-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gi65H2dRGEnznoOqfZ1B/f/1i4/nFwpLcf+FVZS1DwQDtBG3nk8kx1dnM07h8u/q sHVIyNtt+8bnDdJ8U/G/pQ== 0000902561-98-000044.txt : 19980218 0000902561-98-000044.hdr.sgml : 19980218 ACCESSION NUMBER: 0000902561-98-000044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACE LTD CENTRAL INDEX KEY: 0000896159 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11778 FILM NUMBER: 98537243 BUSINESS ADDRESS: STREET 1: ACE BLDG STREET 2: P O BOX HM 1015 CITY: HAMILTON HM 08 BERMU STATE: D0 BUSINESS PHONE: 8092955200 MAIL ADDRESS: STREET 1: P O BOX HM 1015 CITY: HAMITON BERMUDA STATE: D0 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ________________ to ________________ Commission File No. 1-11778 I.R.S. Employer Identification No. N/A ACE LIMITED (Incorporated in the Cayman Islands) The ACE Building 30 Woodbourne Avenue Hamilton HM 08 Bermuda Telephone 441-295-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------------- ----------- The number of registrant's Ordinary Shares ($0.125 par value) outstanding as of February 6, 1998 was 54,203,651. 1 ACE LIMITED INDEX TO FORM 10-Q Part I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements: Consolidated Balance Sheets December 31, 1997 (Unaudited) and September 30, 1997 3 Consolidated Statements of Operations (Unaudited) Three Months Ended December 31, 1997 and December 31, 1996 4 Consolidated Statements of Shareholders' Equity (Unaudited) Three Months Ended December 31, 1997 and December 31, 1996 5 Consolidated Statements of Cash Flows (Unaudited) Three Months Ended December 31, 1997 and December 31, 1996 6 Notes to Interim Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Part II. OTHER INFORMATION Item 4. Submission of matters to a vote of security holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 21 2
ACE LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31 September 30 1997 1997 ------ ---- (unaudited) (in thousands of U.S. dollars except share and per share data) Assets Investments and cash Fixed maturities available for sale, at fair value (amortized cost - $2,978,403 and $3,226,511) $ 3,056,831 $ 3,290,336 Equity securities, at fair value (cost - $509,719 and $502,481) 605,329 634,970 Short-term investments, at fair value (amortized cost - $575,807 and $364,552) 576,071 364,432 Other investments, at cost 83,183 78,691 Cash 123,564 106,336 ------- ------- Total investments and cash 4,444,978 4,474,765 Goodwill on Tempest acquisition 195,397 196,667 Premiums and insurance balances receivable 133,779 135,815 Accrued investment income 33,099 40,581 Deferred acquisition costs 24,165 27,018 Prepaid reinsurance premiums 35,814 22,196 Other assets 131,705 104,504 ------- ------- Total assets $ 4,998,937 $ 5,001,546 ========= ========= Liabilities Unpaid losses and loss expenses $ 1,858,055 $ 1,869,995 Unearned premiums 369,206 400,689 Premiums received in advance 43,307 24,973 Reinsurance balances payable 23,459 11,245 Accounts payable and accrued liabilities 73,002 63,014 Dividend payable 13,356 12,436 ------ ------ Total liabilities 2,380,385 2,382,352 --------- --------- Commitments and Contingencies Shareholders' equity Ordinary Shares ($0.125 par value, 100,000,000 shares authorized; 54,471,452 and 55,293,218 shares issued and outstanding) 6,809 6,911 Additional paid-in capital 1,086,802 1,102,824 Unearned stock grant compensation (4,250) (1,993) Net unrealized appreciation on investments 174,302 196,194 Cumulative translation adjustments 709 855 Retained earnings 1,354,180 1,314,403 --------- --------- Total shareholders' equity 2,618,552 2,619,194 --------- --------- Total liabilities and shareholders' equity $ 4,998,937 $ 5,001,546 ========= ========= See accompanying notes to interim consolidated financial statements 3 ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended December 31, 1997 and 1996 (Unaudited) 1997 1996 ---- ---- (in thousands of U.S. dollars except per share data) Revenues Gross premiums written $ 170,245 $ 132,512 Reinsurance premiums ceded (43,268) (21,898) -------- ------- Net premiums written 126,977 110,614 Change in unearned premiums 40,844 53,786 -------- ------ Net premiums earned 167,821 164,400 Net investment income 58,413 59,738 Net realized gains on investments 27,492 41,723 -------- ------ Total revenues 253,726 265,861 ------- ------- Expenses Losses and loss expenses 109,161 110,150 Acquisition costs 14,201 14,129 Administrative expenses 17,548 15,841 -------- ------ Total expenses 140,910 140,120 ------- ------- Net income $ 112,816 $ 125,741 ======= ======= Basic earnings per share $ 2.06 $ 2.16 ==== ==== Diluted earnings per share $ 2.01 $ 2.14 ==== ==== See accompanying notes to interim consolidated financial statements 4 ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Three Months Ended December 31, 1997 and 1996 (Unaudited) 1997 1996 ---- ---- (in thousands of U.S. dollars) Ordinary Shares Balance -- beginning of period $ 6,911 $ 7,271 Exercise of stock options 2 2 Repurchase of shares (104) (32) ------------ ------ Balance -- end of period 6,809 7,241 ------------ ----- Additional paid-in capital Balance -- beginning of period 1,102,824 1,156,194 Exercise of options for Ordinary Shares 424 393 Repurchase of Ordinary Shares (16,446) (5,015) ---------- ------ Balance -- end of period 1,086,802 1,151,572 --------- --------- Unearned stock grant compensation Balance -- beginning of period (1,993) (1,299) Stock grants awarded (3,123) (2,626) Amortization 866 401 ------------ ------------- Balance -- end of period (4,250) (3,524) ----------- ------------ Net unrealized appreciation on investments Balance -- beginning of period 196,194 61,281 Net (depreciation) appreciation during (21,892) 25,719 period ---------- ------ Balance -- end of period 174,302 87,000 ---------- ------- Cumulative translation adjustments Balance -- beginning of period 855 131 Net adjustment for period (146) (449) ------------ ------- Balance -- end of period 709 (318) ------------ -------- Retained earnings Balance -- beginning of period 1,314,403 1,020,700 Net income 112,816 125,741 Dividends declared (13,085) (10,430) Repurchase of Ordinary Shares (59,954) (9,613) ---------- ------ Balance -- end of period 1,354,180 1,126,398 --------- --------- Total shareholders' equity $ 2,618,552 $ 2,368,369 ========= ========= See accompanying notes to interim consolidated financial statements 5 ACE LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended December 31, 1997 and 1996 (Unaudited) 1997 1996 ------ ---- (in thousands of U.S. dollars) Cash flows from operating activities Net income $ 112,816 $ 125,741 Adjustments to reconcile net income to net cash provided by Operating activities Unearned premiums (31,483) (43,938) Unpaid losses and loss expenses (11,940) 34,506 Prepaid reinsurance premiums (13,618) (8,848) Net realized gains on investments (27,492) (41,723) Amortization of premium/discounts (867) (1,595) Deferred acquisition costs 2,853 3,814 Insurance balances receivable 2,036 432 Premiums received in advance 18,334 22,720 Reinsurance balances payable 12,214 11,683 Accounts payable and accrued liabilities 10,973 (16,384) Other (22,114) 353 ----------- ---------- Net cash flows from operating activities 51,712 86,761 ----------- ------ Cash flows from investing activities Purchases of fixed maturities (1,299,104) (1,890,148) Purchases of equity securities (89,533) (239,903) Sales of fixed maturities 1,339,664 1,979,112 Sales of equity securities 85,537 141,500 Maturities of fixed maturities 13,000 -- Net realized gains on financial futures contracts 8,687 17,688 Other investments (4,492) -- Acquisition of subsidiaries, net of cash acquired -- (30,416) ------------ ------- Net cash from (used in) investing activities 53,759 (22,167) ----------- ------- Cash flows from financing activities Repurchase of Ordinary Shares (76,504) (14,658) Proceeds from exercise of options for Ordinary Shares 426 393 Dividends paid (12,165) (10,199) ---------- ------- Net cash used for financing activities (88,243) (24,464) ----------- ------- Net increase in cash 17,228 40,130 Cash -- beginning of period 106,336 53,374 ---------- ------ Cash -- end of period $ 123,564 $ 93,504 ========== ========
See accompanying notes to interim consolidated financial statements 6 ACE LIMITED AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General The interim consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared on the basis of accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company's 1997 Annual Report on Form 10-K. On January 2, 1998, the Company completed the acquisition of Westchester Specialty Group, Inc. ("WSG"), through its newly-created U.S. holding company, ACE US Holdings, Inc. WSG, through its insurance subsidiaries, provides specialty commercial property and umbrella liability coverages in the U.S. Under the terms of the agreement, the Company purchased all of the outstanding capital stock of WSG for aggregate cash consideration of $338 million. In connection with the acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, has provided $750 million (75 percent quota share of $1 billion) of reinsurance protection to WSG with respect to their loss reserves for the 1996 and prior accident years. The Company financed the transaction with $250 million of bank debt (see note 7 - Credit Facilities) and the remainder with available cash. The acquisition will be recorded using the purchase method of accounting and accordingly, the consolidated financial statements will include the results of ACE US Holdings, Inc. and its subsidiaries from January 2, 1998, the date of acquisition. At December 31, 1997 approximately 70 percent of the Company's written premiums came from North America with approximately 18 percent coming from the United Kingdom and continental Europe and approximately 12 percent from other countries. 2. Significant Accounting Policies Earnings per share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported primary earnings per share which included the dilution effect of outstanding options calculated using the treasury stock method using an average share price for the period. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. 3. Commitments and Contingencies A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such insureds. Lawsuits including class actions, involving thousands of implant recipients have been filed in both state and federal courts throughout the United States. Most of the federal cases have been consolidated pursuant to the rules for Multidistrict Litigation to a Federal District Court in Alabama. On May 15, 1995, the Dow Corning Corporation, a significant defendant, filed for protection under Chapter 11 of the U.S. Bankruptcy Code and claims against Dow Corning remain stayed subject to the Bankruptcy Code. 7 ACE LIMITED AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 3. Commitments and Contingencies (cont'd.) On October 1, 1995, negotiators for three of the major defendants agreed on the essential elements of a revised individual settlement plan for U.S. claimants with at least one implant from any of those manufacturers ("the Settlement"). In general, under the Settlement, the amounts payable to individual participants, and the manufacturers' obligations to make those payments, would not be affected by the number of claimants electing to opt out from the new plan. Also, in general, the compensation would be fixed and not affected by the number of participants, and the manufacturers would not have a right to walk away because of the amount of claims payable. Finally, each settling defendant agreed to be responsible only for cases in which its implant was identified, and not for a percentage of all claims. By November 13, 1995, the Settlement was approved by the three major defendants. In addition, two other defendants became part of the Settlement, although certain of their settlement terms are different and more restricted than the plan offered by the original three defendants. On December 22, 1995, the multidistrict litigation judge approved the Settlement and the materials for giving notice to claimants although an appeal concerning the Settlement is pending