Arch Capital Group Ltd. Reports 2004 Second Quarter Results.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 Bermuda (bûrmy  `də), British dependency (2005 est. pop. 65,400), 21 sq mi (53 sq km), comprising some 150 coral rocks, islets, and islands (of which some 20 are inhabited), in the -- Arch Capital Group Ltd. (NASDAQ NASDAQin 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 second quarter was $104.3 million, or $1.42 per share, compared to $61.8 million, or $0.91 per share, for the 2003 second quarter, and $191.7 million, or $2.69 per share, for the six months ended June June: see month. 30, 2004, compared to $114.3 million, or $1.70 per share, for the six months ended June 30, 2003. 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 increased by 11.0% to $28.33 at June 30, 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. increased by 20.8% to $816.3 million for the 2004 second quarter from $676.0 million for the 2003 second quarter, and increased by 18.9% to $1.83 billion for the six months ended June 30, 2004 from $1.54 billion for the six months ended June 30, 2003. The Company's combined ratio was 87.8% for the 2004 second quarter, compared to 90.7% for the 2003 second quarter, and 88.4% for the six months ended June 30, 2004, compared to 90.7% for the six months ended June 30, 2003. 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. of $106.9 million, or $1.45 per share, for the 2004 second quarter, compared to $59.2 million, or $0.87 per share, for the 2003 second quarter, and $193.7 million, or $2.72 per share, for the six months ended June 30, 2004, compared to $108.4 million, or $1.61 per share, for the six months ended June 30, 2003. The Company's after-tax operating income represented a 21.1% return on average equity for the 2004 second quarter, compared to 15.6% for the 2003 second quarter, and 20.7% for the six months ended June 30, 2004, compared to 14.6% for the six months ended June 30, 2003. Operating income, a non-GAAP measure, is defined as net income or loss, excluding 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. or losses, net foreign exchange gains or losses, other income or loss and non-cash compensation, net of income taxes. See page 6 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) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(U.S. dollars in
thousands) 2004 2003 2004 2003
----------- ----------- ----------- -----------
Gross premiums written $816,323 $676,005 $1,826,111 $1,536,105
Net premiums written 677,646 560,002 1,561,234 1,336,865
Net premiums earned 723,399 508,856 1,431,225 913,307
Underwriting income 88,671 49,201 165,730 89,304
Combined ratio 87.8% 90.7% 88.4% 90.7%
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) (Unaudited)
Three Months Ended Six Months Ended
(U.S. dollars in June 30, June 30,
thousands, except per
share data) 2004 2003 2004 2003
----------- ----------- ----------- -----------
Operating income $106,875 $59,242 $193,685 $108,420
Net realized (losses)
gains (2,333) 3,515 5,365 8,861
Net foreign exchange
gains (losses) 5,102 1,761 (217) 2,811
Other (loss) income (2,850) 381 (2,173) 1,352
Non-cash compensation (2,512) (3,115) (4,923) (7,174)
----------- ----------- ----------- -----------
Net income $104,282 $61,784 $191,737 $114,270
=========== =========== =========== ===========
Diluted per share
results:
Operating income $1.45 $0.87 $2.72 $1.61
Net realized (losses)
gains (0.03) 0.05 0.07 0.13
Net foreign exchange
gains (losses) 0.07 0.03 0.00 0.04
Other (loss) income (0.04) 0.01 (0.03) 0.02
Non-cash compensation (0.03) (0.05) (0.07) (0.10)
----------- ----------- ----------- -----------
Net income $1.42 $0.91 $2.69 $1.70
=========== =========== =========== ===========
Diluted average shares
outstanding 73,500,041 67,728,798 71,336,798 67,381,859
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 consisted of a loss ratio of 60.4% and an underwriting expense ratio of 27.4% for the 2004 second quarter, compared to a loss ratio of 65.1% and an underwriting expense ratio of 25.6% for the 2003 second quarter. The combined ratio of the Company's insurance and reinsurance subsidiaries for the six months ended June 30, 2004 consisted of a loss ratio of 60.5% and an underwriting expense ratio of 27.9%, compared to a loss ratio of 65.1% and an underwriting expense ratio of 25.6% for the six months ended June 30, 2003. The loss ratio of 60.5% for the six months ended June 30, 2004 was comprised of 15.1 points of paid losses, 8.3 points related to reserves for reported losses and 37.1 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. 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 June 30, 2004. For a discussion of 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 second quarter was $446.4 million, compared to $367.4 million for the 2003 second quarter, and $843.4 million for the six months ended June 30, 2004, compared to $667.9 million for the six months ended June 30, 2003. 