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 June 30, 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 August 10, 2001 was 230,880,249.
1
ACE LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 2001 (Unaudited) and December 31, 2000 3
Consolidated Statements of Operations (Unaudited)
Three Months and Six Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Six Months Ended June 30, 2001 and 2000 5
Consolidated Statements of Comprehensive Income (Unaudited)
Six Months Ended June 30, 2001 and 2000 6
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 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 27
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 51
Item 5. Other Information 51
Item 6. Exhibits and Reports on Form 8-K 51
2
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31
2001 2000
---- ----
(unaudited)
(in thousands of U.S. dollars,
except share and per share data)
<s> <c> <c>
Assets
Investments and cash
Fixed maturities available for sale, at fair value
(amortized cost - $11,255,915 and $10,640,937) $ 11,381,882 $ 10,721,309
Equity securities, at fair value (cost - $511,593 and $495,049) 495,075 532,046
Short-term investments, at fair value
(amortized cost - $1,015,211 and $1,369,784) 1,015,211 1,369,784
Other investments, at fair value (cost - $555,376 and $518,130) 578,215 531,116
Cash 677,319 608,069
------------- --------------
Total investments and cash 14,147,702 13,762,324
Accrued investment income 192,869 183,011
Insurance and reinsurance balances receivable 2,412,871 2,095,573
Accounts and notes receivable 313,531 388,996
Reinsurance recoverable 9,404,961 8,994,940
Deferred policy acquisition costs 656,735 572,757
Prepaid reinsurance premiums 1,082,448 857,745
Goodwill 2,807,205 2,846,709
Deferred tax assets 1,126,611 1,144,261
Other assets 862,783 843,210
------------- --------------
Total assets $ 33,007,716 $ 31,689,526
============= ==============
Liabilities
Unpaid losses and loss expenses $ 17,952,252 $ 17,388,394
Unearned premiums 3,706,250 3,035,288
Premiums received in advance 64,999 63,123
Insurance and reinsurance balances payable 1,343,495 1,319,091
Contract holder deposit funds 107,670 139,056
Accounts payable, accrued expenses and other liabilities 1,256,708 1,316,449
Dividends payable 37,782 33,127
Short-term debt 403,265 364,509
Long-term debt 1,424,407 1,424,228
Trust preferred securities 875,000 875,000
------------- --------------
Total liabilities 27,171,828 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;
231,442,862 and 232,346,579 shares issued and outstanding) 9,643 9,681
Additional paid-in capital 2,628,179 2,637,085
Unearned stock grant compensation (43,442) (29,642)
Retained earnings 2,873,562 2,733,633
Accumulated other comprehensive income 56,896 69,454
------------- --------------
Total shareholders' equity 5,524,838 5,420,211
------------- --------------
Total liabilities, mezzanine equity and shareholders' equity $ 33,007,716 $ 31,689,526
============= ==============
See accompanying notes to interim consolidated financial statements
3
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 2001 and 2000
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
(in thousands of U.S. dollars, except per share data)
Revenues
Gross premiums written $ 2,402,661 $ 1,950,067 $ 4,964,299 $ 3,947,027
Reinsurance premiums ceded (932,016) (736,182) (1,758,536) (1,276,120)
------------- ------------- ------------ ------------
Net premiums written 1,470,645 1,213,885 3,205,763 2,670,907
Change in unearned premiums (85,458) (46,049) (451,460) (398,265)
------------- ------------- ------------ ------------
Net premiums earned 1,385,187 1,167,836 2,754,303 2,272,642
Net investment income 196,267 181,029 400,697 363,964
Net realized gains (losses) on investments 15,564 (30,044) (3,811) 26,696
------------- ------------- ------------ ------------
Total revenues 1,597,018 1,318,821 3,151,189 2,663,302
------------- ------------- ------------ ------------
Expenses
Losses and loss expenses 982,993 768,111 1,934,939 1,483,594
Policy acquisition costs 187,640 163,728 354,330 314,370
Administrative expenses 207,106 182,864 400,399 376,872
Amortization of goodwill 19,872 19,324 39,752 38,970
Interest expense 49,640 53,947 103,964 111,136
------------- ------------- ------------ ------------
Total expenses 1,447,251 1,187,974 2,833,384 2,324,942
------------- ------------- ------------ ------------
Income before income tax and cumulative effect
of adopting a new accounting standard 149,767 130,847 317,805 338,360
Income tax expense 18,250 16,919 45,224 49,919
------------- ------------- ------------ ------------
Income before cumulative effect of adopting a
new accounting standard 131,517 113,928 272,581 288,441
Cumulative effect of adopting a new accounting
standard (net of income tax) - - (22,670) -
------------- ------------- ------------ ------------
Net income $ 131,517 $ 113,928 $ 249,911 $ 288,441
============= ============= ============ ============
Basic earnings per share before cumulative effect
of adopting a new accounting standard $ 0.54 $ 0.50 $ 1.12 $ 1.30
============= ============= ============ ============
Basic earnings per share $ 0.54 $ 0.50 $ 1.02 $ 1.30
============= ============= ============ ============
Diluted earnings per share before cumulative effect
of adopting a new accounting standard $ 0.52 $ 0.49 $ 1.07 $ 1.28
============= ============= ============ ============
Diluted earnings per share $ 0.52 $ 0.49 $ 0.98 $ 1.28
============= ============= ============ ============
See accompanying notes to interim consolidated financial statements
4
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2001 and 2000
(Unaudited)
Six Months Ended
June 30
2001 2000
---- ----
(in thousands of U.S. dollars)
Ordinary Shares
Balance - beginning of period $ 9,681 $ 9,061
Ordinary Shares issued 7 17
Exercise of stock options 35 18
Issued under Employee Stock Purchase
Plan (ESPP) 4 1
Cancellation of Ordinary Shares (21) (28)
Repurchase of Shares (63) -
--------------- --------------
Balance - end of period 9,643 9,069
--------------- --------------
Additional paid-in capital
Balance - beginning of period 2,637,084 2,214,989
Ordinary Shares issued 2,567 6,467
Exercise of stock options 16,439 5,773
Issued under ESPP 2,806 821
Repurchase of Ordinary Shares (17,195) -
Cancellation of Ordinary Shares (13,522) (19,007)
FELINE PRIDES issuance costs - (9,878)
--------------- --------------
Balance - end of period 2,628,179 2,199,165
--------------- --------------
Unearned stock grant compensation
Balance - beginning of period (29,642) (28,908)
Stock grants awarded (18,474) (1,502)
Stock grants forfeited 133 -
Amortization 4,541 3,916
--------------- --------------
Balance - end of period (43,442) (26,494)
--------------- --------------
Retained earnings
Balance - beginning of period 2,733,633 2,321,570
Net income 249,911 288,441
Dividends declared on Ordinary Shares (64,797) (52,154)
Dividends declared on FELINE PRIDES (12,763) (5,325)
Repurchase of Ordinary Shares (32,422) -
--------------- --------------
Balance - end of period 2,873,562 2,552,532
--------------- --------------
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 (4,846) (37,246)
--------------- --------------
Balance - end of period 97,489 (120,573)
--------------- --------------
Cumulative translation adjustments
Balance - beginning of period (32,881) 17,175
Net adjustment for period, net of (7,712) (41,823)
income tax --------------- --------------
Balance - end of period (40,593) (24,648)
-------------- ---------------
Accumulated other comprehensive
income (loss) 56,896 (145,221)
--------------- --------------
Total shareholders' equity $ 5,524,838 $ 4,589,051
=============== ==============
See accompanying notes to interim consolidated financial statements
5
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the six months ended June 30, 2001 and 2000
(Unaudited)
Six Months Ended
June 30
2001 2000
---- ----
(in thousands of U.S. dollars)
Net income $ 249,911 $ 288,441
Other comprehensive income (loss)
Net unrealized appreciation/(depreciation) on investments
Unrealized appreciation/(depreciation) on investments 11,100 (14,525)
Less: reclassification adjustment for net realized gains
included in net income (9,167) (18,121)
------------- -------------
1,933 (32,646)
Cumulative translation adjustments (15,965) (58,302)
------------- -------------
Other comprehensive income (loss), before income tax (14,032) (90,948)
Income tax expense related to other
comprehensive income items 1,474 11,879
-------------- -------------
Other comprehensive income (loss) (12,558) (79,069)
-------------- -------------
Comprehensive income $ 237,353 $ 209,372
============== =============
See accompanying notes to interim consolidated financial statements
6
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2001 and 2000
(Unaudited)
Six Months Ended
June 30
2001 2000
---- ----
(in thousands of U.S. dollars)
Cash flows from operating activities
Net income $ 249,911 $ 288,441
Adjustments to reconcile net income to net cash provided by
operating activities:
Unearned premiums 686,575 593,965
Unpaid losses and loss expenses, net of reinsurance recoverable 183,575 359,886
Prepaid reinsurance premiums (224,703) (161,350)
Deferred income taxes 16,107 27,884
Net realized (gains) losses on investments 3,811 (26,696)
Amortization of premium/discounts on fixed maturities (3,534) (2,054)
Amortization of goodwill 39,752 38,970
Deferred policy acquisition costs (90,373) (70,005)
Insurance and reinsurance balances receivable (333,000) (255,843)
Premiums received in advance 1,876 2,952
Insurance and reinsurance balances payable 33,422 (485,207)
Accounts payable, accrued expenses and other liabilities (52,737) (250,754)
Net change in contract holder deposit funds (24,826) (10,356)
Cumulative effect of adopting a new accounting standard 22,670 -
Other (35,181) (253,710)
--------------- ------------
Net cash flows from (used for) operating activities $ 473,345 $ (203,877)
--------------- ------------
Cash flows from investing activities
Purchases of fixed maturities (7,689,345) (5,246,075)
Purchases of equity securities (115,970) (269,119)
Sales of fixed maturities 7,383,010 5,542,027
Sales of equity securities 113,672 563,473
Maturities of fixed maturities 24,000 38,265
Net realized gains (losses) on financial future contracts (17,695) (7,846)
Other investments (37,246) (166,350)
--------------- ----------------
Net cash from (used for) investing activities $ (339,574) $ 454,375
--------------- ----------------
Cash flows from financing activities
Dividends paid on Ordinary Shares $ (60,070) $ (47,779)
Dividends paid on FELINE PRIDES (12,835) (2,424)
Net proceeds from (repayment of) short-term debt 38,780 (722,734)
Proceeds from exercise of options for Ordinary Shares 16,474 5,791
Proceeds from shares issued under ESPP 2,810 821
Repurchase of Ordinary Shares (49,680) -
Proceeds from issuance of trust preferred securities - 300,000
Proceeds from issuance of FELINE PRIDES - 311,050
Issuance costs of FELINE PRIDES - (9,878)
--------------- ----------------
Net cash used for financing activities $ (64,521) $ (165,153)
--------------- ----------------
Net increase in cash 69,250 85,345
Cash - beginning of period 608,069 599,232
--------------- ----------------
Cash - end of period $ 677,319 $ 684,577
=============== ================
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:
- -------------------------------------------------------------------------------
Six Months Ended June 30
2001 2000
---- ----
North America 58% 54%
Europe 25 23
Australia and New Zealand 2 7
South America 5 4
Asia Pacific 9 7
Other (1) 1 5
---------- ----------
100% 100%
========== ==========
(1) includes world wide
coverages
- -------------------------------------------------------------------------------
2. Significant Accounting Policies
New accounting prouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142 primarily addresses the accounting
for goodwill and intangible assets subsequent to their acquisition. As
required, the Company will adopt FAS 142 on January 1, 2002 and will cease
amortizing goodwill at that time. All goodwill recognized in the Company's
consolidated balance sheet at January 1, 2002 should be assigned to one or
more reporting units. Goodwill in each reporting unit should be tested for
impairment by June 30, 2002. An impairment loss recognized as a result of a
transitional impairment test of goodwill should be reported as the
cumulative effect of a change in accounting principle. The Company does not
expect any impairment in goodwill to arise from testing during initial
adoption.
