-----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, N2QFGHrkfw5nceRp/XAm3PtBuJUuktzmlna1SNQQF05tgOjMc8bsj3d5LSfapBhe BJYQxdimKJXaUspQu5ECsA== 0000950131-96-006415.txt : 19961223 0000950131-96-006415.hdr.sgml : 19961223 ACCESSION NUMBER: 0000950131-96-006415 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961220 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11778 FILM NUMBER: 96684249 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-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NO. 1-11778 ---------------- ACE LIMITED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CAYMAN ISLANDS NOT APPLICABLE (JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) THE ACE BUILDING 30 WOODBOURNE AVENUE HAMILTON HM 08 BERMUDA (441) 295-5200 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Ordinary Shares, par value $0.125 per share New York Stock Exchange
---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ---------------- 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 periods 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. () As of December 13, 1996, there were 58,139,285 Ordinary Shares par value $0.125 of the Registrant outstanding and the aggregate market value of voting stock held by non-affiliates at such date was approximately $3.34 billion. For the purposes of this computation, shares held by directors (and shares held by any entities in which they serve as officers) and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of registrant's definitive proxy statement relating to its Annual General Meeting of Shareholders scheduled to be held on February 7, 1997, are incorporated by reference into Part III of this report and certain portions of the 1996 Annual Report to Shareholders are incorporated by reference into Parts II and IV of this report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ACE LIMITED INDEX TO 10-K
PAGE ---- PART I Item 1. Business....................................................... 1 Item 2. Properties..................................................... 20 Item 3. Legal Proceedings.............................................. 20 Item 4. Submission of Matters to a Vote of Security Holders............ 20 PART II Market for the Registrant's Ordinary Shares and Related Item 5. Stockholder Matters............................................ 22 Item 6. Selected Financial Data........................................ 23 Management's Discussion and Analysis of Results of Operations Item 7. and Financial Condition........................................ 23 Item 8. Financial Statements and Supplementary Data.................... 23 Changes and Disagreements with Accountants on Accounting and Item 9. Financial Disclosure........................................... 23 PART III Item 10. Directors and Executive Officers of the Registrant............. 23 Item 11. Executive Compensation......................................... 23 Item 12. Security Ownership of Certain Beneficial Owners and Management. 23 Item 13. Certain Relationships and Related Transactions................. 23 PART IV Exhibits, Financial Statements, Schedules and Reports on Form Item 14. 8-K............................................................ 24
PART I ITEM 1. BUSINESS Certain terms used below are defined in the "Glossary of Selected Insurance Terms" appearing on page 20. General ACE Limited ("ACE") is a holding company incorporated with limited liability under the Cayman Islands Companies Law and maintains its principal business office in Bermuda. The Company, 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 of London ("Lloyd's") to support underwriting by syndicates managed by Methuen Underwriting Limited ("MUL"). The term "the Company" refers to ACE and its subsidiaries excluding the Lloyd's operations carried out by Methuen Group Limited ("Methuen") and its subsidiaries and Ockham Worldwide Holdings plc ("Ockham Worldwide") and its subsidiaries (see "Recent Developments"). The Company's long-term business strategy focuses on achieving underwriting profits and providing value to its clients and shareholders through the utilization of its growing capital base within the insurance and reinsurance markets. As part of this strategy, the Company diversified its product portfolio from excess liability insurance and directors and officers liability insurance to accommodate the needs of its expanding, global client base of multinational corporations by adding satellite insurance, aviation insurance, excess property insurance and financial lines products during 1994 and 1995. This diversification added balance to the risk of the existing portfolio of insurance products and enhanced the Company's overall profit potential while utilizing its existing capital base. The Company continued its strategic diversification with the acquisitions in March 1996 of Methuen Group Limited ("Methuen"), the holding company for MUL, a leading Lloyd's managing agency, and in July 1996 of Tempest, a leading Bermuda-based property catastrophe reinsurer. The acquisition of Tempest provided the Company with a unique opportunity to expand into the property catastrophe reinsurance business through an established and well known reinsurance company. The following table sets forth the percentage of net premiums written by line of business for each of the years ended September 30, 1996, 1995 and 1994:
1996 1995 1994 ------ ------ ------ Excess liability..................................... 33.6% 56.3% 69.2% Financial lines...................................... 19.8 2.2 -- Directors and officers liability..................... 16.2 24.7 27.9 Satellite............................................ 14.1 10.6 3.7 Property catastrophe (Tempest) (1)................... 5.8 -- -- Aviation............................................. 4.5 1.7 -- Excess property...................................... 2.3 1.2 -- First Line........................................... 2.0 3.3 -- Lloyd's syndicates................................... 1.6 -- -- Other................................................ 0.1 -- (0.8) ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ======
- -------- (1) Tempest was acquired on July 1, 1996 and thus net premiums written for Tempest only relate to the three month period since acquisition. Recent Developments On July 1, 1996, the Company completed the acquisition of Tempest. Tempest underwrites property catastrophe reinsurance on a worldwide basis, emphasizing excess layer coverages, and has large aggregate 1 exposures to man-made and natural disasters. The short-tail nature of the property catastrophe business and shorter loss payout patterns complement the generally longer-tail nature of the Company's existing product lines. On March 27, 1996, the Company acquired a controlling interest in Methuen. On November 26, 1996, the Company acquired the remaining 49 percent interest in Methuen. MUL manages six syndicates with total underwriting capacity for the 1996 year of account of (Pounds)366 million (approximately $555 million). For the 1996 year of account, the Company has, through a corporate subsidiary, ACE Capital Limited ("ACE Capital"), provided funds at Lloyd's of (Pounds)12.25 million (approximately $18 million), which was primarily in the form of a letter of credit, supporting (Pounds)24.5 million (approximately $37 million) of underwriting capacity on syndicates managed by MUL. For the 1997 year of account, the Company has agreed to provide funds at Lloyd's of approximately (Pounds)62 million (approximately $93 million) to support up to approximately (Pounds)124 million (approximately $186 million) of underwriting capacity on syndicates managed by MUL (see "Lloyd's of London"). On November 26, 1996 the Company acquired Ockham Worldwide Holdings PLC ("Ockham Worldwide"), a wholly owned subsidiary of Ockham Holdings PLC. Ockham Worldwide owns two Lloyd's managing agencies, ACE London Aviation Limited ("ALVL") (formerly Ockham Sturge Aviation Agency Ltd.) and ACE London Underwriting Limited ("ALUL") (formerly Ockham Worldwide Agency Ltd). Together these two agencies manage seven syndicates with total underwriting capacity for the 1996 year of account of (Pounds)349 million (approximately $524 million). Ockham Worldwide also owns a Lloyd's corporate member which provides funds at Lloyd's to support underwriting on these syndicates. The Company expects to provide approximately (Pounds)15 million (approximately $23 million) of underwriting capacity to the syndicates managed by Ockham Worldwide for the 1997 year of account. Insurance Operations The Company, through ACE Insurance and CODA, provides property and casualty insurance coverage, including excess liability insurance, directors and officers liability insurance, satellite insurance, aviation insurance, excess property insurance and financial lines products, to industrial, commercial and other enterprises. The nature of the insurance coverages provided by the Company are generally expected to result in low frequency but high severity of individual losses. This loss pattern is particularly evident in the Company's excess liability insurance due to the high attachment points and large limits offered. The Company does purchase limited excess of loss clash reinsurance with respect to its excess liability policies and has also purchased reinsurance designed to limit its exposure on the satellite, aviation and excess property lines of business. At September 30, 1996 approximately 73 percent of the Company's written premiums came from North America with approximately 20 percent coming from the United Kingdom and continental Europe and approximately 7 percent from other countries. Excess Liability The Company seeks to provide to the world's largest industrial enterprises the highest layer of excess liability coverage in their insurance programs and requires that at least a portion of its coverage be the highest layer in a policyholder's insurance program. The Company writes excess liability coverage, on an occurrence first reported stand alone form, generally in excess of a minimum attachment point of $100 million per occurrence and with a minimum limit of $10 million and a maximum limit of $200 million per occurrence, subject to an annual aggregate limit in the same amount for all covered occurrences of which notice is given during such year. Effective on or after December 15, 1994 the Company has imposed an annual aggregate sublimit for integrated occurrences of $100 million for all new and renewal business that purchases limits greater than $100 million. During 1994, the Company reduced the minimum attachment point to $50 million (or the 2 foreign currency equivalent) from $100 million for certain classes of non-U.S. domiciled excess liability risks. In this instance, the Company offers limits up to twice the reduced attachment point with a minimum limit of $25 million. In general, the excess liability policies cover occurrences causing unexpected and unintended personal injury, property damage and/or advertising liability arising from events or conditions which commence at or subsequent to the inception date (or retroactive date, if applicable, but typically not prior to November 1, 1985), provided proper notice is given to the Company during the term of the policy or any applicable discovery period. Unlike traditional insurance policy forms, disputes under the Company's policies are required to be settled by arbitration in Bermuda or London, depending on the policy. Either the Bermuda Arbitration Act of 1986, as amended, or the English Arbitration Act of 1950, as amended, governs the arbitration. The Company maintains excess of loss clash reinsurance on a calendar year basis which provides the Company with certain protection from losses arising from a single set of circumstances (occurrence) under more than one excess liability insurance policy. The clash reinsurance agreements do not cover all occurrences covered by the Company's policies and, in particular, do not cover integrated occurrences involving one insured or similar occurrences in which multiple insureds are found liable (e.g., similar defective products manufactured or sold by multiple insureds). Directors and Officers Liability The Company offers up to $75 million of directors and officers liability insurance with a maximum of $50 million being provided for corporate reimbursement coverage. The Company believes this to be the largest amount of directors and officers liability insurance available from a single underwriting source. The directors and officers liability insurance is written on a claims made form and is provided to large industrial corporations, not-for-profit corporations, financial institutions and others. As with the excess liability form, disputes are required to be settled by arbitration in Bermuda or London. Satellite The Company began satellite insurance operations in February 1994. Until February 15, 1996, the Company offered separate limits of up to $25 million per risk for launch insurance, including ascent to orbit and/or initial testing, and up to $25 million per risk for in-orbit insurance. This risk was fully retained by the Company. Effective for all business written on or after February 15, 1996, the Company has entered into a surplus treaty arrangement, which provides for up to $25 million of reinsurance for each risk. This reinsurance arrangement has enabled the Company to raise the gross limits offered for satellite insurance to $50 million per risk. The Company believes its commitment represents one of the world's largest net lines. The Company also believes that this stable capacity and the financial security offered by the Company's asset base provide distinct competitive advantages and have resulted in the Company becoming a significant provider of satellite insurance. Satellite insurance falls within a small, well defined market characterized by a limited number of brokers, underwriters and international clients. There are also a limited number of satellite and launch vehicle manufacturers in the world. The growing worldwide demand for satellite communications capabilities by both governments and private enterprises has resulted in an increase in the number of satellites per annum requiring launch and/or in-orbit insurance coverage. The typical satellite insurance policy is written on a quota-share basis, rather than on an excess of loss basis. The insured value of a commercial satellite now ranges from approximately $150 million to $300 million. The Company is at risk, under the terms of a typical launch insurance policy, from the point of intentional ignition of the launch vehicle and for a period of approximately 90 to 365 days to allow for initial operations of the satellite. In-orbit coverage incepts on termination of the launch insurance policy, which usually occurs on completion of the initial operations testing of the satellite. In-orbit insurance is generally written on an annual basis, although policy periods can be as long as 36 months. 3 Financial Lines The Company introduced its financial lines product group in January 1995. Financial lines utilizes transactions which combine the concepts of finance with the principles of insurance. Typically, clients purchasing these products are seeking insurance or reinsurance for exposures which are difficult to place because of limited or nonexistent capacity or inefficient terms or pricing being provided by traditional insurance markets. Alternatively, they may use these insurance or reinsurance products to cover loss exposures which are not efficiently handled by current products available. Unlike certain traditional insurance, each financial lines contract is individually tailored to meet the needs of the insured. Financial Lines programs typically have the following common characteristics: multi-year contract terms; broad coverage that includes stable capacity and pricing for the insured; insured participation in the results of their own loss experience; and aggregate limits. The specific product types offered by financial lines include the various forms of finite risk insurance. Examples of finite risk products include the combination of self-insurance with an excess program, the combination of various coverages subject to a single retention and insured limit or programs that insure large loss exposure or a portfolio of losses over a period of years. Other product types offered are specialty insurances which cover financial exposures or involve financial instruments. Financial lines products were created by the need to service the more complex risks of today's corporations. The Company anticipates drawing on the strong franchise the Company maintains with its current client base by providing a policy which will further enhance a client's risk management program. Using both insurance and reinsurance brokers and investment bankers, it also anticipates attracting new clients for the Company. The Company believes it has a competitive advantage in the marketplace because of the financial strength of the Company and its ability to offer significant risk transfer while still allowing the insured to retain some of its own exposures. Risk transfer is important to the insured thereby enabling it to meet the accounting and regulatory requirements related to the purchase of insurance or reinsurance. Financial lines has a flexible approach to limits offered, attachment points and coverages provided primarily due to the risk sharing feature and use of funding mechanisms which are generally included in the contract. Each contract is unique because it is tailored to the insurance needs, specific loss history and financial strength of the client. Premium volume, as well as the number of contracts written, can vary significantly from period to period due to the nature of the contracts being written. Profit margins may vary from contract to contract depending on the amount of underwriting risk and investment risk assumed on each contract. Aviation The Company commenced writing aviation insurance in April 1995 and offers limits of up to $100 million per insured, with no minimum attachment point. The Company reduces its net exposure per policy to approximately $50 million with a dedicated reinsurance program. Classes of business written include aviation product liability, aviation manufacturers (including hull and all risks and products liability); aviation refuellers; and airport and airport contractors, together with certain aircraft risks. Generally, the Company will write aircraft liability in conjunction with one or more of the other aviation products, and where the aircraft (owned or non- owned) is used for corporate purposes. Coverage will include third party bodily injury, property damage and passenger legal liability. Excess Property The Company entered the excess property insurance business in June 1995. Primary target markets are chemical, energy, electronics, forest products, heavy manufacturing, mineral, oil and gas, and utilities. Coverage is also available to select manufacturing, industrial and institutional risks. Excess property insurance coverage is offered with limits of up to $50 million per risk, above a minimum attachment point of $25 million. In certain 4 circumstances, the Company uses reinsurance to establish the retained net limit per risk. Attachment levels, terms and pricing for each risk are derived from the Company's property underwriters' independent assessment of "probable maximum loss", a benchmark of risk frequency and severity. The Company has purchased catastrophe reinsurance to control the possible effects of cumulative natural peril exposure. Marketing and Underwriting The Company, through ACE Insurance and CODA, markets its insurance products through brokers and seeks to maintain a competitive advantage by providing insurance coverages which require utilization of technical skills to underwrite individual risks, emphasizing quality rather than volume of business to obtain a suitable spread of risk. This enables the Company to operate with a relatively small number of employees and, together with the reduced costs of operating in a favorable regulatory and tax environment, results in significantly lower administrative expenses relative to other companies in the industry. Policyholders are obtained through non-U.S. insurance brokers who generally receive a brokerage commission on any business accepted and bound by the Company. The Company is not committed to accept any business from any particular broker and brokers do not have the authority to bind the Company. All policy applications (both for renewals and new policies) are subject to approval and acceptance by the Company in its Bermuda office. A substantial number of policyholders meet with the Company outside of the United States each year to discuss their insurance coverage. The Company does not believe that conducting its operations through its offices in Bermuda has materially affected its underwriting and marketing activities to date. The Company receives business from approximately 75 non-U.S. brokers of which 7 produced approximately 80 percent of the Company's business in 1996. The following table sets forth the percentage of the Company's insurance business placed in 1996, 1995 and 1994 through each broker placing more than 10 percent of the Company's business.
YEAR ENDED SEPTEMBER 30, -------------- NAME U.S. AFFILIATE 1996 1995 1994 - ---- -------------- ---- ---- ---- Bowring (Bermuda) Limited......... Marsh & McLennan, Incorporated 31% 43% 41% J&H Intermediaries Limited........ Johnson & Higgins 11 16 17
At September 30, 1996, approximately 28 percent of the Company's policyholders were not based in North America. The Company has experienced an increase in the number of submissions in non-North American business as a result of the activities of its London representative office since its opening in September 1994 and expects further growth as a result of its activities. The London representative office assists brokers throughout the United Kingdom, the rest of Europe, the Middle East, South Africa, the Far East and Australia in gaining access to the Company's underwriting capacity in Bermuda. All underwriting activity continues to take place in Bermuda. The Company employs underwriting staff with substantial industry experience. The underwriter's primary objective is to assess the potential for an underwriting profit, a process complicated in some cases by the limited amount of data for claims which would have been covered by the Company's policy form and which would have exceeded its policy's attachment point. The risk assessment process undertaken by the Company involves a comprehensive analysis of historical data and estimates of future value of losses which may not be evident in the historical data. The factors which the Company considers include the type of risk, the attachment point and coverage limits, the type, size, complexity and location of the potential insureds operations, financial data, the industry in which the potential insured operates, details of the underlying insurance coverage provided, loss history and future corporate plans. Competition Competitive forces in the international property and casualty insurance business are substantial. Results are a function of underwriting and investment performance, direct costs associated with the delivery of insurance 5 products, including the costs of regulation, the frequency and severity of both natural and man-made disasters, as well as inflation (actual, social and judicial), which impact loss costs. Decisions made by insurers concerning their mix of business (offering certain types of coverage but declining to write other types), their methods of operations and the quality and allocation of their assets (including any reinsurance recoverable balances) will all affect their competitive position. Some insurers continue to incur liability for business written decades earlier covering gradual pollution and certain product liability exposures. The relative size and reputation of insurers may influence purchasing decisions of present and prospective customers and will contribute to both geographic and industrial sector market penetration. Oversupply of available capital has historically had the effect of encouraging competition and depressing prices. Capital accumulation to support large excess liability policies and the availability of suitably experienced underwriters are partial barriers to entry, but insurance pricing will continue to be influenced by supply. The Company's competitive position in the casualty insurance industry is influenced by all of these factors. The Company believes it has a number of competitive advantages in the insurance products which it provides. Among the advantages are its strong capital base, its ability to market a number of insurance products to its existing client and potential client base and its ability to be flexible in providing contracts which extend coverage for periods in excess of one year. The Company believes that it is unique in that it offers up to $200 million of excess liability coverage and that its coverage is generally the highest layer of a client's insurance program. There are a small number of insurers that compete with the Company, including American International Group, Inc. ("AIG"), several large European insurers, Exel Limited ("EXEL"), certain Lloyd's syndicates and Starr Excess Liability Insurance Co. Ltd. ("Starr"). The Company has continued to experience increased competition during 1996 in this line of business. There is a small group of dominant insurers in the directors and officers liability insurance area and the Company faces strong competition in that area from competitors such as Executive Risk Insurance Company, AIG, Chubb Group of Insurance Cos., CNA, EXEL, certain Lloyd's syndicates and Starr. The Company has continued to experience increased competition throughout fiscal 1996. However, the Company has been successfully marketing its products through the London representative office, resulting in a number of new non-North American accounts. The Company believes that the available limits, stable capacity and financial security offered by the Company provide a competitive advantage in the satellite insurance market. There are currently a limited number of underwriters available to service the satellite insurance market, however, the amount of capacity available in the market place has grown substantially and there now appears to be excess capacity in this market. The Company believes that there will be continued demand for its services, as evidenced by commitments already provided by the Company for future satellite insurance coverage. Other major firms offering satellite coverage include Assicuraziona Generali S.p.A., International Technology Underwriters, Inc., La Reunion Aerienne, The Marchant Space Consortium, Munich Reinsurance and United States Aviation Insurance Group. There are a number of companies in the insurance market which form the competition for financial lines, including Centre Reinsurance (Bermuda) Limited and several of the major international insurance companies, such as AIG and American Reinsurance. The demand for individually tailored insurance products, such as those offered by financial lines is growing due to the ever- changing and more complex risks facing today's corporations. The Company believes it has a competitive advantage in the marketplace because of the financial strength of the Company and its ability to offer significant risk transfer in its contracts while still allowing the insured to retain some of its own exposures. In providing coverage for aviation insurance exposures, the Company faces significant competition from a small number of specialty firms, including certain Lloyd's syndicates and several large European insurers. The Company believes that the limited number of underwriters available to service the aviation insurance market, particularly in areas such as product manufacturers liability and airport liability, and the commitment of significant capital to this long-tail type of business are barriers to entry. The Company believes that the demand for this type of specialty coverage is growing, as evidenced by the volume of submissions received and the number of accounts written by the Company to date. 6 There are a diverse number of companies providing excess property insurance coverage for increasingly complex multi-site, multi-national risks. Although the market is very competitive, the Company believes that it has several competitive advantages in offering global excess "all risk" coverage, including its experienced underwriting team, access to the latest technology and analytical methods, a precise market focus and a capital base that is unburdened by historic unprofitability and/or uncontrolled accumulation of exposures. The Company expects that a significant portion of the future growth in most of its lines of business will continue to come from new non-U.S. accounts. Accordingly, the Company is promoting its products overseas, particularly to large industrial companies in Latin America, Europe, the Middle East, South Africa, Australia and the Far East. The Company has received a group rating of A (Excellent) from A.M. Best Company, a leading insurance rating company ("A.M. Best"). The most current rating covers the Company, together with its operating subsidiaries ACE Insurance and CODA. A.M. Best assigns an A rating to companies which, in its opinion, have demonstrated excellent overall performance when compared to the standards established by A.M. Best and have a strong ability to meet their obligations to policyholders over a long period of time. An A.M. Best rating is based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities. Reinsurance Operations The Company's reinsurance activities are principally conducted through Tempest, its wholly owned subsidiary, which was acquired on July 1, 1996. In addition, through ACE Insurance, the Company offers financial lines reinsurance products (see discussion in "Insurance Operations") and participates in the reinsurance of "First Line". The Company participates in the reinsurance of a program referred to as "First Line" which provides financial guarantees required by the U.S. Coast Guard to issue Certificates of Financial Responsibility, under the Oil Pollution Act of 1990, to owners of vessels operating in U.S. waters. The Company has purchased excess of loss reinsurance to limit its exposure in this line. Tempest provides property catastrophe reinsurance worldwide to insurers of commercial and personal property, typically under treaties having a duration of one year. Property catastrophe reinsurance protects a ceding company against an accumulation of losses covered by the insurance policies it has issued arising from a common event or "occurrence." Ceding companies may purchase reinsurance to achieve a number of results, including: reduction of net exposure on individual risks or groups of risks, which enables the ceding company to underwrite larger risks, or accept more business than its own capital resources would ordinarily support; diversification of risks; protection against the effect of major catastrophic losses, such as losses involving an accumulation of single retentions; stabilization of a ceding company's operating results by smoothing its loss experience to protect its financial position; and maintenance by a ceding company of acceptable surplus, reserve and other financial ratios. Tempest's property catastrophe reinsurance contracts cover unpredictable natural or man-made disasters, such as hurricanes, windstorms, hail storms, earthquakes, volcanic eruptions, conflagrations, freezes, floods, fires and explosions. Tempest's predominant exposure under such coverage is to property damage. However, other risks, such as business interruption may also be covered when arising from a covered peril. In accordance with market practice, Tempest's property catastrophe reinsurance contracts generally exclude certain risks such as war, nuclear contamination, and radiation. Tempest underwrites reinsurance principally on an excess of loss basis, with attachment points designed to minimize claims from relatively high frequency and low severity events. During the ten month period ended 7 September 30, 1996, approximately 96 percent of premiums were written on an excess of loss basis. Other property reinsurance written by Tempest on a limited basis for select clients, includes proportional property and per risk excess of loss treaty reinsurance. At September 30, 1996, Tempest had 233 programs in force with 200 clients. Tempest underwrites a substantial portion of its business in currencies other than U.S. dollars and may from time to time experience exchange gains and losses and incur significant underwriting losses in currencies other than U.S. dollars. The following table sets forth the amount of Tempest's premiums written allocated by territory of coverage:
YEARS ENDED NOVEMBER 30, TEN MONTHS ENDED ------------- SEPTEMBER 30, 1996 (1) 1995 1994 ---------------------- ------ ------ United States........................ 64.0% 55.7% 69.8% United Kingdom....................... 13.3 15.9 8.1 Australia & New Zealand.............. 6.0 11.3 7.5 Japan................................ 3.8 7.2 7.9 Other................................ 12.9 9.9 6.7 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ======
- -------- (1) Tempest has a November 30 fiscal year-end. Marketing and Underwriting Tempest markets its reinsurance products worldwide through reinsurance brokers. Tempest also opened a representative office in London, England in August 1996. Tempest's underwriting team builds relationships with key brokers and clients by explaining Tempest's approach and demonstrating responsiveness to customer needs. Tempest's approach to the business of reinsurance takes a long-term perspective. Management believes that continual strengthening of the relationships between Tempest, its producing brokers and their clients will continue to contribute to a stable portfolio necessary to achieve continuity. By retaining clients, Tempest seeks to build up extensive knowledge of them and gain additional insight to enable a more accurate assessment of their exposures. Tempest receives business from approximately 40 brokers. The following table sets forth the percentage of Tempest's business written through each broker and its affiliates placing more than 10 percent of Tempest's business:
YEARS ENDED NOVEMBER 30, TEN MONTHS ENDED -------------- SEPTEMBER 30, 1996 1995 1994 ------------------ ------ ------ Marsh & McLennan, Incorporated.......... 26% 30% 29% Greig Fester International Limited...... 7% 16% 8%
Rates, limits, retention and other reinsurance terms and conditions are generally established in a worldwide competitive market that evaluates exposure and balances demand for property catastrophe coverage against the available supply. Tempest believes it is perceived by the market as being a "lead" reinsurer and is typically involved in the negotiation and quotation of the terms and conditions of the majority of the contracts in which it participates. Because Tempest underwrites property catastrophe reinsurance and has large aggregate exposures to natural and man-made disasters, Tempest's claims experience generally will involve infrequent events of great severity. Tempest seeks to diversify its reinsurance portfolio to moderate the impact of this severity. The principal means of diversification are by geographic coverage and by varying attachment points and imposing coverage limits 8 per program. Tempest also establishes zonal accumulation limits to avoid concentrations of risk within particular geographic areas. Tempest applies an underwriting process based on models that use exposure data submitted by prospective reinsureds in accordance with requirements set by Tempest's underwriters. The account review process includes an analysis of exposures both by line of business and geographic location. The underwriting models used by Tempest have been created and continue to be developed in- house. Tempest believes that these risk analysis tools provide greater utility and flexibility in comparison with external vendor catastrophe modeling products, especially when confronted with unique exposures or non-standard coverage. Tempest analyses its exposure in more detail using simulation modeling of loss scenarios and their effects on Tempest's overall portfolio. This approach enables Tempest to assess the portfolio risk, in particular to account for the risk of a combination of multiple events worldwide in a single year. Competition The property catastrophe reinsurance industry is highly competitive. Tempest competes worldwide with major U.S. and non-U.S. property catastrophe reinsurers, other Bermuda-based property catastrophe reinsurers and reinsurance departments of numerous multi-line insurance organizations. Tempest competes effectively because of its strong capital position, the quality of service provided to customers, the leading role Tempest plays in setting the terms, pricing and conditions in negotiating contracts, its customised approach to risk selection and the sponsorship and support of its parent, ACE. Tempest has also received an A (Excellent) rating from A.M. Best. Lloyd's of London Operations Lloyd's of London ("Lloyd's") is a long established insurance marketplace where many varied forms of insurance are sold by syndicates, which are annual joint ventures of participating capital providers known as "Names". Participation as a Name on a syndicate carries with it unlimited liability for the Name's share of any insurance losses incurred by the syndicate (each Name participated severally). In 1994, the rules surrounding participation were changed to allow limited liability "corporate names" to enter the Lloyd's marketplace as capital providers. Several of the underwriting years of the late 1980's and early 1990's proved to be particularly unprofitable for many of the syndicates operating at Lloyd's. This proved to be financially disastrous for some of the Names on the affected syndicates due to the unlimited liability of their participation. During the last three years, Lloyd's governing body has been seeking to implement a reconstruction and renewal plan to allow the market to continue. In August 1996 this plan was formally approved by the required parties and a new company, Equitas, was authorized to underwrite the liabilities of the 1992 and prior years of account of all syndicates at Lloyd's. The funding for this solution came from a variety of sources including the premiums on the liabilities assumed by Equitas as well as a series of levies charged to entities that had historically provided services to the Lloyd's insurance market (including managing agencies and insurance brokers). Participation in selective syndicates in the Lloyd's insurance market provides the Company with new lines of business in the aviation, marine and non-marine markets as well as the opportunity to diversify its insurance risk profile through markets to which it would otherwise not have access. This syndicate participation is through a dedicated corporate capital vehicle thus limiting the liability of the Company. In order to more closely monitor its syndicate participation the Company has acquired Methuen, the holding company for MUL, and Ockham Worldwide, the holding company for two other managing agencies, ALVL and ALUL. These three agencies provide accounting, reporting and ancillary insurance services to the syndicates in which the Company participates or will participate for the 1997 year of account. 9 For the 1996 year of account the Company has committed (Pounds)12.25 million (approximately $18 million) of capital spread amongst the six syndicates managed by MUL, which will support up to (Pounds)24.5 million (approximately $37 million) of premium writing capacity. For the 1997 year of account the Company has agreed to provide funds at Lloyd's of approximately (Pounds)62 million (approximately $93 million) to support up to approximately (Pounds)124 million (approximately $186 million) of underwriting capacity on syndicates managed by MUL. On November 26, 1996, the Company acquired Ockham Worldwide Holdings PLC ("Ockham Worldwide"), a wholly owned subsidiary of Ockham Holdings PLC ("Ockham"). Ockham Worldwide owns two Lloyd's managing agencies, ACE London Aviation Limited ("ALVL") (formerly Ockham Sturge Aviation Agency Ltd.) and ACE London Underwriting Limited ("ALUL") (formerly Ockham Worldwide Agency Ltd.). Together these two agencies manage seven syndicates with total underwriting capacity for the 1996 year of account of (Pounds)349 million (approximately $524 million). Ockham Worldwide also owns a Lloyd's corporate member which provides funds at Lloyd's to support underwriting on these syndicates. The Company expects to provide approximately (Pounds)15 million (approximately $23 million) of underwriting capacity to the syndicates managed by Ockham Worldwide for the 1997 year of account. The syndicates managed by MUL, ALVL and ALUL underwrite an extensive range of insurance and reinsurance risks worldwide. Risks underwritten include most classes of aviation and space, property and liability, marine and energy business. All business is underwritten through registered Lloyd's insurance brokers either on a direct basis or as facultative or treaty reinsurance. There is significant competition in all classes of business transacted by the syndicates and emanates from a number of different markets worldwide. Depending on the class of business concerned competition comes from the London market; other Lloyd's syndicates and ILU Companies (Institute of London Underwriters), major international insurers and reinsurers. On international risks, competition also comes from the domestic insurers in the country of origin of the insured. The syndicates are able to compete successfully by developing and maintaining close, long term relationships with clients through a high quality service and an ability to deliver innovative solutions tailored to the client's needs. Claims Administration Claims arising under policies issued by ACE Insurance and CODA are managed in Bermuda by the Company's claims department. The Company maintains a claims database into which all notices of loss are entered. If the claims department determines that a loss is of sufficient severity, it makes a further inquiry of the facts surrounding the loss and, if deemed required, retains outside claims counsel to monitor claims. Based upon its evaluation of the claims file, the Company's claims department may recommend that a case reserve in a specified amount be established or that all or part of a claim be paid. The Company's claims department monitors all claims files and, where appropriate, will recommend the establishment of a new case reserve or the increase or decrease of an existing case reserve with respect to a claim. With the exception of certain aviation coverages, the Company does not undertake to defend its insureds. It has, in certain instances, provided advice to insureds with respect to the management of claims. The Company believes that its experience in resolving large claims and its proactive approach to claims management has contributed to the favourable resolution of several cases. Because the Company does not do business in the U.S., it must often rely on U.S. counsel to assist it in evaluating liability and damages confronting its insureds in the U.S. The Company does not believe that the information received or the procedures followed have materially or adversely affected its ability to identify, review or settle claims. 10 Claims arising under contracts written by Tempest are managed in Bermuda by Tempest. Tempest also maintains a claims database into which all notices of loss are entered. Loss notices are received from brokers. They are reviewed and case reserves are established for Tempest's portion of the loss in excess of the contract's attachment point. Case reserves are then adjusted based on receipt of further notifications from brokers. With respect to claims arising in Lloyd's syndicates, each syndicate maintains a claims database into which all notices of loss are entered. These are primarily notified by various central market bureaux, such as, through a daily electronic data interchange message. Where a syndicate is a "leading" syndicate on a Lloyd's policy, then it acts through its underwriters and claims adjusters, on behalf of itself and the following market, in dealing with the broker and/or insured for any particular claim. This may involve the appointment of attorneys and/or loss adjusters. The leading syndicates, together with the claims bureaux, advise movements in case reserves to all syndicates participating on the risk. All information received with respect to case reserves, whether on "lead business" or on "following business", are screened, validated and recorded by the syndicates. The syndicates' claims departments can vary the case reserves carried from those advised by the bureaux and can carry reserves for claims not processed by the bureaux. Any such adjustments and entries are specifically identifiable within the claims system. Unpaid Losses and Loss Expenses The Company is required to make provisions in its financial statements for the estimated unpaid liability for losses and loss expenses for claims made against it under the terms of its policies and agreements. Estimating the ultimate liability for losses and loss expenses is an imprecise science subject to variables that are influenced by both internal and external factors. This is true because claim settlements to be made in the future may be impacted by changing rates of inflation and other economic conditions, changing legislative, judicial and social environments and changes in the Company's claims handling procedures. 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. In other cases, the period between first notice and final payment can be relatively short, even less than one year. Several aspects of the Company's operations exacerbate the inherent uncertainties in estimating its losses as compared to more conventional insurance companies. Primary among these aspects are the limited amount of statistically significant historical data regarding losses, particularly of the type intended to be covered by the Company's excess liability policies and the expectation that losses in excess of the attachment level of the policies will be characterized by low frequency and high severity, limiting the utility of claims experience of other insurers for similar claims. Accordingly, the ultimate claims experience of the Company cannot be as reliably predicted as may be the case with more traditional insurance companies, and there can be no assurance that losses and loss expenses will not exceed the reserves. 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. 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 Global I settlement (including information relating to opt-outs) 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. In August 1996, the Company settled with one of its insureds, a breast implant manufacturer, for a sum of money to be paid out over 11 a number of years in the future. The settlement is 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 Settlement II and the number and value of the opt-out claims. 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. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-- Breast Implant Litigation" in the 1996 Annual Report to shareholders filed with this Form 10-K. After a claim is reported to the Company, a case reserve is established for the estimated ultimate losses and loss expenses, if any, with respect to the reported claim. The amount and timing of the reserve reflects the judgment of the claims personnel, based upon general corporate reserving practices and on the experience and knowledge of the claims personnel (including, where appropriate, outside counsel and claim consultants) regarding the nature and value of the specific type of claim. The process in estimating ultimate liability employed by the Company is set forth in an actuarial report (the "Actuarial Report") prepared annually by the Company's Chief Actuary. The Company engages an independent actuarial firm to review the Actuarial Report on an annual basis. As stated in its actuarial review, such firm believed that the methods and assumptions contained in the Actuarial Report were reasonable and appropriate for use in setting loss reserves at September 30, 1996. Such Actuarial Report contains a number of qualifications with respect to the complications and relative uncertainty that exists in establishing reserves for the Company's lines of business, which qualifications are substantially similar to those discussed above. Losses and loss expenses are charged to income as incurred. The reserve for unpaid losses and loss expenses represents the estimated ultimate losses and loss expenses less paid losses and loss expenses and is composed of case reserves, loss expense reserves and IBNR loss reserves. During the loss settlement period, which can be many years in duration, additional facts regarding individual claims and trends often will become known. As these become apparent, case reserves may be adjusted by allocation from the IBNR loss reserve without any change in the overall reserve. In addition, application of the statistical and actuarial method may require the adjustment of the overall reserves upward or downward from time to time. The final liability nonetheless may be significantly greater than or less than the prior estimates. At September 30, 1996, the reserve for unpaid losses including IBNR loss reserves was $1,806.3 million and the reserve for loss expenses was $29.8 million. The Company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as of September 30, 1996. The "Analysis of Loss and Loss Expense Development" shown below presents the subsequent development of the estimated year-end liability for unpaid losses and loss expenses since the Company's inception at the end of each of the years in the eleven-year period ended September 30, 1996. The top line of the table shows the estimated liability for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss expenses for claims arising from all prior years' policies and agreements that were unpaid at the balance sheet date, including IBNR loss reserves. The upper (paid) portion of the table presents the amounts paid as of subsequent years on those claims for which reserves were carried as of each specified year. The lower portion of the table shows the re-estimated amount of the previously recorded liability as of the end of each succeeding year. Several aspects of the Company's operations, including the low frequency and high severity of losses in the high excess layers in which the Company provides insurance, complicate the actuarial reserving techniques utilized by the Company. Accordingly, the Company expects that ultimate losses and loss expenses attributable to any single underwriting year will be either more or less than the incremental changes in the lower portion of the following table. Management believes, however, that the losses and loss expenses which have been recorded through September 30, 1996, including those arising from breast implant claims, are adequate to cover the ultimate cost of losses and loss expenses incurred through September 30, 1996 under the terms of the Company's policies and agreements. Since such provisions are necessarily based on estimates, the ultimate losses and loss expenses may be significantly greater or less than such amounts. See "Management's Discussion and Analysis of Results of 12 Operations and Financial Condition--Breast Implant Litigation" in the 1996 Annual Report to Shareholders filed with this Form 10-K. It should be noted that as of July 1, 1996 the Company acquired Tempest and as of November 1, 1993 the Company acquired CODA. ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------------------- 1986 1987 1988 1989 1990 1991 1992 1993 ------- -------- -------- -------- -------- -------- ---------- ---------- (IN THOUSANDS) Unpaid........... $ 250 $ 5,600 $ 22,500 $ 78,009 $319,230 $470,832 $ 813,849 $ 766,402 Paid (Cumulative) As Of: 1 year later.... 80 167 431 26,190 181,525 149,493 340,836 126,566 2 years later... 192 469 1,195 82,715 207,587 490,116 465,074 183,439 3 years later... 250 672 21,307 108,689 531,502 590,847 517,366 228,638 4 years later... 250 674 42,450 432,541 601,811 611,113 551,887 5 years later... 250 674 182,110 459,183 622,097 627,691 6 years later... 250 674 182,110 476,570 631,371 7 years later... 250 674 195,939 484,475 8 years later... 250 674 196,207 9 years later... 250 674 10 years later.. 250 Liability Reestimated As Of: End of year..... $ 250 $ 5,600 $ 22,500 $ 78,009 $319,230 $470,832 $ 813,849 $ 766,402 1 year later.... 250 5,643 57,682 267,674 475,647 706,960 813,848 966,402 2 years later... 250 35,765 105,503 346,022 665,533 706,960 1,085,012 1,067,987 3 years later... 250 19,901 134,227 516,763 665,533 874,368 1,234,462 1,211,424 4 years later... 250 19,672 333,869 516,783 663,480 888,387 1,412,495 5 years later... 250 139,674 333,869 487,911 680,119 940,513 6 years later... 46,250 139,674 189,332 489,556 711,671 7 years later... 46,250 674 176,889 479,306 8 years later... 250 674 174,837 9 years later... 250 674 10 years later.. 250 Cumulative redundancy/ (deficiency).... 0 4,926 (152,337) (401,297) (392,441) (469,681) (598,646) (445,022)
--------------------------------- 1994 1995 1996 ---------- ---------- ---------- Unpaid........... $1,176,215 $1,474,924 $1,836,113 Paid (Cumulative) As Of: 1 year later.... 66,888 68,482 2 years later... 121,628 3 years later... 4 years later... 5 years later... 6 years later... 7 years later... 8 years later... 9 years later... 10 years later.. Liability Reestimated As Of: End of year..... $1,176,215 $1,474,924 $1,836,113 1 year later.... 1,177,292 1,474,924 2 years later... 1,227,538 3 years later... 4 years later... 5 years later... 6 years later... 7 years later... 8 years later... 9 years later... 10 years later.. Cumulative redundancy/ (deficiency).... (51,323) 0
The Company does not consider it appropriate to extrapolate future deficiencies or redundancies based upon the above tables, as conditions and trends that have affected development of liability in the past may not necessarily occur in the future. In 1994, the Company recorded an additional reserve of $200 million, related primarily to developments in breast implant litigation, in respect of years prior to 1994. In 1992, the Company began applying actuarial and statistical methods to estimate ultimate expected losses and loss expenses for all of the Company's business since inception. As at September 30, 1994 the Company changed its method of allocating IBNR to accident and balance sheet years. This allocation assigns IBNR to years based upon various risk factors including immaturity of year, amount of earned premium in that year, and development of known claims. As the Company's loss experience is characterized as low frequency, and high severity, IBNR is considered a bulk reserve, and is therefore available for loss development from which ever year it may arise. Prior to 1994, the allocation of IBNR to accident and balance sheet years was based upon a loss distribution indicated by the expected loss method employed by the Company. Losses paid for the year ending September 30, 1988 include an amount of $23.4 million, which is expected to be recovered from an insured. The table has been re-stated to include CODA's and Tempest's loss experience as if both companies had been wholly owned subsidiaries of the Company from their inception. 13 The "cumulative redundancy/(deficiency)" shown in the table represents the aggregate change in the reserve estimates over all subsequent years. The amounts noted are cumulative in nature; that is, an increase in loss estimate for prior year losses generates a deficiency in each intermediate year. For instance, a deficiency recognized in 1994 relating to losses incurred during the year ending September 30, 1992 would be included in the cumulative deficiency amount for each year from September 30, 1992 to the year the loss was recognized (1994), yet the deficiency would be reflective in operating results only in 1994. An analysis of the changes in aggregate reserves for losses and loss expenses under GAAP is presented below. Since reserves are necessarily based upon estimates, the ultimate net costs may vary from the original estimates. As adjustments to these estimates become necessary, they are reflected in current operations. RECONCILIATION OF UNPAID LOSSES AND LOSS EXPENSES
YEAR ENDED SEPTEMBER 30, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS) Unpaid losses and loss expenses at beginning of year......................... $1,437,930 $1,160,392 $ 650,180 Unpaid losses and loss expenses assumed in respect of acquired companies............. 34,735 -- 116,222 ---------- ---------- ---------- 1,472,665 1,160,392 766,402 ---------- ---------- ---------- Losses and loss expenses incurred in respect of losses occurring in: Current year............................. 464,824 350,653 320,556 Prior years.............................. -- -- 200,000 ---------- ---------- ---------- Total.................................. 464,824 350,653 520,556 ---------- ---------- ---------- Losses and loss expenses paid in respect of losses occurring in: Current year............................. 39,567 14,394 -- Prior years.............................. 61,809 58,721 126,566 ---------- ---------- ---------- Total.................................. 101,376 73,115 126,566 ---------- ---------- ---------- Unpaid losses and loss expenses at end of year...................................... $1,836,113 $1,437,930 $1,160,392 ========== ========== ==========
