last year. During the quarter, most of the segments achieved year
over year growth; however, the most significant area of growth was in the
financial solutions line of business at ACE Bermuda. In addition, during
the quarter, the Company continued to experience increases in pricing in
most geographic areas including the US, Europe, Latin America and Asia
Pacific including Australia. In Japan, economic conditions and increased
24
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
competition due to deregulation continue to mitigate price increases in the
Japanese insurance markets. Net premiums written and net premiums earned
increased by $278 million and $264 million respectively, compared with the
same quarter last year. Again, this increase is primarily due to several
financial solutions contracts written during the quarter, including loss
portfolio contracts ("LPTs") of approximately $250 million which were fully
earned when written.
ACE Bermuda: Gross premiums written for the quarter ended March 31, 2001,
increased by $204 million to $377 million from $173 million for the same
quarter last year. This increase is due to several financial solutions
contracts written during the current quarter including a large LPT contract
valued at approximately $140 million, which was fully earned during the
quarter. Compared with the March 2000 quarter, production was affected by a
strategic decision to move certain lines of business to their center of
expertise. The aviation business in ACE Bermuda was moved to ACE Global Markets
and a large part of the satellite business was moved to ACE USA. These changes,
together with slow launch activity reduced ACE Bermuda's premium base by
about $15 million. ACE Bermuda's other products benefited from increased
demand and price improvements.
For the quarter ended March 31, 2001, net premiums written increased by
$221 million to $359 million and net premiums earned increased by $186
million to $269 million, compared with the same quarter last year. As with
gross premiums written, the increases are primarily due to premiums from
the financial solutions contracts already discussed.
ACE Global Markets: Gross premiums written for the quarter ended March 31,
2001 decreased by $18 million to $302 million and net premiums written for
the quarter decreased by $37 million to $200 million, compared with the
same quarter last year. However, on an adjusted basis, gross and net
premiums written actually increased in the quarter compared with last year.
This increase is not evident in the reported numbers as in the March 2000
quarter, ACE Global Markets accelerated its reporting to a current basis
from a quarter in arrears. Gross and net premiums written by syndicate 2488
increased during the current quarter. In addition, ACE increased its
participation in Lloyd's syndicate 2488. For 2001, ACE's share of the
capacity of syndicate 2488 is approximately 90 percent compared with 84
percent in 2000.
Net premiums earned for the quarter ended March 31, 2001, increased by $36
million to $169 million from $133 million for the same quarter last year.
This increase is primarily due to the increased participation in the
Lloyd's syndicate along with a change in the mix of business with different
earnings patterns.
ACE Global Reinsurance: Gross premiums written for the quarter ended March
31, 2001, increased by $61 million to $166 million from $105 million for
the same quarter last year. This increase is primarily due to increasing
prices and demand in the property catastrophe marketplace, particularly in
the international sector. Property catastrophe premiums accounted for $54
million of the increase while the U.S. property and casualty and life
reinsurance businesses accounted for the other $7 million of the increase.
Net premiums written for the quarter ended March 31, 2001, increased by $58
million to $162 million from $104 million for the same quarter last year.
This increase is primarily due to the improved property catastrophe market
conditions as noted above.
Net premiums earned for the quarter ended March 31, 2001, increased by $22
million to $54 million from $32 million for the same quarter last year. As
with gross premiums written and net premiums written, the increase is
primarily due to the higher property catastrophe volumes experienced, both
in the latter half of fiscal 2000 and in the January 2001 renewals.
25
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE USA: Gross premiums written for the quarter ended March 31, 2001,
increased by $204 million to $943 million from $739 million for the same
quarter last year. Most of ACE USA's operating divisions experienced
premium growth this quarter however, special risk facilities ("SRF"),
property and U.S. international business were the main contributors to the
increase. While financial solutions had good production this quarter, year
over year production declined by approximately $23 million as ACE USA wrote
an $83 million loss portfolio transfer in the March 2000 quarter. In
addition, during the current quarter, ACE USA did not renew approximately
$38 million of business that did not meet its underwriting standard. U.S.
market conditions were favorable during the quarter and the trend is
expected to continue. ACE USA continues to experience price increases which
were generally above 15 percent for all of ACE USA's specialty business
units during the current quarter.