8
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
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, is not expected to 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 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
$15 million to reflect the change in the fair value of derivatives for the
six months ended June 30, 2001. 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.
9
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
4. Restricted Stock Awards
Under the Company's long-term incentive plans, 484,300 restricted Ordinary
Shares were awarded during the six months ended June 30, 2001, to officers
of the Company and its subsidiaries. These shares vest at various dates
through February 2005. In addition, during the period, 12,896 restricted
Ordinary Shares were awarded to outside directors under the terms of the
1995 Outside Directors Plan. These shares vest in May 2002.
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.
10
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 Six Months Ended
June 30 June 30
2001 2000 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 $ 131,517 $ 113,928 $ 272,581 $ 288,441
Dividends on FELINE PRIDES (6,415) (5,325) (12,763) (5,325)
--------------- ---------------- ---------------- --------------
Net income available to the holders of Ordinary
Shares before cumulative effect 125,102 108,603 259,818 283,116
Cumulative effect of adopting a new accounting
standard - - (22,670) -
--------------- ---------------- ---------------- --------------
Net income available to the holders of Ordinary
Shares $ 125,102 $ 108,603 $ 237,148 $ 283,116
=============== ================ ================ ==============
Denominator
Denominator for basic earnings per share:
Weighted average shares outstanding 231,175,889 217,257,524 231,790,182 217,058,392
Dilutive effect of FELINE PRIDES 3,256,112 - 3,326,176 -
Effect of other dilutive securities 6,695,811 4,688,677 6,785,925 3,266,194
--------------- ---------------- ---------------- --------------
Denominator for diluted earnings per share:
Adjusted weighted average shares outstanding
and assumed conversions 241,127,812 221,946,201 241,902,283 220,324,586
=============== ================ ================ ==============
Basic earnings per share:
Earnings per share before cumulative effect of
adopting a new accounting standard $ 0.54 $ 0.50 $ 1.12 $ 1.30
=============== ================ ================ ==============
Earnings per share $ 0.54 $ 0.50 $ 1.02 $ 1.30
=============== ================ ================ ==============
Diluted earnings per share:
Earnings per share before cumulative effect of
adopting a new accounting standard $ 0.52 $ 0.49 $ 1.07 $ 1.28
=============== ================ ================ ==============
Earnings per share $ 0.52 $ 0.49 $ 0.98 $ 1.28
=============== ================ ================ ==============
- -----------------------------------------------------------------------------------------------------------------------------------
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.
11
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
June 30, 2001 and December 31, 2000.
-----------------------------------------------------------------------------
June 30, 2001 December 31, 2000
------------- -----------------
(in millions of U.S. dollars)
Short-term debt
ACE INA commercial paper $ 378 $ 340
ACE Financial Services Note 25 25
---------- -----------
$ 403 $ 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. Commercial paper rates averaged 4.6 percent during
the three months ended June 30, 2001 and 5.2 percent during the six months
ended June 30, 2001.
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 and six months ended June 30,
2001 and 2000 are as follows:
12
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
(in thousands of U.S. dollars)
Premiums
Premiums written
Direct $ 1,968,344 $ 1,581,089 $ 3,774,443 $ 3,049,756
Assumed 434,317 368,978 1,189,856 897,271
Ceded (932,016) (736,182) (1,758,536) (1,276,120)
---------------- --------------- --------------- ---------------
Net premiums written $ 1,470,645 $ 1,213,885 $ 3,205,763 $ 2,670,907
================ =============== =============== ===============
Premiums earned
Direct $ 1,900,568 $ 1,570,860 $ 3,378,991 $ 2,633,968
Assumed 422,007 346,896 915,695 748,819
Ceded (937,388) (749,920) (1,540,383) (1,110,145)
---------------- --------------- --------------- ---------------
Net premiums earned $ 1,385,187 $ 1,167,836 $ 2,754,303 $ 2,272,642
================ =============== =============== ===============
- -------------------------------------------------------------------------------------------------------------
The Company's provision for reinsurance recoverable at June 30, 2001 and
December 31, 2000, is as follows:
June 30 December 31
2001 2000
---- ----
(in thousands of U.S. dollars)
Reinsurance recoverable on paid losses and loss expenses $ 990,727 $ 937,496
Reinsurance recoverable on unpaid losses and loss expenses 9,137,443 8,767,111
Provision for uncollectible balances on reinsurance recoverable (723,209) (709,667)
------------ --------------
Reinsurance recoverable $ 9,404,961 $ 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.
13
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
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.
There can be no assurance that applicable laws, regulations or treaties
will remain the same. If they were to change the Company might have to
change the way it operates or become subject to taxation.
The income tax expense for the three and six months ended June 30, 2001 and
2000 is as follows:
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
(in thousands of U.S. dollars)
Current tax expense $ 6,669 $ 13,307 $ 29,117 $ 22,035
Deferred tax expense 11,581 3,612 16,107 27,884
----------- ----------- ---------- ---------
Total income tax expense $ 18,250 $ 16,919 $ 45,224 $ 49,919
=========== =========== ========== =========
- -------------------------------------------------------------------------------
The components of the net deferred tax asset as of June 30, 2001 and
December 31, 2000 are as follows:
June 30 December 31
2001 2000
---- ----
(in thousands of U.S. dollars)
Deferred tax assets
Loss reserve discount $ 485,109 $ 536,005
Foreign tax credits 152,943 137,765
Uncollectible reinsurance 28,297 28,297
Net operating loss carryforward 517,768 500,916
Other 199,373 199,689
------------ ---------
Total deferred tax assets 1,383,490 1,402,672
------------ ---------
Deferred tax liabilities
Deferred policy acquisition costs 49,417 62,080
Unrealized appreciation on investments 23,452 25,861
Other 47,535 32,064
----------- ---------
Total deferred tax liabilities 120,404 120,005
------------ ---------
Valuation allowance 136,475 138,406
------------ ----------
Net deferred tax asset $ 1,126,611 $ 1,144,261
============ =========
- -------------------------------------------------------------------------------
14
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
11. Subsidiary Issuer Information
The following tables present 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 June 30, 2001 and December 31, 2000 and
for the three and six months ended June 30, 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).
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Balance Sheet as at June 30, 2001
(in thousands of U.S. dollars)
Other ACE
ACE INA ACE Financial Limited
ACE Limited Holdings, Inc. Services, Inc. Subsidiaries
(Parent Co. (Subsidiary (Subsidiary and Consolidating ACE Limited
Guarantor) Issuer) Issuer) Eliminations(1) Adjustments(2) Consolidated
----------- ------------- ------------- --------------- -------------- ------------
Assets
Total investments and cash $ 467,428 $ 6,229,229 $ 976,334 $ 6,474,711 $ - $14,147,702
Insurance and reinsurance
balances receivable - 1,669,308 16,447 727,116 - 2,412,871
Reinsurance recoverable - 7,889,527 67,916 1,447,518 - 9,404,961
Goodwill - 2,211,778 98,826 496,601 - 2,807,205
Investments in subsidiaries 4,975,830 - 152,000 (152,000) (4,975,830) -
Due from subsidiaries and
affiliates, net 438,788 (62,259) (38,363) 100,622 (438,788) -
Other assets 27,235 3,239,335 159,500 808,907 - 4,234,977
---------------------------------------------------------------------------------------------
Total assets $5,909,281 $21,176,918 $1,432,660 $9,903,475 $(5,414,618) $33,007,716
=============================================================================================
Liabilities
Unpaid losses and loss expenses $ - $12,983,582 $ 245,192 $4,723,478 $ - $17,952,252
Unearned premiums - 1,980,430 297,259 1,428,561 - 3,706,250
Short-term debt - 378,265 25,000 - - 403,265
Long-term debt - 1,099,445 74,962 250,000 - 1,424,407
Trust preferred securities - 800,000 75,000 - - 875,000
Other liabilities 73,393 2,404,033 92,749 240,479 - 2,810,654
---------------------------------------------------------------------------------------------
Total liabilities 73,393 19,645,755 810,162 6,642,518 - 27,171,828
---------------------------------------------------------------------------------------------
Mezzanine equity 311,050 - - - - 311,050
---------------------------------------------------------------------------------------------
Total shareholders' equity 5,524,838 1,531,163 622,498 3,260,957 (5,414,618) 5,524,838
---------------------------------------------------------------------------------------------
Total liabilities,
mezzanine equity
and shareholders' equity $5,909,281 $21,176,918 $1,432,660 $9,903,475 $(5,414,618) $33,007,716
=============================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(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 Balance Sheet as at December 31, 2000
(in thousands of U.S. dollars)
Other ACE
ACE INA ACE Financial Limited
ACE Limited Holdings, Inc. Services, Inc. Subsidiaries
(Parent Co. (Subsidiary (Subsidiary and Consolidating ACE Limited
Guarantor) Issuer) Issuer) Eliminations(1) Adjustments(2) Consolidated
----------- ------------- ------------- --------------- -------------- ------------
Assets
Total investments and cash $ 479,969 $ 6,655,182 $ 919,181 $ 5,707,992 $ - $ 13,762,324
Insurance and reinsurance
balances receivable - 1,616,027 9,832 469,714 - 2,095,573
Reinsurance recoverable - 7,603,352 76,087 1,315,501 - 8,994,940
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
Unearned premiums - 1,680,166 293,618 1,061,504 - 3,035,288
Short-term debt - 339,509 25,000 - - 364,509
Long-term debt - 1,099,417 74,942 249,869 - 1,424,228
Trust preferred securities - 800,000 75,000 - - 875,000
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 shareholders' equity $ 5,801,842 $ 21,073,583 $ 1,414,311 $ 8,694,259 $ (5,294,469) $ 31,689,526
=============================================================================================
----------------------------------------------------------------------------------------------------------------------------------
(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 June 30, 2001
(in thousands of U.S. dollars)
Other ACE
ACE INA ACE Financial Limited
ACE Limited Holdings, Inc. Services, Inc. Subsidiaries
(Parent Co. (Subsidiary (Subsidiary and Consolidating ACE Limited
Guarantor) Issuer) Issuer) Eliminations(1) Adjustments(2) Consolidated
----------- ------------- ------------- --------------- -------------- ------------
