SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 2, 1999
ACE LIMITED
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(Exact name of registrant as specified in its charter)
Cayman Islands 1-11778 98-0091805
- ------------------------------ -------------- ----------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
The ACE Building
30 Woodbourne Avenue
Hamilton, Bermuda HM 08
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (441) 295-5200
Not Applicable
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(Former name or former address, if changed since last report)
On July 2, 1999, ACE Limited, through its wholly owned subsidiary ACE INA
Holdings, Inc., completed the acquisition of the domestic and international
property and casualty business (the "Acquired Business") of CIGNA Corporation
("CIGNA"). A Current Report on Form 8-K (the "Form 8-K") was filed July 19,
1999 reporting such event. This current report on Form 8-K/A contains unaudited
pro forma financial information of ACE Limited omitted from the Form 8-K in
accordance with the rules and regulations of the Securities and Exchange
Commission.
Item 7 Financial Statements and Exhibits
(a) Financial Statements
Not Applicable
(b) Pro Forma Financial Information
See Exhibit 1
(c) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 15, 1999 ACE LIMITED
By: /s/ Robert A. Blee
----------------------------
Robert A. Blee
Chief Accounting Officer
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION OF ACE LIMITED
On July 2, 1999, ACE purchased the international and domestic property and
casualty businesses of CIGNA for $3.45 billion in cash. Under the terms of the
agreement, ACE acquired CIGNA's domestic property and casualty insurance
operations and also its international property and casualty insurance companies
and branches, including most of the accident and health business written through
those companies. National Indemnity Company, a subsidiary of Berkshire Hathaway
Inc., provided $1.25 billion of reinsurance against unanticipated increases in
recorded reserves for insurance losses and loss adjustment expenses of certain
subsidiaries being acquired by ACE. ACE financed this acquisition with a
combination of available cash, a hybrid trust preferred security, and the
remainder with commercial paper issuance. On August 17, 1999 ACE issued $800
million of senior notes and debentures and used the proceeds to repay a portion
of the outstanding commercial paper. ACE intends to repay the remainder of the
commercial paper with a combination of additional debt, newly issued ACE
ordinary shares and trust preferred securities.
On June 11, 1999, ACE announced that it had entered into an Agreement and
Plan of Merger for the acquisition of Capital Re. Capital Re's stockholders
will receive 0.6 ordinary shares of ACE for each share of common stock of
Capital Re at closing, subject to a maximum value to Capital Re stockholders of
$22 per share. It is anticipated that the transaction will be completed during
the second half of calendar 1999, subject to customary closing conditions,
including approval of the merger by Capital Re's shareholders and receipt of
necessary regulatory approval.
The following unaudited pro forma condensed consolidated balance sheet as of
June 30, 1999 gives effect to the acquisition of CIGNA's property and casualty
businesses and Capital Re as if they had occurred on June 30, 1999. The
unaudited pro forma condensed consolidated statements of operations for the
twelve months ended September 30, 1998 and for the nine months ended June 30,
1999 present operating results of ACE as if these acquisitions had occurred on
October 1, 1997. These amounts do not include ACE's estimate of the expected
annual operating expense savings from the acquisition of CIGNA's property and
casualty businesses.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with ACE's consolidated financial statements included in
ACE's Annual Report on Form 10-K for the year ended September 30, 1998, the
unaudited consolidated financial statements of ACE included in ACE's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, the audited combined
financial statements of CIGNA's property and casualty businesses for the year
ended December 31, 1998 previously filed as exhibit 99.1 to a Form 8-K filed by
ACE dated May 19, 1999, the consolidated financial statements of Capital Re
included in the Capital Re Annual Report on Form 10-K for the year ended
December 31, 1998 and the unaudited consolidated financial statements of
Capital Re included in the Capital Re Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999. The unaudited pro forma condensed consolidated
financial information is not intended to be indicative of the consolidated
results of operations or financial position of ACE that would have been
reported if these acquisitions had occurred at the dates indicated or of the
consolidated results of future operations or of future financial position. For
the historical periods presented below, ACE's fiscal year ended on September
30. From and after July 2, 1999, ACE's fiscal year will end on December 31.
The acquisitions of CIGNA's property and casualty businesses and Capital Re
have both been accounted for as a purchase in accordance with generally
accepted accounting principles. Under purchase accounting, the total purchase
price is allocated to the acquired assets and liabilities based on their fair
values.