with the Eleventh Circuit Court of Appeals. Beginning in mid-January, 1996, the three major defendants have each made payments to a court-established fund for use in making payments under the Settlement. The Settlement Claims Office had reported that as of October 31, 1997, it has sent out Notification of Status Letters to more than 360,000 non-opt-out domestic implant recipients who had registered with the Settlement Claims Office. As of October 31, 1997, approximately $565 million had been distributed under the Settlement to implant recipients of the three major defendants. Certain potential payments to claimants relating to other implants remain suspended because of the pending appeals. The Settlement Claims Office has also reported that approximately 32,500 domestic registrants exercised opt-out rights after receiving their status letters. Previously, approximately 19,000 other domestic implant recipients had exercised opt-out rights in 1994 and/or before receiving status letters. At June 30, 1994, the Company increased its then existing reserves relating to breast implant claims. Although the reserve increase was partially satisfied by an allocation from existing IBNR, it also required an increase in the Company's total reserve for unpaid losses and loss expenses at June 30, 1994 of $200 million. The increase in reserves was based on information made available in conjunction with the lawsuits and information made available from the Company's insureds and was predicated upon an allocation between coverage provided before and after the end of 1985 (when the Company commenced underwriting operations). No additional reserves relating to breast implant claims have been added since June 30, 1994. The Company continually evaluates its reserves in light of developing information and in light of discussions and negotiations with its insureds. During fiscal 1997 and the first quarter of fiscal 1998, the Company made payments of approximately $260 million with respect to breast implant claims. These payments were included in previous reserves and are consistent with the Company's belief that its reserves are adequate. Significant uncertainties continue to exist with regard to the ultimate outcome and cost of the Settlement and value of the opt-out claims. While the Company is unable at this time to determine whether additional reserves, which could have a material adverse effect upon the financial condition, results of operations and cash flows of the Company, may be necessary in the future, the Company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as at December 31, 1997. 8 ACE LIMITED AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 4. Shares Issued and Outstanding The Board of Directors has authorized the repurchase from time to time of the Company's Ordinary Shares in open market and private purchase transactions. On May 9, 1997 the Board of Directors terminated the then existing share repurchase program and authorized a new share program for up to $300 million of the Company's Ordinary Shares. During the quarter ended December 31, 1997, the Company repurchased 836,200 Ordinary Shares under the share repurchase program for an aggregate cost of $76.5 million. As at December 31, 1997, approximately $191.2 million of the Board authorization had not been utilized. 5. Restricted Stock Awards Under the terms of the 1995 Long-Term Incentive Plan 34,500 restricted Ordinary Shares were awarded during the current quarter, to officers of the Company and its subsidiaries. These shares vest at various dates through November 2002. 6. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share. December 31, 1997 1996 ---- ---- (in thousands of U.S. dollars except share and per share data) Numerator: Net Income $ 112,816 $ 125,741 ============ ========== Denominator: Denominator for basic earnings per share - weighted average shares 54,883,826 58,139,648 Effect of dilutive securities 1,342,994 746,607 ----------- ---------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 56,226,820 58,886,255 ========== ========== Basic earnings per share $ 2.06 $ 2.16 ==== ==== Diluted earnings per share $ 2.01 $ 2.14 ==== ==== 9 ACE LIMITED AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 7. Credit Facilities In December 1997 the Company put in place syndicated credit facilities which replaced the exisiting facilities. J.P. Morgan Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in the arranging, structuring and syndication of these credit facilities. The new facilities provide: . A $200 million 364 day revolving credit facility and a $200 million five year revolving credit facility which together make up a combined $400 million committed, unsecured revolving credit facility. This new five year revolving credit facility has a $50 million LOC sublimit. . A five year LOC of approximately 154 million pounds ($260 million) which is being used to fulfill the requirements of Lloyd's to provide funds to support underwriting capacity on Lloyd's syndicates in which the Company participates. The minimum consolidated tangible net worth covenant for A.C.E. Insurance Company, Ltd. under this LOC is $1.0 billion. . A $250 million seven year Amortized Term Loan Facility which was used on January 2, 1998 to partially finance the acquisition of WSG. The interest rate on the term loan is LIBOR plus an applicable spread. The revolving credit and term loan facilities require that the Company maintain a minimum consolidated tangible net worth of $1.4 billion. 8. Reclassification Certain items in the prior period financial statements have been reclassified to conform with the current period presentation. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION General The following is a discussion of the Company's results of operations, financial condition, liquidity and capital resources as of and for the three months ended December 31, 1997. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto and the Management's Discussion and Analysis of Results of Operations and Financial Condition included in the Company's 1997 Annual Report on Form 10-K. ACE Limited ("ACE") is a holding company which, through its Bermuda-based operating subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Insurance"), Corporate Officers & Directors Assurance Ltd. ("CODA") and Tempest Reinsurance Company Limited ("Tempest"), provides insurance and reinsurance for a diverse group of international clients. In addition, the Company provides funds at Lloyd's to support underwriting by syndicates managed by Methuen Underwriting Limited ("MUL"), ACE London Aviation Limited ("ALA") and ACE London Underwriting Limited ("ALU"), each indirect wholly owned subsidiaries of ACE. The term "the Company" refers to ACE and its subsidiaries, excluding MUL, ALA and ALU. For the 1996, 1997 and 1998 years of account, the Company, through corporate subsidiaries, has or will participate in the underwriting of these syndicates by providing funds at Lloyd's, primarily in the form of a letter of credit, supporting approximately $37 million, $229 million and $485 million, respectively, of underwriting capacity. The syndicates managed by these agencies in which the Company participates underwrite aviation, marine and non-marine risks. Underwriting capacity is the amount of gross premiums that a syndicate at Lloyd's can underwrite in a given year of account. However, a syndicate is not required to fully utilize all of the capacity and it is not unusual for capacity utilization to be significantly lower than 100 percent. On January 2, 1998, the Company completed the acquisition of Westchester Specialty Group, Inc. ("WSG"), through its newly-created U.S. holding company, ACE US Holdings, Inc. ("ACE US"). WSG, through its insurance subsidiaries, provides specialty commercial property and umbrella liability coverages in the U.S. Under the terms of the agreement, the Company purchased all of the outstanding capital stock of WSG for aggregate cash consideration of $338 million. In connection with the acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, has provided $750 million (75 percent quota share of $1 billion) of reinsurance protection to WSG with respect to their loss reserves for the 1996 and prior accident years (see "Liquidity and Capital Resources"). The Company will continue to evaluate potential new product lines and other opportunities in the insurance and reinsurance markets. Results of Operations - Three Months ended December 31, 1997 Net Income Three Months ended % Change December 31 from 1997 1996 Prior year ----- ------ ---------- (in millions) Income excluding net realized gains on investments $ 85.3 $ 84.0 1.6% Net realized gains on investments 27.5 41.7 N.M. ---- ---- ----- Net income $ 112.8 $125.7 N.M. ===== ===== ==== (N.M. -- Not meaningful) 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Results of Operations - Three Months ended December 31, 1997 (continued) Income excluding net realized gains on investments for the first quarter of fiscal 1998 increased by 1.6 percent, compared with the corresponding fiscal 1997 quarter. This increase is a result of higher income from insurance operations and was partially offset by a decrease in investment income and an increase in general and administrative expenses. Both net income for the current quarter and the first quarter of fiscal 1997 benefited from positive movements in the investment markets which produced net realized gains on investments in each of these quarters. Premiums Three Months ended % Change December 31 from 1997 1996 Prior year ----- ------ --------- (in millions) Gross premiums written: ACE Insurance (including CODA) $ 127.5 $ 124.7 2.2% Lloyd's syndicates 42.7 6.1 N.M. Property catastrophe (Tempest) __ 1.7 N.M. ----- ------- ------- $ 170.2 $ 132.5 28.5% ===== ===== ======= Net premiums written: ACE Insurance (including CODA) $ 94.8 $ 105.2 (9.9)% Lloyd's syndicates 32.2 3.7 N.M. Property catastrophe (Tempest) __ 1.7 N.M. ----- ------- ------ $ 127.0 $ 110.6 14.8% ===== ===== ====== Net premiums earned: ACE Insurance (including CODA) $ 119.6 $ 126.0 (5.1)% Lloyd's syndicates 19.8 2.3 N.M. Property catastrophe (Tempest) 28.4 36.1 (21.1) ------ ------ ------ $ 167.8 $ 164.4 2.1% ===== ===== ====== (N.M. -- Not meaningful) 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Results of Operations - Three Months ended December 31, 1997 (continued) Despite continuing competitive pressures in most insurance and reinsurance markets, gross premiums written increased by 28.5 percent to $170.2 million in the quarter ended December 31, 1997 compared with $132.5 million in the quarter ended December 31, 1996. This increase is primarily a result of the Company's diversification strategy undertaken over the past several years. The Company recorded an increase of $36.6 million in gross premiums written with respect to the Company's participation in the Lloyd's syndicates managed by ACE London at Lloyd's. This growth, which was achieved despite continuing price competition in the Lloyd's market, is a result of the Company's increased participation in the syndicates under management. Gross premiums written in ACE Insurance increased by 2.2 percent, or $2.8 million, in the quarter compared with the comparable quarter last year. This increase was primarily the result of growth in satellite premiums, which experienced increased activity in both launch and in-orbit programs, offset by continuing declines in the directors and officers liability and excess liability lines of business. The decline in excess liability is mainly the result of non-renewed accounts, premium adjustments and pricing changes resulting primarily from increases in attachment points and decreases in limits provided. While this has resulted in decreasing premiums, it has also led to a reduction in the Company's exposure and an improved risk profile. As Tempest renewals primarily fall in January and July of each year premium transactions are minimal during the December quarter. However, Tempest experienced continuing price pressures on its January 1998 renewals with price reductions up to 20 percent in many cases. Net premiums written increased by $16.4 million to $127.0 million this quarter from $110.6 million in the quarter ended December 31, 1996, an increase of 14.8 percent. This increase was the result of increases in the Company's participation in the Lloyd's syndicates managed by ACE London at Lloyd's. Net premiums written in ACE Insurance declined by 9.9 percent in the quarter compared to the first quarter of fiscal 1997. The decline is primarily the result of continuing declines in directors and officers liability and excess liability premiums, offset somewhat by growth in premiums from the satellite division. Net premiums written were also affected by the increased purchase of reinsurance in several divisions in ACE Insurance. Net premiums earned were $167.8 million compared to $164.4 million last year, an increase of 2.1 percent. This increase was a result of a $17.5 million increase in net premiums earned from our Lloyd's syndicate participation, offset somewhat by declines in earned premiums in ACE Insurance and in the property catastrophe business in Tempest. Net Investment Income Three Months ended % Change December 31 from 1997 1996 Prior year ---- ---- ---------- (in millions) Net investment income $ 58.4 $ 59.7 (2.2)% ==== ==== ====== Net investment income decreased to $58.4 million in the quarter compared to $59.7 million in the quarter ended December 31, 1996. This decrease was primarily due to the reduction in average yield on the portfolio caused by downward movements in the yield curve as well as the movement from 15 percent equities to 20 percent equities during December 1996. In addition, during fiscal 1997 and the first quarter of fiscal 1998, the investable asset base remained relatively constant as cash flows from operations were largely offset by share repurchases and dividend payments. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Results of Operations - Three Months ended December 31, 1997 (continued) Net Realized Gains on Investment Three Months ended December 31, 1997 1996 ----- ---- (in millions) Fixed maturities and short-term investments $ 21.4 $ 21.4 Equity securities 7.3 4.2 Financial futures and option contracts 8.7 17.7 Currency (9.9) (1.6) ----- ----- $ 27.5 $ 41.7 ===== ==== The Company's investment strategy takes a long-term view and the portfolio is actively managed to maximize total return within certain specific guidelines which minimize risk. The portfolio is reported at fair value. The effect of market movements on the investment portfolio will directly impact net realized gains (losses) on investments when securities are sold. Changes in unrealized gains and losses, which result from the revaluation of securities held, are reported as a separate component of shareholders' equity. The Company uses foreign currency forward and option contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar holdings. The contracts used are not designated as specific hedges and therefore, realized and unrealized gains and losses recognized on these contracts are recorded as a component of net realized gains (losses) on investments in the period in which the fluctuations occur, together with net foreign currency gains and losses recognized when non-U.S. dollar securities are sold. During the first quarter of fiscal 1998 the fair value of the Company's investment portfolio was positively impacted by a general increase in prices in the U.S. bond markets resulting from the decline in interest rates during the period. The sales proceeds for fixed maturity securities were generally higher than their amortized cost during most of the quarter which resulted in net realized gains of $21.4 million being recognized on fixed maturities and short-term investments. With strong U.S. equity markets, net realized gains on sales of equity securities were $7.3 million in the first quarter of fiscal 1998 compared with gains of $4.2 million in the first quarter of fiscal 1997. In the first quarter of fiscal 1998 the S&P 500 Stock Index rose approximately 3 percent and generated net realized gains on the equity index futures contracts of $4.4 million. The remainder of the net realized gains on financial futures and option contracts in the first quarter of fiscal 1998 arose from gains recognized on futures contracts used by certain of the Company's external managers of fixed income securities. Net realized gains on financial futures contracts of $17.7 million recorded in the first quarter of fiscal 1997 were primarily generated by the equity index futures contracts held as a result of an over 8 percent rise in the S&P 500 Stock Index during that quarter. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Results of Operations - Three Months ended December 31, 1997 (continued) Combined Ratio Three Months ended December 31 1997 1996 ------ ---- (in millions) Loss and loss expense ratio 65.1% 67.0% Underwriting and administrative expense ratio 18.9 18.2 ------- ---- Combined ratio 84.0% 85.2% ==== ==== The underwriting results of a property and casualty insurer are discussed frequently by reference to its loss and loss expense ratio, underwriting and administrative expense ratio and combined ratio. Each ratio is derived by dividing the relevant expense amounts by net premiums earned. The combined ratio is the sum of the loss and loss expense ratio and the underwriting and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting profits and a combined ratio exceeding 100 percent indicates underwriting losses. Property catastrophe reinsurance companies generally expect to have overall lower combined ratios as compared with other reinsurance companies with long-tail exposures. However, property catastrophe loss experience is generally characterized by low frequency but high severity short-tail claims which may result in significant volatility in results. Several aspects of the Company's operations, including the low frequency and high severity of losses in the high excess layers in certain lines of business in which the Company provides insurance and reinsurance, complicate the actuarial reserving techniques utilized by the Company. Management believes, however, that the Company's reserves for unpaid losses and loss expenses, including those arising from breast implant litigation, are adequate to cover the ultimate cost of losses and loss expenses incurred through December 31, 1997. Since such provisions are necessarily based on estimates, future developments may result in ultimate losses and loss expenses significantly greater or less than such amounts (see "Breast Implant Litigation"). For the quarter ended December 31, 1997, the loss and loss expense ratio decreased to 65.1 percent from 67.0 percent for the first quarter of fiscal 1997. This decline is partly due to the fact that Tempest had very little loss activity in the quarter, posting a loss and loss expense ratio of 1.8 percent compared to 15.0 percent for the 1997 quarter. The change in mix of earned premiums in ACE Insurance has also contributed to the decrease in the loss and loss expense ratio during the quarter. Acquisition costs remained relatively flat during the current quarter compared to the first quarter of fiscal 1997, despite a continuing change in the mix of earned premiums. The additional acquisition costs generated primarily by the increase in earned premiums from the Lloyd's participation, were offset by a net decrease in acquisition costs resulting from declines in earned premiums from ACE Insurance and Tempest. Administrative expenses increased by $1.7 million in the current quarter compared to the first quarter of fiscal 1997 due primarily to the costs associated with our increased participation in the Lloyd's market. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) LIQUIDITY AND CAPITAL RESOURCES As a holding company, ACE's assets consist primarily of the stock of its subsidiaries as well as other investments. In addition to investment income, its cash flows currently depend primarily on dividends or other statutorily permissible payments from its Bermuda-based operating subsidiaries (the "Bermuda subsidiaries"). There are currently no legal restrictions on the payment of dividends from retained earnings by the Bermuda subsidiaries as the minimum statutory capital and surplus requirements are satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. However, the payment of dividends or other statutorily permissible distributions by the Bermuda subsidiaries is subject to the need to maintain shareholder's equity at a level adequate to support the level of insurance and reinsurance operations. During December 1997 ACE received a dividend of $115 million from Tempest. The Company's consolidated sources of funds consist primarily of net premiums written, investment income, and proceeds from sales and maturities of investments. Funds are used primarily to pay claims, operating expenses and dividends and for the purchase of investments and for share repurchases. For the three months ended December 31, 1997, the Company's consolidated net cash flow from operating activities was $51.7 million, compared with $86.8 million for the three months ended December 31, 1996. Cash flows are affected by claims payments, which due to the nature of the insurance and reinsurance coverage provided by the Company, may comprise large loss payments on a limited number of claims and can therefore fluctuate significantly. The irregular timing of these large loss payments, for which the source of cash can be from operations, available credit facilities or routine sales of investments, can create significant variations in cash flow from operations between periods. For the three month periods ended December 31, 1997 and 1996, loss and loss expense payments amounted to $120.8 million and $75.1 million respectively. Total loss and loss expense payments amounted to $402.1 million, $101.4 million and $73.1 million in fiscal years 1997, 1996 and 1995, respectively. At December 31, 1997, total investments and cash amounted to approximately $4.4 billion, compared to $4.5 billion at September 30, 1997. The Company's investment portfolio is structured to provide a high level of liquidity to meet insurance related or other obligations. The consolidated investment portfolio is externally managed by independent professional investment managers and is invested in high quality investment grade marketable fixed income and equity securities, the majority of which trade in active, liquid markets. The Company believes that its cash balances, cash flow from operations, routine sales of investments and the liquidity provided by its credit facilities (discussed below) are adequate to allow the Company to pay claims within the time periods required under its policies. During December 1997, the Company put in place syndicated credit facilities which replaced the existing facilities. J.P. Morgan Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in the arranging, structuring and syndication of these credit facilities. The new facilities provide: 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) LIQUIDITY AND CAPITAL RESOURCES (continued) . A $200 million 364 day revolving credit facility and a $200 million five year revolving credit facility which together make up a combined $400 million committed, unsecured revolving credit facility. This new five year revolving credit facility has a $50 million LOC sublimit. . A five year LOC of approximately 154 million pounds ($260 million) which is being used to fulfill the requirements of Lloyd's to provide funds to support underwriting capacity on Lloyd's syndicates in which the Company participates. The minimum consolidated tangible net worth covenant for ACE Insurance under this LOC is $1.0 billion. . A $250 million seven year Amortized Term Loan Facility which was used on January 2, 1998 to partially finance the acquisition of WSG. The interest rate on the term loan is LIBOR plus an applicable spread. The revolving credit and term loan facilities require that the Company maintain a minimum consolidated tangible net worth of $1.4 billion. On November 13, 1997, the Board of Directors approved a special resolution to split each outstanding Ordinary Share of the Company into three Ordinary Shares. The stock split was voted on