Arch Capital Group Ltd. Reports 2003 First Quarter Results.Business Editors HAMILTON Hamilton, city, Bermuda Hamilton, city (1990 est. pop. 3,100), capital of Bermuda, on Bermuda Island. It is a port at the head of Great Sound, a huge lagoon and deepwater harbor protected by coral reefs. , Bermuda--(BUSINESS WIRE)--May 12, 2003 Arch Capital Group Ltd. (NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on :ACGL ACGL Arch Capital Group Ltd. ACGL Automobile Corporation of Goa Limited ACGL Alternative County Government Law ) reports that net income for the 2003 first quarter was $52.5 million, or $0.78 per share, compared to $4.0 million, or $0.08 per share, for the 2002 first quarter. The Company also reported after-tax af·ter-tax also af·ter·tax adj. Relating to or being that which remains after payment, especially of income taxes: after-tax profits. operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. for the 2003 first quarter of $49.2 million, or $0.73 per share, compared to $8.4 million, or $0.16 per share, for the 2002 first quarter. Net premiums written for the 2003 first quarter were $776.9 million, compared to $280.7 million for the 2002 first quarter. During the 2003 first quarter, diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. book value per share increased by $0.96, or 4.5%, to $22.16. The following table summarizes, on an after-tax basis After-tax basis The comparison basis used to analyze the net after-tax returns on a corporate taxable bond and a municipal tax-free bond. , the Company's consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: financial data, including a reconciliation of operating income, a non-GAAP measure, to net income (amounts in thousands except share data):
(Unaudited)
Three Months Ended
March 31,
2003 2002
----------- -----------
Gross premiums written $860,100 $304,795
Net premiums written 776,863 280,710
Net premiums earned 404,451 67,527
Underwriting income - GAAP basis 40,103 3,825
Combined Ratio:
Statutory Basis 87.7% 90.0%
GAAP Basis 90.6% 94.3%
Components of Net Income (after-tax):
Operating income $ 49,178 $ 8,368
Net realized investment gains (losses) 5,346 (1,161)
Net foreign exchange gains (losses) 1,050 (108)
Other income 971 540
Non-cash compensation (4,059) (3,673)
----------- -----------
Net income $ 52,486 $ 3,966
=========== ===========
Diluted Per Share Results (after-tax):
Operating income $0.73 $0.16
Net realized investment gains (losses) 0.08 (0.02)
Net foreign exchange gains (losses) 0.02 0.00
Other income 0.01 0.01
Non-cash compensation (0.06) (0.07)
----------- -----------
Net income $0.78 $0.08
=========== ===========
Diluted average shares outstanding 66,939,562 51,996,949
Operating income is defined as net income or loss excluding net realized investment gains or losses, net foreign exchange gains or losses, other income and non-cash compensation charges, net of tax. These items are excluded from operating income because the Company does not believe that they are relevant indicators of the performance of, or trends in, the Company's core business operations Business operations are those activities involved in the running of a business for the purpose of producing value for the stakeholders. Compare business processes. The outcome of business operations is the harvesting of value from assets . Management believes that operating income provides useful information because it reflects the underlying fundamentals of the Company's operations, follows industry practice and enables investors to compare the Company's performance with its industry peer group. Operating income should not be viewed as a substitute for net income determined in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). . As set forth in the above table, the Company's underwriting profit Underwriting profit is a term used in the insurance industry. It consists of the earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investment income earned on held premiums. , on a GAAP basis, was $40.1 million for the 2003 first quarter, compared to $3.8 million for the 2002 first quarter. The Company's combined ratio, on a GAAP basis, was 90.6% for the 2003 first quarter, compared to 94.3% for the 2002 first quarter. The Company's loss ratio was 65.1% for the 2003 first quarter, compared to 74.8% for the 2002 first quarter. A significant portion of the decrease was due to the higher percentage of reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. segment net premiums earned in 2003 relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share. In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. contracts. In addition, during the 2003 first quarter, the Company recorded lower loss ratios on business that is primarily exposed to catastrophic events based on a lower than expected level of such events. In establishing the reserves for losses and loss adjustment expenses, the Company has made various assumptions relating to the pricing of its reinsurance contracts and insurance policies and also has considered available historical industry experience and current industry conditions. The Company's reserving method is primarily the expected loss method, which is commonly applied when limited loss experience exists. Any estimates and assumptions made as part of the reserving process could prove to be inaccurate due to several factors, including the fact that very limited historical information has been reported to the Company through March 31, 2003. The total expense ratio of the Company's operating units operating unit A type of operating company that engages in transactions with outsiders and that is owned by another business. For example, in 1995 the stockholders of Capital Cities/ABC approved a $19 billion merger with the Walt Disney Company, whereupon , on a GAAP basis, which includes acquisition expenses and other operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. , was 25.5% for the 2003 first quarter and 19.5% for the 2002 first quarter. The