ACE Limited Selected Financial Data
For the three
For the years months ended For the years
ended December 31, December 31, ended September 30,
(in thousands of U.S. dollars, except --------------------------------- ------------ ---------------------
share, per share data, and selected data) 2001 2000 1999 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Operations data:
Net premiums earned
Property and casualty premiums $5,510,897 $4,534,763 $2,485,737 $218,007 $894,303 $805,372
Life and annuity premiums 406,280 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
5,917,177 4,534,763 2,485,737 218,007 894,303 805,372
Net investment income 785,869 770,855 493,337 85,095 324,254 253,440
Net realized gains (losses) on investments (58,359) (38,961) 37,916 130,154 188,385 127,702
Losses and loss expenses 4,552,456 2,936,065 1,639,543 111,169 516,892 486,140
Life and annuity benefits 401,229 -- -- -- -- --
Policy acquisition costs and administrative expenses 1,614,667 1,393,432 833,312 69,030 271,566 153,486
Amortization of goodwill 79,571 78,820 45,350 4,435 12,834 7,325
Interest expense 199,182 221,450 105,138 4,741 25,459 11,657
Income tax expense (benefit) (78,674) 93,908 28,684 5,342 20,040 25,181
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of adopting
a new accounting standard (123,744) 542,982 364,963 238,539 560,151 502,725
Cumulative effect of adopting a new accounting
standard (net of income tax) (22,670) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (146,414) 542,982 364,963 238,539 560,151 502,725
Dividends on FELINE PRIDES 25,594 18,391 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to holders of
Ordinary Shares $ (172,008) $ 524,591 $ 364,963 $238,539 $560,151 $502,725
====================================================================================================================================
Diluted earnings (loss) per share before cumulative
effect of adopting a new accounting standard $ (0.64) $ 2.31 $ 1.85 $ 1.21 $ 2.96 $ 2.69
====================================================================================================================================
Diluted earnings (loss) per share/(1)/ $ (0.74) $ 2.31 $ 1.85 $ 1.21 $ 2.96 $ 2.69
====================================================================================================================================
/(1)/ Diluted earnings (loss) per share is calculated by dividing net income
(loss) available to holders of Ordinary Shares by weighted average shares
outstanding - diluted.
1
For the three
months ended
For the years ended December 31, December 31, For the years ended September 30,
(in thousands of U.S. dollars, except ----------------------------------------- ------------ ---------------------------------
share, per share, and selected data) 2001 2000 1999 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet data (at end of period)
Total investments and cash $ 15,935,913 $ 13,762,324 $ 12,875,535 $ 6,214,900 $ 6,201,074 $ 4,787,916
Total assets 37,186,764 31,689,526 30,122,888 8,834,305 8,788,753 5,647,596
Net unpaid losses and loss expenses 10,339,014 9,330,950 8,908,817 2,577,805 2,678,341 2,006,873
Net future policy benefits for life
and annuity contracts 377,395 - - - - -
Mezzanine equity 311,050 311,050 - - - -
Shareholders' equity 6,106,707 5,420,211 4,450,560 3,909,577 3,714,270 2,785,155
Diluted book value per share $ 23.59 $ 23.25 $ 20.28 $ 20.19 $ 19.14 $ 15.40
Selected data
Loss and loss expense ratio/(2)/ 82.6% 64.7% 66.0% 51.0% 57.8% 60.4%
Underwriting and administrative
expense ratio/(3)/ 29.1% 30.8% 33.5% 31.7% 30.4% 19.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Combined ratio/(4)/ 111.7% 95.5% 99.5% 82.7% 88.2% 79.4%
====================================================================================================================================
Net loss reserves to capital and
surplus ratio/(5)/ 175.5% 172.2% 200.2% 65.9% 72.1% 72.1%
Weighted average shares
outstanding-diluted 233,799,588 227,418,430 197,626,354 197,349,356 189,281,175 186,809,023
Cash dividends per share $ 0.58 $ 0.50 $ 0.42 $ 0.09 $ 0.34 $ 0.27
====================================================================================================================================
/(2)/ The loss and loss expense ratio is calculated by dividing the losses and
loss expenses by property and casualty net premiums earned.
/(3)/ The underwriting and administrative expense ratio is calculated by
dividing the policy acquisition costs and administrative expenses by
property and casualty net premiums earned.
/(4)/ The combined ratio is the sum of the loss and loss expense ratio and the
underwriting and administrative expense ratio.
/(5)/ The net loss reserves to capital and surplus ratio is calculated by
dividing the net unpaid losses and loss expenses by shareholders' equity.
The above table sets forth selected consolidated financial data of the Company
as of and for the years ended December 31, 2001, 2000 and 1999, the three months
ended December 31, 1998, and for each of the years in the two-year period ended
September 30, 1998. These selected financial and other data should be read in
conjunction with the consolidated financial statements and related notes and
with "Management's Discussion and Analysis of Results of Operations and
Financial Condition," presented on pages 54 to 102 and 32 to 53 respectively, of
this annual report. On July 2, 1999, the Company changed its fiscal year end
from September 30 to December 31. This change was implemented retroactively to
December 31, 1998, so that the 1999 fiscal year is for the twelve-month period
ended December 31, 1999.
2
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Management's Discussion and Analysis of Results of Operations and Financial
Condition is a discussion of ACE's results of operations, financial condition,
liquidity and capital resources. This discussion should be read in conjunction
with our consolidated financial statements and related notes, presented on pages
52 to 100 of this annual report.
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 ACE may include forward-looking statements which reflect our 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 we file with the Securities and
Exchange Commission) include, but are not limited to: (i) the impact of the
September 11th tragedy and its aftermath on ACE's insureds and reinsureds, on
the insurance and reinsurance industry and on the economy in general, and
uncertainties relating to governmental responses to the tragedy; (ii) the
ability to collect reinsurance recoverables and any delays with respect thereto;
(iii) the occurrence of catastrophic events or other insured or reinsured events
with a frequency or severity exceeding our estimates; (iv) the uncertainties of
the loss reserving process, including the difficulties associated with assessing
environmental damage and latent injuries; (v) uncertainties relating to
government and regulatory policies such as subjecting ACE to insurance
regulation or taxation in additional jurisdictions or amending, revoking or
enacting any laws, regulations or treaties affecting our current operations and
other legal, regulatory and legislative developments; (vi) the actual amount of
new and renewal business and market acceptance of our products; (vii) risks
associated with the introduction of new products and services; (viii) the
competitive environment in which we operate, related trends and associated
pricing pressures, market perception, and developments; (ix) actions that rating
agencies may take from time to time; (x) developments in global financial
markets, which could affect our investment portfolio and financing plans; (xi)
changing rates of inflation and other economic conditions; (xii) losses due to
foreign currency exchange rate fluctuations; (xiii) loss of the services of any
of our executive officers without suitable replacements being recruited in a
reasonable timeframe; (xiv) the ability of technology to perform as anticipated;
(xv) the amount of dividends received from subsidiaries, and (xvi) management's
response to these factors. The words "believe", "anticipate", "estimate",
"project", "should", "plan", "expect", "intend", "hope", "will likely result",
or "will continue," 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. We
undertake no obligation to publicly update or review any forward-looking
statements, whether as a result of new information, future events or otherwise.
General
ACE, through its various subsidiaries, provides a broad range of insurance and
reinsurance products to insureds worldwide. We currently operate through six
business segments: ACE Bermuda, ACE Global Markets, ACE Global Reinsurance
(includes both property and casualty reinsurance business and life reinsurance
business), ACE USA, ACE International and ACE Financial Services. Our segments
are structured on a geographic basis. Following recent management changes we are
reassessing the manner in which we present our segments.
32
During 1999, we made two substantial acquisitions that were accounted for under
the purchase method of accounting, which requires that income from the acquired
company only be included in our results from the date of acquisition. These
acquisitions are described below.
On July 2, 1999, we acquired CIGNA Corporation's ("CIGNA") 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 businesses written through those companies for
$3.45 billion in cash (the "ACE INA Acquisition"). We made this acquisition
through our U.S. holding company, ACE INA Holdings, Inc. ("ACE INA"). ACE INA's
results are included in our results from July 2, 1999.
On December 30, 1999, we acquired Capital Re Corporation, which is engaged in
the financial guaranty reinsurance business. Following the acquisition, Capital
Re Corporation was renamed ACE Financial Services. Under the terms of the
acquisition agreement, we paid $110.3 million in cash and issued approximately
20.8 million ACE Ordinary Shares. ACE Financial Services' results are included
in our results from January 1, 2000.
We expect to continue evaluating potential new product lines and other
opportunities in the insurance and reinsurance markets. In addition, we evaluate
potential acquisitions of other companies and businesses and hold discussions
with potential acquisition candidates. As a general rule, we publicly announce
such acquisitions only after a definitive agreement has been reached.
Through ACE Global Markets, we provide funds at Lloyd's, primarily in the form
of letters of credit, to support underwriting capacity for Lloyd's syndicate
2488 managed by the Lloyd's managing agencies that we own. Syndicate 2488 is the
largest syndicate in Lloyd's and its 2002 capacity of (Pound)900 million
represents 7 percent of the total Lloyd's capacity for 2002. We increased our
percentage participation in syndicate 2488 from 90 percent for the 2001 year of
account to 99.6 percent for the 2002 year of account and expect to own 100
percent for the 2003 year of account. We have increased our participation in the
Lloyd's syndicates we manage each year since we started participating in the
Lloyd's market in 1996.
In January 2002, the Council of Lloyd's, the market's ruling body, put forward a
proposal for radical reforms designed to modernize the Lloyd's insurance market.
The proposal is subject to discussion with businesses and representative bodies
in Lloyd's. Following consultation in the Lloyd's market, the proposal should be
voted on later in 2002. Key reforms proposed include, replacing the existing
regulatory and market boards and committees with a single franchise board,
replacing the current three-year accounting system with more conventional GAAP
accounting, changing the way Names participate in the market, and ending
unlimited liability. While we endorse the proposed changes at Lloyd's, any
changes made to the three-year accounting model would not impact our reported
results as we currently report our Lloyd's operations using U.S. GAAP.
We write loss portfolio transfer contracts ("LPTs"), which indemnify ceding
companies for events that have occurred in prior years. These contracts, which
meet the established criteria for reinsurance accounting, are recorded in the
statement of operations when written and generally result in large one-time
written and earned premiums with comparable incurred losses. These contracts,
when written, can cause significant variances in gross premiums written, net
premiums written, net premiums earned, net incurred losses, as well as the loss
and loss expense ratio and underwriting and administrative expense ratio. At the
time an LPT is written, we make certain assumptions with respect to the ultimate
amount and timing of payments in order to establish loss and loss expense
reserves. As with most loss reserves, the actual amount and timing of payments
may result in losses and loss expenses which are significantly greater or less
than the reserves initially provided.
September 11th 2001 Tragedy
The terrorist attacks on September 11, 2001 ("the September 11th tragedy")
resulted in the largest insured loss in history and had a substantial impact on
our results. We believe that our current estimate for September 11, 2001 claims
is reasonable and accurate based on information currently available. We continue
to evaluate our total potential liability based upon individual insurance and
reinsurance policy language, legal and factual developments in underlying
matters involving its insureds, as well as legislative developments in the U.S.
involving the terrorist attack. If our current assessments of future
developments are proved wrong, the financial impact of any of them, singularly
or in the aggregate, could be material. For
33
example, business interruption insurance claims could materialize in the future
with greater frequency than we have anticipated or provided for in our
estimates, or, insureds that we expect will not be held responsible for injuries
resulting from the attack, are ultimately found to be responsible at a financial
level that impacts our insurance or reinsurance policies.
Detailed below is an analysis, by operating segment, of the impact of the
September 11th tragedy on our statement of operations recorded in the quarter
ended September 30, 2001. This analysis includes the effects of intercompany
reinsurance transactions. As noted, our net income was reduced by $559 million
on an after tax basis. In estimating the impact of the tragedy on us, premium
payments required for us to reinstate reinsurance policies with third parties
have been accrued. Premiums from insureds required to reinstate their insurance
or reinsurance coverage with us have not been accrued in the estimate. The
premiums accrued in ACE Bermuda represent additional premiums due under the
terms of certain financial solutions reinsurance programs directly impacted by
the tragedy. These amounts have not changed substantively since they were
reported in the third quarter.
- ---------------------------------------------------------------------------------------------------------
Impact of September 11, 2001 Tragedy
Year ended December 31, 2001
ACE ACE
ACE Global Global ACE ACE ACE
(in millions of U.S. dollars) Bermuda Markets Reinsurance USA International Consolidated
- ---------------------------------------------------------------------------------------------------------
Operations Data:
Gross premiums written $ 142 $ (20) $ - $ - $ - $ 122
Net premiums written 139 (66) 2 (18) (5) 52
Net premiums earned 100 (66) 3 (18) (5) 14
Losses and loss expenses 342 140 122 28 18 650
Policy acquisition costs - - 1 - - 1
- ---------------------------------------------------------------------------------------------------------
Underwriting income (242) (206) (120) (46) (23) (637)
Income tax benefit - (62) - (16) - (78)
- ---------------------------------------------------------------------------------------------------------
Net loss $(242) $(144) $(120) $(30) $(23) $(559)
=========================================================================================================
Prior to the September 11th tragedy, we were operating in an environment where
insurance and reinsurance rates were increasing. As a result of the tragedy,
changes in the insurance and reinsurance industry have accelerated. Prices are
increasing, available capacity has reduced, and coverage along with policy terms
and conditions are changing. Changes in industry conditions will be discussed
where relevant in the segment discussions.
In line with the industry, we are experiencing price increases in most lines of
business. In certain areas, at times, we are reducing the gross capacity we
offer to insureds as reinsurance prices increase and available capacity reduces.
We are also assessing the amount of gross and net capacity offered in lines of
business where price increases have not been commensurate with our assessment of
risk. However, we expect to continue to increase our net retention in other
areas. In addition, we are assessing our exposure to terrorism related risks
and, where considered necessary, have and will continue to take steps to reduce
or eliminate these risks from our insurance portfolios.
- --------------------------------------------------------------------------------
Results of Operations
Years ended December 31,
(in millions of U.S. dollars) 2001 2000 1999
- --------------------------------------------------------------------------------
Income (loss) excluding net realized
gains (losses) on investments,
non-recurring expenses and cumulative
effect of adopting new
accounting standard $ (69) $582 $330
Net realized gains (loss) on investments
(net of income tax) (50) (39) 42
Non-recurring expenses (net of income tax) (4) - (7)
- --------------------------------------------------------------------------------
Income (loss) excluding cumulative effect of adopting
a new accounting standard (123) 543 365
Cumulative effect of adopting a new
accounting standard (net of income tax) (23) - -
- --------------------------------------------------------------------------------
Net income (loss) $(146) $543 $365
================================================================================
34
In 2001, we reported a net loss excluding net realized gains (losses) on
investment, non-recurring expenses and the cumulative effect of adopting a new
accounting standard of $69 million compared with income of $582 million in
2000. Of the $651 million decrease, $559 million is a result of the September
11th tragedy and $130 million relates to additional loss charges in the fourth
quarter, primarily in our international operations discussed later. We also
incurred non-recurring expenses of $4 million (net of income tax) during the
second quarter relating to a contractual obligation due to a departing employee.
We had net realized losses on investments (net of income tax) of $50 million in
2001 primarily due to losses on financial futures and option contracts, the
write-down of certain other investments and the ongoing fair value adjustments
on derivatives. As discussed later in this report, we implemented FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") on
January 1, 2001, which required that all derivatives be measured at fair value
and recognized as either assets or liabilities in our consolidated balance
sheet. We recorded an expense in the first quarter of 2001 relating to the
cumulative effect of adopting this standard of $23 million, net of income tax of
$12 million. The cumulative effect of adopting this standard primarily related
to market value adjustments on the credit default swap portfolio held by ACE
Financial Services.
In 2000, income excluding net realized gains (losses) on investments and
non-recurring expenses increased by 76 percent to $582 million compared with
$330 million in 1999. Approximately $100 million of the increase was caused by
the inclusion of the results of ACE INA for a full year in 2000 compared with
six months of results in 1999. ACE INA also reported better results in 2000
compared with 1999. The 2000 year also includes $82 million of income excluding
net realized gains (losses) on investments from ACE Financial Services which was
acquired on December 30, 1999. Our 2000 results also reflect the fact that
catastrophe losses in ACE Global Reinsurance were $78 million lower in 2000
compared with 1999.
- -------------------------------------------------------------------------------
Premiums
Years ended December 31,
Percentage Percentage
(in millions of U.S. dollars) 2001 Change 2000 Change 1999
- -------------------------------------------------------------------------------
Gross premiums written:
ACE Bermuda $ 1,145 92% $ 598 8% $ 553
ACE Global Markets 1,300 22 1,064 68 635
ACE Global Reinsurance 740 288 191 5 182
ACE USA 4,428 31 3,380 116 1,567
ACE International 2,260 11 2,027 117 932
ACE Financial Services 292 (11) 327 - -
- -------------------------------------------------------------------------------
Consolidated $10,165 34% $7,587 96% $3,869
===============================================================================
Net premiums written:
ACE Bermuda $ 1,061 107% $ 512 19% $ 429
ACE Global Markets 766 (1) 772 76 439
ACE Global Reinsurance 694 341 157 8 145
ACE USA 2,047 20 1,708 114 797
ACE International 1,512 7 1,419 107 685
ACE Financial Services 284 (9) 311 - -
- -------------------------------------------------------------------------------
Consolidated $ 6,364 30% $4,879 96% $2,495
===============================================================================
Net premiums earned:
ACE Bermuda $ 945 94% $ 487 (5)% $ 510
ACE Global Markets 624 1 619 70 364
ACE Global Reinsurance 662 368 141 1 140
ACE USA 1,892 17 1,619 116 749
ACE International 1,442 4 1,386 92 723
ACE Financial Services 352 25 283 - -
- -------------------------------------------------------------------------------
Consolidated $ 5,917 30% $4,535 82% $2,486
===============================================================================
Premiums: Gross premiums written increased by 34 percent to $10.2 billion in
2001. We experienced steady growth in gross premiums written during 2001 due to
new business opportunities as well as price increases on renewing business. In
addition, in 2001 financial solutions generated $582 million more gross premiums
written than in 2000 and ACE Global Re's life reinsurance business generated
$414 million in gross premiums written in its first full year of operation.
35
Net premiums written, which reflect the premiums we retain after purchasing
reinsurance protection, increased by 30 percent to $6.4 billion in 2001 due to
the increase in gross premiums written. Net premiums written did not increase at
the same rate as gross premiums written as some of our growth in premiums came
from more heavily ceded business at ACE USA and ACE Global Markets where
additional reinsurance was purchased following the September 11th tragedy. Net
premiums earned, which reflect the portion of net premiums written recorded as
revenues for the year, also increased by 30 percent in 2001 compared with 2000.
Gross premiums written in 2000 increased by 96 percent to $7.6 billion compared
with $3.9 billion in 1999. This increase resulted from several factors
including the upturn in the business cycle for the insurance and reinsurance
markets. However, the primary reasons for the increase were the inclusion of ACE
INA premiums for the full year in 2000 compared with six months in 1999, the
increase in our participation in Lloyd's and the inclusion of ACE Financial
Services in 2000.
ACE Bermuda: Gross premiums written in 2001 increased by 92 percent to $1.1
billion compared with 2000. The increase is due primarily to the financial
solutions line of business that has shown significant growth augmented by
additional premiums on policies in force arising from the September 11th
tragedy. In 2001, financial solutions wrote $868 million of premiums compared
with $286 million in 2000. Included in the financial solutions premium in 2001
is a $125 million inter-company reinsurance contract written with a wholly owned
subsidiary, ACE Capital Re. ACE Capital Re is included in the ACE Financial
Services segment.
The increase in the financial solutions business was somewhat offset by a
decrease in professional lines, aviation and satellite lines. In 2000, the
professional lines division wrote a retrospective program with premiums of $50
million that was not available for renewal this year. As disclosed in previous
filings, during fiscal 2000, ACE Bermuda moved its aviation business to ACE
Global Markets and a large part of the satellite business to ACE USA. In 2000,
these lines accounted for $60 million of gross premiums written in ACE Bermuda.
Prior to the September 11th tragedy, excess liability, excess property and
professional lines were experiencing premium growth as a result of rising
insurance prices in the industry. Since that time rates have continued to
increase in the region of 20-30 percent, 50-100 percent and 20-25 percent,
respectively. In addition, the political risk premium written through Sovereign
Risk, a 50 percent owned joint venture, increased in 2001 compared with 2000.
Net premiums written in 2001 increased by 107 percent to $1.1 billion compared
with 2000 for the same reasons outlined above for gross premiums written. Net
premiums written increased by a higher percentage than gross due to a change in
the mix of business written as financial solutions tends to reinsure less
business than the other lines in ACE Bermuda. Net premiums earned in 2001
increased by 94 percent to $945 million compared with 2000. As with gross and
net premiums written, the increase is due primarily to the increase in the
financial solutions line of business that experienced significant premium growth
during the year. This line also benefited by additional premiums earned due
under terms of certain financial solutions programs directly impacted by the
September 11th tragedy.
Gross premiums written in 2000 increased by 8 percent to $598 million compared
with $553 million in 1999, primarily due to growth in the professional lines
division. During the third quarter of 2000, the professional lines division
bound a retrospective professional lines program that resulted in $50 million of
gross, net and earned premiums in the quarter. Premium production in the other
divisions was mixed in 2000. Net premiums written increased by 19 percent to
$512 million in 2000 compared with $429 million in 1999. The increase was
primarily due to the $50 million professional lines program previously
discussed. Net premiums earned in 2000, decreased by $23 million to $487 million
compared with $510 million in 1999. The decrease is primarily due to a
significant LPT transaction in 1999 that was earned when written. The decrease
in net premiums earned was partially offset by the aforementioned $50 million
professional lines retrospective premium.
ACE Global Markets: Gross premiums written in 2001 increased by 22 percent to
$1.3 billion compared with 2000. In the March 2000 quarter, ACE Global Markets
accelerated its reporting to a current basis from a quarter in arrears. On a
comparable basis, gross premiums written increased by 37 percent. The increase
is primarily due to an increase in our participation in syndicate 2488 and
higher premium levels in most areas of our business in 2001 due to price
increases.
36
Net premiums written in 2001 decreased by 1 percent to $766 million compared
with 2000. On a comparable basis, net premiums written increased by 17 percent.
Net premiums written increased at a slower rate than gross premiums due
primarily to higher reinsurance costs compounded by reinstatement premiums
arising from the September 11th tragedy and additional premiums being paid to
extend the reinsurance program.
Net premiums earned in 2001 increased by 1 percent to $624 million compared
with 2000. On a comparable basis, net premiums earned increased by 22 percent
due to our increased participation in syndicate 2488 and the increase in
premiums in 2001.
Following the September 11th tragedy, dramatic premium increases have been seen
in the fourth quarter of 2001 particularly in the aviation and property sectors.
The reduction in available market capacity, the uncertainty surrounding
reinsurance availability going forward and the public's heightened awareness of
the need for adequate insurance cover have resulted in substantial price
increases.
Gross premiums written in 2000 increased by 68 percent to $1.1 billion compared
with $635 million in 1999. This increase was primarily due to our increased
participation in the Lloyd's syndicates in 2000 compared with 1999. In addition,
ACE Global Markets started to experience rate increases in 2000, which
contributed to the increase in premiums in 2000. Net premiums written in 2000
increased by 76 percent to $772 million compared with 1999 and net premiums
earned in 2000 increased by 70 percent to $619 million compared with 1999. These
increases were consistent with the increase in gross premiums written discussed
above.
ACE Global Reinsurance: Gross premiums written of $740 million in 2001 include
$326 million of property and casualty premiums and $414 million of life
reinsurance premiums. Gross premiums written for property and casualty business
in 2001 increased by $135 million or 71 percent to $326 million compared with
2000. The increase is attributable to new business from the U.S. property and
casualty operations and higher property catastrophe production arising from
improved reinsurance market conditions during 2001. Included in the $414 million
was one large single premium of $310 million related to a group long-term
disability program written late in the fourth quarter. Due to the nature of the
life reinsurance business we are writing and the fact that this is a start-up
operation, premium volumes will be inconsistent. However, ACE Global Reinsurance
expects life reinsurance to be a significant contributor to its growth going
forward.