ACE USA's business expansion initiatives showed positive results with
growth in its professional risk unit, following the reorganization and
reintroduction of its professional lines capabilities. ACE USA also saw
good activity in its new accident and health unit.
Net premiums written for the quarter ended March 31, 2001, of $456 million
were essentially flat compared with $460 million for the quarter ended
March 31, 2000. This is primarily due to a number of large risk and
property accounts written during the quarter that produced large gross
premiums but comparatively low net premiums primarily in SRF.
Net premiums earned for the quarter ended March 31, 2001, of $386 million
were also essentially flat compared with $383 million for the quarter ended
March 31, 2000. This is primarily because ACE USA wrote a large financial
solutions contract during the March 2000 quarter, which was fully earned
when written and not available for renewal this quarter. Excluding this
item, net premiums earned by ACE USA increased during the current quarter.
ACE International: Gross premiums written for the quarter ended March 31,
2001, increased by $109 million to $621 million from $512 million for the
same quarter last year. The increase is primarily due to continuing growth
across various regions including accident and health business in Europe;
all lines in Latin America, with a significant increase in personal lines.
These increases were partially offset by the devaluation in the yen of
approximately 10 percent and decreased accident and health business in the
Far East.
For the quarter ended March 31, 2001, net premiums written increased by $36
million to $412 million and net premiums earned increased by $21 million to
$364 million, compared with the same quarter last year. As with gross
premiums written, the increases are a result of continued growth across
various regions.
ACE Financial Services: Growth in gross premiums written for the quarter
ended March 31, 2001, was relatively flat compared with the quarter ended
March 31, 2000. Gross premiums written of $152 million for the current
quarter included an LPT of $87 million, compared with an LPT of $82 million
in the same quarter last year. Increases in the credit default swaps line
of business and significant new business in the structured financial
guaranty were offset by declines in the other lines of business.
Net premiums written for the quarter ended March 31, 2001, increased by $4
million to $146 million from $142 million for the same quarter last year.
The increase is due to the same influences, described above for gross
premiums written.
Net premiums earned for the quarter ended March 31, 2001, decreased by $4
million to $127 million from $131 million for the same quarter last year.
The decrease is due to the decrease in municipal refunding as well as the
timing of new business written and the varying periods over which such
premiums are earned.
26
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
Underwriting Results
The underwriting results of a property and casualty insurer are discussed
frequently by reference to its combined ratio, loss and loss expense ratio
and underwriting and administrative expense ratio. Each ratio is derived by
dividing the relevant expense amounts by net premiums earned. The combined
ratio is the sum of the loss and loss expense ratio and the underwriting
and the administrative expense ratio. A combined ratio under 100 percent
indicates underwriting income and a combined ratio exceeding 100 percent
indicates underwriting losses.
- -------------------------------------------------------------------------------
Three Months Ended
March 31
2001 2000
---- ----
Loss and loss expense ratio
ACE Bermuda 88.1% 71.5%
ACE Global Markets 58.2 54.3
ACE Global Reinsurance 24.8 30.4
ACE USA 71.8 72.4
ACE International 62.4 57.8
ACE Financial Services 78.2 75.5
Consolidated 69.5% 64.8%
Underwriting and administrative expense ratio
ACE Bermuda 5.0% 12.7%
ACE Global Markets 38.6 40.7
ACE Global Reinsurance 26.7 22.4
ACE USA 27.2 27.1
ACE International 33.4 38.1
ACE Financial Services 16.8 16.7
Consolidated 26.3% 31.2%
Combined Ratio
ACE Bermuda 93.1% 84.2%
ACE Global Markets 96.8 95.0
ACE Global Reinsurance 51.5 52.8
ACE USA 99.0 99.5
ACE International 95.8 95.9
ACE Financial Services 95.0 92.2
Consolidated 95.8% 96.0%
- -------------------------------------------------------------------------------
Loss and Loss Expense Ratios
The Company establishes reserves for unpaid losses and loss expenses, which
are estimates of future payments of reported and unreported claims for
losses and related expenses, with respect to insured events that have
occurred. The process of establishing reserves for property and casualty
claims continues to be a complex and imprecise process, requiring the use
of informed estimates and judgments. The Company's estimates and judgments
may be revised as additional experience and other data becomes available
and are reviewed, as new or improved methodologies are developed or as
current laws change. Any such revisions could result in future changes in
estimates of losses or reinsurance recoverable, and would be reflected in
the Company's results of operations in the period in which the estimates
are changed.