Company's acquisition expense ratio, which is reflected net of certain policy-related fee income, was 18.5% and 9.1% for the 2003 first quarter and 2002 first quarter, respectively. A significant part of the increase was due to the higher percentage of reinsurance segment net premiums earned in 2003 relating to pro rata contracts. The other operating expense Operating Expense The essential things that a company must purchase in order to maintain business. Notes: For example, the payment of employees wages are an operating expense. Also known as OPEX. ratio was 7.0% and 10.4% for the 2003 first quarter and the 2002 first quarter, respectively. While aggregate other operating expenses were higher for the 2003 first quarter compared to the 2002 first quarter, the other operating expense ratio decreased primarily due to the significant growth in net premiums earned. The Company's underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. results for the 2003 first quarter reflect the significant growth achieved by the Company's reinsurance segment over the past fifteen months as well as the expansion of the insurance segment into additional lines of business, which occurred primarily during the second half of 2002. Results for the 2002 first quarter were primarily related to the Company's reinsurance segment. The Company's reinsurance and insurance segments, respectively, provided 70.5% and 29.5% of net premiums written for the 2003 first quarter, compared to 94.4% and 5.6% of net premiums written for the 2002 first quarter. In addition, the results of the Company's reinsurance segment are influenced by the amount of business written on a pro rata basis compared to business written on an excess of loss basis. Typically, pro rata business is written at lower loss ratios and higher acquisition expense ratios than excess of loss business. For the 2003 first quarter, 64.6% of the reinsurance segment's net premiums earned were generated from pro rata contracts, compared to 20.6% for the 2002 first quarter. Net investment income for the 2003 first quarter was $18.4 million, compared to $9.2 million for the 2002 first quarter. The growth in net investment income was due to a significant increase in the Company's invested assets primarily resulting from cash flow provided by operating activities during 2002 and 2003. Consolidated cash flow provided by operating activities for the 2003 first quarter was $300.5 million, compared to $48.3 million for the 2002 first quarter. The Company's investment portfolio primarily consists of high quality fixed income securities, which had an average Standard & Poor's quality rating of "AA-" and an average duration of 2.5 years at March 31, 2003. The Company's effective tax rate fluctuates from year to year consistent with the relative mix of income reported by jurisdiction due primarily to the varying tax rates in each jurisdiction. The Company's tax provision for the 2003 first quarter is based upon the expected annual effective tax rates on net income and operating income of 13.0% and 12.5%, respectively. Non-cash compensation results primarily from restricted shares granted in connection with the Company's capital infusion Capital infusion Often refers to the cross-subsidization of divisions within a firm. When one division is not doing well, it might benefit from an infusion of new funds from the more successful divisions. in 2001 and its underwriting initiative. After-tax non-cash compensation expense for the 2003 first quarter was $4.1 million, compared to $3.7 million for the 2002 first quarter. Absent significant additional restricted share grants, after-tax non-cash compensation expense during the remaining three quarters of 2003 is currently expected to be approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $3.3 million, $3.3 million, and $2.5 million, respectively. The increase in diluted average shares outstanding in the 2003 first quarter compared to the 2002 first quarter is primarily due to the effect of the issuance of (i) 7,475,000 common shares in the stock offering completed by the Company in April 2002, (ii) 3,706,930 preference shares issued in 2002 pursuant to post-closing purchase price adjustments to investors who provided the Company's November November: see month. 2001 capital infusion and (iii) 3,748,946 common shares upon the exercise of warrants from August to September September: see month. 2002. The following table summarizes selected underwriting results by segment, including combined ratios on a GAAP and statutory basis (amounts in thousands):
(Unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
--------- ---------
REINSURANCE SEGMENT
Gross premiums written $562,661 $264,861
Net premiums written 547,436 264,861
Net premiums earned 265,947 55,533
Underwriting income - GAAP basis 33,174 3,849
Combined Ratio:
Statutory Basis 84.4% 88.8%
GAAP Basis 88.2% 93.1%
INSURANCE SEGMENT
Gross premiums written $297,439 $ 39,934
Net premiums written 229,427 15,849
Net premiums earned 138,504 11,994
Underwriting income - GAAP basis 6,929 (24)
Combined Ratio:
Statutory Basis 93.8% 94.5%
GAAP Basis 94.9% 100.2%
TOTAL
Gross premiums written $860,100 $304,795
Net premiums written 776,863 280,710
Net premiums earned 404,451 67,527
Underwriting income - GAAP basis 40,103 3,825
Combined Ratio:
Statutory Basis 87.7% 90.0%
GAAP Basis 90.6% 94.3%