Net premiums written of $694 million in 2001 include $287 million of property
and casualty premiums and $407 million of life reinsurance premiums. Net
premiums written for property and casualty in 2001 increased by $129 million to
$287 million compared with 2000. The reason for the increase is consistent with
gross premiums written. Again, the life reinsurance division accounted for most
of the increase in net premiums written as we retain most of this premium. Net
premiums earned increased by $520 million to $662 million compared with 2000.
During the fourth quarter of 2001, ACE Global Reinsurance expanded its product
offering by introducing workers' compensation and personal accident catastrophe
reinsurance in response to a market need for protection against major events.
Late in the fourth quarter, ACE Global Reinsurance also began writing
reinsurance in London. Both the U.S. and London operations of ACE Global
Reinsurance are experiencing opportunities to write business in many classes of
reinsurance, particularly in specialty areas, at terms acceptable to them.
Property catastrophe premium rates continued to increase during 2001 and into
early 2002. Rates increased an average of 23 percent for January 2002 renewals.
Gross premiums written in 2000, increased by $9 million to $191 million compared
with 1999. The increase was primarily due to increasing rates in the property
catastrophe market place and new business opportunities. As with gross premiums
written, net premiums written in 2000, increased by 8 percent to $157 million
compared with 1999. Net premiums earned were constant between 2000 and 1999,
because of ACE Tempest Re's additional purchase of retrocessional coverage in
the first half of 2000. ACE Tempest Re is included in the ACE Global Reinsurance
segment.
ACE USA: Gross premiums written in 2001 increased by 31 percent to $4.4 billion
compared with 2000. ACE USA achieved growth in most divisions in 2001 with the
risk management group, Westchester specialty, specialty property and casualty
group and financial solutions generating much of the growth. During 2001, ACE
USA experienced strong new business, related growth and higher pricing due to
favorable
37
market conditions during the year prior to the September 11th tragedy. In the
aftermath of the tragedy, with account retention remaining strong, premiums
charged to insureds have risen in virtually every business group, generally with
attachment points increasing and policy limits on the decline. The pricing
increases are most significant in the large property accounts, catastrophe
exposed property business and the excess casualty lines. During the fourth
quarter of 2001, ACE USA also experienced sizeable price increases expanding to
the professional risk (errors and omissions and directors and officers) and
commercial marine lines. The financial solutions group also experienced strong
growth during 2001 and contributed $148 million to the increase in gross
premiums written.
Net premiums written in 2001 increased by 20 percent compared with 2000. The
increase follows the growth in gross premiums written in 2001. Although there
was an increase in net premiums written during 2001 compared with 2000, most of
the gross premium growth during 2001 occurred in business segments that
traditionally purchase more reinsurance protection.
Net premiums earned in 2001 increased by 17 percent to $1.9 billion compared
with 2000. This increase is consistent with the growth in net premiums written.
Net premiums written and earned in 2001 were reduced by $18 million due to
reinstatement reinsurance premiums associated with the September 11th tragedy.
Gross premiums written in 2000 increased by 116 percent compared with 1999.
Gross premiums in 2000 include premiums from both ACE US Holdings and the U.S.
operations of ACE INA, which in 1999 are included from July 2, 1999, the date
of acquisition. On a comparable basis, including 12 months of 1999 premiums for
the U.S. operations of ACE INA, gross premiums increased by more than 30 percent
in 2000, despite a $158 million reduction in gross premiums due to curtailment
of certain unprofitable business. In the 2000 calendar year, market conditions
were favorable over 1999 with firming prices, increases in submission levels and
strong account retention providing a backdrop for the growth.
Net premiums written in 2000 were 114 percent higher than 1999. The increase
was primarily due to the inclusion of a full year of results for the ACE INA
business in 2000, which for 1999 was only included from July 2, 1999. On a
comparable basis, net premiums written increased by $346 million, due to the
more favorable market conditions driving the increase in gross premiums written,
as well as the formation of the financial solutions business group in 2000.
Net premiums earned in 2000 increased by 116 percent from 1999. The increase
was partly due to the higher level of net premiums written achieved in 2000 due
to the improvement in market conditions and growth in new business. More
significantly, the increase was attributable to the inclusion of the ACE INA
business for a full year in 2000 compared with 1999 where ACE INA business was
included from July 2, 1999.
ACE International: Gross premiums written in 2001 increased by 11 percent to
$2.3 billion compared with 2000. On a constant dollar basis, gross premiums
written increased by 21 percent. The increase in 2001 reflects growth in
underlying property and casualty lines in both indigenous and multinational
programs, and in the accident and health and consumer products business
segments. ACE Europe experienced growth primarily due to large price increases
on property renewals and Latin America experienced growth in its Mexican captive
program business. Premiums written in Japan were relatively flat on a
constant-dollar basis. Overall, growth in local currency premiums was partially
offset by the weakening of European and Japanese currencies against the U.S.
dollar during 2001. Net premiums written and net premiums earned increased by 7
percent and 4 percent respectively, primarily due to the growth in ACE Europe.
Gross premiums written in 2000 increased by 117 percent to $2 billion compared
with 1999. The increase was primarily due to the inclusion of a full year of
results for the ACE INA business in 2000, which in 1999 are only included from
July 2, 1999. Net premiums written and net premiums earned increased for the
same reasons.
ACE Financial Services: Gross premiums written in 2001 decreased by 11 percent
to $292 million compared with 2000. During the fourth quarter of 2001, ACE
Capital Re (which is included in the ACE Financial Services segment) purchased
long-term reinsurance protection from its parent, ACE Bermuda, for $125 million.
ACE Capital Re purchased the cover to enhance rating agency capital and
claims-paying resources as a result of increased demand for ACE Capital Re's
products after consultation with the major rating agencies. Adjusting for this
inter-company contract, gross premiums written in this segment would have
increased by 28 percent due primarily to growth from new business in the
structured finance, credit default swaps
38
and residual value lines of business. Net premiums written in 2001 decreased by
$27 million to $284 million, compared with 2000. The decrease is primarily due
to the retrocession contract with ACE Bermuda.
Net premiums earned in 2001 increased by 25 percent to $352 million, compared
with 2000. The growth in net premiums earned is primarily due to the increase in
premiums earned in the residual value line of business.
Gross premiums written in 2000 were $327 million. As ACE Financial Services was
acquired on December 30, 1999, the year ended December 31, 2000 is the first
year in which results from ACE Financial Services are reflected in the financial
results of ACE. During 2000, the rising interest rate environment reduced
financial guaranty reinsurance premiums. However, rising interest rates also led
to greater persistency in the mortgage guaranty business, thereby partially
offsetting the downturn in financial guaranty. In addition, ACE Financial
Services experienced strong premium volume in other business lines, particularly
in residual value and credit default swaps. Net premiums written and net
premiums earned increased for the same reasons.
Life Reinsurance Underwriting Results
In 2001, we concluded our first full year of operations for our life reinsurance
division. Our principal business in this division is to provide reinsurance
coverage to life insurance companies. We price this reinsurance using
sophisticated actuarial and investment models that incorporate a number of
factors, including assumptions for mortality, morbidity, expenses, demographics,
persistency, investment returns and inflation. We assess the performance of our
life reinsurance business based on net operating income, which is net income
excluding net realized gains and losses from the sale of investments. In 2001,
this division generated operating income of $4 million.
Property and Casualty Underwriting Results
The underwriting results of property and casualty business are discussed by
reference to the combined ratio, loss and loss expense ratio and underwriting
and administrative expense ratio. We calculate these ratios 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.
Years ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Loss and loss expense ratio
ACE Bermuda 111.7% 74.3% 76.5%
ACE Global Markets 88.2 57.2 56.6
ACE Global Reinsurance 78.1 12.7 69.2
ACE USA 75.0 73.7 71.2
ACE International 75.4 59.6 57.1
ACE Financial Services 68.3 64.8 -
- --------------------------------------------------------------------------------
Consolidated 82.6% 64.7% 66.0%
================================================================================
Underwriting and administrative expense ratio
ACE Bermuda 6.5% 10.4% 10.4%
ACE Global Markets 47.2 37.8 40.9
ACE Global Reinsurance 28.0 25.1 23.4
ACE USA 24.6 25.6 33.6
ACE International 36.9 37.6 40.9
ACE Financial Services 23.9 27.0 -
- --------------------------------------------------------------------------------
Consolidated 29.1% 30.8% 33.5%
================================================================================
Combined ratio
ACE Bermuda 118.2% 84.7% 86.9%
ACE Global Markets 135.4 95.0 97.5
ACE Global Reinsurance 106.1 37.8 92.6
ACE USA 99.6 99.3 104.8
ACE International 112.3 97.2 98.0
ACE Financial Services 92.2 91.8 -
- --------------------------------------------------------------------------------
Consolidated 111.7% 95.5% 99.5%
================================================================================
Loss and Loss Expense Ratios
We establish 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.
Our estimates and judgments may be revised as additional experience and other
data becomes available and are reviewed, as new or improved methodologies are
developed or as current laws change. Any such revisions could result in future
changes in estimates of
39
losses or reinsurance recoverables, and would be reflected in our 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 our 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 our accumulations of potential
losses across the group. We use retrocessional programs to limit our net losses
from catastrophes. However, property catastrophe loss experience is generally
characterized as low frequency but high severity short-tail claims, which may
add volatility to our financial results.
The loss and loss expense ratio increased to 82.6 percent in 2001 compared with
64.7 percent in 2000. The increase resulted from three significant events.
During the quarter ended June 30, 2001, we incurred losses of $55 million from a
series of Mid-Western United States storms that added 1 percentage point to our
loss ratio. As already noted, we incurred large losses as a result of the
September 11th tragedy that added 11.6 percentage points to our loss ratio. In
addition, in the fourth quarter, we strengthened our loss reserves in our
international casualty operations, which added 1.2 percentage points to our loss
ratio. Removing the effects of these three items would put our 2001 loss and
loss expense ratio at 68.8 percent. The loss and loss expense ratio declined to
64.7 percent in 2000 compared with 66.0 percent in 1999, as there were
relatively few major catastrophe losses during 2000.
ACE Bermuda: The loss and loss expense ratio increased to 111.7 percent in 2001
from 74.3 percent in 2000 primarily due to losses incurred in the financial
solutions and property lines of business as a result of the Mid-Western United
States storms and the September 11th tragedy. Loss and loss expenses incurred as
a result of these events amounted to $360 million. Even though the loss and loss
expense ratio was slightly offset by additional premiums due under the terms of
certain financial solutions reinsurance programs directly impacted by the
tragedy, the event had a significantly negative impact on the loss and loss
expense ratio for 2001. Adjusting for the impact of these losses, the loss ratio
would have been 82.4 percent. The remaining increase in the loss ratio from 74.3
percent to 82.4 percent results from a change in the mix of business, primarily
due to the increase in financial solutions business. The loss and loss expense
ratio decreased from 76.5 percent in 1999 to 74.3 percent in 2000. This change
was primarily the result of a change in the mix of business written.
ACE Global Markets: The loss and loss expense ratio increased to 88.2 percent in
2001 from 57.2 percent in 2000. The most significant contributing factors to the
increase were the losses arising from the September 11th tragedy as well as
reserve strengthening in one of our syndicates that is in run-off. Adjusting for
these two items, the loss ratio would have been 56.9 percent, a slight
improvement on the prior year.
The loss and loss expense ratio did not substantially change in 2000 compared
with 1999.
ACE Global Reinsurance: The loss and loss expense ratio increased to 78.1
percent in 2001 from 12.7 percent in 2000. The change in the loss ratio is
primarily the result of the $122 million loss incurred from the September 11th
tragedy in the third quarter of 2001 and catastrophe losses incurred in the
second quarter resulting from a series of Mid-Western United States storms.
There was no significant loss activity in fiscal 2000. Excluding the impact of
these two items, the loss and loss expense ratio would have been 16.1 percent.
The loss and loss expense ratio decreased from 69.2 percent in 1999 to 12.7
percent in 2000. This significant decrease was the result of the relatively
small number of catastrophes in 2000 as compared with 1999.
ACE USA: The loss and loss expense ratio increased to 75 percent in 2001 from
73.7 percent in 2000. This change is primarily the result of the September 11th
tragedy, which added net incurred losses and loss expenses of $28 million or
about 2.2 percentage points to the ratio. The curtailment of certain business
that did not meet our underwriting standards subsequent to the acquisition and
the associated run-off of earned premiums attributable to the high loss ratio
business in 2000, contributed to the improvement in 2001. The loss and loss
expense ratio increased from 71.2 percent in 1999 to 73.7 percent in 2000. The
loss and loss expense ratio of the ACE INA domestic segment is historically
higher than the loss ratio reported for ACE US Holdings business due to the type
of business mix. On a comparative
40
basis, including 12 months of 1999 operations for the ACE INA business, the loss
ratio in 2000 actually declined by more than 8 percentage points. The
curtailment of certain lines of unprofitable business, more favorable
catastrophe experience and the purchase of reinsurance on the ACE USA run-off
books of business on July 2, 1999 as part of the ACE INA Acquisition all
contributed to the improvement.
ACE International: The loss and loss expense ratio increased to 75.4 percent in
2001 from 59.6 percent in 2000. This change is primarily the result of losses
incurred in the European commercial property portfolio, the reserve
strengthening principally in the casualty operations as previously mentioned and
the effects of the September 11th tragedy. Excluding the impact of these items,
the loss and loss expense ratio would have been 62.9 percent.
The loss and loss expense ratio increased from 57.1 percent in 1999 to 59.6
percent in 2000. This change was primarily the result of additional loss
activity in 2000 in the property division.
ACE Financial Services: The loss and loss expense ratio was 68.3 percent in
2001 compared with 64.8 percent in 2000. The increase in the loss and loss
expense ratio is a result of a change in the mix of business earned in 2001
compared with 2000. ACE Financial Services was acquired on December 30, 1999;
therefore, there are no comparatives for 1999.
Underwriting and Administrative Expense Ratios
Underwriting and administrative expenses are comprised of policy acquisition
costs, which include commissions, premium taxes, underwriting and other costs
that vary with and are primarily related to the production of premiums, and
administrative expenses which include all other operating costs. The
underwriting and administrative expense ratio decreased from 30.8 percent in
2000 to 29.1 percent in 2001. The reasons for the change are relatively stable
operating costs coupled with continuing growth in the earned premium base. The
underwriting and administrative expense ratio decreased to 30.8 percent in 2000
compared with 33.5 percent in 1999 primarily due to cost reduction measures by
ACE INA.
ACE Bermuda: The underwriting and administrative expense ratio decreased to 6.5
percent in 2001 from 10.4 percent in 2000. This change is primarily the result
of a significant increase in earned premium while the expense base remained
relatively unchanged. The underwriting and administrative expense ratio remained
unchanged at 10.4 percent from 1999 to 2000.
ACE Global Markets: The underwriting and administrative expense ratio increased
to 47.2 percent in 2001 from 37.8 percent in 2000. The increase is primarily
due to a higher acquisition cost ratio as a result of the increased earned
reinsurance costs from reinstatement premiums from the September 11th tragedy
lowering net premiums earned. In addition, the administrative expense base
increased for the current year due to a non-recurring contractual obligation to
a departing employee. The underwriting and administrative expense ratio
decreased by 3.1 percentage points in 2000 compared with 1999. These changes
were primarily the result of relatively stable administrative expenses over a
higher earned premium base.
ACE Global Reinsurance: The underwriting and administrative expense ratio
increased from 25.1 percent in 2000 to 28 percent in 2001. The increase is
primarily the result of increased administrative expenses during the year due to
business expansion. The increase was partially offset by a higher net earned
premium base arising out of improved market conditions. The underwriting and
administrative expense ratio increased by 1.7 percent in 2000 over 1999
primarily due to the business expansion activities in 2000.
ACE USA: The underwriting and administrative expense ratio decreased to 24.6
percent in 2001 from 25.6 percent in 2000. The decrease is primarily the result
of the relatively stable level of operating expenses in 2001 compared with 2000,
paired with a $273 million increase in the earned premium base in 2001. The
underwriting and administrative expense ratio declined to 25.6 percent in 2000
from 33.6 percent in 1999. The decrease was primarily due to cost reduction
initiatives implemented at ACE USA subsequent to the ACE INA Acquisition. These
included staff reductions, the outsourcing of certain information technology
operations and the closure and consolidation of numerous field office locations.
ACE International: The underwriting and administrative expense ratio decreased
to 36.9 percent in 2001 from 37.6 percent in 2000. This decrease is the result
of higher net premiums earned in 2001 together with lower operating costs due to
a reduction in the number of staff.
41
The underwriting and administrative expense ratio decreased by 3.3 percentage
points in 2000 over 1999. This change was primarily due to savings achieved as a
result of restructuring and other spending reduction initiatives.
ACE Financial Services: The underwriting and administrative expense ratio
decreased from 27 percent in 2000 to 23.9 percent in 2001. The reduction in the
expense ratio is the result of a larger portion of the business derived from the
structured finance and credit default swap lines, which typically have much
lower or no associated ceding commissions.
ACE Financial Services was acquired on December 30, 1999; therefore, there are
no comparative figures for 1999.
- --------------------------------------------------------------------------------
Net Investment Income
Years ended December 31,
Percentage Percentage
(in millions of U.S. dollars) 2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
ACE Bermuda $153 2% $150 (14)% $174
ACE Global Markets 36 (2) 37 29 28
ACE Global Reinsurance 74 23 60 -- 60
ACE USA 335 (2) 341 81 189
ACE International 81 (12) 92 127 41
ACE Financial Services 102 5 97 -- --
Other 5 -- (6) -- 1
- --------------------------------------------------------------------------------
Net Investment Income $786 2% $771 56% $493
================================================================================
Net investment income is influenced by a number of factors, including the
amounts and timing of inward and outward cash flows, the level of interest rates
as well as changes in overall asset allocation. Net investment income increased
in 2001 by $15 million to $786 million compared to $771 million in 2000. On a
comparable basis, net investment income declined by $14 million. As our
Commercial Insurance Services ("CIS") was treated as a discontinued operation
until July 2, 2000, the 2000 year only includes six months of investment income
from the CIS division. The comparable number assumes 2000 includes 12 months of
investment income from CIS.
While we had substantial positive operating and financing cash flow in 2001,
these inflows were weighted toward the end of the year. Thus they did not have a
large impact on net investment income during the year.
Offsetting the increase in investment income from the higher asset base was the
continual decline in interest rates during the year and the corresponding
decline in the investment portfolio's yield.
Net investment income increased in 2000 by $278 million to $771 million compared
with $493 million in 1999. The primary reason for the increase was an increase
in the size of the investable asset base resulting from the ACE INA Acquisition
on July 2, 1999, and the ACE Financial Services acquisition on December 30,
1999. Net investment income in 1999 includes six months of ACE INA results,
whereas the net investment income in 2000 includes 12 months of both ACE INA
and ACE Financial Services.
ACE Bermuda: Net investment income increased by $3 million to $153 million in
2001. The increase is primarily the result of a larger asset base and a change
in investment strategy to a portfolio with a higher yield. The increase was
offset by lower short-term interest rates in the second half of the year.
Net investment income decreased by $24 million in 2000 compared with 1999. This
decrease was primarily the result of a higher investable asset base in the first
half of 1999, before ACE Bermuda paid dividends to ACE Limited for the purchase
of ACE INA. ACE Bermuda also provided funding for the ACE Financial Services
acquisition in December 1999.
ACE Global Markets: Net investment income in 2001 was relatively unchanged
compared with 2000. The investable base grew on average by approximately 18
percent in 2001 over 2000, however this was offset by ACE Global Markets' need
to have relatively higher cash and short-term investment balances (in order to
maintain liquidity) while short-term rates were falling. In addition, the fourth
quarter of 2001 experienced significant reduction in federal interest and fixed
income coupon rates.
Net investment income was $37 million in 2000 compared with $28 million in 1999.
The increase was the result of our increased participation in the Lloyd's
syndicates we manage, in both 2000 and 1999, resulting in an increasing asset
base.
42
ACE Global Reinsurance: Net investment income increased by $14 million to $74
million in 2001 compared with 2000. The additional assets arising from net
positive cash flows, and a capital contribution of $400 million in the fourth
quarter contributed to the increase. Net investment income was unchanged in
2000 compared with 1999 at $60 million.
ACE USA: Net investment income decreased by $6 million to $335 million in 2001
from $341 million in 2000. On a comparable basis, including a full year of
investment income from CIS in 2000, the decline was approximately $34 million.
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 individual lines of our financial statements. The
decline is mainly due to a reduction in investment income generated by the
run-off books of business due to the expected decline in the invested asset base
as loss reserves are paid. Lower short-term rates also had an unfavorable
impact. Net investment income increased by 81 percent to $341 million in 2000
from $189 million in 1999. The increase in 2000 was due to the inclusion of 12
months of investment income for ACE INA in 2000, while in 1999 the results of
ACE INA are included from July 2, 1999.
ACE International: Net investment income decreased by $11 million to $81 million
in 2001 from $92 million in 2000. This change is primarily the result of lower
yields and the unfavorable effect of devaluing foreign currencies.
Net investment income increased by 127 percent to $92 million in 2000 from $41
million in 1999. The increase was primarily due to the inclusion of 12 months
of results for ACE INA, while 1999 includes the six months of ACE INA results
from the July 2, 1999, date of acquisition.
ACE Financial Services: Net investment income in 2001 increased by $5 million to
$102 million compared with 2000. Although the value of the invested portfolio
has increased, reduced interest rates in 2001 have negatively impacted
investment income. Net investment income was $97 million in 2000. We completed
the acquisition of ACE Financial Services on December 30, 1999, and the
investment income for the year ended December 31, 2000, represents a full year
of income generated by the investment portfolio. As ACE Financial Services was
acquired on December 30, 1999, there are no comparative figures for 1999.
- -------------------------------------------------------------------------------
Net Realized Gains (Losses) on Investments
Years ended December 31,
(in millions of U.S. dollars) 2001 2000 1999
- -------------------------------------------------------------------------------
Fixed maturities and short-term investments $ (7) $(82) $(82)
Equity securities 27 114 47
Financial futures, options
and interest rate swaps (11) (48) 68
Other investments (38) (12) 9
Fair value adjustment on derivatives (17) - -
Currency (12) (11) (4)
- -------------------------------------------------------------------------------
Total net realized gains (losses) on
investments $(58) $(39) $ 38
===============================================================================
Our investment strategy takes a long-term view and our portfolio is actively
managed to maximize total return within certain specific guidelines, which
minimize risk. The portfolio is reported at fair value and the effect of market
movements on the investment portfolio only impact net realized gains (losses) on
investments when securities are sold or other than temporary impairments are
recorded on invested assets. 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.
We use foreign currency forward 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.
These contracts are not designated as specific hedges and therefore, realized
and unrealized gains and losses recognized on these contracts are recorded as
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.
During 2001, sales proceeds for fixed maturity securities were generally lower
than their amortized cost. This resulted in net realized losses of $7 million
being recognized on fixed maturities and short-term investments in 2001,
compared with net realized losses of $82 million in both 2000 and 1999.
43
The liquidation of certain equity portfolios contributed $27 million to net
realized gains in 2001 compared to $114 million and $47 million in 2000 and
1999, respectively.
We use fixed income futures contracts and interest rate swaps to manage duration
exposure. Gains of $11 million were recognized on interest rate swaps during
2001. Net realized losses generated by our equity index futures contracts
amounted to $22 million for the year, bringing the total net realized losses
attributable to financial futures and option contracts and interest rate swaps
to $11 million compared with losses of $48 million in 2000, and gains of $68
million in 1999.
Other investments had a loss of $38 million primarily because we wrote down the
value of an equity investment by $28 million during the third quarter of 2001.
We 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 of our derivatives in 2001
was a loss of $17 million. The level of such gains and losses is dependent upon
a number of factors including changes in interest rates, credit spreads and
other market factors.
- --------------------------------------------------------------------------------
Other Expenses
Years ended December 31,
Percentage Percentage
(in millions of U.S. dollars) 2001 Change 2000 Change 1999
- --------------------------------------------------------------------------------
Amortization of goodwill $ 80 1% $ 79 76% $ 45
- --------------------------------------------------------------------------------
Interest expense $199 (10)% $221 111% $105
- --------------------------------------------------------------------------------
Income tax expense (benefit) $(79) (184)% $ 94 227% $ 29
================================================================================
As expected, the amortization of goodwill was relatively unchanged in 2001
compared with 2000. The amortization of goodwill increased by $34 million in
2000 compared with 1999. Of this increase, $30 million related to the difference
in ACE INA goodwill amortization as 2000 had a full year of amortization
compared with six months in 1999. The remaining increase relates to the
amortization of goodwill generated by the acquisition of ACE Financial Services
in December 1999. 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, we have adopted FAS 142 on January 1, 2002 and ceased amortizing
goodwill.