4
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
At June 30, 1999
-----------------------------------------------------------------------------------------------
Pro forma
Pro forma combined
combined for CIGNA
for CIGNA P&C and
CIGNA Pro forma P&C Pro forma Capital Re
ACE P&C Adjustments Notes Acquisition Capital Re Adjustments Notes Acquisitions
----------- ------- ----------- ----- ----------- ----------- ----------- ------ ------------
(dollars in millions, except per share data)
Total investments and
cash.................. $ 6,561 $ 9,244 $ 2,025 (2)
(3,450) (1)
(1,250) (3) $ 13,130 $1,249 $ (75) (13) $ 14,304
Reinsurance
recoverables.......... 1,291 6,044 1,250 (3) 8,585 4 8,589
Premiums receivable.... 459 2,329 -- 2,788 16 2,804
Other assets........... 823 2,500 118 (4) 3,441 262 3,703
Goodwill............... 534 394 1,501 (6)
71 (5) 2,500 41 (10)
75 (13) 2,616
----------- ------- --------- ----------- ------ ---------- -----------
Total assets.......... $ 9,668 $20,511 $ 265 $ 30,444 $1,531 $ 41 $ 32,016
=========== ======= ========= =========== ====== ========== ===========
Unpaid losses and loss
expenses.............. 3,803 14,425 -- 18,228 143 18,371
Unearned premiums...... 847 1,378 -- 2,225 425 2,650
Trust Preferred
Securities............ 400 -- 400 75 475
Indebtedness........... 250 -- 2,025 (2) 2,275 100 2,375
Other liabilities...... 430 3,057 (230) (4)
50 (1) 3,307 233 5 (10) 3,545
----------- ------- --------- ----------- ------ ---------- -----------
Total liabilities..... $ 5,730 $18,860 $ 2,245 $ 26,435 $ 976 $ 5 $ 27,416
----------- ------- --------- ----------- ------ ---------- -----------
Total shareholders'
equity................ 3,938 1,651
230 (4)
118 (4)
71 (5)
(1,999) (7) 4,009 555 584 (9)
7 (11)
(555) (12) 4,600
----------- ------- --------- ----------- ------ ---------- -----------
Total liabilities, and
shareholders equity.. $ 9,668 $20,511 $ 265 $ 30,444 $1,531 $ 41 $ 32,016
=========== ======= ========= =========== ====== ========== ===========
Shares outstanding on a
fully diluted basis... 203,494,644 2,544,000 (5) 206,038,699 20,103,571 (9)(11) 226,142,215
=========== ========= =========== ========== ===========
Fully diluted book
value per
share(8)(14).......... $ 20.24 $ 20.34 $ 21.18
=========== =========== ===========
5
PRO FORMA BALANCE SHEET FOOTNOTES
WITH RESPECT TO THE CIGNA P&C ACQUISITION
(1) Under the terms of the acquisition agreement by and among CIGNA
Corporation, CIGNA Holdings, Inc. and ACE Limited dated January 11, 1999,
ACE paid a total purchase price of $3.45 billion. In addition, ACE expects
to incur approximately $50 million of estimated transaction related
expenses.
(2) The $3.45 billion purchase price was initially financed with $1.025 billion
of available cash, $400 million from a hybrid trust preferred security and
the remainder with commercial paper issuance (the "initial financing"). On
August 17, 1999, the company issued $800 million of senior notes and
debentures and used the proceeds to repay a portion of the outstanding
commercial paper. Ultimately, the remaining commercial paper will be repaid
with a combination of additional debt, newly issued ACE ordinary shares
and trust preferred securities. Each of the additional debt, new ACE
ordinary shares and trust preferred securities will be issued at the time
when ACE considers market conditions to be most favorable for issuance.
These pro forma financial statements reflect the initial financing
described above, adjusted to include the issuance of the senior notes and
debentures.
(3) Under the terms of the 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 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 a reinsurer for aggregate coverage of $2.5 billion. Such
coverage attached at an amount equal to the net recorded reserves of the
certain subsidiaries acquired, on the closing date, minus $1.25 billion.
(4) Under the terms of the acquisition agreement, CIGNA Corporation: (a)
forgave certain inter-company indebtedness amounting to $118 million, and
(b) retained certain net employment and post-employment related
liabilities amounting to approximately $230 million.