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 second quarter was $32.8 million, compared to $19.8 million for the 2003 second quarter, and $57.4 million for the six months ended June 30, 2004, compared to $38.2 million for the six months ended June 30, 2003. The growth in net investment income in the 2004 periods was due to a significant increase in the Company's invested assets, primarily resulting from cash flow provided by operating activities and the Company's capital raising activities during the first half of 2004. 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 3.6 years at June 30, 2004, up from 2.3 years at March 31, 2004. During the 2004 second quarter, in connection with the Company's offering of $300 million of senior notes described below, the Company purchased a comparable amount of U.S. treasury U.S. Treasury Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. bonds with the same effective duration as the senior notes. This purchase had the effect of increasing the duration of the Company's fixed income portfolio by 0.6 years. The balance of the increase in duration was effected as part of the Company's decision to increase the target duration of its fixed income portfolio to 3.6 years, excluding the bonds purchased in connection with the offering of senior notes. In May 2004, the Company completed a public offering of $300 million principal amount of 7.35% senior notes due May 1, 2034 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 ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $296 million. The Company used $200 million of the net proceeds to repay all amounts outstanding under its existing credit facility and the remainder of the net proceeds were used to support the underwriting activities of the Company's insurance and reinsurance subsidiaries and for other general corporate purposes. Interest expense was $4.6 million for the 2004 second quarter and $6.0 million for the six months ended June 30, 2004 in connection with our 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 borrowings outstanding until May 2004 and our senior notes outstanding beginning in May 2004. 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. The Company's quarterly tax provision is adjusted to reflect changes in its expected annual effective tax rates, if any. The effective tax rate on income before income taxes was 4.3% for the 2004 second quarter, compared to 9.6% for the 2003 second quarter, and 7.6% for the six months ended June 30, 2004, compared to 11.2% for the six months ended June 30, 2003. The effective tax rate on pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta operating income was 5.4% for the 2004 second quarter, compared to 9.7% for the 2003 second quarter, and 7.5% for the six months ended June 30, 2004, compared to 11.0% for the six months ended June 30, 2003. The reduction in the effective tax rates in the 2004 periods resulted from a change in the relative mix of income reported by jurisdiction. The Company currently expects that its annual effective tax rate on pre-tax operating income for 2004 will be in the range of 5% to 8%. Included in other (loss) income for the 2004 second quarter is an after-tax charge of $2.9 million resulting from a write down of the carrying value Carrying Value Also know as "book value," it is a company's total assets minus intangible assets and liabilities, such as debt. Notes: This is different than market value, as it can be higher or lower depending on the circumstances. of Hales
The church of Hales St Margaret is one of 124 existing round-tower churches in Norfolk. & Company Inc., the Company's merchant banking subsidiary. During the 2004 second quarter, the Company entered into negotiations to sell Hales and currently anticipates that such transaction will close in the 2004 third quarter. Non-cash compensation expense for the 2004 second quarter was $2.8 million, compared to $3.5 million for the 2003 second quarter, and $5.4 million for the six months ended June 30, 2004, compared to $7.8 million for the six months ended June 30, 2003. Absent significant additional restricted share grants, non-cash compensation expense is currently expected to be approximately $2.4 million and $1.5 million during the remaining two quarters of 2004, respectively. Net foreign exchange gains for the 2004 second quarter of $5,503,000 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 $5,959,000 and net realized losses Realized Loss A loss recognized when assets are sold for a price lower than the original purchase price. Notes: A portion of the realized loss may be applied against a capital gain or realized profit to reduce taxes. of $456,000, and net foreign exchange gains for the 2003 second quarter of $1,761,000 consisted of net unrealized gains of $1,052,000 and net realized gains of $709,000. Net foreign exchange gains for the six months ended June 30, 2004 of $184,000 consisted of net unrealized gains of $449,000 and net realized losses of $265,000, and net foreign exchange gains for the six months ended June 30, 2003 of $2,811,000 consisted of net unrealized gains of $1,647,000 and net realized gains of $1,164,000. Diluted weighted average shares outstanding, which is used in the calculation of operating income and net income per share, increased by 5.8 million shares, or 8.5%, from the 2003 second quarter to the 2004 second quarter. Most of the increase in diluted weighted average shares outstanding was due to the full weighting of 4.7 million shares issued in our March 2004 stock offering. Also contributing were 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 fluctuates as the market price of the Company's common shares changes. In addition, part of the increase resulted from the exercise of stock options during 2003 and 2004 and 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. On July July: see month. 