Interest expense decreased by 10 percent in 2001 compared with 2000. The
decrease is primarily attributed to lower short-term interest rates on our
floating rate debt in 2001 as compared with 2000. The increase in interest
expense in 2000 as compared with 1999 was a result of our incurring a full year
of interest with respect to debt acquired in connection with the ACE INA
Acquisition. A full description of our outstanding debt, including interest
rates and terms, is included in Note 9 of the Consolidated Financial Statements.
We recorded an income tax benefit of $79 million in 2001 compared with an
expense of $94 million in 2000. This decrease was primarily due to the net loss
we incurred in 2001. The increase in income tax expense from $29 million in 1999
to $94 million in 2000 was primarily due to the inclusion of ACE INA for six
months in 1999 and a full year in 2000. For further information on taxation, see
Note 14 of the Consolidated Financial Statements.
Investments and Cash
Our principal investment objective is to ensure that funds will be available to
meet our insurance and reinsurance obligations. Within this broad liquidity
constraint, our investment portfolio's structure seeks to maximize return
subject to specifically approved guidelines of overall asset classes, credit
quality, liquidity and volatility of expected returns. As such, our investment
portfolio is invested primarily in fixed income securities of the highest credit
quality.
At December 31, 2001, total investments and cash were $15.9 billion compared
with $13.8 billion at December 31, 2000, an increase of $2.1 billion. In October
2001, we raised $1.1 billion in a public offering of our Ordinary Shares (see
Liquidity and Capital Resources discussion). The balance of the increase in
total investments and cash is primarily due to positive cash flows from
operations due to strong premium volume, and an increase in unrealized
appreciation on the fixed income portfolio caused by declining interest rates
during 2001. Offsetting these
44
increases, we paid dividends of $154 million during the year and spent $179
million repurchasing our own shares. Our investment portfolio is externally
managed by independent professional investment managers. The following table
identifies our invested assets at fair value, by type held as of December 31,
2001 and 2000:
(in millions of U.S. dollars) 2001 2000
- --------------------------------------------------------------------------------
Fixed maturities available for sale $13,000 $10,721
Equity securities 468 532
Short-term investments 1,206 1,370
Other investments 591 531
Cash 671 608
- --------------------------------------------------------------------------------
Total investments and cash $15,936 $13,762
================================================================================
The following table identifies the fixed maturity securities at fair value, by
type as of December 31, 2001 and 2000:
- --------------------------------------------------------------------------------
(in millions of U.S. dollars) 2001 2000
- --------------------------------------------------------------------------------
U.S. Treasury and agency $ 1,344 $ 1,216
Non-U.S. governments 1,429 1,251
Corporate securities 6,743 5,378
Mortgage-backed securities 2,323 1,713
States, municipalities and political sub division 1,161 1,163
- --------------------------------------------------------------------------------
Fixed maturities $13,000 $10,721
================================================================================
Restricted Assets
We are required to maintain assets on deposit with various regulatory
authorities to support our insurance and reinsurance operations. These
requirements are generally promulgated in the statutory regulations of the
individual jurisdictions. These funds on deposit are available to settle
insurance and reinsurance liabilities. We also utilize trust funds in certain
large transactions where the trust funds are set up for the benefit of the
ceding companies, and generally take the place of Letter of Credit ("LOC")
requirements. We also have investments in segregated portfolios primarily to
provide collateral or guarantees for LOCs and debt instruments (see Notes 8 and
9 of the Consolidated Financial Statements). The following table identifies the
value of restricted assets as of December 31, 2001 and 2000:
(in millions of U.S. dollars) 2001 2000
- --------------------------------------------------------------------------------
Deposits with U.S. regulatory authorities $ 864 $ 923
Deposits with non-U.S. regulatory authorities 735 670
Assets used for collateral or guarantees 1,030 731
Trust funds 852 -
- --------------------------------------------------------------------------------
$3,481 $2,324
================================================================================
Property and Casualty Loss Reserves
We establish reserves for the estimated unpaid ultimate liability for losses and
loss expenses under the terms of our policies and agreements. These reserves
include estimates for both claims that have been reported and those that have
been incurred but not reported ("IBNR"), and include estimates of expenses
associated with processing and settling these claims. The reserve for unpaid
losses and loss expenses was $20.7 billion at December 31, 2001, compared with
$17.4 billion at December 31, 2000, and includes $13.3 billion of case and loss
expense reserves for 2001. We incurred gross losses of $1.9 billion with respect
to the September 11th tragedy (see September 11th 2001 tragedy discussion). In
addition, during the year, we incurred losses of $55 million from a series of
Mid-Western United States storms, an after tax charge of $50 million to
strengthen loss reserves principally in our international casualty operations
and incurred additional after tax losses of $80 million in the European
commercial property portfolio. The remainder of the increase is due to the
growth in business written during 2001. While we believe that our reserve for
unpaid losses and loss expenses at December 31, 2001, is adequate, future
developments may result in ultimate losses and loss expenses significantly
greater or less than the reserve provided.
As part of our evaluation process of loss reserves, we engage independent
actuarial firms to review the methods and assumptions we use in estimating the
unpaid losses and loss expense. As stated in their actuarial reviews, the firms
believe that the methods and assumptions we use are reasonable and appropriate
for use in setting loss reserves at December 31, 2001.
Note 6 of our Consolidated Financial Statements includes a reconciliation of our
beginning and ending net loss and loss adjustment expense reserves for each of
the three years ended December 31, 2001, 2000 and 1999. Our net incurred losses
in 2001 were $4.6 billion and are discussed in more detail in the property
45
and casualty underwriting results. Net losses and loss expenses incurred in 2001
were impacted by $94 million of prior year development principally in the ACE
International segment. This development was reflected during the fourth quarter
of 2001 when we recorded additional reserves to strengthen our casualty loss
reserves.
Net losses and loss expenses incurred in 2000 were impacted by favorable
development of reserves from prior periods primarily from ACE Tempest Re, ACE
USA and ACE Bermuda partially offset by unfavorable development in ACE Financial
Services.
Net losses and loss expenses incurred in 1999 include incurred losses for
ACE INA from July 2, 1999, the date of acquisition. In our analysis of incurred
and paid losses for ACE INA for the 1999 period, all losses incurred and paid on
losses occurring in the period January 1, 1999, through December 31, 1999, have
been included as current year activity in 1999.
Reinsurance
One of the ways we manage our loss exposure is through the use of reinsurance.
While reinsurance arrangements are designed to limit our losses from large
exposures and to permit recovery of a portion of direct losses, reinsurance does
not relieve us of our liability to our insureds. Accordingly, our 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 we have already paid. Reinsurance
recoverables increased by $2.4 billion during 2001 to $11.4 billion. Part of
this increase was due to the $1.3 billion of reinsurance recoverables accrued
with respect to the September 11th tragedy, as our gross insured losses are
covered by significant amounts of reinsurance from high-quality reinsurers. The
remaining increase is a result of our business growth during 2001. Our
reinsurance recoverable on our September 11th losses is of high quality with
approximately 98 percent of all reinsurance purchased by us being with
reinsurers rated A- or better, including 38 percent with reinsurers rated AAA-
and 33 percent with reinsurers rated AA-, based on ratings from Standard &
Poor's or an equivalent rating. Our total reinsurance recoverable is also of
high quality with approximately 90 percent of our reinsurance recoverable with
reinsurers rated A- or better, including approximately 53 percent with
reinsurers that are either rated AAA- or better, are collateralized or
recoverable from a government pool. Approximately 20 percent is recoverable from
reinsurers in the AA rating category, 18 percent from reinsurers in the A rating
category and 9 percent is recoverable from all others. This analysis is based on
ratings from Standard & Poor's or an equivalent rating.
We evaluate the financial condition of our reinsurers and potential reinsurers
on a regular basis and also monitor concentrations of credit risk with
reinsurers. At December 31, 2001, the largest concentration of reinsurance
recoverables, which amounted to 24 percent, was with a group of affiliated
reinsurers rated AAA by Standard & Poor's, and no other reinsurer or affiliated
group of reinsurers accounted for more than 5 percent of total reinsurance
recoverable.
The allowance for unrecoverable reinsurance is required principally due to the
failure of reinsurers to indemnify us, 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 and London reinsurance market
exposures. Allowances have been established for amounts estimated to be
uncollectible. Our allowance for unrecoverable reinsurance was $789 million and
$710 million for 2001 and 2000, respectively.
Asbestos and Environmental Claims
Included in our liabilities for losses and loss expenses are liabilities for
asbestos, environmental and latent injury damage claims and expenses ("A&E
exposures"). 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. These amounts include
provision for both reported and IBNR claims. The table below presents loss
reserve details for A&E exposures as of December 31, 2001 and 2000:
2001 2000
------------------------------------
(in millions of U.S. dollars) Gross Net Gross Net
- --------------------------------------------------------------------------
Asbestos $1,119 $149 $1,073 $212
Environmental and Other $1,089 $452 $1,156 $540
- --------------------------------------------------------------------------
Total $2,208 $601 $2,229 $752
==========================================================================
46
We continuously evaluate our estimates of liabilities and related reinsurance
recoverable for A&E exposures. While most of these liabilities for such claims
arise from exposures in North America, we have also provided for international
A&E exposures.
We have considered asbestos and environmental claims and claims expenses in
establishing the liability for unpaid losses and loss expenses. We have
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 our best estimate of future loss and loss expense
payments and recoveries which are expected to develop over the next several
decades. We continuously monitor evolving case law and its effect on
environmental and latent injury claims. While reserving for these claims is
inherently uncertain, we believe that the reserves carried for these claims are
adequate based on known facts and current law.
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of a company's ability to generate sufficient cash flows
to meet the short-term and long-term cash requirements of its business
operations. 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"). During 2001 and 2000, ACE was able to meet all of its
obligations, including the payment of dividends declared on its Ordinary Shares
and FELINE PRIDES, with its net operating cash flow and the dividends received.
Should the need arise, we have access to the debt markets and other available
credit facilities which are discussed below.
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 levels
adequate to support the insurance and reinsurance operations. During 2001,
dividends of $105 million and $234 million were declared by ACE Tempest Life Re
and ACE Bermuda, respectively. During 2000, dividends of $20 million and $81
million were declared by ACE Tempest Life Re and ACE Bermuda, respectively. ACE
expects that a majority of its cash inflows for 2002 will be from dividends from
these two companies.
The payments of dividends from ACE's non-Bermuda based operating subsidiaries
are also subject to laws and regulations, which vary by jurisdiction. 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. ACE INA's and ACE Financial Services' U.S. insurance
subsidiaries may pay dividends, without prior regulatory approval, only from
earned surplus and 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.
During the years ended December 31, 2001 and 2000, ACE did not receive any
dividends from ACE Global Markets, ACE INA or ACE Financial Services nor does
ACE expect to receive dividends from these subsidiaries during 2002. Under the
Lloyd's accounting model, syndicates in Lloyd's operate each year as an annual
venture. Each "year of account" is held open for three years. At the end of
three years, the "year of account" purchases reinsurance from the next open year
(this purchase is known as "reinsurance to close" or "RITC") and distributes the
remaining funds to the investors in the syndicate. ACE Global Markets has
historically reinvested these funds in its operations, which have expanded each
year. ACE INA has issued debt to provide partial financing for the ACE INA
Acquisition and for other operating needs. This debt is serviced by dividends
paid by ACE INA's insurance subsidiaries to ACE INA as well as other group
resources. ACE Financial Services' U.S. insurance subsidiaries are limited in
their dividend paying abilities due to their AA and AAA financial strength
ratings.
Our 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. After satisfying our cash requirements, excess cash
flows
47
from these underwriting and investing activities are used to build the
investment portfolio and thereby increase future investment income.
Our insurance and reinsurance operations provide liquidity in that premiums are
received in advance, generally substantially in advance, of the time claims are
paid. Our consolidated net cash flow from operating activities was $1.4 billion
in 2001, compared with $(427) million in 2000. The positive operating cash flows
were generated from strong premium volume during the current year. This growth
in premiums came from all segments in the group, including the new ACE Global Re
life reinsurance division, which completed its first full year of operation in
2001. Net loss and loss expense payments were the same in 2001 and 2000 at $3.8
billion. Generally cash flows are affected by claim payments which, due to the
nature of our 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. We believe that we have sufficient liquidity to meet our
anticipated cash flow obligations, including those resulting from the September
11th tragedy. Although ongoing operations continue to generate positive cash
flows, our 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 $614 million and $729 million in 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.
Both internal and external forces influence our 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 us and the settlement of the liability for that loss.
We believe that our cash balances, cash flow from operations, routine sales of
investments and the liquidity provided by our credit facilities (discussed
below) are adequate to meet expected cash requirements.
Capital Resources
Capital resources consist of funds deployed or available to be deployed to
support our business operations. The following table summarizes the components
of our capital resources as of December 31, 2001, 2000 and 1999:
(in millions of U.S. dollars) 2001 2000 1999
- --------------------------------------------------------------------------------
Shareholders' equity $6,107 $5,420 $4,451
Mezzanine equity 311 311 -
Trust preferred securities 875 875 575
Long-term debt 1,349 1,424 1,424
Short-term debt 495 365 1,075
- --------------------------------------------------------------------------------
Total capitalization $9,137 $8,395 $7,525
================================================================================
Debt to total capitalization 20% 21% 33%
================================================================================
Our financial strength provides us with the flexibility and capacity to obtain
funds externally through debt or equity financings on both a short-term and
long-term basis. As noted in the table above, we have accessed both the debt and
equity markets from time to time. Historically, this has primarily been in
connection with acquisitions, although we did issue Ordinary Shares in October
2001 to provide additional capital to support growth in our operations. Our
ability to access the capital markets is dependent on maintaining our debt and
financial strength ratings. We are currently rated by the four major rating
agencies.
In 1999, we filed a registration statement with the Securities and Exchange
Commission utilizing a "shelf " registration process relating to a number of
different types of debt and equity securities. Under this shelf process, we may
sell the securities described in the registration statement up to a total
offering price of $4 billion. We have utilized the shelf to issue the mezzanine
equity, the trust preferred securities, the short- and long-term debt, as well
as the equity offerings of $400 million in 2000 and $1.1 billion in October
2001. At December 31, 2001, $627 million of securities were available under the
shelf filing.
48
Shareholders' Equity
The following table analyzes the movements in our shareholders' equity for the
years ended December 31, 2001, 2000 and 1999:
(in millions of U.S. dollars) 2001 2000 1999
- --------------------------------------------------------------------------------
Balance, beginning of year $ 5,420 $ 4,451 $ 3,910
Net income (loss) (147) 543 365
Change in net unrealized appreciation
(depreciation) on investments 35 186 (186)
Dividends declared - Ordinary Shares (138) (113) (84)
Dividends declared - FELINE PRIDES (26) (18) -
Ordinary Shares issued in share offering 1,127 400 -
Repurchase of Ordinary Shares (179) - -
Other movements, net 15 (29) 6
Ordinary Shares issued in ACE Financial
Services transaction - - 367
Ordinary Shares issued in ACE INA transaction - - 73
- --------------------------------------------------------------------------------
Balance, end of year $ 6,107 $ 5,420 $ 4,451
================================================================================
Our shareholders' equity increased by $687 million or 13 percent in 2001,
primarily due to a public offering of shares. We completed the public offering
of 32.89 million Ordinary Shares (which included the over-allotment option of
4.29 million shares) in October 2001 and raised approximately $1.1 billion. We
have used the net proceeds of the Ordinary Share offering to expand our net
underwriting capacity following the September 11th tragedy and for general
corporate purposes.
As part of our capital management program, in November 2000, our Board of
Directors authorized the repurchase of any ACE issued debt or capital securities
including Ordinary Shares, up to an aggregate total of $250 million. During
2001, we repurchased and cancelled 6,760,900 Ordinary Shares under the program
at a cost of $179.4 million. In November 2001, our Board of Directors replaced
the existing authorization with a new authorization to repurchase any ACE issued
debt or capital securities including Ordinary Shares, up to an aggregate total
of $250 million. As of December 31, 2001, this authorization had not been
utilized.
During 2001, we continued to pay quarterly dividends on our Ordinary Shares. In
January 2001, and April 2001, we paid dividends of 13 cents per share to
shareholders of record on December 29, 2000, and March 30, 2001, respectively.
In July 2001, October 2001 and January 2002, we paid dividends of 15 cents per
share to shareholders of record on July 29, 2001, September 28, 2001, and
December 31, 2001, respectively. We have paid dividends each quarter since we
became a public company in January 1993 and the quarterly dividend amount has
increased each year. However, the declaration, payment and value of future
dividends is at the discretion of our Board of Directors and will be dependent
upon our profits, financial requirements and other factors, including legal
restrictions on the payment of dividends and such other factors as our Board of
Directors deems relevant.
Contractual Obligations and Commitments
The table below shows our contractual obligations and commitments including our
payments due by period:
Payments Due By Period
--------------------------------------------
Less than 1-3 4-5 After 5
(in millions of U.S. dollars) Total 1 Year Years Years Years
- --------------------------------------------------------------------------------
Operating leases $ 318 $ 64 $ 120 $ 80 $ 54
Short-term debt 495 495 - - -
Long-term debt 1,349 - 400 299 650
Trust preferred securities 875 400 - - 475
- --------------------------------------------------------------------------------
Total contractual obligations
and commitments $ 3,037 $ 959 $ 520 $ 379 $ 1,179
================================================================================
Operating Lease Commitments
We lease office space in certain countries in which we operate under operating
leases that expire at various dates through January 2017. We renew and enter
into new leases in the ordinary course of business as required.
Short-Term Debt
Included in short-term debt are the ACE Financial Services $75 million 7.75
percent debentures which mature in November 2002. Upon maturity, we have the
ability to either repay the debenture or obtain alternative financing in the
capital markets.
49
In June 1999, we 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. The
commercial paper for ACE and ACE INA is rated P1 by Moody's, A2 by Standard
& Poor's and F1 by Fitch.
Following the September 11th tragedy, our ability to access the commercial paper
markets was disrupted, partly because certain of our debt ratings were placed on
"negative watch". As we were unable to sell new commercial paper, we borrowed
$180 million under the $800 million 364-day revolving credit facility to replace
the maturing commercial paper. These funds were borrowed at rates which averaged
3.4 percent. During the fourth quarter of 2001, as an alternative to raising
commercial paper, we entered into securities repurchase agreements with various
counter-parties to raise short-term funds. Under these repurchase agreements, we
agree to sell securities and repurchase them at a date in the future for a
predetermined price, thereby creating liquidity. The proceeds of repurchase
transactions and internal liquidity were used to repay maturing commercial paper
of $215 million and the bank borrowings of $180 million. At December 31, 2001,
amounts due to brokers under the repurchase agreements amounted to $395 million.
The average cost of borrowing using repurchase transactions was 2.0 percent.
Long-Term Debt
Our total long-term debt of $1.3 billion is described in Note 9 to our
Consolidated Financial Statements. The following instruments have specific
collateral triggers. In 1998, ACE US Holdings issued $250 million of unsecured
senior notes that mature in October 2008. Simultaneously, we have entered into a
notional $250 million swap transaction that has the economic effect of reducing
our cost of borrowing. Fixed maturity securities of approximately $90 million
are pledged as collateral for the swap transaction. In December 1999, ACE INA
issued $300 million of unsecured subordinated notes that mature in December
2009. Simultaneously, we entered into a notional $300 million swap transaction
that has the economic effect of reducing our cost of borrowing. Fixed maturity
securities totaling approximately $105 million are pledged as collateral in
connection with the swap transaction.
Under these two issuances, we would be required to provide collateral of $300
million and $250 million, respectively, if Standard & Poor's downgraded our debt
rating to BB+ or lower (currently A-), or downgraded ACE Bermuda's financial
strength rating to BBB- or lower (currently A+). Although there can be no
assurance, we believe it is unlikely that either of these two events will occur.
In the event that we terminate either of the swaps prematurely, we would be
liable for certain transaction costs. The counter-party in each swap is a highly
rated major financial institution and management does not anticipate
non-performance.
The "negative watches" on our debt ratings have now been lifted. Subsequent to
year-end we raised commercial paper and repaid $335 million of the amounts due
to brokers under the repurchase agreements.
We continue to have access to substantial liquidity resources. In the event of
any future disruption to the commercial paper markets, we have access to our
cash resources, short-term investments and our substantial investment portfolio.
We also have the ability to draw down on our existing $1.05 billion of credit
facilities. In addition, we have the ability to enter into repurchase agreements
to provide liquidity. The covenants of our existing credit facilities limit our
borrowing under repurchase agreements to $800 million.
Trust Preferred Securities
During 1999 and 2000, we issued $800 million of trust preferred securities. The
funds generated from these issues were used to partially finance the ACE INA
Acquisition. These securities consist of:
(i) $400 million company-obligated mandatorily redeemable preferred shares ($100
million and $300 million) issued by two business trusts wholly owned by us and,
(ii) $400 million Auction Rate Reset Preferred Securities ("RHINO Preferred
Securities") issued by a business trust wholly owned by us ("RHINOS Trust").
We also have outstanding $75 million of monthly income preferred securities
issued by one of our subsidiary limited liability companies.
50
Each of the four series of preferred securities was issued by a special purpose
entity, three trusts and a limited liability company, that is wholly owned by
us. The sole assets of the special purpose entities are debt instruments issued
by one or more of our subsidiaries. The special purpose entities look to
payments on the debt instruments to make payments on the preferred securities.
We have guaranteed the payments on these debt securities. The trustees of the
trusts and the managers of the limited liability company include one or more of
our officers and at least one independent trustee or manager, such as a bank or
trust company. Our officers serving as trustees of the trusts or managers of the
limited liability company do not receive any compensation or other remuneration
for their services in such capacity. The full $875 million of outstanding
preferred stock is shown on our consolidated balance sheet as a liability.
Additional information with respect to the preferred securities is contained in
Note 9 to our financial statements.
The RHINO Preferred Securities were issued in June 1999 and mature on September
30, 2002. These securities are subject to certain remarketing provisions if the
trading price of our Ordinary Shares falls below $18.83. If the remarketing
fails, the holder has the right to require us to repurchase the RHINO Preferred
Securities. Our Ordinary Shares did trade below $18.83 following the September
11th tragedy but the holders of these securities did not exercise their
remarketing rights. Since that time, our share price has increased substantially
and at December 31, 2001, the trading price of our Ordinary Shares was $40.15.
In September 2000, we issued $400 million of Ordinary Shares, the proceeds of
which support ACE's guarantee of the $412 million principal amount of the
Subordinated Notes held by the RHINOS Trust. These proceeds are available to
repay the RHINO Preferred Securities if and when required. None of the other
three series of preferred securities is mandatorily redeemable prior to maturity
except upon the occurrence of an event of default. Events of default include the
failure to make interest or principal payments on the preferred securities or
underlying debt securities, breaches of covenants contained in the indentures
governing the underlying debt securities, payment defaults on indebtedness of
$50 million or more, accelerations of indebtedness of $50 million or more and
certain events of bankruptcy. The maturity of the preferred securities and
underlying debt securities will not be accelerated as a result of adverse
changes in our credit rating, financial ratios, earnings, cash flows, or stock
price.
Credit Facilities
In April 2001, we renewed our $800 million, 364-day revolving credit facility.
This facility, together with our $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 (see Note 8c of the Consolidated Financial Statements). The five-year
facility also permits the issuance of letters of credit. In 2000, an amount of
$25 million was drawn under the five-year facility. This remains outstanding at
December 31, 2001.
In November 2001, to fulfill the requirements of Lloyd's for open years of
account, we renewed and increased a syndicated uncollateralized, five-year
letter of credit ("LOC") facility in the amount of (Pound)440 million
(approximately $625 million). This facility was originally arranged in 1998. In
addition to the covenants noted below, the facility requires that collateral be
posted if the financial strength rating of the guarantor, ACE Bermuda, falls to
Standard and Poor's BBB+ or less.