(5) Pursuant to the acquisition agreement, all unvested options to acquire
shares of CIGNA and all unvested restricted stock of CIGNA held by CIGNA
employees that transferred to ACE were cancelled by CIGNA and replaced
with restricted stock of ACE. As a result, ACE will issue approximately
2,544,000 shares of restricted stock for a total value of approximately
$71 million to those new ACE employees. ACE will record the fair value of
these ACE shares as part of the purchase price of the acquired businesses.
(6) Under purchase accounting, the total purchase price is allocated to the
acquired assets and liabilities assumed based on their fair values. The
excess of the cost of the transaction (including expenses incurred by ACE
related to the transaction estimated at $50 million and the value of new
ACE restricted stock discussed in note 5) over the fair value of net
tangible assets acquired is recorded as goodwill. Goodwill is expected to
be amortized on a straight line basis over 40 years.
(7) This adjustment reflects the consolidation adjustment to eliminate the
shareholder's equity of the acquired businesses after adjustment for the
items discussed in notes 4 and 5.
(8) Fully diluted book value per share is based on the sum of the total
shareholders' equity and the aggregate proceeds assuming exercise of all
outstanding ACE options.
6
PRO FORMA BALANCE SHEET FOOTNOTES
WITH RESPECT TO THE CAPITAL RE ACQUISITION
(9) The Agreement and Plan of Merger among Capital Re Corporation, ACE Limited
and CapRe Acquisition Corp. dated June 10, 1999 provides that, at the
effective time of the merger, each Capital Re common share issued and
outstanding immediately prior to the effective time will be converted into
the right to receive 0.6 ACE ordinary shares in accordance with the
applicable exchange ratio. This value has been determined in accordance
with the EITF 95-19 consensus that the value of equity securities issued
to effect a purchase combination (in this case the merger) should be based
on (a) the market price for a reasonable period before and after the date
the terms of the acquisition are agreed and announced, or (b) at a later
date if any significant terms of the transaction change. The original
terms of the Capital Re merger were agreed and announced on May 27, 1999.
For purposes of the pro forma financial statements, ACE has used a
$30.3125 share price and has assumed that it will issue 19,259,171 ACE
ordinary shares (with a total value of $583.8 million) in exchange for
Capital Re common shares.
(10) Under purchase accounting, the total purchase price is allocated to the
acquired assets and liabilities assumed based on their fair values. The
excess of the cost of the transaction (including expenses incurred by ACE
related to the transaction estimated at $5 million) over the fair value of
the Capital Re net assets acquired is recorded as goodwill. Based on the
value of the ACE ordinary shares expected to be issued, including the ACE
options described in note 11, to effect the merger, ACE would record
goodwill of $116 million as a result of the merger (see discussion of
purchase price in note 9 above). Goodwill is expected to be amortized on a
straight line basis over 25 years.
(11) Pursuant to the merger agreement, all of Capital Re stock options
outstanding will be cancelled and replaced with ACE options. ACE will
record the value of these ACE options of approximately $7 million as part
of the purchase price of Capital Re.
(12) The adjustment reflects the consolidation adjustment to eliminate Capital
Re's shareholders' equity.
(13) Eliminates ACE's current investment of $75 million in Capital Re.
(14) Fully diluted book value per share is based on the sum of total
shareholders' equity and the aggregate proceeds assuming exercise of all
outstanding ACE options and Capital Re stock options that will be
cancelled and replaced with ACE options.
