Arch Capital Group Ltd. Reports 2004 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)--April 28, 2004 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 2004 first quarter was $87.5 million, or $1.26 per share, compared to $52.5 million, or $0.78 per share, for the 2003 first quarter. The Company's 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, including the effects of the Company's recent public offering of common shares, increased by 9.5% to $27.95 at March 31, 2004 from $25.52 at December December: see month. 31, 2003 (see "Calculation of Book Value Per Share" in the Supplemental Financial Information section of this release). Gross premiums written When a non-life insurance company closes a contract to provide insurance against loss, the revenues (premiums) expected to be received over the life of the contract are called gross premiums written. for the 2004 first quarter increased by 17.4% to $1.01 billion from $860.1 million for the 2003 first quarter, and the Company's combined ratio was 89.2% for the 2004 first quarter, compared to 90.6% for the 2003 first quarter. All per share amounts discussed in this release are on a diluted basis. 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 2004 first quarter of $86.8 million, or $1.26 per share, compared to $49.2 million, or $0.73 per share, for the 2003 first quarter. The Company's after-tax operating income represented a 20.3% return on beginning equity for the 2004 first quarter, compared to 13.9% for the 2003 first quarter. Operating income, a non-GAAP measure, 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, net of tax. See page 5 for a further discussion of operating income and Regulation G. The following table summarizes 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:
(Unaudited)
Three Months Ended
March 31,
(in thousands) 2004 2003
----------- ---------
Gross premiums written $1,009,788 $860,100
Net premiums written 883,588 776,863
Net premiums earned 707,826 404,451
Underwriting income 77,059 40,103
Combined ratio 89.2% 90.6%
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 to net income and related diluted per share results.
(Unaudited)
Three Months Ended
March 31,
(in thousands, except per share data) 2004 2003
----------- -----------
Operating income $86,810 $49,178
Net realized investment gains 7,698 5,346
Net foreign exchange (losses) gains (5,319) 1,050
Other income 677 971
Non-cash compensation (2,411) (4,059)
----------- -----------
Net income $87,455 $52,486
=========== ===========
Operating income $1.26 $0.73
Net realized investment gains 0.11 0.08
Net foreign exchange (losses) gains (0.08) 0.02
Other income 0.01 0.01
Non-cash compensation (0.04) (0.06)
----------- -----------
Net income $1.26 $0.78
=========== ===========
Diluted average shares outstanding 69,145,060 66,939,562
The combined ratio represents a measure of underwriting profitability, excluding investment income, and is the sum of the loss ratio and expense ratio. A combined ratio under 100% represents an 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. and a combined ratio over 100% represents an underwriting loss. The combined ratio of the Company's insurance and 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. subsidiaries for the 2004 first quarter consisted of a loss ratio of 60.7% and an underwriting expense ratio of 28.5%, compared to a loss ratio of 65.1% and an underwriting expense ratio of 25.5% for the 2003 first quarter. The loss ratio of 60.7% for the three months ended March 31, 2004 was comprised of 13.1 points of paid losses, 8.0 points related to reserves for reported losses and 39.6 points related to incurred but not reported Incurred but not reported (IBNR) is a term in common use in general insurance. When a policy of general insurance is written it will typically cover a 12 month period from inception of the policy. loss reserves. In establishing the reserves for losses and loss adjustment expenses, the Company has made various assumptions relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc the pricing of its reinsurance contracts and insurance policies and also has considered available historical industry experience and current industry conditions. The Company primarily uses the expected loss method of reserving, 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 limited historical information has been reported to the Company through March 31, 2004. For a discussion of changes in underwriting activities and a review of the Company's results by operating division, see "Segment Information" in the Supplemental Financial Information section of this release. Consolidated cash flow provided by operating activities for the 2004 first quarter was $397.0 million, compared to $300.5 million for the 2003 first quarter. The significant increase in cash flow was primarily due to the substantial growth in premiums written and collected and a low level of claim payments. Net investment income for the 2004 first quarter was $24.6 million, compared to $18.4 million for the 2003 first quarter. The growth in net investment income in the 2004 first quarter compared to the 2003 first quarter was due to a significant increase in the Company's invested assets, primarily resulting from cash flow provided by operating activities during 2003, which more than offset the effects of lower yields available in the financial markets. The Company's investment portfolio mainly consists of high