As our Bermuda-based subsidiaries are not admitted insurers and reinsurers in
the United States, the terms of certain insurance and reinsurance contracts
require them to provide LOCs to clients. ACE Global Markets are required to
satisfy certain United States regulatory trust fund requirements which can be
met by the issuance of LOCs. In August 2001, we arranged a $450 million
unsecured syndicated, one year LOC facility for general business purposes,
including the issuance of insurance and reinsurance letters of credit. This
facility replaced an LOC facility originally arranged in September 1999 and
renewed in September 2000. Usage under this facility was $373 million at
December 31, 2001. In December 2001, we arranged a $500 million secured
syndicated, one-year LOC facility for general business purposes, including the
issuance of insurance and reinsurance letters of credit. This additional
capacity was required to meet the increased requirements for LOCs arising
principally from ACE Tempest Re's growing life reinsurance operations and U.S.
regulatory trust fund requirements of ACE Global Markets arising from the
September 11th tragedy. Usage under this facility was $130 million as of
December 31, 2001. The LOCs issued under these facilities are principally used
to support unpaid losses and loss expenses already reflected in our balance
sheet.
51
All of the above facilities require that we maintain certain covenants. These
covenants include:
(i) a minimum consolidated tangible net worth covenant of $3.6 billion plus 25
percent of cumulative net income since March 31, 2000 and;
(ii) maximum debt to total capitalization of 35 percent. Under this covenant,
debt does not include trust preferred securities or mezzanine equity except
where the ratio of the sum of trust preferred securities and mezzanine equity to
total capitalization is greater than 15 percent. In this circumstance, the
surplus greater than 15 percent would be included in the debt to total
capitalization ratio.
At December 31, 2001, the minimum consolidated net worth requirement under the
covenant was $3.8 billion and our actual consolidated net worth as calculated
under the covenant was $6.0 billion and our ratio of debt to total
capitalization was 20 percent.
Our failure to meet these covenants would result in an event of default and we
could be required to repay any outstanding borrowings under these facilities.
The covenants also provide that failure to meet commitments of $25 million or
more under any of these facilities would result in default of the other
facilities.
As of December 31, 2001, ACE Guaranty Re Inc. was party to a non-recourse credit
facility which provides up to $150 million specifically designed to provide
rating agency qualified capital to further support ACE Guaranty Re Inc.
claims-paying resources. During 2001, the facility's expiry date was extended to
October 2008. ACE Guaranty Re Inc. has not borrowed under this credit facility.
We also maintain various other LOC facilities, both collateralized and
uncollateralized, for general corporate purposes. At December 31, 2001, the
aggregate availability under these facilities was $533 million and usage was
$307 million.
Market-Sensitive Instruments and Risk Management
Market risk represents the potential for loss due to adverse changes in the fair
value of financial instruments. We are exposed to potential loss to various
market risks, including changes in interest rates and foreign currency exchange
rates. Our investment portfolio consists of both fixed income and equity
securities, denominated in both U.S. and foreign currencies, which are sensitive
to changes in interest rates, equity prices and foreign currency exchange rates.
Therefore earnings would be effected by changes in interest rates, equity prices
and foreign currency exchange rates. We use investment derivative instruments
such as futures, options, interest rate swaps, and foreign currency forward
contracts for duration management and management of foreign currency exposures.
These instruments are sensitive to changes in interest rates and foreign
currency exchange rates. The portfolio includes other market-sensitive
instruments which are subject to changes in market values, with changes in
interest rates.
Duration Management and Market Exposure Management
We utilize financial futures, options, interest rate swaps, and foreign currency
forward contracts for the purpose of managing certain investment portfolio
exposures. These instruments are recognized as assets or liabilities in our
consolidated financial statements and changes in market value are included in
net realized gains or losses on investments in the consolidated statements of
operations. The market value of mortgage-backed securities, another category of
market sensitive instruments, was $2.3 billion at December 31, 2001, or
approximately 15 percent of the total investment portfolio, compared with $1.7
billion or 13 percent in 2000. Mortgage-backed securities include pass-through
mortgage bonds and collateralized mortgage obligations.
Our exposure to interest rate risk is concentrated in our investment portfolio,
and to a lessor extent, our debt obligations. A hypothetical adverse parallel
shift in the treasury yield curve of 100 basis points would have resulted in a
decrease in total return of 3.2 percent on our fixed income portfolio in 2001
compared with 3.8 percent in 2000. This equates to a decrease in market value of
approximately $452 million on a fixed income portfolio valued at $14 billion at
December 31, 2001, and $450 million on a fixed income portfolio valued at $12
billion at December 31, 2000. An immediate time horizon was used as this
presents the worse case scenario.
Our portfolio of equity securities, which we carry on our balance sheet at fair
value, has exposure to price risk. This risk is defined as the potential loss in
fair value resulting from adverse changes in prices. In addition, we attain
exposure to the
52
equity markets through the use of derivative instruments which also have
exposure to price risk. Our U.S. equity exposure in the portfolio is highly
correlated with the Standard and Poor's 500 index and changes in this index
would approximate the impact on our portfolio. Our international equity
portfolio has exposure to a broad range of non-U.S. equity markets, primarily in
those countries where we have insurance operations. These portfolios are
correlated to movement in each country's broad equity market. The combined
equity exposure through both our equity portfolio and derivative instruments was
valued at $805 million at December 31, 2001. A hypothetical 10 percent decline
in the price of each stock in these portfolios and the index correlated to the
derivative instruments would have resulted in an $81 million decline in fair
value. Changes in fair value of these derivative instruments are recorded as
realized gains or losses in the consolidated statements of operations. Changes
in the fair value of our equity portfolio are recorded as unrealized
appreciation (depreciation) and are included as other comprehensive income in
shareholders' equity.
Our exposure to foreign exchange risk is concentrated in our net invested assets
denominated in foreign currencies. Our international operations use cash flows
to purchase these investments to hedge insurance reserves and other liabilities
denominated in the same currencies. At December 31, 2001, our net asset exposure
to foreign currencies was not material.
Derivatives
As of January 1, 2001, we adopted FAS 133 which 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. FAS 133 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. As of December 31, 2001, we had no derivatives
that were designated as hedges.
We maintain investments in derivative instruments such as futures, options,
interest rate swaps, 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. We have
historically recorded the changes in market value of these instruments as
realized gains or losses in our consolidated statement of operations and,
accordingly, FAS 133, as amended, did not have a significant impact on the
results of operations, financial condition or liquidity in future periods as it
relates to these instruments.
Certain products (principally credit protection oriented) issued by the ACE
Financial Services segment 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, we record these products at their fair value,which is
determined principally through obtaining quotes from independent dealers and
counterparties.
We recorded an expense related to the cumulative effect of adopting this
standard of $23 million, net of income tax of $12 million. We have recorded in
net realized gains (losses) on investments, a pretax loss of $17 million to
reflect the change in the fair value of derivatives during the year. The level
of gains and losses resulting from changes in the fair value of derivatives on a
prospective basis is dependent upon a number of factors including changes in
interest rates, credit spreads and other market factors. Our involvement with
derivative instruments and transactions is primarily to offer protection to
others or to mitigate our own risk and is not considered speculative in nature.
New Accounting Pronouncement
In June 2001, FASB issued FAS 142. FAS 142 primarily addresses the accounting
for goodwill and intangible assets subsequent to their acquisition. As required,
we have adopted FAS 142 on January 1, 2002, and ceased amortizing goodwill at
that time. All goodwill recognized in our consolidated balance sheet at January
1, 2002 will 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. We do
not expect any impairment in goodwill to arise from testing during initial
adoption.
53
Management's Responsibility for Financial Statements
Management is responsible for the preparation, integrity and objectivity of the
consolidated financial statements and other financial information presented in
this annual report. The accompanying consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States, applying certain estimates and judgments as required.
The Company's internal controls are designed to provide reasonable assurance as
to the integrity and reliability of the financial statements and to adequately
safeguard, verify and maintain accountability of assets. Such controls are based
on established policies and procedures and are implemented by trained, skilled
personnel with an appropriate segregation of duties. The Company's internal
audit department performs independent audits on the Company's internal controls.
The Company's policies and procedures prescribe that the Company and all its
employees are to maintain the highest ethical standards and that its business
practices are to be conducted in a manner which is above reproach.
PricewaterhouseCoopers LLP, independent accountants, are retained to audit the
Company's financial statements. Their accompanying report is based on audits
conducted in accordance with auditing standards, generally accepted in the
United States which includes the consideration of the Company's internal
controls to establish a basis for reliance thereon in determining the nature,
timing and extent of audit tests to be applied.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of independent
non-management Board members. The Audit Committee meets periodically with the
independent accountants, both privately and with management present, to review
accounting, auditing, internal controls and financial reporting matters.
/s/ Brian Duperreault /s/ Philip V. Bancroft
- ------------------------------------ ---------------------------
Brian Duperreault Philip V. Bancroft
Chairman and Chief Executive Officer Chief Financial Officer
54
Report of Independent Accountants
To the Board of Directors and Shareholders of ACE Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity, cash flows and
comprehensive income present fairly, in all material respects, the financial
position of ACE Limited and its subsidiaries at December 31, 2001 and 2000, and
the results of their operations and their cash flows for the years ended
December 31, 2001, 2000 and 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2m to the financial statements, the Company changed its
method of accounting for derivatives in 2001.
PricewaterhouseCoopers LLP
New York, New York
February 13, 2002
55
Consolidated Balance Sheets
ACE Limited and Subsidiaries
December 31, 2001 and 2000
(in thousands of U.S. dollars except share and per share data) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Assets
Investments and cash
Fixed maturities available for sale, at fair value (amortized cost -
$12,794,444 and $10,640,937) $ 13,000,165 $ 10,721,309
Equity securities, at fair value (cost - $516,028 and $495,049) 467,566 532,046
Short-term investments, at fair value 1,205,795 1,369,784
Other investments (cost - $569,045 and $518,130) 591,006 531,116
Cash 671,381 608,069
- ----------------------------------------------------------------------------------------------------------
Total investments and cash 15,935,913 13,762,324
Accrued investment income 213,821 183,011
Insurance and reinsurance balances receivable 2,521,562 2,095,573
Accounts and notes receivable 242,724 388,996
Reinsurance recoverable 11,398,446 8,994,940
Deferred policy acquisition costs 679,281 572,757
Prepaid reinsurance premiums 1,222,795 857,745
Goodwill 2,772,094 2,846,709
Deferred tax assets 1,250,835 1,144,261
Other assets 949,293 843,210
- ----------------------------------------------------------------------------------------------------------
Total assets $ 37,186,764 $ 31,689,526
==========================================================================================================
Liabilities
Unpaid losses and loss expenses $ 20,728,122 $ 17,388,394
Unearned premiums 3,853,429 3,035,288
Future policy benefits for life and annuity contracts 382,730 -
Premiums received in advance 57,486 63,123
Insurance and reinsurance balances payable 1,418,001 1,319,091
Contract holder deposit funds 101,187 139,056
Accounts payable, accrued expenses and other liabilities 1,466,127 1,316,449
Dividends payable 42,044 33,127
Short-term debt 495,408 364,509
Long-term debt 1,349,473 1,424,228
Trust preferred securities 875,000 875,000
- ----------------------------------------------------------------------------------------------------------
Total liabilities 30,769,007 25,958,265
==========================================================================================================
56
December 31, 2001 and 2000
(in thousands of U.S. dollars except share and per share data) 2001 2000
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies
Mezzanine equity $ 311,050 $ 311,050
- ---------------------------------------------------------------------------------------------------------
Shareholders' equity
Ordinary Shares ($0.041666667 par value, 300,000,000 shares authorized;
259,861,205 and 232,346,579 shares issued and outstanding) 10,828 9,681
Additional paid-in capital 3,710,698 2,637,085
Unearned stock grant compensation (37,994) (29,642)
Retained earnings 2,321,576 2,733,633
Deferred compensation obligation 16,497 14,597
Accumulated other comprehensive income 101,599 69,454
Ordinary Shares issued to employee trust (16,497) (14,597)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,106,707 5,420,211
- ---------------------------------------------------------------------------------------------------------
Total liabilities, mezzanine equity and shareholders' equity $37,186,764 $31,689,526
=========================================================================================================
See accompanying notes to consolidated financial statements
57
Consolidated Statements of Operations
ACE Limited and Subsidiaries
For the years ended December 31,
(in thousands of U.S. dollars, except per share data) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Revenues
Gross premiums written
Property and casualty premiums $ 9,751,310 $ 7,586,771 $ 3,869,157
Life and annuity premiums 414,052 - -
- ---------------------------------------------------------------------------------------------------------
10,165,362 7,586,771 3,869,157
Reinsurance premiums ceded (3,801,748) (2,707,417) (1,373,809)
- ---------------------------------------------------------------------------------------------------------
Net premiums written
Property and casualty premiums 5,955,924 4,879,354 2,495,348
Life and annuity premiums 407,690 - -
- ---------------------------------------------------------------------------------------------------------
6,363,614 4,879,354 2,495,348
Change in unearned premiums (446,437) (344,591) (9,611)
- ---------------------------------------------------------------------------------------------------------
Net premiums earned
Property and casualty premiums 5,510,897 4,534,763 2,485,737
Life and annuity premiums 406,280 - -
- ---------------------------------------------------------------------------------------------------------
5,917,177 4,534,763 2,485,737
Net investment income 785,869 770,855 493,337
Net realized gains (losses) on investments (58,359) (38,961) 37,916
- ---------------------------------------------------------------------------------------------------------
Total revenues $ 6,644,687 $ 5,266,657 $ 3,016,990
=========================================================================================================
58
For the years ended December 31,
(in thousands of U.S. dollars, except per share data) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Expenses
Losses and loss expenses $4,552,456 $2,936,065 $1,639,543
Life and annuity benefits 401,229 - -
Policy acquisition costs 784,664 650,741 338,076
Administrative expenses 830,003 742,691 495,236
Amortization of goodwill 79,571 78,820 45,350
Interest expense 199,182 221,450 105,138
- ---------------------------------------------------------------------------------------------------------------------
Total expenses 6,847,105 4,629,767 2,623,343
=====================================================================================================================
Income (loss) before income tax and cumulative effect of adopting a new
accounting standard (202,418) 636,890 393,647
Income tax expense (benefit) (78,674) 93,908 28,684
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of adopting a new accounting standard (123,744) 542,982 364,963
Cumulative effect of adopting a new accounting standard (net of income tax) (22,670) - -
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (146,414) $ 542,982 $ 364,963
=====================================================================================================================
Basic earnings (loss) per share before cumulative effect of adopting a new
accounting standard $ (0.64) $ 2.37 $ 1.88
Basic earnings (loss) per share $ (0.74) $ 2.37 $ 1.88
- ---------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share before cumulative effect of adopting a new
accounting standard $ (0.64) $ 2.31 $ 1.85
Diluted earnings (loss) per share $ (0.74) $ 2.31 $ 1.85
=====================================================================================================================
See accompanying notes to consolidated financial statements
59
Consolidated Statements of Shareholders' Equity
ACE Limited and Subsidiaries
For the years ended December 31,
(in thousands of U.S. dollars) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Ordinary Shares
Balance - beginning of year $ 9,681 $ 9,061 $ 8,070
Shares issued 1,380 542 -
Exercise of stock options 69 76 15
Issued under Employee Stock Purchase Plan (ESPP) 9 2 1
Repurchase of Shares (282) - -
Cancellation of Ordinary Shares (29) - -
Shares issued in ACE Financial Services transaction - - 867
Shares issued in ACE INA transaction - - 108
- ----------------------------------------------------------------------------------------------------------
Balance - end of year 10,828 9,681 9,061
==========================================================================================================
Additional paid-in capital
Balance - beginning of year 2,637,085 2,214,989 1,767,188
Ordinary Shares issued 1,135,328 406,561 -
Exercise of stock options 32,597 31,259 5,658
Ordinary Shares issued under ESPP 6,065 1,232 1,150
Equity offering expenses (830) (7,072) -
Cancellation of Ordinary Shares (22,698) - -
Repurchase of Ordinary Shares (76,849) - -
FELINE PRIDES issuance cost - (9,884) -
Ordinary Shares issued in ACE Financial Services transaction - - 366,009
Ordinary Shares issued in ACE INA transaction - - 72,484
Options issued in ACE Financial Services transaction - - 2,500
- ----------------------------------------------------------------------------------------------------------
Balance - end of year 3,710,698 2,637,085 2,214,989
==========================================================================================================
Unearned stock grant compensation
Balance - beginning of year (29,642) (28,908) (15,087)
Stock grants awarded (22,559) (10,346) (21,706)
Stock grants forfeited 4,533 - 312
Amortization 9,674 9,612 7,573
- ----------------------------------------------------------------------------------------------------------
Balance - end of year $ (37,994) $ (29,642) $ (28,908)
==========================================================================================================
60
For the years ended December 31,
(in thousands of U.S. dollars) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Retained earnings
Balance - beginning of year $2,733,633 $2,321,570 $2,040,664
Net income (loss) (146,414) 542,982 364,963
Dividends declared on Ordinary Shares (137,734) (112,528) (84,057)
Dividends declared on FELINE PRIDES (25,594) (18,391) -
Repurchase of Ordinary Shares (102,315) - -
- ---------------------------------------------------------------------------------------------------------
Balance - end of year 2,321,576 2,733,633 2,321,570
=========================================================================================================
Deferred compensation obligation
Balance - beginning of year 14,597 14,563 9,900
Increase to obligation 1,900 34 4,663
- ---------------------------------------------------------------------------------------------------------
Balance - end of year 16,497 14,597 14,563
=========================================================================================================
Accumulated other comprehensive income
Net unrealized appreciation (depreciation) on investments
Balance - beginning of year 102,335 (83,327) 102,271
Change in year, net of tax 34,581 185,662 (185,598)
- ---------------------------------------------------------------------------------------------------------
Balance - end of year 136,916 102,335 (83,327)
=========================================================================================================
Cumulative translation adjustments
Balance - beginning of year (32,881) 17,175 6,471
Net adjustment for period, net of tax (2,436) (50,056) 10,704
- ---------------------------------------------------------------------------------------------------------
Balance - end of year (35,317) (32,881) 17,175
- ---------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) 101,599 69,454 (66,152)
=========================================================================================================
Ordinary Shares issued to employee trust
Balance - beginning of year (14,597) (14,563) (9,900)
Increases in Ordinary Shares (1,900) (34) (4,663)
- ---------------------------------------------------------------------------------------------------------
Balance - end of year (16,497) (14,597) (14,563)
=========================================================================================================
Total shareholders' equity $6,106,707 $5,420,211 $4,450,560
=========================================================================================================
See accompanying notes to consolidated financial statements
61
Consolidated Statements of Cash Flows
ACE Limited and Subsidiaries
For years ended December 31,
(in thousands of U.S. dollars) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (146,414) $ 542,982 $ 364,963
Adjustments to reconcile net income to net cash provided by operating
activities:
Unpaid losses and loss expenses, net of reinsurance recoverable 965,983 (329,072) (1,098,795)
Unearned premiums 771,039 574,244 71,658
Future policy benefits for life and annuity contracts 382,730 - -
Prepaid reinsurance premiums (365,050) (256,501) (65,068)
Deferred income taxes (118,058) 33,827 (46,853)
Net realized (gains) losses on investments 58,359 38,961 (37,916)
Amortization of premium/discounts on fixed maturities (2,019) (7,377) (8,712)
Amortization of goodwill 79,571 78,820 45,350
Deferred policy acquisition costs (112,714) (50,626) (7,282)
Insurance and reinsurance balances receivable (449,585) (175,809) (41,199)
Premiums received in advance (5,637) (636) 1,088
Insurance and reinsurance balances payable 110,809 (415,310) 440,607
Accounts payable, accrued expenses and other liabilities 160,646 (373,733) (89,171)
Net change in contract holder deposit funds (31,670) (49,825) (3,814)
Cumulative effect of adopting a new accounting standard 22,670 - -
Other 32,345 (37,117) 14,292
- ---------------------------------------------------------------------------------------------------------------
Net cash flows from (used for) operating activities $ 1,353,005 $ (427,172) $ (460,852)
===============================================================================================================
Cash flows from investing activities
Purchases of fixed maturities (16,847,920) (11,476,638) (17,853,323)
Purchases of equity securities (210,936) (411,022) (368,923)
Sales of fixed maturities 14,733,578 11,521,678 18,553,593
Sales of equity securities 204,842 793,499 421,365
Maturities of fixed maturities 44,929 68,869 437,665
Net realized gains (losses) on financial future contracts (21,976) (48,227) 68,311
Other investments (89,115) (214,416) (139,034)
Acquisitions of subsidiaries, net of cash acquired - - (2,679,216)
- ---------------------------------------------------------------------------------------------------------------
Net cash from (used for) investing activities $ (2,186,598) $ 233,743 $ (1,559,562)
===============================================================================================================
62
For the years ended December 31,
(in thousands of U.S. dollars) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid on Ordinary Shares $ (128,745) $ (106,459) $ (77,836)
Dividends paid on FELINE PRIDES (25,666) (15,254) -
Repurchase of Ordinary Shares (179,446) - -
Proceeds from short-term debt 56,144 314,623 1,049,585
Net proceeds from issuance of Ordinary Shares 1,135,878 400,320 -
Proceeds from exercise of options for Ordinary Shares 32,666 31,335 5,672
Proceeds from shares issued under Employee Stock Purchase Plan 6,074 1,234 1,151
Repayment of bank debt - (1,024,699) (198,816)
Issuance costs of FELINE PRIDES - (9,884) -
Proceeds from long-term debt - - 1,099,334
Proceeds from issuance of trust preferred securities - 300,000 500,000
Proceeds from issuance of FELINE PRIDES - 311,050 -
- ------------------------------------------------------------------------------------------------------------
Net cash from financing activities $ 896,905 $ 202,266 $2,379,090
============================================================================================================
Net increase in cash 63,312 8,837 358,676
Cash - beginning of year 608,069 599,232 240,556
- ------------------------------------------------------------------------------------------------------------
Cash - end of year $ 671,381 $ 608,069 $ 599,232
============================================================================================================
Supplemental cash flow information
Taxes paid $ 28,513 $ 38,817 $ 29,532
Interest paid $ 220,155 $ 224,787 $ 73,021
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
63
Consolidated Statements of Comprehensive Income
ACE Limited and Subsidiaries
For years ended December 31,
(in thousands of U.S. dollars) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $(146,414) $542,982 $ 364,963
Other comprehensive income (loss)
Net unrealized appreciation (depreciation) on investments
Unrealized appreciation (depreciation) on investments 65,168 220,901 (130,832)
Less: reclassification adjustment for net realized (gains) losses included in
net income (16,303) (7,219) (60,145)
- --------------------------------------------------------------------------------------------------------------
48,865 213,682 (190,977)
Cumulative translation adjustments (6,646) (70,448) 18,008
- --------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before income tax 42,219 143,234 (172,969)
Income tax expense related to other comprehensive income items (10,074) (7,628) (1,925)
- --------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 32,145 135,606 (174,894)
- --------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(114,269) $678,588 $ 190,069
==============================================================================================================
See accompanying notes to consolidated financial statements
64
Notes to Consolidated Financial Statements
ACE Limited and Subsidiaries
1. General
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 a broad range of insurance and reinsurance products to insureds
worldwide. In addition, ACE, through ACE Global Markets, provides funds at
Lloyd's, primarily in the form of letters of credit, to support underwriting
capacity for Lloyd's syndicates managed by Lloyd's managing agencies, which are
wholly owned subsidiaries of ACE. ACE operates through six business segments:
ACE Bermuda, ACE Global Markets, ACE Global Reinsurance, ACE USA, ACE
International and ACE Financial Services. These segments are described in Note
18.
2. Significant accounting policies
a) Basis of presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and include the accounts of the Company and its subsidiaries. The Company
records its proportionate share of the results of the Lloyd's syndicates in
which it participates. All significant intercompany accounts and transactions
have been eliminated. Certain items in the prior year financial statements have
been reclassified to conform with the current year presentation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company's principal estimates include loss and loss
expense reserves and estimated premiums for situations where the Company has not
received ceding company reports. Actual results may differ from these estimates.
b) Investments
The Company's investments are considered to be "available for sale" under the
definition included in the Financial Accounting Standard Board's ("FASB")
Statement of Financial Accounting Standards ("FAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Company's investment
portfolio is reported at fair value, being the quoted market price of these
securities provided by either independent pricing services, or when such prices
are not available, by reference to broker or underwriter bid indications.