7
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended June 30, 1999
----------------------------------------------------------------------------------------------------------
Pro forma
Pro forma combined for
combined CIGNA
for CIGNA P&C and
CIGNA Pro forma P&C Pro forma Capital
ACE P&C (1) Adjustments Notes Acquisition Capital Re(8) Adjustments Notes Re Acquisition
----------- ------- ----------- ------ ----------- -------------- ----------- ------- --------------
(dollars in millions, except share and per share data)
Net Premiums
Written........ $ 887 $ 2,188 $ 3,075 $ 160 $ 3,235
Net Premiums
Earned......... 804 2,174 2,978 122 3,100
Net investment
income......... 256 413 $ (106) (2)(3) 563 51 614
Other revenues.. 213 213 5 218
Losses and loss
expenses....... (523) (1,698) 61 (3) (2,160) (241) (2,401)
Acquisition
costs and
administrative
expenses....... (231) (740) (971) (62) (1,033)
Other expenses.. (27) (515) (154) (4)(5) (696) (6) $ (3) (11) (705)
Income tax...... (15) 34 38 (6) 57 52 109
----------- ------- --------- ----------- ----- ---------- -----------
Income (loss)
excluding net
realized gains
(losses)....... 264 (119) (161) (16) (79) (3) (98)
Net realized
gains (losses)
on
investments.... 173 68 241 (2) 239
Cumulative
effect of
accounting
change for
guaranty fund
and other
insurance
related
assessments,
net of taxes... (85) (85) (85)
----------- ------- --------- ----------- ----- ---------- -----------
Income (loss)
from continuing
operations..... 437 (136) (161) 140 (81) (3) 56
Loss from
discontinued
operations, net
of tax......... (26) (26)
=========== ======= ========= ----------- ----- ---------- -----------
Net Income
(loss)......... $ 437 $ (136) $ (161) $ 140 $(107) $ (3) $ 30
=========== ======= ========= =========== ===== ========== ===========
Basic earnings
per share,
excluding net
realized gains
(losses) and
cumulative
effect of
accounting
change......... $ 1.36 $ (0.08) $ (0.58)
=========== =========== ===========
Basic earnings
per share from
continuing
operations..... $ 2.25 $ .71 $ .26
=========== =========== ===========
Basic earnings
per share...... $ 2.25 $ .71 $ .14
=========== =========== ===========
Weighted average
shares
outstanding--
basic.......... 193,802,722 2,544,000 (7) 196,346,722 19,259,171 (9) 215,605,893
=========== ========= =========== ========== ===========
Diluted Earnings
per share,
excluding net
realized gains
(losses) and
cumulative
effect of
accounting
change......... $ 1.34 $ (0.08) $ (0.57)
=========== =========== ===========
Diluted earnings
per share from
continuing
operations..... $ 2.21 $ .70 $ .26
=========== =========== ===========
Diluted earnings
per share...... $ 2.21 $ .70 $ .14
=========== =========== ===========
Weighted average
shares
outstanding--
diluted........ 197,258,687 2,544,000 (7) 199,802,687 19,602,730 (9)(10) 219,405,417
=========== ========= =========== ========== ===========
8
PRO FORMA FOOTNOTES WITH RESPECT TO THE CIGNA P&C ACQUISITION FOR THE NINE
MONTHS ENDED JUNE 30, 1999
(1) The combined statements of operations of CIGNA's property and casualty
businesses reflect its results of operations for the nine months ended
June 30, 1999.
(2) ACE funded part of the purchase price with $1.025 billion of cash on hand.
The estimated investment income on this $1.025 billion of the purchase
price has been eliminated (based on a yield of 5.8% that approximates the
yield on the ACE portfolio for the fiscal year ended September 30, 1998).
(3) Under the terms of the 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 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 a reinsurer for aggregate coverage of $2.5 billion. Such
coverage attached at an amount equal to the net recorded reserves of the
certain subsidiaries acquired, on the closing date, minus $1.25 billion.
The estimated investment income on this $1.25 billion has been eliminated
(based on a yield of 6.5% that approximates the yield on the applicable
portion of the acquired businesses' portfolio for the fiscal year ended
December 31, 1998). The pro forma adjustment to losses and loss expenses
reflects the estimated historical adverse development recorded during the
period on the guaranteed reserves.
(4) In addition to the $1.025 billion of cash on hand, ACE funded part of the
purchase price with $400 million from a hybrid trust preferred security and
the remainder with commercial paper issuance (the "initial financing").
Interest on the hybrid trust preferred security and commercial paper has
been calculated at rates of 8.5% and 5.3%, respectively. On August 17,
1999, the Company issued $800 million of senior notes and debentures and
used the proceeds to repay a portion of the outstanding commercial paper.
Interest on the senior notes and debentures has been calculated at 8.4%.
Ultimately, the remaining commercial paper will be replaced with a
combination of additional debt, newly issued ACE ordinary shares and trust
preferred securities. Each of the additional debt, new ACE ordinary shares
and trust preferred securities will be issued at the time when ACE
considers market conditions to be most favorable for issuance. These pro
forma financial statements reflect the initial financing described above,
adjusted to include the issuance of the senior notes and debentures.
(5) Any excess between the purchase price and the fair value of acquired net
tangible assets will be allocated to goodwill. These pro forma financial
statements reflect all of the excess purchase price over net tangible
assets as goodwill. This entry reflects the amortization of goodwill for
the period.
(6) The estimated income tax saving is based on the estimated reduction in net
income before tax as a result of interest expense on the transaction
financing.