quality fixed income securities, which had an average Standard & Poor's quality rating of "AA+" and an average duration of 2.3 years at March 31, 2004. For the 2004 and 2003 first quarters, the Company's effective tax rates on income before income taxes were 11.2% and 13.0%, respectively, and the effective tax rates on pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta operating income were 10.0% and 12.5% respectively. The reduction in the effective tax rates in the 2004 first quarter resulted from a change in the relative mix of income reported by jurisdiction. The Company's effective tax rates may fluctuate from period to period based on the relative mix of income reported by jurisdiction primarily due to the varying tax rates in each jurisdiction. For the remainder of 2004, the Company currently expects that its effective tax rate on pre-tax operating income will be in the range of 9% to 11%. Non-cash compensation expense for the 2004 first quarter was $2.6 million, compared to $4.3 million for the 2003 first quarter. Absent significant additional restricted share grants, non-cash compensation expense is currently expected to be approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $2.5 million, $2.4 million and $1.5 million during the remaining three quarters of 2004, respectively. The United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. dollar is the functional currency for all of the Company's business. Net foreign exchange losses for the 2004 first quarter of $5,319,000 consisted of net unrealized losses Unrealized Loss A loss that results from holding onto an asset rather than cashing it in and officially taking the loss. Notes: Let's say you own a stock that is down 50%, but you haven't sold it to realize the loss yet. This is said to be an unrealized loss. of $5,509,000 and net realized gains Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. of $190,000. Net foreign exchange gains for the 2003 first quarter of $1,050,000 consisted of net unrealized gains Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. of $595,000 and net realized gains of $455,000. In late March 2004, the Company issued 4,688,750 common shares and received net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). of approximately $179 million. The offering proceeds will be used to support the growth of the Company's insurance and reinsurance divisions and for other corporate purposes. In addition, the Company has announced that it has commenced the marketing of a public offering of $300 million principal amount of its senior notes. The Company expects to use the net proceeds from the sale of the notes to repay all amounts outstanding under its existing revolving credit Revolving Credit A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customers current cash flow needs. facility and to support the underwriting activities of its insurance and reinsurance divisions and for other corporate purposes. Diluted weighted average shares outstanding, which is used in the calculation of operating income and net income per share, increased by 2.2 million shares, or 3.3%, from the 2003 first quarter to the 2004 first quarter. A majority of the increase in diluted weighted average shares outstanding was due to increases in the dilutive effects Dilutive effect Result of a transaction that decreases earnings per common share (EPS). of stock options and nonvested restricted stock calculated using the treasury stock method. Under such method, the dilutive impact of options and nonvested stock on diluted weighted average shares outstanding increases as the market price of the Company's common shares increases. The remainder of the increase primarily resulted from the weighted average impact of additional shares issued in the Company's recent stock offering and through the exercise of stock options during 2003 and 2004. In addition, the vesting Vesting The process by which employees accrue non-forfeitable rights over employer contributions that are made to the employee's qualified retirement plan account. Notes: of restricted shares also contributed to the increase in average shares outstanding. The shares issued in the recent stock offering will be fully reflected in the 2004 second quarter diluted weighted average shares outstanding. At March 31, 2004, the Company's capital of $2.21 billion consisted of revolving credit facility borrowings of $200.0 million, representing 9.0% of the total, and 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. of $2.01 billion, representing 91.0% of the total. The increase in the Company's capital of approximately $300 million during 2004 was primarily attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to the effects of the recent stock offering and net income for the 2004 first quarter. The Company will hold a conference call for investors and analysts at 10:00 a.m. Eastern Time on April 29, 2004. A live webcast of this call will be available via the Media-Earnings Webcasts section of the Company's website at http://www.archcapgroup.bm and will be archived on the website from 12:00 p.m. Eastern Time on April 29 through midnight Eastern Time on May 29, 2004. A telephone replay of the conference call also will be available beginning on April 29 at 12:00 p.m. Eastern Time until May 6 at midnight Eastern Time. To access the replay, domestic callers should dial 888-286-8010 (passcode 19849112), and international callers should dial 617-801-6888 (passcode 19849112). Arch Capital Group Ltd., a Bermuda-based company with over $2.2 billion in 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 during "soft" as well as "hard" markets; -- acceptance of the Company's business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and the Company's insureds and reinsureds; -- the Company's ability to maintain or improve its ratings, which may be affected by the Company's ability to raise additional equity or debt financings Debt Financing When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay , as well as other factors described herein; -- 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 (including the implementation of improved computerized computerized adapted for analysis, storage and retrieval on a computer. computerized axial tomography see computed tomography. systems and programs to replace and support manual systems) to effectively support its 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, especially in the light of the rapid growth of the Company's business; -- the loss of key personnel; -- the integration of businesses the Company has acquired or may acquire into its existing operations; -- accuracy of those estimates and judgments utilized in the preparation of the Company's financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets Intangible Asset An asset that is not physical in nature. Notes: Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. , bad debts, income taxes, contingencies Contingencies (ISSN 1048-9851) is the bimonthly magazine of the American Academy of Actuaries, providing a large and diverse readership with general interest and technical articles on a wide range of issues related to the actuarial profession. and litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. , for a relatively new insurance and reinsurance company, like the Company, are even more difficult to make than those made in a mature company since very limited historical information has been reported to the Company through March 31, 2004; -- greater than expected loss ratios on business written by the Company and adverse development on claim 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. claim expense liabilities related to business written by the Company's insurance and reinsurance subsidiaries; -- severity and/or 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 the Company's prior reinsurance business or to others in connection with the May 5, 2000 asset sale described in the Company's periodic reports filed with the SEC; -- 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. Comment on Regulation G Throughout this release, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company's financial information in evaluating the performance of the Company. This presentation includes the use of operating income, which 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, net of tax. The Company believes that net realized investment gains or losses, net foreign exchange gains or losses, other income and non-cash compensation for any particular period are not indicative indicative: see mood. of the performance of, or trends in, the Company's business performance. This presentation is a "non-GAAP financial measure" as defined in Regulation G. The reconciliation of such measure to net income (the most directly comparable GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). financial measure) 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 Regulation G is included on page 2 of this release. Although net realized investment gains or losses and net foreign exchange gains or losses are an integral part of the Company's operations, the decision to realize investment gains or losses and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company's financial information believe that, for many companies, the timing of the realization (specification) realization - A UML semantic relationship between a classifier that specifies a contract and another classifier that guarantees to carry it out. [Handout by Mr. David Gillibrand]. of investment gains or losses is largely opportunistic opportunistic /op·por·tu·nis·tic/ (op?er-tldbomacn-is´tik) 1. denoting a microorganism which does not ordinarily cause disease but becomes pathogenic under certain circumstances. 2. , and, under applicable GAAP accounting, losses on the Company's investments can be realized as the result of other-than-temporary declines in value without actual realization. Due to these reasons, the Company excludes net realized investment gains or losses and net foreign exchange gains or losses from the calculation of operating income. Other income is generated by certain of the Company's privately held securities which are accounted for under the equity method of accounting. The Company records a proportionate pro·por·tion·ate adj. Being in due proportion; proportional. tr.v. pro·por·tion·at·ed, pro·por·tion·at·ing, pro·por·tion·ates To make proportionate. share of the investee company's net income or loss based on its ownership percentage in such investment. As this is a non-cash item which fluctuates based on the underlying results of the investee companies, the Company excludes other income from the calculation of operating income. With respect to non-cash compensation, since these charges, in large part, relate to the Company's capital raising activities during 2001 and the new underwriting initiative, the Company has excluded such charges from operating income. Non-cash compensation also does not have any impact on the Company's shareholders' equity. The Company believes that showing net income exclusive of the items referred to above reflects the underlying fundamentals of the Company's business since the Company evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income, the Company believes that this presentation enables investors and other users of the Company's financial information to analyze an·a·lyze v. 1. To examine methodically by separating into parts and studying their interrelations. 