and approved by the shareholders of the Company on February 6, 1998. The record date for determining those shareholders entitled to receive certificates representing additional Ordinary Shares pursuant to the stock split shall be as of the close of business on February 17, 1998. Certificates representing the additional shares of stock will be mailed on March 2, 1998. (see Part II, Item 4 "Submission of Matters to a Vote of Security Holders"). The Board of Directors has authorized the repurchase from time to time of the Company's Ordinary Shares in open market and private purchase transactions. On May 9, 1997, the Board of Directors terminated the then existing share repurchase program and authorized a new program for up to $300.0 million of the Company's Ordinary Shares. During the quarter ended December 31, 1997, the Company repurchased 836,200 Ordinary Shares under the share repurchase program for an aggregate cost of $76.5 million. During the period January 1, 1998 through February 6, 1998, the Company repurchased an additional 337,500 Ordinary Shares under the share repurchase program for an aggregate cost of $31.1 million, leaving approximately $160.1 million of the Board authorization not utilized. On October 18, 1997 and January 16, 1998, the Company paid quarterly dividends of 22 cents and 24 cents per share, respectively to shareholders of record on September 30, 1997 and December 13, 1997. On February 6, 1998, following approval by the shareholders of the three-for-one stock split, the Board of Directors declared a quarterly dividend of 8 cents per share payable on April 18, 1998 to shareholders of record on March 31, 1998. The declaration and payment of future dividends is at the discretion of the Board of Directors and will be dependent upon the profits and financial requirements of the Company and other factors, including legal restrictions on the payment of dividends and such other factors as the Board of Directors deems relevant. As previously discussed, on January 2, 1998, the Company completed the acquisition of WSG, through its newly-created U.S. holding company, ACE US, for an aggregate cash consideration of $338 million. ACE US was capitalized by ACE Limited with $75 million and received $35 million from an inter-company loan. ACE US financed the acquisition of WSG with $250 million of bank debt (see discussion of syndicated credit facilities above) and the remaining $88 million came from available funds. Fully diluted net asset value per share was $48.30 at December 31, 1997, compared with $47.14 at September 30, 1997. The Company maintains loss reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of its policies and agreements. The reserve for unpaid losses and loss expenses of $1.8 billion at December 31, 1997, includes $839 million of case and loss expense reserves. While the Company believes that its reserve for unpaid losses and loss expenses at December 31, 1997 is adequate, future developments may result in ultimate losses and loss expenses significantly greater or less than the reserve provided. A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such insureds. During fiscal 1997 and 1998, the Company made certain payments to policyholders with respect to these claims. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) LIQUIDITY AND CAPITAL RESOURCES (continued) However, the Company does not have adequate data upon which to anticipate the timing of future payments relating to these liabilities, and it expects that the amount of time required to determine the ultimate financial impact of the options selected by claimants may extend well into 1998 and beyond (see "Breast Implant Litigation"). The Company's financial condition, results of operations and cash flow are influenced by both internal and external forces. Claims 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 elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the settlement of the Company's liability for that loss. The liquidity of its investment portfolio, cash flows and the credit facilities are, in management's opinion, adequate to meet the Company's expected cash requirements. Breast Implant Litigation A number of the Company's insureds have given notice of claims relating to breast implants or components or raw material thereof that had been produced and/or sold by such insureds. Lawsuits, including class actions, involving thousands of implant recipients have been filed in both state and federal courts throughout the United States. Most of the federal cases have been consolidated pursuant to the rules for Multidistrict Litigation to a Federal District Court in Alabama, although cases are in the process of being transferred back to federal courts or remanded to state courts. On May 15, 1995, the Dow Corning Corporation, one of the major defendants, filed for protection under Chapter 11 of the U.S. Bankruptcy Code and claims against Dow Corning remain stayed subject to the Bankruptcy Code. On October 1, 1995, negotiators for three of the major defendants agreed on the essential elements of an individual settlement plan for U.S. claimants with at least one implant from any of those manufacturers (" the Settlement"). In general, under the Settlement, the amounts payable to individual participants, and the manufacturers' obligations to make those payments, would not be affected by the number of participants electing to opt out from the new plan. Also, in general, the compensation would be fixed and not affected by the number of participants, and the manufacturers would not have a right to walk away because of the amount of claims payable. Finally, each settling defendant agreed to be responsible only for cases in which its implant was identified, and not for a percentage of all cases. By November 13, 1995, the Settlement was approved by the three major defendants. In addition, two other defendants became part of the Settlement, although certain of their settlement terms are different and more restricted than the plan offered by the original three defendants. On December 22, 1995, the multidistrict litigation judge approved the Settlement and the materials for giving notice to claimants although an appeal concerning the Settlement is pending with the Eleventh Circuit Court of Appeals. Beginning in mid-January, 1996, the three major defendants have each made payments to a court-established fund for use in making payments under the Settlement. The Settlement Claims Office had reported that as of October 31, 1997, it has sent out Notification of Status Letters to more than 360,000 non-opt-out domestic implant recipients who had registered with the Settlement Claims Office. As of October 31, 1997, approximately $565 million had been distributed under the Settlement to implant recipients of the three major defendants. Certain potential payments to claimants relating to other implants remain suspended because of the pending appeals. The Settlement Claims Office has also reported that approximately 32,500 domestic registrants exercised opt-out rights after receiving their status letters. Previously, approximately 19,000 other domestic implant recipients had exercised opt-out rights in 1994 and/or before receiving status letters. Although the Company has underwritten the coverage for a number of the defendant companies including four of the companies involved in the Settlement, the Company anticipates that insurance coverage issued prior to the time the Company issued policies will be available for a portion of the defendants' liability. In addition, the Company's policies only apply when the underlying liability insurance policies or per occurrence retentions are exhausted. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Breast Implant Litigation (continued) Declaratory judgment lawsuits, involving four of the Company's insureds, have been filed seeking guidance on the appropriate trigger for their insurance coverage. None of the insureds have named the Company in such lawsuits, although other insurers and third parties have sought to involve the Company in those lawsuits. To date, one court has stayed a lawsuit against the Company by other insurers; two courts have dismissed actions by other insurers against the Company. Another court in Texas has ruled against the Company's arguments that the court should dismiss the claims by other insurers and certain doctors attempting to bring the Company into coverage litigation there. On appeal in the Texas lawsuit, the appellate court affirmed the lower court's order refusing to dismiss the claims against the Company; further appellate review in the Texas Supreme Court is pending. In addition, further efforts are contemplated to stay or dismiss the doctor's claims against the Company in the Texas lawsuit. At June 30, 1994, the Company increased its then existing reserves relating to breast implant claims. Although the reserve increase was partially satisfied by an allocation from existing IBNR, it also required an increase in the Company's total reserve for unpaid losses and loss expenses at June 30, 1994 of $200 million. The increase in reserves was based on information made available in the pending lawsuits and information from the Company's insureds and was predicated upon an allocation between coverage provided before and after the end of 1985 (when the Company commenced underwriting operations). No additional reserves relating to breast implant claims have been added since June 30, 1994. The Company continually evaluates its reserves in light of developing information and in light of discussions and negotiations with its insureds. During fiscal 1997 and the first quarter of fiscal 1998 the Company made payments of approximately $260 million with respect to breast implant claims. These payments were included in previous reserves and are consistent with the Company's belief that its reserves are adequate. Significant uncertainties continue to exist with regard to the ultimate outcome and cost of the Settlement and value of the opt-out claims. While the Company is unable at this time to determine whether additional reserves, which could have a material adverse effect upon the financial condition, results of operations and cash flows of the Company, may be necessary in the future, the Company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as at December 31, 1997. IMPACT OF THE YEAR 2000 ISSUE Management has initiated a Company wide program to prepare the Company's various computer systems and selected applications for the Year 2000. The Company has appointed individuals in each business segment to review all systems to assess their ability to process transactions in the Year 2000. Based on these assessments, the Company has determined that certain business segments, particularly ACE USA and ACE London, need to modify or replace significant portions of their computer systems so these systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with these modifications and replacements the Year 2000 Issue can be adequately addressed. The Company will utilize both internal and external resources to reprogram or replace, and test these systems for Year 2000 modifications. The Company has initiated communications with its significant business partners, including its business partners in the Lloyd's markets, to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. The Company is also assessing its exposure to contingencies related to the Year 2000 Issue for the policies it issues. The total cost of this effort is still being evaluated and the Company has not yet determined if the total cost will be material. 19 ACE LIMITED PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 1) The Annual General Meeting was held on February 6, 1998. 