Gross and net premiums written for the Company's reinsurance segment were $562.7 million and $547.4 million, respectively, for the 2003 first quarter, compared to gross and net premiums written of $264.9 million for the 2002 first quarter. For the 2003 first quarter, 57.0% of net premiums written were generated from pro rata contracts and 43.0% were generated from excess of loss treaties. For the 2002 first quarter, 29.8% of net premiums written were generated from pro rata contracts and 70.2% were derived de·rive v. de·rived, de·riv·ing, de·rives v.tr. 1. To obtain or receive from a source. 2. from excess of loss treaties. The Company's reinsurance subsidiaries have entered into reinsurance treaties Reinsurance Treaty (June 18, 1887) Secret agreement between Germany and Russia. Arranged by Otto von Bismarck after the collapse of the Three Emperors' League, it provided that each party would remain neutral if either became involved in a war with a third nation, and that and other reinsurance arrangements during the 2003 first quarter that are expected to provide approximately $854 million of annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. net reinsurance premiums, compared to $506 million in annualized net reinsurance premiums for the 2002 first quarter. The quarterly net premiums written for reinsurance operations differ from the annualized net reinsurance premiums due to the timing of recording premiums for contracts written on an excess of loss and pro rata basis. For excess of loss contracts, the minimum premium, as defined in the contract, is generally recorded as an estimate of premiums written as of the date of the treaty. Estimates of premiums written under pro rata contracts are recorded in the period in which the underlying risks are expected to incept in·cept tr.v. in·cept·ed, in·cept·ing, in·cepts To take in; ingest. [Latin incipere, incept-, to begin, take up; see inception. and are based on information provided by the brokers and the ceding cede tr.v. ced·ed, ced·ing, cedes 1. To surrender possession of, especially by treaty. See Synonyms at relinquish. 2. companies. The reinsurance segment's underwriting income Underwriting income For an insurance company, the difference between the premiums earned and the costs of settling claims. , on a GAAP basis, was $33.2 million for the 2003 first quarter, compared to $3.8 million for the 2002 first quarter. The combined ratio for the reinsurance segment, on a GAAP basis, was 88.2% for the 2003 first quarter, compared to 93.1% for the 2002 first quarter. The loss ratio for the 2003 first quarter was 61.6%, compared to 73.7% for the 2002 first quarter. The acquisition expense ratio for the 2003 first quarter was 24.3%, compared to 13.1% for the 2002 first quarter, while the other operating expense ratio for the 2003 first quarter was 2.3%, compared to 6.3% for the 2002 first quarter. The decrease in the loss ratio and the increase in the acquisition expense ratio in the 2003 first quarter compared to the 2002 first quarter were due, in part, to the increased percentage of net premiums earned from pro rata contracts. Gross and net premiums written for the Company's insurance segment were $297.4 million and $229.4 million, respectively, for the 2003 first quarter, compared to gross and net premiums written of $39.9 million and $15.8 million, respectively, for the 2002 first quarter. During 2002, the Company's insurance segment established new profit centers in various specialty A contract under seal. A specialty is a written document that has been sealed and delivered and is given as security for the payment of a specifically indicated debt. lines and began writing business in its new areas of focus in the 2002 second quarter. In addition, the insurance segment added a number of new programs during 2002. Accordingly, premiums written by the insurance segment for the 2003 first quarter are significantly higher than the 2002 first quarter. The insurance segment's underwriting income, on a GAAP basis, was $6.9 million for the 2003 first quarter, compared to an underwriting loss of $24,000 for the 2002 first quarter. The combined ratio for the insurance segment, on a GAAP basis, was 94.9% for the 2003 first quarter, compared to 100.2% for the 2002 first quarter. The loss ratio for the 2003 first quarter was 71.6%, compared to 80.3% for the 2002 first quarter. The decrease in the insurance segment's loss ratio primarily resulted from the increased contribution of business from its new areas of focus. The acquisition expense ratio for the 2003 first quarter, which is reflected net of policy-related fee income, was 7.4%, compared to (9.3%) for the 2002 first quarter. The other operating expense ratio for the 2003 first quarter was 15.9%, compared to 29.2% for the 2002 first quarter, reflecting the significant growth in net premiums earned in 2003. At March 31, 2003 and December December: see month. 31, 2002, the Company's consolidated shareholders' equity Shareholders' Equity A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares. was approximately $1.5 billion, or $22.16 per diluted share, and approximately $1.4 billion, or $21.20 per diluted share, respectively. The increase in diluted per share book value was primarily attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to the Company's operating income in the 2003 first quarter and an increase in unrealized appreciation of investments. The calculation of the Company's book value per share amounts is included in the accompanying ac·com·pa·ny v. ac·com·pa·nied, ac·com·pa·ny·ing, ac·com·pa·nies v.tr. 1. To be or go with as a companion. 2. supplemental financial information. The Company will hold a conference call for investors and analysts at 9:30 a.m. Eastern Time on May 13, 2003. A live webcast of this call will be available at http://www.vcall.com/EventPage.asp?ID=83746 and will be archived on VCall's website from 12:00 p.m. Eastern Time on May 13, 2003 through midnight Eastern Time on June June: see month. 