2. To separate a chemical substance into its constituent elements to determine their nature or proportions. 3. the Company's performance in a manner similar to how the Company's management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company's financial information to compare the Company's performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies who follow the Company and the insurance industry as a whole exclude these items from their analyses for the same reasons.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(Unaudited)
Three Months Ended
March 31,
2004 2003
----------- -----------
Revenues
Net premiums written $883,588 $776,863
Increase in unearned premiums (175,762) (372,412)
----------- -----------
Net premiums earned 707,826 404,451
Net investment income 24,573 18,438
Net realized investment gains 8,901 6,199
Fee income 3,994 5,676
Other income 1,042 1,139
----------- -----------
Total revenues 746,336 435,903
Expenses
Losses and loss adjustment expenses 429,614 263,128
Acquisition expenses 152,856 78,152
Other operating expenses 57,467 31,080
Net foreign exchange losses (gains) 5,319 (1,050)
Non-cash compensation 2,638 4,264
----------- -----------
Total expenses 647,894 375,574
Income Before Income Taxes 98,442 60,329
Income tax expense 10,987 7,843
----------- -----------
Net Income $87,455 $52,486
=========== ===========
Net Income Per Share Data
Basic $3.21 $2.02
Diluted $1.26 $0.78
Weighted Average Shares Outstanding
Basic 27,277,998 26,017,313
Diluted 69,145,060 66,939,562
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
March 31, December 31,
2004 2003
----------- -----------
Assets
Investments:
Fixed maturities available for sale, at fair
value (amortized cost: 2004, $3,837,754;
2003, $3,363,193) $3,899,090 $3,398,424
Short-term investments available for sale, at
fair value (amortized cost: 2004, $358,538;
2003, $228,616) 358,845 229,348
Privately held securities (cost: 2004,
$20,854; 2003, $27,632) 27,262 32,476
----------- -----------
Total investments 4,285,197 3,660,248
----------- -----------
Cash 78,558 56,899
Accrued investment income 31,204 30,316
Premiums receivable 631,624 477,032
Funds held by reinsureds 232,751 211,944
Unpaid losses and loss adjustment expenses
recoverable 460,837 409,451
Paid losses and loss adjustment expenses
recoverable 25,262 18,549
Prepaid reinsurance premiums 232,923 236,061
Goodwill and intangible assets 35,882 35,882
Deferred income tax asset 32,600 33,979
Deferred acquisition costs, net 304,377 275,696
Other assets 158,655 139,264
----------- -----------
Total Assets $6,509,870 $5,585,321
=========== ===========
Liabilities
Reserve for losses and loss adjustment expenses$2,353,109 $1,951,967
Unearned premiums 1,576,765 1,402,998
Reinsurance balances payable 110,995 117,916
Revolving credit agreement borrowings 200,000 200,000
Investment accounts payable 45,707 --
Other liabilities 213,097 201,711
----------- -----------
Total Liabilities 4,499,673 3,874,592
----------- -----------
Commitments and Contingencies
Shareholders' Equity
Preferred shares ($0.01 par value, 50,000,000
shares authorized, issued: 2004, 38,364,972;
2003, 38,844,665) 384 388
Common shares ($0.01 par value, 200,000,000
shares authorized, issued: 2004, 33,552,344;
2003, 28,200,372) 336 282
Additional paid-in capital 1,547,407 1,361,267
Deferred compensation under share award plan (15,795) (15,004)
Retained earnings 415,418 327,963
Accumulated other comprehensive income
consisting of unrealized
appreciation in value of investments, net of
deferred income tax 62,447 35,833
----------- -----------
Total Shareholders' Equity 2,010,197 1,710,729
----------- -----------
Total Liabilities and Shareholders' Equity $6,509,870 $5,585,321
=========== ===========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
Three Months Ended
March 31,
2004 2003
----------- -----------
Preference Shares
Balance at beginning of year $388 $388
Converted to common shares (4) --
----------- -----------
Balance at end of period 384 388
----------- -----------
Common Shares
Balance at beginning of year 282 277
Common shares issued 50 3
Converted from preference shares 4 --
----------- -----------
Balance at end of period 336 280
----------- -----------
Additional Paid-in Capital
Balance at beginning of year 1,361,267 1,347,165
Common shares issued 184,483 3,586
Exercise of stock options 2,080 3,356
Common shares retired (551) (253)
Other 128 832
----------- -----------
Balance at end of period 1,547,407 1,354,686
----------- -----------
Deferred Compensation Under Share Award Plan
Balance at beginning of year (15,004) (25,290)
Restricted common shares issued (3,950) (2,696)
Deferred compensation expense recognized 3,159 3,798
----------- -----------
Balance at end of period (15,795) (24,188)
----------- -----------
Retained Earnings
Balance at beginning of year 327,963 47,372