2) The following matters were voted on at the Annual General Meeting: a) The following directors were elected. Term Expiring Votes In Favour Votes Withheld ------------- --------------- -------------- Thomas J. Neff 2000 37,816,864 233,441 Brian Duperreault 2001 37,818,446 231,859 Robert M. Hernandez 2001 37,817,443 232,862 Peter Menikoff 2001 37,819,231 261,074 Glen M. Renfrew 2001 37,812,471 237,834 Robert Ripp 2001 37,819,549 230,756 Dermot F. Smurfit 2001 37,816,974 233,331 b) A resolution was voted on amending the Company's Memorandum of Association and Articles of Association to split each outstanding Ordinary Share of the Company into three Ordinary Shares. The record date for determining those shareholders entitled to receive certificates representing additional Ordinary Shares pursuant pursuant to the stock split shall be as of the close of business on February 17, 1998. Certificates representing the additional shares of stock will be mailed on March 2, 1998. The holders of 37,796,245 shares voted in favour, 21,530 shares voted against and 232,530 shares abstained. c) A special resolution was voted upon to amend Article 33 of the Company's Articles to clarify the setting of record dates in respect of shareholder meetings and payments of dividends. The holders of 37,794,080 shares voted in favour, 13,754 shares voted against and 242,471 shares abstained. d) The appointment of Coopers & Lybrand L.L.P. as independent public accountants for the Company for the year ended September 30, 1998 was ratified and approved. The holders of 37,794,080 shares voted in favour, 13,754 shares voted against and 242,471 shares abstained. ITEM 5. OTHER INFORMATION 1) On February 6, 1998, following approval by the shareholders of the three-for-one stock split, the Company declared a dividend of $0.08 per Ordinary Share payable on April 18, 1998 to shareholders of record on March 31, 1998. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 1) Exhibits -------- 10.1 ACE Limited Elective Deferred Compensation Plan 10.2 ACE Limited Rules of the Approved UK Stock Option Program 27 Financial Data Schedule 2) Reports on Form 8-K The Company filed a Form-8K current report dated January 23, 1998 pertaining to the completion of the acquisition of Westchester Specialty Group, Inc. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACE LIMITED --------------------------------- February 13, 1998 /s/ Brian Duperreault ---------------------------- Brian Duperreault Chairman, President and Chief Executive Officer February 13, 1998 /s/ Christopher Z. Marshall ---------------------------- Christopher Z. Marshall Chief Financial Officer 22 EXHIBIT INDEX Exhibit Number Description Numbered Page - ------- ------------ -------------- 10.1 ACE Limited Elective Deferred Compensation Plan 10.2 ACE Limited Rules of the Approved UK Stock Option Programme 27 Financial Data Schedule EX-10.1 2 ELECTIVE DEFERRED COMPENSATION PLAN ACE LIMITED ELECTIVE DEFERRED COMPENSATION PLAN -1- TABLE OF CONTENTS SECTION 1.................................................................... 1 General ............................................................1 1.1. Purpose ..............................................1 1.2. Effective Date........................................1 1.3. Related Companies and Employers.......................1 1.4. Operation and Administration..........................1 1.5. Plan Year.............................................1 1.6. Gender and Number.....................................1 1.7. Notices ..............................................2 1.8. Form and Time of Elections............................2 1.9. Other Costs and Benefits..............................2 1.10. Evidence.............................................2 1.11. Action by Employers..................................2 SECTION 2.....................................................................2 Participation..........................................................2 2.1. Participant...........................................2 2.2. Deferral Election.....................................3 2.3. Eligible Compensation.................................3 2.4. Plan Not Contract of Employment.......................3 SECTION 3.....................................................................3 Plan Accounting......................................................3 3.1. Accounts..............................................3 3.2. Adjustment of Accounts................................3 3.3. Crediting Under Deferral Election.....................4 3.4. Investment Return Dates...............................4 3.5. Participant Selection of Investment Return Rate.......4 3.6. Statement of Accounts.................................4 SECTION 4.....................................................................5 Distributions........................................................5 4.1. General ..............................................5 4.2. Distribution Election.................................5 4.3. Beneficiary...........................................5 4.4. Distributions to Disabled Persons.....................5 4.5. Benefits May Not be Assigned..........................5 4.6. Offset ..............................................6 4.7. Unforeseeable Emergency...............................6 -i- SECTION 5....................................................................6 Source of Benefit Payments..........................................6 5.1. Liability for Benefit Payments.......................6 5.2. No Guarantee.........................................7 SECTION 6....................................................................7 Committee...........................................................7 6.1. Powers of Committee..................................7 6.2. Delegation by Committee..............................7 6.3. Information to be Furnished to Committee.............8 6.4. Liability and Indemnification of Committee...........8 SECTION 7....................................................................8 Amendment and Termination...........................................8 -ii- ACE LIMITED ELECTIVE DEFERRED COMPENSATION PLAN SECTION 1 General 1.1. Purpose. The ACE Limited Elective Deferred Compensation Plan (the "Plan") has been established by ACE Limited (the "Company") so that it, and each of the Related Companies which, with the consent of the Company, adopts the Plan may provide its eligible employees with an opportunity to build additional financial security, thereby aiding such companies in attracting and retaining employees of exceptional ability. 1.2. Effective Date. The "Effective Date" of the Plan is January 1, 1998. 1.3. Related Companies and Employers. For purposes of the Plan, the term "Related Company" means any company during any period in which it is a "subsidiary corporation,"as that term in defined in section 424(f) of the United States Internal Revenue Code of 1986, as amended (the "Code") with respect to the Company. The Company and each Related Company which adopts the Plan for the benefit of its eligible employees are referred to below collectively as the "Employers" and individually as an "Employer." A Related Company may adopt the Plan by action of its Board of Directors; provided that a Related Company will be considered to have adopted the Plan for its Eligible Employees (without the need for action by its Board of Directors) if an executive officer of the Related Company announces such adoption to the Eligible Employees. 1.4. Operation and Administration. The authority to control and manage the operation and administration of the Plan shall be vested in the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). In controlling and managing the operation and administration of the Plan, the Committee shall have the rights, powers and duties set forth in Section 6. Capitalized terms in the Plan shall be defined as set forth in the Plan. 1.5. Plan Year. The term "Plan Year" means the fiscal year of the Company. 1.6. Gender and Number. Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular. -1- 1.7. Notices. Any notice or document required to be filed with the Plan Administrator or the Committee under the Plan will be properly filed if delivered or mailed to the Plan Administrator, in care of the Company, at its principal executive offices. The Plan Administrator may, by advance written notice to affected persons, revise such notice procedure from time to time. Any notice required under the Plan may be waived by the person entitled to notice. 1.8. Form and Time of Elections. Unless otherwise specified herein, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification or revocation thereof, shall be in writing filed at such times, in such form, and subject to such restrictions and limitations as the Plan Administrator shall require. In addition to any other deferral elections made under this Plan, an election to defer the receipt of an award under the ACE Limited Annual Performance Incentive Plan will be made under this Plan. 1.9. Other Costs and Benefits. The Plan is intended to defer, but not to eliminate, payment of compensation to a Participant. Accordingly, if any compensation or benefits that would otherwise be provided to a Participant in the absence of the Plan are reduced or eliminated by reason of deferral under the Plan, the Company shall equitably compensate the Participant for such reduction or elimination. However, no reimbursement will be made for increased taxes resulting from benefits under the Plan (whether resulting from a change in individual income tax rates or otherwise). 1.10. Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. 1.11. Action by Employers. Any action required or permitted to be taken by any Employer shall be by resolution of its board of directors, or by a duly authorized officer of the Employer. SECTION 2 Participation 2.1. Participant. Subject to the terms of the Plan, an individual shall be eligible to make deferrals under the Plan during any period he or she is an Eligible Employee. For purposes of the Plan, the term "Eligible Employee" for any period shall mean any individual during any period he or she is a Bermuda-based employee of an Employer; -2- provided that the Committee may designate any other employee of an Employer or member of a group of employees of an Employer as an Eligible Employee. 2.2. Deferral Election. An Eligible Employee shall participate in the Plan by electing to defer payment of all or a portion of his or her Eligible Compensation pursuant to the terms of a "Deferral Election." An individual's Deferral Election shall be filed with the Plan Administrator prior to the period to which it relates. Except as otherwise provided by the Committee, a Participant may not revoke any Deferral Elections. The Committee may revoke a Participant's Deferral Election as of the date on which the Participant ceases to be an Eligible Employee (provided that this sentence shall not be construed to permit the Committee to revoke a Distribution Election by reason of the Participant ceasing to be an Eligible Employee). 2.3. Eligible Compensation. For purposes of the Plan, a Participant's "Eligible Compensation" from any Employer for any Plan Year means (i) salary otherwise payable to him by the Employer, (ii) amounts payable under the ACE Limited Annual Performance Incentive Plan and (iii) amounts which are designated by the Committee as compensation eligible for deferral in accordance with the Plan. 2.4. Plan Not Contract of Employment. The Plan does not constitute a contract of employment, and participation in the Plan will not give any employee the right to be retained in the employ of any Employer nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. SECTION 3 Plan Accounting 3.1. Accounts. The Plan Administrator shall establish an Account for each Participant who has filed a Deferral Election. If a Participant's Eligible Compensation subject to a Deferral Election would otherwise be payable from more than one Employer, a separate Account shall be established for the Participant with respect to the Eligible Compensation from each such Employer. The amount held in an Account established on behalf of a Participant will be expressed in United States dollars. 3.2. Adjustment of Accounts. Each Account shall be adjusted in accordance with this Section 3 in a uniform manner as of such periodic "Accounting Dates" as may be determined by the Committee from time to time. As of each Accounting Date, the balance of each Account shall be adjusted as follows: -3- (a) first, charge to the Account balance the amount of any distributions under the Plan with respect to that Account that have not previously been charged; (b) then, adjust the Account balance for the applicable Investment Return Rate(s); and (c) then, credit to the Account balance the amount to be credited to that Account in accordance with subsection 3.3 that have not previously been credited. 