13, 2003. A telephone replay of the conference call also will be available beginning on May 13, 2003 at 12:00 p.m. Eastern Time until May 16, 2003 at midnight Eastern Time. To access the replay, domestic callers should dial 877-660-6853 (account 1628, confirmation number 64287), and international callers should dial 201-612-7415 (account 1628, confirmation number 64287). Arch Capital Group Ltd., a Bermuda-based company with approximately $1.5 billion in equity capital, provides insurance and reinsurance on a worldwide basis through its wholly owned subsidiaries Wholly Owned Subsidiary A subsidiary whose parent company owns 100% of its common stock. Notes: In other words, the parent company owns the company outright and there are no minority owners. . Cautionary Note Regarding Forward-Looking Statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. The Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995 provides a "safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. " for forward-looking statements. This release or any other written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company's current views with respect to future events and financial performance. All statements other than statements of historical fact included in this release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking for·ward-look·ing adj. Concerned with or making provision for the future: forward-looking educators; a forward-looking corporate plan. Adj. 1. terminology The terminology used in the computer and telecommunications field adds tremendous confusion not only for the lay person, but for the technicians themselves. What many do not realize is that terms are made up by anybody and everybody in a nonchalant, casual manner without any regard or such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology. Forward-looking statements involve the Company's current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied Inferred from circumstances; known indirectly. In its legal application, the term implied is used in contrast with express, where the intention regarding the subject matter is explicitly and directly indicated. in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this release and in the Company's periodic reports filed with the Securities and Exchange Commission, and include: -- the Company's ability to successfully implement its business strategy; -- acceptance of the Company's products and services and security by brokers and insureds; -- acceptance of the Company's business strategy, security and financial condition by rating agencies and regulators; -- general economic and market conditions (including inflation, interest rates and foreign currency exchange rates) and conditions specific to the reinsurance and insurance markets in which the Company operates; -- competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors; -- the Company's ability to successfully integrate new management and operating personnel and to establish and maintain operating procedures to effectively support its new underwriting initiatives and to develop accurate actuarial ac·tu·ar·y n. pl. ac·tu·ar·ies A statistician who computes insurance risks and premiums. [Latin data and develop and implement actuarial models and procedures; -- the loss of key personnel; -- the integration of businesses the Company has acquired or may acquire into its existing operations; -- greater than expected loss ratios on business written by the Company and adverse development on reserves for losses and loss adjustment expenses related to business written by its insurance and reinsurance subsidiaries; -- severity and/or and/or conj. Used to indicate that either or both of the items connected by it are involved. Usage Note: And/or is widely used in legal and business writing. frequency of losses; -- claims for natural or man-made man-made or man·made adj. Made by humans rather than occurring in nature; synthetic: man-made fibers; a manmade lake. See Usage Note at man. catastrophic events in the Company's insurance or reinsurance business could cause large losses and substantial volatility Volatility 1. A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time. 2. A variable in option pricing formulas that denotes the extent to which the return of the underlying asset will fluctuate between now and the in the Company's results of operations; -- acts of terrorism terrorism, the threat or use of violence, often against the civilian population, to achieve political or social ends, to intimidate opponents, or to publicize grievances. , political unrest Unrest is a sociological phenomenon, for instance:
n. pl. hos·til·i·ties 1. The state of being hostile; antagonism or enmity. See Synonyms at enmity. 2. a. A hostile act. b. hostilities Acts of war; overt warfare. or other unforecasted and unpredictable events An Unpredictable Event is an event in which the predictability cannot be measured. An unpredictable event is usually an unfavorable event, because people tend not to plan an unfavorable event. Its result, most likely, affects many lives. ; -- losses relating to aviation business and business produced by a certain managing underwriting agency for which the Company may be liable liable adj. responsible or obligated. Thus, a person or entity may be liable for damages due to negligence, liable to pay a debt, liable to perform an act for which he/she/it contracted to do, or liable to punishment for commission of a crime. to the purchaser of its prior reinsurance business or to others in connection with the May 5, 2000 asset sale; -- availability to the Company of reinsurance to manage its gross and net exposures and the cost of such reinsurance; -- the failure of reinsurers, managing general agents or others to meet their obligations to the Company; -- the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company; -- changes in accounting principles or the application of such principles by accounting firms or regulators; -- statutory or regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. developments, including as to tax policy and matters and insurance and other regulatory matters (such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers); and -- rating agency policies and practices. In addition, other general factors could affect the Company's results, including: (a) developments in the world's financial and capital markets and the Company's access to such markets; (b) changes in regulation or tax laws applicable to the Company, its subsidiaries, brokers or customers; and (c) the effects of business disruption disruption /dis·rup·tion/ (dis-rup´shun) a morphologic defect resulting from the extrinsic breakdown of, or interference with, a developmental process. or economic contraction An economic contraction is a reduction in goods and services for sale in the market place. Typically it relates to a downturn in production caused by external factors such as weather or a decline in exports, or by such internal factors as taxes, regulatory constraints or other due to terrorism or other hostilities. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety The whole, in contradistinction to a moiety or part only. When land is conveyed to Husband and Wife, they do not take by moieties, but both are seised of the entirety. by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction conjunction, in astronomy conjunction, in astronomy, alignment of two celestial bodies as seen from the earth. Conjunction of the moon and the planets is often determined by reference to the sun. with other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(Unaudited)
Three Months Ended
March 31,
2003 2002
----------- -----------
Revenues
Net premiums written $776,863 $280,710
Increase in unearned premiums (372,412) (213,183)
----------- -----------
Net premiums earned 404,451 67,527
Net investment income 18,438 9,167
Net realized investment gains (losses) 6,199 (1,465)
Fee income 5,676 2,755
Other income 1,139 798
----------- -----------
Total revenues 435,903 78,782
Expenses
Losses and loss adjustment expenses 263,128 50,539
Acquisition expenses, net 78,152 7,311
Other operating expenses 31,080 12,505
Net foreign exchange (gains) losses (1,050) 108
Non-cash compensation 4,264 4,128
----------- -----------
Total expenses 375,574 74,591
Income Before Income Taxes 60,329 4,191
Income tax expense 7,843 225
----------- -----------
Net Income $52,486 $3,966
=========== ===========
Net Income Per Share Data
Basic $2.02 $0.30
Diluted $0.78 $0.08
Average Shares Outstanding
Basic 26,017,313 13,018,631
Diluted 66,939,562 51,996,949
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
March December
31, 31,
2003 2002
----------- -----------
Assets
Investments:
Fixed maturities available for sale, at fair
value (amortized cost: 2003, $1,976,678;
2002, $1,334,637) $2,030,876 $1,382,104
Short-term investments available for sale, at
fair value (amortized cost: 2003, $175,560;
2002, $480,541) 175,560 480,541
Privately held securities (cost: 2003,
$26,330; 2002, $31,630) 27,926 31,536
----------- -----------
Total investments 2,234,362 1,894,181
----------- -----------
Cash 88,882 91,717
Accrued investment income 20,506 17,127
Premiums receivable 573,329 343,716
Funds held by reinsureds 84,873 58,351
Unpaid losses and loss adjustment expenses
recoverable 236,899 211,100
Paid losses and loss adjustment expenses
recoverable 26,072 14,462
Prepaid reinsurance premiums 128,164 120,191
Goodwill 28,867 28,867
Deferred income tax asset 10,838 16,514
Deferred acquisition costs, net 221,331 148,960
Other assets 52,659 46,142
----------- -----------
Total Assets $3,706,782 $2,991,328
=========== ===========
Liabilities
Reserve for losses and loss adjustment expenses $836,056 $592,432
Unearned premiums 1,141,695 761,310
Reinsurance balances payable 70,826 89,191
Investment accounts payable 74,924 45,960
Other liabilities 102,683 91,191
----------- -----------
Total Liabilities 2,226,184 1,580,084
----------- -----------
Commitments and Contingencies
Shareholders' Equity
Preferred shares ($0.01 par value, 50,000,000
shares authorized, issued: 2003, 38,844,665;
2002, 38,844,665) 388 388
Common shares ($0.01 par value, 200,000,000
shares authorized, issued: 2003, 27,977,277;
2002, 27,725,334) 280 277
Additional paid-in capital 1,354,686 1,347,165
Deferred compensation under share award plan (24,188) (25,290)
Retained earnings 99,858 47,372
Accumulated other comprehensive income
consisting of unrealized appreciation in
value of investments, net of deferred
income tax 49,574 41,332
----------- -----------
Total Shareholders' Equity 1,480,598 1,411,244
----------- -----------
Total Liabilities and Shareholders' Equity $3,706,782 $2,991,328
=========== ===========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
Three Months Ended
March 31,
2003 2002
----------- -----------
Preference Shares
Balance at beginning of year $388 $357
----------- -----------
Balance at end of period 388 357
----------- -----------
Common Shares
Balance at beginning of year 277 135
Common shares issued 3 23
----------- -----------
Balance at end of period 280 158
----------- -----------
Additional Paid-in Capital
Balance at beginning of year 1,347,165 1,039,887
Common shares issued 7,147 60,963
Common shares retired (254) --
Stock options 628 80
----------- -----------
Balance at end of period 1,354,686 1,100,930
----------- -----------
Deferred Compensation Under Share Award Plan
Balance at beginning of year (25,290) (8,230)
Restricted common shares issued (2,696) (61,301)
Deferred compensation expense recognized 3,798 4,048
----------- -----------
Balance at end of period (24,188) (65,483)
----------- -----------
Retained Earnings (Deficit)
Balance at beginning of year 47,372 (11,610)
Net income 52,486 3,966
----------- -----------
Balance at end of period 99,858 (7,644)
----------- -----------
Accumulated Other Comprehensive Income
Unrealized Appreciation (Decline) in Value of
Investments,
Net of Deferred Income Tax
Balance at beginning of year 41,332 (170)
Change in unrealized appreciation (decline) 8,242 (7,991)
----------- -----------
Balance at end of period 49,574 (8,161)
----------- -----------
Total Shareholders' Equity $1,480,598 $1,020,157
=========== ===========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
Three Months
Ended
March 31,
2003 2002
-------- --------
Comprehensive Income (Loss)
Net income $52,486 $3,966
Other comprehensive income (loss), net of deferred
income tax
Unrealized appreciation (decline) in value of
investments:
Unrealized holding gains (losses) arising during