Short-term investments comprise securities due to mature within one year of date
of issue. Short-term investments include certain cash and cash equivalents,
which are part of investment portfolios under the management of external
investment managers.
Securities sold under agreements to repurchase (liabilities) are accounted for
as collateralized investments and borrowings and are recorded at the contractual
repurchase amounts plus accrued interest. Assets to be repurchased are the same,
or substantially the same, as the assets transferred and the transferror,
through right of substitution, maintains the right and ability to redeem the
collateral on short notice.
Other investments principally comprise direct investments, investments in
investment funds and investments in limited partnerships. For direct investments
that meet the requirements for equity accounting, the Company accrues its
portion of the net income or loss of the investment. Other direct investments
are carried at fair value. Where fair values are not publicly available, the
investments are carried at estimated fair value. Investments in investment funds
are carried at the net asset value as advised by the fund. Investments in
limited partnerships are accounted for using the equity method.
Realized gains or losses on sales of investments are determined on a first-in,
first-out basis. Unrealized appreciation (depreciation) on investments is
included as other comprehensive income in shareholders' equity. The Company
evaluates the carrying value of its investments and if any of its investments
experience a decline in value that is considered other than temporary, the
Company records a realized loss in the statement of operations.
65
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
The Company utilizes financial futures, options, interest rate swaps and foreign
currency forward contracts for the purpose of managing certain investment
portfolio exposures (see Note 8 for additional discussion of the objectives and
strategies employed). These instruments are recognized as assets or liabilities
in the accompanying consolidated financial statements and changes in market
value are included in net realized gains or losses on investments in the
consolidated statements of operations.
Collateral held by brokers equal to a percentage of the total value of open
futures contracts is included in short-term investments.
Net investment income includes interest and dividend income together with
amortization of market premiums and discounts and is net of investment
management and custody fees. For mortgage-backed securities, and any other
holdings for which there is a prepayment risk, prepayment assumptions are
evaluated and revised as necessary. Any adjustments required due to the
resultant change in effective yields and maturities are recognized
prospectively.
c) Premiums
Premiums are generally recognized as written upon inception of the policy. For
multi-year policies written which are payable in annual installments, due to the
ability of the insured/reinsured to commute or cancel coverage within the term
of the policy, only the annual premium is included as written at policy
inception. The remaining annual premiums are included as written at each
successive anniversary date within the multi-year term.
Reinsurance premiums from traditional life and annuity policies with life
contingencies are generally recognized as revenue when due from policyholders.
Traditional life policies include those contracts with fixed and guaranteed
premiums and benefits. Benefits and expenses are matched with such income to
result in the recognition of profit over the life of the contracts.
Premiums written are primarily earned on a daily pro rata basis over the terms
of the policies to which they relate. Accordingly, unearned premiums represent
the portion of premiums written which is applicable to the unexpired portion of
the policies in force. Premium estimates for retrospectively rated policies are
recognized within the periods in which the related losses are incurred.
Financial guarantee premiums that are received upon inception of the policy are
earned pro rata over the period of risk. Installment premiums are earned over
each installment period, generally one year or less.
The Company underwrites loss portfolio transfer contracts. These contracts,
which meet the established criteria for reinsurance accounting, are recorded in
the statement of operations when written and generally result in large one-time
written and earned premiums with comparable incurred losses. The contracts, when
written, can cause significant variances in gross premiums written, net premiums
written, net premiums earned, net incurred losses, as well as the loss and loss
expense ratio and underwriting and administrative expense ratio.
Reinsurance premiums assumed are estimated based on information provided by
ceding companies. The information used in establishing these estimates is
reviewed and subsequent adjustments are recorded in the period in which they are
determined. These premiums are earned over the terms of the related reinsurance
contracts.
d) Earnings per share
Basic earnings per share is calculated utilizing the weighted average shares
outstanding. All potentially dilutive securities including FELINE PRIDES,
unvested restricted stock, stock options, warrants and convertible securities
are excluded from the basic earnings per share calculation. In calculating
diluted earnings per share, the weighted average shares outstanding is increased
to include all potentially dilutive securities. The incremental shares from
assumed conversions are not included in computing diluted loss per share amounts
as these shares are considered anti-dilutive. Basic and diluted earnings per
share are calculated by dividing income available to ordinary shareholders by
the applicable weighted average number of shares outstanding during the year.
66
e) Policy acquisition costs
Policy acquisition costs consist of commissions, premium taxes, underwriting and
other costs that vary with and are primarily related to the production of
premium. Acquisition costs are deferred and amortized over the period in which
the related premiums are earned, or for annuities over the pattern of estimated
gross profit. Deferred policy acquisition costs are reviewed to determine if
they are recoverable from future income, including investment income. If such
costs are estimated to be unrecoverable, they are expensed.
f) Unpaid losses and loss expenses
A liability is established for the estimated unpaid losses and loss expenses of
the Company under the terms of, and with respect to, its policies and
agreements. The methods of determining such estimates and establishing the
resulting reserve are reviewed continuously and any adjustments are reflected in
operations in the period in which they become known. Future developments may
result in losses and loss expenses significantly greater or less than the
reserve provided.
The development of life and annuity policy reserves requires management to make
estimates and assumptions regarding mortality, morbidity, lapse, expense and
investment experience. Such estimates are primarily based on historical
experience and information provided by ceding companies. Actual results could
differ materially from these estimates.
Management monitors actual experience, and where circumstances warrant, will
revise its assumptions and the related reserve estimates. These revisions are
recorded in the period they are determined.
In accordance with industry standards, the financial guaranty unpaid losses and
loss expenses have been discounted using an average rate of 6 percent in both
2001 and 2000.
g) Contract holder deposit funds
Contract holder deposit funds represents a liability for an investment contract
sold that does not meet the definition of an insurance contract under Statement
of Financial Accounting Standards No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts." The investment contracts are
sold with a guaranteed rate of return. The proceeds are then invested with the
intent of realizing a greater return than is called for in the investment
contract.
h) Goodwill
Goodwill represents the excess of the cost of acquisitions over the identifiable
net assets acquired. The Company amortizes goodwill recorded in connection with
its business combinations on a straight-line basis over the estimated useful
lives, which range from 25 to 40 years. In June 2001, FASB issued FAS No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142"). As required, the Company
will adopt FAS 142 on January 1, 2002 and will cease amortizing goodwill at that
time.
i) Reinsurance
In the ordinary course of business, the Company's insurance subsidiaries assume
and cede reinsurance with other insurance companies. These arrangements provide
greater diversification of business and minimize the net loss potential arising
from large risks. Ceded reinsurance contracts do not relieve the Company of its
obligation to its insureds.
Reinsurance recoverable includes the balances due from reinsurance companies for
paid and unpaid losses and loss expenses that will be recovered from reinsurers,
based on contracts in force. A reserve for uncollectible reinsurance has been
determined based upon a review of the financial condition of the reinsurers and
an assessment of other available information.
Prepaid reinsurance premiums represent the portion of premiums ceded to
reinsurers applicable to the unexpired terms of the reinsurance contracts in
force.
67
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
j) Translation of foreign currencies
Financial statements of subsidiaries expressed in foreign currencies are
translated into U.S. dollars in accordance with FAS No. 52, "Foreign Currency
Translation" ("FAS 52"). Under FAS 52, functional currency assets and
liabilities are translated into U.S. dollars generally using period end rates of
exchange and the related translation adjustments are recorded as a separate
component of accumulated other comprehensive income. Functional currencies are
generally the currencies of the local operating environment. Statement of
operations amounts expressed in functional currencies are translated using
average exchange rates. Gains and losses resulting from foreign currency
transactions are recorded in current income.
k) Income taxes
Income taxes have been provided in accordance with the provisions of FAS No.
109, "Accounting for Income Taxes" on those operations which are subject to
income taxes (see Note 14). Deferred tax assets and liabilities result from
temporary differences between the amounts recorded in the consolidated financial
statements and the tax basis of the Company's assets and liabilities. Such
temporary differences are primarily due to the tax basis discount on unpaid
losses, adjustment for unearned premiums, uncollectible reinsurance, and tax
benefits of net operating loss carry-forwards. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance against deferred tax
assets is recorded if it is more likely than not that all or some portion of the
benefits related to deferred tax assets will not be realized.
l) Cash flow information
Purchases and sales or maturities of short-term investments are recorded net for
purposes of the statements of cash flows and are included with fixed maturities.
m) Derivatives
The Company adopted FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133") which 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 as of January 1, 2001. 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. As of December 31, 2001, the Company had no
derivatives that were designated as hedges.
The Company maintains investments in derivative instruments such as futures,
options, interest rate swaps 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, FAS 133, as amended, did not have a significant
impact on the results of operations, financial condition or liquidity as it
relates to these instruments.
Certain products (principally credit protection oriented) issued by the ACE
Financial Services segment 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.
Included in premiums written is $76 million related to these products. Effective
January 1, 2001, the Company records these products at their fair value, which
is determined principally through obtaining quotes from independent dealers and
counterparties.
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, a pretax loss of $17
million to reflect the change in the fair value of derivatives during the year.
The level of gains and losses resulting from changes in the fair value of
derivatives on a prospective basis is 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.
68
n) New accounting pronouncements
In June 2001, FASB issued FAS 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 will 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.
3. Acquisitions
On July 2, 1999, the Company, through a U.S. holding company, ACE INA Holdings,
Inc. ("ACE INA"), acquired CIGNA Corporation's ("CIGNA") 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"). The ACE INA Acquisition has
been recorded using the purchase method of accounting and accordingly, the
consolidated financial statements include the results of ACE INA and its
subsidiaries from July 2, 1999, the date of acquisition. Approximately $1.85
billion of goodwill was generated as a result of the acquisition.
Under the terms of the ACE INA Acquisition Agreement, CIGNA agreed to provide a
guarantee to ACE to indemnify against unanticipated increases in recorded
reserves for losses and loss adjustment expenses of certain subsidiaries being
acquired by ACE. CIGNA had the option to replace its guarantee with reinsurance
obtained from a mutually agreed upon third-party reinsurer. Contemporaneous with
the consummation of the ACE INA Acquisition, CIGNA exercised its option and
replaced its guarantee with reinsurance by directing certain subsidiaries being
acquired to transfer $1.25 billion of investments to National Indemnity Company,
a subsidiary of Berkshire Hathaway Inc., for aggregate coverage of $2.5 billion.
This coverage attaches at an amount equal to the net recorded reserves of the
certain subsidiaries acquired, on the closing date, minus $1.25 billion.
On December 30, 1999, the Company acquired Capital Re Corporation ("Capital Re")
which is engaged in the financial guaranty reinsurance business. Following the
acquisition the name of the company was changed to 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. These shares were capitalized at a value of $17.625 per
share, which was determined in accordance with the Emerging Issues Task Force
("EITF") 95-19 consensus that deals with the value of equity securities issued
to effect a purchase combination. The total value of the acquisition amounted to
$588 million, which includes the value of stock options and restricted stock of
Capital Re that were converted into stock options and restricted stock of ACE
and transaction costs. The Capital Re acquisition was recorded using the
purchase method of accounting and accordingly, the consolidated financial
statements include the results of Capital Re and its subsidiaries from December
30, 1999, the date of acquisition. Approximately $105 million of goodwill was
generated as a result of the acquisition. As Capital Re was acquired on December
30, 1999, the Company has not reflected any operations from this segment during
1999.
69
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
4. Investments
a) Fixed maturities
The fair values and amortized costs of fixed maturities at December 31, 2001 and
2000 are as follows:
2001 2000
-----------------------------------------------------------
(in thousands of U.S. dollars) Fair Value Amortized Cost Fair Value Amortized Cost
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury and agency $ 1,344,076 $ 1,314,524 $ 1,216,544 $ 1,179,018
Non-U.S. governments 1,428,977 1,403,053 1,250,712 1,205,424
Corporate securities 6,743,090 6,687,887 5,378,203 5,450,681
Mortgage-backed securities 2,322,951 2,272,111 1,712,949 1,689,849
States, municipalities and political subdivisions 1,161,071 1,116,869 1,162,901 1,115,965
- -----------------------------------------------------------------------------------------------------------------------
Fixed maturities $13,000,165 $12,794,444 $10,721,309 $10,640,937
=======================================================================================================================
The gross unrealized appreciation (depreciation) related to fixed maturities at
December 31, 2001 and 2000 are as follows:
2001 2000
-----------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
(in thousands of U.S. dollars) Appreciation Depreciation Appreciation Depreciation
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury and agency $ 38,499 $ (8,947) $ 38,566 $ (1,040)
Non-U.S. governments 32,993 (7,068) 54,494 (9,206)
Corporate securities 179,028 (123,826) 70,868 (143,346)
Mortgage-backed securities 60,345 (9,505) 30,316 (7,216)
States, municipalities and political subdivisions 50,105 (5,903) 48,213 (1,277)
- -----------------------------------------------------------------------------------------------------------------------
$ 360,970 $ (155,249) $ 242,457 $ (162,085)
=======================================================================================================================
70
Mortgage-backed securities issued by U.S. government agencies are combined with
all other mortgage derivatives held and are included in the category
"mortgage-backed securities". Approximately 81 percent of the total mortgage
holdings at December 31, 2001, and 74 percent at December 31, 2000, are
represented by investments in GNMA, FNMA and FHLMC bonds. The remainder of the
mortgage exposure consists of CMOs (Collateralized Mortgage Obligations) and
non-government mortgage-backed securities, the majority of which provide a
planned structure for principal and interest payments and carry a "AAA" rating
by the major credit rating agencies. Fixed maturities at December 31, 2001, by
contractual maturity, are shown below. Expected maturities could differ from
contractual maturities because borrowers may have the right to call or prepay
obligations, with or without call or prepayment penalties.
(in thousands of U.S. dollars) Fair Value Amortized Cost
- -------------------------------------------------------------------------------
Maturity period
Less than 1 year $ 776,130 $ 757,954
1-5 years 4,553,390 4,463,448
5-10 years 3,959,947 3,940,549
Greater than 10 years 1,387,747 1,360,382
- -------------------------------------------------------------------------------
$10,677,214 $10,522,333
Mortgage-backed securities 2,322,951 2,272,111
- -------------------------------------------------------------------------------
Total fixed maturities $13,000,165 $12,794,444
===============================================================================
b) Equity securities
The gross unrealized appreciation (depreciation) on equity securities at
December 31, 2001 and 2000 is as follows:
(in thousands of U.S. dollars) 2001 2000
- -------------------------------------------------------------------------------
Equity securities-cost $ 516,028 $ 495,049
Gross unrealized appreciation 41,043 84,199
Gross unrealized depreciation (89,505) (47,202)
- -------------------------------------------------------------------------------
Equity securities-fair value $ 467,566 $ 532,046
===============================================================================
c) Net realized gains (losses) and change in net unrealized appreciation
(depreciation) on investments
The analysis of net realized gains (losses) on investments and the change in net
unrealized appreciation (depreciation) on investments for the years ended
December 31, 2001, 2000 and 1999 is as follows:
(in thousands of U.S. dollars) 2001 2000 1999
- -------------------------------------------------------------------------------
Fixed maturities
Gross realized gains $ 189,751 $ 90,403 $ 113,129
Gross realized losses (196,732) (172,009) (195,496)
- -------------------------------------------------------------------------------
(6,981) (81,606) (82,367)
Equity securities
Gross realized gains 58,779 170,243 59,384
Gross realized losses (32,213) (56,199) (12,149)
- -------------------------------------------------------------------------------
26,566 114,044 47,235
Other investments (38,200) (12,114) 8,696
Currency losses (12,061) (11,058) (3,959)
Financial futures and option contracts
and interest rate swaps - net realized
gains (losses) (10,843) (48,227) 68,311
Fair value adjustment on derivatives (16,840) - -
- -------------------------------------------------------------------------------
Net realized gains (losses) on investments (58,359) (38,961) 37,916
- -------------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) on investments
Fixed maturities 125,349 310,971 (311,614)
Equity securities (85,459) (115,759) 127,350
Other investments 8,975 16,389 (4,271)
Short-term investments - 2,081 (2,442)
Deferred income taxes (14,284) (28,020) 5,379
- -------------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) on investments 34,581 185,662 (185,598)
- -------------------------------------------------------------------------------
Total net realized gains (losses) and
change in net unrealized appreciation
(depreciation) on investments $ (23,778) $ 146,701 $(147,682)
===============================================================================
71
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
d) Net investment income
Net investment income for the years ended December 31, 2001, 2000 and 1999 was
derived from the following sources:
(in thousands of U.S. dollars) 2001 2000 1999
- ---------------------------------------------------------------------------------------
Fixed maturities and short-term investments $ 811,912 $ 766,312 $ 495,078
Equity securities 9,837 12,268 8,731
Other investments 5,861 39,783 22,481
- ---------------------------------------------------------------------------------------
Gross investment income 827,610 818,363 526,290
Investment expenses (41,741) (47,508) (32,953)
- ---------------------------------------------------------------------------------------
Net investment income $ 785,869 $ 770,855 $ 493,337
=======================================================================================
e) Restricted assets
The Company is required to maintain assets on deposit with various regulatory
authorities to support its insurance and reinsurance operations. These
requirements are generally promulgated in the statutory regulations of the
individual jurisdictions. These funds on deposit are available to settle
insurance and reinsurance liabilities. The Company also utilizes trust funds in
certain large transactions where the trust funds are set up for the benefit of
the ceding companies, and generally take the place of Letter of Credit ("LOC")
requirements. The Company also has investments in segregated portfolios
primarily to provide collateral or guarantees for LOCs and debt instruments
described in Notes 8 and 9. The total value of restricted assets at December 31,
2001 and 2000 was $3.5 billion and $2.3 billion, respectively.
(in millions of U.S. dollars) 2001 2000
- --------------------------------------------------------------------------------
Deposits with U.S. regulatory authorities $ 864 $ 923
Deposits with non-U.S. regulatory authorities 735 670
Assets used for collateral or guarantees 1,030 731
Trust funds 852 -
- --------------------------------------------------------------------------------
$ 3,481 $ 2,324
================================================================================
5. September 11, 2001 tragedy
The terrorist attacks on September 11, 2001 ("the September 11th tragedy")
resulted in the largest insured loss in history and had a substantial impact on
the results of the Company. Detailed below is an analysis, by operating segment,
of the impact of the September 11th tragedy on the Company's statement of
operations for the year ended December 31, 2001. The analysis of the impact of
the September 11th tragedy includes the effects of intercompany reinsurance
transactions. ACE believes that its current estimate for September 11, 2001
claims is reasonable and accurate based on information currently available. ACE
continues to evaluate its total potential liability based upon individual
insurance and reinsurance policy language, legal and factual developments in
underlying matters involving its insureds as well as legislative developments in
the U.S. involving the terrorist attack. If ACE's current assessments of future
developments are proved wrong, the financial impact of any of them, singularly
or in the aggregate, could be material. For example, business interruption
insurance claims could materialize in the future with greater frequency than ACE
has anticipated or provided for in its estimates; or, insureds that ACE expects
will not be held responsible for injuries resulting from the attack, are
ultimately found to be responsible at a financial level that impacts ACE's
insurance or reinsurance policies.
72
- ------------------------------------------------------------------------------------------------------------
Impact of September 11, 2001 Tragedy
Year ended December 31, 2001
ACE ACE
ACE Global Global ACE ACE ACE
(in thousands of U.S. dollars) Bermuda Markets Reinsurance USA International Consolidated
- ------------------------------------------------------------------------------------------------------------
Operations Data:
Gross premiums written $ 142,426 $ (20,691) $ - $ - $ - $ 121,735
Net premiums written 138,676 (66,292) 1,768 (18,124) (4,500) 51,528
Net premiums earned 100,092 (66,292) 2,892 (18,124) (4,500) 14,068
Losses and loss expenses 341,785 140,212 122,017 28,178 18,300 650,492
Policy acquisition costs - - 502 - - 502
- ------------------------------------------------------------------------------------------------------------
Underwriting income (241,693) (206,504) (119,627) (46,302) (22,800) (636,926)
Income tax benefit - (61,951) - (16,206) - (78,157)
- ------------------------------------------------------------------------------------------------------------
Net loss $ (241,693) $(144,553) $ (119,627) $(30,096) $ (22,800) $ (558,769)
============================================================================================================
In estimating the impact of the tragedy on the Company, premium payments
required to reinstate reinsurance policies have been accrued. Premiums from
insureds required to reinstate their insurance or reinsurance coverage with the
Company have not been accrued in the estimate. The premiums accrued in ACE
Bermuda represent additional premiums due under the terms of certain financial
solutions reinsurance programs directly impacted by the tragedy.
The Company's exposure to the tragedy is derived from losses incurred by insured
and reinsured clients of ACE. Gross insured claims incurred by ACE with respect
to the tragedy are covered by significant amounts of reinsurance from
high-quality reinsurers. In order to identify policies which may have been
affected by the September 11th tragedy, the Company conducted a review of its
insurance and reinsurance portfolios on a policy by policy basis, which included
first-party, third-party, reinsurance, retrocessional, financial guaranty and
life reinsurance exposures. Net losses and loss expenses of $650 million result
from estimated gross losses and loss expenses of approximately $1.9 billion, net
of estimated reinsurance recoveries of approximately $1.3 billion. Approximately
98 percent of all reinsurance purchased by ACE is with reinsurers rated A- or
better, including 38 percent with reinsurers rated AAA- and 33 percent with
reinsurers rated AA-. This analysis is based on ratings from Standard & Poor's
or an equivalent rating.
6. Unpaid losses and loss expenses
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 become available and are reviewed, as new or improved
methodologies are developed or as current laws change. Any such revisions could
result in future changes in estimates of losses or reinsurance recoverable, and
would be reflected in the Company's results of operations in the period in which
the estimates are changed.
73
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
The reconciliation of unpaid losses and loss expenses for the years ended
December 31, 2001, 2000 and 1999 is as follows:
(in thousands of U.S. dollars) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
Gross unpaid losses and loss expenses at beginning of year $ 17,388,394 $16,460,247 $3,678,269
Reinsurance recoverable on unpaid losses (8,057,444) (7,551,430) (1,100,464)
- ------------------------------------------------------------------------------------------------------------
Net unpaid losses and loss expenses at beginning of year 9,330,950 8,908,817 2,577,805
Unpaid losses and loss expenses assumed in respect of reinsurance
business acquired 300,204 169,537 183,774
Unpaid losses and loss expenses in respect of formerly discontinued
operations - 1,269,914 -
Unpaid losses and loss expenses assumed in respect of acquired
companies (net of reinsurance recoverable of $6,345,679 in 1999) - - 6,940,593
- ------------------------------------------------------------------------------------------------------------
Total 9,631,154 10,348,268 9,702,172
- ------------------------------------------------------------------------------------------------------------
Net losses and loss expenses incurred in respect of losses occurring in:
Current year 4,457,986 2,996,429 1,601,278
Prior year 94,470 (60,364) 38,265
- ------------------------------------------------------------------------------------------------------------
Total 4,552,456 2,936,065 1,639,543
- ------------------------------------------------------------------------------------------------------------
Net losses and loss expenses paid in respect of losses occurring in:
Current year 1,345,699 1,205,110 916,848
Prior year 2,430,655 2,631,171 1,509,638
- ------------------------------------------------------------------------------------------------------------
Total 3,776,354 3,836,281 2,426,486
- ------------------------------------------------------------------------------------------------------------
Foreign currency revaluation (68,242) (117,102) (6,412)
- ------------------------------------------------------------------------------------------------------------
Net unpaid losses and loss expenses at end of year 10,339,014 9,330,950 8,908,817
Reinsurance recoverable on unpaid losses 10,389,108 8,057,444 7,551,430
- ------------------------------------------------------------------------------------------------------------
Gross unpaid losses and loss expenses at end of year $20,728,122 $17,388,394 $16,460,247
============================================================================================================
Net losses and loss expenses incurred for the year ended December 31, 2001 were
impacted by $94 million of prior year development principally in the ACE
International segment. This development was reflected during the fourth quarter
of 2001 when the Company recorded additional reserves to strengthen its casualty
loss reserves.
Net losses and loss expenses incurred for the year ended December 31, 2000 were
impacted by favorable development of reserves from prior periods primarily from
ACE Tempest Re, ACE USA and ACE Bermuda partially offset by unfavorable
development in ACE Financial Services.
Net losses and loss expenses incurred for the year ended December 31, 1999
include incurred losses for ACE INA from July 2, 1999, the date of acquisition.