(7) Pursuant to the acquisition agreement, all unvested options to acquire
shares of CIGNA and all unvested restricted stock of CIGNA held by CIGNA
employees that transferred to ACE were cancelled by CIGNA and replaced
with restricted stock of ACE. As a result, ACE will issue approximately
2,544,000 shares of restricted stock to those new ACE employees.
(8) The Capital Re consolidated statements of operations reflect its results
of operations for the nine months ended June 30, 1999.
9
PRO FORMA FOOTNOTES WITH RESPECT TO THE CAPITAL RE ACQUISITION FOR THE NINE
MONTHS ENDED JUNE 30, 1999
(9) The Agreement and Plan of Merger among Capital Re Corporation, ACE
Limited, and CapRe Acquisition Corp. dated June 10, 1999 provides that, at
the effective time of the merger, each Capital Re common share issued and
outstanding immediately prior to the effective time will be converted into
the right to receive 0.6 ACE ordinary shares in accordance with the
applicable exchange ratio. This value will be determined in accordance
with the EITF 95-19 consensus that the value of equity securities issued
to effect a purchase combination (in this case the amalgamation) should be
based on (a) the market price for a reasonable period before and after the
date the terms of the acquisition are agreed and announced, or (b) at a
later date if any significant terms of the transaction change. The
original terms of the amalgamation were agreed and announced on May 27,
1999. For purposes of the pro forma financial statements, ACE has used a
$30.3125 share price and has assumed that it will issue 19,259,171 ACE
ordinary shares (with a total value of $583.8 million) in exchange for
Capital Re common shares. Fees and other expenses related to the
transaction are estimated to be $5 million.
(10) Certain of the outstanding options to purchase Capital Re common shares
will be cancelled and replaced with options to purchase ACE ordinary
shares. This adjustment represents the weighted average number of ordinary
share equivalents outstanding related to the newly issued ACE options.
(11) Amortization of goodwill created by the acquisition of Capital Re is
expected to be amortized over 25 years.
10
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30, 1998
------------------------------------------------------------------------------------------------
Pro forma
Pro forma combined for
combined for CIGNA
CIGNA CIGNA P&C and
P&C Pro forma P&C Capital Pro forma Capital Re
ACE (1) Adjustments Notes Acquisition Re (8) Adjustments Notes Acquisitions
------------ ------ ----------- ----- ------------ ------- ----------- ------ ------------
(dollars in millions, except share and per share data)
Net Premiums Written.... $ 881 $2,990 $ 3,871 $211 $ 4,082
Net Premiums Earned..... 894 2,957 3,851 168 4,019
Net investment income... 324 590 $ (141) (2)(3) 773 65 838
Other revenues.......... 282 282 3 285
Losses and loss
expenses............... (517) (2,247) 81 (3) (2,683) (86) (2,769)
Acquisition costs and
administrative
expenses............... (271) (1,500) (1,771) (86) (1,857)
Other expenses.......... (38) (205) (4)(5) (243) (7) $ (5) (11) (255)
Income tax.............. (20) (30) 50 (6) -- (11) (11)
------------ ------ --------- ------------ ---- ----------- ------------
Income excluding net
realized gains (losses)
....................... 372 52 (215) 209 46 (5) 250
Net realized gains
(losses) on investments
....................... 188 22 210 (2) 208
------------ ------ --------- ------------ ---- ----------- ------------
Income from continuing
operations............. 560 74 (215) 419 44 (5) 458
Loss from discontinued
operations (3) (3)
------------ ------ --------- ------------ ---- ----------- ------------
Net Income.............. $ 560 $ 74 $ (215) $ 419 $ 41 $ (5) $ 455
============ ====== ========= ============ ==== =========== ============
Basic earnings per
share, excluding
realized gains (losses)
and loss from
discontinued
operations............. $ 2.01 $ 1.11 $ 1.21
============ ============ ============
Basic earnings per share
from continuing
operations............. $ 3.03 $ 2.23 $ 2.21
============ ============ ============
Basic earnings per
share.................. $ 3.03 $ 2.23 $ 2.20
============ ============ ============
Weighted average shares
outstanding--basic..... 185,130,479 2,544,000 (7) 187,674,479 19,259,171 (9) 206,933,650
============ ========= ============ =========== ============
Diluted Earnings per
share, excluding
realized gains (losses)
and loss from
discontinued
operations............. $ 1.97 $ 1.09 $ 1.18
============ ============ ============
Diluted earnings per
share from continuing
operations............. $ 2.96 $ 2.18 $ 2.16
============ ============ ============
Diluted earnings per
share.................. $ 2.96 $ 2.18 $ 2.15
============ ============ ============
Weighted average shares
outstanding--diluted... 189,281,175 2,544,000 (7) 191,825,175 20,111,846 (9)(10) 211,937,021
============ ========= ============ =========== ============
11
PRO FORMA FOOTNOTES WITH RESPECT TO THE CIGNA P&C ACQUISITION FOR THE YEAR
ENDED SEPTEMBER 30, 1998
(1) The combined statements of operations of CIGNA's property and casualty
businesses reflect its results of operations for the year ended December
31, 1998.