Net premiums written $ - $ 609,595 $ 28,171 $ 832,879 $ - $ 1,470,645
Net premiums earned - 619,706 19,501 745,980 - 1,385,187
Net investment income 13,741 88,208 11,485 89,716 (6,883) 196,267
Equity in earnings
of subsidiaries 134,832 - - - (134,832) -
Net realized gains (losses)
on investments - (26,800) 17,354 25,010 - 15,564
Losses and loss expenses - 445,435 2,960 534,598 - 982,993
Policy acquisition costs and
administrative expenses 17,417 185,087 9,227 183,412 (397) 394,746
Amortization of goodwill - 14,490 1,051 4,331 - 19,872
Interest expense (2,417) 44,529 3,275 5,319 (1,066) 49,640
Income tax expense 2,056 519 7,548 8,127 - 18,250
----------------------------------------------------------------------------------------------
Net income (loss) $ 131,517 $ (8,946) $ 24,279 $ 124,919 $(140,252) $ 131,517
==============================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(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 Operations
For the three months ended June 30, 2000
(in thousands of U.S. dollars)
Other ACE
ACE INA ACE Financial Limited
ACE Limited Holdings, Inc. Services, Inc. Subsidiaries
(Parent Co. (Subsidiary (Subsidiary and Consolidating ACE Limited
Guarantor) Issuer) Issuer) Eliminations(1) Adjustments(2) Consolidated
----------- ------------- ------------- --------------- -------------- ------------
Net premiums written $ - $ 606,731 $ 18,041 $ 589,113 $ - $ 1,213,885
Net premiums earned - 652,305 17,008 498,523 - 1,167,836
Net investment income 9,768 90,977 11,804 75,428 (6,948) 181,029
Equity in earnings of subsidiaries 125,104 - - - (125,104) -
Net realised gains (losses) on
investments (324) (13,057) 2,054 (18,717) - (30,044)
Losses and loss expenses - 480,356 1,785 285,970 - 768,111
Policy acquisition costs and
administrative expenses 15,395 177,088 9,916 144,590 (397) 346,592
Amortization of goodwill - 13,875 1,051 4,398 - 19,324
Interest expense 3,227 45,761 3,331 5,676 (4,048) 53,947
Income tax expense 1,998 6,939 3,840 4,142 - 16,919
---------------------------------------------------------------------------------------------
Net income $ 113,928 $ 6,206 $ 10,943 $ 110,458 $ (127,607) $ 113,928
=============================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(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 Operations
For the six months ended June 30, 2001
(in thousands of U.S. dollars)
Other ACE
ACE INA ACE Financial Limited
ACE Limited Holdings, Inc. Services, Inc. Subsidiaries
(Parent Co. (Subsidiary (Subsidiary and Consolidating ACE Limited
Guarantor) Issuer) Issuer) Eliminations(1) Adjustments(2) Consolidated
----------- ------------- ------------- --------------- -------------- ------------
Net premiums written $ - $ 1,209,775 $ 43,438 $ 1,952,550 $ - $ 3,205,763
Net premiums earned - 1,124,412 38,361 1,591,530 - 2,754,303
Net investment income 27,410 187,154 23,663 175,983 (13,513) 400,697
Equity in earnings of subsidiaries 251,560 - - - (251,560) -
Net realized gains (losses) on
investments - (29,953) 23,658 2,484 - (3,811)
Losses and loss expenses - 791,235 5,776 1,137,928 - 1,934,939
Policy acquisition costs and
administrative expenses 30,262 350,567 19,276 355,021 (397) 754,729
Amortization of goodwill - 28,980 2,102 8,670 - 39,752
Interest expense (5,248) 93,432 6,646 11,205 (2,071) 103,964
Income tax expense 4,045 14,325 14,752 12,102 - 45,224
----------------------------------------------------------------------------------------------
Income before cumulative effect of
adopting a new accounting standard 249,911 3,074 37,130 245,071 (262,605) 272,581
Cumulative effect of adopting a new
accounting standard (net of income
tax) - (50) (22,800) 180 - (22,670)
----------------------------------------------------------------------------------------------
Net income $ 249,911 $ 3,024 $ 14,330 $ 245,251 $ (262,605) $ 249,911
==============================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(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)
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Operations
For the six months ended June 30, 2000
(in thousands of U.S. dollars)
Other ACE
ACE INA ACE Financial Limited
ACE Limited Holdings, Inc. Services, Inc. Subsidiaries
(Parent Co. (Subsidiary (Subsidiary and Consolidating ACE Limited
Guarantor) Issuer) Issuer) Eliminations(1) Adjustments(2) Consolidated
----------- ------------- ------------- --------------- -------------- ------------
Net premiums written $ - $ 1,269,860 $ 38,531 $ 1,362,516 $ - $ 2,670,907
Net premiums earned - 1,254,803 35,687 982,152 - 2,272,642
Net investment income 20,689 184,922 23,484 150,323 (15,454) 363,964
Equity in earnings of subsidiaries 270,825 - - - (270,825) -
Net realized gains (losses)
on investments 43,379 15,206 (43,494) 11,605 - 26,696
Losses and loss expenses - 890,910 3,188 589,496 - 1,483,594
Policy acquisition costs and
administrative expenses 30,478 369,579 19,607 271,975 (397) 691,242
Amortization of goodwill - 28,000 2,103 8,867 - 38,970
Interest expense 11,610 89,424 6,638 10,842 (7,378) 111,136
Income tax expense 4,364 30,326 7,629 7,600 - 49,919
--------------------------------------------------------------------------------------------
Net income (loss) $ 288,441 $ 46,692 $ (23,488) $ 255,300 $ (278,504) $ 288,441
============================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
20
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
For the six months ended June 30, 2001
(in thousands of U.S. dollars)
Other ACE
ACE INA ACE Financial Limited
ACE Limited Holdings, Inc. Services, Inc. Subsidiaries
(Parent Co. (Subsidiary (Subsidiary and Consolidating ACE Limited
Guarantor) Issuer) Issuer) Eliminations(1) Adjustments(2) Consolidated
----------- ------------- ------------- --------------- -------------- ------------
Net cash flows from (used for)
operating activities $ (9,708) $ (460,163) $ 59,043 $ 884,173 $ - $ 473,345
---------------------------------------------------------------------------------------------
Cash flow from investing activities
Purchases of fixed maturities (13,988) (1,067,197) (498,929) (6,109,231) - (7,689,345)
Purchases of equity securities - (69,294) - (46,676) - (115,970)
Sales of fixed maturities - 1,528,351 466,513 5,388,146 - 7,383,010
Sales of equity securities - 76,346 37,326 - 113,672
Maturities of fixed maturities - - 4,500 19,500 - 24,000
Net realized gains (losses) on
financial future contracts - - - (17,695) - (17,695)
Other investments 833 (3,372) - (34,707) - (37,246)
---------------------------------------------------------------------------------------------
Net cash from (used for)
investing activities $ (13,155) $ 464,834 $ (27,916) $ (763,337) $ - $ (339,574)
---------------------------------------------------------------------------------------------
Cash flow from financing activities
Dividends paid on Ordinary Shares (60,070) - - - - (60,070)
Dividends paid on FELINE PRIDES (12,835) - - - - (12,835)
Repayment of bank debt, net - 38,784 - (4) - 38,780
Advances to affiliate (129,405) - - 129,405 - -
Proceeds from exercise of
options for Ordinary Shares 16,474 - - - - 16,474
Proceeds from shares issued
under ESPP 2,810 - - - - 2,810
Repurchase of Ordinary Shares (49,680) - - - - (49,680)
Dividends received from
subsidiaries 223,691 - - (223,691) - -
---------------------------------------------------------------------------------------------
Net cash from (used for) financing
activities $ (9,015) $ 38,784 $ - $ (94,290) $ - $ (64,521)
---------------------------------------------------------------------------------------------
Net increase (decrease) in cash (31,878) 43,455 31,127 26,546 - 69,250
Cash - beginning of period 46,516 253,447 26,576 281,530 - 608,069
---------------------------------------------------------------------------------------------
Cash - end of period $ 14,638 $ 296,902 $ 57,703 $ 308,076 $ - $ 677,319
=============================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
21
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
For the six months ended June 30, 2000
(in thousands of U.S. dollars)
Other ACE
ACE INA ACE Financial Limited
ACE Limited Holdings, Inc. Services, Inc. Subsidiaries
(Parent Co. (Subsidiary (Subsidiary and Consolidating ACE Limited
Guarantor) Issuer) Issuer) Eliminations(1) Adjustments(2) Consolidated
----------- ------------- ------------- --------------- -------------- ------------
Net cash flows from (used for)
operating activities $ (17,089) $ (769,539) $ 33,322 $ 549,429 $ - $ (203,877)
--------------------------------------------------------------------------------------------
Cash flow from investing activities
Purchases of fixed maturities (38,683) (1,170,984) (3,704,111) (3,704,111) - (5,246,075)
Purchases of equity securities - (160,394) - (108,725) - (269,119)
Sales of fixed maturities 271,808 1,712,367 288,523 3,269,329 - 5,542,027
Sales of equity securities - 357,969 - 205,504 - 563,473
Maturities of fixed maturities - - 2,000 36,265 - 38,265
Net realized gains (losses) on
financial futures contracts - - - (7,846) - (7,846)
Sale (acquisition) of 82,244 - 10,200 (10,200) (82,244) -
subsidiaries
Other investments (6,953) 5,872 23,500 (188,769) - (166,350)
---------------------------------------------------------------------------------------------
Net cash from (used for)
investing activities $ 308,416 $ 744,830 $ (8,074) $ (508,553) $ (82,244) $ 454,375
---------------------------------------------------------------------------------------------
Cash flow from financing activities
Dividends paid on
Ordinary Shares (47,779) - - - - (47,779)
Dividends paid on FELINE PRIDES (2,424) - - - - (2,424)
Repayment of bank debt, net (424,886) (293,610) - (4,238) - (722,734)
Proceeds from issuance of trust
preferred securities - 300,000 - - - 300,000
Proceeds from issuance of
FELINE PRIDES 311,050 - - - - 311,050
Issuance costs of FELINE PRIDES (9,878) - - - - (9,878)
Advances to (from) affiliate (140,847) - - 140,847 - -
Proceeds from exercise of
options for Ordinary Shares 5,791 - - - - 5,791
Proceeds from shares issued
under ESPP 821 - - - - 821
Capitalization of subsidiary (5,000) - 5,000 - - -
Dividends received from
subsidiaries 81,147 - - (81,147) - -
--------------------------------------------------------------------------------------------
Net cash from (used for)financing
activities $ (232,005) $ 6,390 $ 5,000 $ 55,462 $ - $ (165,153)
--------------------------------------------------------------------------------------------
Net increase (decrease) in cash 59,322 (18,319) 30,248 96,338 (82,244) 85,345
Cash - beginning of period 15,942 282,426 231 300,633 - 599,232
--------------------------------------------------------------------------------------------
Cash - end of period $ 75,264 $ 264,107 $ 30,479 $ 396,971 $ (82,244) $ 684,577
============================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
22
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 and
six months ended June 30, 2001 and 2000. For segment reporting purposes,
certain items have been presented in a different manner than in the
consolidated financial statements. For segment reporting purposes, items
considered non-recurring in nature have been aggregated and shown
separately net of related taxes, and net realized gains (losses) have been
presented net of related taxes.