period 13,588 (9,152)
Reclassification of net realized (gains) losses
included in net income (5,346) 1,161
-------- --------
Other comprehensive income (loss) 8,242 (7,991)
-------- --------
Comprehensive Income (Loss) $60,728 ($4,025)
======== ========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
2003 2002
--------- ---------
Operating Activities
Net income $52,486 $3,966
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Net realized investment (gains) losses (6,199) 1,465
Provision for non-cash compensation 4,264 4,128
Net unrealized foreign exchange gains (595) --
Changes in:
Reserve for losses and loss adjustment
expenses, net of unpaid losses and loss
adjustment expenses recoverable 217,594 47,788
Unearned premiums, net of prepaid reinsurance
premiums 372,412 212,889
Premiums receivable (229,282) (183,323)
Deferred acquisition costs (72,371) (29,432)
Funds held by reinsureds (26,579) --
Reinsurance balances payable (18,365) (5,862)
Accrued investment income (3,379) (1,090)
Paid losses and loss adjustment expenses
recoverable (11,610) (4,216)
Deferred income tax asset 5,495 (359)
Other liabilities 13,547 2,408
Other items, net 3,052 (76)
--------- ---------
Net Cash Provided By Operating Activities 300,470 48,286
--------- ---------
Investing Activities
Purchases of fixed maturity investments (984,053) (315,446)
Release of escrowed assets -- (18,833)
Sales of fixed maturity investments 333,655 122,652
Sales of equity securities 7,121 232
Net sales of short-term investments 342,995 175,405
Acquisitions, net of cash -- (2,513)
Purchases of furniture, equipment and other (5,570) (752)
--------- ---------
Net Cash Used For Investing Activities (305,852) (39,255)
--------- ---------
Financing Activities
Proceeds from common shares issued 2,801 --
Repurchase of common shares (254) --
Debt retirement and other -- (24)
--------- ---------
Net Cash Provided By (Used For) Financing
Activities 2,547 (24)
--------- ---------
(Decrease) increase in cash (2,835) 9,007
Cash beginning of year 91,717 9,970
--------- ---------
Cash end of period $88,882 $18,977
========= =========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(in thousands except share data)
(Unaudited)
Three Months Ended
March 31,
Investment income yield (at amortized cost) 2003 2002
----------- --------
Pre-tax 3.5% 3.6%
After-tax 3.1% 3.2%
(Unaudited)
March December
31, 31,
Fixed Maturities and Short-term Investments 2003 2002
----------- --------
Average duration (in years) 2.5 2.1
Average credit quality (Standard & Poors) AA- AA-
(Unaudited)
Three Months Ended
March 31,
2003 2002
----------- --------
Annualized operating return on
beginning equity(1) 13.9% 3.3%
(1) Annualized operating return on beginning equity, a non-GAAP
measure, equals operating income divided by shareholders' equity
as of the beginning of the year.
Segment Information The determination of the Company's business segments is based on the manner in which the Company monitors the performance of its underwriting operations. The Company classifies its businesses into two underwriting segments - reinsurance and insurance - and a corporate and other segment (non-underwriting). The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment. In addition, other revenue and expense items are not evaluated by segment. Management measures segment performance based on underwriting income or loss. The accounting policies of the segments are the same as those used for the preparation of our consolidated financial statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge . Inter-segment insurance business is allocated to the segment accountable for the underwriting results in accordance with SFAS SFAS Statement of Financial Accounting Standards SFAS Special Forces Assessment and Selection SFAS Student Financial Aid Services SFAS Sport Fishing Association of Singapore SFAS Safety Features Actuation System SFAS Statewide Fixed Assets System No. 131, "Disclosures about Segments of an Enterprise and Related Information." The reinsurance segment consists of the Company's reinsurance underwriting subsidiaries. The reinsurance segment generally seeks to write significant lines on specialty property and casualty reinsurance treaties. Classes of business focused on include casualty, other specialty, property excluding property catastrophe Catastrophe, from the Greek Καταστροφή (katastrephein), literally means "to turn" (strephein) "downwards" (kata-). (losses on a single risk, both excess of loss and pro rata), property catastrophe, marine, aviation and space, non-traditional and casualty clash. The insurance segment consists of the Company's insurance underwriting subsidiaries which primarily write on a direct basis. The insurance segment consists of eight profit centers, including casualty, programs, property, executive assurance, healthcare, professional liability, construction and surety An individual who undertakes an obligation to pay a sum of money or to perform some duty or promise for another in the event that person fails to act. surety n. and other (primarily non-standard auto and collateralized protection business). The corporate and other segment (non-underwriting) includes net investment income, other fee income and other expenses incurred by the Company, net realized investment gains or losses, net foreign exchange gains or losses and non-cash compensation. The corporate and other segment also includes the results of the Company's merchant banking operations. The following tables set forth (i) underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income and (ii) net premiums written and earned for each major line of business and net premiums written by client location by segment. Certain prior period information has been reclassified to conform to Verb 1. conform to - satisfy a condition or restriction; "Does this paper meet the requirements for the degree?" fit, meet coordinate - be co-ordinated; "These activities coordinate well" the current presentation.
