PHILADELPHIA -- ACE Ltd.'s $3.5 billion offer for the property/casualty operations of CIGNA Corp. could significantly benefit policyholders and create a new international powerhouse.

Under terms of the deal announced last week, ACE would pay $3.5 billion for CIGNA's domestic property and casualty business and most of its international business. ACE would initially pay cash and later issue stock and debt to fund the purchase.

The price tag for CIGNA is larger than the amounts paid for other large U.S. property/casualty insurers in recent years, including the $2.8 billion The St. Paul Cos. Inc. paid for USF&G Corp. in 1997, and CNA Financial Corp.'s $1.1 billion purchase of Continental Insurance Co. But it is lower than the $4.0 billion that Travelers Corp. paid in 1996 for Aetna Life & Casualty Co.'s property/casualty operations.

The proposed deal would give ACE an established, and largely profitable, insurance franchise worldwide, as well as a significant presence in the U.S. market.

"We have been trying to develop a global specialty property/casualty company. . .and this short-cuts a long process by getting there in one acquisition," said Brian Duperreault, chairman, president and chief executive officer of ACE in Hamilton, Bermuda.

For CIGNA policyholders, an acquisition by ACE could bring additional protection for long-tail liabilities as well as a new parent committed to property/casualty insurance.

But more information on the proposed deal is needed, however, before any advantages or disadvantages of an ACE/CIGNA combination can be properly judged, analysts say.

Aspects of the acquisition that are unclear, for example, include how much additional reinsurance protection ACE would arrange for CIGNA's long-tail liabilities, which in 1995 were restructured and shifted to Brandywine Holdings, a separately capitalized company, to be run off. Also unclear is whether the cost of that reinsurance will be fully included in the $3.45 billion purchase price.

Another uncertainty is that a challenge to regulators' approval of that restructuring still is before the Pennsylvania Supreme Court.

"Acquisition strategies by definition are very risky," said Donald S. Watson, director of global reinsurance rating at Standard & Poor's Corp. in New York.

The final structure of ACE's purchase of CIGNA could be affected by the Pennsylvania court's actions, he said.

The purchase would transform ACE from a specialty insurer and reinsurer, with operations largely based in Bermuda and London, into a multiline insurer and reinsurer with extensive operations worldwide.

The net written premiums of ACE would jump to nearly $4 billion from $883 million, the company estimates.

In the United States, the enlarged ACE's net written premiums would increase to nearly $2 billion from $503 million for ACE only. Internationally, net written premiums in the United Kingdom and Europe would increase to $773 million from $129 million; in Japan to $441 million from $21 million; and in Latin America to $176 million from $5 million.

That would still leave it smaller than some international competitors, such as American International Group Inc., which had $13.41 billion in property/casualty net written premiums in 1997.

The purchase of CIGNA's property/casualty operations would greatly expand ACE's lines of business. For example, in the United States, ACE would write workers compensation and commercial package business, while internationally it would pick up accident and health and automobile insurance.

Also, much of CIGNA's property and casualty writings are primary coverage, as opposed to the high excess liability business that ACE originally was created to cover during the liability insurance crisis in the mid-1980s.

When Mr. Duperreault joined ACE in 1994, he immediately began to diversify the company's operations by adding new people and making acquisitions. ACE's array of coverages now includes property, marine and aviation, satellite, financial lines, catastrophe reinsurance, and substantial operations at Lloyd's of London.

In recent months, ACE has made several major acquisitions. In January 1998, it completed the acquisition of U.S. specialty insurer Westchester Specialty Group Inc. for $338 million and created ACE USA around the company. In 1998, it bought catastrophe reinsurer Cat Ltd. for $711 million and bolstered its Lloyd's of London holdings with the $500 million purchase of Tarquin Ltd.

When the deal is completed, CIGNA's domestic operations would be merged with ACE USA and trade under that name. ACE is buying the Insurance Co. of North America name, but it has not yet determined how or whether it would use it. The international operations also would be renamed with the ACE name, Mr. Duperreault said.

Dominic J. Frederico, president and chief executive officer of ACE Bermuda, would become chairman of ACE USA. The current management of the CIGNA units would stay in comparable positions with the company.

Gerald A. Isom, president of CIGNA Property & Casualty, would be the senior operating executive of ACE USA, while Kingsley Schubert, president of CIGNA International, would hold a senior executive position at ACE. Dennis Redding, the current head of ACE USA, would continue to hold a senior executive position, Mr. Duperreault added.

The diversification away from ACE's core line of high-severity/low-frequency coverages should benefit ACE, he said.

"I believe in a diversified company. A narrowly focused company just doesn't have the maneuvering room it needs in a competitive market," Mr. Duperreault said.

CIGNA's ongoing operations also would fit well with ACE's because the CIGNA business is mainly profitable, he said.