In addition, catastrophe losses may have a significant effect on the
insurance and reinsurance industry. ACE Global Reinsurance and other
segments of the group have exposure to windstorm, hail, earthquake and
other catastrophic events, all of which are managed using measures
including underwriting controls, occurrence caps as well as modeling,
monitoring and managing its accumulations of potential losses across the
group. The Company uses its retrocessional programs to limit its net losses
from catastrophes. However, property catastrophe loss experience is
generally characterized as low frequency but high severity short-tail
claims which may result in volatility in financial results.
During the quarters ended March 31, 2001 and 2000, there were relatively
few major catastrophe losses that affected the Company. For the quarter
ended March 31, 2001, the loss and loss expense ratio increased to 69.5
percent from 64.8 percent for the quarter ended March 31, 2000, primarily
due to the impact of the financial solutions business written in the
quarter, as these contracts are generally recorded at higher loss ratios
than ACE's other lines of business.
27
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE Bermuda: The loss and loss expense ratio increased to 88.1 percent for
the quarter ended March 31, 2001 from 71.5 percent for the quarter ended
March 31, 2000. This increase is primarily the result of a change in the
mix of business with increased financial solutions business being written
during the current quarter, including an LPT contract of approximately $140
million.
ACE Global Markets: The loss and loss expense ratio increased to 58.2
percent for the quarter ended March 31, 2001 from 54.3 percent for the
quarter ended March 31, 2000. This increase is due to the combination of a
change in the mix of earned business across the various years of account.
ACE Global Reinsurance: The loss and loss expense ratio decreased to 24.8
percent for the quarter ended March 31, 2001 from 30.4 percent for the
quarter ended March 31, 2000. This decrease is primarily the result of
lower losses on the property catastrophe business compared with the same
quarter last year.
ACE USA: The loss and loss expense ratio decreased to 71.8 percent for the
quarter ended March 31, 2001 from 72.4 percent for the quarter ended March
31, 2000. The small decline is due to a change in the mix of business written
during the current quarter.
ACE International: The loss and loss expense ratio increased to 62.4
percent for the quarter ended March 31, 2001 from 57.8 percent for the
quarter ended March 31, 2000. This increase is partly due to a change in
the mix of business between property and casualty and accident and health,
as well as higher loss ratios in the European book of business.
ACE Financial Services: The loss and loss expense ratio increased to 78.2
percent for the quarter ended March 31, 2001 from 75.5 percent for the
quarter ended March 31, 2000. This increase is primarily the result of an
increase in reserves due to the LPT contract written during the current
quarter. Excluding the LPT contracts written in both the March 2001 and
2000 quarters, the loss and loss expense ratio remained relatively
unchanged, at approximately 30 percent.
Underwriting and Administrative Expense Ratios
Underwriting and administrative expenses are comprised of the amortization
of deferred policy acquisition costs, which include commissions, premium
taxes, underwriting and other costs that vary with and are primarily
related to the production of premium, and administrative expenses which
include all other operating costs. The underwriting and administrative
expense ratio decreased to 26.3 percent for the quarter ended March 31,
2001, from 31.2 percent for the quarter ended March 31, 2000. This decrease
is primarily due to a decline in the underwriting and administrative ratio
at ACE Bermuda and ACE International.
ACE Bermuda: The underwriting and administrative expense ratio decreased
from 12.7 percent for the quarter ended March 31, 2000, to 5.0 percent for
the quarter ended March 31, 2001. This decrease is primarily due to the
large increase in net premiums earned resulting from certain financial
solutions premiums which were fully earned during the quarter.
ACE Global Markets: The underwriting and administrative expense ratio
decreased from 40.7 percent for the quarter ended March 31, 2000, to 38.6
percent for the quarter ended March 31, 2001. This decrease is primarily
due to relatively stable underwriting and administrative expenses over
higher earned premiums.
ACE Global Reinsurance: The underwriting and administrative expense ratio
increased from 22.4 percent for the quarter ended March 31, 2000, to 26.7
percent for the quarter ended March 31, 2001. This increase is primarily
the result of increased costs due to the startup operations of the U.K.
branch of ACE Tempest Re.