Investments The Finance Committee of the Board of Directors is responsible for the establishment of the Company's investment policy consistent with the Company's strategies, goals and objectives. The investment policy is reviewed with, and approved by, the Board of Directors. The Company's primary investment objectives are to ensure that funds will be available to meet its insurance and reinsurance obligations and then, to maximize its rate of return on invested funds within specifically approved constraints as to credit quality, liquidity and volatility. Accordingly, the Company's investment portfolio is invested primarily in fixed income instruments of high credit quality. The Company has divided the consolidated investment portfolio into three segments. Assets which are required to match and offset certain specifically identified liabilities are segregated in an asset-liability management ("ALM") segment. The second segment, the core portfolio, supports the current general insurance exposures and is structured to have low to moderate investment risk. The remainder of the portfolio, the discretionary segment, is invested to enhance total return and return on equity by taking on additional investment risks within prudent limits. The core and discretionary portfolios are managed by professional outside managers whose performance is measured against certain recognized broad market indices. Written investment guidelines, approved by the Finance Committee, document standards to ensure portfolio liquidity and diversification, 14 maintain credit quality, and limit volatility within approved asset allocation guidelines. The use of financial futures and options contracts, as well as certain mortgage derivative securities which do not provide a planned stable structure of principal and interest payments, require prior approval from the Finance Committee. Funds are invested in both U.S. and non-U.S. dollar denominated high-quality fixed maturity and equity securities. The asset strategy allocates 20 percent of the consolidated investment portfolio to have an exposure to equities, with international equities limited to no more than 35 percent of total equities. This represents an increase from the period January 1995 to May 1996, when the equity allocation was 15 percent, with international equities limited to no more than 20 percent of total equities. The remainder of the consolidated portfolio is to be invested in fixed income securities, with international bonds limited to 5 percent of the total portfolio. Currency hedging is permitted and used at the discretion of the investment managers. Prior to the first quarter of fiscal 1995, all investments were denominated in U.S. dollars, and total equity exposure was limited to 10 percent of the consolidated investment portfolio. The fixed maturity portion of the Company's investment portfolio includes U.S. and non-U.S. government obligations, corporate bonds, mortgage-backed securities, and other investment grade securities. The Company's investment guidelines do not permit investments in non-investment grade securities and limit the total "BBB" exposure of the portfolio. To ensure diversity and limit concentrations of credit risk, no more than 5 percent of the portfolio may be invested in the obligations of any one issuer (other than the U.S. government). The Company includes its investment in Centre Reinsurance Holdings Limited, a privately held Bermuda-domiciled reinsurer specializing in finite risk reinsurance, as "other investments" in the consolidated financial statements. This investment was originally made as part of a strategic business decision and is not governed by the objectives and investment guidelines established for the consolidated investment portfolio. Applicable insurance laws and regulations do not restrict the Company's investments except that certain types of investments (such as unquoted equity securities, investments in affiliates, real estate and collateral loans) may not qualify as a "relevant asset" for purposes of satisfying Bermuda statutory requirements. See "Regulation--Bermuda." For additional information regarding the investment portfolio, including breakdowns of the sector and maturity distributions, see note 4 to the consolidated financial statements included in the 1996 Annual Report to Shareholders. Regulation Bermuda The businesses of ACE Insurance, CODA and Tempest are regulated by the Insurance Act 1978 (as amended by the Insurance Amendment Act 1995) and related regulations (the "Act"). The Act imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements and grants the Minister of Finance (the "Minister") powers to supervise, investigate and intervene in the affairs of insurance companies. The Act provides for four classes of insurance company. ACE Insurance and Tempest have been designated as Class 4 insurers, which is the designation for the largest companies requiring capital and surplus in excess of $100 million. CODA has been designated a Class 3 insurer requiring capital and surplus in excess of $1million. Each registered insurer must appoint an independent auditor to audit and report on the Statutory Financial Statements and Statutory Financial Return on an annual basis. The independent auditor must be approved by the Minister. Each Class 3 and Class 4 insurer must appoint a loss reserve specialist, who must also be approved by the Minister, to review and report on the loss reserves of the insurer on an annual basis. Class 3 and Class 4 companies are required to file their Statutory Financial Return and Statutory Financial Statements with the Registrar of Companies in Bermuda (the "Registrar"), who is the chief administrative officer under the Act, no later than four months from the insurer's fiscal year end. The Statutory Financial Return includes, among other matters, the report of the approved independent auditor; the actuarial opinion on loss 15 reserves prepared by the approved loss reserve specialist; a declaration of statutory ratios; and a solvency certificate. Both the declaration of statutory ratios and the solvency certificate must be signed by at least two directors of the insurer. United Kingdom London Representative Office The Company has established for marketing purposes, representative offices in London, England. However, all underwriting operations continue to be conducted in Bermuda. Lloyd's The Company and its relevant UK subsidiaries are subject to the regulatory jurisdiction of the Council of Lloyd's (the "Council") as a result of the acquisition by the Company of a majority interest in Methuen and the establishment of ACE Capital Limited ("ACE Capital"), a UK limited liability corporate member of Lloyd's formed in connection with the Methuen acquisition. In addition, as part of the acquisition of Ockham Worldwide, the Company acquired a separate UK limited liability corporate member of Lloyd's, ACE London Ltd ("ACE London"), which is subject to the same regulations as ACE Capital. Unlike other financial markets in the UK, Lloyd's is not subject to direct UK government regulation through the UK Financial Services Act 1986 but, instead, is self regulating by virtue of the Lloyd's Act 1982 through bye-laws, regulations and codes of conduct made by the Council, which governs the market. Under the Council there are two Boards, the Market Board and the Regulatory Board. The former is led by working members of the Council and is responsible for strategy and the provision of services such as premium and claims handling, accounting and policy signing. The Regulatory Board is responsible for the regulation of the market, compliance and the protection of policyholders. Under the regulations, the approval of Council has to be obtained before any person can be a "major shareholder" or "controller" of a corporate member or a managing agency. The Company has been approved as a "controller". A person would be viewed by Lloyd's as a "major shareholder" of ACE Capital or ACE London if such person owns 15 percent or more of the Company's outstanding capital stock and as a "controller" if it owns 30 percent or more of the Company's outstanding capital stock. Therefore, any person that becomes the owner of 15 percent or more of the Company's stock may be required to deliver a declaration and undertaking to Lloyd's, in the form prescribed by Lloyd's, unless Lloyd's exempts such person from this requirement. Lloyd's current practice is to require from a corporate member notification of information concerning any person that becomes a "major shareholder" but only to require such a declaration and undertaking to be given if the shareholders' interest exceeds 20 percent. Lloyd's has stated that this undertaking does not make such person liable for the Lloyd's business of ACE Capital or ACE London. The Company is seeking an exemption from this requirement from Lloyd's for certain categories of investors, but there is no assurance that such an exemption will be obtained. As a "controller", the Company is required to give certain undertakings, directed principally towards ensuring that there is no direct interference in the conduct of the business of the managing agency, but there are no provisions in the Lloyd's Act 1982, the bye-laws or the regulations which provide for any liabilities of ACE Capital or Methuen to be met by the Company. In addition, a managing agency is required to comply with various capital and solvency requirements, and to submit to regular monitoring and compliance procedures. ACE Capital and ACE London, as corporate members of Lloyd's, are each required to commit an amount broadly equal to 50 percent of their underwriting capacity on the syndicates to support its underwriting on those syndicates. Under English law, if any person that holds or subsequently becomes the holder of more than 5 percent of the Company's stock also owns any interest in a Lloyd's broker or is a partner or a director of a Lloyd's broker, that Lloyd's broker risks losing its Lloyd's license. For these purposes "Lloyd's broker" includes the holding company of a corporate Lloyd's broker, any company which controls (a test based on one-third voting rights or 16 control of the board) such a Lloyd's broker or its holding company or if the Lloyd's broker is a partnership any person who controls (on a similar test) such a Lloyd's broker or one of its partners. United States of America The Company and its insurance subsidiaries, excluding its Lloyd's operations, are not admitted to do business as insurers in any jurisdiction in the U.S. Each state in the U.S. licenses insurers and prohibits, with some exceptions, the sale of insurance products by non-admitted insurers within their applicable jurisdictions. The Company conducts its business from its offices in Bermuda. All of the Company's insurance clients are obtained through non-U.S. insurance brokers and non-U.S. affiliates of U.S. insurance brokers. All policies are issued and delivered and premiums are received in Bermuda. Based on, among other things, the foregoing, the Company does not believe it is in violation of the insurance laws of any state in the U.S. Many states impose a premium tax (typically 2 percent to 4 percent of gross premiums) on insureds obtaining insurance from nonadmitted foreign insurers, such as ACE Insurance and CODA. The premiums charged by the Company do not include any American state premium tax. Each insured is responsible for determining whether it is subject to any such tax and for paying such tax as may be due. The U.S. also imposes on policyholders an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rates of tax applicable to premiums paid to ACE Insurance and CODA are 4 percent or insurance premiums and 1 percent for reinsurance premiums. The Company has from time to time received inquiries from certain U.S. state insurance regulators regarding the Company's activities in a particular jurisdiction. To date only the State of Nevada Department of Insurance has formally challenged the insurance activities of the Company and that challenge was resolved in favor of the Company by legislation. There can be no assurance that additional challenges will not be raised in the future or that the Company will be able to successfully defend against such challenges. Such challenges may arise, among other things, in connection with actions seeking the payment of state premium taxes from insureds. In the event that the Company is not able to successfully defend against challenges by certain U.S. jurisdictions, the Company's business could be adversely affected in the short term. However, should this occur, the Company could elect to qualify as a surplus lines insurer in such U.S. jurisdictions as were necessary. Were it necessary to do so, the Company believes that generally it could meet and comply with the prescribed legislative requirements, and such compliance would not have a material impact on the ability of the Company to conduct its business or its results of operations. If the Company is unable to defend successfully against challenges of U.S. jurisdiction, it is possible that a policyholder could attempt to sue the Company in a U.S. court. Although the Company's policies have a mandatory arbitration clause for coverage disputes, courts in some states can impose damages in excess of policy limits if an insurer is found to have improperly and in bad faith declined coverage. If a U.S. court took jurisdiction of such a claim, it is possible that the Company's exposure could be significantly greater than policy limits. There can be no assurance that new or additional legislation will not be proposed and enacted that has the effect of subjecting the Company to regulation in the U.S. 17 Tax Matters United States of America Corporate Income Tax ACE is a Cayman Islands corporation and has never paid U.S. corporate income taxes (other than withholding taxes on dividend income) on the basis that it is not engaged in a trade or business in the U.S.; however, there can be no assurance that the Internal Revenue Service ("IRS") will not contend to the contrary. If the Company were subject to U.S. income tax, there could be a material adverse effect on the Company's shareholders' equity and earnings. The Company and its subsidiaries do not file U.S. income tax returns reporting income subject to U.S. income tax since they do not conduct business within the U.S. except that the Company and its insurance subsidiaries have filed protective tax returns reporting no U.S. income to preserve their ability to deduct their ordinary and necessary business expenses should the IRS successfully challenge the Company's contention that none of its income is subject to a net income tax in the U.S. Related Person Insurance Income Each U.S. person who beneficially owns Ordinary Shares of the Company (directly or through foreign entities) on the last day of an insurance company subsidiary's fiscal year will have to include in such person's gross income for U.S. tax purposes a proportionate share (determined as described herein) of the related person insurance income ("RPII") of such insurance company subsidiary if the RPII of such insurance company subsidiary, determined on a gross basis, is 20 percent or more of that insurance company subsidiary's gross insurance income in such fiscal year. RPII is income attributable to insurance policies where the direct or indirect insureds are U.S. shareholders or are related to U.S. shareholders of the Company. RPII may be includible in a U.S. shareholder's gross income for U.S. tax purposes regardless of whether or not such shareholder is an insured. For the fiscal year ended September 30, 1996, the Company believes that gross RPII of each of its insurance company subsidiaries was below 20 percent for the year. Although no assurances can be given, the Company anticipates that gross RPII of each of its insurance company subsidiaries will be less than 20 percent of each such subsidiary's gross insurance income for subsequent years and the Company will endeavor to take such steps as it determines to be reasonable to cause its gross RPII to remain below such level. The RPII provisions of the Internal Revenue Code of 1986, as amended (the "Code"), have never been interpreted by the courts. Regulations interpreting the RPII provisions of the Code exist only in proposed form, having been proposed on April 16, 1991. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts, or otherwise, might have retroactive effect. For a more detailed discussion of RPII and other tax matters pertaining to an investment in the Company's shares, reference is hereby made to the section entitled "Taxation of Ace and its Shareholders" in the Company's Registration Statement on Form S-4 (No. 333- 04153), which section is incorporated by reference herein. United Kingdom Lloyd's is required to pay U.S. income tax on U.S. connected income ("U.S. income") written by Lloyd's syndicates. Lloyd's has a closing agreement with the IRS whereby the amount of tax due on this business is calculated by Lloyd's and remitted directly to the IRS. These amounts are then charged to the personal accounts of the Names in proportion to their participation in the relevant syndicates. ACE Capital is subject to this arrangement but, as a UK domiciled company, will receive UK corporation tax credits for any U.S. income tax incurred up to the value of the equivalent UK corporation income tax charge on the U.S. income. Methuen and Ockham Worldwide are subject to UK corporation tax and value added tax. The Company's corporate subsidiary which has acquired Methuen and Ockham Worldwide and ACE Capital and ACE London Ltd., the Lloyd's corporate members participating in the managed by MUL, ALVL and ALUL syndicates are also subject to UK corporation tax and value added tax. 18 Although the Company has representative offices in London, it has been advised that it is not deemed to be doing insurance business in the UK and therefore is subject only to minimal tax in the UK. With effect from October 1, 1994, the UK imposed an insurance premium tax on that portion of policies related to certain UK risks. ACE has registered to collect and pay this tax on behalf of UK domiciled policyholders. Bermuda Under current Bermuda law, the Company is not required to pay any taxes on its income or capital gains. The Company has received an undertaking from the Minister of Finance that, in the event of any taxes being imposed, the Company will be exempt from taxation in Bermuda until March 2016. Employees At September 30, 1996, the Company employed a total of 256 persons, 118 of whom were located in Bermuda and 138 in London. Of the 118 persons employed in Bermuda, 14 are employed by Tempest. Of the 138 persons employed in London, 134 are employed by Methuen. None of these employees is represented by a labor union. 19 GLOSSARY OF SELECTED INSURANCE TERMS Catastrophe Excess of Loss Catastrophe excess of loss reinsur- Reinsurance............................ ance provides coverage to a primary insurer when aggregate claims and claim expenses from a single occur- rence of a peril covered under a portfolio of primary insurance con- tracts written by the insurer exceed the attachment point specified in the reinsurance contract with the insur- er. Claims made form....................... Insurance coverage which is dependent upon the filing of a claim, which must normally fall within the policy period. IBNR loss reserves..................... The reserves included in the Company's financial statements under the caption "Unpaid Losses and Loss Expenses" for the estimated ultimate unpaid liability which the Company has incurred under the terms of the Company's policies and agreements, less case reserves. Integrated occurrence.................. All losses attributable directly or indirectly to the same event, condi- tion, cause, defect or hazard or failure to warn of such which are added together and treated as one oc- currence under an insured's policy. Occurrence first reported.............. Manuscripted form of stand-alone in- surance coverage offered by the Com- pany, which generally ties the limits available and other policy terms to the date on which an occurrence is first reported to the Company. Proportional Property Reinsurance...... Proportional property reinsurance treaties assume a specified percent- age of the risk exposure under a portfolio of primary insurance con- tracts written by the ceding insurer and receive an equal percentage of the premium received by the ceding insurer. Stand alone basis...................... A term referring to an insurance pol- icy which is governed by its own terms, conditions, exclusions and re- tention and does not incorporate the terms, conditions or exclusions of underlying policies. Reinsurance............................ A form of insurance in which the re- insurer, in consideration for a pre- mium paid to it, agrees to indemnify the reinsured ("the ceding company") for part or all of the liability as- sumed by the ceding company. Risk Excess of Loss Reinsurance........ Property per risk excess of loss re- insurance responds to a loss of the reinsured in excess of its retention level on a single "risk", rather than to aggregate losses for all covered risks. A risk in this context might mean the insurance coverage on one building or a group of buildings. Treaty Reinsurance..................... A reinsurance agreement whereby the ceding company is obligated to offer and the reinsurer is obligated to ac- cept a specified portion of all such type or category of risks originally insured by the ceding company. 20 ITEM 2. PROPERTIES The Company leases office space in Hamilton, Bermuda for its principal offices. The lessor is a joint venture in which the Company has a 40 percent interest and there is an agreement with the joint venture partner which ensures the Company's ability to occupy a portion of the building until 2011. Tempest also leases office space in Hamilton, Bermuda for its principle offices under a non-cancelable lease expiring in 1998 with a three year renewal option. Methuen leases office space at 122 Leadenhall Street, London, England for its principal offices. The lease expires in June 2012. Methuen also leases an office in the 1986 Lloyd's Building in London. The lease has termination dates of September 2001 and 2006. ITEM 3. LEGAL PROCEEDINGS The Company, in common with the insurance industry in general, is subject to litigation in the normal course of its business. Although all of the Company's policies provide for resolution of disputes by arbitration in Bermuda or London, the Company has been sued by insureds several times in the United States and, with one exception which is currently on appeal, has been successful in either being dismissed from such suits or in having such suits dismissed on procedural grounds or stayed pending the results of arbitration. In addition, the Company is occasionally named as a party in Louisiana "direct action" suits by insureds. The Company has sought dismissal of these actions as well and decisions are pending in these actions. At September 30, 1996, the Company was not a party to any material litigation other than as encountered in claims activity and none of such litigation is expected by management to have a materially adverse effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Other then the Extraordinary General Meeting held on July 1, 1996 which was reported in the Company's June 30, 1996 Form 10-Q, no matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE COMPANY The table below sets forth the names, ages, positions and business experience of the executive officers of the Company.
NAME AGE POSITION ---- --- -------- Brian 49 Chairman, President and Chief Executive Officer and Director Duperreault Donald 59 Vice Chairman and Director; Kramer President and Chief Executive Officer of Tempest Reinsurance Company Limited Dominic J. 43 Executive Vice President, Underwriting Frederico William J. 57 Executive Vice President; Chairman of ACE UK Limited Loschert Christopher 40 Executive Vice President and Chief Financial Officer Z. Marshall Peter N. 52 Executive Vice President, Claims and General Counsel Mear John C. 49 Senior Vice President and Chief Actuary Burville Robin J.W. 41 Senior Vice President and Treasurer Masters Keith P. 53 Senior Vice President, Administration and Assistant Secretary White George Rivaz 33 Executive Vice President and Chief Underwriter of Tempest Reinsurance Company Limited Leslie D. 50 Chief Executive of Methuen Underwriting Limited Goodman
21 Brian Duperreault has served as Chairman, President and Chief Executive Officer and as a director of the Company since October 1, 1994. Mr. Duperreault joined AIG in 1973 and served in various senior executive positions with AIG from 1978 until September 1994, most recently as Executive Vice President, Foreign General Insurance and concurrently as Chairman and Chief Executive Officer of American International Underwriters, from April 1994 to September 1994. Mr. Duperreault was President of American International Underwriters, an affiliate of AIG, from 1991 to 1994, and Chief Executive Officer of AIG companies in Japan and Korea, from 1989 until 1991. Donald Kramer has served as Vice Chairman and a director of the Company and Chairman and Chief Executive Officer of Tempest since July 1996. Mr. Kramer previously served as Chairman of Tempest and was instrumental in the formation of Tempest in September 1993. Mr. Kramer was previously Chief Executive Officer of Kramer Capital Corp., North American Insurance Company of California and was the founder and Chairman of NAC Re Corp. where he served until his retirement in June 1993. Dominic J. Frederico has served as Executive Vice President, Underwriting since December 1, 1996, and as Executive Vice President, Financial Lines from January 1995 to December 1, 1996. Mr. Frederico served in various capacities at AIG in Europe and the U.S. from 1982 to January 1995, most recently as Senior Vice President and Chief Financial Officer of an AIG subsidiary, with multi- regional general management responsibilities. William J. Loschert was appointed as Chairman of ACE UK Limited with effect from December 1, 1996 to oversee the Company's insurance operations at Lloyd's. Mr. Loschert previously served as Executive Vice President, Underwriting of the Company since January 1986. Christopher Z. Marshall has served as Executive Vice President and Chief Financial Officer of the Company since November 1992 and as Senior Vice President, Finance of the Company from January 1990 to November 1992. Peter N. Mear has served as Executive Vice President, Claims and General Counsel of the Company since April 1996. Mr. Mear served as Vice President and Claims Counsel of Aetna Casualty and Surety Company from February 1991 to April 1996 and Counsel and Litigation Section Head of Aetna Life & Casualty from September 1977 to February 1991. John C. Burville has served as Senior Vice President and Chief Actuary of the Company since January 1992. Mr. Burville served as managing actuarial consultant with Tillinghast, Nelson & Warren (Bermuda) Ltd. (management consulting and actuaries) from March 1986 to December 1991. Robin J. W. Masters has served as Senior Vice President since February 1995, as Treasurer of the Company since October 1992 and as Assistant Treasurer from February 1990 to October 1992. Keith P. White has served as Senior Vice President, Administration of the Company since January 1990. Mr. White served as Manager of the International Operations of The Bermuda Fire and Marine Insurance Company Ltd. from 1973 to 1989. George Rivaz has served as Executive Vice President and Chief Underwriter of Tempest since July 1996. Prior to joining the company, Mr. Rivaz served as a senior underwriter with General Re Underwriting Services Limited from September 1993. General Re Underwriting Services Limited provided underwriting services to Tempest. Previously, Mr. Rivaz was with Syndicate 1095 (managed by the Wellington Underwriting Agency) at Lloyd's. Leslie D. Goodman has served as Chief Executive of MUL since October 1, 1994. Prior to joining MUL, Mr. Goodman served as Chief Executive of Jardine Lloyd's Advisors Limited, a Lloyd's agency representing the interests of capital providers to the Lloyd's market. 22 PART II ITEM 5. MARKET FOR THE REGISTRANT'S ORDINARY SHARES AND RELATED STOCKHOLDER MATTERS (a) The Company's Ordinary Shares, par value $0.125 per share, have been listed on the New York Stock Exchange since March 25, 1993, under the symbol ACL. The following table sets forth the high and low closing sales prices of the Company's Ordinary Shares per fiscal quarters, as reported on the New York Stock Exchange Composite Tape for the periods indicated.
FISCAL 1996 FISCAL 1995 ------------- ------------- HIGH LOW HIGH LOW ------ ------ ------ ------ First Quarter................................. 39 3/4 33 25 1/4 20 3/4 Second Quarter................................ 48 3/4 38 25 7/8 22 1/8 Third Quarter................................. 49 1/4 41 3/4 30 5/8 24 3/8 Fourth Quarter................................ 52 7/8 41 3/4 34 3/8 28 1/2
The last reported sale price of the Ordinary Shares on the New York Stock Exchange Composite Tape on December 13, 1996 was $59 3/4. (b) The approximate number of record holders of Ordinary Shares as of December 13, 1996 was 202. (c) The Company paid two quarterly dividends of $0.14 per share to all shareholders of record on December 29, 1995 and March 29, 1996, and two quarterly dividends of $0.18 per share to all shareholders of record on June 14, 1996 and September 30, 1996. On November 15, 1996 the Company declared a quarterly dividend of $0.18 per Ordinary Share, payable on January 17, 1997 to shareholders of record on December 31, 1996. During 1996, the Company repurchased 1,268,600 Ordinary Shares under share repurchase programs for an aggregate cost of $57.8 million. On August 9, 1996, the Board of Directors authorized a new program for up to $100.0 million of the Company's Ordinary Shares. This program superceded and replaced the balance of the February 3, 1995 authorization. At September 30, 1996, $65.8 million of the Board authorization had not been utilized. During 1995 the Company repurchased 1,332,300 Ordinary Shares under share repurchase programs for an aggregate cost of $33.5 million. As of December 13, 1996 the remaining $63.6 million of the Board authorization had not been utilized. The Company is a holding company whose principal source of income is investment income and dividends from its operating subsidiaries. The ability of the operating subsidiaries to pay dividends to the Company and the Company's ability to pay dividends to its shareholders are each subject to legal and regulatory restrictions. The declaration and payment of future dividends will be 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. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-- Liquidity and Capital Resources" in the 1996 Annual Report to Shareholders filed with this Form 10-K. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended September 30, 1996 is incorporated by reference to pages 16 and 17 of the 1996 Annual Report to Shareholders filed with this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This item is incorporated by reference to pages 18 and 27 of the 1996 Annual Report to Shareholders. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This item is incorporated by reference to pages 28 and 46 of the 1996 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in nor any disagreements with accountants on accounting and financial disclosure within the 24 months ended September 30, 1996. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This item is incorporated by reference to the sections entitled "Election of Directors--Nominees for Election to Terms Expiring in 1999", "Election of Directors--Nominees for Election to Terms Expiring in 2000" and "--Directors Whose Terms of Office Will Continue After This Meeting" of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on February 7, 1997, which involves the election of directors and will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to regulation 14A. ITEM 11. EXECUTIVE COMPENSATION This item is incorporated by reference to the section entitled "Executive Compensation" of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on February 7, 1997, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to regulation 14A. ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This item is incorporated by reference to the section entitled "Beneficial Ownership of Ordinary Shares" of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on February 7, 1997, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This item is incorporated by reference to the section entitled "Election of Directors--Certain Business Relationships" of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on February 7, 1997, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS 1. Financial Statements The following is a list of financial statements filed as part of this Report, all of which have been incorporated by reference to the material in the Annual Report to Shareholders as described under item 8 of this Report --Report of Independent Accountants --Consolidated Balance Sheets at September 30, 1996 and 1995 24 --Consolidated Statements of Operations for the years ended September 30, 1996,1995 and 1994 --Consolidated Statements of Shareholders' Equity for the years ended September 30,1996, 1995 and 1994 --Consolidated Statements of Cash Flows for the years ended September 30, 1996,1995 and 1994 --Notes to Consolidated Financial Statements. 2. Financial Statement Schedules Included in Part IV of this report.
SCHEDULE NUMBER PAGE -------- ---- --Report of Independent Accountants on financial statement schedules included in Form 10-K 24 --Summary of Investments I 25 --Condensed financial information of the Registrant as of September 30, 1996 and 1995, and for the years ended September 30, 1996, 1995 and 1994 II 26 --Supplemental information concerning Property/Casualty Insurance Operations VI 29
Other schedules have been omitted as they are not applicable to the Company, or the required information has been included in the financial statements and related notes. 3. Exhibits 2.1 Agreement and Plan of Amal- gamation, dated as of March 14, 1996, by and among ACE Limited, TRCL Acquisition Limited and Tempest Rein- surance Com- pany Limited (incorporated by reference to Exhibit 2.1 to Form S-4 of the Company (No. 333-04153)). 3.1 Memorandum of Association of the Compa- ny, (incorpo- rated by ref- erence to Ex- hibit 3.1 to the Registra- tion State- ment on Form S-1 of the Company (No. 33-57206)). 3.2 Articles of Association of the Compa- ny, (incorpo- rated by ref- erence to Ex- hibit 3.2 to the Registra- tion State- ment on Form S-1 of the Company (No. 33-57206)). 4.1 Memorandum of Association of the Com- pany (see Ex- hibit 3.1). 4.2 Articles of Association of the Com- pany (see Ex- hibit 3.2). 4.3 Specimen cer- tificate rep- resenting Or- dinary Shares, (in- corporated by reference to Exhibit 3.1 to the Regis- tration Statement on Form S-1 of the Company (No. 33- 57206)). 10.1 Employment Agreement dated Decem- ber 23, 1985, between ACE Limited, A.C.E. Insur- ance Company Ltd., and William J. Loschert, (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of the Company (No. 33- 57206)). 10.2 Employment Agreement dated January 1, 1986, be- tween ACE Limited, A.C.E. Insur- ance Company Ltd., and Christopher Z. Marshall, (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1 of the Company (No. 33- 57206)). 10.3 ACE Limited Annual Per- formance In- centive Plan, (incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 of the Company (No. 33- 57206)). 10.4 ACE Limited Equity Linked Incentive Plan, (incor- porated by reference to Exhibit 10.14 to the Regis- tration Statement on Form S-1 of the Company (No. 33- 57206)).
25 10.5 Amendment to ACE Limited Equity Linked Incentive Plan, (incorporated by reference to Exhibit 10.15 to the Registra- tion Statement on Form S-1 of the Company (No. 33-57206)). 10.6 ACE Limited Employee Re- tirement Plan, (incorpo- rated by reference to Exhibit 10.21 to the Registration Statement on Form S-1 of the Com- pany (No. 33-57206)). 10.7 First Amendment to ACE Limited Employee Retire- ment Plan, (incorporated by reference to Exhibit 10.22 to the Registra- tion Statement on Form S-1 of the Company (No. 33-57206)). 10.8 Second Amendment to ACE Limited Employee Retire- ment Plan, (incorporated by reference to Exhibit 10.23 to the Registra- tion Statement on Form S-1 of the Company (No. 33-57206)). 10.9 Third Amendment to ACE Limited Employee Retire- ment Plan, (incorporated by reference to Exhibit 10.24 to the Registra- tion Statement on Form S-1 of the Company (No. 33-57206)). 10.10 ACE Limited Supplemental Retirement Plan, (incor- porated by reference to Exhibit 10.25 to the Registration Statement on Form S-1 of the Com- pany (No. 33-57206)). 10.11 First Amendment to ACE Limited Supplemental Re- tirement Plan, (incorpo- rated by reference to Exhibit 10.26 to the Registration Statement on Form S-1 of the Com- pany (No. 33-57206)). 10.12 Second Amendment to ACE Limited Supplemental Re- tirement Plan, (incorpo- rated by reference to Exhibit 10.27 to the Registration Statement on Form S-1 of the Com- pany (No. 33-57206)). 10.13 Form of restricted stock award dated August 24, 1993 to ACE Limited Di- rectors, (incorporated by reference to Exhibit 10.39 to Form 10-K of the Company for the year ended September 30, 1993). 10.14 Employment Agreement, dated October 1, 1994, between ACE Limited and Brian Duperreault (in- corporated by reference to Exhibit 10.42 to Form 10-K of the Company for the year ended September 30, 1994). 10.15 Option and Restricted Share Agreement, dated October 1, 1994, between ACE Limited and Brian Duperreault (incorpo- rated by reference to Exhibit 10.43 to Form 10-K of the Company for the year ended September 30, 1994). 10.16 Consulting Agreement, effective October 1, 1994, between ACE Lim- ited and Walter A. Scott (incorporated by refer- ence to Exhibit 10.44 to Form 10-K of the Company for the year ended Sep- tember 30, 1994). 10.17 Employment Agreement, dated January 9, 1995, between ACE Limited and Dominic J. Frederico (incorporated by refer- ence to Exhibit 10.45 to Form 10-K of the Company for the year ended Sep- tember 30, 1995). 10.18 Second amendment to ACE Limited Equity Linked Incentive Plan (incorpo- rated by reference to Exhibit 10.45 to Form 10-K of the Company for the year ended September 30, 1995). 10.19 Loan Agreement between the Company and a syndi- cate of banks dated No- vember 17, 1995 (incor- porated by reference to Exhibit 10.47 to Form 10-K of the Company for the year ended September 30, 1995). 10.20 Employment Agreement, dated April 1, 1996, be- tween ACE Limited and Peter N. Mear (incorpo- rated by reference to Exhibit 10.48 to Form 10-Q of the Company for the quarter ended June 30, 1996).
26 10.21 ACE Limited 1995 Long Term Incentive Plan (in- corporated by reference to Exhibit 10.35 to Form 10-Q of the Company for the quarter ended March 31, 1996). 10.22 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.36 to Form 10-Q of the Company for the quarter ended March 31, 1996). 10.23 1995 Outside Directors Plan (incorporated by reference to Exhibit 10.37 to Form 10-Q of the Company for the quarter ended March 31, 1996). 10.24 ACE Limited 1996 Tempest Replacement Option Plan. 10.25 Credit Agreement between the Company and a syndi- cate of banks dated No- vember 15, 1996. 10.26 Reimbursement Agreement and Pledge Agreement be- tween the Company and a syndicate of banks dated November 22, 1996. 10.27 First Amendment of ACE Limited 1995 Long Term Incentive Plan. 11.1 Statement regarding com- putation of per share earnings. 13.1 Pages 16 through 45 of the 1996 Annual Report to Shareholders. 21.1 Subsidiaries of the Com- pany. 23.1 Consent of Coopers & Lybrand L.L.P. 27.1 Financial Data Schedule 99.1 Extracts from the Company's Registration Statement on Form S-4 (No. 333-04153) concerning taxation of ACE and its Sharehold- ers.
(b) REPORTS ON FORM 8-K The Company has filed no reports on Form 8-K for the fourth quarter ended September 30, 1996. 27 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES INCLUDED IN FORM 10-K Our report on the consolidated financial statements of ACE LIMITED AND SUBSIDIARIES has been incorporated by reference in this Form 10-K from page 28 of the 1996 Annual Report to Shareholders of ACE Limited. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in item 14 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as whole, present fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P New York, New York November 7, 1996 28 SCHEDULE I ACE LIMITED AND SUBSIDIARIES SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES SEPTEMBER 30, 1996
AMOUNT AT WHICH COST OR FAIR SHOWN IN THE AMORTIZED COST VALUE BALANCE SHEET -------------- --------- --------------- (IN THOUSANDS OF U.S. DOLLARS) FIXED MATURITIES: Bonds: U.S. Treasury and agency.......... 971,615 973,362 973,362 Non-U.S. governments.............. 191,727 190,999 190,999 Corporate securities.............. 948,694 950,532 950,532 Mortgage-backed securities........ 1,282,401 1,274,869 1,274,869 --------- --------- --------- Total fixed maturities.......... 3,394,437 3,389,762 3,389,762 --------- --------- --------- EQUITY SECURITIES: Common stock: Public utilities.................. 21,275 27,987 27,987 Banks, trust and insurance companies........................ 22,756 27,149 27,149 Industrial, miscellaneous and all other............................ 208,415 262,824 262,824 Non redeemable preferred stock...... 4,603 5,045 5,045 --------- --------- --------- Total equity securities......... 257,049 323,005 323,005 --------- --------- --------- Other investments................... 12,453 12,453 12,453 --------- --------- --------- Short-term investments and cash..... 430,054 430,054 430,054 --------- --------- --------- Total investments and cash...... 4,093,993 4,155,274 4,155,274 ========= ========= =========
29 SCHEDULE II ACE LIMITED AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (PARENT COMPANY ONLY) SEPTEMBER 30, 1996 AND 1995
1996 1995 ---------- ---------- (IN THOUSANDS OF U.S. DOLLARS) ASSETS Investments and cash Investments in subsidiaries and affiliate on equity basis.................................... $2,252,319 $1,542,126 Other investments, at cost ...................... 12,453 12,453 Cash............................................. 2,297 55 ---------- ---------- Total investments and cash..................... 2,267,069 1,554,634 Other assets....................................... 11,435 11,951 ---------- ---------- Total assets................................... $2,278,504 $1,566,585 ========== ========== LIABILITIES Due to subsidiaries and affiliate, net............. $ 6,944 $ 10,980 Advances from affiliate............................ -- 96,299 Accounts payable and accrued liabilities........... 16,812 10,187 Dividend payable................................... 10,470 6,456 ---------- ---------- Total liabilities.............................. 34,226 123,922 ---------- ---------- SHAREHOLDERS' EQUITY Ordinary shares.................................... 7,271 5,764 Additional paid-in capital......................... 1,156,194 548,513 Unearned stock grant compensation.................. (1,299) (1,796) Net unrealized appreciation on investments......... 61,281 94,694 Cumulative translation adjustment.................. 131 -- Retained earnings.................................. 1,020,700 795,488 ---------- ---------- Total shareholders' equity..................... 2,244,278 1,442,663 ---------- ---------- Total liabilities and shareholders' equity..... $2,278,504 $1,566,585 ========== ==========
30 SCHEDULE II--(CONTINUED) ACE LIMITED AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY) FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994 -------- -------- -------- (IN THOUSANDS OF U.S. DOLLARS) Revenues Management fees................................ $ 21,081 $ 17,580 $ 6,600 Investment income, including intercompany interest income (expense)..................... (6,881) (9,034) 2,036 Equity in net (loss) income of subsidiaries and affiliate..................................... 313,359 254,901 (95,551) Net realized gains on investments.............. -- -- 57,678 -------- -------- -------- 327,559 263,447 (29,237) Expenses Administrative expenses........................ (37,826) (25,881) (16,441) -------- -------- -------- Net income (loss)............................ $289,733 $237,566 $(45,678) ======== ======== ========
31 SCHEDULE II--(CONTINUED) ACE LIMITED AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994 --------- --------- --------- (IN THOUSANDS OF U.S. DOLLARS) Cash flows from operating activities Net income (loss)........................... $ 289,733 $ 237,566 $ (45,678) Adjustments to reconcile net income (loss) to net cash provided by operating activities Equity in net income of subsidiaries and affiliate................................ (313,359) (254,901) 95,551 Realized gains on investments............. -- -- (57,678) Amounts due to subsidiaries and affiliate, net...................................... (4,036) (475) (23,628) Accounts payable and accrued liabilities.. 6,625 2,414 (942) Accrued interest on advances to affiliate. (9,729) 8,682 49,713 Other..................................... (3,957) (2,935) (2,188) --------- --------- --------- Net cash flows from (used for) operating activities............................. (34,723) (9,649) 15,150 --------- --------- --------- Cash flows from investing activities Sale of equity securities................... -- -- 128,382 Capitalization of subsidiary................ 74,123 -- (200,000) Capital contributions to subsidiary......... -- -- (100,000) Dividends received from subsidiaries........ 135,000 -- 40,000 Advances to affiliate....................... (284,620) (300) (165,546) Repayment of advances to affiliate.......... -- -- 345,023 --------- --------- --------- Net cash from (used for) investing activities............................. (75,497) (300) 47,859 --------- --------- --------- Cash flows from financing activities Proceeds from exercise of options for shares..................................... 28 168 5 Repurchase of Ordinary Shares............... (57,931) (33,514) (65,312) Dividends paid.............................. (27,685) (22,058) (19,900) Proceeds from loans......................... -- -- 166,000 Loan payments............................... -- -- (166,000) Advances from affiliate..................... 198,050 63,350 23,520 --------- --------- --------- Net cash from (used for) financing activities............................. 112,462 7,946 (61,687) --------- --------- --------- Net increase (decrease) in cash............... 2,242 (2,003) 1,322 Cash--beginning of year....................... 55 2,058 736 --------- --------- --------- Cash--end of year............................. $ 2,297 $ 55 $ 2,058 ========= ========= =========
32 SCHEDULE VI ACE LIMITED AND SUBSIDIARIES SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY OPERATIONS
LOSSES AND LOSS EXPENSES RESERVES INCURRED RELATED FOR UNPAID TO AMORTIZATION PAID DEFERRED LOSSES NET ----------------- OF DEFERRED LOSSES NET ACQUISITION AND LOSS UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION AND LOSS PREMIUMS COSTS EXPENSES PREMIUM PREMIUM INCOME YEAR YEARS COSTS EXPENSES WRITTEN ----------- ---------- -------- -------- ---------- -------- -------- ------------ -------- -------- (IN THOUSANDS OF U.S. DOLLARS) 1996.............. $34,546 $1,836,113 $398,731 $587,245 $206,524 $464,824 -- $52,954 $101,376 $602,707 1995.............. $34,428 $1,437,930 $309,722 $428,661 $181,375 $350,653 -- $46,647 $ 73,115 $424,756 1994.............. $37,444 $1,160,392 $309,473 $391,117 $142,677 $320,556 $200,000 $45,849 $126,566 $385,926
33 SIGNATURE PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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 Christopher Z. Marshall By: _________________________________ Christopher Z. Marshall Executive Vice President and Chief Financial Officer December 19, 1996 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- Brian Duperreault - ------------------------------------ Brian Duperreault Chairman, President and Chief Executive Officer; Director December 19, 1996 Christopher Z. Marshall - ------------------------------------ Christopher Z. Marshall Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) December 19, 1996 Donald Kramer - ------------------------------------ Donald Kramer Vice Chairman; Director December 19, 1996 Michael G. Atieh - ------------------------------------ Michael G. Atieh Director December 19, 1996 Bruce L. Crockett - ------------------------------------ Bruce L. Crockett Director December 19, 1996 Jeffrey W. Greenberg - ------------------------------------ Jeffrey W. Greenberg Director December 19, 1996 Meryl D. Hartzband - ------------------------------------ Meryl D. Hartzband Director December 19, 1996 Robert M. Hernandez - ------------------------------------ Robert M. Hernandez Director December 19, 1996
34
SIGNATURE TITLE DATE --------- ----- ---- Andrew J. Markey - ------------------------------------ Andrew J. Markey Director December 19, 1996 Peter Menikoff - ------------------------------------ Peter Menikoff Director December 19, 1996 Glen M. Renfew - ------------------------------------ Glen M. Renfew Director December 19, 1996 Robert Ripp - ------------------------------------ Robert Ripp Director December 19, 1996 Walter A. Scott - ------------------------------------ Walter A. Scott Director December 19, 1996 Robert W. Staley - ------------------------------------ Robert W. Staley Director December 19, 1996 Gary M. Stuart - ------------------------------------ Gary M. Stuart Director December 19, 1996 Sidney F. Wentz - ------------------------------------ Sidney F. Wentz Director December 19, 1996
35 EX-10.24 2 TEMPEST REPLACEMENT OPTION PLAN. DRAFT 9/9/96 ACE LIMITED 1996 REPLACEMENT OPTION PLAN TABLE OF CONTENTS SECTION 1 1 GENERAL 1 1.1. Purpose 1 1.2. Participation 1 1.3. Operation and Administration 1 SECTION 2 1 OPTIONS 1 2.1. Definition 1 2.2. Eligibility 1 2.3. Price 2 2.4. Exercise 2 2.5. Expiration Date 3 2.6. Termination of Employment 3 2.7. Termination as Non-Employee Director 3 2.8. Pre-Effective Date Terminations 4 SECTION 3 OPERATION AND ADMINISTRATION 4 3.1. Effective Date 4 3.2. Adjustments to Shares 4 3.3. Limit on Distribution 7 3.4. Withholding 7 3.5. Distributions to Disabled Persons 8 3.6. Transferability 8 3.7. Administration 8 3.8. Notices 8 3.9. Form and Time of Elections 8 3.10. Agreement With Company 8 3.11. Limitation of Implied Rights 9 3.12. Benefits Under Qualified Retirement Plans 9 3.13. Evidence 9 3.14. Action by Employers 9 3.15. Gender and Number 10 SECTION 4 10 CHANGE IN CONTROL 10 SECTION 5 10 COMMITTEE 10 5.1. Selection of Committee 10 5.2. Powers of Committee 10 5.3. Delegation by Committee 11 5.4. Information to be Furnished to Committee 11 5.5. Liability and Indemnification of Committee 11 SECTION 6 12 AMENDMENT AND TERMINATION 12 SECTION 7 12 DEFINED TERMS 12 Board 12 Cause 12 Change in Control 12 Code 13 Date of Termination 13 Disability 14 Dollars 14 Effective Date 14 Employer 14 Fair Market Value 14 Non-Employee Director 14 Qualified Retirement Plan 14 Related Companies 14 Replacement Option 15 Retirement 15 SEC 15 Stock 15 ACE LIMITED 1996 REPLACEMENT OPTION PLAN ----------------------- SECTION 1 --------- GENERAL ------- Purpose. The ACE Limited 1996 Replacement Option Plan (the "Plan") has been established by ACE Limited (the "Company") to award Replacement Options in satisfaction of its obligation under Section 5.11 of the Agreement and Plan of Amalgamation, dated as of March 14, 1996, as amended (the "Amalgamation Agreement") by and among the Company, TRCL Acquisition Limited, and Tempest Reinsurance Company Limited ("Tempest"). Participation. Subject to the terms and conditions of the Plan, participation in the Plan shall be limited to those persons entitled to Replacement Options pursuant to the Amalgamation Agreement. Operation and Administration. The operation and administration of the Plan, including the Replacement Options granted under the Plan, shall be subject to the provisions of Section 3. Capitalized terms in the Plan shall be defined as set forth in Section 7 or elsewhere in the Plan. SECTION ------- OPTIONS ------- Definition. The grant of a Replacement Option under this Section 2 entitles the Participant to purchase shares of Stock at a price fixed at the time the Replacement Option is granted, as determined in accordance with the Amalgamation Agreement, subject to the terms of this Section 2. Options granted under this Section 2 shall be Non-Qualified Options. A "Non-Qualified Option" is an option that is not intended to be an "incentive stock option" as that term is described in section 422(b) of the Code. Eligibility. Replacement Options shall be awarded by the Committee under this Section 2 to the extent required by the terms of the Amalgamation Agreement. Individuals to whom Replacement Options are granted shall thereby become "Participants" in the Plan, and the Committee shall determine the number of shares of Stock to be subject to each such Replacement Option, all in accordance with the terms of the Amalgamation Agreement. Price. The determination and payment of the purchase price of a share of Stock under each Replacement Option granted under this Section 2 shall be subject to the following: The purchase price shall be established by the Committee in accordance with the Amalgamation Agreement. Subject to the following provisions of this subsection 2.3, the full purchase price of each share of Stock purchased upon the exercise of any Replacement Option shall be paid at the time of such exercise and, as soon as practicable thereafter, a certificate representing the shares so purchased shall be delivered to the person entitled thereto. The purchase price shall be payable in cash or in shares of Stock (valued at Fair Market Value as of the day of exercise), or in any combination thereof, as determined by the Committee. A Participant may elect to pay the purchase price upon the exercise of an Replacement Option through a cashless exercise arrangement as may be established by the Committee. Exercise. Except as otherwise expressly provided in the Plan, a Replacement Option granted under this Section 2 shall be exercisable in accordance with the following terms of this subsection 2.4: The terms and conditions relating to exercise of a Replacement Option shall be established by the Committee, subject to the terms of the Amalgamation Agreement. Each Replacement Option granted under the Plan shall be exercisable at the time fixed by the Committee when the Replacement Option is granted, provided that the time so fixed shall be in accordance with the requirements of the Plan and the Amalgamation Agreement. Any portion of the Replacement Option that is exercisable may be exercised in whole or in part by filing a written notice with the Secretary of the Company at its corporate headquarters, provided that the notice is filed prior to the date the Replacement Option expires. Such notice shall specify the number of shares of Stock which the Participant elects to purchase, and shall be accompanied by payment of the purchase price for such shares of Stock indicated by the Participant's election. Subject to the provisions of subsection 2.3, payment shall be by cash or by check payable to the Company, or by shares of Stock (valued at Fair Market Value as of the day of exercise), or in any combination thereof. Expiration Date. The "Expiration Date" with respect to a Replacement Option means the date established as the Expiration Date by the Committee at the time of the grant of the Replacement Options all in accordance with the terms of the Amalgamation Agreement; provided that Replacement Options will not be exercisable after the expiration of ten (10) years from the date of grant of the option which the Replacement Option is replacing in accordance with the terms of the Amalgamation Agreement. Termination of Employment. Unless otherwise set forth in the agreement evidencing the grant of the Replacement Option, in the event that a Date of Termination occurs with respect to a Participant, any outstanding Replacement Options held by such Participant shall terminate as follows: If the Participant's Date of Termination occurs by reason of his death, Disability or Retirement, the Replacement Option (to the extent exercisable at the time of the Participant's Date of Termination) shall be exercisable for a period of one (1) year following such Date of Termination, and shall thereafter terminate. If the Participant's Date of Termination occurs for Cause, the Replacement Option shall terminate on the date of the Participant's Date of Termination. If the Participant's Date of Termination occurs for any other reason, the Replacement Option (to the extent exercisable at the time of the Participant's Date of Termination) shall be exercisable for a period of ninety (90) days following such Date of Termination, and shall thereafter terminate. Notwithstanding the foregoing, the Board may, in its discretion, provide that the Replacement Option may be exercised after the periods provided for in this Section 2, but in no event beyond the term of the Replacement Option. Termination as Non-Employee Director. Subject to the terms of this subsection 2.7, each Replacement Option granted to a Non-Employee Director shall be for a term of ten (10) years from the date of grant of the option which the Replacement Option is replacing in accordance with the terms of the Amalgamation Agreement. Upon the cessation of a Non-Employee Director's membership on the Board of Directors of the Company or any Related Company for any reason other than for Cause, Replacement Options granted to such Non-Employee Director shall expire upon the earlier of (i) three (3) years from the date of such cessation of Board membership or (ii) expiration of the term of the Replacement Option. The Board may not provide for an extended exercise period beyond the periods set forth in this subsection 2.7. Replacement Options granted to a Non-Employee Director whose membership on the Board of Directors of the Company or any Related Company is terminated for Cause shall expire on the date of such termination. Pre-Effective Date Terminations. If an individual's employment with Tempest and any Subsidiary, as determined under the terms of the Tempest Reinsurance Company 1994 Stock Option Plan ("Tempest Plan") terminates prior to the Effective Date, or, if an individual who was a non-employee director under the Tempest Plan ceases membership on the Board of Directors of Tempest prior to the Effective Date, and immediately prior to the Effective Date, the individual held an unexercised option of the type which the Replacement Option is replacing in accordance with the terms of the Amalgamation Agreement, than such unexercised option shall be replaced in accordance with Section 2 of the Plan, subject to the terms of the Plan, and treating the dates on which the individual terminated employment with Tempest and its Subsidiaries as the individual's Date of Termination under this Plan (or with respect to a non-employee director, treating the date of his cessation of membership on the Board of Directors of Tempest as a cessation of membership on the Board under this Plan); provided, however, that nothing in this Plan shall be construed to (i) extend the time during which such option is exercisable to a date that is later than the date on which it would cease to be exercisable in the absence of the transaction contemplated by the Amalgamation Agreement, or (ii) permit the exercise of any portion of such option that would not be exercisable in the absence of the transaction contemplated by the Amalgamation Agreement. SECTION ------- OPERATION AND ADMINISTRATION ---------------------------- Effective Date. Subject to the terms of the Amalgamation Agreement, the Plan shall be effective as of the Effective Date. The Plan shall be unlimited in duration and, in the event of Plan termination, shall remain in effect as long as any Replacement Options under it are outstanding. Adjustments to Shares. If the Company shall effect any subdivision or consolidation of shares of Stock or other capital readjustment, payment of stock dividend, stock split, combination of shares or recapitalization or other increase or reduction of the number of shares of Stock outstanding without receiving compensation therefor in money, services or property, then the Committee shall adjust (i) the number of shares available under any limits; (ii) the number of shares of Stock subject to outstanding Replacement Options; and (iii) the per-share price under any outstanding Replacement Option to the extent that the Participant is required to pay a purchase price per share with respect to the Replacement Option. If the Company is reorganized, merged or consolidated or is party to a plan of exchange with another corporation, pursuant to which reorganization, merger, consolidation or plan of exchange the shareholders of the Company receive any shares of stock or other securities or property, or the Company shall distribute securities of another corporation to its shareholders, there shall be substituted for the shares subject to outstanding Replacement Options an appropriate number of shares of each class of stock or amount of other securities or property which were distributed to the shareholders of the Company in respect of such shares, subject to the following: If the Committee determines that the substitution described in accordance with the foregoing provisions of this paragraph (b) would not be fully consistent with the purposes of the Plan or the purposes of the outstanding Replacement Options under the Plan, the Committee may make such other adjustments to the Replacement Options to the extent that the Committee determines such adjustments are consistent with the purposes of the Plan and of the affected Replacement Options. All or any of the Replacement Options may be cancelled by the Committee on or immediately prior to the effective date of the applicable transaction, but only if the Committee gives reasonable advance notice of the cancellation to each affected Participant, and only if either: (A) the Participant is permitted to exercise the Replacement Option for a reasonable period prior to the effective date of the cancellation; or (B) the Participant receives payment or other benefits that the Committee determines to be reasonable compensation for the value of the cancelled Replacement Options. Upon the occurrence of a reorganization of the Company or any other event described in this paragraph (b), any successor to the Company shall be substituted for the Company to the extent that the Company and the successor agree to such substitution. Upon (or, in the discretion of the Committee, immediately prior to) the sale to (or exchange with) a third party unrelated to the Company of all or substantially all of the assets of the Company, all Replacement Options shall be cancelled. If Replacement Options are cancelled under this paragraph (c), then, with respect to any affected Participant, either: the Participant shall be provided with reasonable advance notice of the cancellation, and the Participant shall be permitted to exercise the Replacement Option for a reasonable period prior to the effective date of the cancellation; or the Participant shall receive payment or other benefits that the Committee determines to be reasonable compensation for the value of the cancelled Replacement Options. The foregoing provisions of this paragraph (c) shall also apply to the sale of all or substantially all of the assets of the Company to a related party, if the Committee determines such application is appropriate. In determining what action, if any, is necessary or appropriate under the foregoing provisions of this subsection 3.2, the Committee shall act in a manner that it determines to be consistent with the purposes of the Plan and of the affected Replacement Options and, where applicable or otherwise appropriate, in a manner that it determines to be necessary to preserve the benefits and potential benefits of the affected Replacement Options for the Participants and the Employers. The existence of this Plan and the Replacement Options granted hereunder shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Company's Stock or the rights thereof, the dissolution or liquidation of the Company, any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. Except as expressly provided by the terms of this Plan, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property or for labor or services, either upon direct sale, upon the exercise of rights or warrants to subscribe therefor or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to Replacement Options then outstanding hereunder. Replacement Options under the Plan are subject to adjustment under this subsection 3.2 only during the period in which they are considered to be outstanding under the Plan. For purposes of this subsection 3.2, a Replacement Option is considered "outstanding" on any date if the Participant's ability to obtain all benefits with respect to the Replacement Option is subject to limits imposed by the Plan (including any limits imposed by the agreement evidencing the grant of the Replacement Option). The determination of whether a Replacement Option is outstanding shall be made by the Committee. Limit on Distribution. Distribution of shares of Stock or other amounts under the Plan shall be subject to the following: Notwithstanding any other provision of the Plan, the Company shall have no liability to issue any shares of Stock under the Plan or make any other distribution of benefits under the Plan unless such delivery or distribution would comply with all applicable laws and the applicable requirements of any securities exchange or similar entity. In the case of a Participant who is subject to Section 16(a) and 16(b) of the Securities Exchange Act of 1934, the Committee may, at any time, add such conditions and limitations to any Replacement Option to such Participant, or any feature of any such Replacement Option, as the Committee, in its sole discretion, deems necessary or desirable to comply with Section 16(a) or 16(b) and the rules and regulations thereunder or to obtain any exemption therefrom. To the extent that the Plan provides for issuance of certificates to reflect the transfer of shares of Stock, the transfer of such shares may, at the direction of the Committee, be effected on a non-certificated basis, to the extent not prohibited by the provisions of Rule 16b-3, applicable local law, the applicable rules of any stock exchange, or any other applicable rules. Withholding. All Replacement Options and other payments under the Plan are subject to withholding of all applicable taxes, which withholding obligations may be satisfied, with the consent of the Committee, through the surrender of shares of Stock which the Participant already owns, or to which a Participant is otherwise entitled under the Plan. Distributions to Disabled Persons. Notwithstanding any other provision of the Plan, if, in the Committee's opinion, a Participant or other person entitled to benefits under the Plan is under a legal disability or is in any way incapacitated so as to be unable to manage his financial affairs, the Committee may direct that payment be made to a relative or friend of such person for his benefit until claim is made by a conservator or other person legally charged with the care of his person or his estate, and such payment or distribution shall be in lieu of any such payment to such Participant or other person. Thereafter, any benefits under the Plan to which such Participant or other person is entitled shall be paid to such conservator or other person legally charged with the care of his person or his estate. 