Net income 87,455 52,486
----------- -----------
Balance at end of period 415,418 99,858
----------- -----------
Accumulated Other Comprehensive Income
Unrealized Appreciation in Value of
Investments,
Net of Deferred Income Tax
Balance at beginning of year 35,833 41,332
Change in unrealized appreciation 26,614 8,242
----------- -----------
Balance at end of period 62,447 49,574
----------- -----------
Total Shareholders' Equity $2,010,197 $1,480,598
=========== ===========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
Three Months Ended
March 31,
2004 2003
--------- --------
Comprehensive Income
Net income $87,455 $52,486
Other comprehensive income, net of deferred income
tax
Unrealized appreciation in value of investments:
Unrealized holding gains arising during year 33,686 13,588
Reclassification of net realized investment gains,
net of tax, included in net income (7,072) (5,346)
--------- --------
Other comprehensive income 26,614 8,242
--------- --------
Comprehensive Income $114,069 $60,728
========= ========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
2004 2003
----------- ---------
Operating Activities
Net income $87,455 $52,486
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized investment gains (8,275) (6,199)
Other income (1,042) (1,139)
Provision for non-cash compensation 2,638 4,264
Changes in:
Reserve for losses and loss adjustment
expenses, net of unpaid losses and loss
adjustment expenses recoverable 349,756 217,825
Unearned premiums, net of prepaid reinsurance
premiums 176,905 372,412
Premiums receivable (154,592) (229,613)
Deferred acquisition costs, net (28,681) (72,371)
Funds held by reinsureds (20,807) (26,522)
Reinsurance balances payable (6,921) (18,365)
Accrued investment income (888) (3,379)
Paid losses and loss adjustment expenses
recoverable (6,713) (11,610)
Deferred income tax asset 551 5,495
Other liabilities 12,975 13,547
Other items, net (5,358) 3,639
----------- ---------
Net Cash Provided By Operating Activities 397,003 300,470
----------- ---------
Investing Activities
Purchases of fixed maturity investments (1,388,771) (984,053)
Sales of fixed maturity investments 915,555 333,655
Sales of equity securities 7,557 7,121
Net (purchases) sales of short-term investments (84,568) 342,995
Purchases of furniture, equipment and other (6,114) (5,570)
----------- ---------
Net Cash Used For Investing Activities (556,341) (305,852)
----------- ---------
Financing Activities
Proceeds from common shares issued 181,548 2,801
Repurchase of common shares (551) (254)
----------- ---------
Net Cash Provided By Financing Activities 180,997 2,547
----------- ---------
Increase (decrease) in cash 21,659 (2,835)
Cash beginning of year 56,899 91,717
----------- ---------
Cash end of period $78,558 $88,882
=========== =========
Income taxes paid, net $73 $1,082
=========== =========
Interest paid $2,516 --
=========== =========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
The following table provides information on the Company's
investing activities, including investment income yield, average
duration and average credit quality.
(Unaudited)
Three Months Ended
March 31,
Investment income yield (at amortized cost) 2004 2003
----------- --------
Pre-tax 2.5% 3.5%
After-tax 2.3% 3.1%
(Unaudited)
March 31, December 31,
Fixed maturities and short-term investments 2004 2003
----------- --------
Average duration (in years) 2.3 2.0
Average credit quality (Standard & Poors) AA+ AA+
(Unaudited)
Three Months Ended
March 31,
2004 2003
----------- --------
Annualized operating return on
beginning equity (1) 20.3% 13.9%
(1) Annualized operating return on beginning equity, a non-GAAP
measure, equals annualized operating income divided by
shareholders' equity as of the beginning of the period. See
"Comment on Regulation G" above.
Segment Information The Company classifies its businesses into two underwriting segments - reinsurance and insurance - and a corporate and other segment (non-underwriting). The Company's reinsurance and insurance operating segments each have segment managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company's chief operating decision makers, the President and Chief Executive Officer of ACGL and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation resource allocation Managed care The constellation of activities and decisions which form the basis for prioritizing health care needs decisions on a line of business basis. The Company determined its reportable operating segments using the management approach described in 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." Management measures segment performance based on underwriting income Underwriting income For an insurance company, the difference between the premiums earned and the costs of settling claims. or loss. 