The main exception, he said, is the middle-market business CIGNA writes in the United States.

"But that used to be a much, much larger part of the business before. . .

the trend has been to reduce that business, and I agree with that," he said.

Mr. Duperreault said he is confident that Brandywine Holdings would be capable of covering all of CIGNA's outstanding liabilities and would not be a drain on ACE.

"I have no problem stepping into CIGNA's shoes," he said.

As of year-end 1997, Brandywine had $4.6 billion of statutory assets.

ACE is in the process of securing additional third-party protection to ensure that the potential liabilities are fully capped, Mr. Duperreault confirmed. He would not specify the amount of coverage that will be bought.

"The reinsurance will be put in place contemporaneously with the closing, and the cost has been factored into the purchase price," he said.

Mr. Duperreault declined to comment on the outstanding litigation against CIGNA's restructuring prior to a Pennsylvania Supreme Court hearing on the issue, which is slated for Feb. 1.

Uncertainty over the amount of reinsurance to be bought and the outcome of the court hearing takes a little shine off the otherwise good deal, said Mr. Watson of S&P.

"We are all still waiting to see what the reinsurance will be," he said.

However, even if CIGNA's restructuring is overturned by a series of court and regulatory decisions, ACE still would likely benefit from the transaction as CIGNA's old liabilities, regardless of how they are ultimately structured, are well-capitalized, Mr. Watson said.

"It wouldn't of itself cause the deal to fall apart, but maybe the price would change," he said of the possibility of the court unraveling the company's restructuring.

Brandywine has had a successful runoff so far, and claims payments are well within its original projections, said Eric Simpson, senior vp at A.M. Best Co. in Oldwick, N.J.

"And the addition of a large stop-loss coverage could diminish the rightful concerns of policyholders," he said.

On the face of it, the purchase of additional reinsurance coverage could benefit policyholders if the restructuring is allowed to stand, said John N. Ellison, a partner at Anderson Kill & Olick P.C. in Philadelphia, who represents a group of policyholders fighting the restructuring.

But that will not be clear until more details on the reinsurance coverage are in place, he said.

Mr. Ellison claimed that policyholders still have a good chance of prevailing before the Pennsylvania Supreme Court, which he said could unravel the CIGNA restructuring. ACE then would have to stand by the liabilities if it goes through with the purchase, he said.

"All this talk about restructured Brandywine operations is a bit of an overstatement of the restructured status right now," Mr. Ellison said.

Regulatory approval of the sale to ACE would be needed, regardless of the state Supreme Court ruling.

The deal also would benefit new and existing CIGNA policyholders, according to brokers.

In an increasingly consolidating market, policyholders now would have access to a new global insurance company, said Norman Barham, vice chairman of J&H Marsh & McLennan Inc. in New York.

"The global arena has become real important, and people need a global reach," he said.

ACE would be able to expand its product offerings through the deal, Mr. Barham said.

In particular, the addition of a workers comp unit would enable ACE to offer combined casualty and workers comp programs, which are becoming increasingly attractive to buyers, he said.

The additional products and capacity that ACE could provide would benefit CIGNA policyholders, agreed Charles Ruoff, executive vp at Acordia Inc. in Indianapolis.

An ACE/CIGNA combination would offer policyholders the full gamut of products from low-level primary to high-excess coverage in several lines of business, he said.

"Maybe some will be concerned about having so many eggs in one basket, but with the market consolidating the way it is, there's less choice anyway," Mr. Ruoff said.

With the addition of CIGNA's operations, ACE could become a substantial competitor to international insurers AIG, Zurich and Allianz, he added.

The combined ACE/CIGNA would contain several former AIG executives. Mr. Duperreault was an executive vp at AIG, and Mr. Frederico was a senior vp at an AIG unit. Mr. Schubert at CIGNA International was chief operating officer of AIG units in Japan and South Korea prior to joining CIGNA in 1992.

"AIG is a world-class organization, so anything we do in international business, we'll be competing with them," Mr. Duperreault said.

AIG has been a vigorous opponent of the CIGNA restructuring.

ACE also has an ironic link to CIGNA. John Cox, the founding chairman of ACE in 1984, was formerly president of INA, which was merged with Connecticut General Corp. in 1982 to form CIGNA Corp.

The deal also would bring an end to CIGNA's original ambitions, when it was formed in 1982, to cross-sell property and casualty and employee benefits products.

Instead, CIGNA would concentrate on its employee benefits business, CEO Wilson H. Taylor said in a statement.

"This transaction further positions CIGNA to capitalize on its strengths in the global employee benefits business," he said.

CIGNA would be able to use funds from the sale to expand its benefits operations either through internal growth or acquisitions, a CIGNA spokesman said.