3.6. Transferability. Replacement Options under the Plan are not transferable except as designated by the Participant by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code, Title I of the Employee Retirement Income Security Act, or the rules thereunder (a "QDRO"). To the extent that the Participant who receives a Replacement Option under the Plan has the right to exercise such Replacement Option, the Replacement Option may be exercised during the lifetime of the Participant only by the Participant. 3.7. Administration. The authority to control and manage the operation and administration of the Plan shall be vested in a committee (the "Committee") in accordance with Section 5. 3.8. Notices. Any notice or document required to be filed with the Committee under the Plan will be properly filed if delivered or mailed by registered mail, postage prepaid, to the Committee, in care of the Company, at its principal executive offices. The Committee may, by advance written notice to affected persons, revise such notice procedure from time to time. Any notice required under the Plan (other than a notice of election) may be waived by the person entitled to notice. 3.9. 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 with the Committee at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the Plan, as the Committee shall require. 3.10. Agreement With Company. At the time a Replacement Option is granted to a Participant under the Plan, the Committee will require a Participant to enter into an agreement with the Company in a form specified by the Committee, agreeing to the terms and conditions of the Plan and to such additional terms and conditions, not inconsistent with the Plan and the Amalgamation Agreement, as the Committee may, in its sole discretion, prescribe. 3.11. Limitation of Implied Rights. (a) 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. (b) The Plan does not constitute a contract of employment, and selection as a Participant will not give any employee the right to be retained in the employ of an Employer or any Related Company, 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. Except as otherwise provided in the Plan, no Replacement Option under the Plan shall confer upon the holder thereof any right as a shareholder of the Company prior to the date on which he fulfills all service requirements and other conditions for receipt of such rights. 3.12. Benefits Under Qualified Retirement Plans. Replacement Options to a Participant (including the grant and the receipt of benefits) under the Plan shall be disregarded for purposes of determining the Participant's benefits under any Qualified Retirement Plan. 3.13. 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. 3.14. 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 action of one or more members of the board (including a committee of the board) who are duly authorized to act for the board, or (except to the extent prohibited by the provisions of Rule 16b-3, applicable local law, the applicable rules of any stock exchange, or any other applicable rules) by a duly authorized officer of the Employer. 3.15. 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. SECTION 4 --------- CHANGE IN CONTROL ----------------- Subject to the provisions of subsection 3.2 (relating to the adjustment of shares), and except as otherwise provided in the Plan or the agreement evidencing the grant of the applicable Replacement Option, upon the occurrence of a Change in Control all outstanding Replacement Options shall become fully exercisable. SECTION 5 --------- COMMITTEE --------- 5.1. Selection of Committee. The Committee shall be selected by the Board, and shall consist of not less than two members of the Board. 5.2. Powers of Committee. The authority to manage and control the operation and administration of the Plan shall be vested in the Committee, subject to the following: (a) Subject to the provisions of the Plan and the Amalgamation Agreement, the Committee will have the authority and discretion to select individuals to receive Replacement Options, to determine the time or times of receipt, to determine the types of Replacement Options and the number of shares covered by the Replacement Options, to establish the terms, conditions, performance criteria, restrictions, and other provisions of such Replacement Options, and to cancel or suspend Replacement Options. In making such Replacement Option determinations, the Committee may take into account the nature of services rendered by the respective individual, his present and potential contribution to the Company's success and such other factors as the Committee deems relevant. (b) The Committee will have the authority and discretion 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. (c) Any interpretation of the Plan by the Committee and any decision made by it under the Plan is final and binding on all persons. (d) Except as otherwise expressly provided in the Plan, where the Committee is authorized to make a determination with respect to any Replacement Option, such determination shall be made at the time the Replacement Option is made, except that the Committee may reserve the authority to have such determination made by the Committee in the future (but only if such reservation is made at the time the Replacement Option is granted and is expressly stated in the agreement evidencing the grant of the Replacement Option). 5.3. Delegation by Committee. Except to the extent prohibited by the provisions of Rule 16b-3, applicable local law, the applicable rules of any stock exchange, or any other applicable rules, 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. 5.4. 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 or service as a director, termination of employment or termination as a director, leave of absence, reemployment and 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 terms of the Plan. 5.5. 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 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, to the fullest extent permitted by law, 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 6 --------- AMENDMENT AND TERMINATION ------------------------- The Board may, at any time, amend or terminate the Plan, provided that, subject to subsection 3.2 (relating to certain adjustments to shares), no amendment or termination may adversely affect the rights of any Participant or beneficiary under any Replacement Option made under the Plan prior to the date such amendment is adopted by the Board. SECTION 7 --------- DEFINED TERMS ------------- For purposes of the Plan, the terms listed below shall be defined as follows: (a) Board. The term "Board" shall mean the Board of Directors of the Company. (b) Cause. "Cause" means, unless otherwise defined in the particular agreement evidencing the grant of a Replacement Option (i) the wilful neglect or refusal to perform the Participant's duties or responsibilities or the wilful taking of actions which materially impair the Participant's ability to perform the Participant's duties or responsibilities which continues after being brought to the attention of the Participant (other than any such failure resulting from the Participant's incapacity due to physical or mental illness) or (ii) the wilful act or failure to act by the Participant which is materially injurious to the Company which is brought to the attention of the Participant in writing not more than thirty (30) days from the date of its discovery by the Company, or the Board. (c) Change in Control. The term "Change in Control" shall mean the occurrence of any one of the following events: (i) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, becomes a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of 50% or more of the Voting Stock (as defined below) of the Company; (ii) the majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the Effective Date of this Plan; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by three-quarters of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of 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 the 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); or (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 (as defined below) of such other company in exchange for stock of such other company). For the purpose of this definition of "Change in Control", (I) an "Affiliate" of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with the person or other entity specified and (II) "Voting Stock" shall mean capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation. (d) Code. The term "Code" means the Internal Revenue Code of 1986, as amended. A reference to any provision of the Code shall include reference to any successor provision of the Code. (e) Date of Termination. A Participant's "Date of Termination" shall be the date on which his employment with all Employers and Related Companies terminates for any reason; provided that a Date of Termination shall not be deemed to occur by reason of a transfer of the Participant between the Company and a Related Company (including an Employer) or between two Related Companies (including Employers); and further provided that a Participant's employment shall not be considered terminated while the Participant is on a leave of absence from an Employer or a Related Company approved by the Participant's employer. (f) 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. (g) Dollars. As used in the Plan, the term "dollars" or numbers preceded by the symbol "$" shall mean amounts in United States Dollars. (h) Effective Date. The "Effective Date" shall be the Closing Date as defined in the Amalgamation Agreement. (i) Employer. The Company and each Related Company which, with the consent of the Company, adopts the Plan for the benefit of its eligible employees are referred to collectively as the "Employers" and individually as an "Employer". (j) Fair Market Value. The "Fair Market Value" of a share of Stock of the Company as of any date shall be the closing market composite price for such Stock as reported for the New York Stock Exchange - Composite Transactions on that date or, if Stock is not traded on that date, on the next preceding date on which Stock was traded. (k) Non-Employee Director. The term "Non-Employee Director" shall mean a member of the Board of Directors of the Company or a Related Company, who is not an employee of the Company or any Related Company. (l) Qualified Retirement Plan. The term "Qualified Retirement Plan" means any plan of the Company or a Related Company that is intended to be qualified under section 401(a) of the Code. (m) Related Companies. The term "Related Company" means any company during any period in which it is a "subsidiary corporation" (as that term is defined in Code section 424(f)) with respect to the Company. (n) Replacement Option. "Replacement Option" shall mean an option to purchase stock of the Company which conforms to the requirements of this Plan and is granted in satisfaction of the Company's obligation under Section 5.11 of the Amalgamation Agreement. (o) Retirement. "Retirement" of a Participant shall mean the occurrence of a Participant's Date of Termination with the consent of the Participant's employer after the Participant is eligible for early retirement or normal retirement under the ACE Limited Employee Retirement Plan (or any other retirement plan maintained by the Company or the Related Companies); provided, however, that the Committee may impose such additional conditions or restrictions on Retirement as it determines to be appropriate. (p) SEC. "SEC" shall mean the Securities and Exchange Commission. (q) Stock. The term "Stock" shall mean shares of common stock of the Company. EX-10.25 3 CREDIT AGREEMENT [EXECUTION COPY] ---------------- $50,000,000 CREDIT AGREEMENT dated as of November 15, 1996 among ACE Limited, as Borrower, A.C.E. Insurance Company, Ltd. and Corporate Officers & Directors Assurance Ltd., as Guarantors, The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Agent TABLE OF CONTENTS* ARTICLE I DEFINITIONS SECTION 1.01. Definitions............................................ 1 SECTION 1.02. Accounting Terms and Determinations......................................... 11 SECTION 1.03. Types of Borrowings.................................... 12 SECTION 1.04. United States Dollars.................................. 12 ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend.................................... 12 SECTION 2.02. Notice of Committed Borrowing.......................... 13 SECTION 2.03. Money Market Borrowings................................ 13 SECTION 2.04. Notice to Banks; Funding of Loans...................... 17 SECTION 2.05. Notes.................................................. 18 SECTION 2.06. Maturity of Loans...................................... 19 SECTION 2.07. Interest Rates......................................... 19 SECTION 2.08. Facility Fee........................................... 23 SECTION 2.09. Optional Termination or Reduction of Commitments......................................... 23 SECTION 2.10. Scheduled Termination of Commitments............................................ 23 SECTION 2.11. Optional Prepayments................................... 23 SECTION 2.12. General Provisions as to Payments...................... 24 SECTION 2.13. Funding Losses......................................... 25 SECTION 2.14. Computation of Interest and Fees....................... 25 SECTION 2.15. Regulation D Compensation.............................. 26 ARTICLE III CONDITIONS SECTION 3.01. Closing................................................ 26 SECTION 3.02. Borrowings............................................. 27 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence and Power.......................... 29 - --------------------- *The Table of Contents is not a part of this Agreement. i
PAGE ---- SECTION 4.02. Corporate and Governmental Authorization; No Contravention.............................. 29 SECTION 4.03. Binding Effect............................................... 29 SECTION 4.04. Financial Information........................................ 29 SECTION 4.05. Litigation................................................... 31 SECTION 4.06. ERISA........................................................ 31 SECTION 4.07. Taxes........................................................ 31 SECTION 4.08. Not an Investment Company.................................... 31 SECTION 4.09. Full Disclosure.............................................. 31 SECTION 4.10. Compliance with Laws......................................... 32 ARTICLE V COVENANTS SECTION 5.01. Information.................................................. 32 SECTION 5.02. Payment of Obligations....................................... 34 SECTION 5.03. Maintenance of Property; Insurance........................... 34 SECTION 5.04. Conduct of Business and Maintenance of Existence................................................. 35 SECTION 5.05. Compliance with Laws......................................... 35 SECTION 5.06. Inspection of Property, Books and Records...................................................... 35 SECTION 5.07. Leverage..................................................... 36 SECTION 5.08. Subsidiary Debt.............................................. 36 SECTION 5.09. Minimum Tangible Net Worth................................... 36 SECTION 5.10. Negative Pledge.............................................. 36 SECTION 5.11. Consolidations, Mergers and Sales of Assets.................................................... 37 SECTION 5.12. Use of Proceeds.............................................. 38 SECTION 5.13. ERISA........................................................ 38 ARTICLE VI DEFAULTS SECTION 6.01. Events of Default............................................ 38 SECTION 6.02. Notice of Default............................................ 41 ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization................................ 42 SECTION 7.02. Agent and Affiliates......................................... 42 SECTION 7.03. Action by Agent.............................................. 42 SECTION 7.04. Consultation with Experts.................................... 42 SECTION 7.05. Liability of Agent........................................... 42 SECTION 7.06. Indemnification.............................................. 43
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PAGE ---- SECTION 7.07. Credit Decision.............................................. 43 SECTION 7.08. Successor Agent.............................................. 43 SECTION 7.09. Agent's Fee.................................................. 44 ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair......................................... 44 SECTION 8.02. Illegality................................................... 45 SECTION 8.03. Increased Cost and Reduced Return............................ 45 SECTION 8.04. Taxes........................................................ 47 SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans.................................... 49 ARTICLE IX GUARANTY SECTION 9.01. The Guaranty................................................. 49 SECTION 9.02. Guaranty Unconditional....................................... 50 SECTION 9.03. Discharge Only Upon Payment In Full; Reinstatement In Certain Circumstances................................................ 51 SECTION 9.04. Waiver by each of the Guarantors............................. 51 SECTION 9.05. Subrogation.................................................. 51 SECTION 9.06. Stay of Acceleration......................................... 51 SECTION 9.07. Limit of Liability........................................... 51 ARTICLE X MISCELLANEOUS SECTION 10.01. Notices...................................................... 52 SECTION 10.02. No Waivers................................................... 52 SECTION 10.03. Expenses; Indemnification.................................... 52 SECTION 10.04. Sharing of Set-Offs.......................................... 53 SECTION 10.05. Amendments and Waivers....................................... 53 SECTION 10.06. Successors and Assigns....................................... 54 SECTION 10.07. Collateral................................................... 56 SECTION 10.08. Governing Law................................................ 56 SECTION 10.09. Counterparts; Integration; Effectiveness................................................ 56 SECTION 10.10. Judicial Proceedings......................................... 56 SECTION 10.11. Judgment Currency............................................ 58 SECTION 10.12. WAIVER OF JURY TRIAL......................................... 58 SECTION 10.13. Existing Credit Agreement.................................... 58
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Page ---- Exhibit A - Note Exhibit B - Money Market Quote Request Exhibit C - Invitation for Money Market Quotes Exhibit D - Money Market Quote Exhibit E - Opinion of Counsel for the Borrower Exhibit F - Opinion of Special Bermuda Counsel for the Guarantors Exhibit G - Opinion of New York Counsel for the Borrower and the Guarantors Exhibit H - Opinion of Special United States Counsel for the Agent Exhibit I - Assignment and Assumption Agreement Exhibit J - Letter from CT System
iv CREDIT AGREEMENT AGREEMENT dated as of November 15, 1996 among ACE LIMITED, A.C.E. INSURANCE COMPANY, LTD. and CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "ACE Insurance" means A.C.E. Insurance Company, Ltd., a Bermuda limited liability company, and its successors. "Adjusted CD Rate" has the meaning set forth in Section 2.07(b). "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Banks under the Financing Documents, and its successors in such capacity. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Assessment Rate" has the meaning set forth in Section 2.07(b). "Assignee" has the meaning set forth in Section 10.06(c). "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 10.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Committed Loan to be made by a Bank as a Base Rate Loan in accordance with the applicable Notice of Committed Borrowing or pursuant to Article VIII. "Bermuda Companies Law" means The Companies Act 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "Bermuda Insurance Law" means The Insurance Act 1978 of Bermuda, as amended, and the regulations promulgated thereunder. "Borrower" means ACE Limited, a Cayman Islands company limited by shares, and its successors. "Borrowing" has the meaning set forth in Section 1.03. "CD Base Rate" has the meaning set forth in Section 2.07(b). "CD Loan" means a Committed Loan to be made by a Bank as a CD Loan in accordance with the applicable Notice of Committed Borrowing. "CD Margin" has the meaning set forth in Section 2.07(b). "CD Reference Banks" means The Bank of New York and Morgan Guaranty Trust Company of New York. "Closing Date" means the date on or after the Effective Date on which the Agent shall have received the documents specified in or pursuant to Section 3.01. 2 "CODA" means Corporate Officers & Directors Assurance Ltd., a Bermuda limited liability company, and its successors. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.09. "Committed Loan" means a loan made by a Bank pursuant to Section 2.01. "Consolidated Debt" means at any date the Debt of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Tangible Net Worth" means at any date the consolidated stockholders' equity of the Borrower and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to June 30, 1996 in the book value of any asset owned by the Borrower or a Consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, solely for purposes 3 of Section 5.10 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person, provided that the term "Debt" shall not include obligations of an insurance company under insurance policies or surety bonds issued by it. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.07(b). 4 "Effective Date" means the date this Agreement becomes effective in accordance with Section 10.09. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means, with respect to any Person, such Person, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with such Person or any such Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro- Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a Euro-Dollar Loan in accordance with the applicable Notice of Committed Borrowing. "Euro-Dollar Margin" has the meaning set forth in Section 2.07(c). "Euro-Dollar Reference Banks" means the principal London offices of The Bank of New York and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which 5 includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.01. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Agent. "Financing Documents" means this Agreement and the Notes. "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.01(a)) or any combination of the foregoing. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantors" means ACE Insurance and CODA. 6 "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Indemnitee" has the meaning set forth in Section 10.03(b). "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of such Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro- Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (3) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 30 days thereafter; provided that: 7 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (4) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of months thereafter as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro- Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; and (5) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. 8 "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Domestic Loan or a Euro-Dollar Loan or a Money Market Loan and "Loans" means Domestic Loans or Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.07(c). "Material Debt" means Debt (other than the Notes) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $10,000,000. "Material Financial Obligations" means a principal or face amount of Debt and/or current payment obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $10,000,000. "Money Market Absolute Rate" has the meaning set forth in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Agent; provided that any Bank may from time to time by notice to the Borrower and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case 9 all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01(a)). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.03(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "Obligors" means the Borrower and each of the Guarantors. "Other Taxes" has the meaning set forth in Section 8.04(b). "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 10.06(b). "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. 10 "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Refunding Borrowing" means a Committed Borrowing which, after application of the proceeds thereof, results in no net increase in the outstanding principal amount of Committed Loans made by any Bank. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Taxes" has the meaning set forth in Section 8.04(a). "Termination Date" means November 14, 1997 or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Wholly-Owned Consolidated Subsidiary" means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Borrower. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to 11 the Banks; provided that, if the Borrower notifies the Agent that the Borrower wishes to amend any covenant in Article V to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Borrower that the Required Banks wish to amend Article V for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. SECTION 1.03. Types of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article II on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith). SECTION 1.04. United States Dollars. Each reference herein to "dollars" or "$" shall refer to United States Dollars. ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time prior to the Termination Date in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $5,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 12 3.02(e)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.11, prepay Loans and reborrow at any time prior to the Termination Date. SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give the Agent notice (such notice to be signed by any two of the President or Executive Vice-President(s) or any one of the President or Executive Vice- President(s) together with any one of the Senior Vice-President(s) signing jointly and hereinafter referred to as a "Notice of Committed Borrowing") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks prior to the Termination Date to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be 13 received no later than 10:30 A.M. (New York City time) on (x) the fifth Euro- Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $5,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex 14 or facsimile transmission at its offices specified in or pursuant to Section 10.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro- Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. Subject to Articles III and VI, any Money Market Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 15 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the 16 proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (such notice to be signed by any two of the President or Executive Vice-President(s) or any one of the President or Executive Vice-President(s) together with any one of the Senior Vice-President(s) signing jointly and hereinafter referred to as a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $5,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.04. Notice to Banks; Funding of Loans. 17 (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 10.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (c) If any Bank makes a new Loan hereunder on a day on which the Borrower is to repay all or any part of an outstanding Loan from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the Agent as provided in subsection (b), or remitted by the Borrower to the Agent as provided in Section 2.12, as the case may be. (d) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsections (b) and (c) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.05. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of 18 such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(a), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.06. Maturity of Loans. Each Loan included in any Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum 19 equal to the sum of the CD Margin plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD Loan or any portion thereof shall, as a result of clause (2)(b) of the definition of Interest Period, have an Interest Period of less than 30 days, such portion shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the CD Margin plus the Adjusted CD Rate applicable to the Interest Period for such Loan and (ii) the rate applicable to Base Rate Loans for such day. "CD Margin" means 0.400% per annum. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ---------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate ---------------- * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. 20 "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. (S) 327.4(a) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Euro-Dollar Margin" means 0.285% per annum. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. 21 (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin plus the London Interbank Offered Rate applicable to the Interest Period for such Loan and (ii) the sum of 2% plus the Euro-Dollar Margin plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination 22 thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.08. Facility Fee. The Borrower shall pay to the Agent for the account of the Banks ratably a facility fee at the rate of 0.090% per annum. Such facility fee shall accrue (i) from and including the Closing Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety), on the daily aggregate amount of the Commitments (whether used or unused) and (ii) from and including the Termination Date or such earlier date of termination to but excluding the date the Loans shall be repaid in their entirety, on the daily aggregate outstanding principal amount of the Loans. Accrued fees under this Section shall be payable quarterly in arrears on each March 31, June 30, September 30 and December 31 and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). SECTION 2.09. Optional Termination or Reduction of Commitments. The Borrower may, upon at least three Domestic Business Days' notice to the Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $25,000,000 or any larger multiple of $5,000,000, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. Upon receipt of any notice pursuant to this Section 2.09, the Agent shall promptly notify the Banks of the contents of such notice. SECTION 2.10. Scheduled Termination of Commitments. The Commitments shall terminate on the Termination Date, and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. SECTION 2.11. Optional Prepayments. (a) Subject in the case of any Fixed Rate Borrowing to Section 2.13, the Borrower may, in the case of any CD Borrowing, upon at least three Domestic Business Days' notice to the Agent, prepay 23 such CD Borrowing, or, in the case of any other Domestic Borrowing (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.01(a)), upon at least one Domestic Business Day's notice to the Agent, prepay such other Domestic Borrowing, or in the case of any Euro-Dollar Borrowing, upon at least three Euro-Dollar Business Days' notice to the Agent, prepay any Euro- Dollar Borrowing, in each case in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (b) Except as provided in Section 2.11(a), the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 2:00 P.M. (New York City time) on the date when due, in Federal or other funds immediately available in New York City and in the lawful currency of the United States, to the Agent at its address referred to in Section 10.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of 24 principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.13. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan (pursuant to Article II, VI or VIII or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.07(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a) or 2.11(c), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or, in the case of the failure of the Borrower to borrow any Fixed Rate Loans, prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow or prepay, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense and setting forth the calculation thereof, which certificate shall be conclusive in the absence of manifest error. SECTION 2.14. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and all facility fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). 25 SECTION 2.15. Regulation D Compensation. For so long as any Bank maintains reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer's certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Borrower may reasonably request as to the computation set forth therein. ARTICLE III CONDITIONS SECTION 3.01. Closing. The closing hereunder shall occur upon (x) termination of the Commitments (as defined in the Credit Agreement referred to below in this clause (x)) under the Credit Agreement dated as of November 17, 1995 among the Borrower, the Guarantors, the banks listed therein and Morgan Guaranty Trust Company of New York, as agent, and payment in full of all amounts owing thereunder to any of such banks or such agent and (y) receipt by the Agent of the following documents, each dated the Closing Date unless otherwise indicated: 26 (a) a duly executed Note for the account of each Bank dated on or before the Closing Date complying with the provisions of Section 2.05; (b) an opinion of Maples and Calder, counsel for the Borrower, substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (c) an opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Guarantors, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (d) an opinion of Mayer, Brown & Platt, New York counsel for the Borrower and the Guarantors, substantially in the form of Exhibit G hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (e) an opinion of Davis Polk & Wardwell, special United States counsel for the Agent, substantially in the form of Exhibit H hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (f) a letter from CT System in New York, New York, New York, substantially in the form of Exhibit J hereto, evidencing CT System's agreement to act as agent for service of process for the Obligors pursuant to Section 10.10(b); and (g) all documents the Agent may reasonably request relating to the existence of the Borrower and the Guarantors, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Agent. The Agent shall promptly notify the Borrower and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: 27 (a) receipt by the Agent of evidence satisfactory to it of the adoption by the Board of Directors of the Borrower of a resolution, in form and substance satisfactory to the Agent, to the effect that the execution, delivery and performance of this Agreement by the Borrower is approved and of evidence satisfactory to the Agent that such resolution is in full force and effect; (b) receipt by the Agent of evidence satisfactory to it of the adoption by the Board of Directors of each Guarantor of a resolution, in form and substance satisfactory to the Agent, to the effect that the execution, delivery and performance of the Credit Agreement by such Guarantor is approved and of evidence satisfactory to the Agent that the respective resolution of such Guarantor is in full force and effect; (c) the fact that the Closing Date shall have occurred on or prior to December 31, 1996; (d) receipt by the Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be; (e) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (f) the fact that, immediately before and after such Borrowing, no Default (except, in the case of a Refunding Borrowing, Defaults other than Defaults under subsection (a) or (g) of Section 6.01) shall have occurred and be continuing; and (g) the fact that the representations and warranties of each Obligor contained in this Agreement (except, in the case of a Refunding Borrowing, the representations and warranties set forth in Sections 4.04(c), (e) and (g) and 4.05 as to any matter which has theretofore been disclosed in writing by the Borrower to the Banks) shall be true on and as of the date of such Borrowing. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Obligors on the date of such Borrowing as to the facts specified in clauses (e), (f) and (g) of this Section. 28 ARTICLE IV REPRESENTATIONS AND WARRANTIES The Obligors jointly and severally represent and warrant that: SECTION 4.01. Corporate Existence and Power. The Borrower is a company limited by shares and each of the Guarantors is a limited liability company, in each case duly incorporated and validly existing under the laws of its jurisdiction of incorporation and the Borrower is in good standing under the laws of the Cayman Islands. Each of the Obligors has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its respective business as now conducted. Each of the Guarantors is a Wholly-Owned Consolidated Subsidiary of the Borrower. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each Obligor of this Agreement and by the Borrower of the Notes are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Memorandum of Association, Articles of Association or Bye-Laws (or any comparable document) of any Obligor or of any agreement, judgment, injunction, order, decree or other instrument binding upon any Obligor or any of their respective Subsidiaries or result in the creation or imposition of any Lien on any asset of any Obligor or any of their respective Subsidiaries. SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of each Obligor and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms. SECTION 4.04. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal year then ended, reported on by Coopers & Lybrand, 29 copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of June 30, 1996 and the related unaudited consolidated statements of operations and cash flows for the nine months then ended, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine month period (subject to normal year-end adjustments). (c) Since June 30, 1996 there has been no material adverse change in the business, financial position, or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. (d) The consolidated balance sheet of ACE Insurance and its Consolidated Subsidiaries as of September 30, 1995 and the related consolidated statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of ACE Insurance and its Consolidated Subsidiaries as of such date and their consolidated results of operations and retained earnings and cash flows for such fiscal year. (e) Since June 30, 1996 there has been no material adverse change in the business, financial position or results of operations of ACE Insurance and its Consolidated Subsidiaries, considered as a whole. (f) The balance sheet of CODA as of October 31, 1995 and the related statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by KPMG Peat Marwick, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the financial position of CODA as of 30 such date and its results of operations and retained earnings and cash flows for such fiscal year. (g) Since July 31, 1996 there has been no material adverse change in the business, financial position or results of operations of CODA and its Consolidated Subsidiaries, considered as a whole. SECTION 4.05. Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable likelihood of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or the Notes. SECTION 4.06. ERISA. Neither the Borrower, nor any Guarantor, nor any member of their respective ERISA Groups, maintains or contributes to, or has within the previous six years (whether or not while a member of such Person's current ERISA Group) maintained or contributed to, or been required to maintain or been jointly and severally liable for contributions to, or liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. SECTION 4.07. Taxes. The Borrower and its Subsidiaries have filed all income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. SECTION 4.08. Not an Investment Company. No Obligor is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.09. Full Disclosure. All information heretofore furnished by the Obligors to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to the Agent 31 or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts which materially and adversely affect or may affect (to the extent the Obligors can now reasonably foresee) the business, operations or financial condition of any Obligor and its Consolidated Subsidiaries, taken as a whole, or the ability of any Obligor to perform its obligations under this Agreement. SECTION 4.10. Compliance with Laws. The Borrower and each Subsidiary are in compliance, in all material respects, with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. ARTICLE V COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations, shareholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission or otherwise reasonably acceptable to the Required Banks by Coopers & Lybrand or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of operations 32 and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such statements of operations and cash flows in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer or the chief accounting officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.07 to 5.10, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) within five days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (f) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (g) as soon as available and in any event within 20 days after submission, each statutory statement of the Guarantors (or any of them) in the form submitted to the Bermuda Department of Insurance; 33 (h) as soon as available and in any event within 120 days after the end of each fiscal year of each Guarantor, a balance sheet of each Guarantor as of the end of such fiscal year and the related statements of income and changes in financial position for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by the independent public accountants which reported on the financial statements referred to in clause (a) above; (i) promptly upon obtaining knowledge thereof, (i) a copy of any notice from the Minister of Finance or the Registrar of Companies or any other Person of the revocation, the suspension or the placing of any restriction or condition on the registration as an insurer of either Guarantor under the Bermuda Insurance Law or of the institution of any proceeding or investigation which could result in any such revocation, suspension or placing of such a restriction or condition, (ii) copies of any correspondence by, to or concerning either Guarantor relating to an investigation conducted by the Minister of Finance, whether pursuant to Section 132 of the Bermuda Companies Law or otherwise and (iii) a copy of any notice of or requesting or otherwise relating to the winding up or any similar proceeding of or with respect to either Guarantor; and (j) from time to time such additional information regarding the financial position, results of operations or business of the Borrower or any of its Subsidiaries as the Agent, at the request of any Bank, may reasonably request from time to time. SECTION 5.02. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.03. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. 34 (b) The Borrower will maintain, and will cause each Subsidiary to maintain, physical damage insurance on all real and personal property on an all risks basis (including the perils of flood and quake), covering the repair and replacement cost of all such property and consequential loss coverage for business interruption and extra expense. All such insurance shall be provided by insurers having an A.M. Best policyholders rating of not less than B+ or such other insurers as the Required Banks may approve in writing. The Borrower will deliver to the Banks (i) upon request of any Bank through the Agent from time to time, full information as to the insurance carried, (ii) within five days of receipt of notice from any insurer, a copy of any notice of cancellation or material change in coverage from that existing on the date of this Agreement and (iii) forthwith, notice of any cancellation or nonrenewal of coverage by the Borrower. SECTION 5.04. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect, their respective existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) the merger of a Subsidiary (other than a Guarantor) into the Borrower or the merger or consolidation of a Subsidiary (other than a Guarantor) with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing or (ii) the termination of the corporate existence of any Subsidiary (other than a Guarantor) if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. SECTION 5.05. Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. SECTION 5.06. Inspection of Property, Books and Records. The Borrower will keep, and will cause each 35 Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.07. Leverage. Consolidated Debt will at no time exceed 35% of Consolidated Tangible Net Worth. SECTION 5.08. Subsidiary Debt. The Borrower will not permit any of its Subsidiaries to create, assume or suffer to exist any Debt, except (i) Debt under the Financing Documents, (ii) Debt owing to the Borrower, (iii) Debt of Tripar Partnership, a Bermuda general partnership, owing to other Subsidiaries or Debt of such other Subsidiaries owing to Tripar Partnership, (iv) Debt in respect of letters of credit issued in the ordinary course of business and (v) Debt created by exercise of overdraft privileges on a basis not more frequent than once each calendar month for not more than five Euro-Dollar Business Days in an amount not to exceed $10,000,000 in the aggregate at any one time. SECTION 5.09. Minimum Tangible Net Worth. Consolidated Tangible Net Worth will at no time be less than $1,250,000,000. SECTION 5.10. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement in an aggregate principal or face amount not exceeding $25,000,000; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part 36 of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; (d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Borrower or a Subsidiary and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not secured by any additional assets; (g) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $10,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (h) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $10,000,000; (i) Liens on any asset of ACE Insurance securing obligations in respect of letters of credit to be issued pursuant to any reimbursement agreement entered into among ACE Insurance, the Banks and Morgan Guaranty Trust Company of New York, as issuing bank and agent; and (j) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 5% of Consolidated Tangible Net Worth. SECTION 5.11. Consolidations, Mergers and Sales of Assets. No Obligor will (i) consolidate with or merge into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or any substantial part of its assets to any other Person. 37 SECTION 5.12. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for its general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. SECTION 5.13. ERISA. Neither the Borrower, nor any Guarantor, nor any member of their respective ERISA Groups will maintain or contribute to, or become obligated to maintain or become jointly and severally liable for contributions to, or have liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. ARTICLE VI DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay within five Business Days of the due date thereof any interest on any Loan, any fees or any other amount payable hereunder or either Guarantor shall fail to pay when due any such principal, interest, fees or other amount payable hereunder; provided that, for purposes of this Section 6.01(a), no such payment default by the Borrower shall be continuing if the Guarantors pay the amount thereof at the time and otherwise in the manner provided in Article IX; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.07 through 5.12, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Agent at the request of any Bank; 38 (d) any representation, warranty, certification or statement made by any Obligor in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; (g) (i)(x) a resolution or other similar action is passed authorizing the voluntary winding up of the Borrower or any other similar action with respect to the Borrower or a petition is filed for the winding up of the Borrower or the taking of any other similar action with respect to the Borrower in the Grand Court of the Cayman Islands or (y) any corporate action is taken authorizing the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to either Guarantor or authorizing any corporate action to be taken to facilitate any such winding up, liquidation, arrangement or other similar action or any petition shall be filed seeking the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to either Guarantor by the Registrar of Companies in Bermuda, one or more holders of insurance policies or reinsurance certificates issued by either Guarantor or by any other Person or Persons or any petition shall be presented for the winding up of either Guarantor to a court of Bermuda as provided under the Bermuda Companies Law and in either such case such petition shall remain undismissed and unstayed for a period of 60 days or any creditors' or members' voluntary winding up of either Guarantor as provided under the Bermuda Companies Law shall be commenced or any receiver shall be appointed by a creditor of either Guarantor or by a court of Bermuda on the application of a creditor of either Guarantor as provided under any instrument giving rights for the appointment of a receiver; 39 (ii) a proceeding shall be commenced by any Person seeking the rehabilitation, liquidation, dissolution or conservation of the assets of either Guarantor or any substantial part thereof or any similar remedy and such proceedings shall remain undismissed and unstayed for a period of 60 days; (iii) the Borrower or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (iv) an involuntary case or other proceeding shall be commenced against the Borrower or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; (h) a judgment or order for the payment of money in excess of $10,000,000 shall be rendered against the Borrower or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 20% or more of the outstanding shares of common stock of the Borrower; or, during any period of 12 consecutive calendar months, individuals who were directors of the Borrower on the first day of such 40 period shall cease to constitute a majority of the board of directors of the Borrower; or either Guarantor shall cease to be a Wholly-Owned Consolidated Subsidiary of the Borrower; (j) any court or arbitrator or any governmental body, agency or official which has jurisdiction in the matter shall decide, rule or order that any provision of any of the Financing Documents is invalid or unenforceable in any material respect, or any Obligor shall so assert in writing; or (k) the registration of either Guarantor as an insurer shall be revoked, suspended or otherwise have restrictions or conditions placed upon it unless, in the case of the placing of any such restrictions or conditions, such restrictions or conditions could not have a material adverse effect on the interests of the Agent and the Banks under the Financing Documents; then, and in every such event, the Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes (together with accrued interest thereon) shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Obligors; provided that in the case of any of the Events of Default specified in clause (g) above with respect to any Obligor, without any notice to any Obligor or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Obligors. SECTION 6.02. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. 41 ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Financing Documents as are delegated to the Agent by the terms hereof and thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent hereunder. SECTION 7.03. Action by Agent. The obligations of the Agent under this Agreement are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. SECTION 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Agent. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with the Financing Documents or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any Obligor; (iii) the satisfaction of any 42 condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of any Financing Document or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with the Financing Documents or any action taken or omitted by such indemnitees hereunder or thereunder. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Agent. The Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent, which successor Agent shall be reasonably acceptable to the Borrower. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the 43 rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. SECTION 7.09. Agent's Fee. The Borrower shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Agent. ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) in the case of a Committed Borrowing, Banks having 50% or more of the aggregate amount of the Commitments advise the Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last 44 day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro- Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any 45 such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. 