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. The accounting policies of the segments are the same as those used for the preparation of the Company's 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. The reinsurance segment, or division, consists of the Company's reinsurance underwriting subsidiaries. The reinsurance segment generally seeks to write significant lines on 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. property and casualty 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 . Classes of business include casualty, casualty clash, marine and aviation, non-traditional, other specialty, property catastrophe Catastrophe, from the Greek Καταστροφή (katastrephein), literally means "to turn" (strephein) "downwards" (kata-). , and property excluding property catastrophe (losses on a single risk, both excess of loss and 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. ). The insurance segment, or division, consists of the Company's insurance underwriting subsidiaries which primarily write on a direct basis. The insurance segment consists of eight product lines, including casualty, 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. , executive assurance, healthcare, professional liability, programs, property, marine and aviation, and other (primarily non-standard auto, collateralized protection business and certain programs). The reinsurance division's underwriting income increased to $47.2 million for the 2004 first quarter, compared to $33.2 million for the 2003 first quarter. The increase in underwriting income in 2004 was primarily due to a significantly higher level of net premiums earned. The combined ratio for the reinsurance division was 87.8% for the 2004 first quarter, compared to 88.2% for the 2003 first quarter. Gross premiums written for the reinsurance division increased slightly to $565.7 million for the 2004 first quarter from $562.7 million for the 2003 first quarter as increases in casualty and U.S. regional property business were offset by reductions in writings in certain sectors in response to changes in market conditions and the non-renewal of two significant Lloyd's Lloyd's, London insurance underwriting corporation of many separate syndicates; often called Lloyd's of London. Founded in the late 17th cent. by a group of merchants, shipowners, and insurance brokers at the coffeehouse of Edward Lloyd, the association is now qualifying quota shares For This article is about quota shares (shares of the quota). For other usages of quota, see, see . A quota share is a specified number or percentage of the allotment as a whole (quota), that is prescribed to each individual entity (see Non-tariff barriers to trade). . Net premiums earned for the reinsurance division increased to $383.1 million for the 2004 first quarter, compared to $265.9 million for the 2003 first quarter. Approximately 63% of the increase in net premiums earned was attributable to casualty business. Net premiums earned reflect period to period changes in net premiums written, including the mix and type of business. The reinsurance division's loss ratio was 57.4% for the 2004 first quarter, compared to 61.6% for the 2003 first quarter. The 2004 first quarter results included losses of approximately $8.1 million, or 2.1 points of the loss ratio, from the Algerian natural gas plant explosion in January January: see month. 2004. The loss ratio for the 2004 first quarter benefited from estimated net favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. development in prior year reserves of $5.1 million, or a 1.3 point reduction in the loss ratio. Both the frequency and the severity of reported losses have been lower than the assumed pattern of losses established for property and other short-tail business at December 31, 2003, which, in turn, led to a decrease in the reinsurance division's expected loss ratio during the 2004 first quarter. In addition, primarily as a result of the commutation of two treaties, the reinsurance division experienced estimated favorable development in its non-traditional business of approximately $18.7 million, or a 4.9 point reduction in the loss ratio. Such development was substantially offset by additional profit commissions payable as a result of the commutations that increased acquisition expenses by $14.0 million, or 3.6 points of the acquisition expense ratio. As a result, the net effect from non-traditional business was $4.7 million of underwriting income in the 2004 first quarter, or a 1.3 point decrease in the reinsurance division's combined ratio. In 2002 and 2003, in its reserving process, the reinsurance division recognized that there is a possibility that the assumptions made could prove to be inaccurate due to several factors primarily related to the start up nature of its operations. Due to the availability of additional data, and based on reserve analyses, the reinsurance division determined that it was no longer necessary to continue to include such factors in the reserving process. This resulted in a decline of 2.7 points in the loss ratio from the 2003 first quarter to the 2004 first quarter. The remainder of the change in the loss ratio compared to the 2003 first quarter resulted from changes in the mix of business earned. The reinsurance division's acquisition expense ratio for the 2004 first quarter was 28.0%, compared to 24.3% for the 2003 first quarter. The increase was primarily due to additional profit commissions recorded in the reinsurance division's non-traditional business as discussed above. The insurance division's underwriting income was $29.9 million for the 2004 first quarter, compared to $6.9 million for the 2003 first quarter. The increase in the insurance division's underwriting profitability in 2004 was primarily due to a higher level of net premiums earned. In addition, the insurance division's combined ratio improved to 90.8% for the 2004 first quarter from 94.9% for the 2003 first quarter. Gross premiums written for the insurance division increased to $481.6 million for the 2004 first quarter, compared to $345.3 million for the 2003 first quarter. Net