28
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE USA: The underwriting and administrative expense ratio was essentially
flat at 27.1 percent for the quarter ended March 31, 2000, compared with
27.2 percent for the quarter ended March 31, 2001. This is primarily due to
relatively stable underwriting and administrative expenses over comparable
earned premium.
ACE International: The underwriting and administrative expense ratio
decreased from 38.1 percent for the quarter ended March 31, 2000, to 33.4
percent for the quarter ended March 31, 2001. This decrease in expenses is
the result of various cost cutting measures taken in this segment during
2000.
ACE Financial Services: The underwriting and administrative expense ratio
remained stable at 16.7 percent for the quarter ended March 31, 2000, and
16.8 percent for the quarter ended March 31, 2001.
- --------------------------------------------------------------------------------
Net Investment Income Three Months Ended Percentage
March 31 Change from
2001 2000 Prior Year
-------------- --------- -----------
(in millions of U.S. Dollars)
ACE Bermuda $ 40 $ 36 10%
ACE Global Markets 9 8 12
ACE Global Reinsurance 16 15 6
ACE USA 90 84 8
ACE International 22 22 -
ACE Financial Services 24 22 10
Other(1) 3 (4) 18
=========== ========== ========
Total net investment income $ 204 $ 183 12%
=========== ========== ========
(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
- --------------------------------------------------------------------------------
Net investment income increased by $21 million to $204 million for the
quarter ended March 31, 2001, from $183 million for the quarter ended March
31, 2000. The primary reason for this change was an increase in the asset
base due to the reclassification of the assets of CIS on July 2, 2000 and
the proceeds from the share offering in September 2000.
ACE Bermuda: Net investment income increased to $40 million for the quarter
ended March 31, 2001, from $36 million for the quarter ended March 31,
2000. This increase is primarily the result of a larger capital base and a
change in investment strategy to a higher yield portfolio. This increase
was offset somewhat by reduced interest income due to dividends paid to ACE
during 2000.
ACE Global Markets: Net investment income increased to $9 million for the
quarter ended March 31, 2001, from $8 million for the quarter ended March
31, 2000. Increased participation in the syndicates managed by ACE resulted
in increased investment income. The increase is partially offset by the
comparative quarter which included an additional quarter of income,
amounting to approximately $2 million when the Lloyd's accounts were
changed to a current reporting basis.
ACE Global Reinsurance: Net investment income of $16 million remained
relatively unchanged compared with the same quarter last year. Additional
assets accumulated from higher business volumes was offset by dividends
paid to ACE.
29
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE USA: Net investment income increased to $90 million for the quarter
ended March 31, 2001, from $84 million for the quarter ended March 31,
2000. This increase is primarily due to the presentation of the CIS
activity in investment income in 2001. Prior to July 2, 2000, CIS was
presented as a discontinued operation. As of July 2, 2000, the CIS
operations had not been sold and its activity had to be reconsolidated into
the Company's operations.
ACE International: Net investment income remained flat at $22 million for
both the quarters ended March 31, 2001 and 2000. The replacement of
yen-based securities with higher-yielding U.S. dollar securities and the
replacement of a portion of the equity holdings with interest-yielding bonds
resulted in increased investment income, which was offset by the devaluation of
the yen.
ACE Financial Services: Net investment income increased to $24 million for
the quarter ended March 31, 2001, from $22 million for the quarter ended
March 31, 2000. This increase is primarily the result of positive operating
cash flow recorded in 2000.
- -------------------------------------------------------------------------------
Net Realized Gains (Losses) on Investments Three Months Ended
March 31
2001 2000
---- ----
(in millions of U.S. Dollars)
Fixed maturities and short-term investments $ 8 $ (38)
Equity securities 13 90
Financial futures and option contracts (29) 9
Other investments (11) -
Currency (4) (4)
FAS 133 4 -
------ -------
Total net realized gains (losses) on investments $ (19) $ 57
====== =======
- -------------------------------------------------------------------------------
The Company's investment strategy takes a long-term view and the portfolio
is actively managed to maximize total return within certain specific
guidelines, which minimize risk. The portfolio is reported at fair value.
The effect of market movements on the investment portfolio will directly
impact net realized gains (losses) on investments when securities are sold.