(2) ACE funded part of the purchase price with $1.025 billion of cash on hand.
The estimated investment income on this $1.025 billion of the purchase
price has been eliminated (based on a yield of 5.8% that approximates the
yield on the ACE portfolio for the fiscal year ended September 30, 1998).
(3) Under the terms of the 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 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 a
reinsurer for aggregate coverage of $2.5 billion. Such coverage attached at
an amount equal to the net recorded reserves of the certain subsidiaries
acquired, on the closing date, minus $1.25 billion. The estimated
investment income on this $1.25 billion has been eliminated (based on a
yield of 6.5% that approximates the yield on the applicable portion of the
acquired businesses' portfolio for the fiscal year ended December 31,
1998). The pro forma adjustment to losses and loss expenses reflects the
estimated historical adverse development recorded during the period on the
guaranteed reserves.
(4) In addition to the $1.025 billion of cash on hand, ACE funded part of the
purchase price with $400 million from a hybrid trust preferred security and
the remainder with commercial paper issuance (the "initial financing").
Interest on the hybrid trust preferred security and commercial paper has
been calculated at rates of 8.5% and 5.3%, respectively. On August 17, 1999,
the Company issued $800 million of senior notes and debentures and used the
proceeds to repay a portion of the outstanding commercial paper. Interest on
the senior notes and debentures has been calculated at 8.4%. Ultimately, the
remaining commercial paper will be replaced with a combination of additional
debt, new issued ACE ordinary shares and trust preferred securities. Each of
the additional debt, new ACE ordinary shares and trust preferred securities
will be issued at the time when ACE considers market conditions to be most
favorable for issuance. These pro forma financial statements reflect the
initial financing described above, adjusted to include the issuance of the
senior notes and debentures.
(5) Any excess between the purchase price and the fair value of acquired net
tangible assets will be allocated to goodwill. These pro forma financial
statements reflect all of the excess purchase price over net tangible
assets as goodwill. This entry reflects the amortization of goodwill for
the period.
(6) The estimated income tax saving is based on the estimated reduction in net
income before tax as a result of interest expense on the transaction
financing.
(7) Pursuant to the acquisition agreement, all unvested options to acquire
shares of CIGNA and all unvested restricted stock of CIGNA held by CIGNA
employees that transferred to ACE were cancelled by CIGNA and replaced with
restricted stock of ACE. As a result, ACE will issue approximately
2,544,000 shares of restricted stock to those new ACE employees.
(8) The Capital Re consolidated statements of operations reflect its results of
operations for the year ended December 31, 1998.
12
PRO FORMA FOOTNOTES WITH RESPECT TO THE CAPITAL RE ACQUISITION
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(9) The merger agreement provides that, at the effective time, each Capital Re
common share issued and outstanding immediately prior to the effective
time will be converted into the right to receive 0.6 ACE ordinary shares
in accordance with the applicable exchange ratio. This value will be
determined in accordance with the EITF 95-19 consensus that the value of
equity securities issued to effect a purchase combination (in this case
the amalgamation) should be based on (a) the market price for a reasonable
period before and after the date the terms of the acquisition are agreed
and announced, or (b) at a later date if any significant terms of the
transaction change. The original terms of the amalgamation were agreed and
announced on May 27, 1999. For purposes of the pro forma financial
statements, ACE has used a $30.3125 share price and has assumed that it
will issue 19,259,171 ACE ordinary shares (with a total value of $583.8
Million) in exchange for Capital Re common shares. Fees and other expenses
related to the transaction are estimated to be $5 million.
(10) Certain of the outstanding options to purchase Capital Re common shares
will be cancelled and replaced with options to purchase ACE ordinary
shares. This adjustment represents the weighted average number of ordinary
share equivalents outstanding related to the newly issued ACE options.
(11) Amortization of goodwill created by the acquisition of Capital Re is
expected to be amortized over 25 years.
13