premiums written for the insurance division increased to $332.7 million for the 2004 first quarter, compared to $229.4 million for the 2003 first quarter. Gross and net premiums written in the 2004 first quarter were higher in most lines of business than in the 2003 first quarter as a result of the continued growth of the insurance division's market share. Net premiums earned for the insurance division increased to $324.8 million for the 2004 first quarter, compared to $138.5 million for the 2003 first quarter. The insurance division's loss ratio for the 2004 first quarter was 64.6%, compared to 71.6% for the 2003 first quarter. The loss ratio for the 2004 first quarter benefited from estimated net favorable development in prior year reserves in property and other short-tail business of $1.7 million, which reduced the insurance division's loss ratio by 0.5 points. The remainder of the decrease in the 2004 first quarter loss ratio compared to the 2003 first quarter primarily resulted from changes in the mix of business earned. The acquisition expense ratio for the insurance division is calculated net of certain policy-related fee income and is influenced by, among other things, (1) the amount of ceding cede tr.v. ced·ed, ced·ing, cedes 1. To surrender possession of, especially by treaty. See Synonyms at relinquish. 2. commissions received from unaffiliated reinsurers and (2) the amount of business written on a surplus lines (non-admitted) basis. The acquisition expense ratio was 12.9% for the 2004 first quarter (net of 1.2 points of policy-related fee income), compared to 7.4% for the 2003 first quarter (net of 2.3 points of policy-related fee income). The increase in the acquisition expense ratio primarily resulted from changes in the mix of business. The insurance division's 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 for the 2004 first quarter was 13.3%, compared to 15.9% for the 2003 first quarter. While aggregate 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. were significantly higher for the 2004 first quarter compared to the 2003 first quarter, the operating expense ratio of the insurance division decreased primarily due to the substantial growth in net premiums earned in the 2004 period. The following table sets forth underwriting income or loss by segment, together with a reconciliation of underwriting income to net income:
(Unaudited)
Three Months Ended
March 31, 2004
---------------------------------
(in thousands) Reinsurance Insurance Total
----------- --------- -----------
Gross premiums written (1) $565,739 $481,569 $1,009,788
Net premiums written 550,888 332,700 883,588
Net premiums earned $383,050 $324,776 $707,826
Policy-related fee income -- 3,785 3,785
Other underwriting-related fee income 320 128 448
Losses and loss adjustment expenses (219,817) (209,797) (429,614)
Acquisition expenses, net (107,128) (45,728) (152,856)
Other operating expenses (9,271) (43,259) (52,530)
----------- --------- -----------
Underwriting income $47,154 $29,905 $77,059
=========== =========
Net investment income 24,573
Net realized investment gains 8,901
Other fee income, net of related
expenses (239)
Other income 1,042
Other expenses (4,937)
Net foreign exchange losses (5,319)
Non-cash compensation (2,638)
-----------
Income before income taxes 98,442
Income tax expense (10,987)
-----------
Net income $87,455
===========
Underwriting Ratios
Loss ratio 57.4% 64.6% 60.7%
Acquisition expense ratio (2) 28.0% 12.9% 21.1%
Other operating expense ratio 2.4% 13.3% 7.4%
----------- --------- -----------
Combined ratio 87.8% 90.8% 89.2%
=========== ========= ===========
(1) Certain amounts included in the gross premiums written of each
segment are related to intersegment transactions and are included in
the gross premiums written of each segment. Accordingly, the sum of
gross premiums written for each segment does not agree to the total
gross premiums written as shown in the table above due to the
elimination of intersegment transactions in the total.
(2) The acquisition expense ratio is adjusted to include
policy-related fee income.
The following table sets forth underwriting income or loss by segment, together with a reconciliation of underwriting income to net income:
(Unaudited)
Three Months Ended
March 31, 2003
-------------------------------
(in thousands) Reinsurance Insurance Total
----------- --------- ---------
Gross premiums written (1) $562,661 $345,306 $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)
----------- --------- ---------
Underwriting income $33,174 $6,929 $40,103
=========== =========
Net investment income 18,438
Net realized investment gains 6,199
Other fee income, net of related
expenses 536
Other income 1,139
Other expenses (2,872)
Net foreign exchange gains 1,050
Non-cash compensation (4,264)
---------
Income before income taxes 60,329
Income tax expense (7,843)
---------
Net income $52,486
=========
Underwriting Ratios
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) Certain amounts included in the gross premiums written of each
segment are related to intersegment transactions and are included
in the gross premiums written of each segment. Accordingly, the
sum of gross premiums written for each segment does not agree to
the total gross premiums written as shown in the table above due
to the elimination of intersegment transactions in the total.
(2) The acquisition expense ratio is adjusted to include
policy-related fee income.