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 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 $ 196,866 $ 348,937 $ 98,555 $ 1,042,002 $ 591,110 $ 125,191 $ - $ 2,402,661
Net premiums written 181,054 230,126 89,888 464,053 380,360 125,164 - 1,470,645
Net premiums earned 231,896 177,076 91,139 434,064 355,462 95,550 - 1,385,187
Losses and loss expenses 218,094 99,833 71,586 308,005 216,130 69,345 - 982,993
Policy acquisition costs 5,131 54,003 11,648 44,605 63,058 9,195 - 187,640
Administrative expenses 8,075 17,996 4,622 72,962 64,258 9,351 23,469 200,733
--------------------------------------------------------------------------------------------------------
Underwriting income 596 5,244 3,283 8,492 12,016 7,659 (23,469) 13,821
Net investment income 38,193 11,113 16,252 81,714 21,625 25,294 2,076 196,267
Amortization of goodwill (225) 919 3,502 135 - 1,051 14,490 19,872
Interest expense 29 631 - 8,067 - 3,275 37,638 49,640
Income tax expense
(benefit) 680 5,008 - 26,326 6,083 4,470 (17,423) 25,144
--------------------------------------------------------------------------------------------------------
Income (loss) excluding
net realized gains
(losses) and
non-recurring expenses 38,305 9,799 16,033 55,678 27,558 24,157 (56,098) 115,432
Non-recurring expenses
(net of income tax) - (4,461) - - - - - (4,461)
--------------------------------------------------------------------------------------------------------
Income (loss) excluding
net realized gains
(losses) 38,305 5,338 16,033 55,678 27,558 24,157 (56,098) 110,971
Net realized gains
(losses) (net of
income tax 20,766 840 1,240 (10,108) (6,604) 14,412 - 20,546
--------------------------------------------------------------------------------------------------------
Net income (loss) $ 59,071 $ 6,178 $ 17,273 $ 45,570 $ 20,954 $ 38,569 $ (56,098) $ 131,517
========================================================================================================
Total Assets $ 3,388,123 $ 2,290,257 $ 1,506,124 $16,981,293 $ 3,803,045 $ 2,323,198 $ 2,715,676 $ 33,007,716
========================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
23
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 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 $ 137,968 $ 193,389 $ 42,607 $ 948,785 $ 544,300 $ 83,018 $ - $ 1,950,067
Net premiums written 126,676 137,277 29,977 459,269 379,378 81,308 - 1,213,885
Net premiums earned 103,387 147,325 26,159 462,756 355,018 73,191 - 1,167,836
Losses and loss expenses 73,397 83,584 1,863 353,886 209,446 45,935 - 768,111
Policy acquisition costs 3,998 38,173 5,747 43,632 57,943 14,235 - 163,728
Administrative expenses 7,324 17,985 3,596 60,729 68,390 8,515 16,325 182,864
---------- ----------- ----------- ------------ ----------- ------------ ----------- ------------
Underwriting income (loss) 18,668 7,583 14,953 4,509 19,239 4,506 (16,325) 53,133
Net investment income 36,162 7,300 14,783 78,521 23,372 24,474 (3,583) 181,029
Amortization of goodwill (225) 985 3,503 135 - 1,051 13,875 19,324
Interest expense 6 978 - 8,336 - 3,331 41,296 53,947
Income tax expense (benefit) 638 2,591 (173) 23,561 8,332 2,928 (17,060) 20,817
---------- ----------- ----------- ------------ ----------- ------------ ----------- ------------
Income (loss) excluding net
realized gains (losses) 54,411 10,329 26,406 50,998 34,279 21,670 (58,019) 140,074
Net realized gain (loss)
(net of income tax) (10,922) (174) (5,825) (6,449) (3,040) 588 (324) (26,146)
---------- ----------- ----------- ------------ ----------- ------------ ----------- ------------
Net income (loss) $ 43,489 $ 10,155 $ 20,581 $ 44,549 $ 31,239 $ 22,258 $ (58,343) $ 113,928
=========== =========== =========== ============ =========== ============ =========== ============
Total Assets $2,861,857 $1,850,119 $1,498,144 $15,709,214 $ 3,574,109 $ 2,236,564 $2,474,841 $30,204,848
=========== =========== =========== ============ =========== ============ =========== ============
- ------------------------------------------------------------------------------------------------------------------------------------
(1)Includes ACE Limited, ACE INA Holdings and intercompany eliminations
24
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 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 $ 573,469 $ 651,373 $ 264,989 $ 1,985,292 $ 1,211,877 $ 277,299 $ - $4,964,299
Net premiums written 539,820 430,683 251,675 920,003 791,911 271,671 - 3,205,763
Net premiums earned 500,872 346,203 145,580 819,613 719,376 222,659 - 2,754,303
Losses and loss expenses 454,971 198,326 85,077 584,698 443,122 168,745 - 1,934,939
Policy acquisition costs 9,846 102,687 21,202 79,318 120,159 21,118 - 354,330
Administrative expenses 16,770 34,558 9,625 143,077 128,681 18,814 42,501 394,026
----------- ----------- ----------- ------------ ------------ ----------- ---------- ----------
Underwriting income 19,285 10,632 29,676 12,520 27,414 13,982 (42,501) 71,008
Net investment income 77,846 20,287 32,085 171,724 43,746 49,812 5,197 400,697
Amortization of goodwill (450) 1,845 7,005 270 - 2,102 28,980 39,752
Interest expense 29 1,425 - 17,348 - 6,646 78,516 103,964
Income tax expense
(benefit) 1,349 9,435 - 52,333 12,631 9,683 (36,707) 48,724
----------- ----------- ----------- ------------ ------------ ----------- ---------- ----------
Income (loss) excluding
net realized gains
(losses), non recurring
expenses and cumulative
effect 96,203 18,214 54,756 114,293 58,529 45,363 (108,093) 279,265
Non-recurring expenses
(net of income tax) - (4,461) - - - - - (4,461)
----------- ------------ ------------- ----------- ----------- ----------- --------- ----------
Income(loss) excluding
net realised gains
(losses) and cumulative
effect 96,203 13,753 54,756 114,293 58,529 45,363 (108,093) 274,804
Net realized gain (loss)
(net of income tax) 13,375 3,030 (18,569) (17,478) (1,237) 18,656 - (2,223)
----------- ----------- ----------- ------------ ------------ ----------- --------- ----------
Income (loss) excluding
cumulative effect of
adopting a new accounting
standard 109,578 16,783 36,187 96,815 57,292 64,019 (108,093) 272,581
Cumulative effect of
adopting a new accounting
standard (net of income
tax) - 510 470 (50) (23,600) - (22,670)
----------- ----------- ----------- ------------ ------------ ----------- --------- ----------
Net income (loss) $ 109,578 $ 17,293 $ 36,657 $ 96,765 $ 57,292 $ 40,419 $ (108,093) $ 249,911
=========== =========== =========== ============ ============ =========== ========= ===========
Total Assets $ 3,388,123 $ 2,290,257 $ 1,506,124 $ 16,981,293 $ 3,803,045 $ 2,323,198 $2,715,676 $33,007,716
=========== =========== =========== ============ ============ =========== ========= ===========
- -----------------------------------------------------------------------------------------------------------------------------------
(1)Includes ACE Limited, ACE INA Holdings and intercompany eliminations
25
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 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 $ 311,047 $ 513,307 $ 147,473 $ 1,687,680 $ 1,056,900 $ 230,620 $ - $ 3,947,027
Net premiums written 264,724 374,468 133,454 919,267 755,538 223,456 - 2,670,907
Net premiums earned 185,872 280,333 58,355 845,570 698,310 204,202 - 2,272,642
Losses and loss expenses 132,301 155,768 11,661 631,091 407,966 144,807 - 1,483,594
Policy acquisition costs 7,083 74,733 11,697 78,068 114,123 28,666 - 314,370
Administrative expenses 14,784 35,570 4,849 129,921 143,037 16,040 32,671 376,872
----------- ------------ ----------- ------------- ----------- ----------- ------------- ------------
Underwriting income (loss) 31,704 14,262 30,148 6,490 33,184 14,689 (32,671) 97,806
Net investment income 72,334 15,488 29,783 161,943 44,886 46,834 (7,304) 363,964
Amortization of goodwill (433) 2,025 7,005 270 - 2,103 28,000 38,970
Interest expense 690 2,183 - 16,605 - 6,638 85,020 111,136
Income tax expense
(benefit) 1,265 5,446 (173) 46,753 14,835 9,261 (32,835) 44,552
----------- ----------- ----------- ----------- ----------- ----------- ---------- -----------
Income (loss) excluding
net realized gains
(losses) 102,516 20,096 53,099 104,805 63,235 43,521 (120,160) 267,112
Net realized gain (loss)
(net of income tax) 24,297 (948) (7,945) (10,847) 19,287 (464) (2,051) 21,329
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 126,813 $ 19,148 $ 45,154 $ 93,958 $ 82,522 $ 43,057 $ (122,211) $288,441
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Assets $ 2,861,857 $1,850,119 $1,498,144 $15,709,214 $ 3,574,109 $ 2,236,564 $ 2,474,841 $30,204,848
=========== =========== ========== =========== =========== =========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
(1)Includes ACE Limited, ACE INA Holdings and intercompany eliminations
26
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 and six months ended June 30, 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 businesses,
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,
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd)
(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.
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.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd)
Results of Operations - Three Months Ended June 30, 2001 and 2000
Net Income
- -------------------------------------------------------------------------------
Three Months Ended
June 30
2001 2000
---- ----
(in millions of U.S.
dollars)
Income excluding net realized gains (losses)
on investments and non-recurring expenses $ 115 $ 140
Non-recurring expenses (net of income tax) (4) -
Net realized gains (losses) on investments
(net of income tax) 21 (26)
--------- ---------
Net income $ 132 $ 114
========= =========
- -------------------------------------------------------------------------------
Income excluding net realized gains (losses) on investments and
non-recurring expenses decreased by 18 percent to $115 million for the
quarter ended June 30, 2001, compared with $140 million for the the quarter
ended June 30, 2000. This decrease is primarily due to increased losses
incurred as a result of an unusual number of insured catastrophes during
the quarter, which adversely impacted the Company's earnings. The impact
from storms in the Mid-Western United States and Tropical Storm Allison
reduced net income by $55 million. In addition, the Company incurred
non-recurring expenses of $4 million (net of income tax) during the quarter
relating to a contractual obligation due to a departing employee. The
decrease in underwriting income was offset somewhat by increased investment
income and a decrease in interest expense.
Net realized gains on investments (net of income tax) were $21 million for
the quarter ended June 30, 2001 compared with net realized losses of $26
million for the quarter ended June 30, 2000. The net realized gains were
generated primarily as a result of gains realized on the equities,
financial futures and option contracts and FAS 133 fair value adjustments
on derivatives (see below).
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
As discussed later in this report, 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 measured
at fair value. The change in fair value for the quarter ended June 30,
2001, as a result of FAS 133, was a pre-tax gain of $11 million and is
reflected in net realized gains (losses) on investments.
