What drove the improvement in ACE's profitability in fiscal 1997?

The filing attributes strong growth in insurance operations and net investment income, partly offset by higher administrative expenses. Tempest contributed $119.8 million to income excluding realized gains, compared with $23.8 million in 1996, reflecting a full year of operations versus three months in the prior year. Net realized gains also rose to $128.0 million from $55.2 million.

What is the status of the Westchester Specialty Group acquisition?

ACE executed a definitive agreement on September 18, 1997 to purchase WSG from Xerox for approximately $333 million in cash. The deal is subject to regulatory approval and other customary closing conditions and is expected to close in early 1998. ACE expects to finance it with $250 million of bank debt and the remainder with available cash. National Indemnity, a Berkshire Hathaway subsidiary, will provide $750 million of reinsurance protection to WSG on its 1996 and prior accident-year reserves.

How significant is the breast implant litigation exposure?

The filing says ACE increased reserves by $200 million at June 30, 1994 for breast implant claims and has added no further reserves since. It made about $250 million of breast implant payments in 1997, which were included in previous reserves. The company states it is unable at this time to determine whether additional reserves may be necessary, but believes its reserves are adequate as of September 30, 1997. Significant uncertainties remain regarding the Settlement's outcome and the value of opt-out claims.

What are the main risks to ACE's U.S. tax position?

ACE is a Cayman Islands corporation that has never paid U.S. corporate income taxes, on the basis that it is not engaged in a U.S. trade or business. The filing acknowledges the IRS could contend otherwise, and says that if the company were subject to U.S. income tax, there could be a material adverse effect on shareholders' equity and earnings. It also notes that the RPII rules have never been interpreted by courts and that proposed regulations remain unadopted.

What capital return actions did ACE take during the year?

During 1997 ACE repurchased 3,031,000 ordinary shares for an aggregate cost of $182.6 million and paid dividends of $0.80 per share for the year. A new share repurchase program of up to $300.0 million was authorized on May 9, 1997, with approximately $268.0 million unused at September 30, 1997. Between October 1 and November 25, 1997, the company repurchased an additional 786,200 shares for $71.8 million.

CB 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed December 24, 1997. Cited figures are marked; the original filing is the authoritative source.

ACE Limited, a Cayman Islands holding company with principal business office in Bermuda, reported net income of $461.4 million^a for the fiscal year ended September 30, 1997, up from $289.7 million in 1996, with earnings per share of $8.02 versus $5.82.

Gross premiums written rose 15.0% to $742.6 million^b, while net premiums written reached $639.7 million. The combined ratio improved to 85.2% from 95.2% in 1996, driven by a loss and loss expense ratio of 67.6%, and the filing notes that results were favorably affected by Tempest, the property catastrophe reinsurer acquired in July 1996. Shareholders' equity grew to $2.62 billion, or $47.14 fully diluted book value per share, and total investments and cash were $4.47 billion.

The filing highlights several pending transactions and risks. ACE agreed to acquire Westchester Specialty Group from Xerox for approximately $333 million^c in cash, expected to close in early 1998 and financed with $250 million of bank debt and available cash. The company also announced a proposed three-for-one stock split subject to shareholder approval.

Breast implant litigation remains a key uncertainty: the filing states that the company is unable at this time to determine whether additional reserves may be necessary, though it believes current reserves are adequate. Total unpaid losses and loss expenses were $1.87 billion^d at year end.

The company's U.S. tax position is also noted as a risk. ACE states it has never paid U.S. corporate income taxes on the basis that it is not engaged in a U.S. trade or business, but acknowledges the IRS could contend otherwise, which could have a material adverse effect on shareholders' equity and earnings.

02—Key points

Key Highlights

Net income rose to $461.4 million in fiscal 1997 from $289.7 million in fiscal 1996; EPS was $8.02 versus $5.82.
Combined ratio improved to 85.2% from 95.2%, with the loss and loss expense ratio at 67.6% versus 79.1%.
Gross premiums written increased 15.0% to $742.6 million; net premiums written were $639.7 million.
Shareholders' equity reached $2.62 billion, with fully diluted book value per share of $47.14 versus $38.31 a year earlier.
Agreed to acquire Westchester Specialty Group for about $333 million cash, expected to close in early 1998.
Board approved a three-for-one stock split, subject to shareholder approval at the February 6, 1998 annual meeting; quarterly dividend declared at $0.24 per share.
Breast implant litigation remains an uncertainty; the company believes reserves are adequate but cannot determine whether additional reserves may be needed.

03—Questions

Frequently Asked Questions

What drove the improvement in ACE's profitability in fiscal 1997?
The filing attributes strong growth in insurance operations and net investment income, partly offset by higher administrative expenses. Tempest contributed $119.8 million to income excluding realized gains, compared with $23.8 million in 1996, reflecting a full year of operations versus three months in the prior year. Net realized gains also rose to $128.0 million from $55.2 million.
What is the status of the Westchester Specialty Group acquisition?
ACE executed a definitive agreement on September 18, 1997 to purchase WSG from Xerox for approximately $333 million in cash. The deal is subject to regulatory approval and other customary closing conditions and is expected to close in early 1998. ACE expects to finance it with $250 million of bank debt and the remainder with available cash. National Indemnity, a Berkshire Hathaway subsidiary, will provide $750 million of reinsurance protection to WSG on its 1996 and prior accident-year reserves.
How significant is the breast implant litigation exposure?
The filing says ACE increased reserves by $200 million at June 30, 1994 for breast implant claims and has added no further reserves since. It made about $250 million of breast implant payments in 1997, which were included in previous reserves. The company states it is unable at this time to determine whether additional reserves may be necessary, but believes its reserves are adequate as of September 30, 1997. Significant uncertainties remain regarding the Settlement's outcome and the value of opt-out claims.
What are the main risks to ACE's U.S. tax position?
ACE is a Cayman Islands corporation that has never paid U.S. corporate income taxes, on the basis that it is not engaged in a U.S. trade or business. The filing acknowledges the IRS could contend otherwise, and says that if the company were subject to U.S. income tax, there could be a material adverse effect on shareholders' equity and earnings. It also notes that the RPII rules have never been interpreted by courts and that proposed regulations remain unadopted.
What capital return actions did ACE take during the year?
During 1997 ACE repurchased 3,031,000 ordinary shares for an aggregate cost of $182.6 million and paid dividends of $0.80 per share for the year. A new share repurchase program of up to $300.0 million was authorized on May 9, 1997, with approximately $268.0 million unused at September 30, 1997. Between October 1 and November 25, 1997, the company repurchased an additional 786,200 shares for $71.8 million.

04—Continue

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