(Unaudited)
Three Months Ended
March 31, 2003
-------------------------------
(in thousands) Reinsurance Insurance Total
----------- --------- ---------
Gross premiums written $562,661 $297,439 $860,100
Net premiums written 547,436 229,427 776,863
Net premiums earned $265,947 $138,504 $404,451
Policy-related fee income -- 3,213 3,213
Other underwriting-related fee income 1,927 -- 1,927
Losses and loss adjustment expenses (163,915) (99,213) (263,128)
Acquisition expenses, net (64,666) (13,486) (78,152)
Other operating expenses (6,119) (22,089) (28,208)
----------- --------- ---------
GAAP underwriting income $ 33,174 $ 6,929 40,103
=========== =========
Net investment income 18,438
Other fee income, net of related
expenses 536
Other expenses (2,872)
---------
Pre-tax operating income 56,205
Income tax expense (7,027)
---------
After-tax operating income 49,178
Net realized investment gains, net of
$853 tax expense 5,346
Net foreign exchange gains, net of $0
tax expense 1,050
Other income, net of $168 tax expense 971
Non-cash compensation, net of $205 tax
benefit (4,059)
---------
Net income $ 52,486
=========
Diluted Per Share Results
Operating income $0.73
Net realized investment gains 0.08
Net foreign exchange gains 0.02
Other income 0.01
Non-cash compensation (0.06)
---------
Net income per share $0.78
=========
Statutory Basis (1)
Loss ratio 61.6% 71.6% 65.1%
Acquisition expense ratio (2) 21.2% 10.6% 18.1%
Other operating expense ratio 1.6% 11.6% 4.5%
----------- --------- ---------
Combined ratio 84.4% 93.8% 87.7%
----------- --------- ---------
GAAP Basis (1)
Loss ratio 61.6% 71.6% 65.1%
Acquisition expense ratio (2) 24.3% 7.4% 18.5%
Other operating expense ratio 2.3% 15.9% 7.0%
----------- --------- ---------
Combined ratio 88.2% 94.9% 90.6%
----------- --------- ---------
(1) The loss ratios for statutory and GAAP are based on earned
premiums. The statutory expense ratios are based on net premiums
written, while the GAAP expense ratios are based on net premiums
earned.
(2) The acquisition expense ratio is adjusted to include
policy-related fee income.
(Unaudited)
Three Months Ended
March 31, 2002
-------------------------------
(in thousands) Reinsurance Insurance Total
----------- --------- ---------
Gross premiums written $264,861 $39,934 $304,795
Net premiums written 264,861 15,849 280,710
Net premiums earned $ 55,533 $11,994 $ 67,527
Policy-related fee income -- 1,168 1,168
Losses and loss adjustment expenses (40,904) (9,635) (50,539)
Acquisition expenses, net (7,262) (49) (7,311)
Other operating expenses (3,518) (3,502) (7,020)
----------- --------- ---------
GAAP underwriting income $3,849 ($24) 3,825
=========== =========
Net investment income 9,167
Other fee income, net of related
expenses (612)
Other expenses (3,286)
---------
Pre-tax operating income 9,094
Income tax expense (726)
---------
After-tax operating income 8,368
Net realized investment losses, net of
$304 tax benefit (1,161)
Net foreign exchange losses, net of $0
tax benefit (108)
Other income, net of $258 tax expense 540
Non-cash compensation, net of $455 tax
benefit (3,673)
---------
Net income $ 3,966
=========
Diluted Per Share Results
Operating income $0.16
Net realized investment losses (0.02)
Net foreign exchange losses 0.00
Other income 0.01
Non-cash compensation (0.07)
---------
Net income per share $0.08
=========
Statutory Basis (1)
Loss ratio 73.7% 80.3% 74.8%
Acquisition expense ratio (2) 13.0% (13.3%) 11.6%
Other operating expense ratio 2.1% 27.5% 3.6%
----------- --------- ---------
Combined ratio 88.8% 94.5% 90.0%
----------- --------- ---------
GAAP Basis (1)
Loss ratio 73.7% 80.3% 74.8%
Acquisition expense ratio (2) 13.1% (9.3%) 9.1%
Other operating expense ratio 6.3% 29.2% 10.4%
----------- --------- ---------
Combined ratio 93.1% 100.2% 94.3%
----------- --------- ---------
(1) The loss ratios for statutory and GAAP are based on earned
premiums. The statutory expense ratios are based on net premiums
written, while the GAAP expense ratios are based on net premiums
earned.
(2) The acquisition expense ratio is adjusted to include
policy-related fee income.
(Unaudited)
Three Months Ended
March 31,
2003 2002
---------------- ----------------
REINSURANCE SEGMENT % of % of
(in thousands) Amount Total Amount Total
--------- ------ --------- ------
Major line of business:
Net premiums written
Casualty $163,960 30.0% $40,740 15.4%
Other specialty 136,015 24.8% 30,255 11.4%
Property excluding property
catastrophe 112,600 20.6% 42,672 16.1%
Property catastrophe 48,773 8.9% 50,715 19.1%
Non-traditional 47,635 8.7% 70,370 26.6%
Marine, aviation and space 31,421 5.7% 18,959 7.2%
Casualty clash 7,032 1.3% 11,150 4.2%
--------- ------ --------- ------
Total $547,436 100.0% $264,861 100.0%
========= ====== ========= ======
Net premiums earned
Casualty $ 78,507 29.5% $ 6,516 11.7%
Property excluding property
catastrophe 61,067 23.0% 7,830 14.1%
Other specialty 57,672 21.7% 7,482 13.5%
Property catastrophe 27,611 10.4% 11,932 21.5%
Non-traditional 22,028 8.3% 14,950 26.9%
Marine, aviation and space 15,582 5.8% 4,020 7.2%
Casualty clash 3,480 1.3% 2,803 5.1%
--------- ------ --------- ------
Total $265,947 100.0% $55,533 100.0%
========= ====== ========= ======
Client location:
Net premiums written
United States $328,888 60.1% $111,747 42.2%
United Kingdom 109,498 20.0% 78,383 29.6%
Bermuda 34,324 6.3% 12,324 4.7%
France 19,431 3.5% 15,341 5.8%
Canada 16,176 2.9% 7,931 3.0%
Germany 13,727 2.5% 23,703 8.9%
Switzerland 4,281 0.8% 527 0.2%
Australia 3,245 0.6% 845 0.3%
Other 17,866 3.3% 14,060 5.3%