The following table sets forth the reinsurance segment's net premiums written and earned by major line of business and type of business, together with net premiums written by client location:
(Unaudited)
Three Months Ended
March 31,
2004 2003
---------------- ----------------
REINSURANCE SEGMENT % of % of
(in thousands) Amount Total Amount Total
--------- ------ --------- ------
Net premiums written
Casualty $228,550 41.5% $163,960 30.0%
Property excluding property
catastrophe 108,590 19.7% 112,600 20.6%
Other specialty 106,297 19.3% 136,015 24.8%
Property catastrophe 58,204 10.6% 48,773 8.9%
Marine and aviation 30,643 5.6% 31,421 5.7%
Non-traditional 11,728 2.1% 47,635 8.7%
Casualty clash 6,876 1.2% 7,032 1.3%
--------- ------ --------- ------
Total $550,888 100.0% $547,436 100.0%
========= ====== ========= ======
Net premiums earned
Casualty $152,576 39.8% $78,507 29.5%
Other specialty 86,115 22.5% 57,672 21.7%
Property excluding property
catastrophe 84,797 22.2% 61,067 23.0%
Property catastrophe 27,214 7.1% 27,611 10.4%
Marine and aviation 20,782 5.4% 15,582 5.8%
Non-traditional 8,779 2.3% 22,028 8.3%
Casualty clash 2,787 0.7% 3,480 1.3%
--------- ------ --------- ------
Total $383,050 100.0% $265,947 100.0%
========= ====== ========= ======
Net premiums written
Pro rata $324,106 58.8% $312,158 57.0%
Excess of loss 226,782 41.2% 235,278 43.0%
--------- ------ --------- ------
Total $550,888 100.0% $547,436 100.0%
========= ====== ========= ======
Net premiums earned
Pro rata $284,282 74.2% $169,314 63.7%
Excess of loss 98,768 25.8% 96,633 36.3%
--------- ------ --------- ------
Total $383,050 100.0% $265,947 100.0%
========= ====== ========= ======
Net premiums written by client
location
North America $340,898 61.9% $345,064 63.0%
Europe 158,602 28.8% 151,356 27.6%
Bermuda 37,125 6.7% 34,324 6.3%
Asia and Pacific 5,452 1.0% 4,721 0.9%
Other 8,811 1.6% 11,971 2.2%
--------- ------ --------- ------
Total $550,888 100.0% $547,436 100.0%
========= ====== ========= ======
The following table sets forth the insurance segment's net premiums written and earned by major line of business, together with net premiums written by client location:
(Unaudited)
Three Months Ended
March 31,
2004 2003
---------------- ----------------
INSURANCE SEGMENT % of % of
(in thousands) Amount Total Amount Total
--------- ------ --------- ------
Net premiums written
Programs $89,780 27.0% $70,627 30.8%
Casualty 63,546 19.1% 49,335 21.5%
Professional liability 45,722 13.7% 19,843 8.6%
Construction and surety 38,243 11.5% 19,710 8.6%
Property, marine and aviation 29,731 8.9% 14,238 6.2%
Executive assurance 27,483 8.3% 25,264 11.0%
Healthcare 13,426 4.0% 16,264 7.1%
Other 24,769 7.5% 14,146 6.2%
--------- ------ --------- ------
Total $332,700 100.0% $229,427 100.0%
========= ====== ========= ======
Net premiums earned
Programs $88,071 27.1% $39,832 28.8%
Casualty 54,780 16.9% 25,255 18.2%
Construction and surety 49,912 15.4% 9,829 7.1%
Professional liability 34,786 10.7% 8,375 6.0%
Property, marine and aviation 34,712 10.7% 12,495 9.0%
Executive assurance 31,039 9.6% 16,274 11.8%
Healthcare 11,517 3.5% 8,813 6.4%
Other 19,959 6.1% 17,631 12.7%
--------- ------ --------- ------
Total $324,776 100.0% $138,504 100.0%
========= ====== ========= ======
Net premiums written by client
location
North America $324,835 97.6% $228,328 99.5%
Other 7,865 2.4% 1,099 0.5%
--------- ------ --------- ------
Total $332,700 100.0% $229,427 100.0%
========= ====== ========= ======
Calculation of Book Value Per Share The following book value per share calculations are based on shareholders' equity of $2.01 billion and $1.71 billion at March 31, 2004 and December 31, 2003, respectively. The shares and per share numbers set forth below exclude the effects of stock options and Class B warrants.
(Unaudited)
March 31, 2004 December 31, 2003
---------------------- ----------------------
Cumulative Cumulative
Book Book
Outstanding Value Per Outstanding Value Per
Shares Share Shares Share
----------- ---------- ----------- ----------
Common shares (1) 33,552,344 $35.90 28,200,372 $31.74
Series A convertible
preference shares 38,364,972 $27.95 38,844,665 $25.52
----------- -----------
Total 71,917,316 67,045,037
=========== ===========
(1) Book value per common share at March 31, 2004 and December 31,
2003 was determined by dividing (i) the difference between total
shareholders' equity and the aggregate liquidation preference of
the Series A convertible preference shares of $805.7 million and
$815.7 million, respectively, 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 into in connection
with the November 2001 capital infusion (the "Subscription
Agreement"), in November 2005, there will be a calculation of a final
adjustment basket based on (1) liabilities owed to Folksamerica (if
any) under the Asset Purchase Agreement, dated as of January 10, 2000,
between the Company and Folksamerica, and (2) specified tax and ERISA
matters under the Subscription Agreement.
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