3.3. Crediting Under Deferral Election. The balance of a Participant's Account for any period shall be credited, in accordance with the provisions of paragraph 3.2(c), with the amount by which his or her Eligible Compensation for that period is reduced pursuant to a Deferral Election. Such crediting shall occur as of the date on which such Eligible Compensation would otherwise have been paid to the Participant by the Employer were it not for the reduction made pursuant to the Deferral Election or, if such date is not an Accounting Date, as of the first Accounting Date occurring thereafter. 3.4. Investment Return Rates. The "Investment Return Rate(s)" with respect to the Account(s), or portions of the Account(s), of any Participant for any period shall be the Investment Return Rate(s) elected by the individual in accordance with subsection 3.5 from among such investment alternatives (if any) for that period which, in the discretion of the Committee, are offered from time to time under this paragraph 3.4. 3.5. Participant Selection of Investment Return Rate. The Investment Return Rate alternatives under the Plan, and a Participant's ability to choose among Investment Return Rate alternatives, shall be determined in accordance with rules established by the Committee from time; provided, however, that the Company may not modify the Investment Return Rate with respect to periods prior to the adoption of such modification. 3.6. Statement of Accounts. As soon as practicable after the end of each Plan Year, and at such other times as determined by the Committee or the Chief Executive Officer of the Company, the Company shall provide each Participant having one or more Accounts under the Plan with a statement of the transactions in his or her Accounts during that year and his or her Account balances as of the end of the year. -4- SECTION 4 Distributions 4.1. General. Subject to this Section 4, the balance of a Participant's Account(s) with respect to any year shall be distributed in accordance with the Participant's Distribution Election. In no event shall the amount distributed with respect to any Participant's Account as of any date exceed the amount of the Account balance as of that date. 4.2. Distribution Election. A Participant's Distribution Election shall specify the manner (including the time and form of distribution) in which the Participant's Account(s) shall be distributed, subject to such restrictions and limitations as may be imposed by the Committee. 4.3. Beneficiary. Subject to the terms of the Plan, any benefits payable to a Participant under the Plan that have not been paid at the time of the Participant's death shall be paid at the time and in the form determined in accordance with the foregoing provisions of the Plan, to the beneficiary designated by the Participant in writing filed with the Plan Administrator in such form and at such time as the Plan Administrator shall require. A beneficiary designation form will be effective only when the signed form is filed with the Plan Administrator while the Participant is alive and will cancel all beneficiary designation forms filed earlier. If a deceased Participant failed to designate a beneficiary, or if the designated beneficiary of a deceased Participant dies before him or before complete payment of the Participant's benefits, the amounts shall be paid to the legal representative or representatives of the estate of the last to die of the Participant and his or her designated beneficiary. 4.4. Distributions to Disabled Persons. Notwithstanding the provisions of this Section 4, if, in the Plan Administrator's opinion, a Participant or beneficiary is under a legal disability or is in any way incapacitated so as to be unable to manage his or her financial affairs, the Plan Administrator may direct that payment be made to a relative or friend of such person for his or her benefit until claim is made by a conservator or other person legally charged with the care of his or her person or his or her estate, and such payment shall be in lieu of any such payment to such Participant or beneficiary. Thereafter, any benefits under the Plan to which such Participant or beneficiary is entitled shall be paid to such conservator or other person legally charged with the care of his or her person or his or her estate. 4.5. Benefits May Not be Assigned. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, -5- anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt of the amounts, if any, payable hereunder, or any part hereof, which are expressly declared to be unassignable and non-transferable. No part of the amounts payable shall be, prior to actual payment, subject to seizure or sequestration for payment of any debts, judgements, alimony or separate maintenance owed by the Participant or any other person, or be transferred by operation of law in the event of the Participant's or any other person's bankruptcy or insolvency. 4.6. Offset. Notwithstanding the provisions of subsection 4.5, if, at the time payments are to be made under the Plan, the Participant or beneficiary or both are indebted or obligated to any Employer or Related Company, then the payments remaining to be made to the Participant or the beneficiary or both may, at the discretion of the Plan Administrator, be reduced by the amount of such indebtedness, or obligation, provided, however, that an election by the Plan Administrator not to reduce any such payment shall not constitute a waiver of the claim for such indebtedness or obligation. 4.7. Unforeseeable Emergency. Prior to the date otherwise scheduled for distribution of his or her benefits under the Plan, upon a showing of an unforeseeable emergency, a Participant may elect to accelerate payment of an amount not exceeding the lesser of (a) the amount necessary to meet the emergency or (b) the sum of his or her Account balance(s) under the Plan. For purposes of the Plan, the term "unforeseeable emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant (or the control of the beneficiary, if the amount is payable to a beneficiary) and that would result in severe financial hardship to the individual if early withdrawal were not permitted. The determination of "unforeseeable emergency" shall be made by the Plan Administrator, based on such information as the Plan Administrator shall deem to be necessary. SECTION 5 Source of Benefit Payments 5.1. Liability for Benefit Payments. Subject to the provisions of this Section 5, an Employer shall be liable for payment of benefits under the Plan with respect to any Participant to the extent that such benefits are attributable to the deferral of compensation otherwise payable by that Employer to the Participant. Any disputes relating to liability of Employers for benefit payments shall be resolved by the Committee. -6- 5.2. No Guarantee. Neither a Participant nor any other person shall, by reason of the Plan, acquire any right in or title to any assets, funds or property of the Employers whatsoever, including, without limitation, any specific funds, assets, or other property which the Employers, in their sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the amounts, if any, payable under the Plan, unsecured by any assets of the Employers. Nothing contained in the Plan shall constitute a guarantee by any of the Employers that the assets of the Employers shall be sufficient to pay any benefits to any person. SECTION 6 Committee 6.1. Powers of Committee. Responsibility for the day-to-day administration of the Plan shall be vested in the Plan Administrator, which shall be the Committee. The authority to control and manage all other aspects of the operation and administration of the Plan shall also be vested in the Committee. The Committee is authorized to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any agreements made pursuant to the Plan, and to make all other determinations that may be necessary or advisable for the administration of the Plan. Except as otherwise specifically provided by the Plan, any determinations to be made by the Committee under the Plan shall be decided by the Committee in its sole discretion. Any interpretation of the Plan by the Committee and any decision made by it under the Plan is final and binding on all persons. 6.2. Delegation by Committee. The Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time. Until the Committee takes action to the contrary: (a) The Chief Executive Officer of the Company shall be delegated the power and responsibility to take all actions assigned to or permitted to be taken by the Committee under Section 2, Section 3, and Section 4 (other than the powers and responsibility of the Plan Administrator). (b) The powers and responsibilities of the Plan Administrator shall be delegated to the Chief Administration Officer (or his or her delegate) of the Company, subject to such direction as may be provided to the Chief Administration Officer or his or -7- her delegate from time to time by the Committee and the Chief Executive Officer of the Company. 6.3. Information to be Furnished to Committee. The Employers and Related Companies shall furnish the Committee with such data and information as may be required for it to discharge its duties. The records of the Employers and Related Companies as to an employee's or Participant's employment, termination of employment, leave of absence, reemployment and Eligible Compensation shall be conclusive on all persons unless determined to be incorrect. Participants and other persons entitled to benefits under the Plan must furnish the Committee such evidence, data or information as the Committee considers desirable to carry out the Plan. 6.4. Liability and Indemnification of Committee. No member or authorized delegate of the Committee shall be liable to any person for any action taken or omitted in connection with the administration of the Plan unless attributable to his or her own fraud or willful misconduct; nor shall the Employers be liable to any person for any such action unless attributable to fraud or willful misconduct on the part of a director or employee of the Employers. The Committee, the individual members thereof, and persons acting as the authorized delegates of the Committee under the Plan, shall be indemnified by the Employers against any and all liabilities, losses, costs and expenses (including legal fees and expenses) of whatsoever kind and nature which may be imposed on, incurred by or asserted against the Committee or its members or authorized delegates by reason of the performance of a Committee function if the Committee or its members or authorized delegates did not act dishonestly or in willful violation of the law or regulation under which such liability, loss, cost or expense arises. This indemnification shall not duplicate but may supplement any coverage available under any applicable insurance. SECTION 7 Amendment and Termination The Committee may, at any time, amend or terminate the Plan (including the rules for administration of the Plan), subject to the following: (a) Subject to the following provisions of this Section 7, no amendment or termination may materially adversely affect the rights of any Participant or beneficiary under the Plan. (b) The Committee may revoke the right to defer Eligible Compensation under the Plan. -8- (c) The Plan may not be amended to delay the date on which benefits are otherwise payable under the Plan without the consent of each affected Participant. The Committee may amend the Plan to accelerate the date on which Plan benefits are otherwise payable under the Plan and eliminate all future deferrals under the Plan, thereby terminating the Plan. (d) The Committee may amend the Plan to modify or eliminate any Investment Return Rate alternative, except that any such amendment may not modify the Investment Return Rate with respect to periods prior to the adoption of the amendment. (e) Notwithstanding any other provision of the Plan to the contrary, neither the Committee nor the Board may delegate its rights and responsibilities under this Section 7; provided, however, that, the Board of Directors may, from time to time, substitute itself, or another committee of the Board, for the Compensation Committee under this Section 7. IN WITNESS WHEREOF, ACE Limited has caused this Plan to be executed by its duly authorized officer this ______, day of _________, 1997. ACE Limited By:___________________ -9- EX-10.2 3 APPROVED UK STOCK OPTION PROGRAMME ACE Limited Rules of the Approved UK Stock Option Programme Approved by the Inland Revenue on 24 November 1997 (Reference No: X19095/RC) Lovell White Durrant 65 Holborn Viaduct London EC1A 2DY Ref: A4/JCMcM/LLW CONTENTS
