writer David Fox reviews ACE's annual report and speaks to management on the company's New Year prospects Bermuda-based insurer ACE Ltd. paid out some $250 million in 1997 with respect to breast implant claims, 62 percent of the $402 million in paid claims for the year.

The breast implant claim payments were included in previous reserves and are consistent with the firm's belief that its reserves are adequate. But ACE conceded it remained uncertain whether or not further reserves would be required.

A number of the company's insureds have given notice of claims relating to breast implants or components or raw materials of the product that had been manufactured and/or sold by such insureds.

Lawsuits including class actions, involving hundreds of thousands of implant recipients have been filed in state and federal courts throughout the US. Most of the federal cases have been consolidated.

The breast implant claims and litigation caused a significant defendant, the Dow Corning Corporation, to file for protection under Chapter 11 of the US Bankruptcy Code in May 1995, with claims against the company stayed, subject to the Bankruptcy Code.

Five months later, negotiators for three of the major defendants agreed in principle on a revised individual settlement plan for US claimants who had at least one implant from any of those manufacturers.

By August 1997, some $518 million had been distributed in combined payouts under the settlement to implant recipients of the three major defendants.

ACE had significantly increased its existing reserves relating to breast implant claims in 1994.

ACE's annual report said although their reserve increase was partially satisfied by an allocation from the existing IBNR (incurred but not reported), it also required an increase in the company's total reserve for unpaid losses and loss expenses at June 30, 1994 of $200 million.

ACE said that the increase in reserves at the time was based on information made available in conjunction with the lawsuits and information made available from the company's insureds and was predicated upon an allocation between coverage provided before and after the end of 1985 (when the company commenced underwriting operations).

No additional reserves relating to breast implant claims have been added since June 1994.

Notes to the consolidated financial statements said: "Significant uncertainties continue to exist with regard to the ultimate outcome and cost of the settlement and value of the opt-out claims.

"While the company is unable at this time to determine whether additional reserves, which could have a material adverse effect upon the financial condition, results of operations and cash flows of the company, may be necessary in the future, the company believes that its reserves for unpaid losses and loss expenses including those arising from breast implant claims are adequate at September 30, 1997.'' Meanwhile, reviewing the company's overall performance, ACE chairman, president and CEO, Brian Duperreault, told shareholders in an end of year letter, "The combination of large limits, low expenses and the flexibility gained from operating out of Bermuda provides us with several competitive advantages over less flexible, more encumbered insurers.'' For the 1998 year of account, syndicates managed by ACE London at Lloyd's have the capacity to write about $1.1 billion of premiums, or about seven percent of the total Lloyd's market.

Mr. Duperreault speculates that given the focus on profitability, as opposed to market share, it is likely that ACE syndicates will record net premiums written representing only about 50 percent of their stated capacity.

ACE London's retained share of 1998 syndicate capacity will represent 44 percent of the total under management or about $485 million, a rapid growth in a seasoned book of business at Lloyd's, while maintaining underwriting discipline in a shrinking market.

The capital management strategy is to maintain a superior compound rate of return on equity (ROE).

The proposed acquisition of Westchester Specialty represents the reinvestment of 100 percent of ACE's 1997 operating income as debt is strategically used to increase overall capitalisation.

Tempest Re's purchase was an example of how earnings per share and ROE can be increased by acquisition for stock.

ACE stock, which began publicly trading five years ago at $27.50 per share, traded at $98 per share on November 24 and $94 on December 31. It represents a compound annual growth rate around 30 percent.

ACE's original lines of excess liability and D&O (directors & officers) now represent 42 percent of ACE Insurance Company's total premium volume, and 31 percent of the total premium volume for the ACE group of companies.

ACE Insurance (ACE Ltd.'s principal operating subsidiary) expects that with the establishment of US and European platforms for business development, the D&O product line will have more opportunities for growth.

Under president Dominic J. Frederico, ACE Insurance is a world leader in satellite insurance, and recorded an increase in gross premiums written, although net premiums decreased due to the increased use of reinsurance.

Mr. Frederico said, "A high level of launch activity is being sustained by new satellite applications in the direct broadcast and mobile communications sectors.

"Additionally, in this information age, much of the growth in satellite activity has been due to the rapid expansion of international telecommunications, especially in the emerging markets of Southeast Asia, the Middle East and South America.

"We expect launch activity to remain high for our core market of geostationary communications satellites, where one or two satellites are launched at a time.

"We anticipate growth as smaller low-earth-orbit satellite constellations are deployed to provide worldwide telephony, mobile and multi-media telecommunications services.

"For these constellations, the number of satellites launched on a single vehicle may reach as high as seven or eight.

"Although the value of the individual satellites may be smaller, the aggregate value will approach that of the larger communications satellites that we routinely insure.'' Brian Dupperault