2, 2004, the Company filed a universal shelf registration statement with the Securities and Exchange Commission. This registration statement replaces the Company's $12.5 million unused portion of the previous shelf registration statement and will allow for the possible future offer and sale by the Company of up to $650 million of various types of securities, including unsecured debt Unsecured debt Debt that does not identify specific assets that the debtholder is entitled to in case of default. securities, preference shares, common shares, warrants, share purchase contracts and units and depositary DEPOSITARY, contracts. He with whom a deposit is confided or made. 2. It is, the essence of the contract of deposits that it should be gratuitous on the part 'of the depositary. 9 M. R. 470. shares. The shelf registration statement, once declared de·clare v. de·clared, de·clar·ing, de·clares v.tr. 1. To make known formally or officially. See Synonyms at announce. 2. To state emphatically or authoritatively; affirm. 3. effective, will enable the Company to cost effectively and efficiently access public debt 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. equity capital markets in order to meet the Company's future capital needs. The registration statement on Form S-3 relating to these securities has been filed with the Securities and Exchange Commission but is not yet effective. Securities described in the registration statement may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This release is not an offer to sell or the solicitation solicitation In criminal law, the act of asking, inducing, or directing someone to commit a crime. The person soliciting another becomes an accomplice to the crime. The term also refers to the act of obtaining bribes, as well as to the crime of a prostitute who offers sexual of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful Contrary to or unauthorized by law; illegal. When applied to promises, agreements, or contracts, the term denotes that such agreements have no legal effect. The law disapproves of such conduct because it is immoral or contrary to public policy. prior to registration or qualification under the securities laws of any such state. At June 30, 2004, the Company's capital of $2.34 billion consisted of senior notes of $300.0 million, representing 12.8% 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 $2.04 billion, representing 87.2% of the total. The increase in the Company's capital during 2004 of $426.8 million was primarily attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to the effects of net income for the six months ended June 30, 2004, net proceeds from the stock offering in March 2004 and the offering of senior notes in May 2004, partially offset by a decline of $54.0 million in the fair value of the Company's investment portfolio, reflecting changes in the interest rate environment during the 2004 second quarter. The Company also announced that it has entered into a definitive agreement to sell its non-standard automobile automobile, self-propelled vehicle used for travel on land. The term is commonly applied to a four-wheeled vehicle designed to carry two to six passengers and a limited amount of cargo, as contrasted with a truck, which is designed primarily for the transportation of insurance operations. During 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. periods following closing, the Company will continue to provide substantial reinsurance to the subsidiaries transferred in the sale. The transaction is subject to obtaining applicable 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. approvals and other customary closing conditions and is not expected to result in a material realized gain or loss for the Company. The Company will hold a conference call for investors and analysts at 10:00 a.m. Eastern Time on July 30, 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 July 30 through midnight Eastern Time on August 30, 2004. A telephone replay of the conference call also will be available beginning on July 30 at 12:00 p.m. Eastern Time until August 6 at midnight Eastern Time. To access the replay, domestic callers should dial 888-286-8010 (passcode 74490934), and international callers should dial 617-801-6888 (passcode 74490934). Arch Capital Group Ltd., a Bermuda-based company with over $2.3 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 (the "SEC"), 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 June 30, 2004; --greater than expected loss ratios on business written by the Company and adverse development on claim