46 (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. Taxes. (a) Any and all payments by any Obligor hereunder shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all penalties, interest, expenses and similar liabilities with respect thereto, excluding (i) in the case of each Bank and the Agent, taxes imposed on its income, and franchise and similar taxes imposed on it, by the jurisdiction under the laws of which such Bank or the Agent, as the case may be, shall be organized or any political subdivision thereof, (ii) in the case of each Bank, taxes imposed on its income, and franchise and similar taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof or in which such Bank's principal executive office is located or any political subdivision thereof and (iii) any Taxes imposed as a result of a change of such Bank's Applicable Lending Office to the extent such Taxes would not have been imposed absent such change; provided however, that (x) a change in such Bank's Applicable Lending Office to which the Obligor has consented and (y) a change in such Bank's Applicable Lending Office as a result of legal or regulatory restrictions shall not constitute a change for the purposes of this Section 8.04 (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). Each Obligor agrees that, if any Obligor shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, (A) the sum payable to such Bank or the Agent shall be increased as may be necessary so that after making all required deductions for Taxes (including deductions applicable to additional sums payable under this Section 8.04), such Bank or the Agent, as the case may be, shall receive an amount equal to the sum it would have received had no such deductions been made, (B) such Obligor shall make such deductions and (C) such Obligor shall pay the full 47 amount deducted to the relevant taxing authority or other authority in accordance with applicable law. (b) In addition, each Obligor agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which shall arise from any payment made under, or from the execution, delivery or registration of, or otherwise with respect to, this Agreement (all such taxes, charges or levies being hereinafter referred to as "Other Taxes"). (c) Each Obligor agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed on amounts payable under this Section 8.04) paid by such Bank or the Agent or any penalties, interest, expenses and similar liabilities arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted provided that such Bank has acted in good faith with respect to such Taxes or Other Taxes and that such Bank reasonably cooperates with the Obligors in challenging such Taxes or Other Taxes. Each indemnification under this paragraph (c) shall be made within 30 days from the date such Bank or the Agent makes demand therefor. (d) Each Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) (x) to file any certificate or document or to furnish any information as reasonably requested by any Obligor pursuant to any applicable treaty, law, rule or regulation or (y) to designate a different Lending Office if the making of such a filing, the furnishing of such information or the designation of such other Lending Office would avoid the need for or reduce the amount of any additional amounts payable by any Obligor pursuant to this Section 8.04 and would not, in the reasonable judgment of such Bank, be disadvantageous to such Bank. Notwithstanding the foregoing, it is understood and agreed that nothing in this Section 8.04 shall interfere with the rights of any Bank to conduct its fiscal or tax affairs in such manner as it deems fit. (e) Within 90 days after the date of any payment of Taxes, the Obligors will furnish to the Agent notarized copies for each Bank of the original receipt evidencing payment thereof. If no Taxes shall be payable in respect of any payment under this Agreement, the Obligors will, upon the reasonable request of the Agent, furnish to the Agent a certificate in form reasonably acceptable to the Agent's counsel confirming that such payment is exempt from or not subject to Taxes. 48 (f) For any period with respect to which a Bank has failed to provide the Obligors with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(a) or (b) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Obligors shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as CD Loans or Euro-Dollar Loans, as the case may be, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid, all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. ARTICLE IX GUARANTY SECTION 9.01. The Guaranty. Each Guarantor hereby unconditionally, absolutely and irrevocably guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of all amounts payable by the Borrower under the Financing Documents including, without limitation, the principal of and interest on each Note issued by the Borrower pursuant to this 49 Agreement. Upon failure by the Borrower to pay punctually any such amount, each Guarantor shall forthwith on demand pay the amount not so paid at the place and in the manner specified in this Agreement. SECTION 9.02. Guaranty Unconditional. The obligations of each Guarantor hereunder shall be unconditional, absolute and irrevocable and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any other Obligor under any of the Financing Documents, by operation of law or otherwise; (ii) any modification or amendment of or supplement to any of the Financing Documents; (iii) any release, non-perfection or invalidity of any direct or indirect security for any obligation of any other Obligor under any of the Financing Documents; (iv) any change in the corporate existence, structure or ownership of any Obligor, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any other Obligor or its assets or any resulting release or discharge of any obligation of any other Obligor contained in any of the Financing Documents; (v) the existence of any claim, set-off or other rights which any Obligor may have at any time against any other Obligor, the Agent, any Bank or any other corporation or person, whether in connection with any of the Financing Documents or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) any invalidity or unenforceability relating to or against any other Obligor for any reason of any of the Financing Documents, or any provision of applicable law or regulation purporting to prohibit the payment by any other Obligor of the principal of or interest on any Note or any other amount payable under any of the Financing Documents; or (vii) any other act or omission to act or delay of any kind by any Obligor, the Agent, any Bank or any other corporation or person or any other circumstance 50 whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of or defense to either Guarantor's obligations hereunder. SECTION 9.03. Discharge Only Upon Payment In Full; Reinstatement In Certain Circumstances. Each Guarantor's obligations hereunder shall remain in full force and effect until the Commitments shall have terminated and the principal of and interest on the Notes and all other amounts payable by the Borrower under the Financing Documents shall have been paid in full. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Borrower under the Financing Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, each Guarantor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 9.04. Waiver by each of the Guarantors. Each Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any corporation or person against any other Obligor or any other corporation or person. SECTION 9.05. Subrogation. Each Guarantor irrevocably waives any and all rights to which it may be entitled, by operation of law or otherwise, upon making any payment hereunder to be subrogated to the rights of the payee against the Borrower with respect to such payment or otherwise to be reimbursed, indemnified or exonerated by the Borrower in respect thereof. SECTION 9.06. Stay of Acceleration. If acceleration of the time for payment of any amount payable by the Borrower under any of the Financing Documents is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by each Guarantor hereunder forthwith on demand by the Agent made at the request of the requisite proportion of the Banks specified in Article VI. SECTION 9.07. Limit of Liability. The obligations of each Guarantor hereunder shall be limited to an aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance under any applicable bankruptcy, insolvency or similar law. 51 ARTICLE X MISCELLANEOUS SECTION 10.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of any Obligor or the Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (iii) if given by mail, 10 days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Agent under Article II or Article VIII shall not be effective until received. SECTION 10.02. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in the Financing Documents shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent, including fees and disbursements of special counsel for the Agent, reasonably incurred in connection with the preparation of the Financing Documents, any waiver or consent hereunder or thereunder or any amendment hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if an Event of Default occurs, all out-of- pocket expenses incurred by the Agent and each Bank, including (without duplication) the fees and disbursements 52 of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be reasonably incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Financing Documents or any actual or proposed use of proceeds of Loans; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 10.04. Sharing of Set-Offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. Each Obligor agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Obligor in the amount of such participation. SECTION 10.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or 53 waived if, but only if, such amendment or waiver is in writing and is signed by the Obligors and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment, (iv) release the Guarantors hereunder or (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 10.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Obligors may not assign or otherwise transfer any of their rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii), (iv) or (v) of Section 10.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement and subject to subsection (e) below, be entitled to the benefits of Article VIII with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for 54 purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial Commitment of not less than $5,000,000, unless the Borrower shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit I hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, and the Agent; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent shall be required; and provided further that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans; and provided further that, unless the Borrower shall otherwise consent or the assignment is for all of the rights and obligations of the transferor Bank, the Commitment of such transferor Bank after giving effect to such assignment (together with the Commitments of its affiliates) shall not be less than $5,000,000. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any 55 greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 10.07. Collateral. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 10.08. Governing Law. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. SECTION 10.09. Counterparts; Integration; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party). SECTION 10.10. Judicial Proceedings. (a) Consent to Jurisdiction. Each Obligor irrevocably submits to the jurisdiction of any federal court sitting in New York City and, in the event that jurisdiction cannot be obtained or maintained in a federal court, to the jurisdiction of any New York State court sitting in New York City over any suit, action or proceeding arising out of or relating to any of the Financing Documents. Each Obligor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such court and any claim that any suit, action or proceeding brought in such a court has been brought in an inconvenient forum. Each Obligor agrees that a final judgment in any such suit, action or proceeding brought in such a court shall be 56 conclusive and binding upon it and will be given effect in Bermuda or the Cayman Islands, as the case may be, to the fullest extent permitted by applicable law and may be enforced in any federal or New York State court sitting in New York City (or any other courts to the jurisdiction of which such Obligor is or may be subject) by a suit upon such judgment, provided that service of process is effected upon it in one of the manners specified herein or as otherwise permitted by law. (b) Appointment of Agent for Service of Process. Each Obligor hereby irrevocably designates and appoints CT Corporation System having an office on the date hereof at 1633 Broadway, New York, New York 10019 as its authorized agent, to accept and acknowledge on its behalf, service of any and all process which may be served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City. Each Obligor represents and warrants that such agent has agreed in writing to accept such appointment and that a true copy of such designation and acceptance has been delivered to the Agent. Said designation and appointment shall be irrevocable until all principal and interest and all other amounts payable hereunder and under the Notes shall have been paid in full in accordance with the provisions hereof and thereof. If such agent shall cease so to act, each Obligor covenants and agrees to designate irrevocably and appoint without delay another such agent satisfactory to the Agent and to deliver promptly to the Agent evidence in writing of such other agent's acceptance of such appointment. (c) Service of Process. Each Obligor hereby consents to process being served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City by service of process upon the agent of such Obligor for service of process in such jurisdiction appointed as provided in subsection (b) above; provided that, to the extent lawful and possible, notice of said service upon such agent shall be mailed by registered or certified air mail, postage prepaid, return receipt requested, to such Obligor at its address specified on the signature page hereof or to any other address of which such Obligor shall have given written notice to the Bank. Each Obligor irrevocably waives, to the fullest extent permitted by law, all claim of error by reason of any such service in such manner and agrees that such service shall be deemed in every respect effective service of process upon such Obligor in any such suit, action or proceeding and shall, to the fullest extent 57 permitted by law, be taken and held to be valid and personal service upon and personal delivery to such Obligor. (d) No Limitation on Service or Suit. Nothing in this Section 10.10 shall affect the right of the Agent or any Bank to serve process in any other manner permitted by law or limit the right of the Agent or any Bank to bring proceedings against any Obligor in the courts of any jurisdiction or jurisdictions. SECTION 10.11. Judgment Currency. If, under any applicable law and whether pursuant to a judgment being made or registered against any Obligor or for any other reason, any payment under or in connection with any of the Financing Documents is made or satisfied in a currency (the "Other Currency") other than that in which the relevant payment is due (the "Required Currency") then, to the extent that the payment (when converted into the Required Currency at the rate of exchange on the date of payment or, if it is not practicable for the party entitled thereto (the "Payee") to purchase the Required Currency with the Other Currency on the date of payment, at the rate of exchange as soon thereafter as it is practicable for it to do so) actually received by the Payee falls short of the amount due under the terms of this Agreement and the Notes, each Obligor shall, to the extent permitted by law, as a separate and independent obligation, indemnify and hold harmless the Payee against the amount of such short-fall. For the purpose of this Section, "rate of exchange" means the rate at which the Payee is able on the relevant date to purchase the Required Currency with the Other Currency and shall take into account any premium and other costs of exchange. SECTION 10.12. WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 10.13. Existing Credit Agreement. On the Closing Date and simultaneously with the closing the Borrower hereby gives notice to Morgan Guaranty Trust Company of New York, as agent, under Section 2.09 of the Credit Agreement referred to in clause (x) of Section 3.01 of the termination of the Commitments (as defined therein) and the Banks hereby waive the requirement that prior notice of such termination be given as therein provided. 58 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ACE LIMITED The Common Seal of ACE Limited was hereunto affixed in the presence of: By ___________________ Title: Director The ACE Building 30 Woodbourne Avenue ___________________ Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Secretary Facsimile number: (441) 295-5221 ___________________ A.C.E. INSURANCE COMPANY, LTD., as Guarantor The Common Seal of A.C.E. Insurance Company, Ltd. was hereunto affixed in the presence of: By ____________________________ Title: Director The ACE Building 30 Woodbourne Avenue ___________________ Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Director/Secretary Facsimile number: (441) 295-5221 ___________________ 59 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD., as Guarantor The Common Seal of Corporate Officers and Directors Assurance, Ltd. was hereunto affixed in the presence of: By ____________________________ Title: Director The ACE Building 30 Woodbourne Avenue ___________________ Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Director/Secretary Facsimile number: (441) 295-5221 ___________________ 60 Commitments - ----------- $10,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ____________________________ Title: $8,000,000 BANK OF BERMUDA By ____________________________ Title: $8,000,000 THE BANK OF NEW YORK By ____________________________ Title: $8,000,000 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By ____________________________ Title: $8,000,000 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH By ____________________________ Title: By ____________________________ Title: 61 $8,000,000 MELLON BANK, N.A. By ____________________________ Title: ________________ Total Commitments $ 50,000,000 ================= 62 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By___________________________ Title: 60 Wall Street New York, New York 10260-0060 Attention: _________________ Telex number: 177615 Facsimile number: 212-648-5249 63 EXHIBIT A NOTE New York, New York , 19 For value received, ACE Limited, a Cayman Islands corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the last day of the Interest Period relating to such Loan. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Credit Agreement dated as of November 15, 1996 among the Borrower, A.C.E. Insurance Company, Ltd. and Corporate Officers & Directors Assurance Ltd., as Guarantors, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. Pursuant to the Credit Agreement payment of principal and interest on this Note is unconditionally guaranteed by the Guarantors named above. ACE LIMITED By________________________ Title: 2 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL ________________________________________________________________________________ Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 3 EXHIBIT B Form of Money Market Quote Request ---------------------------------- [Date] To: Morgan Guaranty Trust Company of New York (the "Agent") From: [Name of Borrower] Re: Credit Agreement (as amended, the "Credit Agreement") dated as of November 15, 1996 among the Borrower, A.C.E. Insurance Company, Ltd. and Corporate Officers & Directors Assurance Ltd., as Guarantors, the Banks listed on the signature pages thereof and the Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: ------------------ Principal Amount* Interest Period** - ---------------- ----------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] - -------------------- *Amount must be $5,000,000 or a larger multiple of $1,000,000. **Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. Terms used herein have the meanings assigned to them in the Credit Agreement. ACE LIMITED By ----------------------- Title: 2 EXHIBIT C Form of Invitation for Money Market Quotes ------------------------------------------ To: [Name of Bank] Re: Invitation for Money Market Quotes to [Name of Borrower] (the "Borrower") Pursuant to Section 2.03 of the Credit Agreement dated as of November 15, 1996, as amended, among the Borrower, A.C.E. Insurance Company, Ltd. and Corporate Officers & Directors Assurance Ltd., as Guarantors, the Banks parties thereto and the undersigned, as Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: ------------------ Principal Amount Interest Period - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By --------------------------- Authorized Officer EXHIBIT D Form of Money Market Quote -------------------------- To: Morgan Guaranty Trust Company of New York, as Agent Re: Money Market Quote to [Name of Borrower] (the "Borrower") In response to your invitation on behalf of the Borrower dated - -------------, 19--, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: -------------------------------- 2. Person to contact at Quoting Bank: ----------------------------- 3. Date of Borrowing: --------------------* 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates:
Principal Interest Money Market Amount** Period*** [Margin****] [Absolute Rate*****] - ---------- --------- ----------------------------------- $ $
[Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $------------.]** - --------------- * As specified in the related Invitation. ** Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. (notes continued on following page) We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement dated as of November 15, 1996, as amended, among the Borrower, A.C.E. Insurance Company, Ltd. and Corporate Officers & Directors Assurance Ltd., as Guarantors, the Banks listed on the signature pages thereof and yourselves, as Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated: By: --------------- --------------------- Authorized Officer - ---------- *** Not less than one month or not less than 7 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. **** Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". ***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%). 2 EXHIBIT H FORM OF DAVIS POLK & WARDWELL OPINION ------------------------------------- November 15, 1995 To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260-0060 Ladies and Gentlemen: We have participated in the preparation of the Credit Agreement (the "Credit Agreement") dated as of November 15, 1996 among ACE Limited, a Cayman Islands company limited by shares (the "Borrower"), and A.C.E. Insurance Company, Ltd., a Bermuda limited liability company ("ACE Insurance"), and Corporate Officers & Directors Assurance Ltd., a Bermuda limited liability company ("CODA"), as Guarantors, the Banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Agent, and have acted as special United States counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.01(e) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporation action. To the Banks and the Agent 2 November 15, 1995 Referred to Below 2. The execution, delivery and performance by each Guarantor of the Credit Agreement are within such Guarantor's corporate powers and have been duly authorized by all necessary corporate action. 3. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. The Credit Agreement constitutes a valid and binding agreement of each Guarantor enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. In giving the foregoing opinion we have relied, with your consent and without independent investigation, as to all matters governed by the laws of (i) the Cayman Islands, upon the opinion of Maples and Calder dated the date hereof, a copy of which has been delivered by you pursuant to Section 3.01(b) of the Credit Agreement and (ii) Bermuda, upon the opinion of Conyers, Dill & Pearman dated the date hereof, a copy of which has been delivered to you pursuant to Section 3.01(c) of the Credit Agreement. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other Person without our prior written consent. Very truly yours, 2 EXHIBIT I ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of __________ __, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), [BORROWER] (the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S S E T H - - - - - - - - - - WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the Credit Agreement dated as of November 15, 1996 among the Borrower, A.C.E. Insurance Company, Ltd. and Corporate Officers & Directors Assurance Ltd., as Guarantors, the Assignor and the other Banks party thereto, as Banks, and the Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Borrower and the Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.* It is understood that commitment and/or facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. [SECTION 4. Consent of the Borrower and the Agent. This Agreement is conditioned upon the consent of the Borrower and the Agent pursuant to Section 10.06(c) of - ------------------ *Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. 2 the Credit Agreement. The execution of this Agreement by the Borrower and the Agent is evidence of this consent. Pursuant to Section 10.06(c) the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein.] SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By_________________________ Title: [ASSIGNEE] By__________________________ Title: 3 ACE LIMITED By__________________________ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By__________________________ Title: 4 EXHIBIT J [CT System] [Dated the Closing Date] To the Persons Identified on Schedule A Dear Sirs: In respect of the Credit Agreement dated as of November 15, 1996 (the "Agreement") among ACE Limited, (the "Borrower"), as Borrower, A.C.E. Insurance Company, Ltd. ("A.C.E. Insurance") and Corporate Officers & Directors Assurance Ltd., ("CODA" and, together with A.C.E. Insurance, the "Guarantors"), as Guarantors, the Banks listed therein (the "Banks") and Morgan Guaranty Trust Company of New York, as Agent (the "Agent"), the undersigned hereby accepts the irrevocable designation and appointment of it as of the date hereof as agent for the Borrower and each of the Guarantors to accept and acknowledge service of any and all process, as contemplated by Section 10.10(b) of the Agreement and otherwise as provided thereby, such acceptance to remain in effect until the Agreement shall have been terminated and all obligations thereunder of the Borrower and each Guarantor shall have been paid in full. The undersigned agrees to give the Agent or the Borrower or the Guarantors, as applicable, immediate notice by telephone, fax, telex, cable or any other means of instant communication upon receipt of all papers served upon the undersigned pursuant to such appointment and to forward promptly to the Agent or the Borrower or the Guarantors, as the case may be, all such papers served pursuant to such appointment by reputable overnight carrier. Very truly yours, CT SYSTEM By:__________________________ Title: SCHEDULE A Morgan Guaranty Trust Company of New York, as Agent Morgan Guaranty Trust Company of New York [other Banks] ACE Limited, as Borrower A.C.E. Insurance Company, Ltd., as Guarantor Corporate Officers & Directors Assurance Ltd., as Guarantor 2 EX-10.26 4 REIMBURSEMENT AGREEMENT AND PLEDGE AGREEMENT (Pounds)75,000,000 REIMBURSEMENT AGREEMENT dated as of November 22, 1996 among A.C.E. Insurance Company, Ltd., The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent TABLE OF CONTENTS/*/
Page ARTICLE I DEFINITIONS SECTION 1.01. Definitions......................... 1 SECTION 1.02. Accounting Terms and Determinations...................... 7 SECTION 1.03. United States Dollars and English Pounds Sterling..................... 7 ARTICLE II THE LETTERS OF CREDIT SECTION 2.01. Commitments to Issue Letters of Credit; Extension................... 8 SECTION 2.02. Notice of Issuance.................. 9 SECTION 2.03. Drawings under Letters of Credit; Reimbursement....................... 10 SECTION 2.04. Obligations Absolute................ 11 SECTION 2.05. Indemnification..................... 12 SECTION 2.06. Fees................................ 13 SECTION 2.07. Increased Costs; Reduced Return..... 14 SECTION 2.08. Payments and Computations........... 15 ARTICLE III CONDITIONS SECTION 3.01. Conditions Precedent to Closing..... 15 SECTION 3.02. Conditions Precedent to Issuance of the Letters of Credit............... 17 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence and Power....... 18 SECTION 4.02. Corporate and Governmental Authorization; No Contravention..... 18 SECTION 4.03. Binding Effect...................... 18 SECTION 4.04. Financial Information............... 18
- --------------- /*/The Table of Contents is not a part of this Agreement. i
Page ---- SECTION 4.05. Litigation............................................... 19 SECTION 4.06. ERISA.................................................... 19 SECTION 4.07. Taxes.................................................... 19 SECTION 4.08. Not an Investment Company................................ 19 SECTION 4.09. Full Disclosure.......................................... 20 SECTION 4.10. Compliance with Laws..................................... 20 SECTION 4.11. Lien..................................................... 20 ARTICLE V COVENANTS SECTION 5.01. Information.............................................. 22 SECTION 5.02. Payment of Obligations................................... 23 SECTION 5.03. Maintenance of Property; Insurance....................... 24 SECTION 5.04. Conduct of Business and Maintenance of Existence......... 24 SECTION 5.05. Compliance with Laws..................................... 24 SECTION 5.06. Inspection of Property, Books and Records................ 25 SECTION 5.07. Leverage................................................. 25 SECTION 5.08. Subsidiary Debt.......................................... 25 SECTION 5.09. Minimum Tangible Net Worth............................... 25 SECTION 5.10. Negative Pledge.......................................... 25 SECTION 5.11. Consolidations, Mergers and Sales of Assets.............. 27 SECTION 5.12. No Amendments............................................ 27 SECTION 5.13. ERISA.................................................... 27 SECTION 5.14. Termination Of Existing Letter Of Credit................. 27 ARTICLE VI DEFAULTS SECTION 6.01. Events of Default........................................ 27 SECTION 6.02. Notice of Default........................................ 31 ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization............................ 31 SECTION 7.02. Agent and Affiliates..................................... 31 SECTION 7.03. Action by Agent.......................................... 31 SECTION 7.04. Consultation with Experts................................ 31 SECTION 7.05. Liability of Agent....................................... 31 SECTION 7.06. Indemnification.......................................... 32
ii
Page SECTION 7.07. Credit Decision........................................... 33 SECTION 7.08. Successor Agent........................................... 33 ARTICLE VIII MISCELLANEOUS SECTION 8.01. Notices.................................................. 33 SECTION 8.02. No Waivers............................................... 34 SECTION 8.03. Expenses; Indemnification................................ 34 SECTION 8.04. Sharing of Set-Offs...................................... 35 SECTION 8.05. Amendments and Waivers................................... 35 SECTION 8.06. Successors and Assigns................................... 36 SECTION 8.07. Collateral............................................... 37 SECTION 8.08. Governing Law............................................ 37 SECTION 8.09. Counterparts; Integration; Effectiveness................. 38 SECTION 8.10. Judicial Proceedings..................................... 38 SECTION 8.11. Judgment Currency........................................ 39 SECTION 8.12. WAIVER OF JURY TRIAL..................................... 40 SECTION 8.13. Taxes.................................................... 40 SECTION 8.14. Confidential Information................................. 41 Schedule I - Participation of Banks Exhibit A - Form of Letter of Credit Exhibit B - Opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Custodian Exhibit C - Opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Company Exhibit D - Opinion of Mayer, Brown & Platt, New York counsel for the Company Exhibit E - Opinion of Davis Polk & Wardwell, special United States counsel for the Issuing Bank and the Agent Exhibit F - Letter from CT Corporation System Exhibit G - Form of Letter of Credit Request Exhibit H - Form of Pledge Agreement Exhibit I - Form of Custodian Agreement
iii REIMBURSEMENT AGREEMENT REIMBURSEMENT AGREEMENT dated as of November 22, 1996 among A.C.E. INSURANCE COMPANY, LTD., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "ACE Limited" means ACE Limited, a Cayman Islands company limited by shares, and its successors. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Banks hereunder, and its successors in such capacity. "Applicant" means ACE Capital Limited, a corporation incorporated under the laws of England and Wales, and its successors. "Assignee" has the meaning set forth in Section 8.06(c). "Bank" means each bank listed on the signature pages hereof, each bank or other financial institution which becomes a Bank pursuant to Section 2.01(b)(iii) and each Assignee which becomes a Bank pursuant to Section 8.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Bermuda Companies Law" means The Companies Act 1981 of Bermuda, as amended, and the regulations promulgated thereunder. "Bermuda Insurance Law" means The Insurance Act 1978 of Bermuda, as amended, and the regulations promulgated thereunder. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City or London are authorized or required by law to close. "Closing Date" means the date on or after the Effective Date on which the Agent shall have received the documents specified in or pursuant to Section 3.01. "CODA" means Corporate Officers & Directors Assurance Ltd., a Bermuda limited liability company, and its successors. "Collateral" has the meaning set forth in the Pledge Agreement. "Company" means A.C.E. Insurance Company, Ltd., a Bermuda limited liability company, and its successors. "Confirmation Agreement" means the Confirmation and Agreement of The Bank of Bermuda Limited dated November 22, 1996, as amended, between the Custodian and the Agent, substantially in the form of Exhibit B to the Pledge Agreement. "Consolidated Debt" means at any date the Debt of the Company and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Company in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Tangible Net Worth" means at any date the consolidated stockholder's equity of the Company and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholder's equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to June 30, 1996 in the book value of any asset owned by the Company or a Consolidated Subsidiary and (ii) all unamortized debt discount and 2 expense, unamortized deferred charges, deferred acquisition costs, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "Custodian" means The Bank of Bermuda Limited in its capacity as Custodian under the Custodian Agreement. "Custodian Agreement" means the Custodian Agreement dated as of November 20, 1996, as amended, between the Custodian and the Company. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, solely for purposes of Section 5.10 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person, provided that the term "Debt" shall not include obligations of an insurance company under insurance policies or surety bonds issued by it. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. 3 "Effective Date" means the date this Agreement becomes effective in accordance with Section 8.09. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means, with respect to any Person, such Person, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with such Person or any such Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Event of Default" has the meaning set forth in Section 6.01. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Agent. "Financing Documents" means this Agreement, the Letters of Credit, the Pledge Agreement, the Notice of Pledge, the Confirmation Agreement and the Custodian Agreement, and any agreement, instrument or document executed and delivered in connection with or relating to any Letter of Credit. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement 4 conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Indemnitee" has the meaning set forth in Section 8.03(b). "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Issuing Bank" means Morgan Guaranty Trust Company of New York as issuer of the Letters of Credit hereunder. "Letters of Credit" means the standby letters of credit to be issued by the Issuing Bank pursuant to Section 2.01. "Letter of Credit Commitment" means (Pounds)75,000,000. "Letter of Credit Liabilities" means, for any Bank and at any time, the sum of (x) the amounts then owing to such Bank (including in its capacity as the Issuing Bank) by the Company to reimburse it in respect of amounts drawn under the Letters of Credit, including in respect of participations purchased by such Bank pursuant to Section 2.02(a) and (y) such Bank's ratable participation in the aggregate amount then available for drawing under the Letters of Credit. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Company shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Material Debt" means Debt of the Company and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $10,000,000. 5 "Material Financial Obligations" means a principal or face amount of Debt and/or current payment obligations in respect of Derivatives Obligations of the Company and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $10,000,000. "Notice of Issuance" has the meaning set forth in Section 2.02. "Notice of Pledge" means the Notice of Pledge dated November 22, 1996, as amended, between the Company and the Custodian, substantially in the form of Exhibit A to the Pledge Agreement. "Parent" has the meaning set forth in Section 2.08(b). "Participation Percentage" means, with respect to each Bank, the percentage of participation by such Bank in the Letters of Credit issued hereunder as set forth in Schedule I, as modified as a result of an assignment pursuant to Section 8.06. "Pledge Agreement" means the Pledge Agreement dated as of November 22, 1996, as amended, between the Company and the Agent, substantially in the form of Exhibit H hereto. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Reimbursement Obligation" has the meaning set forth in Section 2.03(b). "Required Banks" means at any time Banks having at least 66 2/3% of the aggregate Letter of Credit Liabilities. "Revolving Credit Agreement" means the Credit Agreement dated as of November 15, 1996, as amended, among ACE Limited, the Company and CODA, as guarantors, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Agent. "Subparticipant" has the meaning set forth in Section 8.06(b). "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a 6 majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Company. "Termination Date" means, with respect to each Letter of Credit, the initial expiry date of such Letter of Credit or, if it is extended, the date to which such Letter of Credit is so extended. "Wholly-Owned Consolidated Subsidiary" means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Company. Capitalized terms used but not otherwise defined herein shall have the respective meanings set forth in the Revolving Credit Agreement. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Company's independent public accountants) with the most recent audited consolidated financial statements of the Company and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Company notifies the Agent that the Company wishes to amend any covenant in Article V to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Company that the Required Banks wish to amend Article V for such purpose), then the Company's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. SECTION 1.03. United States Dollars and English Pounds Sterling. Each reference herein to "dollars" or "$" or "Pounds Sterling" or "(Pounds)" shall refer to United States Dollars or English Pounds, as the case may be. 7 ARTICLE II THE LETTERS OF CREDIT SECTION 2.01. Commitments to Issue Letters of Credit; Extension. (a)(i) Subject to the terms and conditions hereof, the Issuing Bank agrees to issue one or more letters of credit, substantially in the form of Exhibit A hereto, from time to time upon the request of the Applicant (the "Letters of Credit"); provided that, immediately after each Letter of Credit is issued, the aggregate amount of the Letter of Credit Liabilities shall not exceed the Letter of Credit Commitment. Upon the date of issuance by the Issuing Bank of a Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in such Letter of Credit and the related Letter of Credit Liabilities ratably in accordance with its Participation Percentage. (ii) Only one Letter of Credit can be issued hereunder, which must be issued on or before November 29, 1996, unless such Letter of Credit is extended as provided in subsection (b) below or this Agreement is amended as provided in Section 8.05; references herein to Letters of Credit and other similar references are contained herein only to accommodate the possibility that this Agreement may be amended to permit the issuance of multiple Letters of Credit. (b) (i) The extension or renewal of any Letter of Credit shall, for all purposes hereof (other than clause (i) of Section 3.02), be deemed to be an issuance of such Letter of Credit. On or before November 10 of each year, the Issuing Bank shall give notice of termination of each Letter of Credit, unless (x) it has theretofore timely received Notice of Issuance in respect of the Letters of Credit, (y) all of the other conditions contained in Section 3.02 are then satisfied and (z) each Bank party to this Agreement has theretofore agreed in writing to a one year extension in respect of such Letters of Credit, confirming the Participation Percentage of such Bank in such Letters of Credit; provided that no failure by the Issuing Bank to give any such notice of termination and no delay in giving any such notice shall affect the obligations of (i) the Company to reimburse the Issuing Bank for any drawing under any Letters of Credit or (ii) any Banks to pay to the Issuing Bank an amount in respect of such Bank's ratable share of any such drawing. 8 (ii) Each Bank party to this Agreement agrees that it will give notice to the Agent and the Company on or before September 15 of each year as to whether it agrees to a one year extension of the Letters of Credit, effective from the next succeeding January 1, provided that the failure of any Bank to give such notice or any delay in giving the same shall be deemed to be a notice from such Bank by September 15 that it does not agree to such a one year extension, and no such Bank shall incur any obligation or liability as a result of any such failure or delay. (iii) If any Bank party to this Agreement gives (or is deemed to have given) notice that it does not agree to a one year extension as contemplated by subsection (ii), then the Company may designate by October 20 of such year a bank or other financial institution which is willing to assume all of the rights and obligations of such Bank under this Agreement and the other Financing Documents, such bank or other financial institution to be subject to the written consent of the Issuing Bank (such consent not to be unreasonably withheld by the Issuing Bank in its good faith business judgment). In that case such Bank agrees to assign such rights and obligations to such designated bank or other financial institution and enter into an agreement therefor with such other bank or financial institution pursuant to which such bank or other financial institution agrees to pay to such Bank all amounts then due and owing (and all fees accrued to but excluding the date of such agreement) to such Bank hereunder and under each other Financing Document, in which case such Bank shall no longer be a party hereto (except as to Sections 2.05, 2.07 and 8.03 for the period prior to the date of such agreement) and such bank or other financial institution shall become a Bank party hereto. SECTION 2.02. Notice of Issuance. (a) The Applicant shall give the Issuing Bank notice, by a Letter of Credit Request in the form of Exhibit G hereto, by November 1 of each year (or, in the case of 1996, by November 22, 1996), specifying the date the applicable Letter of Credit is to be issued or extended and setting forth the terms of such Letter of Credit which are to be completed (including, without limitation, the beneficiary thereof, which must be the Society and Corporation of Lloyd's (such notice, including any such notice given in connection with the extension of a Letter of Credit, a "Notice of Issuance"). (b) Upon receipt of a Notice of Issuance, the Issuing Bank shall promptly notify each Bank of the contents thereof and of the amount of such Bank's participation in the applicable Letter of Credit. The issuance by the Issuing Bank of each Letter of Credit shall, in addition to 9 the conditions precedent set forth in Article III, be subject to the conditions precedent that (i) such Letter of Credit shall be substantially in the form of Exhibit A hereto, or in such other form and contain such terms as shall be satisfactory to the Company and the Issuing Bank and the Required Banks and (ii) the Company shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested. SECTION 2.03. Drawings under Letters of Credit; Reimbursement. (a) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the Issuing Bank shall promptly notify the Company and each other Bank as to the amount to be paid as a result of such drawing and the payment date. The Company shall be irrevocably and unconditionally obligated forthwith to reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit (each, a "Reimbursement Obligation"), without presentment, demand, protest or other formalities of any kind. All such amounts paid by the Issuing Bank and remaining unpaid by the Company shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of the Base Rate plus 2%. (b) In addition, each Bank will pay to the Issuing Bank immediately upon the Issuing Bank's demand at any time during the period commencing after such drawing until reimbursement therefor in full by the Company, an amount equal to such Bank's ratable share of such drawing (in proportion to its participation therein), together with interest on such amount for each day from the date of the Issuing Bank's demand for such payment (or, if such demand is made after 12:00 Noon (New York City time) on such date, from the next succeeding Business Day) to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Base Rate plus 2%. Each Bank shall also be liable for its pro rata share of any amounts paid by the Company that are subsequently rescinded or avoided, or are otherwise restored or returned. Such liability shall be unconditional and without regard to the occurrence of any Default or the compliance by the Company with any of its obligations under this Agreement or any other Financing Document. The Issuing Bank will pay to each Bank ratably all amounts received from the Company for application in payment of its reimbursement obligations in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant hereto. 10 SECTION 2.04. Obligations Absolute. The obligations of the Company and each Bank under Section 2.03 shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (i) any lack of validity or enforceability of this Agreement or any Letter of Credit or any other Financing Document; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of this Agreement or any Letter of Credit or any other Financing Document; (iii) the use which may be made of any Letter of Credit by, or any acts or omission of, a beneficiary of a Letter of Credit (or any Person for whom such beneficiary may be acting); (iv) the existence of any claim, set-off, defense or other rights that the Company may have at any time against a beneficiary of a Letter of Credit (or any Person for whom such beneficiary may be acting), the Banks (including the Issuing Bank) or any other Person, whether in connection with this Agreement or any Letter of Credit or any other Financing Document or any unrelated transaction; (v) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (vi) payment under a Letter of Credit against presentation to the Issuing Bank of a draft or certificate that does not comply with the terms of such Letter of Credit, provided that the Issuing Bank's determination that documents presented under such Letter of Credit comply with the terms thereof shall not have constituted gross negligence or willful misconduct of the Issuing Bank; or (vii) any other act or omission to act or delay of any kind by any Bank (including, without limitation, the Issuing Bank), the Agent or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this clause (vii), constitute a 11 legal or equitable discharge of the Company's or the Bank's obligations hereunder. SECTION 2.05. Indemnification. (a) The Company hereby indemnifies and holds harmless each Bank (including the Issuing Bank) and the Agent from and against any and all claims, damages, losses, liabilities, costs or expenses which such Bank or the Agent may incur hereunder or under any other Financing Document or in connection with any transaction contemplated hereby or thereby (including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the Issuing Bank may incur by reason of or in connection with the failure of any other Bank to fulfill or comply with its obligations to the Issuing Bank hereunder (but nothing herein contained shall affect any rights the Company may have against such defaulting Bank)), and none of the Banks (including the Issuing Bank) nor the Agent nor any of their officers or directors or employees or agents shall be liable or responsible, by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including without limitation any of the circumstances enumerated in Section 2.04, as well as (i) any error, omission, interruption or delay in transmission or delivery of any message, by mail, cable, telegraph, telex or otherwise, (ii) any loss or delay in the transmission of any document required in order to make a drawing under a Letter of Credit and (iii) any consequences arising from causes beyond the control of the Issuing Bank, including without limitation any government acts; provided that the Company shall not be required to indemnify the Issuing Bank for any claims, damages, losses, liabilities, costs or expenses, and the Company shall have a claim against the Issuing Bank for direct (but not consequential) damage suffered by it, to the extent found by a court of competent jurisdiction to have been caused by (x) the willful misconduct or gross negligence of the Issuing Bank in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) the Issuing Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit except as a direct result of court orders prohibiting such payment; and provided further that the Company shall not be required to indemnify any Bank (other than the Issuing Bank the indemnification of which under this Section 2.05 is governed by the preceding proviso) or the Agent for any claims, damages, losses, liabilities, costs or expenses suffered by it to the extent found by a court of competent jurisdiction to have been caused by its willful misconduct or gross negligence. Nothing in this 12 Section 2.05 is intended to limit the obligations of the Company under any other provision of this Agreement. To the extent the Company does not indemnify the Issuing Bank as required by this subsection, the Banks agree to do so ratably in accordance with their Participation Percentage. (b) The parties hereto agree that in making any payment under any Letter of Credit by the Issuing Bank none of the following shall constitute or be deemed to constitute the wilful misconduct or gross negligence of the Issuing Bank: (i) the Issuing Bank's exclusive reliance on any document (including without limitation any draft) presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented thereunder, whether or not the amount due to the beneficiary thereof equals the amount of such draft, and whether or not any document presented thereunder proves to be inaccurate or otherwise insufficient in any respect, if such document on its face appears to be in order and whether or not such document or any statement contained therein proves to be forged or invalid or inaccurate or untrue in any respect whatsoever and (ii) any non-material, non-compliance by the documents (including without limitation any draft) presented under any Letter of Credit with the terms thereof. SECTION 2.06. Fees. (a) Ticking Fee. On the earlier of the date of first issuance of a Letter of Credit and January 1, 1997, the Company shall pay to the Agent, for the account of each Bank (including the Issuing Bank), a ticking fee with respect to such Letter of Credit on the Letter of Credit Commitment, at a rate per annum equal to .09 of 1%, calculated on a 360-day basis, for the period from and including the Effective Date to but excluding January 1, 1997. (b) Letter of Credit Fee. The Company agrees to pay to the Agent, for the account of each Bank (including the Issuing Bank), a letter of credit fee with respect to each Letter of Credit, at a rate per annum equals to .15 of 1%, calculated on a 360-day basis, for the period from and including January 1, 1997 to but excluding the Termination Date of such Letter of Credit, on such Bank's share of the daily average amount available at any time to be drawn under such Letter of Credit. The letter of credit fees shall be payable quarterly, with respect to each Letter of Credit, in arrears on the last Business Day of each March, June, September and December and on its Termination Date. (c) Fronting Fee. The Company agrees to pay to the Issuing Bank for its own account, as compensation for 13 its services hereunder, a fronting fee for each issuance of a Letter of Credit in the amounts and at the times agreed upon by the Company and the Issuing Bank. SECTION 2.07. Increased Costs; Reduced Return. (a) If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, (i) shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System), special deposit, insurance assessment or similar requirement against letters of credit issued by, or assets of, or deposits with or for the account of, or credit extended by, any Bank or (ii) shall impose on any Bank any other condition regarding this Agreement or any Letter of Credit and the result of any of the foregoing is to increase the cost to such Bank of issuing or maintaining such Letter of Credit (or its participation therein), or funding any drawings thereunder, or reduce the amount of any sum received or receivable by such Bank under this Agreement, by an amount deemed by such Bank to be material, then, within 45 days after demand by such Bank (with a copy to the Agent), the Company shall pay to such Bank all additional amounts which are necessary to compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or any Person controlling such Bank (a "Parent")) as a consequence of its obligations hereunder or under any Letter of Credit to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 45 days after demand by such Bank, the Company agrees to pay to such 14 Bank such additional amount or amounts as will compensate such Bank for such reduction. (c) Each Bank will promptly notify the Company of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 2.07. A certificate of any Bank claiming compensation under this Section 2.07 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 2.08. Payments and Computations. (a) The Company shall make each payment of Reimbursement Obligations, fees, interest and other amounts payable hereunder to the Agent, as provided herein, not later than 2:00 P.M. (New York City time) on the day when due in English Pounds in the case of Reimbursement Obligations or in United States Dollars in the case of fees, interest or other amounts payable hereunder immediately available at an address of the Agent specified in writing to the Company by the Agent. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of such Bank. Each payment shall be made without any set-off, counterclaim or deduction. (b) Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in any computation of interest or fees. (c) In the event that any payment to the Agent hereunder is made after 2:00 P.M. (London or New York City time, as relevant) on a Business Day, such payment shall be deemed received on the immediately following Business Day, and such extension of time shall be included in any computation of interest or fees. ARTICLE III CONDITIONS SECTION 3.01. Conditions Precedent to Closing. The closing hereunder shall occur upon satisfaction of the condition described in clause (h) below and receipt by the Agent of the following documents, each dated the Closing Date unless otherwise indicated: 15 (a) counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) an executed copy of the Pledge Agreement, the Notice of Pledge, the Confirmation Agreement and the Custodian Agreement; (c) an opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Custodian, substantially in the form of Exhibit B hereto; (d) an opinion of Conyers, Dill & Pearman, special Bermuda counsel for the Company, substantially in the form of Exhibit C hereto; (e) an opinion of Mayer, Brown & Platt, New York counsel for the Company, substantially in the form of Exhibit D hereto; (f) an opinion of Davis Polk & Wardwell, special United States counsel for the Agent, substantially in the form of Exhibit E hereto; (g) a letter from CT System in New York, New York, substantially in the form of Exhibit F hereto, evidencing CT System's agreement to act as agent for service of process for the Company pursuant to Section 8.10(b); (h) receipt by the Agent and the Banks of all fees due to them on or prior to the Effective Date; and (i) all documents the Agent may reasonably request prior to the Closing Date relating to the existence of the Company, the corporate authority for and the validity of this Agreement and each other Financing Document, the existence, validity, enforceability and first priority of a Lien in the Collateral (assuming that the Collateral is delivered at the time, in the amount and as otherwise provided in the Pledge Agreement) and any other matters relevant hereto, all in form and substance satisfactory to the Agent. 16 The Agent shall promptly notify the Company and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Conditions Precedent to Issuance of the Letters of Credit. The obligation of the Issuing Bank to issue any Letter of Credit is subject to the (i) fact that such Letter of Credit is first issued (as opposed to extended or renewed) on or prior to November 29, 1996 and (ii) the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Issuance as required by Section 2.02; (b) the fact that the aggregate amount of the Letter of Credit Liabilities immediately after such issuance will not exceed the Letter of Credit Commitment; (c) the fact that, immediately before and after such issuance, no Default shall have occurred and be continuing; (d) the fact that the representations and warranties of the Company contained in this Agreement and in each other Financing Document shall be true on and as of the date of such issuance, except representations and warranties which expressly refer to an earlier date in which case the same shall be true on and as of such earlier date; and (e) the fact that such Letter of Credit is being issued solely as security to support the Applicant's underwriting business at the Society and Corporation of Lloyd's provided in accordance with the requirements of the Society and Corporation of Lloyd's. Such issuance shall be deemed to be a representation and warranty by the Company on the date of such issuance as to the facts specified in clauses (b) through (e), inclusive, of this Section. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Company represents and warrants on each day during the term of this Agreement that: 17 SECTION 4.01. Corporate Existence and Power. The Company is a limited liability company, duly incorporated and validly existing under the laws of Bermuda. The Company has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The Company is a Wholly-Owned Consolidated Subsidiary of ACE Limited. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement and the other Financing Documents to which it is a party are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Memorandum of Association, Articles of Association or Bye-Laws (or any comparable document) of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. SECTION 4.03. Binding Effect. Each of this Agreement and the other Financing Documents to which the Company is a party constitutes a valid and binding agreement of the Company enforceable in accordance with its terms. SECTION 4.04. Financial Information. (a) The consolidated balance sheet of the Company and its Consolidated Subsidiaries as of September 30, 1995 and the related consolidated statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by Coopers & Lybrand, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and retained earnings and cash flows for such fiscal year. (b) Since June 30, 1996 there has been no material adverse change in the business, financial position or results of operations of the Company and its Consolidated Subsidiaries, considered as a whole. (c) The balance sheet of CODA as of September 30, 1995 and the related statements of operations and retained earnings and of cash flows for the fiscal year then ended, 18 all reported on by Coopers & Lybrand, copies of which have been delivered to each of the Banks, fairly present, in all material respects, in conformity with generally accepted accounting principles, the financial position of CODA as of such date and its results of operations and retained earnings and cash flows for such fiscal year. (d) Since June 30, 1996 there has been no material adverse change in the business, financial position or results of operations of CODA and its Consolidated Subsidiaries, considered as a whole. SECTION 4.05. Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Company threatened against or affecting, the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable likelihood of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Company and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity or enforceability of this Agreement or any other Financing Document. SECTION 4.06. ERISA. Neither the Company nor any member of its ERISA Group maintains or contributes to, or has within the previous six years (whether or not while a member of such Person's current ERISA Group) maintained or contributed to, or been required to maintain or been jointly and severally liable for contributions to, or has liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. SECTION 4.07. Taxes. The Company and its Subsidiaries have filed all income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any Subsidiary. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Company, adequate. SECTION 4.08. Not an Investment Company. The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 19 SECTION 4.09. Full Disclosure. All information heretofore furnished by the Company or on behalf of the Company by ACE Limited to the Agent or any Bank for purposes of or in connection with this Agreement or any of the other Financing Documents or any transaction contemplated hereby or thereby is, and all such information hereafter furnished by the Company or on behalf of the Company by ACE Limited to the Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Company has disclosed to the Banks in writing any and all facts which materially and adversely affect or may affect (to the extent the Company can now reasonably foresee) the business, operations or financial condition of the Company and its Consolidated Subsidiaries, taken as a whole, or the ability of the Company to perform its obligations under this Agreement or any of the other Financing Documents. SECTION 4.10. Compliance with Laws. The Company and each Subsidiary are in compliance, in all material respects, with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. SECTION 4.11. Lien. (a) Upon delivery of the Collateral to the Custodian as provided in the Pledge Agreement, the Company will have good and marketable title in and to the Collateral free and clear of all Liens (except the Lien created under the Financing Documents) and will hold such title and all of the Collateral in its own name and not in the name of any nominee or other Person, except that the Collateral described in clause (i) of the definition of "Eligible Securities" contained in Section 2(a) of the Pledge Agreement shall be held in the name of Citibank, N.A. for the account of the Company. (b) Upon delivery of the Collateral to the Custodian as provided in the Pledge Agreement, the Pledge Agreement will create in favor of the Agent for the benefit of the Banks a valid and enforceable first priority Lien on all of the Collateral, subject to the interest of the Custodian under the Financing Documents. (c) Upon delivery of the Collateral to the Custodian as provided in the Pledge Agreement, the Company will not have outstanding, nor will it be contractually bound to create, any Lien on or with respect to any of the Collateral, subject to the interest of the Custodian under the Financing Documents. 20 (d) The Company is not subject to any agreement, judgment, injunction, order, decree or other instrument or any law or regulation which would prevent or otherwise interfere with the Company's obligations to deliver Collateral in the amounts, at the times and as otherwise provided in the Pledge Agreement, subject to the interest of the Custodian under the Financing Documents. 21 ARTICLE V COVENANTS The Company agrees that, so long as any Letter of Credit is in effect or any Letter of Credit Liability remains unpaid: SECTION 5.01. Information. The Company will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Required Banks by Coopers & Lybrand or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of ACE Limited, a consolidated balance sheet of ACE Limited and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of operations and cash flows for such quarter and for the portion of ACE Limited's fiscal year ended at the end of such quarter, setting forth in the case of such statements of operations and cash flows in comparative form the figures for the corresponding quarter and the corresponding portion of ACE Limited's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer or the chief accounting officer of ACE Limited; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Company (i) setting forth in reasonable detail the calculations required to establish whether the Company was in compliance with the requirements of Sections 5.07 to 5.10, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default 22 then exists, setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (d) within five days after any officer of the Company obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Company setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (e) as soon as available and in any event within 20 days after submission, each statutory statement of the Company in the form submitted to the Bermuda Department of Insurance; (f) promptly upon obtaining knowledge thereof, (i) a copy of any notice from the Minister of Finance or the Registrar of Companies or any other Person of the revocation, the suspension or the placing of any restriction or condition on the registration as an insurer of the Company under the Bermuda Insurance Law or of the institution of any proceeding or investigation which could result in any such revocation, suspension or placing of such a restriction or condition, (ii) copies of any correspondence by, to or concerning the Company relating to an investigation conducted by the Minister of Finance, whether pursuant to Section 132 of the Bermuda Companies Law or otherwise and (iii) a copy of any notice of or requesting or otherwise relating to the winding up or any similar proceeding of or with respect to the Company; and (g) from time to time such additional information regarding the financial position, results of operations or business of the Company or any of its Subsidiaries as the Agent, at the request of any Bank, may reasonably request from time to time. SECTION 5.02. Payment of Obligations. The Company will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. 23 SECTION 5.03. Maintenance of Property; Insurance. (a) The Company will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Company will maintain, and will cause each Subsidiary to maintain, physical damage insurance on all real and personal property on an all risks basis (including the perils of flood and quake), covering the repair and replacement cost of all such property and consequential loss coverage for business interruption and extra expense. All such insurance shall be provided by insurers having an A.M. Best policyholders rating of not less than B+ or such other insurers as the Required Banks may approve in writing. The Company will deliver to the Banks (i) upon request of any Bank through the Agent from time to time, full information as to the insurance carried, (ii) within five days of receipt of notice from any insurer, a copy of any notice of cancellation or material change in coverage from that existing on the date of this Agreement and (iii) forthwith, notice of any cancellation or nonrenewal of coverage by the Company. SECTION 5.04. Conduct of Business and Maintenance of Existence. The Company will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Company and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect, their respective existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) the merger of a Subsidiary into the Company or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing or (ii) the termination of the existence of any Subsidiary if the Company in good faith determines that such termination is in the best interest of the Company and is not materially disadvantageous to the Banks. SECTION 5.05. Compliance with Laws. The Company will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of 24 compliance therewith is contested in good faith by appropriate proceedings. SECTION 5.06. Inspection of Property, Books and Records. The Company will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.07. Leverage. Consolidated Debt will at no time exceed 35% of Consolidated Tangible Net Worth. SECTION 5.08. Subsidiary Debt. The Company will not permit any of its Subsidiaries to create, assume or suffer to exist any Debt, except (i) Debt under the Financing Documents or the Revolving Credit Agreement, (ii) Debt owing to the Company or ACE Limited, (iii) Debt of Tripar Partnership, a Bermuda general partnership, owing to other Subsidiaries or Debt of such other Subsidiaries owing to Tripar Partnership, (iv) Debt in respect of letters of credit issued in the ordinary course of business and (v) Debt created by exercise of overdraft privileges on a basis not more frequent than once each calendar month for not more than five Business Days in an amount not to exceed $10,000,000 in the aggregate at any one time. SECTION 5.09. Minimum Tangible Net Worth. Consolidated Tangible Net Worth will at no time be less than the sum of (i) $900,000,000 plus (ii) 25% of the consolidated net income of the Company and its Consolidated Subsidiaries for the period from September 30, 1996 through the end of the Company's then most recent fiscal quarter (treated for this purpose as a single accounting period), provided that, for purposes of calculation under this Section 5.09, such consolidated net income shall in no event be less than zero. SECTION 5.10. Negative Pledge. Neither the Company nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: 25 (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement in an aggregate principal or face amount not exceeding $25,000,000; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; (d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Company or a Subsidiary and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Company or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not secured by any additional assets; (g) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $10,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (h) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $10,000,000; (i) Liens on any assets of the Company created pursuant to the Financing Documents; and (j) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Tangible Net Worth. 26 SECTION 5.11. Consolidations, Mergers and Sales of Assets. The Company will not (i) consolidate with or merge into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or any substantial part of its assets to any other Person. SECTION 5.12. No Amendments. The Company shall not amend or waive, or utilize or rely on any waiver of, any provision of the Pledge Agreement or the Confirmation Agreement without the written consent of the Agent and the Required Banks. SECTION 5.13. ERISA. Neither the Company nor any member of its ERISA Group will maintain or contribute to, or become obligated to maintain or become jointly and severally liable for contributions to, or have liability upon withdrawal from, any plan or arrangement subject to (i) the minimum funding standards of ERISA and the Internal Revenue Code, (ii) Part 3 of Subtitle B of Title I of ERISA or (iii) Title IV of ERISA. SECTION 5.14. Termination Of Existing Letter Of Credit. The Company shall cause the Issuing Bank to receive on January 2, 1997 its Irrevocable Letter of Credit No. 5250090140, together with evidence satisfactory to the Issuing Bank from the account party and applicant therefor and the beneficiary thereof that it has been cancelled on January 1, 1997. ARTICLE VI DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Company shall fail (i) to pay when due any Reimbursement Obligation or (ii) to pay within five Business Days of the due date thereof any interest or fees or other amounts payable hereunder; (b) the Company shall fail to observe or perform any covenant (i) contained in Sections 5.07 through 5.12, inclusive, or Section 5.14 or (ii) relating to the delivery of the Collateral and the perfection of the first priority charge and security interest created therein contained in any other Financing Document; 27 (c) the Company shall fail to observe or perform any covenant or agreement contained in this Agreement or in any other Financing Document (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Company by the Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Company in this Agreement or any other Financing Document or in any certificate, financial statement or other document delivered pursuant to this Agreement or any other Financing Document shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Company or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period or an Event of Default (as defined in the Revolving Credit Agreement) shall have occurred and be continuing; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; (g) (i) any corporate action is taken authorizing the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to the Company or authorizing any corporate action to be taken to facilitate any such winding up, liquidation, arrangement or other similar action or any petition shall be filed seeking the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to the Company by the Registrar of Companies in Bermuda, one or more holders of insurance policies or reinsurance certificates issued by the Company or by any other Person or Persons or any petition shall be presented for the winding up of the Company to a court of Bermuda as provided under the Bermuda Companies Law and in either such case such petition shall remain undismissed and unstayed for a period of 60 days or any creditors' or members' voluntary winding up of the Company as provided under the Bermuda Companies Law shall be commenced or any receiver shall be appointed by a creditor of the Company or by a court of Bermuda on the application of a creditor of the Company as provided under any 28 instrument giving rights for the appointment of a receiver; (ii) a proceeding shall be commenced by any Person seeking the rehabilitation, liquidation, dissolution or conservation of the assets of the Company or any substantial part thereof or any similar remedy and such proceedings shall remain undismissed and unstayed for a period of 60 days; (iii) the Company or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (iv) an involuntary case or other proceeding shall be commenced against the Company or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; (h) a judgment or order for the payment of money in excess of $10,000,000 shall be rendered against the Company or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 20% or more of the outstanding shares of common 29 stock of ACE Limited; or, during any period of 12 consecutive calendar months, individuals who were directors of ACE Limited on the first day of such period shall cease to constitute a majority of the board of directors of ACE Limited; or the Company shall cease to be a Wholly-Owned Consolidated Subsidiary of ACE Limited; (j) any court or arbitrator or any governmental body, agency or official which has jurisdiction in the matter shall decide, rule or order that any provision of any of the Financing Documents is invalid or unenforceable in any material respect, or the Company shall so assert in writing; (k) the registration of the Company as an insurer shall be revoked, suspended or otherwise have restrictions or conditions placed upon it unless, in the case of the placing of any such restrictions or conditions, such restrictions or conditions could not have a material adverse effect on the interests of the Issuing Bank or the Agent or the Banks under the Financing Documents; (l) the Company shall fail to deliver Collateral at the times, in the amounts or as otherwise specified in the Financing Documents or the Lien created pursuant thereto on the Collateral shall at any time or for any reason cease to be a valid, enforceable or first priority Lien on any of the Collateral; or (m) the Company shall terminate, amend or waive, or utilize or rely on any waiver of, any provision of the Custodian Agreement or the Notice of Pledge without the written consent of the Agent and the Required Banks; then, and in every such event, the Agent may, and in the case of clauses (i), (ii) and (iv) below shall if requested by Banks having more than 50% of the aggregate amount of Letter of Credit Liabilities, (i) by notice to the Company terminate the Letter of Credit Commitment and it shall thereupon terminate, (ii) by notice to the Company declare, to the extent permitted by law, the Letter of Credit Liabilities to be and the same shall thereupon become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, (iii) take all other actions at law or in equity permitted to be taken by it and (iv) by notice to the Company, require that the Company specifically perform, and the Company shall specifically perform, its 30 obligations to deliver Collateral under the Pledge Agreement and its other obligations under the Financing Documents. SECTION 6.02. Notice of Default. The Agent shall give notice to the Company under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Financing Documents as are delegated to the Agent by the terms hereof and thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement and each other Financing Document as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Company or any affiliate of the Company as if it were not the Agent hereunder or thereunder. SECTION 7.03. Action by Agent. The obligations of the Agent under this Agreement and each other Financing Document are only those expressly set forth herein or therein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Event of Default, except as expressly provided in Article VI. SECTION 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Company or the Custodian or both), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Agent. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for 31 any action taken or not taken by it in connection herewith or with any other Financing Document (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made hereunder or under any other Financing Document or in connection herewith or therewith including, without limitation, the authenticity or accuracy of any draft, certificate, statement or other item presented under a Letter of Credit, (ii) the performance or observance of any of the covenants or agreements of the Company; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; (iv) the validity, effectiveness or genuineness of this Agreement or any other Financing Document or any other instrument or other writing furnished in connection herewith or therewith; or (v) the existence, validity, enforceability or priority of the Lien on the Collateral. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. (a) Each Bank shall, ratably in accordance with its Participation Percentage, indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Company) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from any indemnitee's gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any other Financing Document or any action taken or omitted by such indemnitees hereunder or thereunder. (b) Without limiting the generality of the foregoing, each Bank shall, ratably and in accordance with its Participation Percentage, indemnify the Issuing Bank and its directors, officers, agents and employees (to the extent not reimbursed by the Company) against any costs, expense (including counsel fees and disbursements), claim, demand, action, loss or liability that each such indemnitee may suffer or incur and which results from any failure on the part of such Bank to pay to the Issuing Bank such Bank's ratable share of any drawing under any Letter of Credit in accordance with Section 2.03(b). 32 SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Agent. The Agent may resign at any time by giving notice thereof to the Banks and the Company. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent, which successor Agent shall be reasonably acceptable to the Company. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party at its address, facsimile number or telex number set forth on the signature pages hereof or such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the other parties hereto. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is 33 transmitted to the telex number referred to in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number referred to in this Section and confirmation of receipt is received, (iii) if given by mail, 10 days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Agent under Article II shall not be effective until received. SECTION 8.02. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege under this Agreement or any other Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement and the other Financing Documents shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 8.03. Expenses; Indemnification. (a) The Company shall pay (i) all out-of-pocket expenses of the Agent, including fees and disbursements of special United States counsel for the Agent and any special Bermuda counsel to the Agent or the Custodian, reasonably incurred in connection with the preparation of this Agreement and the other Financing Documents, any waiver or consent hereunder or thereunder or any amendment hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent and each Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Company agrees to indemnify the Agent and each Bank (including the Issuing Bank), their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be reasonably incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Financing 34 Documents or any actual or proposed use of proceeds of any draft drawn under any Letter of Credit; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 8.04. Sharing of Set-Offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of any Reimbursement Obligation owing to it which is greater than the proportion received by any other Bank in respect of the amount of any Reimbursement Obligation owing to such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Reimbursement Obligations owing to the other Banks, and such other adjustments shall be made, as may be required so that all such payments with respect to such Reimbursement Obligation owing to the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Company other than its indebtedness hereunder. The Company agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Reimbursement Obligation, whether or not acquired pursuant to the foregoing arrangements or the arrangements set forth in Section 2.02(a) or otherwise, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Company in the amount of such participation. SECTION 8.05. Amendments and Waivers. Any provision of this Agreement or the Letters of Credit or any provision of the other Financing Documents requiring the consent of the Agent and the Required Banks may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Company and the Required Banks (and (x) if the rights or duties of the Agent are affected thereby, by the Agent and (y) if any Letter of Credit is being amended or waived, by the beneficiary thereof); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Letter of Credit Commitment or subject any Bank to any additional obligation, (ii) reduce the amount of any Reimbursement Obligation or the default rate of interest payable thereon or the amount of any fees or other amounts payable hereunder, (iii) postpone the date fixed for any payment of 35 any Reimbursement Obligation or of any interest or fees or other amounts payable hereunder or postpone the Termination Date of any Letter of Credit, (iv) release any Collateral furnished pursuant to the Pledge Agreement or otherwise, except as contemplated by the other Financing Documents or (v) change the Participation Percentage, or the percentage of the aggregate unpaid principal amount of the Letter of Credit Liabilities, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement or any other Financing Document. SECTION 8.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Subparticipant") subparticipating interests in its rights and obligations under this Agreement. In the event of any such grant by a Bank of a subparticipating interest to a Subparticipant, whether or not upon notice to the Company and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Company and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a subparticipating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Company hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such subparticipation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii), (iv) or (v) of Section 8.05 without the consent of the Subparticipant. The Company agrees that each Subparticipant shall, to the extent provided in its subparticipation agreement and subject to subsection (e) below, be entitled to the benefits of Section 2.07 with respect to its subparticipating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a subparticipating interest granted in accordance with this subsection (b). 36 (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (in an amount not less than (Pounds)10,000,000 unless the Company shall otherwise consent) of all, of its rights and obligations under this Agreement and the other Financing Documents, and such Assignee shall assume such rights and obligations with (and subject to) the subscribed consent of the Company, which shall not be unreasonably withheld, and the Issuing Bank, which may consent or not in its sole discretion; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent of the Company shall be required. Upon the consummation of any assignment pursuant to this subsection (c) and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank as set forth in any instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and the other Financing Documents to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Sections 2.07 and 8.13 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Company's prior written consent or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 8.07. Collateral. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 8.08. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 37 SECTION 8.09. Counterparts; Integration; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement, together with the other Financing Documents, constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party). SECTION 8.10. Judicial Proceedings. (a) Consent to Jurisdiction. The Company irrevocably submits to the jurisdiction of any federal court sitting in New York City, and in the event that jurisdiction cannot be obtained or maintained in a federal court, to the jurisdiction of any New York State court sitting in New York City over any suit, action or proceeding arising out of or relating to this Agreement or any other Financing Document. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such court and any claim that any suit, action or proceeding brought in such a court has been brought in an inconvenient forum. The Company agrees that a final judgment in any such suit, action or proceeding brought in such a court shall be conclusive and binding upon it and will be given effect in Bermuda to the fullest extent permitted by applicable law and may be enforced in any federal or New York State court sitting in New York City (or any other court to the jurisdiction of which the Company is or may be subject) by a suit upon such judgment, provided that service of process is effected upon it in one of the manners specified herein or as otherwise permitted by law. (b) Appointment of Agent for Service of Process. The Company hereby irrevocably designates and appoints CT Corporation System having an office on the date hereof at 1633 Broadway, New York, New York 10019 as its authorized agent, to accept and acknowledge on its behalf, service of any and all process which may be served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City. The Company represents and warrants that such agent has agreed in writing to accept such appointment and 38 that a true copy of such designation and acceptance has been delivered to the Agent. Said designation and appointment shall be irrevocable until each Reimbursement Obligation and each other amount payable hereunder shall have been paid in full in accordance with the provisions hereof. If such agent shall cease so to act, the Company covenants and agrees to designate irrevocably and appoint without delay another such agent satisfactory to the Agent and to deliver promptly to the Agent evidence in writing of such other agent's acceptance of such appointment. (c) Service of Process. The Company hereby consents to process being served in any suit, action or proceeding of the nature referred to in subsection (a) above in any federal or New York State court sitting in New York City by service of process upon the agent of the Company for service of process appointed as provided in subsection (b) above; provided that, to the extent lawful and possible, notice of said service upon such agent shall be mailed by registered or certified air mail, postage prepaid, return receipt requested, to the Company at its address specified on the signature page hereof or to any other address of which the Company shall have given written notice to the Agent. The Company irrevocably waives, to the fullest extent permitted by law, all claims of error by reason of any such service in such manner and agrees that such service shall be deemed in every respect effective service of process upon the Company in any such suit, action or proceeding and shall, to the fullest extent permitted by law, be taken and held to be valid and personal service upon and personal delivery to the Company. (d) No Limitation on Service or Suit. Nothing in this Section 8.10 shall affect the right of the Agent or any Bank to serve process in any other manner permitted by law or limit the right of the Agent or any Bank to bring proceedings against the Company in the courts of any jurisdiction or jurisdictions. SECTION 8.11. Judgment Currency. If, under any applicable law and whether pursuant to a judgment being made or registered against the Company or for any other reason, any payment under or in connection with this Agreement or any other Financing Document is made or satisfied in a currency (the "Other Currency") other than that in which the relevant payment is due (the "Required Currency"), then, to the extent that the payment (when converted into the Required Currency at the rate of exchange on the date of payment or, if it is not practicable for the party entitled thereto (the "Payee") to purchase the Required Currency with the Other Currency on the date of payment, at the rate of 39 exchange as soon thereafter as it is practicable for it to do so) actually received by the Payee falls short of the amount due under the terms of this Agreement, the Company shall, to the extent permitted by law, as a separate and independent obligation, indemnify and hold harmless the Payee against the amount of such short-fall. For the purpose of this Section, "rate of exchange" means the rate at which the Payee is able on the relevant date to purchase the Required Currency with the Other Currency and shall take into account any premium and other costs of exchange. SECTION 8.12. WAIVER OF JURY TRIAL. THE COMPANY, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 8.13. Taxes. (a) For purposes of this Section 8.13, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings of any nature with respect to any payment by the Company pursuant to this Agreement or under any Financing Documents, and all liabilities with respect thereto, excluding in the case of each Bank and the Agent, taxes imposed on its net income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or in which its principal executive office is located (all such excluded taxes being hereinafter referred to as "Domestic Taxes"). "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Financing Documents or from the execution, delivery, registration or enforcement of, or otherwise with respect to, this Agreement or any Financing Documents. (b) Any and all payments by the Company to or for the account of any Bank or the Agent hereunder or under any Financing Documents shall be made without deduction for any Taxes or Other Taxes; provided that, if the Company shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions or withholdings applicable to additional sums payable under this Section 40 8.13) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions or withholdings, (iii) the Company shall pay the full amount deducted or withheld to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Company shall furnish to the Agent, at its address referred to in Section 8.01, the original or a certified copy of a receipt evidencing payment thereof. (c) The Company agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.13), whether or not legally or correctly imposed, paid by such Bank or the Agent (as the case may be) in good faith and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. In addition, the Company agrees to indemnify each Bank and the Agent for all Domestic Taxes (calculated based on a hypothetical basis at the maximum marginal rate for a corporation) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto to the extent such Domestic Taxes result from the payment of or indemnification for Taxes, Other Taxes or Domestic Taxes pursuant to this Section 8.13. This indemnification shall be paid within 15 days after such Bank or the Agent (as the case may be) makes demand therefor. (d) Each Bank and the Agent shall, at the request of the Company, use reasonable efforts (consistent with applicable legal and regulatory restrictions) to file any certificate or document requested by the Company if the making of such a filing would avoid the need for or reduce the amounts payable to or for the account of such Bank or the Agent (as the case may be) pursuant to this Section 8.13 which may thereafter accrue and would not, in the sole judgment of such Bank or the Agent, require such Bank or the Agent to disclose any confidential or proprietary information or be otherwise disadvantageous to such Bank or the Agent. (e) Notwithstanding the foregoing, nothing in this Section 8.13 shall interfere with the rights of any Bank or the Agent, as the case may be, to conduct its fiscal or tax affairs in such manner as it deems fit. SECTION 8.14. Confidential Information. Each Bank agrees to comply with the terms of Section 21 of the Pledge Agreement as if such terms were expressly applicable to each Bank and each Bank agrees to notify its auditors and attorneys of the provisions of Section 21 of the Pledge Agreement prior to 41 providing them with any Confidential Information (as defined therein) and instruct them to comply with the terms of such Section as if such terms were expressly applicable to such auditors and attorneys. 42 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. A.C.E. INSURANCE COMPANY, LTD., The Common Seal of A.C.E. Insurance Company, Ltd. was hereunto affixed in the presence of: By ____________________________ Title: Director The ACE Building 30 Woodbourne Avenue ___________________ Hamilton HM 08, Bermuda Telex number: 3543ACEILBA Director/Secretary Facsimile number: (441) 295-5221 ___________________ 43 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ____________________________ Title: BANK OF BERMUDA By ____________________________ Title: THE BANK OF NEW YORK By ____________________________ Title: BANK OF TOKYO-MITSUBISHI TRUST COMPANY By ____________________________ Title: DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCH By ____________________________ Title: By ____________________________ Title: 44 MELLON BANK, N.A. By ____________________________ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and Agent By___________________________ Title: 60 Wall Street New York, New York 10260-0060 Attention: _________________ Telex number: 177615 Facsimile number: (212) 648-5249 45 SCHEDULE I PARTICIPATION OF BANKS Banks Participation % - ----- --------------- Bank of Bermuda - 13.33% The Bank of New York - 13.33% Bank of Tokyo-Mitsubishi - 13.33% Trust Company Deutsche Bank AG, New York - 13.33% and/or Cayman Islands Branch Mellon Bank, N.A. - 20.00% Morgan Guaranty Trust Company - 26.67% of New York 46 EXHIBIT A FORM OF LETTER OF CREDIT Credit Operations Department: HW/MW Direct Dial Number: 0171 325 1923 __ November 1996 The Society and Corporation of Lloyd's One Lime Street London EC3M 7HA Gentlemen IRREVOCABLE STANDBY LETTER OF CREDIT NO. _____________ RE: ACE CAPITAL LIMITED ("THE APPLICANT") - ------------------------------------------------------------------------------- We are pleased to inform you that by order of the Applicant, we, Morgan Guaranty Trust Company of New York, PO Box 161, 60 Victoria Embankment, London EC4Y 0JP have opened our Clean Irrevocable Credit No. ____________ in your favour for a sum not to exceed the aggregate of (Pounds)75,000,000 effective from 01 January 1997. The initial expiry date of this Letter of Credit shall be 31 December 2001. This Letter of Credit will be extended automatically for a further year, without written amendment, on the first day of January of every future year from the commencement date, so that it is always valid for a minimum period of four years unless, at least thirty days prior to 31 December of the first year of the then current validity period, notice is given in writing, sent by registered mail for the attention of the Manager, Corporate Membership Department at the above address, that this Letter of Credit will not be extended beyond the then current expiry date. All charges are for the Applicant's account. Funds under this Letter of Credit are available to you in London upon presentation of your sight draft(s) drawn on us at the above address, our London Office, mentioning the issuing Bank's Credit No. ______ and name (Morgan Guaranty Trust Company of New York). 47 This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision) International Chamber of Commerce Publication No. 500. This Letter of Credit shall be governed by and interpreted in accordance with English law and we hereby irrevocably submit to the jurisdiction of the High Court of Justice in England. We hereby engage with you that we will honour draft(s) drawn under and in compliance with the terms and conditions of this Letter of Credit. Yours faithfully Authorised Signature Authorised Signature For and on behalf of for and on behalf of Morgan Guaranty Trust Morgan Guaranty Trust Company of New York Company of New York 48 EXHIBIT F [CT Corporation System] [Dated the Closing Date] To the Persons Identified on on Schedule A Dear Sirs: In respect of the Reimbursement Agreement dated as of November 22, 1996, as amended from time to time (the "Agreement"), among A.C.E. Insurance Company, Ltd. (the "Company"), the Banks listed therein (the "Banks") and Morgan Guaranty Trust Company of New York, as Agent and Issuing Bank (the "Agent"), the undersigned hereby accepts the irrevocable designation and appointment of it as of the date hereof as agent for the Company to accept and acknowledge service of any and all process, as contemplated by Section 8.10(b) of the Agreement and otherwise as provided thereby, such acceptance to remain in effect until the Agreement shall have been terminated and all obligations thereunder of the Company shall have been paid in full. The undersigned agrees to give the Agent or the Company, as applicable, immediate notice by telephone, fax, telex, cable or any other means of instant communication upon receipt of all papers served upon the undersigned pursuant to such appointment and to forward promptly to the Agent or the Company, as the case may be, all such papers served pursuant to such appointment by reputable overnight carrier. Very truly yours, CT CORPORATION SYSTEM By:__________________________ Title: 49 SCHEDULE A Morgan Guaranty Trust Company of New York, as Agent Morgan Guaranty Trust Company of New York, as Issuing Bank Bank of Bermuda Limited The Bank of New York Bank of Tokyo-Mitsubishi Trust Company Deutsche Bank AG, New York and/or Cayman Islands Branch Mellon Bank A.C.E. Insurance Company, Ltd. 50 EXHIBIT G FORM OF LETTER OF CREDIT REQUEST -------------------------------- , 19 ------------------ -- Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260 Attention: --------------------- Morgan Guaranty Trust Company of New York, as Issuing Bank c/o J. P. Morgan Services Inc. P.O. Box 6071 Newark, DE 19714-9857 Attention: International Trade Services Re: Reimbursement Agreement dated as of November 22, 1996, as amended from time to time (the "Agreement"), among A.C.E. Insurance Company, Ltd. (the "Company"), the Banks listed therein and Morgan Guaranty Trust Company of New York, as Agent and Issuing Bank. Capitalized terms used herein that are defined in the Agreement shall have the meanings therein defined. 1. Pursuant to Section 2.02 of the Agreement, ACE Capital Limited (the "Applicant") hereby requests that the Issuing Bank issue a Letter of Credit in accordance with the information annexed hereto as Annex A hereto. 2. The Company hereby certifies that on the date hereof and on the date of issuance set forth in Annex A, in each case both before and after giving effect to the Letter of Credit requested hereby: (a) no Default has occurred and is continuing; (b) each of the representations and warranties of the Company contained in the Agreement and each other Financing Document is true on the date hereof, except representations and warranties which expressly refer to an earlier date in which case the same shall be true on and as of such earlier date; 51 (c) after giving effect to the Letter of Credit requested hereby, the aggregate amount of the Letter of Credit Liabilities will not exceed the Letter of Credit Commitment; and (d) the Letter of Credit requested hereby is being issued solely as security to support the Applicant's underwriting business at the Society and Corporation of Lloyd's provided in accordance with the requirements of the Society and Corporation of Lloyd's. IN WITNESS WHEREOF, the Applicant has caused this Certificate to be executed by its duly authorized officer as of the date and year first written above. ACE CAPITAL LIMITED By:_____________________________________ Name:___________________________________ Title:__________________________________ 52 Annex A LETTER OF CREDIT INFORMATION 1. Name of Beneficiary: - -------------------------------------------------------------------------------. 2. Address of Beneficiary of the Letter of Credit: - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------. 3. Conditions under which a drawing under such Letter of Credit may be made (specify the required documentation): - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------. 4. Maximum amount to be available under such Letter of Credit: $______________. 5. Requested Date of Issuance: ________________________ __, 199__. 6. Stated Expiration Date: _______________________ __, 199__. 7. Description of Transaction to be supported by such Letter of Credit: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------. 53 PLEDGE AGREEMENT ---------------- PLEDGE AGREEMENT dated as of November 22, 1996 between A.C.E. INSURANCE COMPANY, LTD., a company incorporated in and under the laws of Bermuda whose registered office is at The ACE Building, Woodbourne Avenue, Pembroke, Bermuda (hereinafter called the "Pledgor") of the first part, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank (the "Issuing Bank") and as Agent (the "Bank") for the Participating Banks (as defined below) of the second part. WHEREAS, as contemplated by the Reimbursement Agreement (the "Reimbursement Agreement") dated as of November 22, 1996 among the Pledgor, the Banks listed therein (the "Participating Banks", including Morgan Guaranty Trust Company of New York) and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent, the Pledgor has requested that the Issuing Bank from time to time issue letters of credit for the Pledgor's account, the reimbursement of which and all other payments related thereto will be secured by the Collateral (as defined below); and WHEREAS, the Issuing Bank has agreed to issue such letters of credit subject to the terms and conditions hereinafter set forth and as set forth in the Reimbursement Agreement, including without limitation, the automatic participation of the Participating Banks therein; NOW, THEREFORE, the parties hereto agree as follows: 1. As inducement for, and in consideration of, inter alia, (i) the Issuing Bank issuing letters of credit for the Pledgor's account from time to time (each a "Letter of Credit" and, together, the "Letters of Credit") pursuant to the Reimbursement Agreement (each defined term used herein, but not otherwise defined herein, shall have the meaning ascribed to it therein) and (ii) the participation by the Participating Banks therein, in each case the receipt and adequacy of which are hereby acknowledged, the Pledgor hereby pledges and assigns to the Bank and grants to the Bank a security interest and a charge in the Collateral pursuant to this Agreement as security for all amounts owed from time to time to the Issuing Bank, the Participating Banks and the Agent by the Pledgor under the Financing Documents (collectively, the "Secured Obligations"). For purposes hereof, the term "Bank" shall mean Morgan Guaranty Trust Company of New 54 York in its capacity as agent for the Participating Banks hereunder. 2. (a) As stated above, as collateral security for the performance of the Secured Obligations, the Pledgor hereby pledges and assigns to the Bank, and grants to the Bank a security interest and a charge in, all Eligible Securities (as defined below) and cash held in the Pledge Account (as defined in the Custodian Agreement dated as of November 19, 1996 between The Bank of Bermuda Limited (the "Custodian") and the Pledgor (the "Custodian Agreement")), as set forth in a written addendum hereto signed by the Pledgor and the Bank, which may be amended from time to time by the Pledgor and the Bank, along with all proceeds and products thereof, accessions thereto and substitutions therefor and any other property of the Pledgor held by the Bank or the Custodian expressly for this purpose (the "Collateral"). The Pledgor covenants to deliver to the Custodian, on or before December 31, 1996, Eligible Securities the Value (as defined below) of which shall equal the Minimum Collateral Amount (as defined below). For purposes hereof, the term "Eligible Securities" shall mean "direct claims (including securities, loans, and leases) on, and the portions of claims that are directly and unconditionally guaranteed by, the central governments of the OECD countries and U.S. Government agencies", as used in Appendix A, Section III(C), Category I to Regulation H, as promulgated by the Board of Governors of the Federal Reserve System, but only so long as no risk weight is attached thereto and the same are either (i) uncertificated and governed by the provisions of 31 C.F.R. Part 306 and, after January 1, 1997, 31 C.F.R. Part 357 or such similar provisions of the Code of Federal Regulations, applicable to United States agency securities as are acceptable to the Bank or (ii) certificated. So long as no Default has occurred and is continuing, the Pledgor may from time to time withdraw portions of the Collateral and substitute other Eligible Securities and/or cash therefor, which substituted property shall then be deemed to constitute a portion of the Collateral, provided that at no time shall the Value of the Collateral in the Pledge Account following any such withdrawal be less than the Minimum Collateral Amount. For purposes of this Agreement, the "Value" of an Eligible Security shall be the fair market value thereof as determined by the Custodian. (b) The Pledgor agrees that, if on the 15th Business Day of any calendar month (commencing with January, 1997) or at other times as notified by the Bank, the Value of the Collateral is less than an amount equal to 115% (the "Minimum Collateral Amount") of the then existing Letter of Credit Liabilities, the Pledgor shall deposit with the Custodian such additional Eligible Securities and/or cash as is necessary so that the Value of the Collateral is equal to or exceeds the Minimum Collateral Amount. If the Pledgor does not deposit such additional Collateral within five Business Days after receiving a notice from the 55 Bank stating that the Value of the Collateral has become less than the Minimum Collateral Amount, the Pledgor agrees that the Bank may sell the Collateral and retain the proceeds as security for the performance of the Secured Obligations. (c) The Pledgor shall forthwith upon the execution and delivery of this Agreement register this Agreement and each other Financing Document which creates a charge, lien or security interest in the Register of Charges with the Registrar of Companies in Bermuda in accordance with Section 55 of the Companies Act 1981, as amended, and pay the registration fee applicable thereon. (d) (i) The Pledgor will faithfully preserve and protect the Bank's security interest and charge in the Collateral and will do all such acts and things and execute and deliver all such documents and instruments, including without limitation, the execution and delivery of a Notice of Pledge in the form of Exhibit A hereto (the "Notice of Pledge"), along with such further pledges, assignments, financing statements and continuation statements, as the Bank in its reasonable discretion may deem necessary or advisable from time to time in order to preserve, protect and perfect such pledge and assignment and security interest and charge and the priority thereof. The Pledgor hereby authorizes the Bank to sign and file financing statements and continuation statements without the signature of the Pledgor. The Bank shall promptly furnish copies of any such financing statements and continuation statements to the Pledgor. (ii) The Pledgor will not permit any liens, security interests, charges or adverse claims (other than in favor of the Bank) to exist upon any of the Collateral except for the interest of the Custodian arising under the Custodian Agreement. 3. The Pledgor represents and warrants: (a) that it is a company duly organized and is empowered under its memorandum of association and by-laws to enter into and perform this Agreement, the Notice of Pledge and the Custodian Agreement and any other documents related hereto or thereto and has taken all necessary actions to authorize the execution, delivery and performance of this Agreement, the Notice of Pledge and the Custodian Agreement and any other documents related hereto or thereto; (b) (i) that, upon delivery of the Collateral to the Custodian and the crediting thereof to the Pledge Account, all of the Collateral will be validly and duly pledged and assigned to the Bank and that a security interest or charge therein will exist in favor of the Bank in accordance with law, and agrees to defend the Bank's right, title, lien, charge and security interest in and to the Collateral against the claims and 56 demands of all Persons whomsoever and (ii) that upon such delivery and crediting, the Bank will have a valid security interest and charge in the Collateral, free and clear of all claims, mortgages, pledges, assignments, liens, encumbrances, charges and security interests of every nature whatsoever except for the interest of the Custodian arising under the Custodian Agreement; (c) that no consent or approval by, and no notice to or filing with, any governmental or regulatory authority or other Person is required for the due and valid execution, delivery and performance of this Agreement, the Notice of Pledge and the Custodian Agreement by the Pledgor or to establish or maintain this pledge and assignment as a first priority pledge of the Collateral, other than the registration of this Agreement in the Register of Charges in accordance with Section 55 of the Companies Act 1981, as amended and such other consent, approval, notice and filing as has been obtained; and (d) that none of the execution, delivery or performance of this Agreement, the Notice of Pledge or the Custodian Agreement, nor the registration of this Agreement or any other Financing Document which creates a charge, lien or security interest, will be subject to ad valorem stamp duty in Bermuda. 4. Dividends (other than liquidating dividends), distributions and interest declared, made or paid upon any of the Collateral shall be credited to the account of the Pledgor until the Bank notifies the Custodian in writing that a Default has occurred and is continuing. 5. If any of the Secured Obligations shall not be performed as and when due pursuant to the Reimbursement Agreement, the Bank may cause all or any part of the Collateral to be transferred to or registered in its name, as agent for the Participating Banks, or the name of its nominee or nominees. The Bank shall promptly notify the Pledgor of any such action it shall have taken, provided that the failure to do so shall not affect the validity of such action. If any of the Secured Obligations shall not be performed as and when due pursuant to the Reimbursement Agreement, upon notice to the Custodian, the Bank shall be entitled to exercise all voting power with respect to the Collateral. 6. If any of the Secured Obligations shall not be performed as and when due pursuant to the Reimbursement Agreement, the Bank, without obligation to resort to other security, shall have the right at any time and from time to time to sell, resell, assign and deliver, in its discretion, all or any of the Collateral, in one or more parcels at the same or different times, and all right, title and interest, claim and demand therein and right of redemption thereof, on any securities exchange on which the Collateral or any of it may be listed, or at public 57 or private sale, for cash, upon credit or for future delivery, and in connection therewith the Bank may grant options, the Pledgor hereby waiving and releasing any and all equity or right of redemption. If any of the Collateral is sold by the Bank upon credit or for future delivery, the Bank and the Participating Banks shall not be liable for the failure of the purchaser to purchase or pay for the same and, in the event of any such failure, the Bank may resell such Collateral. In no event shall the Pledgor be credited with any part of the proceeds of sale of any Collateral until cash payment thereof has actually been received by the Bank. 7. No demand, advertisement or notice, all of which are hereby expressly waived, shall be required in connection with any sale or other disposition of any part of the Collateral which threatens to decline speedily in value or which is of a type customarily sold on a recognized market; otherwise the Bank shall give the Pledgor at least five Business Days' prior notice of the time and place of any public sale and of the time after which any private sale or other disposition is to be made, which notice the Pledgor agrees is reasonable, all other demands, advertisements and notices being hereby waived. The Bank shall not be obligated to make any sale of Collateral if it shall determine not to do so, regardless of the fact that notice of sale may have been given. The Bank may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In the case of all sales of Collateral, public or private, the Pledgor shall pay all reasonable costs and expenses of every kind for sale or delivery, including brokers' and attorneys' fees, and after deducting such costs and expenses from the proceeds of sale, the Bank shall apply any residue to the payment of the Secured Obligations as follows: first, to the payment to the Agent of any other costs or expenses incurred by it under the Financing Documents, second, to the payment of all default interest on the Reimbursement Obligations, third to the reimbursement of all Reimbursement Obligations and fourth to the payment of any other amounts then due and payable to the Bank, the Participating Banks or the Agent under the Financing Documents. The balance, if any, remaining after payment in full of all such amounts and the termination of the Letters of Credit and the Reimbursement Agreement shall be paid to the Pledgor, subject to any duty of the Bank imposed by law to the holder of any subordinate security interest or charge in the Collateral known to the Bank. 8. The Pledgor recognizes that the Bank may be unable to effect a public sale of all or a part of the Collateral by reason of, among other things, certain prohibitions contained in United States securities laws or the securities laws of the various States of the United States, as now or hereafter in effect, but may be compelled to resort to one or more private sales to a restricted group of 58 purchasers who will be obliged to agree, among other things, to acquire such Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor agrees that private sales so made may be at prices and other terms less favorable to the seller than if such Collateral were sold at public sales, and that the Bank has no obligation to delay sale of any such Collateral for the period of time necessary to permit such Collateral to be sold at public sale. The Pledgor agrees that private sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. 9. The remedies provided herein in favor of the Bank shall not be deemed exclusive, but shall be cumulative, and shall be in addition to all other remedies in favor of the Bank existing at law or in equity. 10. The Bank shall have the right, for and in the name, place and stead of the Pledgor, to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Collateral. 