Premiums
- -------------------------------------------------------------------------------
Three Months Ended Percentage
Change
June 30 From
2001 2000 Prior Year
---- ---- ----------
(in millions of U.S. dollars)
Gross premiums written:
ACE Bermuda $ 197 $ 138 43%
ACE Global Markets 349 193 80
ACE Global Reinsurance 99 43 131
ACE USA 1,042 949 10
ACE International 591 544 9
ACE Financial Services 125 83 51
-------- --------- -------
Consolidated $ 2,403 $ 1,950 23%
======== ========= =======
Net premiums written:
ACE Bermuda $ 181 $ 127 43%
ACE Global Markets 230 137 68
ACE Global Reinsurance 90 30 200
ACE USA 464 459 1
ACE International 380 380 -
ACE Financial Services 125 81 54
-------- --------- -------
Consolidated $ 1,470 $ 1,214 21%
======== ========= =======
Net premiums earned:
ACE Bermuda $ 232 $ 103 124%
ACE Global Markets 177 147 20
ACE Global Reinsurance 91 26 248
ACE USA 434 463 (6)
ACE International 355 355 -
ACE Financial Services 96 73 31
-------- --------- -------
Consolidated $ 1,385 $ 1,167 19%
======== ========= =======
- -------------------------------------------------------------------------------
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
Premiums: Gross premiums written for the quarter ended June 30, 2001,
increased by $453 million to $2.4 billion from $1.9 billion for the same
quarter last year. All operating segments contributed to the growth in
gross premiums written. The growth resulted from new business
opportunities, particularly in ACE Global Reinsurance and ACE Financial
Services, ACE's increased participation in the Lloyd's syndicates managed by
ACE Global Markets, as well as the global recovery of insurance pricing that
has permeated nearly every sector of the Company's business. Net premiums
written and net premiums earned increased by $256 million and $218 million
respectively, compared with the same quarter last year. As with gross
premiums written, these increases are due to the new business opportunities,
the increased participation in Lloyd's and the price increases being
experienced by all of the segments.
ACE Bermuda: Gross premiums written for the quarter ended June 30, 2001,
increased by $59 million to $197 million, compared with the same quarter
last year. This increase is primarily due to the financial solutions and
the political risk divisions which had increases in gross premiums written
of $65 million and $9 million, respectively. These increases were offset
somewhat by decreases in satellite, aviation and excess liability. Included
in gross premiums written by financial solutions for the current quarter
was a large loss portfolio transfer ("LPT") contract of $115 million, which
was fully earned in the quarter. The aviation and satellite businesses
experienced reductions in gross premiums written due to the strategic
decision to move these lines of business to their center of expertise. As
disclosed in prior filings, the ACE Bermuda aviation business was moved to
ACE Global Markets and a large part of the satellite business written by
ACE Bermuda was moved to ACE USA. As a result of this and the reduction in
satellite launches, gross premiums written were reduced by $19 million.
Excess liability and professional lines are starting to see premium rate
growth of 10 percent to 15 percent and 15 percent to 20 percent,
respectively.
Net premiums written and earned for the quarter ended June 30, 2001
increased by $54 million and $129 million, respectively, compared with the
same quarter last year. These increases are primarily due to the increase
in premiums from financial solutions as discussed above.
ACE Global Markets: Gross premiums written for the quarter ended June 30,
2001 increased by $156 million to $349 million, compared with the same
quarter last year. This increase is due to an increase in ACE's ownership
of the Lloyd's syndicate and higher premium levels for the 2000 and 2001 years
of account. For 2001, ACE's share of the capacity of syndicate 2488 is
approximately 90 percent compared with 84 percent in 2000. The higher
premium levels is largely due to the continued improvement in the London
market and resulting rate increases on key renewals. In addition, in the
March 2000 quarter, ACE Global Markets accelerated its reporting to a
current basis from a quarter in arrears. On a comparable basis, both gross
and net premiums written increased by 47 percent and 46 percent
respectively.
Net premiums written and earned for the quarter increased by $93 million
and $30 million, respectively,compared with the same quarter last year. As
with gross premiums written, these increases are primarily due to the
increase in our participation and higher premiums written by syndicate 2488
in 2001, offset somewhat by higher reinsurance costs.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE Global Reinsurance: Gross premiums written for the quarter ended June
30, 2001, increased by $56 million to $99 million, compared with the same
quarter last year. This significant increase is a reflection of the
improved pricing in the international property catastrophe marketplace,
together with the continuing development of the life and U.S. property and
casualty reinsurance businesses. Gross premiums written for property
catastrophe reinsurance for the quarter were $60 million, an increase of 32
percent over the same quarter last year. New life and U.S. property and
casualty reinsurance premiums contributed $30 million and $9 million,
respectively. A large non-recurring life reinsurance contract contributed
$20 million to the new life reinsurance premiums this quarter. Growth in
the life reinsurance business will be based on a relatively small number of
large deals; however, it is expected that the life reinsurance business
will be a significant driver of future growth for the reinsurance
operations.
Net premiums written for the quarter ended June 30, 2001, increased by $60
million to $90 million, and net premiums earned for the quarter ended June
30, 2001, increased by $65 million to $91 million, compared with the same
quarter last year. As with gross premiums written, the increases are
primarily due to the higher volume of property catastrophe business written
in 2001. In addition, the life reinsurance contracts written in the quarter
were fully earned when written.
ACE USA: Gross premiums written for the quarter ended June 30, 2001,
increased by $93 million to $1.0 billion, compared with the same quarter
last year. Most of the operating divisions within ACE USA achieved premium
growth in the quarter; however, the professional risk, U.S. international,
special risk facilities ("SRF") and Westchester Specialty were primarily
responsible for the increase. Although financial solutions had good
production in the quarter, year-over-year production declined by $98
million because of a large contract in the comparable quarter last year
which generated over $100 million in non-renewable gross premium. Market
conditions continued to be favorable in all divisions in the U.S. with
price increases in U.S. international, strong client retention and growth
in SRF and growth and price increases in Westchester Specialty's property
and inland marine segments.
ACE USA's business expansion into professional risk continued to show
strong results especially in the errors and omissions and directors' and
officers' liability segments. ACE USA's new accident and health operation
is pursuing opportunities and continues to make progress. 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.
Net premiums written for the quarter ended June 30, 2001, of $464 million
were essentially flat compared with $459 million for the quarter ended June
30, 2000, primarily due to the decline in financial solutions, discussed
above. Excluding financial solutions, ACE USA's specialty business units
experienced solid growth with net premiums written increasing by 26 percent
over the same quarter last year.
Net premiums earned decreased by $29 million to $434 million for the
current quarter, compared with the same quarter last year. Again, this was
primarily due to the decline in financial solutions business. Excluding
financial solutions, net premiums earned increased by $55 million or 15.4
percent over the same quarter last year.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE International: Gross premiums written for the quarter ended June 30,
2001, increased by $47 million to $591 million, compared with the same
quarter last year. On a constant dollar basis, gross premiums written
increased by 18 percent over the same quarter last year. This increase is
primarily due to business expansion in the European sector and the timing
of the recording of one large UK program. With the exception of Japan,
strong premium growth was realized in all of our regional businesses driven
primarily by growth in accident and health business.
For the quarter ended June 30, 2001, net premiums written and earned
remained flat at $380 million and $355 million respectively, due to the
continuing devaluation of the major currencies. On a constant dollar basis,
net premiums written increased by 10 percent compared with the same quarter
last year.
ACE Financial Services: Gross premiums written for the quarter ended June
30, 2001 increased by $42 million to $125 million, compared with the same
quarter last year. Although premium growth was strong across all product
lines, the increase in gross premiums written is mainly due to two LPT
contracts covering long-term disability risk written in the quarter and
increases in the municipal bond area as a result of strong cessions from
primary insurers. The structured finance group generated new business by
participating in various tranches of collateralized debt obligations
("CDO") sourced both domestically and internationally.
Net premiums written for the quarter ended June 30, 2001, increased by $44
million to $125 million from $81 million for the same quarter last year,
and net premiums earned increased by $23 million to $96 million. The
increases are due to the same influences described above for gross
premiums written.
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 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
June 30
2001 2000
---- ----
Loss and loss expense ratio
ACE Bermuda 94.0% 71.0%
ACE Global Markets 56.4 56.7
ACE Global Reinsurance 78.5 7.1
ACE USA 70.9 76.5
ACE International 60.8 59.0
ACE Financial Services 72.6 62.8
Consolidated 71.0% 65.8%
Underwriting and administrative expense ratio
ACE Bermuda 5.7% 11.0%
ACE Global Markets 44.2 38.1
ACE Global Reinsurance 17.9 35.7
ACE USA 27.1 22.5
ACE International 35.8 35.6
ACE Financial Services 19.4 31.0
Consolidated 28.5% 29.7%
Combined Ratio
ACE Bermuda 99.7% 82.0%
ACE Global Markets 100.6 94.8
ACE Global Reinsurance 96.4 42.8
ACE USA 98.0 99.0
ACE International 96.6 94.6
ACE Financial Services 92.0 93.8
Consolidated 99.5% 95.5%
- -------------------------------------------------------------------------------
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd)
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 or regulations 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 quarter ended June 30, 2001 there were an unusual number of
catastrophe losses that impacted the Company's results. The impact from the
storms in the Mid-Western United States and Tropical Storm Allison reduced
net income by $55 million. As a result, the loss and loss expense ratio
increased to 71.0 percent from 65.8 percent for the same quarter last year.
The loss and loss expense ratio was also influenced by the financial
solutions and life reinsurance contracts written and earned in the quarter.
The financial solutions and life reinsurance contracts are generally
recorded at loss ratios close to 100 percent, which are higher loss ratios
than ACE's other lines of business.
ACE Bermuda: The loss and loss expense ratio increased to 94.0 percent for
the quarter ended June 30, 2001, from 71.0 percent for the same quarter
last year. As a result of an inter-group reinsurance arrangement between
ACE Bermuda and ACE Global Reinsurance, ACE Bermuda incurred $18 million of
the $55 million of catastrophe losses noted above. The loss and loss
expense ratio was also impacted by the large LPT contract, which is
recorded at a loss ratio close to 100 percent. Excluding these
transactions, the loss and loss expense ratio would have been 72.4 percent.
ACE Global Markets: The loss ratio is relatively unchanged from the
comparable quarter at 56.4 percent compared with 56.7 percent for the same
quarter last year.
ACE Global Reinsurance: The loss and loss expense ratio was 78.5 percent
for the quarter ended June 30, 2001, compared with 7.1 percent for the same
quarter last year. This increase is primarily the result of the property
catastrophe losses incurred during the quarter and the high loss ratio
booked on the life reinsurance contracts. There was no significant loss
activity in the same quarter last year.
ACE USA: The loss and loss expense ratio decreased to 70.9 percent for the
quarter ended June 30, 2001 from 76.5 percent for the quarter ended June
30, 2000. This decrease is related to the mix of business written in the
current quarter compared with the prior year. A large financial solutions
contract was recorded in the quarter ended June 30, 2000 with a loss ratio
close to 100 percent. Excluding the financial solutions division, in both
the current quarter and the same quarter last year, the loss and loss
expense ratio would have been 70.4 percent and 71.6 percent, respectively.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE International: The loss and loss expense ratio for the quarter ended
June 30, 2001 increased modestly to 60.8 percent from 59.0 percent for the
same quarter last year. The increase is partly due to several
non-catastrophe related property losses in the UK in the current quarter.