Changes in unrealized gains and losses, which result from the revaluation
of securities held, are reported as a separate component of accumulated
other comprehensive income.
The Company uses foreign currency forward and option contracts to minimize
the effect of fluctuating foreign currencies on the value of non-U.S.
dollar holdings currently held in the portfolio not specifically targeted
to match the currency of liabilities. The contracts used are not designated
as specific hedges and therefore, realized and unrealized gains and losses
recognized on these contracts are recorded as a component of net realized
gains (losses) in the period in which the fluctuations occur, together with
net foreign currency gains (losses) recognized when non-U.S. dollar
securities are sold.
Sales proceeds for fixed maturity securities were generally higher than
their amortized cost during the quarter. This resulted in net realized
gains of $8 million being recognized on fixed maturities and short-term
investments for the quarter ended March 31, 2001, compared with net realized
losses of $38 million for the quarter ended March 31, 2000.
30
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
The liquidation of certain equity portfolios contributed to net realized
gains from equity securities of $13 million for the quarter ended March 31,
2001 and $90 million for the quarter ended March 31, 2000.
Certain of the Company's external managers of fixed income securities use
fixed income futures contracts to manage duration exposure, losses of $7
million were recognized on these for the quarter ended March 31, 2001. Net
realized losses generated by the Company's equity index futures contracts
amounted to $22 million for the quarter ended March 31, 2001. Total net
realized losses attributable to the financial futures and option contracts
for the quarter ended March 31, 2001 amounted to $29 million, compared with
gains of $9 million for the quarter ended March 31, 2000 and were due to
declines in the equity markets during the quarter.
The Company implemented FAS 133 on January 1, 2001, which requires that all
derivatives be recognized as either assets or liabilities in the
consolidated balance sheet and be carried at fair value. The market value
adjustment for the quarter ended March 31, 2001, as a result of FAS 133,
resulted in a gain of $4 million.
- -------------------------------------------------------------------------------
Other Expenses Three Months Ended Percentage
March 31 Change
2001 2000 From Prior
---- ----- Year
-------------
(in millions of U.S. Dollars)
Amortization of Goodwill $ 20 $ 20 -
========= ======== ======
Interest expense $ 54 $ 57 (5)%
========= ======= ======
Income tax expense $ 27 $ 33 (18)%
========= ======= ======
- -------------------------------------------------------------------------------
As expected, the amortization of goodwill remained constant at $20 million
for both the quarter ended March 31, 2001 and the quarter ended March 31,
2000.
Interest expense decreased by $3 million to $54 million for the quarter
ended March 31, 2001, from $57 million for the quarter ended March 31,
2000. The decrease in the amount of commercial paper outstanding at March
31, 2001 compared with March 31, 2000, resulted in a decrease in commercial
paper interest expense of $10 million. This decrease was offset by interest
expense of $7 million per quarter on the ACE INA Capital Securities, which
were issued on March 31, 2000.
Income tax expense decreased by $6 million to $27 million for the quarter
ended March 31, 2001, from $33 million for the quarter ended March 31,
2000. During the current quarter, the Company's income before tax was lower
than last year, primarily because the Company generated net realized losses
on investments in 2001 compared with net realized gains on investments in
2000, resulting in lower income tax expense.
31
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
CONSOLIDATED FINANCIAL POSITION
At March 31, 2001, total assets were $32.9 billion compared with $31.7
billion at December 31, 2000, an increase of $1.2 billion. This increase is
due in part to an increase of $367 million on investments and cash, as
discussed below. Additionally, insurance and reinsurance balances
receivable, prepaid reinsurance premiums and reinsurance recoverable
increased by $224 million, $244 million and $388 million, respectively,
following the January renewal period.
At March 31, 2001, total investments and cash amounted to $14.1 billion,
compared with $13.8 billion at December 31, 2000. This increase is
primarily a result of positive cash flows from operations during the
current quarter due to strong premium volume and positive market movements
on the investment portfolio.
The Company maintains reserves for the estimated unpaid ultimate liability
for losses and loss expenses under the terms of its policies and
agreements. The reserve for unpaid losses and loss expenses was $17.9
billion at March 31, 2001, compared with $17.4 billion at December 31,
2000, and includes $10.6 billion of case and loss expense reserves. While
the Company believes that its reserve for unpaid losses and loss expenses
at March 31, 2001 is adequate, future developments may result in ultimate
losses and loss expenses significantly greater or less than the reserve
provided.