11. The Bank shall have no duty as to the collection or protection of the Collateral or any income thereon or as to the preservation of any rights pertaining thereto, beyond the safe custody of any thereof actually in its own physical possession. With respect to any maturities, calls, conversions, exchanges, redemptions, offers, tenders or similar matters relating to any of the Collateral (herein called "events"), the Bank's duty shall be fully satisfied if (a) the Bank exercises reasonable care to ascertain the occurrence and to give reasonable notice to the Pledgor of any events applicable to any Collateral which is registered and held in the name of the Bank or its nominee, (b) the Bank gives the Pledgor reasonable notice of the occurrence of any events, of which the Bank has received actual knowledge, as to any Collateral which is in bearer form or is not registered and held in the name of the Bank or its nominee or the Custodian or its nominee (the Pledgor agreeing to give the Bank reasonable notice of the occurrence of any events applicable to any Collateral of which the Pledgor has received knowledge), and (c) in the exercise of its sole discretion (i) the Bank endeavors to take such action with respect to any of the events as the Pledgor may reasonably and specifically request in writing in sufficient time for such action to be evaluated and taken as long as after the taking of any such action, the Value of the Collateral is not less than the Minimum Collateral Amount or (ii) if the Bank determines that the action requested might adversely affect the value of the Collateral as collateral, the collection of the Secured Obligations, or otherwise prejudice the interests of the Bank, the Bank gives reasonable notice to the Pledgor that any such requested action will not be taken and if the Bank makes such determination or if the Pledgor fails to make such timely request, the Bank 59 may take such other action as it deems reasonably advisable in the circumstances. Except as hereinabove specifically set forth, the Bank shall have no further obligation to ascertain the occurrence of, or to notify the Pledgor with respect to, any events and shall not be deemed to assume any such further obligation as a result of the establishment by the Bank of any internal procedures with respect to any Collateral. The Pledgor releases the Bank from any claims, causes of action and demands that do not arise as a result of the negligence or willful misconduct of the Bank at any time arising out of or with respect to this Agreement or any other Financing Document or the Collateral and/or any actions, taken or omitted to be taken by the Bank with respect hereto or thereto, and the Pledgor hereby agrees to hold the Bank harmless from and with respect to any and all such claims, causes of action and demands of other Persons. 12. The Pledgor hereby irrevocably appoints the Bank as the Pledgor's attorney-in-fact for the purpose of carrying out the provisions of this Agreement and the Notice of Pledge and taking any action and executing any instrument which either may deem necessary or advisable to accomplish the purposes hereof or thereof. Without limiting the generality of the foregoing, the Bank shall have the right and power to receive, endorse and collect all checks and other orders for the payment of money made payable to the Pledgor representing any interest or dividend or other distribution payable in respect of the Collateral or any part thereof and to give full discharge for the same. 13. No delay on the part of the Bank in exercising any of its options, powers or rights, or partial or single exercise thereof, shall constitute a waiver thereof. 14. Upon the repayment in full of all Secured Obligations and the termination of the Letters of Credit and all other Financing Documents except the Custodian Agreement, the Pledgor shall be entitled to the return of all of the Collateral and of all other property and cash which has not been used or applied toward the payment thereof. The assignment by the Bank to the Pledgor of such Collateral and other property shall be without representation or warranty of any nature whatsoever and wholly without recourse. 15. Any notice or demand upon the Pledgor shall be deemed to have been sufficiently given for all purposes thereof if sent by overnight courier or by telecopy, with receipt acknowledged, to the Pledgor at the address specified below, or at such other address as the Pledgor may theretofore have designated in writing and given in like manner to the Bank. 60 16. Any waiver, permit, consent or approval of any kind or character on the part of the Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. Each of the provisions contained in this Agreement shall be severable and distinct from one another and if at any time one or more of such provisions is or becomes invalid, illegal or unenforceable, the validity, legality, and enforceability of each of the remaining provisions of this Agreement shall not in any way be affected, prejudiced or impaired thereby. 17. This Agreement and the rights and obligations of the Bank and the Pledgor hereunder shall be construed in accordance with and governed by the laws of New York, cannot be changed orally and shall bind and inure to the benefit of the Pledgor and the Bank and their respective successors and permitted assigns. 18. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which taken together shall constitute but one and the same instrument. 19. This Agreement is in addition to and not in limitation of any other agreement between the parties. In the event of any conflict between the provisions of this Agreement and those of any other such agreement, the provisions of this Agreement shall prevail. 20. The Pledgor agrees to pay the Bank on demand all reasonable costs, including legal fees, incurred by the Bank in connection with the administration and enforcement of this Agreement. 21. The Bank shall not, unless compelled to do so by any court of competent jurisdiction or regulatory authority, or unless in response to a request from Bank regulators, disclose to any Person (other than the Participating Banks and their auditors and attorneys, who shall be subject to the terms of Section 8.14 of the Reimbursement Agreement) not expressly authorized in writing by the Pledgor or pursuant to the terms hereof any non- public information relating to the Pledgor and to the affairs of the Pledgor of which the Bank shall have become possessed during the period of this Agreement (the "Confidential Information"). Without limiting the generality of the foregoing, the existence of this Agreement and the other Financing Documents, the relationship hereunder between the Pledgor and the Bank, the nature, value and the location of any assets of the Pledgor (including without limitation, the Collateral), and the identity of the Pledgor are to be regarded by the Bank as Confidential Information which the 61 Bank and persons under its control may not disclose except in accordance with the terms of this Section 21. In any such event the Bank will furnish a copy of this Section to any Person (other than the Participating Banks and their auditors and attorneys) to whom the Bank is required to make such disclosure and, if permitted to do so by law, the Bank will advise the Pledgor prior to making such disclosures. Notwithstanding the foregoing, Confidential Information shall not include information that is or becomes publicly available, information that was available to the Bank prior to its disclosure hereunder and information which becomes available to the Bank on a non-confidential basis from a source that is not, to the Bank's knowledge, subject to a confidentiality agreement with the Pledgor. If an attempt is made through a subpoena, attachment, execution, levy or other legal proceeding to obtain Confidential Information, the Bank shall, if permitted to do so by law, immediately notify the Pledgor so that the Pledgor may attempt to resist such disclosure. 62 IN WITNESS WHEREOF, the Pledgor and the Bank have caused this Agreement to be duly executed by their respective officers duly authorized as of the day and year first above written. A.C.E. INSURANCE COMPANY, LTD. The Common Seal of A.C.E. Insurance Company, Ltd. was By:_____________________________ heretofore affixed in Title: the presence of: Address: Director The A.C.E. Building Woodbourne Avenue __________________ Pembroke, Bermuda Attention:______________________ Director/Secretary __________________ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By:_____________________________ Title: Address: 60 Wall Street New York, New York 10260 Attention: Maria H. Dell'Aquila 63 Exhibit A to Pledge Agreement [LETTERHEAD OF PLEDGOR] [Closing Date] The Bank of Bermuda Limited Bank of Bermuda Building 6 Front Street Hamilton, Bermuda NOTICE OF PLEDGE ---------------- Re: Pledge and assignment to Morgan Guaranty Trust Company of New York, as agent, of Securities Owned by A.C.E. Insurance Company, Ltd. and Held by The Bank of Bermuda Limited, as Custodian Dear Sirs: This letter is to notify The Bank of Bermuda Limited (the "Custodian") that A.C.E. Insurance Company, Ltd. (the "Pledgor") has agreed from time to time to pledge and assign certain securities and the proceeds thereof (including cash) (the "Eligible Securities") owned by it and specified in the Pledge Agreement (as hereinafter defined) to Morgan Guaranty Trust Company of New York, as agent (the "Bank"), pursuant to and on the terms and conditions set forth in the Pledge Agreement dated as of November 22, 1996 (the "Pledge Agreement"), a copy of an executed copy of which is attached hereto, to secure certain obligations incurred by the Pledgor to the Bank and (as defined therein) the Participating Banks and the Agent. The Pledgor unconditionally agrees to indemnify and hold the Custodian harmless against all loss or damages (including reasonable legal fees) that the Custodian may suffer as a result of or in connection with such pledge and assignment or the performance of its obligations under this Agreement or the Confirmation and Agreement attached as Exhibit B to the Pledge Agreement (the "Confirmation and Agreement") which are not suffered as a result of the negligence or willful misconduct of the Custodian or that of its officers, employees or agents. The Custodian is hereby irrevocably authorized and directed to do the following: (i) hold the Eligible Securities as the agent of and subject to the sole written order or instructions of the Bank in accordance with the Pledge Agreement in the Pledge Account 64 (as defined in the Custodian Agreement dated November 19, 1996 (the "Custodian Agreement") between the Pledgor and the Custodian), following deposit of the Eligible Securities in the Pledge Account by the Pledgor; (ii) make appropriate entries on its books to evidence that the Pledge Account and all of the Eligible Securities are held by it for the account of the Bank as agent for the Participating Banks and to send notice thereof to the Bank; (iii) on or before 11:00 a.m. (New York City time) on the 15th Business Day of each calendar month (commencing with January, 1997) or at such other times as the Bank may reasonably request, the Custodian will provide the Bank and the Pledgor an account valuation statement, identifying all Eligible Securities and their Value (as defined in the Pledge Agreement) as of the last Business Day of the preceding calendar month or as of such other times and the amount of cash held in the Pledge Account on such last Business Day or as of such other times, and any other information about the Eligible Securities which the Bank may reasonably request; (iv) follow the instructions of the Bank, without the consent of the Pledgor, with respect to the Pledge Account and the Eligible Securities (including, without limitation, instructions to sell or transfer the Eligible Securities or instructions to hold dividends, distributions and interest declared, made or paid upon any of the Eligible Securities as additional collateral for the Bank, Participating Banks and the Agent or to deliver Eligible Securities to the Bank); and (v) enter into a Confirmation and Agreement. The Pledgor hereby represents and warrants to, and agrees with, the Custodian as follows: (a) The execution, delivery and performance by the Pledgor of this Agreement, the Pledge Agreement and the Custodian Agreement are (i) within its powers, (ii) have been duly authorized by all necessary action and (iii) will not (A) contribute to or result in a breach of or default under or conflict with any existing law, order, regulation or ruling of any governmental or regulatory agency or authority, any order, writ, injunction or ruling of any court or other tribunal or any indenture, lease, agreement, instrument or other undertaking to which the Pledgor is a party or by which it or its property or assets may be bound or affected, or (B) result in the imposition of any lien or encumbrance on any property or assets of the Pledgor (other than as contemplated by this Agreement) or (C) require any approval or consent of, or filing with, any governmental or regulatory or any other Person (as defined in the Reimbursement Agreement) or (D) violate any provision of the Pledgor's certificate of incorporation, memorandum of association or by-laws or any amendment thereof; (b) This Agreement is a legally valid and binding obligation of the Pledgor, enforceable against the Pledgor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization. 65 moratorium or other laws or equitable principles relating to or limiting the rights of creditors generally; (c) It shall forthwith upon the delivery of the Eligible Securities register the Pledge Agreement and the Custodian Agreement (as an exhibit to the Reimbursement Agreement dated as of November 22, 1996 among the Pledgor, the Banks listed therein and the Bank, as Issuing Bank and as Agent) in the Register of Charges with the Registrar of Companies in Bermuda in accordance with Section 55 of the Companies Act 1981, as amended, and pay the registration fee applicable thereon; and (d) None of the execution, delivery or performance of this Agreement or the Pledge Agreement or the Custodian Agreement, nor the registration thereof will be subject to ad valorem stamp duty in Bermuda. The Custodian agrees that it shall exercise reasonable care and diligence in performing all of its obligations hereunder; provided, however, that, as between the Pledgor and the Custodian: (a) The Custodian shall be entitled to rely upon the authenticity of, and the truth of the statements in, any certificate, opinion of counsel, evidence of indebtedness, notice, consent, instruction or other document reasonably believed by the Custodian to be genuine and to be signed by the proper party or parties; (b) The Custodian shall not be liable with respect to any action taken or omitted to be taken by it in good faith in reliance upon the advice of its legal counsel; (c) The Custodian shall not be liable with respect to any action taken or omitted to be taken by it in good faith at the instruction of the Bank, provided that such action is in accordance with the terms and conditions of this Agreement; and (d) The Custodian shall be entitled to request the written consent or instructions of the Bank for the Custodian prior to taking any action hereunder requiring the exercise of its discretion and may refrain from taking such action until it shall have received such written consent or instructions. Subject to the terms of the Pledge Agreement, the Custodian is authorized to follow and rely upon all instructions given by the Pledgor by tested telex, or facsimile transmission with receipt confirmed, or written instrument signed by any officer of the Pledgor or any one of the individuals and officers identified from time to time in resolutions contained in a certificate signed by an officer of the Pledgor. 66 This Agreement may not be amended except by a writing signed by both the parties hereto and the Bank and no provision of the Pledge Agreement which affects the obligations or responsibilities of the Custodian may be amended without the prior, written consent of the Custodian. This Agreement may be signed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument and shall be binding upon and inure to the benefit of the parties hereto and the Bank, their successors and permitted assigns. The parties hereto agree that the Pledgor's agreement with the Custodian governing custody of the Pledgor's assets shall be deemed to be modified or superseded in the manner set forth in the Pledge Agreement, this Agreement and Exhibit B to the Pledge Agreement with respect to the Eligible Securities and other collateral subject to the Pledge Agreement. The Pledgor agrees that it will pay all of the fees and expenses of the Custodian properly and reasonably incurred in connection with the execution and performance of the Pledge Agreement and the other agreements attached thereto as exhibits. All obligations performed by the Custodian under this Agreement shall be performed in the capacity of agent for the Bank. This Agreement shall be construed in accordance with and governed by the laws of Bermuda. 67 If you are in agreement with the foregoing, please sign and return the enclosed copy of this letter to Morgan Guaranty Trust Company of New York at 60 Wall Street, New York, New York 10260-0060, Attention: Maria Dell'Aquila. Very truly yours, A.C.E. INSURANCE COMPANY, LTD. The Common Seal of A.C.E. Insurance Company, Ltd. was hereunto affixed in By:______________________________________ the presence of: Director ____________________ Director/Secretary ____________________ Receipt of the above Notice of Pledge is hereby acknowledged this ____ day of November, 1996. THE BANK OF BERMUDA LIMITED By:____________________________________ Title: 68 [LETTERHEAD OF CUSTODIAN] EXHIBIT B to Pledge Agreement [Closing Date] Morgan Guaranty Trust Company of New York , as agent 60 Wall Street New York, New York 10260-0060 CONFIRMATION AND AGREEMENT OF THE BANK OF BERMUDA LIMITED Re: Pledge and assignment to Morgan Guaranty Trust Company of New York, as agent, of Securities Owned by A.C.E. Insurance Company, Ltd. and Held by The Bank of Bermuda Limited, as Custodian Dear Sirs: Reference is made to the pledge and assignment to Morgan Guaranty Trust Company of New York, as agent (the "Bank"), by A.C.E. Insurance Company, Ltd. (the "Pledgor") of certain securities and the proceeds thereof (including cash) of the Pledgor (the "Eligible Securities") held by The Bank of Bermuda Limited (the "Custodian") pursuant to a Pledge Agreement (the "Pledge Agreement") dated as of November 22, 1996, a list of which is set forth in a written addendum thereto, which may be amended from time to time by the Pledgor and the Bank. It is understood that the Eligible Securities are to be held by the Custodian as the Bank's agent subject to a pledge and assignment and charge in the Bank's favor as hereinafter set forth, as security for all amounts owed to the Bank and (as defined in the Pledge Agreement) the Participating Banks and the Agent by the Pledgor from time to time in connection with letters of credit issued by the Bank for the Pledgor's Account (as hereinafter defined) pursuant to the Reimbursement Agreement (as defined therein). The Eligible Securities will be held in the Pledge Account (as defined in the Custodian Agreement dated as of November 19, 1996 (the "Custodian Agreement") between the Pledgor and the Custodian), following deposit of such Eligible Securities in the Pledge Account by the Pledgor. 69 The Custodian hereby confirms that (i) it is holding all of the Eligible Securities as agent for and subject to the sole written order or instructions of the Bank; (ii) it will make appropriate entries on its books to evidence that the Pledge Account and all of the Eligible Securities are being held by it for the benefit of the Bank and to send notice thereof to the Bank and will additionally do so with regard to any securities which at any time and for any reason become Eligible Securities or any funds which become additional collateral subject to the charge and pledge and assignment in the Bank's favor pursuant to the Pledge Agreement; (iii) on or before 11:00 a.m. (New York City time) on the 15th Business Day of each calendar month (commencing with January, 1997) or at such other times as the Bank may reasonably request, it will provide the Bank and the Pledgor an account valuation statement, identifying all Eligible Securities and their Value (as defined in the Pledge Agreement) as of the last Business Day of the preceding calendar month or as of such other times and the amount of cash held in the Pledge Account on such last Business Day or as of such such other times, and any other information about the Eligible Securities which the Bank may reasonably request; and (iv) it will follow the instructions of the Bank, without the consent of the Pledgor, with respect to the Pledge Account and the Eligible Securities (including, without limitation, instructions to sell or transfer the Eligible Securities or instructions to hold dividends, distributions and interest declared, made or paid upon any of the Eligible Securities as additional collateral for the Bank, the Participating Banks and the Agent or to deliver Eligible Securities to the Bank) without any duty of inquiry to determine whether such instructions are in accordance with the Pledge Agreement. The Custodian will credit all dividends (other than liquidating dividends), distributions and interest declared, made or paid upon any of the Eligible Securities to the account of the Pledgor until the Bank notifies the Custodian in writing that a Default (as defined in the Reimbursement Agreement) has occurred and is continuing. The Custodian agrees that, upon the liquidation or dissolution (in whole or in part) of the issuer of any of the Eligible Securities, any sum paid as a liquidating dividend or otherwise upon or with respect to any of the Eligible Securities shall be held by the Custodian as additional collateral for the benefit of the Bank. The Custodian agrees as follows with respect to the Eligible Securities: (a) it will have no right of compensation from the Bank; (b) it will look solely to the Pledgor for payment of its expenses and charges, if any, in connection with the pledge and assignment to the Bank of the Eligible Securities and the Bank's instructions with regard thereto; (c) the Eligible Securities will be maintained free and clear of all liens, safekeeping or other charges and demands and claims of any nature whatsoever, whether now or hereafter existing, on the part of the Custodian or in favor of the Custodian or of anyone claiming by, through or under the Custodian; and (d) if certificates shall at any time be issued with regard to any of the Eligible Securities which were formerly in uncertificated form, the Custodian shall hold such certificates as the Bank's agent. The Custodian shall have no duty to require any cash or securities be delivered to it or to determine that the amount and form of assets constituting Collateral complies with any applicable requirements under the Pledge Agreement, nor shall the Custodian be responsible for any Collateral not delivered to or held by it. Subject to the provisions herein, the Custodian may hold the securities in nominee, book entry or other form and in 70 any depository or clearing corporation established for the purpose of clearing and settling such securities. The Custodian agrees that it shall exercise reasonable care and diligence in performing all of its obligations hereunder; provided, however, that: (a) The Custodian shall be entitled to rely upon the authenticity of, and the truth of the statements in, any certificate, opinion of counsel, evidence of indebtedness, notice, consent, instruction or other document reasonably believed by the Custodian to be genuine and to be signed by the proper party or parties; (b) The Custodian shall be entitled to rely upon the written advice of its legal counsel; (c) The Custodian shall not be liable with respect to any action taken or omitted to be taken by it in good faith at the instruction of the Bank, provided that such action is in accordance with the terms and conditions of this Agreement; (d) The Custodian shall be entitled to request the written consent or instructions of the Bank prior to the Custodian's taking any action hereunder requiring the exercise of its discretion and to refrain from taking such action until it shall have received such written consent or instructions; (e) As between the Pledgor and the Custodian, the terms of the Custodian Agreement shall apply with respect to any losses or liabilities of such parties arising out of matters covered by this Agreement; (f) With respect to Eligible Securities held by a central depository or clearing corporation, it is understood that the Custodian shall have no liability to the Bank in respect of any action or omission of the central depository or clearing corporation; and (g) To the extent any conflict exists between the obligations of the Custodian to perform under the Custodian Agreement and the obligations of the Custodian to perform hereunder, the obligations hereunder shall supersede any conflicting obligations under the Custodian Agreement. All obligations performed by the Custodian under this Agreement shall be performed in the capacity of agent for the Bank. 71 The Custodian is authorized to follow and rely upon all instructions given by the Bank by tested telex or facsimile transmission with receipt confirmed or by written instrument and signed by any officer or designated representative of the Bank notified to the Custodian in writing. Forthwith after execution of the Custodian Agreement the Bank will certify to the Custodian the names and signatures of the persons authorized to sign any proper instructions and generally to give instructions hereunder to the Custodian and shall deliver to the Custodian appropriate evidence of such authority. The Bank shall promptly notify the Custodian of any changes that may be made from time to time in the persons so authorized. This Agreement may not be amended except by a writing signed by both of the parties hereto and no provision of the Pledge Agreement which affects the obligations or responsibilities of the Custodian may be amended without the prior, written consent of the Custodian. This Agreement may be signed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument and shall be binding upon and inure to the benefit of the parties hereto, their successors and assigns. The Custodian hereby represents and warrants to the Bank as follows: (a) The execution, delivery and performance by the Custodian of this Agreement are (i) within its corporate powers and (ii) have been duly authorized by all necessary corporate action; (b) This Agreement is a legally valid and binding obligation of the Custodian, enforceable against the Custodian in accordance with its terms; and (c) No authorization, approval or other action by, and no notice to or filing with any shareholder of the Pledgor, creditor or governmental or regulatory agency or authority is required for the due and valid execution, delivery and performance of this Agreement by the Custodian. This Agreement shall be construed in accordance with and governed by the law of Bermuda. The parties hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any disputes arising hereunder. 72 If the foregoing is agreeable to you, please indicate your acceptance by signing in the space provided below. Very truly yours, THE BANK OF BERMUDA LIMITED By:___________________________________ Title: ACCEPTED AND AGREED TO: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as agent By:__________________________________ Title: 73 EX-10.27 5 FIRST AMENDMENT 1995 LONG TERM INCENTIVE PLAN FIRST AMENDMENT OF ACE LIMITED 1995 LONG-TERM INCENTIVE PLAN ----------------------------------------- WHEREAS, ACE Limited ("ACE") maintains the ACE Limited 1995 Long-Term Incentive Plan (the "Plan"); and WHEREAS, amendment of the Plan is now considered desirable; NOW, THEREFORE, by virtue and in exercise of the amending power reserved to ACE under the Plan and pursuant to the authority delegated to the undersigned officer of ACE by a resolution adopted by its Board of Directors, the Plan be and is hereby amended in the following particulars, effective as of November 15, 1996; provided that for purposes of determining a Participant's Years of Service and Date of Termination, as defined in the Plan, with respect to any Awards granted under the Plan on or after the Effective Date of the Plan, the Participant's service as a Director of ACE or as an employee of ACE or a Related Company prior to November 15, 1996 will be taken into account under the terms of the Plan: 1. By substituting the following for subsection 1.1: "1.1 Purpose. The ACE Limited 1995 Long-Term Incentive Plan (the 'Plan') has been established by ACE Limited (the 'Company') to: (a) attract and retain Directors of the Company and employees of the Company and Related Companies; (b) motivate participating employees and Directors, by means of appropriate incentives, to achieve long-range goals; (c) provide incentive compensation opportunities that are competitive with those of other major corporations; and (d) further identify Participants' interests with those of the Company's other shareholders through compensation that is based on the Company's common stock; and thereby promote the long-term financial interest of the Company and the Related Companies, including the growth in value of the Company's equity and enhancement of long-term shareholder return." 2. By substituting the following for the first sentence of subsection 1.2: "Subject to the terms and conditions of the Plan, the Committee shall determine and designate, from time to time from among the employees of the Employers and from among the Directors of the Company those persons who will be granted one or more Awards under the Plan, and thereby become 'Participants' in the Plan." 3. By substituting the following for subsection 2.1: "2.1. Definitions. The grant of an Option under this Section 2 entitles the Participant to purchase shares of Stock at a price fixed at the time the Option is granted, or at a price determined under a method established at the time the Option is granted, subject to the terms of this Section 2. Options granted under this Section 2 may be either Incentive Stock Options or Non-Qualified Stock Options, as determined in the discretion of the Committee, except that, to the extent required by the Code, a Director who is not an employee of the Company or a Related Company may not be granted an Incentive Stock Option. An 'Incentive Stock Option' is an Option that is intended to satisfy the requirement applicable to an 'incentive stock option' described in section 422(b) of the Code. A 'Non- Qualified Option' is an Option that is not intended to be an 'incentive stock option' as that term is described in section 422(b) of the Code. 4. By substituting the following for paragraph (b) of subsection 2.4: "(b) No Option may be exercised by a Participant: (i) prior to the date on which the Participant completes one Year of Service with the Company or any Related Company after the date as of which the Option is granted (provided, however, that the Committee may permit earlier exercise following the Participant's Date of Termination by reason of death or Disability); or (ii) after the Expiration Date applicable to that Option." 5. By substituting the following for paragraph (b) of subsection 3.3: "(b) If a Stock Appreciation Right is not in tandem with an Option, then the Stock Appreciation Right shall be exercisable in accordance with the terms established by the Committee in connection with such rights; provided, however, that except as otherwise expressly provided in the Plan, no Stock Appreciation Right may -2- be exercised by a Participant (i) prior to the date on which he completes one Year of Service with the Company or any Related Company after the date as of which the Stock Appreciation Right is granted (provided, however, that the Committee may permit earlier exercise following the Participant's Date of Termination by reason of death or Disability); or (ii) after the Expiration Date applicable to that Stock Appreciation Right." 6. By substituting the following for subsection 6.5: "6.5. Liability for Cash Payments. Subject to the provisions of this Section 6, an Employer shall be liable for payment of cash due under the Plan with respect to any Participant to the extent that such benefits are attributable to the services rendered for that Employer by the Participant and the Company shall be liable for payment of cash due under the Plan with respect to any Participant to the extent that such benefits are attributable to the services rendered for the Company as a Director. Any disputes relating to liability of Employers and the Company for cash payments shall be resolved by the Committee." 7. By substituting the following for paragraph (b) of subsection 6.13: "(b) The Plan does not constitute a contract of employment, and neither the Plan nor Awards granted under the Plan, nor selection as a Participant, shall confer any right upon a Participant to be retained in the employ of an Employer or any Related Company or to be retained as a Director of the Company, 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. Except as otherwise provided in the Plan, no Award under the Plan shall confer upon the holder thereof any right as a shareholder of the Company prior to the date on which he fulfills all service requirements and other conditions for receipt of such rights." 8. By substituting the following for paragraph (a) of subsection 8.2: "(a) Subject to the provisions of the Plan, the Committee will have the authority and discretion to select employees and Directors to receive Awards, to determine the time or times of receipt, to determine the types of Awards and the number of shares covered by the Awards, to establish the terms, conditions, performance criteria, restrictions, and other -3- provisions of such Awards, and to cancel or suspend Awards. In making such Award determinations, the Committee may take into account the nature of services rendered by the respective employee or Director, his present and potential contribution to the Company's success and such other factors as the Committee deems relevant." 9. By substituting the following for subsection 8.4: "8.4 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, a Director's term of service, termination of employment, termination as a Director, leave of absence, reemployment and 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 terms of the Plan. 10. By substituting the following for paragraph (e) of Section 10: "(e) Date of Termination. A Participant's 'Date of Termination' shall be, with respect to an employee, the date on which his employment with all Employers and Related Companies terminates for any reason, and with respect to a Director, the date immediately following the last day on which he serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participant's transfer of employment between the Company and a Related Company (including an Employer) or between two Related Companies (including Employers); further provided that a Date of Termination shall not be deemed to occur by reason of a Participant's cessation of service as a Director if immediately following such cessation of service he becomes or continues to be employed by the Company or a Related Company, nor by reason of a Participant's termination of employment with the Company or a Related Company if immediately following such termination of employment he becomes or continues to be a Director; and further provided that a Participant's employment shall not be considered terminated while the Participant is on a leave of absence from an Employer or a Related Company approved by the Participant's employer." -4- 11. By redesignating paragraphs (f) through (p) of Section 10 as paragraphs (g) through (q) and adding the following new paragraph (f): "(f) Director. The term 'Director' means a member of the Board, who may or may not be an employee of the Company or a Related Company." 12. By substituting the following for subparagraph (n), redesignated as subparagraph (o), of Section 10,: "(o) Retirement. 'Retirement' of a Participant shall mean with respect to an employee of the Company or a Related Company, the occurrence of a Participant's Date of Termination with the consent of the Participant's employer after the Participant is eligible for early retirement or normal retirement under the ACE Limited Employee Retirement Plan (or any other retirement plan maintained by the Company or the Related Companies) and with respect to a Director, the Participant's Date of Termination with the consent of the Company after the Participant would be eligible for retirement under any retirement plan maintained by the Company or a Related Company if the Director were an employee of the Company or a Related Company; provided, however, that the Committee may impose such additional or alternative conditions or restrictions on Retirement as it determines to be appropriate." 13. By adding the following new paragraph (r) to the end of Section 10: "(r) Year of Service. The term 'Year of Service' means one continuous year of employment with the Company or a Related Company, one continuous year of service as a Director of the Company, or one continuous year of any combination of employment with the Company or a Related Company and service as a Director." -5- * * * In witness whereof, ACE Limited has caused this amendment to be signed by its duly authorized officer as of this 15th day of November, 1996. ACE Limited By___________________________ Its_____________________ -6- EX-11.1 6 STATEMENT RE COMPUTATION OF EARNINGS Exhibit 11.1 ACE LIMITED AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE
Year Ended September 30, -------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (In thousands of U.S. dollars except share and per share data) Earnings (loss) per share Primary Weighted average Ordinary Shares outstanding 49,275,027 46,859,168 48,202,545 40,619,319 31,428,349 Average stock options outstanding (net of repurchased shares under the treasury stock method) 538,601 199,838 -- 21,944 4,812,385 ----------- ----------- ----------- ----------- ----------- Weighted average ordinary shares and ordinary share equivalents outstanding 49,813,628 47,059,006 48,202,546 40,641,263 36,240,734 =========== =========== =========== =========== =========== Net income (loss) Actual net income (loss) $ 289,733 $ 237,566 $ (45,678) $ 223,547 $ 10,450 ----------- ----------- ----------- ----------- ----------- Adjusted net income (loss) $ 289,733 $ 237,566 $ (45,678) $ 223,547 $ 10,450 =========== =========== =========== =========== =========== Earnings (loss) per share $ 5.82 $ 5.05 $ (0.95) $ 5.50 $ 0.29 =========== =========== =========== =========== =========== Earnings (loss) per share Assuming full dilution Weighted average ordinary shares outstanding 49,275,027 46,859,168 48,202,545 40,619,319 31,428,349 Average stock options outstanding (net of repurchased shares under the treasury stock method) 717,156 199,838 -- 414,744 5,172,785 ----------- ----------- ----------- ----------- ----------- Weighted average ordinary shares and ordinary share equivalents outstanding 49,992,183 47,059,006 48,202,545 41,034,063 36,601,134 =========== =========== =========== =========== =========== Net income (loss) Actual net income (loss) $ 289,733 $ 237,566 $ (45,678) $ 223,547 $ 10,450 ----------- ----------- ----------- ----------- ----------- Adjusted net income (loss) $ 289,733 $ 237,566 $ (45,678) $ 223,547 $ 10,450 =========== =========== =========== =========== =========== Earnings (loss) per share $ 5.79 $ 5.05 $ (0.95) $ 5.45 $ 0.29 =========== =========== =========== =========== ===========
The number of shares for all periods presented have been adjusted to reflect the eight-for-one stock split effective January 14, 1993. - -------- (1) The inclusion of stock options in the loss per share calculations would be antidilutive. EX-13.1 7 1996 ANNUAL REPORT TO SHAREHOLDERS
ACE selected financial data The following table sets forth selected consolidated financial data of the Company as of and for each of the years in the five-year period ended September 30, 1996. - ---------------------------------------------------------------------------------------------------------- Year ended September 30, ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 (in thousands, except share and per share data and selected other data) Operations data: Net premiums written $ 602,707 $ 424,756 $ 385,926 $ 340,355 $ 322,362 --------------------------------------------------------------------------------------------------------- Net premiums earned 587,245 428,661 391,117 319,578 273,977 Net investment income 206,524 181,375 142,677 119,978 109,870 Net realized gains on investments 55,229 50,765 3,717 98,371 135,948 Losses and loss expenses (1) 464,824 350,653 520,556 262,117 463,283 Acquisition costs and administrative expenses 94,441 72,582 62,633 52,263 46,062 - ---------------------------------------------------------------------------------------------------------- Net income (loss) (1) $ 289,733 $ 237,566 $ (45,678) $ 223,547 $ 10,450 ========================================================================================================== Earnings (loss) per share (2) $ 5.82 $ 5.05 $ (0.95) $ 5.50 $ 0.29 ========================================================================================================== Weighted average shares outstanding 49,813,628 47,059,006 48,202,545 40,641,263 36,240,734 Pro forma (3): Earnings per share $ 4.49 $ 0.21 ========================== Weighted average shares outstanding 49,831,087 49,814,295 Cash dividends per share (4) $ 0.64 $ 0.50 $ 0.42 $ 0.43 -
- ------------------------------------------------------------------------------- 1. 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 (see "Management's Discussion and Analysis - Breast Implant Litigation"). In 1992, the Company began applying actuarial and statistical methods to estimate ultimate expected losses and loss expenses. The recording of $463 million of losses and loss expenses in 1992 resulted from the application of these methods to all of the Company's business since inception. Of such amount, $236 million related to premiums earned in years prior to 1992 and $227 million related to premiums earned in 1992. 2. Earnings (loss) per share are computed using net income (loss) divided by the weighted average number of Ordinary Shares outstanding and, if dilutive, shares issuable under outstanding options. There is no material difference between primary and fully diluted earnings (loss) per share. 3. Pro forma earnings per share have been calculated by dividing net income by the weighted average number of Ordinary Shares and Ordinary Share equivalents outstanding as adjusted 16 [ACE LOGO] These selected financial and other data should be read in conjunction with the consolidated financial statements and related notes and with "Management's Discussion and Analysis of Results of Operations and Financial Condition" presented on pages 28 to 45 and 18 to 27 respectively, of this annual report. - --------------------------------------------------------------------------------
Year ended September 30, -------------------------------------------------------------------------- 1996 1995 1994 1993 1992 (in thousands, except share and per share data and selected other data) Balance sheet data (at end of period): Total investments and cash $4,155,274 $3,132,200 $2,538,321 $2,211,230 $1,949,098 Total assets 4,574,358 3,236,906 2,632,361 2,293,587 2,020,379 Unpaid losses and loss expenses (1) 1,836,113 1,437,930 1,160,392 650,180 673,849 Total shareholders' equity (1) 2,244,278 1,442,663 1,088,745 1,368,180 1,101,981 Book value per share (1) (5) $ 38.58 $ 31.29 $ 22.96 $ 27.47 $ 28.81 Fully diluted book value per share (1) (6) $ 38.31 $ 31.19 $ 22.95 $ 27.46 $ 22.28 Selected other data: Loss and loss expense ratio (1) 79.1% 81.8% 133.1% 82.0% 169.1% Underwriting and administrative expense ratio 16.1% 16.9% 16.0% 16.4% 16.8% Combined ratio (1) 95.2% 98.7% 149.1% 98.4% 185.9% Loss reserves to capital and surplus ratio (1) 81.8% 99.7% 106.6% 47.5% 61.1% Ratio of net premiums written to capital and surplus 0.27:1 0.29:1 0.35:1 0.25:1 0.29:1 - ------------------------------------------------------------------------------------------------------------------------------------
to reflect the recapitalization and the repurchase of Ordinary Shares, effected in March 1993, and assumes the recaptilization and repurchase of Ordinary Shares occurred at the beginning of each year for which pro forma information is provided. 4. The dividends declared in 1993 included a special "RPII" dividend of $ 0.23 per Ordinary Share paid to shareholders of record on July 7, 1993. 5. For years prior to 1993, book value per share is based on (i) shareholders' equity plus conditional demand notes receivable less aggregate cost to redeem all outstanding Callable Preferred Shares, divided by (ii) Ordinary Shares outstanding at the end of the period. 6. For years prior to 1993, fully diluted book value per share is based on (i) shareholders' equity plus conditional demand notes receivable plus aggregate proceeds, assuming exercise of all outstanding options less aggregate cost to redeem all outstanding Callable Preferred Shares and Callable Preferred Shares issuable upon exercise of options outstanding, divided by (ii) Ordinary Shares outstanding plus Ordinary Shares issuable upon exercise of options outstanding at the end of the period. ACE The following is a discussion of the Company's financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the consolidated financial statements, and related notes thereto, presented on pages 28 to 45 of this annual report. md&a Management's discussion and analysis of results of operations and financial condition General 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 of London ("Lloyd's") to support underwriting by syndicates managed by Methuen Underwriting Limited ("MUL"). The term "the Company" refers to ACE and its subsidiaries, excluding Methuen. On July 1, 1996, the Company completed the acquisition of Tempest, a leading Bermuda-based property catastrophe reinsurer. Tempest underwrites property catastrophe reinsurance on a worldwide basis, emphasizing excess layer coverages, and has large aggregate exposures to man-made and natural disasters. Property catastrophe loss experience is generally characterized as low frequency but high severity short-tail claims which may result in significant volatility in financial results. (For further discussion, see "Liquidity and Capital Resources"). On March 27, 1996, the Company acquired a controlling interest in Methuen Group Limited ("Methuen"), the holding company for MUL, a leading Lloyd's managing agency. On November 26, 1996 the Company acquired the remaining 49 percent interest in Methuen. MUL manages six syndicates with a total underwriting capacity of (Pounds)366 million (approximately $555 million) in 1996. For the 1996 year of account, the Company, through a corporate subsidiary, has participated in the underwriting of these syndicates by providing funds at Lloyd's of (Pounds)12.25 million (approximately $18 million), which was primarily in the form of a letter of credit, supporting (Pounds) 24.5 million (approximately $37 million) of underwriting capacity. For the 1997 year of account, the Company has agreed to provide funds at Lloyd's of approximately (Pounds)62 million (approximately $93 million) to support up to approximately (Pounds)124 million (approximately $186 million) of premium writing capacity by Methuen syndicates. The Methuen syndicates in which the Company participates underwrite aviation, marine and non-marine risks. On November 26, 1996 the Company acquired Ockham Worldwide Holdings PLC ("Ockham Worldwide"), a wholly-owned subsidiary of Ockham Holdings PLC. Ockham Worldwide owns two Lloyd's managing agencies, Ockham Sturge Aviation Agency Ltd. and Ockham Worldwide Agency Ltd. Upon completion of the acquisition, the two managing agencies changed their names to ACE London Aviation Limited and ACE London Underwriting Limited. Together these two agencies manage seven syndicates with total underwriting capacity of (Pounds) 349 million (approximately $524 million) in 1996. Ockham Worldwide also owns a Lloyd's corporate member which provides funds at Lloyd's to support underwriting on these syndicates. The Company expects to provide approximately (Pounds)15 million (approximately $23 million) of capacity to the syndicates managed by Ockham Worldwide for the 1997 year of account. The Company's excess liability insurance policy generally provides limits of up to a maximum of $200 million per occurrence and annual aggregate, with a minimum attachment point generally of $100 million. For all new and renewal business, effective December 15, 1994, the Company reduced the maximum limits offered for integrated occurrences from $200 million to $100 million. The Company maintains excess of loss clash reinsurance to protect it from losses arising from a single set of circumstances (occurrence) covered by more than one excess liability insurance policy. The reinsurance provides protection to a maximum of $150 million, and in the aggregate excess of $225 million, for each and every loss occurrence involving three or more insureds. Integrated occurrences are specifically excluded. The Company offers up to $75 million of limits in directors and officers liability coverage. The Company does not purchase reinsurance for its directors and officers liability risks. The Company began satellite insurance operations in February 1994. Until February 15, 1996, the Company offered separate limits of up to $25 million per risk for launch insurance, including ascent to orbit and/or initial testing, and up to $25 million per risk for in-orbit insurance. This risk was fully retained by the Company. Effective for all business written on or after 18 [LOGO ACE] February 15, 1996, the Company has entered into a surplus treaty arrangement which provides for up to $25 million of reinsurance for each risk. This reinsurance arrangement has enabled the Company to raise the gross limits offered for satellite insurance to $50 million per risk. During fiscal 1995, the Company entered the following new lines of business: aviation insurance, excess property insurance, and financial lines. Also during 1995, the Company commenced its participation in the reinsurance of "First Line". Aviation insurance provides coverage for various aviation products, including aircraft manufacturer's hull and liability, as well as airport liability, aircraft refueling operations and associated aircraft liability risks. The Company offers limits of up to $100 million per insured, with no minimum attachment point. The Company reduces its net exposure to approximately $50 million per insured, with a dedicated reinsurance program. The Company offers global excess property "all risk" insurance, providing limits of up to a maximum of $50 million per occurrence with a minimum attachment point of $25 million. Coverage includes such perils as windstorm, earthquake and fire, as well as explosion. Consequential business interruption coverage is also offered. In certain circumstances, the Company uses reinsurance to establish the retained net limit per risk. In addition, the Company has purchased catastrophe reinsurance to control the possible effects of cumulative natural peril exposure. The Company's financial lines product group offers specifically designed financial, insurance and reinsurance solutions to address complex risk management problems. The programs offered typically have the following common characteristics: multi-year contract terms, broad coverage that includes stable capacity and pricing for the insured, aggregate policy limits and insured participation in the results of their own loss experience. Each contract is unique because it is tailored to the insurance or reinsurance needs, specific loss history and financial strength of the insured. Premium volume, as well as the number of contracts written, can vary significantly from period to period due to the nature of the contracts being written. Profit margins may vary from contract to contract depending on the amount of underwriting risk and investment risk assumed on each contract. The Company participates in the reinsurance of a program referred to as "First Line" which provides financial guarantees required by the U.S. Coast Guard to issue Certificates of Financial Responsibility, under the Oil Pollution Act of 1990, to owners of vessels operating in U.S. waters. The Company has purchased excess of loss reinsurance to limit its exposure in this line. The Company will continue to evaluate potential new product lines and other opportunities in the insurance and reinsurance markets. - ------------------------------------------------------------------------------- Results of Operations - Years ended September 30, 1996, 1995 and 1994
1996 1995 1994 ------------------------------------------ (in millions) Income (loss) excluding net realized gains on investments $234.5 $186.8 $(49.4) Net realized gains on investments 55.2 50.8 3.7 Net income (loss) $289.7 $237.6 $(45.7)
During the years ended September 30, 1996 and 1995, the Company has experienced strong growth in net premiums earned and net investment income, offset partially by an increase in general and administrative expenses. These factors, together with the inclusion of income excluding net realized gains on investments of $23.8 million from Tempest for the three month period from July 1, 1996, the date of acquisition, resulted in income excluding net realized gains on investments of $234.5 million in 1996. For 1995, these same factors, excluding Tempest, resulted in income excluding net realized gains on investments of $186.8 million. Fiscal 1994 income excluding net realized gains on investments was adversely affected by an additional charge of $200 million in the Company's reserve for unpaid losses and loss expenses which was primarily related to breast implant litigation resulting in a net loss excluding net realized gains on investments of $49.4 million (see "Losses and Loss Expenses" and "Breast Implant Litigation"). - -------------------------------------------------------------------------------- 19 [LOGO, md&a]
Premiums Percentage Percentage 1996 change 1995 change 1994 --------------------------------------------------------------------- Net premiums written (in millions) Excess liability $202.3 (15.4)% $239.1 (10.5)% $267.0 Financial lines 119.2 N.M. 9.2 N.M. -- Directors and officers liability 97.6 (7.1) 105.0 (2.3) 107.5 Satellite 85.3 89.7 45.0 N.M. 14.1 Property catastrophe (Tempest) 34.8 N.M. -- N.M. -- Aviation 27.1 N.M. 7.0 N.M. -- Excess property 13.9 N.M. 5.3 N.M. -- First Line 12.0 (14.0) 13.9 N.M. -- Lloyd's syndicates 9.7 N.M. -- N.M. -- Other 0.8 N.M. 0.3 N.M. (2.7) ---------------------------------------------------------------------------------------------------------------------- $602.7 41.9% $424.8 10.1% $385.9 ---------------------------------------------------------------------------------------------------------------------- Net premiums earned Excess liability $238.2 (9.2)% $262.4 (2.5)% $268.9 Financial lines 84.9 N.M. 0.8 N.M. -- Directors and officers liability 104.5 (5.0) 110.1 (3.4) 114.0 Satellite 77.8 79.7 43.3 N.M. 8.1 Property catastrophe (Tempest) 35.7 N.M. -- N.M. -- Aviation 19.0 N.M. 1.5 N.M. -- Excess property 11.8 N.M. 1.0 N.M. -- First Line 11.9 28.8 9.2 N.M. -- Lloyd's syndicates 2.8 N.M. -- N.M. -- Other 0.6 N.M. 0.4 N.M. 0.1 ---------------------------------------------------------------------------------------------------------------------- $587.2 37.0% $428.7 9.6% $391.1 ---------------------------------------------------------------------------------------------------------------------- N.M. = Not Meaningful
The Company's ability to make strategic acquisitions, develop new product lines and maintain high renewal rates on existing business despite continuing competitive pressure in certain markets, particularly the excess liability and directors and officers liability markets, has resulted in increases in net premiums written and net premiums earned for the years ended September 30, 1996 and 1995. Net premiums written increased by $177.9 million or 41.9 percent in 1996 compared to 1995. This growth is a result of a very strong year for the Company's financial lines and satellite product lines together with the increased contributions from aviation and excess property insurance which both include a full year of underwriting in 1996. Net premiums written also include property catastrophe premiums written by Tempest from July 1, 1996, as well as premiums from the Company's participation in the Lloyd's syndicates managed by MUL. These increases were offset by decreases in excess liability and directors and officers liability premiums written in 1996. Limit reductions, some of which resulted from reduced integrated occurrence coverages and increases to higher attachment points on some business written, contributed to the decrease in excess liability premiums. Continuing competitive pressures in the excess liability market also contributed to the decline in this line of business. The decline in directors and officers premiums is primarily due to a lower level of premiums generated from multi-year policies and premium decreases due to the continuing competitive pressure in the directors and liability market, offset somewhat by a net increase in new business. The increase in net premiums written of $38.9 million or 10.1 percent in 1995 as compared to 1994 was mainly the result of strong growth in the Company's satellite insurance business and the contributions of the Company's new product lines. The Company continued its program of selective premium rate increases for excess liability accounts in the chemical, energy, petrochemical and medical/pharmaceutical industries. However, a combination of the Company's decision to impose an annual aggregate sublimit of $100 million for excess liability integrated occurrences and an increase in competition in the marketplace was primarily responsible for the net decrease in excess liability net premiums written of $27.9 million. The slight decrease of $2.5 million in directors and officers liability net premiums written during 1995 was primarily the result of reduced premiums from multi-year policies and continuing competitive pressures in that marketplace. These factors were partially offset by an additional month of CODA net premiums written in 1995 as compared with 1994. CODA was acquired by the Company on November 1, 1993 20 [LOGO] and accordingly, eleven months of CODA net premiums written were recognized during fiscal 1994 as compared with twelve months in 1995. For fiscal 1996, net premiums earned increased by $158.5 million to $587.2 million compared with $428.7 million in 1995. The increase was the result of contributions from the new lines of business, particularly financial lines, together with the increase in satellite premiums earned, primarily from launch insurance, and the inclusion of Tempest earned premiums since July 1, 1996, the date of acquisition, which amounted to $35.7 million. These increases were offset by a decline in excess liability and directors and officers liability premiums earned in the year. Net premiums earned increased by $37.6 million for 1995 as compared with 1994 due mainly to satellite insurance business which added $35.2 million and new product lines which together contributed $12.5 million offsetting declines primarily in excess liability and directors and officers liability in the aggregate of $10.4 million. Net premiums earned from excess liability and directors and officers liability declined primarily as a result of the imposition of the annual aggregate sublimit for excess liability integrated occurrences and an increase in competition in the marketplace.
- ------------------------------------------------------------------------------------- Net Investment Income Percentage Percentage 1996 change 1995 change 1994 ---------------------------------------------------------- (in millions) Net investment income $ 206.5 13.9% $ 181.4 27.1% $ 142.7 - -------------------------------------------------------------------------------------
The increases in net investment income in 1996 and 1995 were primarily attributable to a larger investable asset base. On average, the portfolio generated a lower yield in 1996 compared to 1995 as a result of general market conditions while higher average yields were generated in 1995 as compared to 1994. The increases in the investable asset base in both 1996 and 1995 were due to positive cash flows from insurance operations and the reinvestment of funds generated by the portfolio. The increase in 1996 was also the result of the consolidation of the Tempest portfolio on July 1, 1996.