In addition, the June 30, 2000 quarter was a good quarter with a loss and
loss expense ratio better than expected.
ACE Financial Services: The loss and loss expense ratio increased to 72.6
percent for the quarter ended June 30, 2001, from 62.8 percent for the
quarter ended June 30, 2000. The increase is the result of the LPT
contracts recorded in the quarter at loss ratios close to 100 percent.
Excluding LPT contracts in both the current quarter and the same quarter
last year, the loss and loss expense ratio would have been 41.5 percent
and 45.7 percent, respectively.
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 28.5 percent for the quarter ended June 30,
2001, from 29.7 percent for the quarter ended June 30, 2000. This decrease
is primarily due to a decline in the underwriting and administrative ratio
at ACE Bermuda, ACE Global Reinsurance and ACE Financial Services.
ACE Bermuda: The underwriting and administrative expense ratio decreased to
5.7 percent for the quarter ended June 30, 2001, from 11.0 percent for the
quarter ended June 30, 2000. This decrease is primarily the result of the
significant increase in net premiums earned as a result of the LPT contract
written and fully earned in the quarter without a significant increase in
expenses. The LPT contracts are generally written with no acquisition costs.
ACE Global Markets: The underwriting and administrative expense ratio
increased to 44.2 percent for the quarter ended June 30, 2001, from 38.1
percent for the quarter ended June 30, 2000. This increase is primarily due
to a higher acquisition cost ratio, which has resulted from increased
reinsurance costs. The acquisition costs are based on gross premiums
written while the acquisition cost ratio is based on net premiums earned.
In addition, the administrative expense base increased for the current
quarter due to a contractual obligation to a departing employee resulting
in a higher administrative expense ratio.
ACE Global Reinsurance: The underwriting and administrative expense ratio
decreased to 17.9 percent for the quarter ended June 30, 2001, from 35.7
percent for the quarter ended June 30, 2000. This decrease is primarily the
result of higher premiums written and earned in the current quarter
combined with lower than anticipated expenses on new business development.
ACE USA: The underwriting and administrative expense ratio increased to
27.1 percent for the current quarter, from 22.5 percent for the same
quarter last year. Since most financial solutions contracts do not incur
acquisition costs, the acquisition cost ratio will fluctuate depending on
the level of financial solutions business earned in the quarter. In
addition, as the administrative cost base is generally fixed, the
administrative expense ratio will decline as net premiums earned increase.
Excluding financial solutions in both the current quarter and the same
quarter last year, the underwriting and administrative expense ratio would
have been 28.6 percent and 29.3 percent, respectively.
ACE International: The underwriting and administrative expense ratio
remained relatively unchanged at 35.8 percent for the current quarter
compared with 35.6 percent for the same quarter last year.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE Financial Services: The underwriting and administrative expense ratio
decreased to 19.4 percent for the quarter ended June 30, 2001, from 31.0
percent for the quarter ended June 30, 2000. The decrease is due primarily
to the large LPT contracts written and earned in the quarter, which had no
acquisition costs. In addition the administrative expense base has remained
relatively constant as the earned premium base has increased, resulting in
a lower administrative expense ratio.
- -------------------------------------------------------------------------------
Net Investment Income Three Months Ended Percentage
June 30 Change from
2001 2000 Prior Year
------------ ------------ ------------
(in millions of U.S. dollars)
ACE Bermuda $ 38 $ 36 6%
ACE Global Markets 11 7 52
ACE Global Reinsurance 16 15 10
ACE USA 82 79 4
ACE International 22 23 (7)
ACE Financial Services 25 25 -
Other 2 (4) (158)
--------- -------- ------
Total net investment income $ 196 $ 181 8%
========= ======== ======
(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations
- -------------------------------------------------------------------------------
Net investment income increased by $15 million to $196 million for the
quarter ended June 30, 2001, from $181 million for the quarter ended June
30, 2000. The primary reason for this change was an increase in the asset
base due to the reclassification of the assets of Commercial Insurance
Services ("CIS") on July 2, 2000 and the proceeds from the share offering
in ACE Limited in September 2000.
ACE Bermuda: Net investment income increased by $2 million to $38 million
for the quarter ended June 30, 2001, compared with the quarter ended June
30, 2000. This increase is primarily the result of a larger asset base and
a change in investment strategy to a portfolio with a higher yield.
ACE Global Markets: Net investment income increased by $4 million to $11
million for the quarter ended June 30, 2001, compared with the quarter
ended June 30, 2000. This increase is primarily the result of ACE's
increased participation in the syndicate managed by ACE Global Markets and
a modest increase in the level of investable assets.
ACE Global Reinsurance: Net investment income for the quarter ended June
30, 2001 increased slightly to $16 million. This increase reflected an
increase in investable assets from operating cash flows, offset by
dividends paid to ACE.
ACE USA: Net investment income increased by $3 million to $82 million for
the quarter ended June 30, 2001 compared with the quarter ended June 30,
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 was reconsolidated into the
Company's operations. On a comparable basis, net investment income
decreased by approximately $10 million, primarily as a result of a decline
in yields and a lower asset base due to negative cash-flows from businesses
in run-off.
ACE International: Net investment income of $22 million remained relatively
unchanged compared with the same quarter last year. 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.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE Financial Services: Net investment income of $25 million was unchanged
compared with the same quarter last year. Although the portfolio of invested
assets has increased, investment yields declined during 2001. In addition, the
timing of large transactions impacted the investment income earned.
- -------------------------------------------------------------------------------
Net Realized Gains (Losses) on Investments Three Months Ended
June 30
2001 2000
---- ----
(in millions of U.S. dollars)
Fixed maturities and short-term investments $ (19) $ (18)
Equity securities 11 3
Financial futures and option contracts 11 (17)
Other investments 2 5
FAS 133 11 -
Currency - (3)
------- -------
Total net realized gains (losses) on investments $ 16 $ (30)
======= ========
- -------------------------------------------------------------------------------
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 lower than their
amortized cost during the quarter. This resulted in net realized losses of $19
million being recognized on fixed maturities and short-term investments for
the quarter ended June 30, 2001.
Sales proceeds for equity securities were generally higher than their cost
during the quarter. This resulted in net realized gains of $11 million being
recognized on equity investments for the quarter ended June 30, 2001, compared
with net realized gains of $3 million for the quarter ended June 30, 2000.
Certain of the Company's external managers of fixed income securities use
fixed income futures contracts to manage duration exposure; gains of $4
million were recognized on these for the quarter ended June 30, 2001. Net
realized gains generated by the Company's equity index futures contracts
amounted to $7 million for the quarter ended June 30, 2001. Total net
realized gains attributable to the financial futures and option contracts
for the quarter ended June 30, 2001, amounted to $11 million, compared with
net realized losses of $17 million for the quarter ended June 30, 2000.
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 measured at fair value. The change in fair value for the
quarter ended June 30, 2001, as a result of FAS 133, was a gain of $11 million.
- -------------------------------------------------------------------------------
Other Expenses Three Months Ended Percentage
June 30 Change
2001 2000 From Prior Year
---- ---- --------------
(in millions of U.S. dollars)
Amortization of Goodwill $ 20 $ 19 3%
========== ========== =======
Interest expense $ 50 $ 54 (8)%
========== ========== =======
Income tax expense $ 18 $ 17 8%
========== ========== =======
- -------------------------------------------------------------------------------
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
Interest expense decreased by $4 million to $50 million for the quarter
ended June 30, 2001, from $54 million for the quarter ended June 30, 2000.
The decrease results from a combination of lower commercial paper rates
coupled with a decline in the average amount of commercial paper
outstanding during the current quarter compared with the same quarter last
year and a lower interest rate on the ACE INA RHINO preferred securities
due to declining interest rates.
Income tax expense increased by $1 million to $18 million for the quarter
ended June 30, 2001, from $17 million for the quarter ended June 30, 2000.
For the current quarter, the Company's tax on operating income was $2
million higher than last year, offset by a tax benefit on net realized
losses on investments of $1 million.
Results of Operations - Six Months Ended June 30, 2001
- ---------------------------------------------------------------------------------------------
Net Income Six Months Ended
June 30
2001 2000
---- ----
(in millions of U.S. dollars)
Income excluding net realized gains (losses) on investments,
non-recurring expenses and cumulative effect $ 279 $ 267
Non-recurring expenses (net of income tax) (4) -
Net realized gains (losses) on investments (net of income tax) (2) 21
Cumulative effect of adopting a new accounting standard (net
of income tax) (23) -
-------- -------
Net income $ 250 288
======== =======
- ---------------------------------------------------------------------------------------------
Income excluding net realized gains (losses) on investments, non-recurring
expenses and the cumulative effect of adopting a new accounting standard
increased by 4.5 percent to $279 million for the six months ended June 30,
2001, compared with $267 million for the six months ended June 30, 2000.
Underwriting income for the period decreased primarily due to the unusual
number of insured catastrophes during the second quarter of 2001 that
impacted the Company's earnings. The impact from storms in the Mid-Western
United States and Tropical Storm Allison reduced net income by $55 million.
The increase in losses incurred was offset by an increase in investment
income and a decrease in interest expense for the period. The Company
incurred non-recurring expenses of $4 million (net of income tax) during
the current quarter relating to a contractual obligation due to a departing
employee.
Net realized losses on investments (net of income tax) were $2 million for
the six months ended June 30, 2001, compared with net realized gains of $21
million for the six months ended June 30, 2000. The net realized losses
were generated primarily as a result of losses realized on the financial
futures and option contracts in the first quarter of 2001.
As previously noted, the Company implemented FAS 133 on January 1, 2001.
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 fair
value adjustments on the credit default swap portfolio held by ACE
Financial Services. The change in fair value for the six months ended June
30, 2001, as a result of FAS 133, resulted in a pre-tax gain of $15 million
and is reflected in net realized gains (losses) on investments.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
- -------------------------------------------------------------------------------
Premiums Six Months Ended Percentage
Change
June 30 From
2001 2000 Prior Year
---- ---- -----------
(in millions of U.S. dollars)
Gross premiums written:
ACE Bermuda $ 574 $ 311 84%
ACE Global Markets 651 513 27
ACE Global Reinsurance 265 147 80
ACE USA 1,985 1,688 18
ACE International 1,212 1,057 15
ACE Financial Services 277 231 20
--------- -------- -------
$ 4,964 $ 3,947 26%
========= ======== =======
Net premiums written:
ACE Bermuda $ 539 $ 265 104%
ACE Global Markets 431 375 15
ACE Global Reinsurance 252 133 89
ACE USA 920 919 -
ACE International 792 756 5
ACE Financial Services 271 223 22
--------- -------- -------
$ 3,205 $ 2,671 20%
========= ======== =======
Net premiums earned:
ACE Bermuda $ 501 $ 186 169%
ACE Global Markets 346 280 23
ACE Global Reinsurance 145 58 149
ACE USA 820 846 (3)
ACE International 719 698 3
ACE Financial Services 223 204 9
--------- -------- -------
$ 2,754 $ 2,272 21%
========= ======== =======
- -------------------------------------------------------------------------------
Gross premiums written for the six months ended June 30, 2001 increased by
$1 billion to $5.0 billion, compared with the six months ended June 30,
2000. All of the operating segments experienced premium growth during the
current period. The most significant areas of growth were in ACE Global
Reinsurance, the financial solutions division at ACE Bermuda, and the
specialty business units at ACE USA. Net premiums written for the current
period increased by $534 million to $3.2 billion, from $2.7 billion for the
six months ended June 30, 2000 and net premiums earned for the current
period increased by $482 million, from $2.3 million for the six months
ended June 30, 2000. As with gross premiums written, these increases were
primarily due to new business opportunities, the several financial
solutions contracts written and fully earned in the period, and the price
increases being experienced by most of the segments. ACE's increased
participation in the Lloyd's syndicate managed by ACE Global Market also
contributed to the increase in net premiums written and earned.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE Bermuda: Gross premiums written increased by $263 million to $574
million and net premiums written increased by $274 million to $539 million
for the six months ended June 30, 2001, compared with the six months ended
June 30, 2000. These increases are primarily due to growth in the financial
solutions division, including two large LPT contracts of $255 million which
were written and fully earned in the period. The increase in the financial
solutions business was partially offset by declines in aviation and
satellite business.