Clause Page No. 1. Establishment and purpose of the Programme 1 2. Definitions 1 3. Grant of Options 5 4. Limitations on Grant of Options 5 5. Exercise of Options 6 6. Time for Exercise of Options 6 7. Replacement of Options on a takeover or other change in Control of the Company 7 8. Variations in the Share Capital of the Company 8 9. Administration of the Programme 8 10. Amendment of the Programme 8 11. Additional Provisions 8 12. Termination 9
- 1 - ACE Limited Approved UK Stock Incentive Programme (An approved Company share option plan pursuant to the provisions of Schedule 9 to the Income and Corporation Taxes Act 1988) 1. Establishment and Purpose of the Programme 1.1 On 12 November 1997 the Committee adopted, subject to the approval of the Inland Revenue, the Programme as an addendum to the ACE Limited 1995 Long-Term Incentive Plan (the "Plan") to enable Eligible Employees of the Company and its Subsidiaries to participate in the Plan and obtain the benefit of approval by the Board of Inland Revenue pursuant to Schedule 9 to the Income and Corporation Taxes Act 1988 ("Schedule 9"). 1.2 On 24 November 1997 the Inland Revenue gave formal approval to the Programme. The rules of the Programme (the "Programme Rules") comply with the requirements of Schedule 9. 1.3 The rules of the Plan (the "Plan Rules") shall apply to the Programme unless the Programme Rules expressly or by implication provide to the contrary, but so that nothing in either the Plan or the Programme Rules shall operate to prejudice the approval by the Board of Inland Revenue of the Programme PROVIDED ALWAYS THAT in the event of a conflict between the Plan Rules and the Programme Rules whereby the status of the Plan is or will be prejudiced the Plan Rules shall prevail. 1.4 For the avoidance of doubt rule 2.5 of the Plan shall not apply to the Programme and the Company may only grant options pursuant the Programme. Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock or a Stock Purchase Program may not be granted pursuant the Programme Rules. 1.5 The Committee may designate whether or not an Option is to be considered an incentive stock option as defined in Section 422(b) of the US Internal Code 1986, as amended ("Incentive Stock Option"). 1.6 The Programme shall be governed and construed in accordance with the laws of England. 2. Definitions 2.1 In the Programme the following words and expressions have the meanings set opposite them: "ACE Group" the Company and all of the Subsidiaries and, in relation to a New Option granted pursuant to clause 7 the Acquiring Company and the Controlling Company and their Subsidiaries as defined in Section 736 of the Companies Act 1985, and "member of the ACE Group" shall be construed accordingly; "Act" the Securities Exchange Act 1934, as amended; - 2 - "Acquiring a company which for the purposes of Company" clause 7 comes within the definition of "the acquiring company" in paragraph 15(1) of Schedule 9; "Affiliate" a person or entity that directly or indirectly controls, is controlled by or is under common control with another person or entity; "Any Other any scheme other than the Programme Approved Scheme" established by the Company or by any Associated Company and approved in accordance with Schedule 9 but excluding for the purposes of this definition any savings-related share option scheme or profit sharing scheme so established; "Approval Date" the date on which the Company receives written notification from the Board of Inland Revenue that the Programme has received Revenue Approval; "Associated any company which is an associated Company" company of the Company within the meaning of section 416(1) of the Taxes Act; "Board" the board of directors for the time being of the Company; "Change in Control" shall for the purposes of clause 6.7 mean the occurrence of one of the following events: (i) the acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of fifty percent (50%) or more of the Voting Stock; (ii) the majority of the Board consists of individuals other than Incumbent Directors; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; - 3 - (iv) all or substantially all the assets or business of the Company is disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned Voting Stock of the Company, all of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company); (v) the Company combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, 50% or less of the Voting Stock of the combined company (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the combined company, any shares received by Affiliates of such other company in exchange for stock of such other company); "Committee" the Compensation Committee of the Board or such other committee as the Board shall designate to administer the Plan; "Company" ACE Limited, a Corporation incorporated in the Cayman Islands; "Control" for the purposes of clause 7, the control of a company within the meaning given to that expression by section 840 of the Taxes Act; "Controlling a company, other than the Company Company" and an Acquiring Company, which falls within sub-paragraphs 10(b) or 10(c) of Schedule 9; - 4 - "Disability" a Participant shall be considered to have a "Disability" during the period in which he is unable by reason of a medically determinable physical or mental impairment to engage in any substantial gainful activity, which condition, in the opinion of a physician selected by the Committee, is expected to have a duration of not less than 120 days; "Eligible Employee" any person whose terms of employment require him to devote substantially the whole of his time to working for any member or members of the ACE Group, except for; (i) any director of a member or members of the ACE Group who is contracted to work for less than 25 hours a week (excluding meal breaks) in that capacity; and (ii) any person who is prohibited from partici- pating in the Programme by the provisions of paragraph 8 of Schedule 9; "Exercise Price" the price per Share payable on the exercise of an Option as determined by the Committee but in no event less than the greater of: (i) the nominal value of a Share (if the Shares are to be subscribed); and (ii) the Fair Market Value of a Share on the day on which the Option is granted; "Fair Market Value" the value of a Share on any day being: (i) if and for so long as the Company's Shares are admitted to the official list of the New York Stock Exchange, the closing market composite price for Shares as reported on the New York Stock Exchange - Composite Transactions on that date or if the New York Stock Exchange is closed on that date, the last preceding date on which the New York Stock Exchange was open for trading and on which the Shares were traded PROVIDED THAT such date shall not be a date which is more than 30 days before the date of grant of an Option; or - 5 - (ii) in all other cases, the market value determined in accordance with Part VIII of the taxation of Chargeable Gains Act 1992 and if and for so long as the Programme has Revenue Approval agreed in advance with the Shares Valuation Division of the Inland Revenue; "Incumbent Directors" the individuals constituting the Board as of the date the Plan was adopted and any subsequent directors whose election or nomination for election by the Company's stockholders was approved by a vote of three quarters (3/4) of the individuals who are then Incumbent Directors; "Normal Retirement the voluntary termination of Age" employment at a time when the Participant has attained normal retirement age under the ACE Limited Employee Retirement Plan or any other retirement benefits scheme maintained by a company in the ACE Group or such other age as shall be determined by the Committee in its sole discretion; "Option" subject to clause 7, a right to acquire Shares pursuant to the provisions of the Programme; "Option Period" subject to clause 6, the period ending no later than ten years from the date of an Option during which an Option shall be exercisable in accordance with the provisions of the Programme as determined by the Committee at the date of grant of the Option provided that the Option may not be exercisable before the Participant has completed one year's service with the Group; "Participant" an Eligible Employee who has been granted an Option or where applicable, the personal represent- ative(s) of any such person; "Person" person for the purposes of the definition of "Change in Control" has the same meaning as set forth in Sections 3(a)(9) and 13(d) of the Act; "Plan" the ACE Limited 1995 Long-Term Incentive Plan approved by the stockholders of the Company in general meeting on 9 February 1996 and as subsequently amended; - 6 - "Programme" the Programme adopted on 12 November 1997 as from time to time amended in accordance with the provisions hereof; "Related Company" any company which is a subsidiary corporation as defined in Section 424(f) of the Internal Revenue Code of 1986; "Revenue Approval" approval of the Programme by the Board of Inland Revenue under Schedule 9; "Schedule 9" Schedule 9 to the Taxes Act; "Shares" subject to clause 7.3(a), Stock which satisfies the requirements of paragraphs 10 to 14 inclusive of Schedule 9; "Stock" shares of the common stock of the Company; Subsidiaries" those companies over which for the time being the Company has Control and which are subsidiaries of the Company within the meaning of Section 736 of the Companies Act 1985; "Taxes Act" the Income and Corporation Taxes Act 1988; "Voting Stock" capital stock if any class or classes having general voting power under ordinary circumstances in the absence of contingencies to elect the directors of a company. - 7 - 2.2 Any reference herein to a statutory provision shall include a reference to that provision as amended or re-enacted from time to time. Where the context permits the singular shall include the plural and vice versa and the masculine gender shall include the feminine. 3. Grant of Options 3.1 Subject to the limits contained in clause 4, at any time after the Approval Date, the Committee may, in its absolute discretion grant an Option to an Eligible Employee in accordance with the Programme. The Committee shall give notice in writing to the Eligible Employee to specify: (a) the number of Shares in respect of which the Option is granted, (b) the date on which it is granted, (c) the Exercise Price, (d) the objective performance target(s), if any, imposed by the Committee, the terms of which must, at any time when the Programme has Revenue Approval, be approved by the Board of Inland Revenue; and (e) the Option Period. 3.2 The grant of an Option shall be made on the basis that participation in the Programme shall be deemed to constitute an agreement to be bound by the Programme Rules and shall be evidenced by an instrument in such form as the Committee may from time to time prescribe. The instrument shall be issued as soon as practicable after the date of grant. 3.3 An Option shall be personal to the Participant and may not be transferred except as designated by the Participant by will or by the laws of descent, or, subject to the provisions of clause 6.2, exercised by any other person. In no event shall an Incentive Stock Option be transferable to the extent that such transferability would violate the requirements of the Inland Revenue Code 1986 Section 422. Any attempt to so transfer or sell an Option shall cause the Option to lapse forthwith. 