One of the ways the Company manages its loss exposure is through the use of
reinsurance. While reinsurance arrangements are designed to limit losses
from large exposures and to permit recovery of a portion of direct losses,
reinsurance does not relieve the Company of its liability to its insureds.
Accordingly, the Company's loss reserves represent total gross losses, and
reinsurance recoverable represents anticipated recoveries of a portion of
those losses as well as amounts recoverable from reinsurers with respect to
claims which have already been paid by the Company. The allowance for
unrecoverable reinsurance is required principally due to the failure of
reinsurers to indemnify the Company, primarily because of disputes under
reinsurance contracts and insolvencies. Reinsurance disputes continue to be
significant, particularly on larger and more complex claims, such as those
related to asbestos and environmental pollution (discussed in more detail
below) and London reinsurance market exposures. Allowances have been
established for amounts estimated to be uncollectible. The Company's
reinsurance recoverable was approximately $9.4 billion at March 31, 2001,
and $9.0 billion at December 31, 2000, net of allowances for unrecoverable
reinsurance of $722 million and $710 million, respectively.
Included in the Company's liabilities for losses and loss expenses are
liabilities for asbestos, environmental damage and latent injury
claims and expenses. These claims are principally related to claims arising
from remediation costs associated with hazardous waste sites and bodily
injury claims related to asbestos products and environmental hazards. The
Company has considered asbestos and environmental claims and claims
expenses in establishing the liability for unpaid losses and loss expenses.
The Company has developed reserving methods, which incorporate new sources
of data with historical experience to estimate the ultimate losses arising
from asbestos and environmental exposures. The reserves for asbestos and
environmental claims and claims expenses represent management's best
estimate of future loss and loss expense payments and recoveries which are
expected to develop over the next several decades. The Company continuously
monitors evolving case law and its effect on environmental damage and
latent injury claims. While reserving for these claims is inherently
uncertain, the Company believes that the reserves carried for these claims
are adequate based on known facts and current law.
At March 31, 2001 and December 31, 2000, the total of the Company's short and
long term debt, including trust preferred securities was $2.7 billion.
Fully diluted book value per share was $23.82 at March 31, 2001, compared
with $23.25 at December 31, 2000.
32
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, ACE's assets consist primarily of the stock of its
subsidiaries as well as other investments. In addition to investment
income, its cash flows currently depend primarily on dividends or other
statutorily permissible payments from its Bermuda-based operating
subsidiaries (the "Bermuda subsidiaries"). There are currently no legal
restrictions on the payment of dividends from retained earnings by the
Bermuda subsidiaries, as the minimum statutory capital and surplus
requirements are satisfied by the share capital and additional paid-in
capital of each of the Bermuda subsidiaries. However, the payment of
dividends or other statutorily permissible distributions by the Bermuda
subsidiaries is subject to the need to maintain shareholders' equity at a
level adequate to support the level of insurance and reinsurance
operations. During the quarter ended March 31, 2001, dividends of $65
million were declared by ACE Tempest Re. ACE Bermuda did not declare any
dividends during the quarter ended March 31, 2001.
The payment of any dividends from ACE Global Markets or its subsidiaries
would be subject to applicable United Kingdom insurance law including those
promulgated by the Society of Lloyd's. No dividends were received from ACE
Global Markets during the current quarter and the Company does not
anticipate receiving dividends from ACE Global Markets during the remainder
of 2001.
ACE INA has issued debt to provide partial financing for the ACE INA
Acquisition and for other operating needs. Cash flow requirements to
service this debt are expected to be met primarily by upstreaming dividend
payments from ACE INA's insurance subsidiaries. ACE INA Holdings did not
receive any dividends from its subsidiaries during the quarter ended March
31, 2001. Under various U.S. insurance laws to which ACE INA's U.S.
insurance subsidiaries are subject, ACE INA's U.S. insurance subsidiaries
may pay a dividend only from earned surplus subject to the maintenance of a
minimum capital requirement, without prior regulatory approval. ACE INA's
international subsidiaries are also subject to various insurance laws and
regulations in the countries in which they operate. These regulations
include restrictions that limit the amount of dividends that can be paid
without prior approval of the insurance regulatory authorities. No
dividends have been received by ACE Limited from ACE INA during the current
quarter and the Company does not anticipate receiving dividends from ACE
INA during the remainder of 2001.