Net premiums earned for the six months ended June 30, 2001 increased by
$315 million to $501 million for the same reasons discussed above.
ACE Global Markets: Gross premiums written increased by $138 million to
$651 million for the six months ended June 30, 2001, compared with the six
months ended June 30, 2000. This increase is primarily due to an increase
in ACE's participation in the Lloyd's syndicate, as previously discussed, and
higher premium levels for the 2001 year of account. In addition, in the
March 2000 quarter, ACE Global Markets accelerated its reporting to a
current basis from a quarter in arrears. On a comparable basis, both gross
and net premiums written increased by 48 percent and 32 percent,
respectively.
Net premiums written for the six months ended June 30, 2001 increased by
$56 million to $431 million compared with the six months ended June 30,
2000. This increase is primarily due to an increase in participation but
offset by higher reinsurance costs incepting at the start of the year.
Net premiums earned for the six months ended June 30, 2001 increased by $66
million to $346 million compared with the six months ended June 30, 2000.
This increase is again primarily due to an increase in ACE's participation.
ACE Global Reinsurance: Gross premiums written increased by $118 million to
$265 million and net premiums written increased by $119 million to $252
million for the six months ended June 30, 2001, compared with the six
months ended June 30, 2000. Improved pricing in the international property
catastrophe marketplace, together with the continuing development of the
life and U.S. property and casualty reinsurance business resulted in the
increase in gross and net premiums written in the current period. Gross
premiums written for property catastrophe increased by $69 million or 43
percent over the same period last year and life reinsurance premiums
contributed $30 million to gross premiums written in the period.
Net premiums earned for the current period increased by $87 million to $145
million from $58 million for the six months ended June 30, 2000. As with
gross and net premiums written, the increase is primarily due to the higher
property catastrophe volumes experienced and the new life reinsurance
contracts written in the period.
ACE USA: Gross premiums written increased by $297 million to $2 billion for
the six months ended June 30, 2001, compared with the six months ended June
30, 2000. Market conditions in the U.S. have been favorable and growth has
been achieved through a combination of strong account retention, growth in
new business and price increases in ACE USA's specialty business units.
Although most ACE USA operating divisions have increased gross premiums
written, the primary drivers of the production increase have been
professional risk, U.S. international, SRF and Westchester Specialty.
Production for financial solutions has been strong; however year-over-year
gross premiums written declined by $113 million due to two large contracts
written in the prior year, which combined, generated over $200 million in
gross premiums written. Additionally, in the current period, ACE USA did
not renew approximately $50 million in business that did not meet its
underwriting standard.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
Net premiums written increased by $1 million to $920 million for the six
months ended June 30, 2001, compared with the six months ended June 30,
2000. Excluding financial solutions, ACE USA's specialty units experienced
strong growth with net premiums written increasing by $109 million or 15
percent over the comparable period. This increase is primarily due to the
lower amount of business written and retained by financial solutions in
2001. Two large contracts recorded by financial solutions in the prior year
were not available for renewal in the current year.
Net premiums earned decreased by $26 million to $820 million for the six
months ended June 30, 2001, compared with the six months ended June 30,
2000. This was primarily due to the two large contracts written by
financial solutions in the prior year as noted above, which were fully
earned when written. Excluding the financial solutions contracts, premiums
earned increased by $98 million or 15 percent over the prior year. The
increase is reflective of the increase in ACE USA's net premiums written in
the latter half of 2000 and throughout the current period.
ACE International: Gross premiums written increased by $155 million to $1.2
billion for the six months ended June 30, 2001, compared with the six
months ended June 30, 2000. The increase is primarily due to continuing
growth across various regions including accident and health business in
Europe.
For the six months ended June 30, 2001, net premiums written increased by
$36 million to $792 million and net premiums earned increased by $21
million to $719 million, compared with the six months ended June 30, 2000.
As with gross premiums written, the increases are a result of continued
growth across various regions.
ACE Financial Services: Gross and net premiums written for the six months
ended June 30, 2001 increased by $46 million and $48 million to $277
million and $271 million, respectively, compared with the six months ended
June 30, 2000. These increases are a result of the large LPT contracts
written in 2001 as well as growth in the structured finance business,
offset by a decrease in accident and health business. New business from
participations in various tranches of CDOs sourced in both Europe and the
U.S. increased gross premiums written in the structured finance line.
Net premiums earned for the six months ended June 30, 2001 increased by $19
million to $223 million, compared with the six months ended June 30, 2000.
This increase is primarily due to the LPT contracts, offset by a decrease in
the accident and health line of business.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
Underwriting Results
- -------------------------------------------------------------------------------
Six Months Ended
June 30
2001 2000
---- ----
Loss and loss expense ratio
ACE Bermuda 90.8% 71.2%
ACE Global Markets 57.3 55.6
ACE Global Reinsurance 58.4 20.0
ACE USA 71.3 74.6
ACE International 61.6 58.4
ACE Financial Services 75.8 70.9
Consolidated 70.2% 65.3%
Underwriting and administrative
expense ratio
ACE Bermuda 5.3% 11.8%
ACE Global Markets 41.4 39.4
ACE Global Reinsurance 21.2 28.3
ACE USA 27.2 24.6
ACE International 34.6 36.8
ACE Financial Services 17.9 21.9
Consolidated 27.4% 30.4%
Combined Ratio
ACE Bermuda 96.1% 83.0%
ACE Global Markets 98.7 95.0
ACE Global Reinsurance 79.6 48.3
ACE USA 98.5 99.2
ACE International 96.2 95.2
ACE Financial Services 93.7 92.8
Consolidated 97.6% 95.7%
- -------------------------------------------------------------------------------
The Company's loss and loss expense ratio increased to 70.2 percent for the
six months ended June 30, 2001 from 65.3 percent for the same period last
year. There were an unusual number of catastrophe losses that impacted the
Company's results during the current period. The impact from the storms in
the Mid-Western United States and Tropical Storm Allison reduced net
income by $55 million. The financial solutions and life reinsurance
contracts written and earned in the quarter also influenced the loss and
loss expense ratio, as these contracts are generally recorded at loss
ratios close to 100 percent, which are higher loss ratios than ACE's other
lines of business.
ACE Bermuda: The loss and loss expense ratio increased to 90.8 percent for
the six months ended June 30, 2001, from 71.2 percent for the six months
ended June 30, 2000. This increase is primarily the result of the
catastrophe losses ceded to ACE Bermuda from ACE Global Reinsurance and the
LPT transactions, which are recorded at loss ratios close to 100 percent.
Excluding the property catastrophe losses and the LPT transactions, the loss
and loss expense ratio would have been 74.2 percent.
ACE Global Markets: The loss and loss expense ratio increased to 57.3
percent for the six months ended June 30, 2001, from 55.6 percent for the
six months ended June 30, 2000. This increase is primarily the result of
the mix of business across the years of account.
ACE Global Reinsurance: The loss and loss expense ratio increased to 58.4
percent for the six months ended June 30, 2001, from 20.0 percent for the
six months ended June 30, 2000. This increase is primarily the result of
property catastrophe losses experienced in the second quarter of 2001
compared with no significant property catastrophe loss activity in the
first six months of 2000. The ratio has also been impacted by $28 million
of losses incurred in the life reinsurance business.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE USA: The loss and loss expense ratio decreased to 71.3 percent for the
six months ended June 30, 2001, from 74.6 percent for the six months ended
June 30, 2000. This decrease is primarily related to the proportion of
financial solutions business written in the current period compared with
the prior year. Excluding financial solutions in both the current period
and the same period last year, the loss and loss expense ratio would have
been 69.9 percent and 68.5 percent, respectively.
ACE International: The loss and loss expense ratio increased to 61.6
percent for the six months ended June 30, 2001, from 58.4 percent for the
six months ended June 30, 2000. This increase is primarily the result of
additional losses in the UK property and casualty book.
ACE Financial Services: The loss and loss expense ratio increased to 75.8
percent for the six months ended June 30, 2001 from 70.9 percent for the
six months ended June 30, 2000. The increase in the loss and loss expense
ratio can be attributed to large LPT contracts, with loss ratios close to
100 percent.
Underwriting and administrative expenses
As with losses and loss expenses, total underwriting and administrative
expenses increased significantly from $691 million for the six months ended
June 2000 to $755 million for the six months ended June 2001 primarily due
to increased policy acquisition costs in ACE Global Markets and ACE Global
Reinsurance. Despite the increase in acquistion costs and higher
administrative expenses, the underwriting and administrative expense ratio
decreased from 30.4 percent to 27.4 percent primarily due to higher earned
premiums in all segments except ACE USA.
ACE Bermuda: The underwriting and administrative expense ratio decreased to
5.3 percent for the six months ended June 30, 2001, from 11.8 percent for
the six months ended June 30, 2000. Since most financial solutions
contracts do not incur acquisition costs, the acquisition cost ratio will
fluctuate depending on the level of financial solutions business earned in
the quarter. In addition, as the administrative cost base is generally
fixed, the administrative expense ratio will decline as net premiums earned
increase.
ACE Global Markets: The underwriting and administrative expense ratio
increased marginally to 41.4 percent for the six months ended June 30,
2001, from 39.4 percent for the six months ended June 30, 2000. This
increase is primarily due to a higher acquisition cost ratio, which has
resulted from the increased earned reinsurance costs lowering net earned
premiums. In addition, the administrative expense base increased for the
current period due to a contractual obligation to a departing employee.
ACE Global Reinsurance: The underwriting and administrative expense ratio
decreased to 21.2 percent for the six months ended June 30, 2001, from 28.3
percent for the six months ended June 30, 2000. This decrease is primarily
the result of higher earned premiums arising out of improved market
conditions, the life reinsurance contracts and lower than anticipated
expenses on new business development.
ACE USA: The underwriting and administrative expense ratio increased to
27.2 percent for the six months ended June 30, 2001, from 24.6 percent for
the six months ended June 30, 2000. This increase is primarily the result
of the year to date decline in the earned premium base. In the prior year,
the earned premiums associated with the two financial solutions contracts
reduced the underwriting and administrative expense ratio.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE International: The underwriting and administrative expense ratio
decreased to 34.6 percent for the six months ended June 30, 2001, from 36.8
percent for the six months ended June 30, 2000. This decease is primarily
the result of higher net premiums earned.