and/or 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 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 gains or losses, net foreign exchange gains or losses, other income or loss and non-cash compensation, net of income taxes. The Company believes that net realized 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 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 gains or losses and net foreign exchange gains or losses from the calculation of operating income. Other income or loss is generated by certain of the Company's privately held securities which are accounted for under the equity method of accounting and, for the 2004 second quarter, the one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. write down of the carrying value of Hales, as described above. Under equity method 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
(U.S. dollars in thousands, except share data)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues
Net premiums written $677,646 $560,002 $1,561,234 $1,336,865
Decrease (increase) in
unearned premiums 45,753 (51,146) (130,009) (423,558)
----------- ----------- ----------- -----------
Net premiums earned 723,399 508,856 1,431,225 913,307
Net investment income 32,811 19,772 57,384 38,210
Net realized (losses)
gains (2,321) 3,889 6,580 10,088
Fee income 4,304 4,934 8,298 10,610
Other (loss) income (4,385) 587 (3,343) 1,726
----------- ----------- ----------- -----------
Total revenues 753,808 538,038 1,500,144 973,941
Expenses
Losses and loss
adjustment expenses 436,895 331,333 866,509 594,461
Acquisition expenses 136,889 95,620 289,745 173,772
Other operating
expenses 69,155 40,995 125,248 72,075
Interest expense 4,642 -- 6,016 --
Net foreign exchange
gains (5,503) (1,761) (184) (2,811)
Non-cash compensation 2,756 3,498 5,394 7,762
----------- ----------- ----------- -----------
Total expenses 644,834 469,685 1,292,728 845,259
Income Before Income
Taxes 108,974 68,353 207,416 128,682
Income tax expense 4,692 6,569 15,679 14,412
----------- ----------- ----------- -----------
Net Income $104,282 $61,784 $191,737 $114,270
=========== =========== =========== ===========
Net Income Per Share
Data
Basic $3.26 $2.36 $6.47 $4.38
Diluted $1.42 $0.91 $2.69 $1.70
Weighted Average Shares
Outstanding
Basic 32,023,865 26,185,445 29,650,932 26,101,843
Diluted 73,500,041 67,728,798 71,336,798 67,381,859
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
(Unaudited)
June 30, December 31,
2004 2003
------------ ------------
Assets
Investments:
Fixed maturities available for sale, at fair
value (amortized cost: 2004, $4,486,543;
2003, $3,363,193) $4,461,137 $3,398,424
Short-term investments available for sale, at
fair value (amortized cost: 2004, $84,031;
2003, $228,616) 84,031 229,348
Privately held securities (cost: 2004,
$18,848; 2003, $27,632) 24,229 32,476
------------ ------------
Total investments 4,569,397 3,660,248
------------ ------------
Cash 188,121 56,899
Accrued investment income 42,219 30,316
Premiums receivable 602,862 477,032
Funds held by reinsureds 206,796 211,944
Unpaid losses and loss adjustment expenses
recoverable 506,715 409,451
Paid losses and loss adjustment expenses
recoverable 23,183 18,549
Prepaid reinsurance premiums 232,329 236,061
Goodwill and intangible assets 31,423 35,882
Deferred income tax assets, net 53,875 33,979
Deferred acquisition costs, net 302,069 275,696
Other assets 157,144 139,264
------------ ------------
Total Assets $6,916,133 $5,585,321
============ ============
Liabilities
Reserve for losses and loss adjustment
expenses $2,702,358 $1,951,967
Unearned premiums 1,529,275 1,402,998
Reinsurance balances payable 104,382 117,916
Senior notes 300,000 --
Revolving credit agreement borrowings -- 200,000
Deposit accounting liabilities 41,495 25,762
Other liabilities 201,119 175,949
------------ ------------
Total Liabilities 4,878,629 3,874,592
------------ ------------
Commitments and Contingencies
Shareholders' Equity
Preference 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, 33,548,012;
2003, 28,200,372) 335 282
Additional paid-in capital 1,548,442 1,361,267
Deferred compensation under share award plan (11,792) (15,004)
Retained earnings 519,700 327,963
Accumulated other comprehensive (loss)
income, net of deferred income tax (19,565) 35,833
------------ ------------
Total Shareholders' Equity 2,037,504 1,710,729
------------ ------------
Total Liabilities and Shareholders' Equity $6,916,133 $5,585,321
============ ============
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
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 49 3
Converted from preference shares 4 --
------------ ------------
Balance at end of period 335 280
------------ ------------
Additional Paid-in Capital
Balance at beginning of year 1,361,267 1,347,165
Common shares issued 184,437 3,585
Exercise of stock options 3,592 4,887
Common shares retired (2,708) (645)
Other 1,854 1,022
------------ ------------
Balance at end of period 1,548,442 1,356,014
------------ ------------
Deferred Compensation Under Share Award Plan
Balance at beginning of year (15,004) (25,290)
Restricted common shares issued (2,142) (2,686)