ACE Financial Services' U.S. insurance subsidiaries are also subject to
various U.S. insurance laws under which subsidiaries may pay a dividend
only from earned surplus subject to the maintenance of a minimum capital
requirement, without prior regulatory approval. No dividends have been
received from ACE Financial Services during the current quarter and the
Company does not anticipate receiving dividends from ACE Financial Services
during the remainder of 2001.
The Company's consolidated sources of funds consist primarily of net
premiums written, investment income, and proceeds from sales and maturities
of investments. Funds are used primarily to pay claims, operating expenses
and dividends and for the purchase of investments.
The Company's insurance and reinsurance operations provide liquidity in
that premiums are normally received substantially in advance of the time
claims are paid. The Company's consolidated net cash flow from operating
activities was $388 million for the quarter ended March 31, 2001, compared
with $(84) million for the quarter ended March 31, 2000. The positive
operating cash flows were generated from very strong premium volume during
the quarter as the Company had net premiums written of $1.7 billion.
Generally cash flows are affected by claim payments which, due to the
nature of the Company's operations, may comprise large loss payments on a
limited number of claims and therefore can fluctuate significantly from
year to year. The irregular timing of these loss payments, for which the
source of cash can be from operations, available net credit facilities or
33
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
routine sales of investments, can create significant variations in cash
flows from operations between periods. Although the Company's ongoing
operations continue to generate positive cash flows from operations, the
Company's cash flows are currently impacted by a large book of loss
reserves from businesses in run-off. The run-off operations generated
negative cash flows of $261 million and $150 million for the quarters ended
March 31, 2001 and 2000, respectively, primarily due to claim payments. The
run-off book of business continues to require cash to meet its liabilities
and cash flows are very dependent on the timing of claim settlements. Net
loss and loss expense payments amounted to $945 million and $834 million
for the quarters ended March 31, 2001 and 2000, respectively.
The Board of Directors, on November 17, 2000 authorized the repurchase of
any ACE issued debt or capital securities including ACE's Ordinary Shares,
up to an aggregate total of $250 million. During the three months ended
March 31, 2001, the Company repurchased and cancelled 1,065,000 Ordinary
Shares under the program for an aggregate cost of $35.3 million. Subsequent
to March 31, 2001, the Company repurchased and cancelled an additional
450,000 shares for an aggregate cost of $14.4 million leaving approximately
$200 million of the Board authorization not utilized.
On January 12, 2001, and April 13, 2001, the Company paid dividends of 13
cents per share to shareholders of record on December 29, 2000, and March
30, 2001, respectively. On May 11, 2001, the Company declared a quarterly
dividend of 15 cents per Ordinary Share payable on July 12, 2001 to shareholders
of record on June 29, 2001. The declaration and payment of future dividends is
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.
In April 2001, the Company renewed its $800 million, 364-day revolving
credit facility. This facility together with the Company's $250 million,
five-year revolving credit facility, which was last renewed in May 2000, is
available for general corporate purposes and each of the facilities may also
be used as commercial paper back-up facilities. The five-year facility also
permits the issuance of letters of credit. Under these facilities the Company
and various subsidiaries are named borrowers and guarantors. Each facility
requires that the Company and/or certain of its subsidiaries maintain specific
covenants, including a consolidated tangible net worth covenant and a maximum
leverage covenant.
In June 1999, the Company arranged certain commercial paper programs. The
programs use revolving credit facilities as back-up facilities and provide
for up to $2.8 billion in commercial paper issuance (subject to the
availability of back-up facilities, which currently total $1.05 billion) for
ACE and for ACE INA. At March 31, 2001, short-term debt consisted of $347
million of commercial paper issued by ACE INA and $25 million in bank
borrowings by ACE Financial Services. Commercial paper rates during the quarter
ended March 31, 2001 averaged 5.75 percent.