4. Limitations on Grant of Options 4.1 No Option shall be granted pursuant to clause 3 if such grant would exceed the limits imposed on the grant of rights under the Plan pursuant to section 6 of the Plan with respect to the number of Shares which may be made the subject of Options and other rights under the Plan. 4.2 No Option shall be granted to an Eligible Employee pursuant to the Programme if as a result the total Option Price of the Shares issuable on the exercise of such Option when aggregated with the total market price at the relevant date of grant of shares still capable of being issued on the exercise of options previously granted to him under the Programme and Any Other Approved Scheme would exceed (pound)30,000 (or its equivalent in any other currency, taking as the rate of exchange the spot rate for the currency in question on the date of grant of the Option as quoted by any of the Company's bankers from time to time). - 8 - 5. Exercise of Options 5.1 Subject to clause 6, an Option shall only be exercised by a Participant within the Option Period by his giving to the Secretary of the Company at its corporate headquarters, written notice, which shall be in such form as may be prescribed by the Committee and shall be signed by the Participant. An Option may be exercised in whole or in part. Such notice shall specify the number of Shares in respect of which the Option is being exercised and shall be accompanied by payment in full of the total Exercise Price for the said Shares and the instrument evidencing the grant of the relevant Option for cancellation or amendment. 5.2 Payment for the Option exercised shall be in cash, or cheque, bank draft or money order to the order of the Company, for an amount in United States dollars equal to the total Exercise Price for the number of Shares in respect of which an Option is exercised. 5.3 The Committee shall transfer the appropriate number of Shares to the Participant at their Exercise Price as soon as possible but in any event not later than one month after the date of exercise of the Option and shall deliver where appropriate to the Participant a definitive share certificate in respect thereof. Any Shares issued pursuant to this clause 5.3 shall rank pari passu in all respects and form a uniform class with Shares already in issue. While an Option is unexercised, a Participant shall have no voting rights or any other rights of stockholders with respect to the Shares which are subject to his Option. Furthermore, no cash dividends shall accrue or be payable with respect to any such Shares. Shares subject to unexercised Options shall have no subscription rights. 6. Time for Exercise of Options 6.1 Subject to clauses 6.2 to 6.4 inclusive, an Option may only be exercised during its Option Period. An Option which is not so exercised shall lapse PROVIDED THAT, at the time of exercise of his Option a Participant is not prohibited from doing so by the provisions of paragraph 8 of Schedule 9. 6.2 If a Participant dies his Option may be exercised in full by his personal representative(s) at any time before the expiry of its Option Period and within but not later than 12 months of his death. Any such Option which is not so exercised shall lapse. 6.3 If a Participant ceases to be employed by the Company or a Related Company by reason of Disability, he may exercise his Option in full at any time before the expiry of its Option Period and within 12 months after the date of cessation of his employment. Any such Option which is not so exercised shall lapse. 6.4 If a Participant ceases to be employed by the Company or a Related Company by reason of retirement on or after Normal Retirement Age or earlier retirement with consent of his employer, he may exercise his option to the extent exercisable by him at the time of such cessation at any time before the expiry of its Option Period or his death if earlier. 6.5 If a Participant ceases to be employed by the Company or a Related Company otherwise than by reason of the events specified in clauses 6.2 to 6.4, he may exercise his option to the extent exercisable by him at the time of such cessation at any time before the expiry of its Option Period and within three months after the date of cessation of his employment. Any such Option which is not so exercised shall lapse. 6.6 For the purposes of this paragraph where a Participant's employment is terminated without notice or on terms in lieu of notice it shall be deemed to cease on the date on which the termination takes effect and where the said employment is terminated with notice it shall cease on the date when the notice period expires. - 9 - 6.7 If a Change in Control of the Company shall occur a Participant may exercise his Option in full at any time before the expiry of its Option Period PROVIDED THAT this clause 6.7 shall not apply where a Participant by agreement with an Acquiring Company, releases his Option in consideration of the grant to him of a New Option pursuant to clause 7 before the expiry of the appropriate period referred to in clause 7.4. 7. Replacement of Options on a takeover or other change in Control of the Company 7.1 Clause 7.2 below shall apply where an Acquiring Company obtains Control of the Company as a result of making: (a) a general offer to acquire the whole of the issued share capital of the Company (other than that which is already owned by it and/or by any of its subsidiaries) made on a condition such that if it is satisfied the Acquiring Company will have Control of the Company; or (b) a general offer to acquire all the Shares (or such Shares as are not already owned by the Acquiring Company and/or by any of its subsidiaries). 7.2 A Participant may at any time within the appropriate period as defined in clause 7.4, by agreement with the Acquiring Company, release any of his Options (the "Old Option" for the purposes of this clause) in consideration of the grant to him of a new option (the "New Option" for the purposes of this clause) PROVIDED THAT any New Option satisfies the conditions set out in clause 7.3. 7.3 The New Option must: (a) be over shares in the Acquiring Company or a Controlling Company which shares satisfy the conditions specified in paragraphs 10 to 14 inclusive of Schedule 9 (references to the term "Shares" in this Programme shall thereafter be construed accordingly); (b) be a right to acquire such number of shares which on acquisition of the New Option have an aggregate market value (determined in accordance with Part VIII of the Taxation of Chargeable Gains Act 1992) equal to the aggregate market value of the Shares the subject of the Old Option immediately before its release; (c) have an exercise price per share such that the aggregate price payable on complete exercise of the New Option equals the aggregate price which would have been payable on complete exercise of the Old Option at the time of its release. 7.4 The appropriate period referred to in clause 7.2 is the period of six months commencing on the date when the Acquiring Company making the offer has obtained Control of the Company and any condition subject to which the offer is made is satisfied. 7.5 The New Option shall be exercisable in the same manner as the Old Option and in accordance with the provisions of the Programme as it had effect in relation to the Old Option immediately before its release (references to the term "Option" in the Programme thereafter being construed accordingly), and the New Option shall, for all purposes of the Programme other than clause 7.6, be treated as having been granted on the date when the corresponding Old Option was granted. 7.6 With effect from the grant of a New Option hereunder clause 5, this clause 7, and clauses 8, 9 and 11 shall, in relation to the New Option, be construed as if references to the Company were references to the Acquiring Company, or as the case may be, the Controlling Company. - 10 - 8. Variations in the Share Capital of the Company 8.1 If at any time after the date of grant of an Option and before it ceases to be exercisable, there is a variation or reorganisation of Stock or other capital of the Company, including, without limitation, any subdivision or consolidation of shares or stock or other capital readjustment, stock split, payment of stock dividend, combination of shares or recapitalisation or other increase or reduction of the number of shares or stock outstanding, without receiving compensation therefor in money, services or property or otherwise with respect to its common stock, the number of Shares available under the Programme shall be adjusted and the number then subject to Options and the Exercise Price therefor shall be proportionately and appropriately adjusted all as the Committee shall deem appropriate PROVIDED THAT: (a) the aggregate Exercise Price payable on the exercise of an Option previously granted hereunder shall not be increased; (b) the Option Price shall not be reduced below the nominal value of a Share thereby; (c) all such adjustments shall be subject to prior approval by the Board of Inland Revenue. 8.2 All Participants shall be notified in writing of any such adjustments as soon as practicable thereafter and the Committee shall be entitled to call in the instruments evidencing the grant of the Options affected by such adjustments for endorsement or replacement, as may appear appropriate. 9. Administration of the Programme 9.1 The Programme shall be administered by the Committee. 9.2 Subject as herein otherwise expressly provided the Committee's decision on any matter concerning the Programme shall be final and binding. 10. Amendment of the Programme 10.1 Subject to clause 10.2, the Board or the Committee shall at any time be entitled to amend by resolution all or any of the provisions of the Programme provided that no amendment may adversely affect the rights of any participant already acquire by him under the Programme. 10.2 No amendment to the Programme shall be effective unless and until approved by the Board of Inland Revenue and subject to clause 1.3 nothing shall be done to the Programme which would prejudice the obtaining of Revenue Approval or cause it to be withdrawn. 11. Additional Provisions 11.1 Every Option shall be subject to the condition that no Shares shall be issued to a Participant following the exercise of an Option if such issuance would be contrary to any enactment or regulation for the time being in force of the United States or of any other country having jurisdiction in relation thereto. The Company shall not be bound to take any action to obtain the consent of any governmental authority to such issue or to take any action to ensure that any such issuance shall be in accordance with any such enactment or regulation if such action could in the opinion of the Committee be unduly onerous. 11.2 Every Option shall be subject to the requirement that if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of the Shares subject to an Option upon any securities exchange or under any state or federal law, or that the consent or approval - 11 - of any governmental authority, is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares under an Option such Option may not be exercised in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board. Any Option may be exercised only in accordance with the provisions of all applicable law. 11.3 The rights and obligations of a Participant under his terms of employment with any member of the ACE Group shall not be affected by his participation in the Programme and the Programme shall not afford to a Participant any right to continued employment or any additional right to compensation in consequence of the termination of his employment for any reason whatsoever. 12. Termination the Committee may at any time resolve to cease making further grants of Options under the Programme but in such event the subsisting rights of Participants shall not thereby be affected. EX-27 4 FINANCIAL DATA SCHEDULE
7 3-MOS DEC-31-1997 DEC-31-1997 3,056,831 0 0 605,329 0 0 4,321,414 123,564 0 24,165 4,998,937 1,858,055 369,206 66,766 0 0 0 0 6,809 2,611,743 4,998,937 167,821 58,413 27,492 0 109,161 14,201 0 112,816 0 112,816 0 0 0 112,816 2.06 2.01 0 0 0 0 0 0 0
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