With respect to the analysis of incurred and paid
74
losses for ACE INA for the 1999 period, all losses incurred and paid, on losses
occurring in the period January 1, 1999, through December 31, 1999, have been
included as current year activity in 1999.
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 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.
The following table presents selected data on the unpaid losses and loss
expenses for asbestos, and environmental and other latent exposures as at
December 31, 2001 and 2000:
2001 2000
-----------------------------------
(in millions of U.S. dollars) Gross Net Gross Net
- --------------------------------------------------------------------------------
Asbestos $1,119 $149 $1,073 $212
Environmental and other latent exposures 1,089 452 1,156 540
- --------------------------------------------------------------------------------
$2,208 $601 $2,229 $752
================================================================================
During the years ended December 31, 2001 and 2000, the Company made payments of
$239.3 million and $308.9 million, respectively, with respect to latent claims.
At December 31, 2001 and 2000, the Company's reinsured financial guaranty
portfolio was broadly diversified by bond type, geographic location and maturity
schedule, with no single risk representing more than 1.3 percent and 1.4
percent, respectively, of the Company's net par in force. The Company limits its
exposure to losses from reinsured financial guarantees by underwriting primarily
investment grade obligations and retroceding a portion of its risks to other
insurance companies.
Net financial guaranty par in force was approximately $74.2 billion and $65.8
billion at December 31, 2001 and 2000, respectively. At December 31, 2001, the
weighted average credit quality of this portfolio, including credit default
swaps was A+ based on ratings assigned by Standard & Poor's. The composition at
December 31, 2001 and 2000, by type of issue and the range of final maturities,
was as follows:
Range of final
(in billions of U.S. dollars) 2001 2000 maturities
- --------------------------------------------------------------------------------
Non-municipal $26.2 $19.5 1-40 years
Tax-backed 17.9 16.9 1-40 years
Utility 13.5 15.1 1-40 years
Special revenue 7.4 6.9 1-40 years
Health care 5.7 6.6 1-40 years
Structured municipal 2.6 - 1-25 years
Housing 0.8 0.8 1-40 years
Project finance 0.1 - 1-30 years
- --------------------------------------------------------------------------------
Total $74.2 $65.8
================================================================================
As part of its financial guaranty business, the Company participates in credit
default swap transactions whereby one counterparty pays a periodic fee in fixed
basis points on a notional amount in return for a contingent payment by the
other counterparty in the event one or more defined credit events occurs with
respect to one or more third-party reference securities or loans. A credit event
is defined as a failure to pay, bankruptcy, cross acceleration (generally
accompanied by a failure to pay), repudiation, restructuring or similar
nonpayment event. The total notional amount of credit default swaps outstanding
at December 31, 2001 and 2000, included in the Company's financial guaranty
exposure above was $15.5 billion and $11.3 billion, respectively.
At December 31, 2001 and 2000, the Company's net mortgage guaranty insurance in
force (representing the current principal balance of all mortgage loans that are
currently reinsured) was approximately $5.7 billion and $6.9 billion,
respectively, and direct primary net risk in force was approximately $2.6
billion and $2.7 billion, respectively.
75
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
7. 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 years ended December 31, 2001, 2000 and 1999 are as follows:
(in thousands of U.S. dollars) 2001 2000 1999
- --------------------------------------------------------------------------------
Premiums written
Direct $ 7,629,233 $ 6,093,151 $ 3,015,176
Assumed 2,536,129 1,493,620 853,981
Ceded (3,801,748) (2,707,417) (1,373,809)
- --------------------------------------------------------------------------------
Net $ 6,363,614 $ 4,879,354 $ 2,495,348
================================================================================
Premiums earned
Direct $ 6,980,359 $ 5,612,988 $ 2,917,301
Assumed 2,359,241 1,361,254 835,966
Ceded (3,422,423) (2,439,479) (1,267,530)
- --------------------------------------------------------------------------------
Net $ 5,917,177 $ 4,534,763 $ 2,485,737
================================================================================
The Company's provision for reinsurance recoverable at December 31, 2001 and
2000, is as follows:
(in thousands of U.S. dollars) 2001 2000
- --------------------------------------------------------------------------------
Reinsurance recoverable on paid losses and
loss expenses, (net of provision for
uncollectible balances - $62,493 and nil) $ 1,004,003 $ 937,496
Reinsurance recoverable on future policy benefits 5,335 -
Reinsurance recoverable on unpaid losses
and loss expenses 11,115,552 8,767,111
Provision for uncollectible balances on
reinsurance recoverable (726,444) (709,667)
- --------------------------------------------------------------------------------
Reinsurance recoverable $11,398,446 $8,994,940
================================================================================
The Company evaluates the financial condition of its reinsurers and potential
reinsurers on a regular basis and also monitors concentrations of credit risk
with reinsurers. At December 31, 2001, the largest concentration of reinsurance
recoverables, which amounted to 24 percent, was with a group of affiliated
reinsurers rated AAA by Standard & Poor's. No other reinsurer or affiliated
group of reinsurers accounted for more than 5 percent of the total reinsurance
recoverable.
At December 31, 2001, approximately 90 percent of the reinsurance recoverable
was recoverable from reinsurers rated A- or better, including approximately 53
percent with reinsurers that are either rated AAA- or better, are collateralized
or recoverable from a government pool. Approximately 20 percent was recoverable
from reinsurers in the AA rating category, 18 percent from reinsurers in the A
rating category and 9 percent was recoverable from all others. This analysis is
based on ratings from Standard & Poor's or an equivalent rating. The allowance
for unrecoverable reinsurance is required principally due to the failure of
reinsurers to indemnify ACE, 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 and London reinsurance market exposures.
Allowances have been established for amounts estimated to be uncollectible.
8. Commitments and contingencies
a) Derivative instruments
The Company maintains investments in derivative instruments such as futures,
options, interest rate swaps 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 currently records changes in market value of these instruments as
realized gains or losses in the consolidated statements of operations.
(i) Foreign currency exposure management
The Company uses foreign currency forward contracts to minimize the effect of
fluctuating foreign currencies. The forward currency contracts purchased are not
specifically identifiable against cash, any single security or groups of
securities denominated in those currencies, and therefore, do not qualify as
hedges for financial reporting purposes. All realized and unrealized contract
gains and losses are reflected currently in the statements of operations. The
contractual amount of the foreign
76
currency forward contracts at December 31, 2001, was $81 million, the current
fair value was $80 million and the unrealized loss was $1 million.
(ii) Duration management and market exposure
Futures: A portion of the Company's equity exposure is attained using a
synthetic equity strategy, whereby equity index futures contracts are held in an
amount equal to the market value of an underlying portfolio comprised of
short-term investments and fixed maturities. This creates an equity market
exposure equal in value to the total amount of funds invested in this strategy.
In addition, exchange traded bond and note futures contracts may be used in
fixed maturity portfolios as substitutes for ownership of the physical bonds and
notes without significantly increasing the risk in the portfolio. Investments in
financial futures contracts may be made only to the extent that there are assets
under management, not otherwise committed.
Futures contracts give the holder the right and obligation to participate in
market movements, determined by the index or underlying security on which the
futures contract is based. Settlement is made daily in cash by an amount equal
to the change in value of the futures contract times a multiplier that scales
the size of the contract. At December 31, 2001, the contract amount of $502
million reflects the net extent of involvement the Company had in these
financial instruments.
Options: Option contracts may be used in the portfolio as protection against
unexpected shifts in interest rates, which would thereby affect the duration of
the fixed maturity portfolio. By using options in the portfolio, the overall
interest rate sensitivity of the portfolio can be reduced. Option contracts may
also be used as an alternative to futures contracts in the Company's synthetic
equity strategy as described above. An option contract conveys to the holder the
right, but not the obligation, to purchase or sell a specified amount or value
of an underlying security at a fixed price. The price of an option is influenced
by the underlying security, expected volatility, time to expiration and supply
and demand.
For long option positions, the maximum loss is the premium paid for the option.
The maximum credit exposure is represented by the fair value of the options
held. For short option positions, the potential loss is the same as having taken
a position in the underlying security. Short call options are backed in the
portfolio with the underlying, or highly correlated, securities and short put
options are backed by uncommitted cash for the in-the-money portion.
Interest rate swaps: An interest rate swap is a contract between two
counterparties in which interest payments are made based on a notional principal
amount, which itself is never paid or received. At December 31, 2001, the
notional principal amount was $621 million. Under the terms of an interest rate
swap one counterparty makes interest payments based on a fixed interest rate and
the other counterparty's payments are based on a floating rate. Interest rate
swap contracts are used in the portfolio as protection against unexpected shifts
in interest rates which would affect the fair value of the fixed maturity
portfolio. By using swaps in the portfolio, the overall duration, or interest
rate sensitivity of the portfolio can be reduced.
The credit risk associated with the above derivative financial instruments
relates to the potential for non-performance by counterparties. Non-performance
is not anticipated; however, in order to minimize the risk of loss, management
monitors the creditworthiness of its counterparties. The performance of exchange
traded instruments is guaranteed by the exchange on which they trade. For
non-exchange traded instruments, the counterparties are principally banks, which
must meet certain criteria according to the Company's investment guidelines.
These counterparties are required to have a minimum credit rating of AA- by
Standard and Poor's or Aa3 by Moody's. In addition, certain contracts require
that collateral be posted once pre-determined thresholds are breached as a
result of market movements.
b) Concentrations of credit risk
The investment portfolio is managed following prudent standards of
diversification. Specific provisions limit the allowable holdings of a single
issue and issuers. The Company believes that there are no significant
concentrations of credit risk associated with its investments.
c) 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
77
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
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. During the year
ended December 31, 2001, amounts of $180 million were drawn under the 364-day
revolving credit facility. These amounts were fully repaid during the year. In
2000, an amount of $25 million was drawn under the five-year facility and
remained outstanding at December 31, 2001.
ACE Tempest Re also maintained an uncollateralized, syndicated revolving credit
facility in the amount of $72.5 million, which was guaranteed by the Company. At
December 31, 2001, no amounts had drawn down under this facility. This facility
expired in February 2002 and was not renewed.
As of December 31, 2001, ACE Guaranty Re Inc. was party to a non-recourse credit
facility with a syndicate of banks pursuant to which the syndicate provides up
to $150 million specifically designed to provide rating agency qualified capital
to further support ACE Guaranty Re Inc. claims-paying resources. The facility
expires on October 15, 2008. ACE Guaranty Re Inc. has not borrowed under this
credit facility.
d) Letters of Credit
In November 2001, to fulfill the requirements of Lloyd's for open years of
account, the Company renewed and increased a syndicated uncollateralized,
five-year LOC facility in the amount of (Pound)440 million (approximately $625
million). This facility was originally arranged in 1998. This LOC facility
requires that the Company and/or certain of its subsidiaries continue to
maintain certain covenants, including a minimum consolidated tangible net worth
covenant and a maximum leverage covenant.
In August 2001, the Company, and various subsidiaries as Account Parties and
Guarantors, entered into an unsecured syndicated, one-year LOC facility in the
amount of $450 million for general business purposes, including the issuance of
insurance and reinsurance letters of credit. This facility replaced an LOC
facility originally arranged in September 1999 and renewed in September 2000.
This 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. Usage under this facility was $373
million as of December 31, 2001.
In December 2001, the Company, along with various subsidiaries as Account
Parties and Guarantors, entered into a secured syndicated, one-year LOC facility
in the amount of $500 million for general business purposes, including the
issuance of insurance and reinsurance letters of credit. Usage under this
facility is secured by fixed maturity investments and 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. Usage
under this facility was $130 million as of December 31, 2001.
The Company also maintains various LOC facilities, both collateralized and
uncollateralized, for general corporate purposes. At December 31, 2001, the
aggregate availability under these facilities was $533 million and usage was
$307 million.
e) Lease commitments
The Company and its subsidiaries lease office space in the countries in which
they operate under operating leases which expire at various dates through
January 2017. The Company renews and enters into new leases in the ordinary
course of business as required. Total rent expense with respect to these
operating leases for the years ended December 31, 2001, 2000 and 1999, were
approximately $62 million, $64 million and $63 million, respectively.
Future minimum lease payments under the leases are expected to be as follows:
Year ending
(in thousands of U.S. dollars) December 31,
- --------------------------------------------------------------------------------
2002 $ 64,300
2003 62,300
2004 57,400
2005 52,300
2006 27,200
Later years 54,200
- --------------------------------------------------------------------------------
Total minimum future lease commitments $317,700
================================================================================
78
f) Legal proceedings
The Company is subject to legal proceedings and claims that have arisen in the
ordinary course of its business and have not been finally adjudicated. Although
there can be no assurance as to the ultimate disposition of these matters, it is
the opinion of the Company's management, based upon the information available at
this time, that the expected outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the results of operations
or financial condition of the Company.
9. Debt
The following table outlines the Company's debt as of December 31, 2001 and
2000:
(in millions of U.S. dollars) 2001 2000
- --------------------------------------------------------------------------------
Short-term debt
ACE Financial Services note $ 25 $ 25
Reverse Repurchase Agreements 395 -
ACE Financial Services Debentures due 2002 75 -
ACE INA commercial paper - 340
- --------------------------------------------------------------------------------
$ 495 $ 365
================================================================================
Long-term debt
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
ACE Financial Services Debentures due 2002 - 75
- --------------------------------------------------------------------------------
$1,349 $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
================================================================================
a) Commercial paper and money market facilities
In 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 as outlined in Note 8) for ACE
and for ACE INA.
During the year ended December 31, 2001 the Company borrowed $180 million under
the $800 million 364-day revolving credit facility. These borrowings were used
to repay maturing commercial paper. In October 2001, the Company and certain
subsidiaries executed securities repurchase agreements with various
counterparties. Under these repurchase agreements, the Company agreed to sell
securities and repurchase them at a date in the future for a predetermined
price. The Company used the proceeds of repurchase transactions to repay
maturing commercial paper of $215 million and the bank borrowings of $180
million. At December 31, 2001, short-term debt consisted of $395 million of
amounts owed to brokers under securities repurchase transactions, $25 million in
bank borrowings by ACE Financial Services and the ACE Financial Services
debentures due in November 2002. Subsequent to year end, the Company repaid $335
million of the amounts owed to brokers under securities repurchase transactions
with the proceeds raised from the issuance of commercial paper and internal
liquidity. Through the years ended December 31, 2001, and December 31, 2000,
commercial paper rates averaged 5.0 percent and 6.2 percent. The average rate on
bank loans during 2001 was 3.4 percent, respectively. The rate on repurchase
transactions, which were used during the quarter ended December 31, 2001,
averaged 2.0 percent.
b) ACE INA notes and debentures
In 1999, ACE INA issued $400 million of 8.2 percent notes due August 15, 2004,
$300 million of 8.3 percent notes due August 15, 2006, and $100 million of 8.875
percent debentures due August 15, 2029. The notes and debentures are not
redeemable before maturity and do not have the benefit of any sinking fund.
These unsecured notes and debentures are guaranteed on a senior basis by the
Company and they rank equally with all of ACE INA's other senior indebtedness.
79
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
c) ACE US Holdings senior notes
In 1998, ACE US Holdings issued $250 million in aggregate principal amount of
unsecured senior notes maturing in October 2008. Interest payments, based on a
floating rate, averaged 9.0 percent during fiscal 2000 and 8.6 percent during
fiscal 2001. The senior notes are callable subject to certain call premiums.
Simultaneously, the Company entered into a notional $250 million swap
transaction that has the economic effect of reducing the cost of debt to the
consolidated group, excluding fees and expenses, to 6.47 percent for 10 years.
Certain assets totaling approximately $90 million are pledged as collateral in
connection with the swap transaction. In the event that the Company terminates
the swap prematurely, the Company would be liable for certain transaction costs.
The swap counterparty is a highly rated major financial institution and the
Company does not anticipate non-performance.
d) ACE INA subordinated notes
In 1999, ACE INA issued $300 million 11.2 percent unsecured subordinated notes
maturing in December 2009. The subordinated notes are callable subject to
certain call premiums. Simultaneously, the Company entered into a notional $300
million swap transaction that has the economic effect of reducing the cost of
debt to the consolidated group, excluding fees and expenses, to 8.41 percent for
10 years. Certain assets totaling approximately $105 million are pledged as
collateral in connection with the swap transaction. In the event that the
Company terminates the swap prematurely, the Company would be liable for certain
transaction costs. The swap counterparty is a highly rated major financial
institution and the Company does not anticipate non-performance.
e) ACE INA RHINO preferred securities
In 1999, ACE RHINOS Trust, a Delaware statutory business trust (the "Trust"),
sold in a private placement $400 million of Auction Rate Reset Preferred
Securities (the "Rhino Preferred Securities"). All of the common securities of
the Trust are owned by ACE INA.
The Rhino Preferred Securities mature on September 30, 2002. Distributions on
the Rhino Preferred Securities are payable quarterly at LIBOR plus 87.5 basis
points, adjusted quarterly. The Trust may defer interest payments (but no later
than September 30, 2002, or, if there is a remarketing, the maturity date of the
remarketed securities), if ACE INA defers interest on the Subordinated Notes (as
defined below). Deferred payments accrue interest compounded quarterly. If the
trading price of ACE's Ordinary Shares declines to approximately $18.83 per
Ordinary Share, the holders of a majority of the Rhino Preferred Securities will
have the option to require Banc of America Securities LLC as the Remarketing
Agent to remarket the Rhino Preferred Securities. If remarketed, the maturity of
the remarketed securities will be reset to one year from the date on which the
remarketed securities are issued. The coupon will be reset pursuant to a bid
process to value the remarketed securities at 100.25 percent of the face amount
thereof. If Banc of America were unable to remarket the securities, the holders
of a majority of the Rhino Preferred Securities would have the right to require
ACE INA to repurchase them at a purchase price equal to the face amount of the
securities plus accrued and unpaid distributions. These obligations would be
guaranteed by ACE. ACE's Ordinary Shares have traded below $18.83 during the
year ended December 31, 2001. The holders of the Rhino Preferred Securities did
not exercise their remarketing rights at that time.
The sole assets of the Trust consist of $412,372,000 principal amount of Auction
Rate Reset Subordinated Notes Series A (the "Subordinated Notes") issued by ACE
INA. The Subordinated Notes mature on September 30, 2002. Interest on the
Subordinated Notes is payable quarterly at LIBOR plus 87.5 basis points,
adjusted quarterly. ACE INA may defer the interest payments (but no later than
September 30, 2002, or, if there is a remarketing, the maturity date of the
remarketed securities). Deferred payments accrue interest compounded quarterly.
If under certain circumstances the Trust is dissolved and the holders of the
Rhino Preferred Securities directly hold the Subordinated Notes, then the
remarketing provisions described above will be applicable to the Subordinated
Notes.
80
Proceeds of the Ordinary Share offering of September 12, 2000, described in
Note 11, were used to support the Company's guarantee of the $412 million
principal amount of the Subordinated Notes.
f) Capital Re LLC monthly income preferred securities
In 1994, ACE Financial Services, through Capital Re LLC, issued $75 million of
company obligated mandatorily redeemable preferred securities. Capital Re LLC
exists solely for the purpose of issuing preferred and common shares. These
securities pay monthly dividends at a rate of 7.65 percent per annum, are
callable as of January 1999 at par and are mandatorily redeemable in January
2044. The Company has guaranteed all obligations of Capital Re LLC.
g) ACE INA trust preferred securities
In 1999, ACE Capital Trust I, a Delaware statutory business trust ("ACE Capital
Trust I") issued $100 million 8.875 percent Trust Originated Preferred
Securities (the "Trust Preferred Securities"). All of the common securities of
ACE Capital Trust I (the "ACE Capital Trust I Common Securities") are owned by
ACE INA.
The Trust Preferred Securities mature on December 31, 2029. The maturity date
may be extended for one or more periods but not later than December 31, 2048.
Distributions on the Trust Preferred Securities are payable quarterly at a rate
of 8.875 percent. ACE Capital Trust I may defer these payments for up to 20
consecutive quarters (but no later than December 31, 2029, unless the maturity
date is extended). Any deferred payments would accrue interest quarterly on a
compounded basis if ACE INA defers interest on the subordinated debentures (as
defined below).
The sole assets of ACE Capital Trust I consist of $103,092,800 principal amount
of 8.875 percent Junior Subordinated Deferrable Interest Debentures (the
"Subordinated Debentures") issued by ACE INA. The Subordinated Debentures mature
on December 31, 2029. Interest on the Subordinated Debentures is payable
quarterly at a rate of 8.875 percent. ACE INA may defer such interest payments
(but no later than December 31, 2029, unless the maturity date is extended),
with such deferred payments accruing interest compounded quarterly. ACE INA may
redeem the Subordinated Debentures at 100 percent of the principal amount
thereof, plus accrued and unpaid interest to the redemption date, in whole or in
part at any time on or after December 31, 2004, and in whole but not in part
prior to December 31, 2004, in the event certain changes in tax or investment
company law occur. The Trust Preferred Securities and the ACE Capital Trust I
Common Securities will be redeemed upon repayment of the Subordinated
Debentures.
The Company has guaranteed, on a subordinated basis, ACE INA's obligations under
the Subordinated Debentures and distributions and other payments due on the
Trust Preferred Securities. These guarantees, when taken together with the
Company's obligations under an expense agreement entered into with ACE Capital
Trust I, provide a full and unconditional guarantee of amounts due on the Trust
Preferred Securities.
h) ACE INA capital securities
In 2000, ACE Capital Trust II, a Delaware statutory business trust ("ACE Capital
Trust II"), issued and sold in a public offering $300 million 9.7 percent
Capital Securities (the "Capital Securities"). All of the common securities of
ACE Capital Trust II (the "ACE Capital Trust II Common Securities") are owned by
ACE INA.
The Capital Securities mature on April 1, 2030, which may not be extended.
Distributions on the Capital Securities are payable semi-annually. ACE Capital
Trust II may defer these payments for up to 10 consecutive semi-annual periods
(but no later than April 1, 2030). Any deferred payments would accrue interest
semi-annually on a compounded basis if ACE INA defers interest on the
Subordinated Debentures due 2030 (as defined below).
The sole assets of ACE Capital Trust II consist of $309,280,000 principal amount
of 9.7 percent Junior Subordinated Deferrable Interest Debentures (the
"Subordinated Debentures due 2030") issued by ACE INA. The Subordinated
Debentures due 2030 mature on April 1, 2030. Interest on the Subordinated
Debentures due 2030 is payable semi-annually. ACE INA may defer such interest
81
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
payments (but no later than April 1, 2030), with such deferred payments accruing
interest compounded semi-annually. ACE INA may redeem the Subordinated
Debentures due 2030 in the event certain changes in tax or investment company
law occur at a redemption price equal to accrued and unpaid interest to the
redemption date plus the greater of (i) 100 percent of the principal amount
thereof, or (ii) the sum of the present value of scheduled payments of principal
and interest on the debentures from the redemption date to April 1, 2030. The
Capital Securities and the ACE Capital Trust II Common Securities will be
redeemed upon repayment of the Subordinated Debentures due 2030.
The Company has guaranteed, on a subordinated basis, ACE INA's obligations under
the Subordinated Debentures due 2030, and distributions and other payments due
on the Capital Securities. These guarantees, when taken together with the
Company's obligations under expense agreements entered into with ACE Capital
Trust II, provide a full and unconditional guarantee of amounts due on the
Capital Securities.
10. Mezzanine equity
On April 12, 2000, the Company publicly offered and issued 6,000,000 FELINE
PRIDES. On May 8, 2000, exercise of the over allotment option resulted in the
issuance of an additional 221,000 FELINE PRIDES, for aggregate net proceeds of
approximately $311 million. Each FELINE PRIDE initially consists of a unit
referred to as an Income PRIDE. Each Income PRIDE consists of (i) one 8.25
percent Cumulative Redeemable Preferred Share, Series A, liquidation preference
$50 per share, of the Company, and (ii) a purchase contract pursuant to which
the holder of the Income PRIDE agrees to purchase from the Company, on May 16,
2003, Ordinary Shares at the applicable settlement rate. Each preferred share is
pledged to the Company to secure the holders obligations under the purchase
contract. A holder of an Income PRIDE can obtain the release of the preferred
share by substituting certain zero-coupon treasury securities as security for
performance under the purchase contract. The resulting unit consisting of the
zero-coupon treasury security and the purchase contract is a Growth PRIDE, and
the preferred shares would be a separate security. A holder of a Growth PRIDE
can convert it back into an Income PRIDE by depositing preferred shares as
security for performance under the purchase contract and thereby obtain the
release of the zero-coupon treasury securities.