--------- ------ --------- ------
Total $547,436 100.0% $264,861 100.0%
========= ====== ========= ======
(Unaudited)
Three Months Ended
March 31,
2003 2002
---------------- ---------------
INSURANCE SEGMENT % of % of
(in thousands) Amount Total Amount Total
--------- ------ -------- ------
Major line of business:
Net premiums written
Programs $74,583 32.5% $2,267 14.3%
Casualty 49,335 21.5% -- --
Executive assurance 25,264 11.0% 1,912 12.1%
Professional liability 19,843 8.7% -- --
Construction and surety 19,710 8.6% -- --
Healthcare 16,264 7.1% -- --
Property 14,238 6.2% -- --
Other 10,190 4.4% 11,670 73.6%
--------- ------ -------- ------
Total $229,427 100.0% $15,849 100.0%
========= ====== ======== ======
Net premiums earned
Programs $43,629 31.5% $1,732 14.4%
Casualty 25,255 18.2% -- --
Executive assurance 16,274 11.8% 96 0.8%
Property 12,495 9.0% -- --
Construction and surety 9,829 7.1% -- --
Healthcare 8,813 6.4% -- --
Professional liability 8,375 6.0% -- --
Other 13,834 10.0% 10,166 84.8%
--------- ------ -------- ------
Total $138,504 100.0% $11,994 100.0%
========= ====== ======== ======
Client location:
Net premiums written
United States $228,328 99.5% $15,849 100.0%
Venezuela 341 0.2% -- --
Japan 209 0.1% -- --
Other 549 0.2% -- --
--------- ------ -------- ------
Total $229,427 100.0% $15,849 100.0%
========= ====== ======== ======
Calculation of Book Value Per Share The following actual book value per share calculations are based on shareholders' equity of approximately $1.5 billion and $1.4 billion at March 31, 2003 and December 31, 2002, respectively. Book value per share excludes the effects of stock options and Class B warrants.
(Unaudited)
March 31, 2003 December 31, 2002
---------------------- ----------------------
Common Common
Shares and Cumulative Shares and Cumulative
Potential Book Potential Book
Common Value Per Common Value Per
Shares Share Shares Share
----------- ---------- ----------- ----------
Common shares (1) 27,977,277 $23.76 27,725,334 $21.48
Series A convertible
preference shares 38,844,665 $22.16 38,844,665 $21.20
----------- -----------
Common shares and
potential common shares 66,821,942 66,569,999
=========== ===========
(1) Book value per common share at March 31, 2003 and December 31,
2002 was determined by dividing (i) the difference between total
shareholders' equity and the aggregate liquidation preference of
the Series A convertible preference shares of $815.7 million, by
(ii) the number of common shares outstanding. Restricted common
shares are included in the number of common shares outstanding as
if such shares were issued on the date of grant.
Pursuant to the subscription agreement entered in connection with the November 2001 capital infusion (the "Subscription Agreement"), a post-closing purchase price adjustment will be calculated in November 2003 (or such earlier date as agreed upon Adj. 1. agreed upon - constituted or contracted by stipulation or agreement; "stipulatory obligations" stipulatory noncontroversial, uncontroversial - not likely to arouse controversy by the Company and the investors thereunder) based on an adjustment basket basket filled with treats, representative of feast on Easter Sunday. [Folklore: Misc.] See : Easter . The adjustment basket will be equal to (1) the difference between value realized upon sale and the GAAP book value at the closing of the capital infusion (November 2001) (as adjusted based on a pre-determined growth rate) of agreed upon non-core businesses; plus (2) the difference between GAAP net book value of the Company's insurance balances attributable to the Company's core insurance operations with respect to any policy or contract written or having an effective date prior to November 20, 2001 at the time of the final adjustment and those balances at the closing; minus (3) reductions in book value arising from costs and expenses relating to the transaction provided under the Subscription Agreement, actual losses arising out of breach of representations under the Subscription Agreement and certain other costs and expenses. If the adjustment basket, which will be calculated by the Company's independent auditors Independent Auditor An external auditor with a certified public accounting designation that qualifies him or her to provide an auditor's report. Notes: These auditors aren't affiliated with the company being audited. , is less than zero, the Company will issue additional preference shares to the investors based on the decrease in value of the components of the adjustment basket. If the adjustment basket is greater than zero, the Company is allowed to use cash in an amount based on the increase in value of the components of the adjustment basket to repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. common shares (other than any common shares issued upon conversion of the preference shares or exercise of the Class A warrants). In addition, on the fourth anniversary of the closing, there will be a calculation of a further adjustment basket based on (1) liabilities owed to Folksamerica (if any) under the Asset Purchase Agreement, dated as of January January: see month. 10, 2000, between the Company and Folksamerica, and (2) specified spec·i·fy tr.v. spec·i·fied, spec·i·fy·ing, spec·i·fies 1. To state explicitly or in detail: specified the amount needed. 2. To include in a specification. 3. tax and ERISA See Employee Retirement Income Security Act. ERISA See Employee Retirement Income Security Act (ERISA). matters under the Subscription Agreement. |
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