Both internal and external forces influence the Company's financial
condition, results of operations and cash flows. Claim settlements, premium
levels and investment returns may be impacted by changing rates of
inflation and other economic conditions. In many cases, significant periods
of time, ranging up to several years or more, may lapse 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. The Company
believes that its cash balances, cash flow from operations, routine sales
of investments and the liquidity provided by its credit facilities
are adequate to meet the Company's expected cash requirements.
34
ACE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd)
CUMULATIVE EFFECT OF ADOPTING A NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value, cash flow or foreign currency
hedge. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation. Upon initial application of FAS 133, hedging
relationships must be designated anew and documented pursuant to the
provisions of this statement. The Company adopted FAS 133, as amended, as
of January 1, 2001.
The Company maintains investments in derivative instruments such as
futures, option contracts and foreign currency forward contracts of which
the primary purposes are to manage duration and foreign currency exposure,
yield enhancement or to obtain an exposure to a particular financial
market. The Company has historically recorded the changes in market value of
these instruments as realized gains (losses) in the consolidated statement of
operations and, accordingly, has estimated that FAS 133, as amended, will
not have a significant impact on the results of operations, financial
condition or liquidity in future periods as it relates to these
instruments.
Certain products (principally credit protection oriented) issued by the
Company have been determined to meet the definition of a derivative under
FAS 133. These products consist primarily of credit default swaps,
index-based instruments and certain financial guarantee coverages.
Effective January 1, 2001, the Company records these products at their fair
value.
To reflect the adoption of FAS 133 on January 1, 2001, the Company recorded
an expense related to the cumulative effect of adopting a new accounting
standard of $23 million, net of income tax of $12 million. Prospectively,
the Company expects some level of gains and losses resulting from changes
in market value of derivatives to be recorded in the statement of
operations. The level of such gains and losses will be dependent upon a
number of factors including changes in interest rates, credit spreads and
other market factors. The Company's involvement with derivative instruments
and transactions is primarily to offer protection to others or to mitigate
its own risk and is not considered speculative in nature.
35
ACE LIMITED
PART II - OTHER INFORMATION
---------------------------
ITEM 5. OTHER INFORMATION
- --------------------------
1. On February 23, 2001, the Company declared a quarterly dividend
of $0.13 per Ordinary Share payable on April 13, 2001 to
shareholders of record on March 30, 2001.
2. On May 11, 2001, the Company declared a quarterly dividend of
$0.15 per Ordinary Share payable on July 12, 2001 to shareholders
of record on June 29, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
Exhibits.
10.1 Promissory Note dated January 9, 2001 from Dominic J. Frederico *
10.2 Amended and Restated Credit Agreement dated as of April 6, 2001
among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest
Reinsurance Ltd., ACE INA Holdings, Inc. and ACE Guaranty Re
Inc., certain lenders, JP Morgan, a division of Chase Securities,
Inc., as Lead Arranger and Bookrunner, Bank of America, N.A.,
Barclays Bank PLC and Fleet National Bank, as Co-Syndication
Agents and Morgan Guaranty Company of New York, as Administrative
Agent.
10.3 ACE Limited 1998 Long-Term Incentive Plan (as amended through the
Second Amendment) *
* Management Contract or Compensation Plan
36
SIGNATURES
----------
Pursuant to the requirements 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
-------------------------------------------
May 15, 2001 /s/ Brian Duperreault
-------------------------------------------
Brian Duperreault
Chairman and Chief
Executive Officer
May 15, 2001 /s/ Robert Blee
-------------------------------------------
Robert A. Blee
Chief Accounting Officer
37
Exhibit Numbered
Number Description Page
- ------- ----------- ---------
1. Exhibits
10.1 Promissory Note dated January 9, 2001 from Dominic J. Frederico *
10.2 Amended and Restated Credit Agreement dated as of April 6, 2001
among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest
Reinsurance Ltd., ACE INA Holdings, Inc. and ACE Guaranty Re
Inc., certain lenders, JP Morgan, a division of Chase Securities,
Inc., as Lead Arranger and Bookrunner, Bank of America, N.A.,
Barclays Bank PLC and Fleet National Bank, as Co-Syndication
Agents and Morgan Guaranty Company of New York, as Administrative
Agent.
10.3 ACE Limited 1998 Long-Term Incentive Plan (as amended through the
Second Amendment) *
* Management Contract or Compensation Plan
38