ACE Financial Services: The underwriting and administrative expense ratio
decreased to 17.9 percent for the six months ended June 30, 2001, from 21.9
percent for the six months ended June 30, 2000. The large LPT contracts
(discussed above) also impacted the underwriting and administrative expense
ratio. The additional net premium earned decreased the underwriting and
administrative expense ratio by 4 percentage points.
- -------------------------------------------------------------------------------
Net Investment Income Percentage
Six Months Ended Change
June 30 From Prior
2001 2000 Year
------ ------ -----------
(in millions of U.S. dollars)
ACE Bermuda $ 78 $ 72 8%
ACE Global Markets 20 15 31
ACE Global Reinsurance 32 30 8
ACE USA 172 162 6
ACE International 44 45 (3)
ACE Financial Services 50 47 6
Other (1) 5 (7) 171
-------- -------- -------
Total investment income $ 401 $ 364 10%
======== ======== =======
(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations
- -------------------------------------------------------------------------------
Net investment income increased by $37 million for the six months ended
June 30, 2001 compared with the six months ended June 30, 2000. The reasons
for the increase were an increase in the asset base due to the
reclassification of the assets of CIS on July 2, 2000, the proceeds from
the share offering in ACE Limited in September 2000 and increased premium
production in 2001.
ACE Bermuda: Net investment income increased by $6 million to $78 million
for the six months ended June 30, 2001 compared with the six months ended
June 30, 2000. This is primarily the result of a larger asset base and a
change in investment strategy to a higher yielding portfolio.
ACE Global Markets: Net investment income increased by $5 million to $20
million for the six months ended June 30, 2001 compared with the six months
ended June 30, 2000. This is primarily the result of ACE's increased
participation in the syndicate managed by ACE Global Markets and to a
lesser extent modest increases in the level of investable assets.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
ACE Global Reinsurance: Net investment income increased by $2 million to
$32 million for the six months ended June 30, 2001 compared with the six
months ended June 30, 2000. The additional assets arising from higher
production levels were offset by reductions in the invested asset base to
pay dividends to ACE.
ACE USA: Net investment income increased by $10 million to $172 million for
the six months ended June 30, 2001 compared with the six months ended
June 30, 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 was reconsolidated into the
Company's operations. On a comparable basis, net investment income
decreased by approximately $18 million, primarily as a result of a decline
in yields and a lower asset base due to negative cash-flows from businesses
in run-off.
ACE International: Net investment income of $44 million for the six months
ended June 30, 2001 was relatively unchanged, compared with the six months
ended June 30, 2000.
ACE Financial Services: Net investment income for the six months ended June
30, 2001 is $50 million, marginally higher then the net investment income
of $47 million for the same period in the prior year. Although the
portfolio of invested assets has increased, investment yields declined
during 2001.
- -------------------------------------------------------------------------------
Net Realized Gains (Losses) on Investments Six Months Ended
June 30
2001 2000
---- ----
(in millions of U.S. dollars)
Fixed maturities and
short-term investments $ (11) $ (58)
Equity securities 24 93
Financial futures
and option contracts (18) (8)
Other (10) 7
Currency (4) (7)
FAS 133 15 -
------- -------
Net realized gains (losses)
on investments $ (4) $ 27
======= =======
- -------------------------------------------------------------------------------
Sales proceeds for fixed maturity securities were generally lower than
their amortized cost during the six months ended June 30, 2001. This
resulted in net realized losses of $11 million being recognized on fixed
maturities and short-term investments compared with net realized losses of
$58 million for the six months ended June 30, 2000.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
Sales proceeds for equity securities were generally higher than their cost
during the six months ended June 30, 2001, resulting in net realized gains
of $24 million being recognized for the period compared with $93 million
for the six months ended June 30, 2000.
Certain of the Company's external managers of fixed income securities use
fixed income futures contracts to manage duration exposure, and losses of
$3 million were recognized on these for the six months ended June 30, 2001.
Net realized losses generated by the Company's equity index futures
contracts amounted to $15 million for the six months ended June 30, 2001.
Total net realized losses attributable to the financial futures and option
contracts amounted to $18 million for the six months ended June 30, 2001,
compared with net realized losses of $8 million for the six months ended
June 30, 2000.
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 measured at fair value. The change in fair
value for the six months ended June 30, 2001, as a result of FAS 133, was a
gain of $15 million.
- -------------------------------------------------------------------------------
Other Expenses Six Months Ended Percentage
June 30 Change
2001 2000 From Prior Year
---- ---- ---------------
(in millions of U.S. dollars)
Amortization of Goodwill $ 40 $ 39 3%
======== ======== =========
Interest expense $ 104 $ 111 (6)%
======== ======== =========
Income tax expense $ 45 $ 50 (10)%
======== ======== =========
- -------------------------------------------------------------------------------
Interest expense for the six months ended June 30, 2001 decreased by $7
million compared with the same period last year. The decrease is due to
lower commercial paper rates together with a decline in the average amount
of commercial paper outstanding during the period compared with the same
period last year and a lower interest rate on the ACE INA RHINO preferred
securities due to declining interest rates.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
Income tax expense decreased by $5 million to $45 million for the six
months ended June 30, 2001 compared with the same period last year. The
decrease is primarily due to net realized losses on the investment
portfolio during the current period which generated an income tax benefit
of $7 million offset by higher income taxes of $2 million on operating
income.
CONSOLIDATED FINANCIAL POSITION
At June 30, 2001, total assets were $33.0 billion compared with $31.7
billion at December 31, 2000, an increase of $1.3 billion. This increase is
due in part to an increase of $385 million on total investments and cash
and increases in insurance and reinsurance balances receivable, reinsurance
recoverables and prepaid reinsurance premiums of $317 million, $410 million
and $225 million, respectively, as a result of insurance business
transacted in the first six months of the year.
At June 30, 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 for the six months
ended June 30, 2001 due to strong premium volume.
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 June 30, 2001, compared with $17.4 billion at December 31, 2000,
and includes $10.2 billion of case and loss expense reserves. While the
Company believes that its reserve for unpaid losses and loss expenses at
June 30, 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 June 30, 2001,
and $9.0 billion at December 31, 2000, net of allowances for unrecoverable
reinsurance of $723 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.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
At June 30, 2001, the total of the Company's short and long term debt,
including trust preferred securities was unchanged from December 31, 2000
at $2.7 billion.
Fully diluted book value per share was $23.90 at June 30, 2001, compared
with $23.25 at December 31, 2000, reflecting an increase in shareholders'
equity during the period.
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 six months ended June 30, 2001, dividends of $105
million and $119 million were declared by ACE Tempest Re and ACE Bermuda,
respectively.
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 six months ended June 30, 2001, 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 received
dividends of $14 million from its subsidiaries during the six months ended
June 30, 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 six
months ended June 30, 2001, 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 six months ended June 30,
2001, 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.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
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 $473 million for the six months ended June 30, 2001,
compared with $(204) million for the six months ended June 30, 2000. The
positive operating cash flows were generated from strong premium
volume during the current year. 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 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 $413 million and $409 million
for the six months ended June 30, 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
$1.9 billion and $1.7 billion for the six months ended June 30, 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 six months ended June
30, 2001, the Company repurchased and cancelled 1,515,000 Ordinary Shares
under the program for an aggregate cost of $49.7 million. Subsequent to June
30, 2001, the Company repurchased and cancelled an additional 742,900
shares for an aggregate cost of $25 million leaving approximately $175
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 July 13, 2001, the Company paid dividends of 15
cents per share to shareholders of record on July 29, 2001. On August 10,
2001, the Company declared a quarterly dividend of 15 cents per Ordinary
Share payable on October 12, 2001 to shareholders of record on September
28, 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 June 30, 2001, short-term debt consisted of
$378 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 June 30, 2001 averaged 4.6 percent and 5.2 percent during the
six months ended June 30, 2001.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (cont'd.)
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. As required,
the Company will adopt FAS 142 on January 1, 2002 and will cease amortizing
goodwill at that time. All goodwill recognized in the Company's consolidated
balance sheet at January 1, 2002 should be assigned to one or more reporting
units. Goodwill in each reporting unit should be tested for impairment by June
30, 2002. An impairment loss recognized as a result of a transitional
impairment test of goodwill should be reported as the cumulative effect of a
change in accounting principle. The Company does not expect any impairment in
goodwill to arise from testing during initial adoption.
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, is not expected to 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. The Company has recorded in
net realized gains (losses) on investments, pretax income of $15 million to
reflect the change in the fair value of derivatives for the six months ended
June 30, 2001. 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.
50
ACE Limited
Part II - Other Information
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1) The Annual General Meeting was held on May 11, 2001.
2) The following matters were voted on at the Annual General Meeting:
a) The following directors were elected.
Term Expiring Votes in Favour Votes Withheld
Brian Duperreault 2004 190,217,538 142,209
Robert M. Hernandez 2004 190,213,911 145,836
Peter Menikoff 2004 190,213,942 145,805
Robert Ripp 2004 190,216,368 143,379
Dermot F. Smurfit 2004 190,214,555 145,192
b) An amendment to the ACE Limited 1998 Long Term Incentive Plan was
voted upon.
The holders of 118,218,978 shares voted in favour, 71,116,479
shares voted against and 1,024,290 shares abstained.
c) The appointment of PricewaterhouseCoopers LLP as independent
accountants for the Company for the year ended December 31, 2001
was ratified and approved.
The holders of 189,217,730 shares voted in favour, 1,109,145
shares voted against and 32,872 shares abstained.
ITEM 5. OTHER INFORMATION
1) On August 10, 2001, the Company declared a quarterly dividend of
$0.15 per Ordinary Share payable on October 12, 2001 to
shareholders of record on September 28, 2001.
2) On August 10, 2001, the Company announced the appointment of
John A. Krol to its Board of Directors. Mr. Krol is the former
chairman and chief executive officer of E.I. du Pont de Nemours &
Company. He worked at du Pont in Wilmington, Delaware, from
1963 to 1999, when he retired.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1) Exhibits.
10.1 The Compromise Agreement dated May 16, 2001 between ACE and
John Charman *
10.2 The ACE Limited 1995 Outside Directors Plan (as amended through the
Fourth Amendment)*
10.3 The ACE Limited 1995 Long Term Incentive Plan (as amended through the
Second Amendment)*
* Management Contract or Compensation Plan
2) There were no reports on Form 8-K filed during the quarter.
51
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
--------------------------------------------
August 14, 2001 /s/ Brian Duperreault
--------------------------------------------
Brian Duperreault
Chairman and Chief
Executive Officer
August 14, 2001 /s/ Robert A. Blee
--------------------------------------------
Robert A. Blee
Chief Accounting Officer
52
EXHIBIT INDEX
-------------
Exhibit Numbered
Number Description Page
- ------ ----------- --------
1. Exhibits
10.1 The Compromise Agreement dated May 16, 2001 between
ACE and John Charman *
10.2 The ACE Limited 1995 Outside Directors Plan (as amended
through the Fourth Amendment)*
10.3 The ACE Limited 1995 Long Term Incentive Plan (as
amended through the Second Amendment)*
* Management Contract or Compensation Plan
53