- --------------------------------------------------------------------------------------------------------------- Net Realized Gains (Losses) on Investments 1996 1995 1994 ------------------------------- Net realized gains (losses): (in millions) Fixed maturities and short-term investments $14.4 $ 8.4 $(43.3) Equity securities 15.8 3.6 -- Financial futures contracts 26.7 39.8 (11.1) Currency losses (1.7) (1.0) -- Centre Reinsurance Holdings Limited ("Centre Re") voting common shares -- -- 58.1 - --------------------------------------------------------------------------------------------------------------- $55.2 $50.8 $ 3.7 ===============================================================================================================
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. In May 1996, the Company decided to increase the equity exposure of the portfolio from 15 percent to 20 percent. It is expected that this change to the equity exposure will be fully implemented by the end of the first quarter of fiscal 1997. The remainder of the portfolio is comprised of fixed maturity securities. Non-U.S. dollar fixed maturity and equity securities are held in the portfolio. The Company's investment guidelines permit the use of 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. 21 md&a ACE Sales proceeds for fixed maturity securities were generally higher than their amortized costs during fiscal 1996 which resulted in net realized gains on investments of $14.4 million compared to gains of $8.4 million during 1995. In fiscal 1994, decreasing market values created by rising interest rates resulted in sales proceeds for securities which were generally less than their amortized cost, with net realized losses of $43.3 million being recognized on fixed maturities and short-term investments. With strong equity markets, net realized gains on sales of equity securities were $15.8 million in fiscal 1996 compared with gains of $3.6 million in 1995. In fiscal 1994, the Company's equity exposure was obtained solely through the use of a synthetic equity fund. In addition to the synthetic equity fund, during fiscal 1995, common stocks were introduced into the portfolio as part of the implementation of changes to the strategic asset allocation. The realized gains on financial futures contracts were generated from U.S. Treasury futures contracts and from the equity index futures contracts held in the synthetic equity fund. Gains and losses on these instruments are closely linked to fluctuations in the U.S. Treasury and equity markets and therefore, realized gains would be expected during periods of broad market improvements while losses are realized during periods of market declines. The majority of the $26.7 million of net realized gains on financial futures contracts recorded in 1996 were generated by the equity index futures contracts held, as a result of the 20 percent rise in the S&P 500 Stock Index during the fiscal year. This compares with $39.8 million generated in 1995 as a result of the nearly 30 percent rise in the S&P 500 Stock Index during the period. The remainder arose from gains recognized on futures contracts used by certain of the Company's external managers of fixed income securities (see note 7(a) of the Notes to Consolidated Financial Statements for a discussion of the Company's use of financial futures contracts). In comparison, net realized losses on financial futures contracts of $11.1 million were generated during 1994 by the equity index futures contracts and future contracts on fixed income securities. Most of the losses were derived from the U.S. Treasury futures contracts and were a direct result of the increase in intermediate and long-term interest rates during the twelve month period which resulted in market depreciation for fixed income securities. Currency losses for the year were $1.7 million compared to a loss of $1.0 million for 1995. Unrealized currency losses of $7.2 million on securities held in the portfolio as at September 30, 1996 are reflected in net unrealized appreciation on investments in shareholders' equity. At September 30, 1995 there was an unrealized currency gain of $1.7 million in net unrealized appreciation on investments in shareholders' equity. In fiscal 1994, the Company sold its voting common shares of Centre Re, a privately held Bermuda-domiciled reinsurer specializing in finite risk reinsurance, to Zurich Insurance Company, the controlling shareholder of Centre Re, for $128.4 million and recognized a gain of $58.1 million. The proceeds from the sale, and interest thereon, were received by the Company in February 1994, and integrated into the Company's investment portfolio. - -------------------------------------------------------------------------------- Combined Ratio
1996 1995 1994 ------------------------ Loss and loss expense ratio 79.1% 81.8% 133.1% Acquisition cost ratio 9.0 10.9 11.7 Administrative expense ratio 7.1 6.0 4.3 ------------------------------------------------------------------------------ Combined ratio 95.2% 98.7% 149.1% ------------------------------------------------------------------------------
The underwriting results of a property and casualty insurer are discussed frequently by reference to its loss and loss expense ratio, acquisition cost ratio, 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, acquisition cost ratio and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting profits and a combined ratio exceeding 100 percent indicates underwriting losses. - -------------------------------------------------------------------------------- Losses and Loss Expenses
Percentage Percentage 1996 change 1995 change 1994 ----------------------------------------------- (in millions) Losses and loss expenses $ 464.8 32.6% $ 350.6 (32.6)% $ 520.6 ------------------------------------------------------------------------------
22 [ACE LOGO] For the year ended September 30, 1996, the loss and loss expense ratio was 79.1 percent. This ratio has been impacted by the inclusion of Tempest since July 1, 1996, the date of acquisition. Property catastrophe loss experience is generally characterized as low frequency but high severity short-tail claims which may result in significant volatility in results. For the period from the date of acquisition of Tempest to September 30, 1996, Tempest's loss and loss expense ratio was 36.4 percent. Excluding the impact of Tempest, the loss and loss expense ratio for fiscal 1996 would have been 81.8 percent. For the year ended September 30, 1995 the loss and loss expense ratio was also 81.8 percent. The loss and loss expense ratio for 1994 was significantly impacted by an additional $200 million charge to earnings which related to increases in the reserve for unpaid losses and loss expenses primarily related to breast implant litigation. Excluding the additional charge, the loss and loss expense ratio for 1994 would have been 82.0 percent and the combined ratio would have been 98.0 percent. 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 reserve 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 September 30, 1996. 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"). - -------------------------------------------------------------------------------- Acquisition costs Percentage Percentage 1996 change 1995 change 1994 ---------------------------------------------- (in millions) Acquisition costs $53.0 13.5% $46.6 1.7% $45.8 ------------------------------------------------------------------------ Acquisition costs have increased by $6.4 million in 1996 compared with 1995 as a result of the significant increase in net premiums earned. However, the acquisition cost ratio decreased to 9.0 percent in 1996 from 10.9 percent in 1995 primarily due to the change in the mix of premiums earned in the year. The acquisition cost ratio decreased in 1995 compared with 1994 primarily as a result of generally lower commission rates on satellite insurance. Administrative expenses Percentage Percentage 1996 change 1995 change 1994 ---------------------------------------------- (in millions) Administrative expenses $41.5 60.0% $25.9 54.5% $16.8 ------------------------------------------------------------------------ Administrative expenses increased by $15.6 million in 1996 compared with 1995 and $9.1 million in 1995 compared with 1994. These additional expenses are primarily due to the increased cost base resulting from the strategic diversification by the Company over the past two years, including the introduction of the new insurance products during 1994 and 1995 and the acquisition of Tempest and Methuen during 1996. Administrative expenses for 1996 include $1.3 million related to the amortization of goodwill resulting from the acquisition of Tempest. In addition, the increase in the market value of the Company's shares during 1996 and 1995 resulted in total expenses related to employee stock appreciation rights of $6.0 million and $2.5 million respectively, compared with a credit of $1.4 million in 1994. - ------------------------------------------------------------------------------- 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 depend primarily on dividends or other statutorily permissible payments from its Bermuda-based insurance and reinsurance 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 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 23 md&a ACE to maintain shareholder's equity at a level adequate to support the level of insurance and reinsurance operations. On January 4, 1996 the Company received a dividend of $10 million from ACE Insurance Management Limited and on September 24, 1996 the Company received a dividend of $125 million from ACE Insurance. The Company's consolidated sources of funds consist primarily of net premiums written, investment income, and the proceeds from sales and maturities of investments. Funds are used primarily to pay claims, operating expenses and 621.40 dividends and for the purchase of investments. For the years ended September 30, 1996, 1995 and 1994, the Company's consolidated net cash flows from operating activities were $621.40 million, $437.0 million and $336.8 million respectively. Cash flows are affected by claim payments, which due to the nature of the Company's operations, may comprise large loss payments on a limited number of claims and therefore can fluctuate significantly from year to year. The irregular timing of these loss payments, for which the source of cash can be from operations, available net credit facilities or routine sales of investments, can create significant variations in cash flows from operations between periods. Total loss and loss expense payments amounted to $101.4 million, $73.1 million and $126.6 million in fiscal 1996, 1995 and 1994, respectively. At September 30, 1996, total investments and cash amounted to $4.2 billion compared with $3.1 billion at September 30, 1995. The significant increase in investable assets can be attributed in part to the acquisition of Tempest, whose investable assets have been consolidated with the Company's. Tempest's investments and cash at September 30, 1996 were approximately $523 million and are included in total investments and cash. The remainder of the increase is attributable to strong cash flows from operating activities during the year as well as the reinvestment of funds generated by the portfolio. The Company's consolidated investment portfolio is structured to provide a high level of liquidity to meet insurance related or other obligations. During 1996, an average of 11.5 percent of the externally managed investment portfolio was held in short-term investments which mature in one year or less from date of issue. Additionally, at September 30, 1996, 4.2 percent of the fixed maturity portfolio had a maturity date within the succeeding twelve month period, providing a further source of liquid funds. 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 (see note 4 of the Notes to Consolidated Financial Statements for a detailed analysis of the portfolio). At September 30, 1996, 95 percent of the fixed maturity portion of the portfolio was rated "A" or better by one or more nationally recognized U.S. rating agencies. The Company believes that its cash balances, cash flow from operations, routine sales of investments and the liquidity provided under its committed line of credit (discussed below) are adequate to allow the Company to pay claims within the time periods required under its policies. The Company has a $150 million committed unsecured line of credit provided by a syndicate of five major international banks, led by Morgan Guaranty Trust Company of New York ("Morgan"). In accordance with the Company's cash management strategy, this facility is utilized when it is determined that borrowing on a short-term basis is advantageous to the Company. Borrowings from this facility are generally repaid from operating cash flows, primarily premium receipts. There were no drawdowns on the facility during 1996 or 1995. The line of credit agreement requires the Company to maintain consolidated tangible net worth of not less than $950 million. Upon renewal on November 15, 1996, an additional bank will participate in the facility, increasing to six the number of banks involved in the syndicate. The committed unsecured line of credit was renewed in the amount of $50 million for an additional 364 day period under essentially the same terms and conditions as expiring. The minimum consolidated tangible net worth covenant was increased to $1.25 billion, reflecting the growth in the Company's consolidated tangible net worth to approximately $2 billion at September 30, 1996. The syndicate of banks have also committed to provide up to (Pounds) 75 million (approximately $112 million) for a five year, secured letter of credit, which will primarily be used to provide funds at Lloyd's to support underwriting capacity on Lloyd's syndicates in which the Company participates. Morgan will remain as agent on the line of credit and will serve as the issuing bank for the letter of credit. On July 1, 1996, the Company completed the acquisition of Tempest. Under the terms of the Agreement and Plan of Amalgamation, Tempest shares outstanding at the time of the acquisition were cancelled and converted into the right to receive 13,333,247 Ordinary Shares of the Company. These shares were capitalized at a value of $46 2/3 per share, which was determined in accordance with the EITF 95-19 consensus that deals with the value of equity securities issued to effect a purchase combination. In addition, options to acquire Tempest shares were converted into 446,089 Company options at a total cost of $12.1 million. The total value of the acquisition amounted to $638.7 million, which includes the value of the shares and options issued as well as other transaction expenses which amounted to $4.4 million. Tempest is not an admitted reinsurer in the United States. Accordingly, the terms of certain reinsurance contracts require Tempest to provide letters of credit ("LOCs") to Tempest's clients in respect of reported claims. Tempest has a facility for the issuance of LOCs of up to $20 million. At September 30, 1996, LOCs outstanding amounted to $8.4 million. Investments with a fair value of $15.4 million were pledged as collateral for these LOCs. During 1995 the Company repurchased 1,332,300 Ordinary Shares under share repurchase programs for an aggregate cost of $33.5 million. During 1996, the Company repurchased 1,268,600 Ordinary Shares under share repurchase programs for an aggregate cost of $57.8 million. On August 9, 1996, the Board of Directors authorized a new repurchase program for up to $100 million of the Company's Ordinary Shares. This program superseded and replaced the balance of the previous authorization. At September 30, 1996, $65.8 million of the current Board authorization had not been utilized. On October 19, 1995, January 18, 1996 and April 19, 1996, 24 ACE the Company paid quarterly dividends of 14 cents per share to shareholders of record on September 29, 1995, December 29, 1995, and March 29, 1996 respectively. On July 19, 1996 the Company paid a quarterly dividend of 18 cents per share to shareholders of record on June 14, 1996. On August 9, 1996, the Board of Directors declared a quarterly dividend of 18 cents per share paid on October 18, 1996 to shareholders of record on September 30, 1996. 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. Fully diluted net asset value per share was $38.31 at September 30, 1996, compared with $31.19 at September 30, 1995. - ------------------------------------------------------------------------------- Changes in shareholders' equity for the years ended September 30, 1996 and 1995 were as follows:
1996 1995 ---------------- (in millions) Balance, beginning of year $1,443 $1,089 Value of Ordinary Shares and options issued in Tempest acquisition 634 -- Repurchase of Ordinary Shares (58) (34) Change in net unrealized appreciation (depreciation) on investments (33) 174 Net income 290 237 Dividends declared (32) (23) - ---------------------------------------------------------------------------------------- Balance, end of year $2,244 $1,443 - ----------------------------------------------------------------------------------------
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 ultimate liability is estimated using actuarial and statistical projections. The reserve for unpaid losses and loss expenses of $1.8 billion at September 30, 1996, includes $1.0 billion of case and loss expense reserves. While the Company believes that its reserve for unpaid losses and loss expenses at September 30, 1996 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. The Company does not have adequate data upon which to anticipate any funding schedule for the payment of these liabilities, and it expects that the amount of time required to determine the financial impact of the options selected by claimants may extend well into 1997 and beyond. Payments may be accelerated for some policyholders in 1997 as a result of settlement of opt-out cases and as additional payments are required to fund Settlement II (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 line of credit 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 ("MDL") to a Federal District Court in Alabama. On April 1, 1994 the judge presiding over the MDL proceeding gave preliminary approval to a global settlement agreement in the approximate amount of $4.2 billion and conditional certification to a settlement class ("Global I"). On May 15, 1995, the Dow Corning Corporation, a significant participant in the Global I settlement, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As of June 1, 1995, over 440,000 registrations were received by the Global I Claims Administrator. Approximately 248,500 of these were filed by domestic class members by the September 16, 1994 deadline for making claims under the Current Disease Compensation Program. Based on an analysis of about 3,000 of these registrations, the judge concluded that a severe racheting (or reduction) of the settlement amounts shown in the notice of settlement would occur if current claims were evaluated under the existing criteria and if funding of the Current Disease 25 [md&a LOGO] [ACE LOGO] Compensation Program remained at the $1.2 billion level. Because of the anticipated racheting of benefit amounts and the defendants' right to withdraw under the Global I settlement, the judge entered an order on October 9, 1995 declaring that class members had new opt-out rights and that in general class members and their attorneys should not expect to receive any benefits under Global I. On October 1, 1995, negotiators for three of the major defendants agreed on the essential elements of a revised individual settlement plan for domestic class members with at least one implant from any of those manufacturers ("Settlement II"). In general, under Settlement II, the amounts payable to individual participants, and the manufacturers' obligations to make those payments, would not be affected by the number of class members electing to opt out from the new plan. Also, in general, the compensation would be fixed rather than subject to potential further racheting, 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. Participants with implants from one or more of those three defendants who had submitted timely claims under Global I would have two options. Option One: An amount based on disease criteria and severity levels in the Global I settlement ranging from $10,000 to $100,000. Although substantially less than the amounts shown in the initial notices for Global I settlement, they are greater for many claimants than the amounts that, after racheting, would have been offered under Global I and are not subject to a "walkaway" by defendants because of such opt-outs. Option Two: A potentially higher benefit based on having or developing during a 15-year period certain diseases that meet more restrictive criteria. The compensation range for persons qualifying under this option is from $75,000 to $250,000. Qualifying claimants would also be eligible for an advance payment of $1,000 under certain circumstances. In general, the maximum total obligation under this 15-year program allocated among the three defendants plus the additional defendants referred to below is $755 million. Each Current Claimant, regardless of the option selected, would be paid an advance payment of $5,000 and would also be eligible for an additional payment of $3,000 to defray the costs of explantation during that 15-year period should the person choose to do so without regard to the status of any appeals. Current Claimants would be given an extended period of time to identify manufacturers of their implants, to correct any deficiencies in the documentation supporting their prior claims or to provide additional support for claims under the more restrictive criteria. By November 13, 1995, Settlement II was approved by the three major defendants. In addition, two other defendants became part of Settlement II, 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 judge approved Settlement II and the materials for giving notice to claimants although several appeals concerning Settlement II have been lodged with the Eleventh Circuit Court of Appeals. In mid-January 1996 the three major defendants each made a payment of $125 million to a court- established fund as an initial reserve for payments to be made under Settlement II. The judge in the MDL proceeding has started to remand or transfer opt-out cases to the originating or other courts for further pre-trial proceedings and trial. The Claims Administrator has begun sending out notifications of status and advance payments to claimants who submitted implant manufacturer proof. At the present time, it cannot be determined how many claimants will accept and qualify under the terms of Settlement II; similarly, the number of opt-outs cannot be estimated. Although the Company has underwritten the coverage for a number of the defendant companies including four of the companies involved in the revised Settlement II described above, 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. 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, a second court has dismissed the claims 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 has been sought. In addition, further efforts are contemplated to stay or dismiss the doctor's claims against the Company in the Texas lawsuit. The remaining case is presently stayed; if it is activated, the Company will resist involvement on jurisdictional and other grounds. 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 Global I (including information relating to opt-outs) 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 believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as of September 30, 1996. The Company 26 [ACE LOGO] continually evaluates its reserves in light of developing information and in light of discussions and negotiations with its insureds. In August 1996, the Company settled with one of its insureds, a breast implant manufacturer, for a sum of money to be paid out over a number of years in the future. The settlement is 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 Settlement II and the number and value of the opt-out claims. 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. - -------------------------------------------------------------------------------- New Accounting Pronouncements In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 "Accounting for Awards of Stock-Based Compensation to Employees" (FAS 123), effective for fiscal years beginning after December 15, 1995. FAS 123 establishes accounting and reporting standards for stock-based employee compensation plans which include stock option and stock purchase plans. FAS 123 provides employers a choice: adopt FAS 123 accounting standards for all stock compensation arrangements which requires the recognition of compensation expense for the fair value of virtually all stock compensation awards; or continue to account for stock options and other forms of stock compensation under Accounting Principles Board Opinion No. 25 ("APB 25"), the current accounting standard, while also providing the disclosure required under FAS 123. The Company intends to continue accounting for its stock-based compensation plans under APB 25. Therefore, the adoption of FAS 123 has no effect on the Company's results of operations, financial position or cash flows. With effect from September 30, 1996, the Company will provide, where material, the disclosures required under FAS 123. In 1994, the American Institute of Certified Public Accountants issued Statement of Position 94-6 "Disclosure of Certain Risks and Uncertainties" (SOP 94-6) effective for fiscal years ending after December 15, 1995. Pursuant to SOP 94-6, the Company has made certain disclosures as to risks and uncertainties and the nature of the Company's operations and the use of estimates in the preparation of its September 30, 1996 financial statements. 27 ACE Management's Responsibility for Financial Statements Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. The Company's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that the Company and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. Coopers & Lybrand L.L.P., independent accountants, are retained to audit the Company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which includes the consideration of the Company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management Board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. /s/ Brian Duperreault Brian Duperreault Chairman, President and Chief Executive Officer /s/ Christopher Z. Marshall Christopher Z. Marshall Executive Vice President and Chief Financial Officer Report of Independent Accountants The Board of Directors and Shareholders of ACE Limited: We have audited the consolidated balance sheets of ACE Limited and Subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ACE Limited and Subsidiaries as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. New York, New York November 7, 1996 28 ACE the financials
Consolidated Balance Sheets September 30, 1996 and 1995 1996 1995 -------------------------------- ASSETS (in thousands of U.S. dollars, except share and per share data) Investments and cash Fixed maturities available for sale, at fair value (amortized cost - $3,394,437 and $2,325,959) $3,389,762 $2,377,510 Equity securities, at fair value (cost - $257,049 and $224,020) 323,005 267,163 Short-term investments 376,680 458,145 Other investments, at cost 12,453 12,453 Cash 53,374 16,929 ----------------------------------------------------------------------------- Total investments and cash 4,155,274 3,132,200 ----------------------------------------------------------------------------- Goodwill 201,742 -- Deferred acquisition costs 34,546 34,428 Premiums and insurance balances receivable 85,033 20,993 Accrued investment income 42,728 29,574 Prepaid reinsurance premiums 15,421 4,154 Other assets 39,614 15,557 ----------------------------------------------------------------------------- Total assets $4,574,358 $3,236,906 ----------------------------------------------------------------------------- LIABILITIES Unpaid losses and loss expenses $1,836,113 $1,437,930 Unearned premiums 398,731 309,722 Premiums received in advance 29,852 23,876 Accounts payable and accrued liabilities 54,913 16,259 Dividend payable 10,471 6,456 ----------------------------------------------------------------------------- Total liabilities 2,330,080 1,794,243 ----------------------------------------------------------------------------- Commitments and contingencies SHAREHOLDERS' EQUITY Ordinary Shares ($0.125 par value, 100,000,000 shares authorized; 58,170,755 and 46,111,185 shares issued and outstanding) 7,271 5,764 Additional paid-in capital 1,156,194 548,513 Unearned stock grant compensation (1,299) (1,796) Net unrealized appreciation on investments 61,281 94,694 Cumulative translation adjustments 131 -- Retained earnings 1,020,700 795,488 ----------------------------------------------------------------------------- Total shareholders' equity 2,244,278 1,442,663 Total liabilities and shareholders' equity $4,574,358 $3,236,906 -----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 29 ACE the financials
Consolidated Statements of Operations For the years ended September 30, 1996, 1995 and 1994 1996 1995 1994 --------------------------------------------- (in thousands of U.S dollars, REVENUES except share and per share data) Net premiums written $ 602,707 $ 424,756 $ 385,926 Change in unearned premiums (15,462) 3,905 5,191 - ------------------------------------------------------------------------------------------ Net premiums earned 587,245 428,661 391,117 Net investment income 206,524 181,375 142,677 Net realized gains on investments 55,229 50,765 3,717 ---------------------------------------------------------------------------------------- Total revenues 848,998 660,801 537,511 ---------------------------------------------------------------------------------------- EXPENSES Losses and loss expenses 464,824 350,653 520,556 Acquisition costs 52,954 46,647 45,849 Administrative expenses 41,487 25,935 16,784 ---------------------------------------------------------------------------------------- Total expenses 559,265 423,235 583,189 ---------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 289,733 $ 237,566 $ (45,678) - ------------------------------------------------------------------------------------------- Earnings (loss) per share $5.82 $5.05 $(0.95) - ------------------------------------------------------------------------------------------- Weighted average shares outstanding 49,813,628 47,059,006 48,202,545 - -------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 30 ACE [LOGO the financials] Consolidated Statements of Shareholders' Equity For the years ended September 30, 1996, 1995 and 1994
1996 1995 1994 ------------------------------------- (in thousands of U.S dollars) Ordinary Shares Balance - beginning of year $ 5,764 $ 5,928 $ 6,226 Shares issued in Tempest transaction 1,666 -- -- Exercise of stock options -- 3 -- Repurchase of shares (159) (167) (298) ------------------------------------------------------------------------------------------------ Balance - end of year 7,271 5,764 5,928 ------------------------------------------------------------------------------------------------ Additional paid-in capital Balance - beginning of year 548,513 564,198 592,591 Shares issued in Tempest acquisition 620,552 -- -- Options issued in Tempest acquisition 12,124 -- -- Exercise of stock options 27 165 4 Repurchase of Ordinary Shares (25,022) (15,850) (28,397) ------------------------------------------------------------------------------------------------ Balance - end of year 1,156,194 548,513 564,198 ------------------------------------------------------------------------------------------------ Unearned stock grant compensation Balance - beginning of year (1,796) (412) (357) Stock grants awarded (708) (2,413) (504) Stock grants forfeited 60 -- -- Amortization 1,145 1,029 449 ------------------------------------------------------------------------------------------------ Balance - end of year (1,299) (1,796) (412) ------------------------------------------------------------------------------------------------ Net unrealized appreciation (depreciation) on investments Balance - beginning of year 94,694 (79,685) 68,573 Net appreciation (depreciation) during year (33,413) 174,379 (148,258) ------------------------------------------------------------------------------------------------ Balance - end of year 61,281 94,694 (79,685) ------------------------------------------------------------------------------------------------ Cumulative translation adjustments Balance - beginning of year -- -- -- Net adjustment for year 131 -- -- ------------------------------------------------------------------------------------------------ Balance - end of year 131 -- -- ------------------------------------------------------------------------------------------------ Retained earnings Balance - beginning of year 795,488 598,716 701,147 Net income (loss) 289,733 237,566 (45,678) Dividends declared (31,699) (23,297) (20,136) Repurchase of Ordinary Shares (32,822) (17,497) (36,617) ------------------------------------------------------------------------------------------------ Balance - end of year 1,020,700 795,488 598,716 ------------------------------------------------------------------------------------------------ Total shareholders' equity $2,244,278 $1,442,663 $1,088,745 ------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements
31 ACE [LOGO the financials] Consolidated Statements of Cash Flows For the years ended September 30, 1996, 1995 and 1994
1996 1995 1994 --------------------------------------- (in thousands of U.S dollars) Cash flows from operating activities Net income (loss) $ 289,733 $ 237,566 $ (45,678) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Unearned premiums 14,247 (1,771) (3,171) Unpaid losses and loss expenses 363,448 277,538 393,990 Deferred acquisition costs 9,262 3,016 2,126 Premiums and insurance balances receivable 3,460 (11,948) 841 Premiums received in advance 5,976 4,230 4,349 Prepaid reinsurance premiums (11,267) (2,134) (2,020) Net realized gains on investments (55,229) (50,765) (3,717) Amortization of premium/discount (7,847) (12,590) 5,378 Accounts payable and accrued liabilities 11,308 1,029 (11,644) Change in cumulative translation adjustments (131) -- -- Other (1,600) (7,148) (3,608) ------------------------------------------------------------------------------------------------------ Net cash flows from operating activities 621,360 437,023 336,846 ------------------------------------------------------------------------------------------------------ Cash flows from investing activities Purchases of fixed maturities (8,781,390) (7,562,469) (6,610,847) Purchases of equity securities (222,382) (325,509) -- Sales of fixed maturities 8,220,230 7,336,706 6,147,515 Sales of equity securities 209,350 118,825 -- Maturities of fixed maturities 59,830 39,342 90,780 Net realized gains (losses) on financial futures contracts 26,678 39,788 (11,102) Acquisition of subsidiaries, net of cash acquired (11,572) (25,794) 8,271 Sale of other investment -- -- 128,382 ------------------------------------------------------------------------------------------------------ Net cash used for investing activities (499,256) (379,111) (247,001) ------------------------------------------------------------------------------------------------------- Cash flows from financing activities Repurchase of Ordinary Shares (58,003) (33,514) (65,312) Proceeds from exercise of options for shares 28 168 5 Dividends paid (27,684) (22,058) (19,900) Proceeds from loans -- -- 166,000 Loan repayments -- -- (166,000) ---------------------------------------------------------------------------- ------------- ------------ Net cash used for financing activities (85,659) (55,404) (85,207) ---------------------------------------------------------------------------- ------------- ------------ Net increase in cash 36,445 2,508 4,638 Cash - beginning of year 16,929 14,421 9,783 Cash - end of year $ 53,374 $ 16,929 $ 14,421 ---------------------------------------------------------------------------- ------------- ------------ Supplemental cash flow information: Interest paid $ -- $ -- $ 221 ---------------------------------------------------------------------------- ------------- ------------
See accompanying notes to consolidated financial statements 32 ACE the notes Notes to Consolidated Financial Statements 1 Organization ACE Limited ("ACE") is incorporated with limited liability under the Cayman Islands Companies Law and maintains its principal business office in Bermuda. The term "the Company" refers to ACE and its Bermuda-based subsidiaries, excluding Methuen. The Company, 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, through a corporate subsidiary, provides funds at Lloyd's of London ("Lloyd's") to support underwriting by syndicates managed by Methuen Underwriting Limited ("MUL"), a majority owned subsidiary of the Company. On March 31, 1993, the Company completed an initial public offering of 21,390,000 Ordinary Shares (the "Offering"). All shares offered were sold by existing shareholders and no proceeds of the Offering were received by the Company. On February 2, 1994, the Company completed a secondary offering of 8,000,000 Ordinary Shares (the "Secondary"). Again, all shares offered were sold by existing shareholders and no proceeds of the Secondary were received by the Company. On November 1, 1993, the Company acquired CODA, a Bermuda-based insurance company, for a cash purchase price of $250 million and an additional contingent cash payment of approximately $25 million which was made in December 1994 (the "CODA Acquisition"). (See note 15 for pro forma financial information with respect to the CODA Acquisition.) On March 27, 1996, the Company acquired a controlling interest in Methuen Group Limited ("Methuen"), the holding company for MUL, a leading Lloyd's managing agency (the "Methuen Acquisition"). The Company may acquire the remaining 49 percent interest in Methuen during the years 1999 and 2000 through various put and call arrangements, or earlier if mutually agreed. MUL manages six syndicates with a total underwriting capacity of (Pounds)366 million (approximately $555 million) in 1996 (see note 2). This acquisition has been recorded using the purchase method of accounting and accordingly, the accompanying consolidated financial statements include the results of Methuen since March 27, 1996, the date of acquisition. Had the results of Methuen been included commencing with operations in 1995, the reported results would not have been materially affected. On July 1, 1996, the Company completed the acquisition of Tempest, a leading Bermuda-based property catastrophe reinsurer (the "Tempest Acquisition"). Under the terms of the Agreement and Plan of Amalgamation, Tempest shares outstanding at the time of the acquisition were cancelled and converted into the right to receive 13,333,247 Ordinary Shares of the Company. These shares were capitalized at a value of $46 2/3 per share, which was determined in accordance with the EITF 95-19 concensus that deals with the value of equity securities issued to effect a purchase combination. In addition, options to acquire Tempest shares were converted into 446,089 Company options at a total cost of $12.1 million. The total value of the acquisition amounted to $638.7 million, which includes the value of the shares and options issued as well as other transaction expenses which amounted to $4.4 million. This acquisition has been recorded using the purchase method of accounting and accordingly, the accompanying consolidated financial statements include the results of Tempest since July 1, 1996, the date of acquisition (see note 16 for pro forma financial information with respect to the Tempest Acquisition). On September 25, 1996, the Company announced that it had signed a conditional memorandum of understanding for the acquisition of Ockham Worldwide Holdings PLC ("Ockham Worldwide"), a wholly owned subsidiary of Ockham Holdings PLC ("Ockham"). Ockham Worldwide owns two Lloyd's managing agencies, Ockham Sturge Aviation Agency Ltd. and Ockham Worldwide Agency Ltd. Together these two agencies manage seven syndicates with total underwriting capacity of (Pounds)349 million (approximately $524 million) in 1996. Ockham Worldwide also owns a Lloyd's corporate member which provides funds at Lloyd's to support underwriting on these syndicates. On November 7, 1996, the Company further announced that it had signed a definitive agreement for the acquisition of Ockham Worldwide. The acquisition is still conditional on final approval by Lloyd's and by Ockham shareholders, as well as other customary closing conditions. It is expected that the acquisition will be completed prior to the end of November 1996. The Company's participation in the syndicates managed by Ockham Worldwide for the 1997 year of account is not likely to be material. - ------------------------------------------------------------------------------- 2 Operations a) Insurance operations The Company, through ACE Insurance and CODA, writes excess liability insurance, directors and officers liability insurance, satellite insurance, aviation insurance, excess property insurance and financial lines products. At September 30, 1996 approximately 33 the notes ACE 73 percent of the Company's written premiums came from North America with approximately 20 percent coming from the United Kingdom and continental Europe and approximately 7 percent from other countries. Two insurance brokers produced approximately 42 percent, 59 percent and 58 percent of the Company's insurance business for 1996, 1995 and 1994. The Company writes excess liability coverage on an occurrence first reported stand alone form to a maximum of $200 million per occurrence and annual aggregate. The minimum attachment point for this excess liability coverage is generally $100 million; however, for certain classes of non-U.S. domiciled insureds the Company allows a minimum attachment point of $50 million. For all new and renewal business, effective on or after December 15, 1994, the Company reduced the maximum limits offered for integrated occurrences from $200 million to $100 million. The Company maintains excess of loss clash reinsurance to protect it from losses arising from a single set of circumstances (occurrence) covered by more than one excess liability insurance policy. The reinsurance provides protection to a maximum of $150 million, and in the aggregate excess of $225 million, for each and every loss occurrence involving three or more insureds. Integrated occurrences are specifically excluded. There have been no reinsurance recoveries to date on this reinsurance. Total clash reinsurance premiums expensed were $7.9 million for fiscal 1996 and $7.8 million in fiscal 1995 and 1994. The Company offers excess directors and officers liability coverage with a maximum policy limit of $50 million and a minimum attachment point, in most circumstances, of $25 million. This coverage is frequently written on a following form basis to underlying policies. The Company also provides up to $75 million of either primary, excess or excess and difference-in-conditions directors and officers liability coverage for claims with respect to losses not covered by corporate reimbursement. In all cases coverage is on a claims made basis. The Company does not purchase reinsurance for its directors and officers liability risks. The Company began satellite insurance operations in February 1994. Until February 1996, the Company offered separate limits of up to $25 million per risk for launch insurance, including ascent to orbit and/or initial testing, and up to $25 million per risk for in-orbit insurance. This risk was fully retained by the Company. Effective for all business written on or after February 15, 1996, the Company has entered into a surplus treaty arrangement which provides for up to $25 million of reinsurance for each risk. This reinsurance arrangement has enabled the Company to raise the gross limits offered for satellite insurance to $50 million per risk. In April 1995, the Company entered the aviation insurance market. The Company currently offers limits of up to $100 million per insured, with no minimum attachment point. The Company reduces its net exposure to approximately $50 million with a dedicated reinsurance program. Classes of business written include aviation product liability, aircraft manufacturer's hull and liability, airport liability, aviation refueling operations and associated aircraft liability risks. From June 1995, the Company offers global excess property "all risk" insurance, providing limits of up to a maximum of $50 million per occurrence with a minimum attachment point of $25 million. Coverage includes such perils as windstorm, earthquake and fire, as well as explosion. Consequential business interruption coverage is also offered. In certain circumstances, the Company uses reinsurance to establish the retained net limit per risk. In addition, the Company has purchased catastrophe reinsurance to control the possible effects of cumulative natural peril exposure. The Company's financial lines product group offers specifically designed financial, insurance and reinsurance solutions to address complex risk management problems. The programs offered typically have the following common characteristics: multi-year contract terms, broad coverage that includes stable capacity and pricing for the insured, aggregate policy limits and insured participation in the results of their own loss experience. Each contract is unique because it is tailored to the insurance or reinsurance needs, specific loss history and financial strength of the insured. Premium volume, as well as the number of contracts written, can vary significantly from period to period due to the nature of the contracts being written. Profit margins may vary from contract to contract depending on the amount of underwriting risk and investment risk assumed on each contract. b) Reinsurance operations The Company, through Tempest, underwrites property catastrophe reinsurance on a worldwide basis, emphasizing excess layer coverages, and has large aggregate exposures to man-made and natural disasters. Tempest underwrites principally on an excess of loss basis, with attachment points designed to minimize claims from relatively high frequency and low severity events. For the ten month period ended September 30, 1996, approximately 64 percent of Tempest's written premiums came from the United States, approximately 13 percent came from United Kingdom, 6 percent from Australia and New Zealand and 16 percent from other countries. Two reinsurance brokers produced approximately 33 percent of Tempest's reinsurance business for the ten month period ended September 30, 1996. The Company, through ACE Insurance, participates in the reinsurance of a program referred to as "First Line" which provides financial guarantees required by the U.S. Coast Guard to issue Certificates of Financial Responsibility, under the Oil Pollution Act of 1990, to owners of vessels operating in U.S. waters. The Company has purchased excess of loss reinsurance to limit its exposure in this line. As discussed in note 2(a), the Company's financial lines product group also offers reinsurance products. c) Lloyd's of London operations For the 1996 year of account, the Company, through a corporate subsidiary, participates in the underwriting of the MUL syndicates by providing funds at Lloyd's of (Pounds) 12.25 million (approximately $18 million), which was primarily in the form of a letter of credit, supporting (Pounds) 24.5 million (approximately $37 million) of underwriting capacity on syndicates managed by MUL. The syndicates in which the Company participates underwrite aviation, marine and non-marine risks. For the 1997 year of account, the Company has agreed to provide funds at Lloyd's of 34 ACE approximately (Pounds) 62 million (approximately $93 million) to support up to approximately (Pounds) 125 million (approximately $186 million) of underwriting capacity by syndicates managed by MUL. 3 Significant accounting policies a) Basis of presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company and its subsidiaries. The Company records its proportionate share of the results of the Lloyd's syndicates in which it participates. All significant intercompany balances and transactions have been eliminated. Certain items in the prior year financial statements have been reclassified to conform with the current year presentation. b) Investments The Company's investments are considered to be "available for sale" under the definition included in the Financial Accounting Standard Board's ("FASB") Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Except for "other investments", the Company's investment portfolio is reported at fair value, being the quoted market price of these securities provided by either independent pricing services, or when such prices are not available, by reference to broker or underwriter bid indications. Realized gains or losses on sales of investments are determined on a first-in, first-out basis and include adjustments to the net realizable value of investments for declines in value that are considered to be other than temporary. Unrealized gains and losses are reported as a separate component of shareholders' equity. Short-term investments comprise securities due to mature within one year of date of issue. Other investments comprise a shareholding in a privately held Bermuda-domiciled company for which there is no quoted market price. It is not practicable to estimate the fair value of the investment and thus it is carried at its original cost. The Company utilizes financial futures and option contracts and foreign currency forward and option contracts for the purpose of managing certain investment portfolio exposures (see note 7(a) for additional discussion of the objectives and strategies employed). Futures contracts are not recognized as assets or liabilities in the accompanying consolidated financial statements. Changes in the market value of futures contracts produce daily cash flows, which are included in net realized gains or losses on investments in the statements of operations. Collateral held by brokers equal to a percentage of the total value of open futures contracts is included in short-term investments. Option contracts that are designated as hedges of securities are marked-to- market. Unrealized gains and losses on forward currency and option contracts which are designated as specific hedges are recognized in the financial statements as a component of shareholders' equity. Gains and losses resulting from currency fluctuations on transactions which are not designated as specific hedges against any single security or group of securities are recognized as a component of income in the period in which the fluctuations occur. Premiums paid or received on option contracts that have expired, been closed out or exercised, are recognized as realized gains and losses on investments in the statements of operations. Net investment income includes interest and dividend income together with amortization of market premiums and discounts and is net of investment management and custody fees and loan expense. For mortgage-backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized in current income. Additionally, in 1994 and the first quarter of 1995, amortization resulting from the discounting of balances outstanding on the acquisition of CODA have been recorded against investment income. c) Premiums Premiums written are recognized as revenues when due. For multi-year policies written which are payable in annual installments, due to the ability of the insured/reinsured to commute or cancel coverage within the term of the policy, only the annual premium is included as written at policy inception. The remaining annual premiums are included as written at each successive anniversary date within the multi-year term. Premiums written are primarily earned on a daily pro rata basis over the terms of the policies to which they relate. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the unexpired portion of the policies in force. Premium estimates for retrospectively rated policies are recognized within the periods in which the related losses are incurred. Property catastrophe reinsurance premiums written are estimated based on information provided by ceding companies. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the period in which they are determined. These premiums are earned over the terms of the related reinsurance contracts. d) Acquisition costs Acquisition costs, consisting primarily of commissions, are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are reviewed to determine that they do not exceed recoverable amounts after considering investment income. e) Losses and loss expenses A reserve is established for the estimated unpaid losses and loss expenses of the Company under the terms of, and with respect to, its policies and agreements. The methods of determining such estimates and establishing the resulting reserve are reviewed continuously and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses significantly 35 the notes ACE greater or less than the reserve provided. f) Goodwill The Company amortizes goodwill recorded in connection with its business combinations on a straight-line basis over the lesser of the expected life of the related operations acquired or forty years. Amortization of goodwill amounting to $1,269,000 with respect to the Tempest Acquisition is included in administrative expenses in the statements of operations for the year ended September 30, 1996. g) Translation of foreign currencies Financial statements of subsidiaries expressed in foreign currencies are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("FAS 52"). Under FAS 52, functional currency assets and liabilities are translated into U.S. dollars generally using period end rates of exchange and the related translation adjustments are recorded as a separate component of shareholders' equity. Functional currencies are generally the currencies of the local operating environment. Statements of operations amounts expressed in functional currencies are translated using average exchange rates. Transaction gains and losses resulting from foreign currency transactions are also recorded in income currently. h) Accounting estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's principal estimates include property and casualty loss and loss expense reserves and estimated premiums for situations where the Company has not received ceding company reports. Actual results may differ from these estimates. i) Earnings (loss) per share Earnings (loss) per share are computed using net income (loss) divided by the weighted average number of Ordinary Shares outstanding and, if dilutive, shares issuable under outstanding options. There is no material difference between primary and fully diluted earnings (loss) per share. j) Cash flow information Purchases and sales or maturities of short-term investments are recorded net for purposes of the statements of cash flows and are included with fixed maturities. k) Accounting pronouncements In October 1995, FASB issued Statement of Financial Accounting Standards No. 123 "Accounting for Awards of Stock-Based Compensation to Employees" ("FAS 123"), effective for fiscal years beginning after December 15, 1995. FAS 123 establishes accounting and reporting standards for stock-based employee compensation plans which include stock option and stock purchase plans. FAS 123 provides employers a choice: adopt FAS 123 accounting standards for all stock compensation arrangements which requires the recognition of compensation expense for the fair value of virtually all stock compensation awards; or continue to account for stock options and other forms of stock compensation under Accounting Principles Board Opinion No. 25 ("APB 25"), the current accounting standard, while also providing the disclosure required under FAS 123. The Company intends to continue accounting for its stock-based compensation plans under APB 25. Therefore, the adoption of FAS 123 has no effect on the Company's results of operations, financial position or cash flows. With effect from September 30, 1996, the Company will provide, where material, the disclosures required under FAS 123. For September 30, 1996, the effect of FAS 123 is not material to the Company. In 1994, the American Institute of Certified Public Accountants issued Statement of Position 94-6 "Disclosure of Certain Risks and Uncertainties" (SOP 94-6) effective for fiscal years ending after December 15, 1995. Pursuant to SOP 94-6, the Company has made certain disclosures as to risks and uncertainties and the nature of the Company's operations and the use of estimates in the preparation of these financial statements. - ------------------------------------------------------------------------------- 4 Investments a) Fixed maturities The fair values and amortized costs of fixed maturities at September 30, 1996 and 1995 are as follows:
1996 1995 ---------------------------------------------------------- Fair Amortized Fair Amortized Value Cost Value Cost ---------------------------------------------------------- (in thousands) U.S. Treasury and agency $ 973,362 $ 971,615 $ 621,389 $ 599,058 Non-U.S. governments 190,999 191,727 147,011 142,217 Corporate securities 950,532 948,694 476,654 461,297 Mortgage-backed securities 1,274,869 1,282,401 1,123,951 1,114,708 States, municipalities and political subdivisions -- -- 8,505 8,679 ---------------------------------------------------------- Fixed maturities $3,389,762 $3,394,437 $2,377,510 $2,325,959 - ---------------------------------------------------------------------------------------------------------------
36 [LOGO ACE] The gross unrealized gains and losses related to fixed maturities at September 30, 1996 and 1995 are as follows:
1996 1995 ------------------------------------------------- Gross Gross Gross Gross Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses ------------------------------------------------- (in thousands) U.S. Treasury and agency $ 8,254 $ (6,507) $23,409 $(1,078) Non-U.S. governments 3,752 (4,480) 6,520 (1,726) Corporate securities 11,271 (9,433) 16,376 (1,019) Mortgage-backed securities 11,251 (18,783) 14,170 (4,927) States, municipalities and political subdivisions -- -- 237 (411) ------------------------------------------------------------------------------ $34,528 $(39,203) $60,712 $(9,161) ------------------------------------------------------------------------------
Mortgage-backed securities issued by U.S. government agencies are combined with all other mortgage derivatives held and are included in the category "mortgage-backed securities". Approximately 72 percent of the total mortgage holdings at September 30, 1996 and 74 percent at September 30, 1995 are represented by investments in GNMA, FNMA and FHLMC bonds. The remainder of the mortgage exposure consists of CMO's (Collateralized Mortgage Obligations) and non-government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a "AAA" rating by the major credit rating agencies. Fixed maturities at September 30, 1996, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
Fair Amortized Value Cost ------------------------- (in thousands) Maturity period Less than 1 year $ 143,067 $ 142,768 1 - 5 years 780,750 776,998 5 - 10 years 673,155 680,684 Greater than 10 years 517,921 511,586 ------------------------------------------------------------------------- 2,114,893 2,112,036 Mortgage-backed securities 1,274,869 1,282,401 ------------------------------------------------------------------------- Total fixed maturities $3,389,762 $3,394,437 -------------------------------------------------------------------------
b) Equity securities The gross unrealized gains and losses on equity securities at September 30, 1996 and 1995 are as follows:
1996 1995 ------------------------- (in thousands) Equity securities - cost $257,049 $224,020 Gross unrealized gains 81,935 53,160 Gross unrealized losses (15,979) (10,017) ------------------------------------------------------------------------- Equity securities - fair value $323,005 $267,163 -------------------------------------------------------------------------
37 [LOGO OF THE NOTES] ACE c) Net realized gains and change in net unrealized appreciation (depreciation) on investments The analysis of net realized gains on investments and the change in net unrealized appreciation (depreciation) on investments for the years ended September 30, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ------------------------------------ (in thousands) Fixed maturities Gross realized gains $ 63,416 $ 78,021 $ 33,738 Gross realized losses (48,963) (69,669) (77,060) - ---------------------------------------------------------------------------------------------------------------------------------- 14,453 8,352 (43,322) Equity securities Gross realized gains 39,768 15,371 -- Gross realized losses (23,985) (11,763) -- - ---------------------------------------------------------------------------------------------------------------------------------- 15,783 3,608 -- Currency losses (1,685) (983) -- Financial futures contracts - net realized gains (losses) 26,678 39,788 (11,102) Other Investments - net realized gains -- -- 58,141 - ---------------------------------------------------------------------------------------------------------------------------------- Net realized gains on investments 55,229 50,765 3,717 - ---------------------------------------------------------------------------------------------------------------------------------- Change in net unrealized appreciation (depreciation) on investments Fixed maturities (56,226) 131,236 (148,258) Equity securities 22,813 43,143 -- - ---------------------------------------------------------------------------------------------------------------------------------- Change in net unrealized appreciation (depreciation) on investments (33,413) 174,379 (148,258) - ---------------------------------------------------------------------------------------------------------------------------------- Total net realized gains and change in net unrealized appreciation (depreciation) on investments $ 21,816 $225,144 $(144,541) ==================================================================================================================================
d) Net investment income Net investment income for the years ended September 30, 1996, 1995 and 1994 was derived from the following sources:
1996 1995 1994 -------------------------------------- (in thousands) Fixed maturities and short-term investments $210,517 $184,240 $ 146,031 Equity securities 1,480 944 -- Other investments 1,245 1,245 1,245 Other 751 1,265 1,092 - ---------------------------------------------------------------------------------------------------------------------------------- Gross investment income 213,993 187,694 148,368 Investment expenses (7,217) (5,662) (4,086) Loan expense (252) (336) (463) Amortization of acquisition liabilities -- (321) (1,142) - ---------------------------------------------------------------------------------------------------------------------------------- Net investment income $206,524 $181,375 $ 142,677 ==================================================================================================================================
e) Other investments Other investments comprise 124,526 shares of cumulative perpetual preferred stock held in Centre Reinsurance Holdings Limited ("Centre Re"), a privately held Bermuda-domiciled reinsurer specializing in finite-risk reinsurance. The investment in Centre Re is recorded at cost of $12,453,000 and management is of the opinion that the fair value of this investment is at least equal to the cost of the investment. The cumulative cash dividend rate is currently 10 percent and is adjusted every ten years based on the prevailing 10-year U.S. Treasury note rate plus 3.65 percent. Dividends are paid twice a year and there are no cumulative dividends in arrears. There are certain restrictions regarding the sale or redemption of the above preferred stock, none of which in the Company's opinion would impair the carrying value of the investment. In fiscal 1994, the Company sold its investment in the voting common shares of Centre Re, and recognized a gain of approximately $58 million which is included in net realized gains on investments in the statements of operations. 38 ACE 5 Losses and loss expenses The reserve for unpaid losses and loss expenses represents estimated ultimate losses and loss expenses less paid losses and loss expenses and is comprised of the following at September 30, 1996 and 1995:
1996 1995 ---------------------- (in thousands) Case and loss expense reserves $ 993,671 $ 822,060 IBNR loss reserves 842,442 615,870 Total unpaid losses and loss expenses $1,836,113 $1,437,930 - -------------------------------------------------------------------------------
The Company uses statistical and actuarial methods to reasonably estimate ultimate expected losses and loss expenses using the Company's loss development history, data obtained from underwriting applications, actuarial evaluations and, in the case of excess liability reserves, research of large liability losses. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to the Company and the settlement of the Company's liability for the loss. During the loss settlement period, additional facts regarding individual claims and trends usually will become known. As these become apparent, case reserves may be adjusted by allocation from IBNR loss reserves without any change in the overall reserve. In addition, application of the statistical and actuarial methods may require the adjustment of the overall reserves from time to time. The reconciliation of unpaid losses and loss expenses for the years ended September 30, 1996, 1995 and 1994 is as follows:
1996 1995 1994 ------------------------------------ (in thousands) Unpaid losses and loss expenses at beginning of year $1,437,930 $1,160,392 $ 650,180 Unpaid losses and loss expenses assumed in respect of acquired companies 34,735 -- 116,222 - ------------------------------------------------------------------------------------------------------------ Total 1,472,665 1,160,392 766,402 - ------------------------------------------------------------------------------------------------------------ Losses and loss expenses incurred in respect of losses occuring in: Current year 464,824 350,653 320,556 Prior years -- -- 200,000 - ------------------------------------------------------------------------------------------------------------ Total 464,824 350,653 520,556 - ------------------------------------------------------------------------------------------------------------ Losses and loss expenses paid in respect of losses occurring in: Current year 39,567 14,394 -- Prior years 61,809 58,721 126,566 - ------------------------------------------------------------------------------------------------------------ Total 101,376 73,115 126,566 - ------------------------------------------------------------------------------------------------------------ Unpaid losses and loss expenses at end of year $1,836,113 $1,437,930 $1,160,392 - ------------------------------------------------------------------------------------------------------------
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 ("MDL") to a Federal District Court in Alabama. On April 1, 1994, the judge presiding over the MDL proceeding gave preliminary approval to a global settlement agreement in the approximate amount of $4.2 billion and conditional certification to a settlement class ("Global I"). On May 15, 1995, the Dow Corning Corporation, a significant participant in the Global I settlement, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As of June 1, 1995, over 440,000 registrations were received by the Global I Claims Administrator. Approximately 248,500 of these were filed by domestic class members by the September 16, 1994 deadline for making claims under the Current Disease Compensation Program. Based on an analysis of about 3,000 of these registrations, the judge concluded that a severe racheting (or reduction) of the settlement amounts shown in the notice of 39 [THE NOTES LOGO] [ACE LOGO] settlement would occur if current claims were evaluated under the existing criteria and if funding of the Current Disease Compensation Program remained at the $1.2 billion level. Because of the anticipated racheting of benefit amounts and the defendants' right to withdraw under the Global I settlement, the judge entered an order on October 9, 1995 declaring that class members had new opt-out rights and that in general class members and their attorneys should not expect to receive any benefits under Global I. On October 1, 1995, negotiators for three of the major defendants agreed on the essential elements of a revised individual settlement plan for domestic class members with at least one implant from any of those manufacturers ("Settlement II"). In general, under Settlement II, the amounts payable to individual participants, and the manufacturers' obligations to make those payments, would not be affected by the number of class members electing to opt out from the new plan. Also, in general, the compensation would be fixed rather than subject to potential further racheting, and the manufacturers would not have a right to walk away because of the amount of claims payable. Finally, each 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, Settlement II was approved by the three major defendants. In addition, two other defendants became part of Settlement II, although certain of their settlement terms are different and more restricted than the plan offered by the original three defendants. 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 Global I (including information relating to opt-outs) 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 believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate as of September 30, 1996. The Company continually evaluates its reserves in light of developing information and in light of discussions and negotiations with its insureds. In August 1996, the Company settled with one of its policyholders, a breast implant manufacturer, for a sum of money to be paid out over a number of years in the future. The settlement is 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 Settlement II and the number and value of the opt- out claims. 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. - ------------------------------------------------------------------------------- 6 Reinsurance The Company reinsures certain risks to limit its exposure to catastrophic risks. Although reinsurance agreements contractually obligate the Company's reinsurers to reimburse it for the agreed upon portion of its gross paid losses, they do not discharge the primary liability of the Company. The Company evaluates the financial condition of its reinsurers through an internal reinsurance committee consisting of certain members of the Company's senior management. No single reinsurer is a material reinsurer to the Company nor is the Company's business dependent on any reinsurance contract. The statements of operations amounts for premiums written and premiums earned are net of reinsurance. Direct, assumed and ceded amounts for these items for the years ended September 30, 1996, 1995 and 1994 are as follows:
1996 1995 1994 -------------------------------- (in thousands) Premiums written Direct $596,176 $416,040 $390,460 Assumed 49,624 19,780 2,156 Ceded (43,093) (11,064) (6,690) - ------------------------------------------------------ Net $602,707 $424,756 $385,926 - ------------------------------------------------------ Premiums earned Direct $566,293 $425,569 $395,943 Assumed 51,201 12,024 2,843 Ceded (30,249) (8,932) (7,669) - ------------------------------------------------------ Net $587,245 $428,661 $391,117 - ------------------------------------------------------
The Company's provision for loss recoveries on reinsurance ceded is not material in each of the years ended September 30, 1996, 1995 and 1994. 40 ACE 7 Commitments and contingencies a) Financial instruments with off-balance sheet risk The Company's investment guidelines permit, subject to specific approval, investments in derivative instruments such as futures, options and foreign currency forward contracts for purposes other than trading. Their use is limited to yield enhancement, duration management, foreign currency exposure management or to obtain an exposure to a particular financial market. (i) Foreign currency exposure management 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 securities currently held in the portfolio. Approximately $255 million is invested in non-U.S. dollar fixed maturity and equity securities. The forward currency contracts purchased are not specifically identifiable against any single security or group of securities denominated in those currencies and therefore do not qualify as hedges for financial reporting purposes. All contract gains and losses, realized and unrealized, are reflected in the statements of operations. At September 30, 1996, no foreign currency forward or option contract had a maturity of more than four months. The table below summarizes the notional amounts, the current fair values and the unrealized gain or loss of the Company's foreign currency forward and option contracts as at September 30, 1996.