The aggregate liquidation preference of the 8.25 percent Cumulative Redeemable
Preferred Shares is $311 million. Unless deferred by the Company, the preferred
shares pay dividends quarterly at a rate of 8.25 percent per year to May 16,
2003, and thereafter at the reset rate established pursuant to a remarketing
procedure. If the Company elects to defer dividend payments on the preferred
shares, the dividends will continue to accrue and the Company will be restricted
from paying dividends on its Ordinary Shares and taking certain other actions.
The preferred shares are not redeemable prior to June 16, 2003, on which date
they must be redeemed by the Company in whole.
11. Shareholders' equity
a) Shares issued and outstanding
Following is a table of changes in Ordinary Shares issued and outstanding for
the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
- -------------------------------------------------------------------------------------------
Opening balance 232,346,579 217,460,515 193,687,126
Shares issued, net 32,415,912 13,008,419 -
Exercise of stock options 1,648,326 1,826,993 356,472
Shares issued under Employee Stock
Purchase Plan 211,288 50,652 25,697
Repurchase of shares (6,760,900) - -
Cancellation of non-vested
restricted stock - - (5,500)
Shares issued in ACE Financial Services
acquisition - - 20,815,677
Shares issued in ACE INA acquisition - - 2,581,043
- -------------------------------------------------------------------------------------------
259,861,205 232,346,579 217,460,515
===========================================================================================
Ordinary Shares issued to
employee trust
Opening balance (661,125) (659,625) (411,625)
Shares issued (52,350) (1,500) (248,000)
- -------------------------------------------------------------------------------------------
(713,475) (661,125) (659,625)
===========================================================================================
82
On October 25, 2001, the Company completed a public offering of 32.89 million
Ordinary Shares (which included the overallotment option of 4.29 million shares)
in which it raised aggregate net proceeds of approximately $1.1 billion. The
Company has used the net proceeds of the Ordinary Share offering to expand its
net underwriting capacity and for general corporate purposes. In addition,
474,088 restricted Ordinary Shares of the Company were cancelled in connection
with the Company's long-term incentive plans during fiscal 2001.
On September 12, 2000, the Company completed a public offering of 12.25 million
Ordinary Shares (which included exercise of the overallotment option of 1.25
million shares) in which it raised aggregate net proceeds of approximately $400
million. The offering was made in satisfaction of a June 29, 1999, agreement
with Banc of America Securities LLC. In addition, the Company issued 758,419
restricted Ordinary Shares in connection with the Company's long-term incentive
plans during fiscal 2000.
Ordinary Shares issued to employee trust are the shares issued by the Company to
a rabbi trust for deferred compensation obligations (see Note 12g).
b) ACE Limited securities repurchase authorization
On November 17, 2000, the Board of Directors authorized the repurchase of any
ACE issued debt or capital securities, including ACE's Ordinary Shares, up to an
aggregate total of $250 million. These purchases may take place from time to
time in the open market or in private purchase transactions. During 2001, the
Company repurchased and cancelled 6,760,900 Ordinary Shares under the program
for an aggregate cost of $179.4 million. In November 2001, the Board of
Directors replaced the existing authorization with a new authorization to
repurchase any ACE issued debt or capital securities including Ordinary Shares,
up to an aggregate total of $250 million. As of December 31, 2001 this
authorization had not been utilized. During 2000, no securities were
repurchased.
c) General restrictions
The holders of the Ordinary Shares are entitled to receive dividends and are
allowed one vote per share provided that, if the controlled shares of any
shareholder constitute 10 percent or more of the outstanding Ordinary Shares of
the Company, only a fraction of the vote will be allowed so as not to exceed 10
percent. Generally, the Company's directors have absolute discretion to decline
to register any transfer of shares. All transfers are subject to the restriction
that they may not increase to 10 percent or higher the proportion of issued
Ordinary Shares owned by any shareholder.
d) Dividends declared
Dividends declared on Ordinary Shares amounted to $0.58, $0.50 and $0.42 per
Ordinary Share for the years ended December 31, 2001, 2000 and 1999. Dividends
declared on FELINE PRIDES amounted to $25.6 million and $18.4 million for the
years ended December 31, 2001 and 2000, respectively.
12. Employee benefit plans
a) Pension plans
The Company provides pension benefits to eligible employees and agents, spouses
and other eligible dependents through various plans sponsored by the Company.
Pension benefits are provided through plans sponsored by ACE covering most U.S.
and Bermuda based employees and by separate pension plans for various non-U.S.
subsidiaries and employees. Pension expenses totaled $9 million, $17 million and
$11 million for the years ended December 31, 2001, 2000 and 1999, respectively.
b) Capital accumulation plans
ACE sponsors a capital accumulation plan in the U.S. in which employee
contributions on a pre-tax basis (401(k)) are supplemented by ACE matching
contributions. These contributions are invested, at the election of the
employee, in one or more of several investment portfolios. In addition, ACE may
provide additional matching contributions, depending on its annual financial
performance. Expenses for the plan totaled $29 million, $28 million and $19
million for the years ended December 31, 2001, 2000 and 1999, respectively.
c) Options and stock appreciation rights
In February 1996 and November 1998, shareholders of the Company approved the ACE
Limited 1995 Long-Term Incentive Plan and the ACE Limited 1998 Long-Term
Incentive Plan, respectively (the "Incentive Plans"), which incorporate stock
options, stock appreciation rights, restricted stock awards and stock purchase
programs. There are 12.5 million Ordinary Shares of the Company available for
award
83
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
under these Incentive Plans. Prior to the adoption of the Incentive Plans, the
Company adopted the Equity Linked Incentive Plan, which incorporated both a
Stock Appreciation Rights Plan and a Stock Option Plan ("Option Plan") which
will continue to run off. Under the Option Plan, generally, options expire ten
years after the award date and are subject to a vesting period of four years.
Stock options granted under the Incentive Plan may be exercised for Ordinary
Shares of the Company upon vesting. Under the Incentive Plans, generally,
options expire ten years after the award date and vest in equal portions over
three years.
During 1999, the Company established the ACE Limited 1999 Replacement Stock
Plan. This plan was established to replace existing Capital Re employee benefits
in connection with the Capital Re acquisition, as well as to permit additional
grants to employees of the Company. At December 31, 2001, 2,000,000 Ordinary
Shares were available for grant under this plan.
d) Options
(i) Options outstanding
Following is a summary of options issued and outstanding for the years ended
December 31, 2001, 2000 and 1999.
Average Options for
Year of Exercise Ordinary
Expiration Price Shares
- -----------------------------------------------------------------------------
Balance at December 31, 1998 10,807,926
Options granted 2009 $27.86 4,058,190
Options exercised 2005-2007 $15.91 (356,472)
Options forfeited 2005-2008 $29.02 (544,884)
- -----------------------------------------------------------------------------
Balance at December 31, 1999 13,964,760
Options granted 2010 $25.26 4,214,018
Options exercised 2003-2009 $35.71 (1,826,993)
Options forfeited 2006-2008 $25.30 (454,985)
- -----------------------------------------------------------------------------
Balance at December 31, 2000 15,896,800
Options granted 2011 $35.63 3,821,615
Options exercised 2002-2010 $37.87 (1,648,326)
Options forfeited 2004-2011 $26.28 (999,459)
- -----------------------------------------------------------------------------
Balance at December 31, 2001 17,070,630
=============================================================================
The following table summarizes the range of exercise prices for outstanding
options at December 31, 2001:
Weighted Weighted Weighted
Average Average Average
Range of Options Remaining Exercisable Options Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------
$ 7.45-$15.00 3,273,296 2.87 years $ 9.15 3,267,962 $ 9.14
$15.00-$30.00 9,597,639 6.90 years $22.16 7,524,888 $22.83
$30.00-$41.25 4,199,695 8.85 years $35.91 501,389 $33.08
- ---------------------------------------------------------------------------------------------------
17,070,630 11,294,239
===================================================================================================
(ii) FAS 123 pro forma disclosures
In October 1995, FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 establishes
accounting and reporting standards for stock-based employee compensation plans,
which include stock option and stock purchase plans. FAS 123 provides employers
a choice: adopt FAS 123 accounting standards for all stock compensation
arrangements which requires the recognition of compensation expense for the fair
value of virtually all stock compensation awards; or continue to account for
stock options and other forms of stock compensation under Accounting Principles
Board Opinion No. 25 ("APB 25"), while also providing the disclosure required
under FAS 123. The Company continues to account for stock-based compensation
plans under APB 25.
The following table outlines the Company's net income available to holders of
Ordinary Shares and diluted earnings per share had the compensation cost been
determined in accordance with the fair value method recommended in FAS 123.
December 31, December 31,
(in thousands of U.S. dollars, except per share data) 2001 2000
- ----------------------------------------------------------------------------------------
Net income (loss) available to holders of Ordinary Shares:
As reported $(172,008) $ 524,591
Pro forma $(192,712) $ 509,088
Diluted earnings (loss) per share:
As reported $ (0.74) $ 2.31
Pro forma $ (0.82) $ 2.24
========================================================================================
84
The fair value of the options issued is estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted-average
assumptions used for grants in 2001 and 2000, respectively: dividend yield of
1.65 percent and 2.23 percent; expected volatility of 42.8 percent and 40.1
percent; risk-free interest rate of 4.84 percent and 6.37 percent and an
expected life of 4 years for both 2001 and 2000.
e) Employee stock purchase plan
The Company maintains an employee stock purchase plan (ESPP). Participation in
the plan is available to all eligible employees. Maximum annual purchases by
participants are limited to the number of whole shares that can be purchased by
an amount equal to 10 percent of the participant's compensation or $25,000,
whichever is less. Participants may purchase shares at a purchase price equal to
85 percent of the lesser of (i) the fair market value of the stock on first day
of the subscription period; or (ii) the fair market value of the stock on the
last day of the subscription period. Pursuant to the provisions of the ESPP,
during 2001, 2000 and 1999, employees paid $6.1 million, $1.2 million and $1.1
million, respectively, to purchase 211,288 shares, 50,652 shares and 25,697
shares, respectively.
f) Restricted stock awards
Under the Company's long-term incentive plans 704,748 restricted Ordinary Shares
were awarded during the year ended December 31, 2001, to officers of the Company
and its subsidiaries. These shares vest at various dates through December 2005.
In addition, during the year, 12,650 restricted Ordinary Shares were awarded to
outside directors under the terms of the 1995 Outside Director Plan. These
shares vest in May 2002.
Under the Company's long-term incentive plans, 461,884 restricted Ordinary
Shares were awarded during the year ended December 31, 2000, to officers of the
Company and its subsidiaries. These shares vest at various dates through
December 2004. In addition, during the year, 17,200 restricted Ordinary Shares
were awarded to outside directors under the terms of the 1995 Outside Directors
Plan. These shares vested in May 2001.
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.
g) Deferred compensation obligation
The Company maintains a rabbi trust for deferred compensation plans for key
employees and executive officers. In accordance with EITF 97-14, "Accounting for
Deferred Compensation Agreements Where Amounts Earned are Held in a Rabbi Trust
and Invested," assets of the rabbi trust are to be consolidated with those of
the employer, and the value of the employer's stock held in the rabbi trust
should be classified in shareholders' equity and accounted for at historical
cost in a manner similar to treasury stock. The shares issued by the Company to
the rabbi trust are recorded in Ordinary Shares issued to employee trust and the
obligation has been recorded in deferred compensation obligation, both are
components of shareholders' equity.
h) Shares issued in ACE INA acquisition
During 1999, the ACE Limited 1999 Replacement Long-Term Incentive Plan
("Replacement Plan") was established to award substitute restricted stock awards
and substitute restricted stock unit awards in satisfaction of the Company's
obligations under the ACE INA Acquisition Agreement and to provide selected
individuals substitute restricted stock awards and substitute restricted stock
unit awards in replacement of certain equity-based awards which terminated or
expired in connection with the closing of the ACE INA transaction. During 1999,
2,581,043 restricted Ordinary Shares were granted in connection with the
Replacement Plan. The costs associated with issuing these awards were included
as a cost of the ACE INA Acquisition.
85
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
13. Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 2001, 2000 and 1999:
(in thousands of U.S. dollars, except share and per share data) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
Numerator:
Net income (loss) before cumulative effect of adopting a new accounting standard $ (123,744) $ 542,982 $ 364,963
Dividends on FELINE PRIDES (25,594) (18,391) -
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to holders of Ordinary Shares before cumulative effect (149,338) 524,591 364,963
Cumulative effect of adopting a new accounting standard (22,670) - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to holders of Ordinary Shares $ (172,008) $ 524,591 $ 364,963
==============================================================================================================================
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 233,799,588 221,082,961 194,028,374
Dilutive effect of FELINE PRIDES - 1,099,226 -
Effect of other dilutive securities - 5,236,243 3,597,980
- ------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings (loss) per share:
Adjusted weighted average shares outstanding and
assumed conversions 233,799,588 227,418,430 197,626,354
==============================================================================================================================
Basic earnings (loss) per share:
Earnings (loss) per share before cumulative effect of adopting a new
accounting standard $ (0.64) $ 2.37 $ 1.88
Earnings (loss) per share $ (0.74) $ 2.37 $ 1.88
- ------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Earnings (loss) per share before cumulative effect of adopting a new
accounting standard $ (0.64) $ 2.31 $ 1.85
Earnings (loss) per share $ (0.74) $ 2.31 $ 1.85
==============================================================================================================================
86
The denominator for diluted loss per share for the year ended December 31, 2001
does not include the dilutive effect of FELINE PRIDES and other dilutive
securities. The incremental shares from assumed conversions are not included in
computing diluted loss per share amounts as these shares are considered
anti-dilutive. The dilutive effect of FELINE PRIDES for the year ended December
31, 2001 is 3,180,571 shares. Other dilutive securities totaled 8,085,418 shares
for the year ended December 31, 2001.
14. Taxation
Under current Cayman Islands law, the Company is not required to pay any taxes
in the Cayman Islands on its income or capital gains. The Company has received
an undertaking that, in the event of any taxes being imposed, the Company will
be exempted from taxation in the Cayman Islands until the year 2013. Under
current Bermuda law, the Company and its Bermuda subsidiaries are not required
to pay any taxes in Bermuda on its income or capital gains. The Company has
received an undertaking from the Minister of Finance in Bermuda that, in the
event of any taxes being imposed, the Company will be exempt from taxation in
Bermuda until March 2016.
Income from the Company's operations at Lloyd's is 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.
The Company is not subject to taxation other than as stated above. There can be
no assurance that there will not be changes in applicable laws, regulations or
treaties, which might require the Company to change the way it operates or
become subject to taxation.
The income tax provision for the years ended December 31, 2001, 2000 and 1999 is
as follows:
(in thousands of U.S. dollars) 2001 2000 1999
- -------------------------------------------------------------------------------
Current tax expense $ 39,384 $ 60,081 $ 8,439
Deferred tax expense (benefit) (118,058) 33,827 20,245
- -------------------------------------------------------------------------------
Provision for income taxes $ (78,674) $ 93,908 $ 28,684
===============================================================================
The weighted average expected tax provision has been calculated using pre-tax
accounting income (loss) in each jurisdiction multiplied by that jurisdiction's
applicable statutory tax rate. A reconciliation of the difference between the
provision for income taxes and the expected tax provision at the weighted
average tax rate for the years ended December 31, 2001 and 2000, is provided
below.
(in thousands of U.S. dollars) 2001 2000
- -------------------------------------------------------------------------------
Expected tax provision at weighted average rate $ (92,276) $ 80,699
Permanent differences
Tax-exempt interest (15,234) (21,716)
Goodwill 23,113 22,875
Other (8,570) 1,182
Net withholding taxes 14,293 10,868
- -------------------------------------------------------------------------------
Total provision for income taxes $ (78,674) $ 93,908
===============================================================================
87
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
The components of the net deferred tax asset as of December 31, 2001 and 2000
are as follows:
(in thousands of U.S. dollars) 2001 2000
- -----------------------------------------------------------------------------
Deferred tax assets
Loss reserve discount $ 523,195 $ 536,005
Foreign tax credits 155,079 137,765
Policyholder dividends 47,509 46,092
Net operating loss carry forward 495,048 500,916
Other 299,068 181,894
- -----------------------------------------------------------------------------
Total deferred tax assets 1,519,899 1,402,672
=============================================================================
Deferred tax liabilities
Deferred policy acquisition costs 66,454 62,080
Unrealized appreciation on investments 28,570 25,861
Other 38,448 32,064
- -----------------------------------------------------------------------------
Total deferred tax liabilities 133,472 120,005
- -----------------------------------------------------------------------------
Valuation allowance 135,592 138,406
- -----------------------------------------------------------------------------
Net deferred tax asset $1,250,835 $1,144,261
=============================================================================
The valuation allowances of $135.6 million and $138.4 million as of December 31,
2001 and 2000, respectively, reflect management's assessment, based on available
information, that it is more likely than not that a portion of the deferred tax
asset will not be realized due to the inability of certain foreign subsidiaries
to generate sufficient taxable income. Adjustments to the valuation allowances
are made when there is a change in management's assessment of the amount of
deferred tax asset that is realizable.
As of December 31, 2001, the Company has net operating loss carryforwards for
U.S. federal income tax purposes of approximately $1.4 billion which are
available to offset future U.S. federal taxable income through 2021.
15. Statutory financial information
The Company's insurance and reinsurance subsidiaries are subject to insurance
laws and regulations in the jurisdictions in which they operate. These
regulations include restrictions that limit the amount of dividends or other
distributions, such as loans or cash advances, available to shareholders without
prior approval of the insurance regulatory authorities. Statutory capital and
surplus of the Bermuda subsidiaries was $3.1 billion, $2.7 billion and $2.2
billion at December 31, 2001, 2000 and 1999, and statutory net income was $55
million, $364 million and $373 million for the years ended December 31, 2001,
2000 and 1999, respectively.
There are no statutory restrictions on the payment of dividends from retained
earnings by any of 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.
The Company's U.S. subsidiaries file financial statements prepared in accordance
with statutory accounting practices prescribed or permitted by insurance
regulators. Statutory accounting differs from generally accepted accounting
policies in the reporting of certain reinsurance contracts, investments,
subsidiaries, acquisition expenses, fixed assets, deferred income taxes and
certain other items. Combined statutory surplus of the Company's U.S.
subsidiaries was $2.2 billion, $1.9 billion and $2.2 billion at December 31,
2001, 2000 and 1999, respectively. The combined statutory net income (loss) of
these operations was $160 million, $(12) million and $(277) million for the
years ended December 31, 2001, 2000 and 1999.
The Company's international subsidiaries prepare statutory financial statements
based on local laws and regulations. Some jurisdictions impose complex
regulatory requirements on insurance companies while other jurisdictions impose
fewer requirements. In some countries, the Company must obtain licenses issued
by governmental authorities to conduct local insurance business. These licenses
may be subject to reserves and minimum capital and solvency tests. Jurisdictions
may impose fines, censure, and/or criminal sanctions for violation of regulatory
requirements.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance, which replaces the
current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting as of January 1, 2001. The Codification
provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in some areas. All states and Puerto Rico
have adopted the Codification guidance, effective January 1, 2001.
88
16. Condensed unaudited quarterly financial data
- ----------------------------------------------------------------------------------------------------------------------------------
2001 Quarter Ended Quarter Ended Quarter Ended Quarter Ended
(in thousands of U.S. dollars, except per share data) March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net premiums earned $ 1,369,116 $ 1,385,187 $ 1,399,429 $ 1,763,445
Net investment income 204,430 196,267 192,909 192,263
Net realized gains (losses) on investments (19,375) 15,564 (58,843) 4,295
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,554,171 $ 1,597,018 $ 1,533,495 $ 1,960,063
==================================================================================================================================
Losses and loss expenses $ 951,946 $ 982,993 $ 1,571,333 $ 1,447,413
==================================================================================================================================
Net income (loss) before cumulative effect of adopting a
new accounting standard $ 141,064 $ 131,517 $ (442,590) $ 46,265
==================================================================================================================================
Cumulative effect of adopting a new accounting standard (22,670) - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 118,394 $ 131,517 $ (442,590) $ 46,265
==================================================================================================================================
Basic earnings (loss) per share:
Earnings (loss) per share before cumulative effect
of adopting a new accounting standard $ 0.58 $ 0.54 $ (1.95) $ 0.16
==================================================================================================================================
Earnings (loss) per share $ 0.48 $ 0.54 $ (1.95) $ 0.16
==================================================================================================================================
Diluted earnings (loss) per share:
Earnings (loss) per share before cumulative effect
of adopting a new accounting standard $ 0.55 $ 0.52 $ (1.95) $ 0.15
==================================================================================================================================
Earnings (loss) per share $ 0.46 $ 0.52 $ (1.95) $ 0.15
==================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
2000 Quarter Ended Quarter Ended Quarter Ended Quarter Ended
(in thousands of U.S. dollars, except per share data) March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Net premiums earned $ 1,104,806 $ 1,167,836 $ 1,174,782 $ 1,087,339
Net investment income 182,935 181,029 197,584 209,307
Net realized gains (losses) on investments 56,740 (30,044) (12,797) (52,860)
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,344,481 $ 1,318,821 $ 1,359,569 $ 1,243,786
==================================================================================================================================
Losses and loss expenses $ 715,483 $ 768,111 $ 772,887 $ 679,584
==================================================================================================================================
Net income $ 174,513 $ 113,928 $ 140,753 $ 113,788
==================================================================================================================================
Basic earnings per share $ 0.80 $ 0.50 $ 0.60 $ 0.46
==================================================================================================================================
Diluted earnings per share $ 0.80 $ 0.49 $ 0.58 $ 0.44
==================================================================================================================================
89
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
17. 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 at December 31, 2001 and 2000 and for the years ended December 31,
2001, 2000 and 1999. 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 9).
- ------------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Balance Sheet
as at December 31, 2001
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Limited
(in thousands of U.S. dollars) Guarantor) Issuer) Issuer) Eliminations/(1)/ Adjustments/(2)/ Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Total investments and cash $ 489,596 $ 6,443,230 $ 901,905 $ 8,101,182 $ - $15,935,913
Insurance and reinsurance
balances receivable - 1,715,873 24,075 781,614 - 2,521,562
Reinsurance recoverable - 9,259,608 8,194 2,130,644 - 11,398,446
Goodwill - 2,186,142 96,723 489,229 - 2,772,094
Investments in subsidiaries 5,621,604 - 152,000 (152,000) (5,621,604) -
Due from subsidiaries and
affiliates, net 348,372 (478,645) (11,862) 490,507 (348,372) -
Other assets 64,570 3,313,941 184,509 995,729 - 4,558,749
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $6,524,142 $22,440,149 $1,355,544 $12,836,905 $(5,969,976) $37,186,764
====================================================================================================================================
Liabilities
Unpaid losses and loss expenses $ - $14,468,024 $ 75,823 $ 6,184,275 $ - $20,728,122
Future policy benefits for life
and annuity contracts - - - 382,730 - 382,730
Unearned premiums - 2,055,459 323,951 1,474,019 - 3,853,429
Short-term debt - - 25,000 470,408 - 495,408
Long-term debt - 1,103,218 74,980 171,275 - 1,349,473
Trust preferred securities - 800,000 75,000 - - 875,000
Other liabilities 106,385 2,392,000 138,586 447,874 - 3,084,845
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 106,385 20,818,701 713,340 9,130,581 - 30,769,007
- ------------------------------------------------------------------------------------------------------------------------------------
Mezzanine equity 311,050 - - - - 311,050
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,106,707 1,621,448 642,204 3,706,324 (5,969,976) 6,106,707
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities, mezzanine
equity and shareholders' equity $6,524,142 $22,440,149 $1,355,544 $12,836,905 $(5,969,976) $37,186,764
====================================================================================================================================
/(1)/ Includes all other subsidiaries of ACE Limited and intercompany
eliminations.
/(2)/ Includes ACE Limited parent company eliminations.
90
- --------------------------------------------------------------------------------
Condensed Consolidating Balance Sheet
as at December 31, 2000
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Limited
(in thousands of U.S. dollars) 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.
91
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
- --------------------------------------------------------------------------------
Condensed Consolidating Statement of Operations
For the year ended December 31, 2001
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Limited
(in thousands of U.S. dollars) Guarantor) Issuer) Issuer) Eliminations/(1)/ Adjustments/(2)/ Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Net premiums written $ - $2,616,489 $ 88,997 $3,658,128 $ - $6,363,614
Net premiums earned - 2,498,169 77,662 3,341,346 - 5,917,177
Net investment income 62,322 351,282 46,602 362,438 (36,775) 785,869
Equity in earnings of subsidiaries (136,456) - - - 136,456 -
Net realized gains (losses) on
investments (13,524) (52,441) 19,968 (12,362) - (58,359)
Losses and loss expenses - 1,970,727 22,854 2,558,875 - 4,552,456
Life and annuity benefits - - - 401,229 - 401,229
Policy acquisition costs and
administrative expenses 58,164 766,803 38,270 752,224 (794) 1,614,667
Amortization of goodwill - 57,960 4,205 17,406 - 79,571
Interest expense (7,753) 179,505 14,013 20,492 (7,075) 199,182
Income tax expense (benefit) 8,345 (45,420) 8,229 (49,828) - (78,674)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) excluding net realized
gains (losses) and cumulative effect
of adopting a new accounting
standard (146,414) (132,565) 56,661 (8,976) 107,550 (123,744)
Cumulative effect of adopting a new
accounting standard - - (22,800) 130 - (22,670)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(146,414) $ (132,565) $ 33,861 $ (8,846) $107,550 $ (146,414)
===================================================================================================================================
/(1)/ Includes all other subsidiaries of ACE Limited and intercompany
eliminations.
/(2)/ Includes ACE Limited parent company eliminations.
92
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Operations
For the year ended December 31, 2000
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Limited
(in thousands of U.S. dollars) Guarantor) Issuer) Issuer) Eliminations/(1)/ Adjustments/(2)/ Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Net premiums written $ - $ 2,437,811 $ 82,746 $ 2,358,797 $ - $ 4,879,354
Net premiums earned - 2,417,189 67,534 2,050,040 - 4,534,763
Net investment income 43,214 385,722 48,045 322,526 (28,652) 770,855
Equity in earnings of subsidiaries 575,032 - - - (575,032) -
Net realized gains (losses) on
investments (1,623) (5,207) (37,836) 5,705 - (38,961)
Losses and loss expenses - 1,713,725 9,109 1,213,231 - 2,936,065
Policy acquisition costs and
administrative expenses 58,984 732,720 35,419 567,103 (794) 1,393,432
Amortization of goodwill - 56,980 4,205 17,635 - 78,820
Interest expense 6,373 188,454 13,361 23,000 (9,738) 221,450
Income tax expense 8,284 45,232 15,910 24,482 - 93,908
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 542,982 $ 60,593 $ (261) $ 532,820 $ (593,152) $ 542,982
===================================================================================================================================
/(1)/ Includes all other subsidiaries of ACE Limited and intercompany eliminations.
/(2)/ Includes ACE Limited parent company eliminations.
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statement of Operations
For the year ended December 31, 1999
ACE INA Other ACE
ACE Limited Holdings, Inc. Limited
(Parent Co. (Subsidiary Subsidiaries and Consolidating ACE Limited
(in thousands of U.S. dollars) Guarantor) Issuer) Eliminations/(1)/ Adjustments/(2)/ Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Net premiums written $ - $1,330,620 $ 1,164,728 $ - $2,495,348
Net premiums earned - 1,360,025 1,125,712 - 2,485,737
Net investment income 33,896 182,144 300,165 (22,868) 493,337
Equity in earnings of subsidiaries 400,623 - - (400,623) -
Net realized gains (losses) on investments (9,354) (4,909) 52,179 - 37,916
Losses and loss expenses - 871,861 767,682 - 1,639,543
Policy acquisition costs and administrative expenses 48,537 498,758 286,617 (600) 833,312
Amortization of goodwill - 27,500 17,850 - 45,350
Interest expense 6,211 76,854 22,092 (19) 105,138
Income tax expense (benefit) 5,454 23,453 (223) - 28,684
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 364,963 $ 38,834 $ 384,038 $ (422,872) $ 364,963
===================================================================================================================================
/(1)/ Includes all other subsidiaries of ACE Limited and intercompany eliminations.
/(2)/ Includes ACE Limited parent company eliminations.
93
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
- --------------------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 2001
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Limited
(in thousands of U.S. dollars) Guarantor) Issuer) Issuer) Eliminations/(1)/ Adjustments/(2)/ Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from
(used for) operating activities $ 113,428 $ (328,591) $ (51,649) $ 1,619,817 $ - $ 1,353,005
Cash flows from investing activities
Purchases of fixed maturities (125,733) (2,153,163) (848,263) (13,720,761) - (16,847,920)
Purchases of equity securities - (122,778) - (88,158) - (210,936)
Sales of fixed maturities 94,689 2,386,217 835,459 11,417,213 - 14,733,578
Sales of equity securities - 122,437 - 82,405 - 204,842
Maturities of fixed maturities - - 4,500 40,429 - 44,929
Net realized gains (losses)
on financial futures contracts - - - (21,976) - (21,976)
Other investments (1,009) (60,594) (7,337) (20,175) - (89,115)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash from (used for)
investing activities $ (32,053) $ 172,119 $ (15,641) $(2,311,023) $ - $ (2,186,598)
====================================================================================================================================
Cash flows from financing activities
Dividends paid on Ordinary Shares (128,745) - - - - (128,745)
Dividends paid on FELINE PRIDES (25,666) - - - - (25,666)
Repurchase of Ordinary Shares (179,446) - - - - (179,446)
Proceeds from short term debt, net - (335,708) - 391,852 - 56,144
Proceeds from issuance of
Ordinary Shares 1,135,878 - - - - 1,135,878
Advances to affiliates (174,000) 483,060 41,741 (350,801) - -
Proceeds from exercise of
options for Ordinary Shares 32,666 - - - - 32,666
Proceeds from shares issued
under ESPP 6,074 - - - - 6,074
Capitalization of subsidiary (1,101,000) 111,000 - 990,000 - -
Dividends received from
subsidiaries 338,873 - - (338,873) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash from (used for)
financing activities $ (95,366) $ 258,352 $ 41,741 $ 692,178 $ - $ 896,905
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (13,991) 101,880 (25,549) 972 - 63,312
Cash - beginning of year 46,516 253,447 26,576 281,530 - 608,069
- ------------------------------------------------------------------------------------------------------------------------------------
Cash - end of year $ 32,525 $ 355,327 $ 1,027 $ 282,502 $ - $ 671,381
====================================================================================================================================
/(1)/ Includes all other subsidiaries of ACE Limited and intercompany
eliminations.
/(2)/ Includes ACE Limited parent company eliminations.
94
- --------------------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 2000
ACE INA ACE Financial Other ACE
ACE Limited Holdings, Inc. Services, Inc. Limited
(Parent Co. (Subsidiary (Subsidiary Subsidiaries and Consolidating ACE Limited
(in thousands of U.S. dollars) Guarantor) Issuer) Issuer) Eliminations/(1)/ Adjustment/(2)/ Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from
(used for) operating activities $ (49,024) $ (1,212,871) $ 58,605 $ 776,118 $ - $ (427,172)
Cash flows from investing
activities
Purchases of fixed maturities (618,049) (2,907,397) (722,539) (7,228,653) - (11,476,638)
Purchases of equity securities - (226,474) - (184,548) - (411,022)
Sales of fixed maturities 449,766 3,764,557 668,059 6,639,296 - 11,521,678
Sales of equity securities - 535,531 - 257,968 - 793,499
Maturities of fixed maturities - - 2,000 66,869 - 68,869
Net realized gains (losses)
on financial futures contracts - - - (48,227) - (48,227)
Sale (acquisition) of subsidiaries 82,244 - 10,200 (10,200) (82,244) -
Other investments 135 (1,495) 5,020 (218,076) - (214,416)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash from (used for)
investing activities $ (85,904) $ 1,164,722 $ (37,260) $ (725,571) $ (82,244) $ 233,743
====================================================================================================================================
Cash flows from financing activities
Dividends paid on Ordinary Shares (106,459) - - - - (106,459)
Dividends paid on FELINE PRIDES (15,254) - - - - (15,254)
Repayment of bank debt, net (424,886) (280,830) - (4,360) - (710,076)
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 (9,884) - - - - (9,884)
Advances to affiliates (95,513) - - 95,513 - -
Proceeds from exercise of options
for Ordinary Shares 31,335 - - - - 31,335
Proceeds from shares
issued under ESPP 1,234 - - - - 1,234
Capitalization of subsidiary (27,103) - 5,000 22,103 - -
Dividends received from
subsidiaries 101,147 - - (101,147) - -
Net proceeds from
issuance of ordinary shares 400,320 - - - - 400,320
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash from (used for)
financing activities $ 165,987 $ 19,170 $ 5,000 $ 12,109 $ - $ 202,266
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 31,059 (28,979) 26,345 62,656 (82,244) 8,837
Cash - beginning of year 15,457 282,426 231 301,118 - 599,232
- ------------------------------------------------------------------------------------------------------------------------------------
Cash - end of year $ 46,516 $ 253,447 $ 26,576 $ 363,774 $ (82,244) $ 608,069
====================================================================================================================================
/(1)/Includes all other subsidiaries of ACE Limited and intercompany
eliminations.
/(2)/Includes ACE Limited parent company eliminations.
95
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
- --------------------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 1999
ACE INA Other ACE
ACE Limited Holdings, Inc. Limited
(Parent Co. (Subsidiary Subsidiaries and Consolidating ACE Limited
(in thousands of U.S. dollars) Guarantor) Issuer) Eliminations/(1)/ Adjustments/(2)/ Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from (used for) operating activities $ (140,091) $ (471,622) $ 150,861 $ - $ (460,852)
Cash flows from investing activities
Purchases of fixed maturities (402,079) (1,784,563) (15,666,681) - (17,853,323)
Purchases of equity securities - (180,266) (188,657) - (368,923)
Sales of fixed maturities 467,010 1,456,512 16,630,071 - 18,553,593
Sales of equity securities - 176,734 244,631 - 421,365
Maturities of fixed maturities - - 437,665 - 437,665
Net realized gains (losses)on financial
futures contracts - - 68,311 - 68,311
Other investments (6,837) 8,506 (140,703) - (139,034)
Acquisition of subsidiary, net of cash acquired - (2,592,631) (86,585) - (2,679,216)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash from (used for) investing activities $ 58,094 $(2,915,708) $ 1,298,052 $ - $(1,559,562)
====================================================================================================================================
Cash flows from financing activities
Dividends paid on Ordinary Shares (77,836) - - - (77,836)
Repayment of bank debt, net 424,886 620,422 (194,539) - 850,769
Proceeds from long term debt - 1,099,334 - 1,099,334
Advances to affiliates (89,526) 400,000 (310,474) - -
Proceeds from exercise of options for
Ordinary Shares 5,672 - - - 5,672
Proceeds from shares issued under ESPP 1,151 - - - 1,151
Proceeds from issuance of trust preferred securities - 500,000 - - 500,000
Capitalization of subsidiaries (1,160,351) 1,050,000 110,351 - -
Dividends received from subsidiaries 966,000 - (966,000) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash from (used for) financing activities $ 69,996 $ 3,669,756 $ (1,360,662) $ - $ 2,379,090
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (12,001) 282,426 88,251 - 358,676
Cash - beginning of year 27,458 - 213,098 - 240,556
- ------------------------------------------------------------------------------------------------------------------------------------
Cash - end of year $ 15,457 $ 282,426 $ 301,349 $ - $ 599,232
====================================================================================================================================
/(1)/ Includes all other subsidiaries of ACE Limited and intercompany
eliminations.
/(2)/ Includes ACE Limited parent company eliminations.
96
18. Segment information
ACE's operations are currently organized into six operating segments: ACE
Bermuda, ACE Global Markets, ACE Global Reinsurance, ACE USA, ACE International
and ACE Financial Services. The operations of ACE Limited, ACE INA Holdings and
certain eliminations required to reconcile the segment data to the consolidated
statement of operations are included in "other". These segments are structured
on a geographic basis. Following recent management changes, the manner in which
the segments are presented is being reassessed.
ACE Bermuda, which primarily encompasses the ACE Bermuda Insurance group of
companies, provides property and casualty insurance and reinsurance coverage,
including excess liability, professional lines, satellite, excess property,
political risk, and financial solutions products, to a diverse group of
industrial, commercial and other enterprises.
ACE Global Markets primarily encompasses the Company's operations in the Lloyd's
market (including for segment purposes Lloyd's operations owned by ACE Financial
Services). ACE Global Markets provides funds at Lloyd's to support underwriting
by Lloyd's syndicates managed by the Lloyd's managing agencies which are owned
by the Company.
ACE Global Reinsurance comprises the operations of ACE Tempest Reinsurance Ltd.
and ACE Tempest Life Reinsurance Ltd. ACE Tempest Reinsurance Ltd. primarily
includes property catastrophe reinsurance provided worldwide to insurers of
commercial and personal property. The company began expanding in 2000 to
diversify its business and offer a broad range of products. The life reinsurance
business completed its first full year of operations in 2001. The principal
business of ACE Tempest Life Reinsurance Ltd. is to provide reinsurance coverage
to other life insurance companies.
ACE USA primarily comprises the domestic U.S. operations of ACE INA, which were
acquired on July 2, 1999, and the operations of ACE US Holdings, which were
acquired on January 2, 1998. These operations provide specialty property and
casualty products and services.
ACE International primarily comprises the international operations of ACE INA,
which were acquired on July 2, 1999. ACE International provides property and
casualty insurance, accident and health insurance and consumer-oriented products
to individuals, mid-sized firms and large commercial clients. In addition, ACE
International provides customized and comprehensive insurance policies and
services to multinational firms and their cross-border subsidiaries. ACE
International is organized into four geographic locations: ACE Europe, ACE Far
East, ACE Asia Pacific, and ACE Latin America.
ACE Financial Services is primarily comprised of the Capital Re companies
acquired on December 30, 1999. ACE Financial Services provides value-added
reinsurance products in several specialty insurance markets. ACE Financial
Services has two principal divisions: financial guaranty and financial risks.
The financial guaranty division is comprised of municipal and non-municipal
financial guaranty reinsurance and credit default swaps. The financial risks
division is comprised of mortgage guaranty reinsurance, trade credit
reinsurance, title reinsurance and financial solutions. As ACE Financial
Services was acquired on December 30, 1999, the Company has not reflected any
operations from this segment during 1999.
a) The following tables summarize the operations by segment for the years ended
December 31, 2001, 2000 and 1999.
b) 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.
97
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
- --------------------------------------------------------------------------------
Supplemental Information by Segment
For the year ended December 31, 2001
ACE ACE ACE
ACE Global Global ACE ACE Financial ACE
(in thousands of U.S. dollars) Bermuda Markets Reinsurance USA International Services Other/(1)/ Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Operations data
Gross premiums written:
Property and
casualty premiums $1,145,564 $1,299,843 $ 325,548 $ 4,427,945 $2,260,222 $ 292,188 $ - $ 9,751,310
Life and annuity premiums - - 414,052 - - - - 414,052
Net premiums written:
Property and
casualty premiums 1,060,959 765,568 286,701 2,046,975 1,511,774 283,947 - 5,955,924
Life and annuity premiums - - 407,690 - - - - 407,690
Net premiums earned:
Property and
casualty premiums 945,501 623,916 255,538 1,891,703 1,441,910 352,329 - 5,510,897
Life and annuity premiums - - 406,280 - - - - 406,280
Losses and loss expenses 1,056,136 550,177 199,606 1,419,157 1,086,782 240,598 - 4,552,456
Life and annuity benefits - - 401,229 - - - - 401,229
Policy acquisition costs 22,632 216,778 54,507 182,334 260,689 47,724 - 784,664
Administrative expenses 38,492 71,622 27,558 283,417 271,372 36,586 94,583 823,630
- ----------------------------------------------------------------------------------------------------------------------------------
Underwriting income (loss) (171,759) (214,661) (21,082) 6,795 (176,933) 27,421 (94,583) (644,802)
Net investment income 153,179 35,745 74,219 335,168 80,846 101,566 5,146 785,869
Amortization of goodwill (900) 3,755 14,011 540 - 4,205 57,960 79,571
Interest expense 6,445 2,591 733 33,481 - 14,013 141,919 199,182
Income tax expense (benefit) 2,756 (65,095) - 99,716 (46,033) 16,607 (76,699) (68,748)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) excluding net
realized gains (losses),
non-recurring expenses and
cumulative effect (26,881) (120,167) 38,393 208,226 (50,054) 94,162 (212,617) (68,938)
Non-recurring expenses
(net of income tax) - (4,461) - - - - - (4,461)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) excluding net
realized gains (losses) and
cumulative effect (26,881) (124,628) 38,393 208,226 (50,054) 94,162 (212,617) (73,399)
Net realized gains (losses)
(net of income tax) 6,470 6,617 (17,323) (31,271) 2,962 (4,276) (13,524) (50,345)
Income (loss) excluding
cumulative effect of
adopting a new
accounting standard (20,411) (118,011) 21,070 176,955 (47,092) 89,886 (226,141) (123,744)
Cumulative effect of
adopting a new
accounting standard
(net of income tax) - 510 470 (50) - (23,600) - (22,670)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ ( 20,411) $ (117,501) $ 21,540 $ 176,905 $ (47,092) $ 66,286 $ (226,141) $ (146,414)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $4,175,670 $3,088,545 $2,311,755 $18,693,792 $4,224,485 $2,183,096 $2,509,421 $37,186,764
==================================================================================================================================
/(1)/ ACE Limited, ACE INA Holdings and intercompany eliminations
98
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental Information by Segment
For the year ended December 31, 2000
ACE ACE ACE
ACE Global Global ACE ACE Financial ACE
(in thousands of U.S. dollars) Bermuda Markets Reinsurance USA International Services Other/(1)/ Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Operations data
Gross premiums written $ 597,865 $1,063,918 $ 190,771 $ 3,380,343 $ 2,027,285 $ 326,589 $ - $ 7,586,771
Net premiums written 512,310 772,021 157,489 1,707,623 1,418,661 311,250 - 4,879,354
Net premiums earned 486,984 619,329 141,337 1,619,025 1,385,557 282,531 - 4,534,763
Losses and loss expenses 361,855 354,123 17,954 1,192,881 826,210 183,042 - 2,936,065
Policy acquisition costs 20,630 164,738 25,192 160,956 235,847 43,378 - 650,741
Administrative expenses 29,933 69,384 10,284 253,946 285,090 32,839 61,215 742,691
Underwriting income (loss) 74,566 31,084 87,907 11,242 38,410 23,272 (61,215) 205,266
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income 149,781 36,636 60,281 341,361 92,477 96,591 (6,272) 770,855
Amortization of goodwill (883) 3,968 14,010 540 - 4,205 56,980 78,820
Interest expense 1,643 4,980 - 38,333 - 13,361 163,133 221,450
Income tax expense (benefit) 2,459 17,481 (173) 98,288 20,067 20,626 (64,841) 93,907
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) excluding net
realized gains (losses) 221,128 41,291 134,351 215,442 110,820 81,671 (222,759) 581,944
Net realized gains (losses)
(net of income tax) 1,344 (1,495) (38,161) (22,633) 18,221 5,440 (1,678) (38,962)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 222,472 $ 39,796 $ 96,190 $ 192,809 $ 129,041 $ 87,111 $ (224,437) $ 542,982
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $3,133,117 $1,962,401 $1,324,641 $16,438,562 $ 3,846,345 $2,254,260 $2,730,200 $31,689,526
================================================================================================================================
/(1)/ ACE Limited, ACE INA Holdings and intercompany eliminations
99
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Information by Segment
For the year ended December 31, 1999
ACE ACE
ACE Global Global ACE ACE ACE
(in thousands of U.S. dollars) Bermuda Markets Reinsurance USA International Other/(1)/ Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Operations data
Gross premiums written $ 553,365 $ 634,689 $ 182,267 $ 1,566,584 $ 932,252 $ - $ 3,869,157
Net premiums written 428,953 438,769 145,673 796,892 685,061 - 2,495,348
Net premiums earned 510,013 363,887 140,094 748,635 723,108 - 2,485,737
Losses and loss expenses 390,385 205,811 96,935 533,275 413,137 - 1,639,543
Policy acquisition costs 14,862 94,419 20,809 68,993 138,993 - 338,076
Administrative expenses 38,233 54,636 11,927 176,524 152,165 51,071 484,556
- -----------------------------------------------------------------------------------------------------------------------------------
Underwriting income (loss) 66,533 9,021 10,423 (30,157) 18,813 (51,071) 23,562
Net investment income 174,647 28,489 60,015 188,688 40,664 834 493,337
Amortization of goodwill (834) 4,204 14,011 469 - 27,500 45,350
Interest expense 4,705 3,944 - 34,563 - 61,926 105,138
Income tax expense (benefit) 2,129 6,006 - 34,693 20,199 (26,403) 36,624
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) excluding net
realized gains (losses)
and non-recurring expenses 235,180 23,356 56,427 88,806 39,278 (113,260) 329,787
Non-recurring expenses (net
of income tax) - - - (3,900) (3,042) - (6,942)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) excluding net
realized gains (losses) 235,180 23,356 56,427 84,906 36,236 (113,260) 322,845
Net realized gains (losses)
(net of income tax) 63,752 (4,373) (3,771) (3,529) (608) (9,353) 42,118
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 298,932 $ 18,983 $ 52,656 $ 81,377 $ 35,628 $ (122,613) $ 364,963
===================================================================================================================================
Total Assets $2,867,138 $1,521,535 $1,328,687 $16,240,045 $3,904,755 $4,260,728/(2)/ $30,122,888
===================================================================================================================================
/(1)/ ACE Limited, ACE INA Holdings and intercompany eliminations
/(2)/ Includes ACE Financial Services assets of $1,483,781
100
The following tables summarize the revenues of each segment by product offering
for the years ended December 31, 2001, 2000 and 1999.
- ----------------------------------------------------------------------------------------------------------
Net Premiums Earned by Type of Premium
Property Life, Accident Financial ACE
(in thousands of U.S. dollars) Casualty & Health Products Consolidated
- ----------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
ACE Bermuda $ 169,187 $ - $ 776,314 $ 945,501
ACE Global Markets 610,873 13,043 - 623,916
ACE Global Reinsurance 255,538 406,280 - 661,818
ACE USA 1,591,560 - 300,143 1,891,703
ACE International 927,484 504,048 10,378 1,441,910
ACE Financial Services - - 352,329 352,329
- ----------------------------------------------------------------------------------------------------------
Net premiums earned $ 3,554,642 $ 923,371 $ 1,439,164 $ 5,917,177
==========================================================================================================
Year ended December 31, 2000
ACE Bermuda $ 280,922 $ - $ 206,062 $ 486,984
ACE Global Markets 577,110 42,219 - 619,329
ACE Global Reinsurance 141,337 - - 141,337
ACE USA 1,402,982 - 216,043 1,619,025
ACE International 974,144 411,413 - 1,385,557
ACE Financial Services - - 282,531 282,531
- ----------------------------------------------------------------------------------------------------------
Net premiums earned $ 3,376,495 $ 453,632 $ 704,636 $ 4,534,763
==========================================================================================================
Year ended December 31, 1999
ACE Bermuda $ 224,503 $ - $ 285,510 $ 510,013
ACE Global Markets 363,887 - - 363,887
ACE Global Reinsurance 140,094 - - 140,094
ACE USA 748,635 - - 748,635
ACE International 477,545 245,563 - 723,108
- ----------------------------------------------------------------------------------------------------------
Net premiums earned $ 1,954,664 $ 245,563 $ 285,510 $ 2,485,737
==========================================================================================================
101
Notes to Consolidated Financial Statements (continued)
ACE Limited and Subsidiaries
c) The following table summarizes the Company's gross premiums written by
geographic region. Allocations have been made on the basis of location of risk.
Year North Australia & Asia Latin
Ended America Europe New Zealand Pacific America Other
- -------------------------------------------------------------------------------
2001 63% 21% 2% 9% 5% -
2000 63% 20% 7% 5% 4% 1%
1999 59% 18% 4% 9% 3% 7%
19. 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 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. In
the absence of an acceptable offer to purchase the in-force book of business,
the Company expects to continue to run off this business. The results of the CIS
operations from July 2, 2000 are reflected in the ACE USA segment.
102