Contractual/Notional Fair Unrealized Amount Value Gains ------------------------------------------ (in thousands) Forward contracts $(1,246) $(1,309) $ 63 Foreign currency option contracts 8,647 290 390
The fair value of the forward contracts represents the estimated cost to the Company at September 30, 1996 of obtaining the specified currency to meet the obligation of the contracts. The unrealized gain is a measure of the net exposure to the Company of its use of forward contracts after any netting agreements given current rates of exchange. The fair value of the options represents the market price of the options at September 30, 1996. The unrealized gains represents the difference between the fair value and the premium paid. The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Non-performance is not anticipated; however in order to minimize the risk of loss, management monitors the creditworthiness of its counterparties. For forward contracts, the counterparties are principally banks which must meet certain criteria according to the Company's investment guidelines. (ii) Duration management and market exposure Futures A portion of the Company's investment portfolio is managed as a synthetic equity fund, whereby S&P 500 index futures contracts are held in an amount equal to the market value of an underlying portfolio comprised of short-term investments and fixed maturities. This creates an equity market exposure equal in value to the total amount of funds invested in this strategy. Each index futures contract held by the Company is rolled over quarterly into a new contract with a later maturity, thereby maintaining a constant equity market exposure. The value of this fund was $305 million and $205 million at September 30, 1996 and 1995, respectively. Exchange traded bond and note futures contracts may be used in fixed maturity portfolios as substitutes for ownership of the physical bonds and notes without significantly increasing the risk in the portfolio. Investments in financial futures contracts may be made only to the extent that there are assets under management, not otherwise committed. Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract. The contract amounts of $478 million and $366 million reflect the net extent of involvement the Company had in these financial instruments at September 30, 1996 and 1995, respectively. Options Option contracts may be used in the portfolio as protection against unexpected shifts in interest rates, which would thereby affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the account can be reduced. An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. The price of an option is influenced by the underlying security, expected volatility, time to expiration and supply and demand. For long option positions, the maximum loss is the premium paid for the option. To minimize the risk of non-performance, all brokers and dealers used as counterparties must be approved. Additional performance assurance is required where deemed necessary. The maximum credit exposure is represented by the fair value of the options held. For short option positions, the potential loss is the same as having taken a position in the underlying security. Short call options are backed in the portfolio with the underlying, or highly correlated, securities and short put options are to be backed by uncommitted cash for the in-the-money portion. Summarized below are the notional amounts, the current fair values and the unrealized gains or losses of the options in the portfolio as at September 30, 1996. 41 the Notes ACE
Contractual/Notional Fair Unrealized Amount Value Gains (Losses) ---------------------------------------------------- (in thousands) Options held $ 166,800 $5,732 $651 Options written (1,037,000) (488) (86)
The fair value of the options represents the market price of the options at September 30, 1996. The unrealized gains or losses represent the difference between the fair value and the premium paid (received). The notional amounts summarized in the above tables are not representative of amounts exchanged by parties and, therefore, do not measure the exposure to the Company of its use of derivatives. b) Concentrations of credit risk The investment portfolio is managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue and issuers. All fixed maturity securities held must have an investment grade rating. The Company believes that there are no significant concentrations of credit risk associated with its investments. c) Letters of credit Tempest is not an admitted reinsurer in the United States. Accordingly, the terms of certain reinsurance contracts require Tempest to provide letters of credit ("LOCs") to Tempest's clients in respect of reported claims. Tempest has a facility for the issuance of LOCs of up to $20 million. At September 30, 1996, LOCs outstanding amounted to $8.4 million. Investments with a market value of $15.4 million were pledged as collateral for these LOCs. d) Lease commitments The Company rents office space in The ACE Building in Hamilton, Bermuda under a lease which expires in 2000, with one five year renewal option. The ACE Building is 40 percent owned by the Company through a joint venture agreement dated July 1, 1987. During 1994, the Company financed the cost of an addition to The ACE Building and entered into a supplemental lease for the additional space for 14 years effective October 1, 1994. The cost of the addition is being amortized as rent expense over the period of the lease. Tempest also leases office space in Hamilton, Bermuda under a non-cancelable lease expiring in 1998 with a three year renewal option. Methuen leases office space in London, England under a lease that expires in 2012. Methuen also leases an office in the 1986 Lloyd's Building in London. Total rent expense was approximately $2.3 million in 1996, $1.5 million in 1995 and $1.0 million in 1994. Future minimum rental commitments under the leases for office space occupied are expected to be approximately $2.9 million per annum. - -------------------------------------------------------------------------------- 8 Shareholders' equity a) Shares issued and outstanding Following is a table of changes in Ordinary Shares issued and outstanding for fiscal 1996, 1995 and 1994:
Ordinary Shares ----------------- Balance at September 30, 1993 49,810,374 Repurchase of shares (2,386,889) Exercise of stock options 491 ----------------------------------------------------------------------- Balance at September 30, 1994 47,423,976 Repurchase of shares (1,332,300) Exercise of stock options 19,509 ----------------------------------------------------------------------- Balance at September 30, 1995 46,111,185 Shares issued in Tempest acquisition 13,333,247 Repurchase of shares (1,268,600) Exercise of stock options 1,000 Cancellation of unvested restricted stock (6,077) ----------------------------------------------------------------------- Balance at September 30, 1996 58,170,755 -----------------------------------------------------------------------
b) Share repurchases During fiscal 1996, the Company repurchased 1,268,600 Ordinary Shares under share repurchase programs for an aggregate cost of $57.8 million. On August 9, 1996, the Board of Directors terminated the existing share repurchase program and authorized a new program for up to $100.0 million of the Company's Ordinary Shares. As at September 30, 1996, there was still Board authorization outstanding for further repurchases of up to $65.8 million under this new program. As of November 7, 1996, none of this outstanding authorization had been utilized. During 1995, 1,332,300 Ordinary Shares were repurchased by the Company under share repurchase programs for a total cost of $33.5 million. During 1994, 2,386,889 Ordinary Shares were repurchased by the Company under share repurchase programs 42 ACE for a total cost of $65.3 million; of these shares, 1,550,289 shares were repurchased immediately following the completion of the Secondary on February 2, 1994. c) General restrictions The holders of the Ordinary Shares are entitled to receive dividends and are allowed one vote per share provided that, if the controlled shares of any shareholder constitute 10 percent or more of the outstanding Ordinary Shares of the Company, only a fraction of the vote will be allowed so as not to exceed 10 percent. Generally, the Company's directors have absolute discretion to decline to register any transfer of shares. All transfers are subject to the restriction that they may not increase to 10 percent or higher the proportion of issued Ordinary Shares owned by any shareholder. d) Dividends declared Dividends declared amounted to $0.64, $0.50 and $0.42 per Ordinary Share for fiscal 1996, 1995 and 1994 respectively. e) Options Following is a table of changes in options outstanding for 1996, 1995 and 1994:
Year of Average Options for Expiration Exercise Price Ordinary Shares ----------------------------------------------- Balance at September 30, 1993 62,000 Options granted 2004 $29.56 122,500 Options exercised 1995 $ 8.59 (491) - --------------------------------------------------------------------------------------------------- Balance at September 30, 1994 184,009 Options granted 2005 $24.19 536,000 Options exercised 1995 $ 8.59 (19,509) Options forfeited 2003-2005 $26.83 (15,000) - --------------------------------------------------------------------------------------------------- Balance at September 30, 1995 685,500 Options granted 2004-2005 $37.41 409,200 Options issued to holders of Tempest Options 2004-2005 $23.69 446,089 Options exercised 2003 $27.50 (1,000) - --------------------------------------------------------------------------------------------------- Balance at September 30, 1996 1,539,789 - ---------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- 9 Line of credit The Company has a committed line of credit provided by a syndicate of five major international banks, led by Morgan Guaranty Trust Company of New York which provides for unsecured borrowings up to an aggregate amount of $150 million. The line of credit agreement requires the Company to maintain consolidated tangible net worth of not less than $950 million. - ------------------------------------------------------------------------------- 10 Employee benefit plans a) Pension plans The Company has defined contribution pension plans which are non-contributory and cover all full-time employees. Contributions are based on a percentage of eligible compensation. Pension costs amounted to $1,741,000, $1,206,000, and $911,000 for 1996, 1995 and 1994, respectively. b) Options and Stock Appreciation Rights On February 9, 1996, shareholders of the Company approved the ACE Limited 1995 Long-Term Incentive Plan (the "Incentive Plan") which incorporates stock options, stock appreciation rights, restricted stock awards and stock purchase programs. There are 2,300,000 Ordinary Shares of the Company available for award under this Incentive Plan. This Incentive Plan superseded and replaced the existing Equity Linked Incentive Plan, which incorporated both a Stock Appreciation Rights Plan ("SAR Plan") and a Stock Option Plan ("Option Plan") which will continue to run off. Stock options granted under the Incentive Plan may be exercised for Ordinary Shares of the Company upon vesting. Under the Incentive Plan, generally, options expire ten years after the award date and vest in equal portions over three years. During 1996, in addition to the 446,089 options issued with respect to the Tempest acquisition, 409,200 options were issued at an average exercise price of $37.41 (see note 8 (e)). Under the Option Plan, generally, options expire ten years after the award date and are subject to a vesting period of four years. During 1995 and 1994, 236,000 and 122,500 options were granted at average exercise prices of $24.35 and $29.56, respectively (see note 8(e)). Of the outstanding options at September 30, 1996 35,000 were vested. In addition to the Option Plan, the Company entered into an Option and Restricted Share Agreement and Plan in connection with the employment of its Chairman, President and Chief Executive Officer whereby during the year ended September 30, 1995, he was awarded 300,000 stock options at an exercise 43 the notes ACE price of $22.63 which may be exercised for Ordinary Shares. These options expire ten years after the award date and vest at various dates up to September 30, 1999. The Chairman also received 100,000 restricted stock under this agreement (see note 10(d)). The SAR Plan entitles participants the right to receive cash equal to the appreciation in value, as provided for in the Plan, of the rights represented by the grant. Rights vest over a period of up to six years from the date of grant. Participants are entitled to receive cash payments equal to the amount of dividends paid on an equivalent number of shares. During 1992 and 1993, 392,800 rights were awarded at prices of between $17.28 and $21.91. As at September 30, 1996, 326,400 rights remained outstanding. During 1996, 18,667 rights were exercised and 27,733 rights were forfeited. During 1995, 20,000 rights were forfeited. Compensation expense is accrued and recorded based on the change in the value of the stock appreciation rights during the year and the applicable vesting period. In 1996 and 1995, compensation expense of $6,023,000 and $2,465,000 was recorded, respectively. In 1994, a reduction of compensation expense of $1,402,000 was recorded as a result of depreciation in the value of the rights. c) Employee Stock Purchase Plan On February 9, 1996, shareholders of the Company approved the ACE Limited Employee Stock Purchase Plan. Participation in the plan is available to all eligible employees. Maximum annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to 10 percent of the participant's compensation or $25,000, whichever is less. Participants may purchase shares at a purchase price equal to 85 percent of the closing market price of the Company's shares on the last day of each subscription period. Subscription periods currently run for six months with the first period closing on September 30, 1996. With respect to the subscription period ending on September 30, 1996, 4,368 shares were subscribed for, resulting in an immaterial expense to the Company. d) Restricted stock awards During 1996, 9,000 restricted Ordinary Shares were awarded to an officer of the Company. These shares vest at various dates up to July 1999. Also, during 1996, 6,734 restricted Ordinary Shares were awarded to outside directors of the Company under the terms of the 1995 Outside Directors Plan which was approved by the shareholders of the Company on February 9, 1996. These shares vest in February 1997. All unvested restricted Ordinary Shares issued to directors prior to approval of the Plan were canceled upon approval of the Plan. Subsequently, two directors resigned resulting in the forfeiture of their restricted Ordinary Shares awards. During 1995, 102,400 restricted Ordinary Shares were awarded principally to the Chairman and four directors of the Company. The Chairman's award vests at various dates up to September 30, 1999. During 1994, 17,600 restricted Ordinary Shares were awarded to an officer and directors of the Company. The officer subsequently resigned from the Company in December 1995 and all unvested awards were forfeited. All restricted stock awards contain restrictions relating to, among other things, transferability and forfeiture under certain circumstances. At the time of grant the market value of the shares awarded under these grants is recorded as unearned stock grant compensation and is presented as a separate component of shareholders' equity. The unearned compensation is charged to operations over the vesting period. - ------------------------------------------------------------------------------- 11 Related party transactions Included in net premiums written are amounts related to policies held by shareholders of the Company of approximately $31 million, $43 million and $45 million for 1996, 1995 and 1994, respectively. - ------------------------------------------------------------------------------- 12 Taxation Under current Bermuda law, the Company is not required to pay any taxes on its income or capital gains. The Company has received an undertaking from the Minister of Finance that, in the event of any taxes being imposed, the Company will be exempt from taxation in Bermuda until March 2016. - ------------------------------------------------------------------------------- 13 Statutory financial data Under the Bermuda Insurance Act 1978, as amended by the Insurance Amendment Act 1995 and Related Regulations the Company's Bermuda-based insurance and reinsurance subsidiaries (the "Bermuda subsidiaries") are required to file an annual Statutory Financial Return and Statutory Financial Statements and to maintain certain measures of solvency and liquidity during each year. Statutory capital and surplus of the Bermuda subsidiaries was $1,885 million, $1,327 million and $914 million at September 30, 1996, 1995 and 1994 and statutory net income was $301 million and $249 million for 1996 and 1995 respectively, and a net loss of $123 million for 1994. Statutory capital and surplus and statutory net income include the results of Tempest from July 1, 1996 and CODA from November 1, 1993, the dates of acquisition for each company. The principal difference between statutory capital and surplus and statutory net income of these Bermuda subsidiaries and shareholders' equity and net income as reported in conformity with GAAP relates to deferred acquisition costs of the subsidiaries, goodwill, and assets and financial activity of the parent company. There are no statutory restrictions on the payment of dividends from retained earnings by any of the Bermuda subsidiaries as the minimum statutory capital and surplus requirements are satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. 44 ACE 14 Condensed unaudited quarterly financial data
First Second Third Fourth 1996 Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------- (in thousands) Net premiums earned $115,984 $146,393 $145,897 $178,971 Net investment income 47,126 48,312 50,641 60,445 Net realized gains (losses) on investments 44,602 5,261 (1,633) 6,596 --------------------------------------------------------------------------------------------------- Total revenues $207,712 $199,966 $194,905 $246,012 --------------------------------------------------------------------------------------------------- Losses and loss expenses $ 92,924 $121,076 $120,438 $130,386 --------------------------------------------------------------------------------------------------- Net income $ 93,536 $ 56,803 $ 52,476 $ 86,415 --------------------------------------------------------------------------------------------------- Earnings per share $ 2.02 $ 1.22 $ 1.13 $ 1.46 --------------------------------------------------------------------------------------------------- First Second Third Fourth 1995 Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------- (in thousands) Net premiums earned $104,077 $106,556 $107,475 $110,553 Net investment income 43,317 44,947 46,520 46,591 Net realized gains (losses) on investments (44,754) 5,086 49,885 40,548 --------------------------------------------------------------------------------------------------- Total revenues $102,640 $156,589 $203,880 $197,692 --------------------------------------------------------------------------------------------------- Losses and loss expenses $ 85,233 $ 87,140 $ 87,895 $ 90,385 --------------------------------------------------------------------------------------------------- Net income $ 1,370 $ 51,926 $ 97,425 $ 86,845 --------------------------------------------------------------------------------------------------- Earnings per share $ 0.03 $ 1.10 $ 2.08 $ 1.87 ---------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 15 Condensed unaudited pro forma financial information relating to CODA Acquisition The following pro forma information assumes the acquisition of CODA occurred at the beginning of fiscal 1994. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the CODA Acquisition been consummated at the beginning of the year presented, nor is it necessarily indicative of future operating results.
1994 Pro forma (in thousands, except per share data): --------------------------------------------------------------------------- Net premiums earned $394,063 Net investment income 144,280 Net Loss (43,802) Loss per share $ (0.91) - --------------------------------------------------------------------------------
16 Condensed unaudited pro forma financial information relating to Tempest Acquisition The following pro forma information assumes the acquisition of Tempest occurred at the beginning of each year presented. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Tempest Acquisition been consummated at the beginning of each year presented, nor is it necessarily indicative of future operating results.
1996 1995 Pro forma (in thousands, except per share data): -------------------------------------------------------------------------- Net premiums earned $671,320 $580,850 Investment income 225,331 213,068 Net income 373,755 360,776 Earnings per share $ 6.23 $ 5.96
45 EX-21.1 8 SUBSIDIARIES Exhibit 21.1 Subsidiaries of the Registrant
Jurisdiction of Percentage Name Organization Ownership ---------------------- ------------ ---------- A.C.E. Insurance Company, Ltd. Bermuda 100% Corporate Officers & Directors Assurance Ltd. Bermuda 100 ACE UK Limited United Kingdom 100 ACE Capital Limited United Kingdom 100 Methuen Group Limited United Kingdom 100 Methuen Holdings Limited United Kingdom 100 Methuen Underwriting Ltd. United Kingdom 100 Oakham Worldwide Holdings PLC United Kingdom 100 ACE London Aviation Limited United Kingdom 100 ACE London Underwriting Limited United Kingdom 100 ACE London Ltd. United Kingdom 100 ACE Insurance Company Europe Limited Ireland 100 Oasis Real Estate Co. Ltd. Bermuda 100 Scarborough Property Holdings, Ltd. Bermuda 40 Tempest Reinsurance Company Limited Bermuda 100 ACE Insurance Management Ltd. Bermuda 100 ACE Services Ltd. Cayman Islands 100 Tripar Partnership Bermuda 100
EX-23.1 9 CONSENT OF COOPERS & LYBRAND L.L.P. Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of ACE Limited on Form S-8 (File No.33-86146) of our reports dated November 7, 1996 on our audits of the consolidated financial statements and financial statement schedules of ACE Limited as of September 30, 1996 and 1995, and for the years ended September 30, 1996, 1995, and 1994, which reports are included, or incorporated by reference, in this Annual Report on Form 10-K. New York, New York December 19, 1996 COOPERS & LYBRAND L.L.P. EX-27 10 FINANCIAL DATA SCHEDULE
7 1,000 12-MOS SEP-30-1996 SEP-30-1996 3,389,762 0 0 323,005 0 0 4,101,900 53,374 0 34,546 4,574,358 1,836,113 398,731 29,852 0 0 7,271 0 0 2,237,007 4,574,358 587,245 206,524 55,229 0 464,824 52,954 0 289,733 0 289,733 0 0 0 289,733 5.82 5.80 1,472,665 464,824 0 39,567 61,809 101,376 0
EX-99.1 11 EXTRACTS FROM REG. STMT. ON S-1 (NO. 33-72118) TAXATION OF ACE AND ITS SHAREHOLDERS The following summary of (i) the taxation of ACE and its subsidiaries and (ii) the taxation of ACE shareholders is based upon current law. Legislative, judicial or administrative changes may be forthcoming that could be retroactive and could affect this summary. The tax treatment of any particular shareholder may vary depending on such shareholder's particular tax situation or status. The following summary is for general information only and does not purport to be a complete analysis or listing of all tax considerations that might be applicable to ACE and its subsidiaries or a holder of ACE Ordinary Shares, including persons who may be subject to special tax rules (e.g. tax exempt entities or dealers in securities) or shareholders who are not U.S. persons. A U.S. person who holds ACE Ordinary Shares as capital assets will be referred to herein as a "U.S. ACE Shareholder." Each prospective shareholder is urged to consult his or its own tax advisors as to the particular tax consequences to such shareholder of owning ACE Ordinary Shares. Taxation of ACE and its Subsidiaries Bermuda. CODA and ACE Insurance have received from the Minister of Finance of Bermuda an assurance under The Exempted Undertakings Tax Protection Act, 1966 of Bermuda, to the effect that in the event of there being enacted in Bermuda any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax shall not be applicable to CODA or ACE Insurance or to any of their operations or the shares, debentures or other obligations of CODA or ACE Insurance until March 28, 2016. This assurance does not prevent the application of any such tax or duty to such persons as are ordinarily resident in Bermuda, nor does it prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 of Bermuda or otherwise payable in relation to the property leased to CODA or ACE Insurance. ACE, as a permit company under the Companies Act 1981 of Bermuda (the "Bermuda Act"), has received similar assurances which are effective until March 28, 2016. CODA and ACE Insurance, under current rates, pay annual Bermuda government and business fees in the aggregate of BD$4,515 and BD$7,875, respectively. ACE is required to pay certain annual Bermuda government fees. Under current rates, ACE pays a fixed annual fee of BD$1,680. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax to the Bermuda Government. For the fiscal year ended September 30, 1996, ACE paid approximately $776,000 in payroll tax. Currently there is no Bermuda withholding tax on dividends paid by CODA or ACE Insurance. Cayman Islands. Under current Cayman Islands law, ACE is not obligated to pay any taxes in the Cayman Islands on its income or gains. ACE has received an undertaking from the Governor-in-Council of the Cayman Islands pursuant to the provisions of the Tax Concessions Law, as amended, that until the year 2005 (i) no subsequently enacted law imposing any tax on profits, income, gains or appreciations shall apply to ACE and (ii) no such tax and no tax in the nature of an estate duty or an inheritance tax shall be payable on any shares, debentures or other obligations of ACE. The Cayman Islands currently imposes stamp duties on certain categories of documents; however, the current operations of ACE do not involve the payment of stamp duties in any material amount. The Cayman Islands currently imposes an annual corporate fee upon all exempted companies; at current rates ACE pays fees of approximately $1,750 per annum. United Kingdom. Methuen is subject to United Kingdom corporation tax and value added tax. ACE's corporate subsidiary which has acquired a 51% interest in Methuen and ACE's corporate subsidiary that is a Lloyd's corporate member participating in the Methuen syndicates are also subject to United Kingdom corporation tax and value added tax. Although ACE has a representative office in London, ACE has been advised that it is not deemed to be doing insurance business in the United Kingdom and therefore is subject only to minimal tax in the United Kingdom. United States. Except as provided below with respect to ACE's corporate subsidiary that is a Lloyd's corporate member, ACE and its subsidiaries do not conduct business within the United States and thus are not subject to net income tax imposed by the United States. However, because definitive identification of activities which constitute being engaged in a trade or business in the United States is not provided by the Code, regulations or court decisions, there can be no assurance that the IRS will not contend successfully that ACE or one or more of its subsidiaries is engaged in a trade or business in the United States. A foreign corporation deemed to be so engaged would be subject to U.S. income tax, as well as the branch profits tax, on its income which is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under the permanent establishment provision of the Bermuda Treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a domestic corporation, except that a foreign corporation can anticipate an allowance of deductions and credits only if it files a U.S. income tax return. Under regulations, the foreign corporation would be entitled to deductions and credits only if the return is filed timely under rules set forth therein. ACE and its subsidiaries have in the past and expect to continue filing protective tax returns to ensure that it and its subsidiaries would be entitled to deductions and credits if they are considered to be engaged in a U.S. trade or business. The highest federal tax rates currently are 35% for a corporation's effectively connected income and 30% for the branch profits tax. The branch profits tax is imposed on effectively connected net income after subtracting the regular corporate tax and making certain other adjustments and on interest paid or deemed paid from the U.S. branch to persons outside the United States. Pursuant to a Closing Agreement between Lloyd's and the IRS, ACE's corporate subsidiary that is a Lloyd's corporate member is treated as engaged in business in the United States and subject to net income tax in the United States on its U.S. source income. Under the Bermuda Treaty, CODA and ACE Insurance are subject to U.S. income tax on any income found to be effectively connected with a U.S. trade or business only if that trade or business is conducted through a permanent establishment in the United States. No regulations interpreting the Bermuda Treaty have been issued. While there can be no assurances, ACE does not believe CODA or ACE Insurance has a permanent establishment in the United States. Neither CODA nor ACE Insurance would be entitled to the benefits of the Bermuda Treaty if (i) less than 50% of such subsidiary's stock were beneficially owned, directly or indirectly, by Bermuda residents or U.S. citizens or residents, or (ii) such subsidiary's income were used in substantial part to make disproportionate distributions to, or to meet certain liabilities of, persons who are not Bermuda residents or U.S. citizens or residents. While there can be no assurances, ACE believes that no exception to Bermuda Treaty benefits will apply after the Amalgamation. Foreign corporations not engaged in a trade or business in the United States are nonetheless subject to U.S. income tax on certain "fixed or determinable annual or periodic gains, profits and income" derived from sources within the United States as enumerated in Section 881(a) of the Code (such as dividends and certain interest on investments). The amount of such taxes paid by ACE has not exceeded $1.7 million in any fiscal year. Effect of the Amalgamation. ACE believes that the Amalgamation will not cause ACE or its existing subsidiaries to be subject to tax in the Cayman Islands, Bermuda or the United States (except to the very limited extent noted above that they are currently subject to tax in those jurisdictions), and it is expected that the ACE Reinsurance Subsidiary will be taxed in a manner similar to ACE's other subsidiaries. Accordingly, the foregoing description of the tax treatment of ACE and its operating subsidiaries by Bermuda, the Cayman Islands, the United Kingdom and the United States should remain unchanged after the Effective Time and should, where applicable, apply equally to the ACE Reinsurance Subsidiary. Taxation of ACE Shareholders Cayman Islands. Dividends paid by ACE are not subject to Cayman Islands withholding tax. Bermuda. Under current Bermuda law, there is no Bermuda income tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by the respective shareholders of ACE with respect to an investment in ACE Ordinary Shares. United States--Taxation of dividends. Subject to the discussion below relating to the potential application of the "controlled foreign corporation" and "passive foreign investment company" rules, cash distributions made with respect to ACE Ordinary Shares will constitute dividends for U.S. federal income tax purposes to the extent paid out of current or accumulated E&P of ACE. U.S. ACE Shareholders generally will be subject to U.S. federal income tax on the receipt of such dividends. Generally, such dividends will not be eligible for the corporate dividends received deduction. To the extent that a distribution exceeds E&P, it will be treated first as a return of the U.S. ACE Shareholder's basis to the extent thereof, and then as gain from the sale of a capital asset. United States--Classification as a controlled foreign corporation. Under Section 951(a) of the Code, each "U.S. 10% shareholder" (as defined below) that, on the last day of foreign corporation's taxable year, owns, directly or indirectly through a foreign entity, shares of a foreign corporation that is a "controlled foreign 6/ corporation" ("CFC") for an uninterrupted period of 30 days or more during any taxable year must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC's "subpart F income" for such year, even if the subpart F income is not distributed. In addition, the U.S. 10% shareholders of a CFC may be deemed to receive taxable distributions to the extent the CFC increases the amount of its earnings that are invested in certain specified types of U.S. property or if the CFC holds "excess passive assets," as defined in Section 956A of the Code. "Subpart F income" includes, inter alia, (i) "foreign personal holding company income", such as interest, dividends, and other types of passive investment income and (ii) "insurance income," which is defined to include any income (including underwriting and investment income) that is attributable to the issuing (or reinsuring) of any insurance or annuity contract in connection with property in, liability arising out of activity in, or in connection with the lives or health of residents of, a country other than the country under the laws of which the CFC is created or organized, and which (subject to certain modifications) would be taxed under the insurance company provision of the Code if such income were the income of a domestic insurance company ("Subpart F Insurance Income"). However, Subpart F income does not include any income from sources within the U.S. which is effectively connected with the conduct of a trade or business within the U.S. and not exempted or subject to a reduced rate of tax by applicable treaty. Therefore, all of ACE's income, and all income of ACE's operating subsidiaries that is not attributable to a permanent establishment in the U.S., is expected to be Subpart F income. Under Section 951(b) of the Code, any U.S. Person who owns, directly or indirectly through foreign entities, or is considered to own (by application of the rules of constructive ownership set forth in Code Section 958(b), generally applying to family members, partnerships, estates, trusts or 10% controlled corporations) 10% or more of the total combined voting power of all classes of stock of a foreign corporation will be considered to be a "U.S. 10% shareholder." In general, a foreign corporation is treated as a CFC only if its U.S. 10% shareholders collectively own more than 50% of the total combined voting power or total value of the corporation's stock on any day (the "50% Test"). However, for purposes only of taking into account Subpart F Insurance Income, a foreign corporation will be treated as a CFC if (i) more than 25% of the total combined voting power or total value of its stock is owned by U.S. 10% shareholders and (ii) the gross amount of premiums or other consideration in respect of risks outside its country of incorporation exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks (the "25% Test"). It is anticipated that the gross premiums of each of the insurance subsidiaries of ACE in respect of Subpart F Insurance Income will exceed 75% of its gross premiums in respect of all risks so that the 25% Test, rather than the 50% Test, will be applicable with respect to its Subpart F Insurance Income. However, the 50% test will continue to apply to ACE itself. After the Amalgamation, all the capital stock of ACE Insurance, CODA, and the ACE Reinsurance Subsidiary will be owned directly or indirectly by ACE. In determining the U.S. 10% shareholders of ACE Insurance, CODA, or the ACE Reinsurance Subsidiary, U.S. Persons who are shareholders of ACE are considered as owning proportionately the stock of ACE Insurance, CODA, and the ACE Reinsurance Subsidiary. After the Amalgamation, U.S. Persons who own, directly, indirectly or by attribution under the rules of Section 958(b) of the Code, more than 10% in value of the stock of ACE will not own more than 25% of the total combined voting power or value of the stock of ACE. As a result, none of ACE Insurance, CODA, or the ACE Reinsurance Subsidiary, will be a CFC under the 25% Test. However, depending on the future ownership of ACE stock, any U.S. Person who subsequently acquires 10% or more of the stock of ACE may be required to include their share of the Subpart F income of ACE and its subsidiaries in their U.S. taxable income. It is not expected that ACE itself would ever be a CFC under the 50% test, so U.S. persons are not expected to have to include any of ACE's Subpart F income in their U.S. taxable income. United States--RPII companies. A different definition of "controlled foreign corporation" is applicable in the case of a foreign corporation which earns related person insurance income ("RPII"). RPII is defined in Code Section 953(c)(2) as any "insurance income" (as defined above) attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a "U.S. shareholder" of the foreign corporation or a "related person" to such a shareholder. For purposes only of taking into account RPII, and subject to the exceptions described below, an insurance subsidiary of ACE will be treated as a CFC it its 7/ "RPII shareholders" (as defined below) collectively own, directly, indirectly, or by attribution under Code Section 958(b), 25% or more of the total combined voting power or value of such subsidiary's stock on any day during a fiscal year. If an insurance subsidiary of ACE is a CFC under the special RPII rules for an uninterrupted period of at least 30 days during any fiscal year, a U.S. Person who owns, directly or indirectly through foreign entities, shares of shares of such subsidiary on the last day of such fiscal year must include in its gross income for U.S. federal income tax purposes its allocable share of RPII for the entire taxable year, subject to certain modifications. For purposes of inclusion of RPII from an insurance subsidiary of ACE in the income of U.S. Persons who own ACE Ordinary Shares, unless an exception applies, the term "RPII shareholder" includes all U.S. Persons who own, directly or indirectly through foreign entities, any amount (rather than 10% or more) of the ACE Ordinary Shares. Generally, the term "related person" for purposes of the RPII rules means someone who controls or is controlled by the RPII shareholder or someone who is controlled by the same person or persons which control the RPII shareholder. Control is measured by either more than 50% in value or more than 50% in voting power of stock, with respect to corporations, or more than 50% of the beneficial interests, with respect to partnerships, trusts, or estates, applying constructive ownership principles similar to the rules of Section 958 of the Code. The term "related persons" also includes, with respect to insurance policies covering liability arising from services performed as a director, officer or employee of a corporation or a partner or employee of a partnership, the person performing such services and the entity for which the services are performed. The above RPII rules do not apply if (A) direct and indirect insureds and persons related to such insureds, whether or not U.S. persons, are treated as owning less than 20% of the voting power and less than 20% of the value of the stock of ACE's insurance company subsidiaries, or (B) the RPII of each of ACE's insurance subsidiaries, determined on a gross basis, is less than 20% of each such subsidiary's gross insurance income for the taxable year. ACE believes that the RPII income of each of ACE Insurance and CODA has been, and should be for the foreseeable future, less than 20% of such subsidiary's gross insurance income for the taxable year and, based in part on information provided by Tempest, it is expected that the ACE Reinsurance Subsidiary's RPII income will constitute less than 20% of its gross insurance income for future taxable years. As a consequence, the special RPII rules should not apply, and U.S. Persons owning ACE Ordinary Shares should not be required to include in gross income any RPII income under the special RPII rules. The IRS may assert, however, that ACE's reinsurance subsidiaries indirectly reinsure shareholders of ACE. ACE does not expect any of its subsidiaries to enter into reinsurance arrangements where the ultimate risk insured is that of a holder of ACE Ordinary Shares that is a U.S. person or person related to such a U.S. person at a level which would cause any subsidiary to have RPII income of 20% or more of its gross insurance income. However, unless final Treasury Regulations under Code Section 953 provide that this rule would apply only if the reinsured entity is fronting for another party, it may be difficult for ACE to obtain and, if requested of ACE or a shareholder by the IRS, provide shareholders with enough information to document and be certain that each of ACE's subsidiaries providing significant reinsurance have satisfied the 20% test. ACE believes that it is unlikely that enough of the underlying reinsured parties will own sufficient ACE Ordinary Shares to cause the RPII income of any of ACE's subsidiaries to be 20% or more of their gross insurance income and ACE will endeavor to avoid failing the 20% test. However, the ultimate application of the RPII rules and the proof that will be required to establish compliance thereunder is uncertain and each prospective investor should consult their own tax advisor with respect to this issue. United States--Passive foreign investment companies. Code Sections 1291 through 1297 contain special rules applicable to foreign corporations that are "passive foreign investment companies" ("PFIC's"). In general, a foreign corporation will be a PFIC if 75% or more of its gross income constitutes "passive income" (the "75% Income Test") or 50% or more of its assets produce, or are held for the production of, passive income (the "50% Asset Test"). If ACE were to be characterized as a PFIC, its U.S. shareholders would have to make an election (a "QEF Election") to be taxable currently on their pro-rata shares of earnings of ACE whether or not such earnings were distributed or they would be subject to a special tax and an interest charge at the time of the sale of, or receipt of an "excess distribution" with respect to, their shares, and a portion of any gain may be recharacterized as ordinary income, which for an individual would be taxed at the highest marginal rate of 39.6%. 8/ In general, a shareholder receives an "excess distribution" if the amount of the distribution is more than 125% of the average distribution with respect to the stock during the three preceding taxable years (or shorter period during which the taxpayer held the stock). In general, the special tax and interest charges are based on the value of the tax deferral of the taxes that are deemed due during the period the U.S. shareholder owned the shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the shares was taxed in equal portions throughout the holder's period of ownership at the highest marginal tax rate. The interest charge is computed using the applicable rate imposed on underpayments of U.S. federal income tax for such period. In general, if a U.S. Person owns stock in a foreign corporation during any taxable year in which such corporation is a PFIC and such shareholder does not make a QEF Election, the stock will be treated as stock in a PFIC for all subsequent years. For the above purposes, "passive income" is defined to include income of a kind that would be characterized as foreign personal holding company income under Code Section 954(c), and generally includes interest, dividends, annuities and other investment income. The PFIC statutory provisions contain and express exception for income "derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business . . ." "This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income. Thus, to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business, it may be treated as passive income for purposes of the PFIC rules. The PFIC statutory provisions also contain a look-through rule that states that, for purposes of determining whether a foreign corporation is a PFIC, such foreign corporation shall be treated as if it "received directly its proportionate share of the income . . . "and as if it "held its proportionate share of the assets . . ." of any other corporation in which it owns at least 25% of the value of the stock. In ACE's view each of its direct and indirect insurance subsidiaries (including the ACE Reinsurance Subsidiary, after the Effective Time) is predominantly engaged in an insurance business and does not have financial reserves in excess of the reasonable needs of its insurance business. Under the look-through rule, ACE would be deemed to own its proportionate share of the assets and to have received its proportionate share of the income of ACE Insurance, CODA, and the ACE Reinsurance Subsidiary for purposes of the 75% Income and 50% Assets Test. However, no regulations interpreting the substantive PFIC provisions have yet been issued. Therefore, substantial uncertainty exists with respect to their application or their possible retroactivity. Each U.S. Person who holds ACE Ordinary Shares should consult his tax advisor as to the possible effects of these rules. Information Reporting. Every U.S. Person who "controls" a foreign corporation by owning directly or by attribution more than 50% of the total value of shares of all classes of stock of such corporation, for an uninterrupted period of 30 days or more during a fiscal year of that corporation, must file IRS Form 5471 with its U.S. income tax return. However, the IRS has the authority to, and does require, any U.S. Person treated as a U.S. 10% shareholder or RPII shareholder of a CFC that owns shares directly or indirectly through a foreign entity to file a Form 5471. In addition, U.S. Persons who own more than 5% in value of the outstanding stock of ACE or its subsidiaries at any time during a taxable year are required in certain circumstances to file Form 5471 even if neither corporation is a CFC. A tax- exempt organization that is treated as a U.S. 10% shareholder or a RPII shareholder for any purpose under subpart F will be required to file a Form 5471 in the circumstances described above. Failure to file Form 5471 may result in penalties. Dispositions of ACE Ordinary Shares. Subject to the discussion elsewhere relating to the potential application of the CFC and PFIC rules, gain or loss realized by a U.S. ACE Shareholder on the sale, exchange or other disposition of ACE Ordinary Shares will be includible in gross income as capital gain or loss in an amount equal to the difference between such holder's basis in the ACE Ordinary Shares and the amount realized on the sale, exchange or other disposition. If a U.S. ACE Shareholder's holding period for the ACE Ordinary Shares is more than one year, any gain will be subject to the U.S. federal income tax at a current maximum marginal rate of 28% for individuals and 35% for corporations. earnings and profits during the period that the shareholder held the shares (with certain adjustments). Code Section 953(c)(7) generally provides that Section 1248 also will apply to the sale or exchange of shares by a U.S. shareholder in a foreign corporation that earns RPII and is characterized as a CFC under the RPII rules if the foreign corporation would be taxed as an insurance company if it were a domestic corporation, regardless of whether the shareholder is a 10% shareholder or whether RPII constitutes 20% or more of the corporation's gross insurance income. ACE believes, based on the advice of counsel, that Code Section 1248 will not apply to dispositions of ACE Ordinary Shares, so long as ACE is not a CFC, because ACE is not directly engaged in the insurance business. There can be no assurance, however, that the IRS will interpret proposed regulations under Code Section 953 in this manner or that the Treasury Department will not amend the proposed regulations under Section 953 or other regulations to provide that Section 1248 will apply to dispositions of shares in a corporation such as ACE which is engaged in the insurance business directly on indirectly through its subsidiaries. If the IRS or Treasury Department were to take such action ACE would notify shareholders that Code Section 1248 will apply to dispositions of Common Shares. Foreign Tax Credit. Because it is anticipated that U.S. Persons will own a majority of ACE's shares after the Amalgamation and because a substantial part of the insurance business of ACE's subsidiaries includes the insurance of U.S. risks only a portion of the RPII and Subpart F inclusions (if any) and dividends paid by ACE (including any gain from the sale of ACE Ordinary Shares that is treated as a dividend under Code Section 1248) will be treated as foreign source income for purposes of computing a shareholder's U.S. foreign tax credit limitation. Except in the case of U.S. 10% shareholders it is likely that all of the RPII and Subpart F inclusions (if any) and dividends that are foreign source income will constitute either "passive" or "financial services" income for foreign tax credit limitation purposes. Thus, it may not be possible for certain U.S. shareholders to utilize excess foreign tax credits to reduce U.S. tax on such income. Other. Dividends paid by ACE to U.S. corporate shareholders will not be eligible for the dividends received deduction provided by Code Section 243. Except as discussed below with respect to backup withholding, dividends paid by ACE will not be subject to a U.S. withholding, tax. Information reporting to the IRS by paying agents and custodians located in the U.S. will be required with respect to payments of dividends (if any) on the ACE Ordinary Shares to U.S. Persons or to paying agents or custodians located in the U.S. In addition, a holder of ACE Ordinary Shares may be subject to backup withholding at the rate of 31% with respect to dividends paid by such persons, unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact; or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. The backup withholding tax is not an additional tax and may be credited against a holder's regular Federal income tax liability. Sales of ACE Ordinary Shares through brokers by certain U.S. Persons also may be subject to backup withholding. Sales by corporations, certain tax-exempt entities, individual retirement plans, REITs, certain financial institutions, and other "exempt recipients" as defined in applicable Treasury regulations currently are not subject to backup withholding. Holders of ACE Ordinary Shares should consult their own tax advisors regarding the possible applicability of the backup withholding rules to sales of their ACE Ordinary Shares. The foregoing discussion (including and subject to the matters and qualifications set forth in such summary) is based on current law and is for general information only. The tax treatment of a holder of ACE Ordinary Shares for U.S. federal income, state, local or non-U.S. tax purposes may vary depending on the holder's particular tax situation. Legislative, judicial or administrative changes or interpretations may be forthcoming that could be retroactive and could affect the tax consequences to holders of ACE Ordinary Shares. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES TO THEM OF OWNING THE ACE ORDINARY SHARES. 70 -----END PRIVACY-ENHANCED MESSAGE-----