Deferred compensation expense recognized 5,354 7,655
------------ ------------
Balance at end of period (11,792) (20,321)
------------ ------------
Retained Earnings
Balance at beginning of year 327,963 47,372
Net income 191,737 114,270
------------ ------------
Balance at end of period 519,700 161,642
------------ ------------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year 35,833 41,332
Change in unrealized (decline) appreciation
in value of investments, net of deferred
income tax (53,958) 27,007
Foreign currency translation adjustments (1,440) --
------------ ------------
Balance at end of period (19,565) 68,339
------------ ------------
Total Shareholders' Equity $2,037,504 $1,566,342
============ ============
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2004 2003
------------ ------------
Comprehensive Income
Net income $191,737 $114,270
Other comprehensive (loss) income, net of
deferred income tax
Unrealized (decline) appreciation in value
of investments:
Unrealized holding (losses) gains arising
during period (50,987) 35,868
Reclassification of net realized gains, net
of income taxes, included in net income (2,971) (8,861)
Foreign currency translation adjustments (1,440) --
------------ ------------
Comprehensive Income $136,339 $141,277
============ ============
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2004 2003
------------ ------------
Operating Activities
Net income $191,737 $114,270
Adjustments to reconcile net income to net
cash provided by
operating activities:
Net realized gains (5,630) (10,088)
Other loss (income) 3,343 (1,726)
Provision for non-cash compensation 5,394 7,762
Changes in:
Reserve for losses and loss adjustment
expenses, net of unpaid losses and loss
adjustment expenses recoverable 653,127 497,825
Unearned premiums, net of prepaid
reinsurance premiums 130,009 423,558
Premiums receivable (125,830) (217,145)
Deferred acquisition costs, net (26,373) (91,340)
Funds held by reinsureds 5,148 (57,687)
Reinsurance balances payable (13,534) (7,600)
Accrued investment income (11,903) (8,411)
Paid losses and loss adjustment expenses
recoverable (4,634) (4,039)
Deferred income tax asset (13,213) 27
Deposit accounting liabilities 15,733 8,780
Other liabilities 24,360 12,010
Other items, net 15,671 1,657
------------ ------------
Net Cash Provided By Operating Activities 843,405 667,853
------------ ------------
Investing Activities
Purchases of fixed maturity investments (3,413,832) (1,602,839)
Sales of fixed maturity investments 2,277,089 683,660
Sales of equity securities 11,043 7,019
Net sales of short-term investments 148,182 235,943
Acquisitions, net of cash -- (11,774)
Purchases of furniture, equipment and other (10,878) (12,802)
------------ ------------
Net Cash Used For Investing Activities (988,396) (700,793)
------------ ------------
Financing Activities
Proceeds from common shares issued 182,090 3,882
Proceeds from issuance of senior notes 296,442 --
Repayment of revolving credit agreement
borrowings (200,000) --
Repurchase of common shares (879) (646)
------------ ------------
Net Cash Provided By Financing Activities 277,653 3,236
------------ ------------
Effects of exchange rate changes on foreign
currency cash (1,440) --
------------ ------------
Increase (decrease) in cash 131,222 (29,704)
Cash beginning of year 56,899 91,717
------------ ------------
Cash end of period $188,121 $62,013
============ ============
Income taxes paid, net $22,663 $22,213
============ ============
Interest paid $1,861 --
============ ============
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) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
Investment income yield
(at amortized cost) 2004 2003 2004 2003
----------- ----------- ----------- -----------
Pre-tax 2.9% 3.3% 2.7% 3.4%
After-tax 2.7% 2.9% 2.5% 3.0%
(Unaudited)
Fixed maturities and June 30, December 31,
short-term investments 2004 2003
----------- -----------
Average duration (in
years) 3.6 2.0
Average credit quality
(Standard & Poors) AA+ AA+
Average yield to
maturity at market
value 3.6% 2.1%
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- -----------------------
Annualized operating
return on average
equity (1) 21.1% 15.6% 20.7% 14.6%
(1) Annualized operating return on average equity, a non-GAAP measure,
equals annualized operating income divided by average
shareholders' equity (calculated using the beginning and ending
values during 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 corporate and other segment (non-underwriting) includes net investment income, other fee income, other income or losses, other expenses incurred by the Company, net realized 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 table sets forth underwriting income or loss by segment, together with a reconciliation of underwriting income to net income:
(Unaudited)
Three Months Ended
June 30, 2004
-----------------------------------
(U.S. dollars in thousands) Reinsurance Insurance Total
----------- ----------- -----------
Gross premiums written (1) $382,987 $465,516 $816,323
Net premiums written 364,271 313,375 677,646
Net premiums earned $378,874 $344,525 $723,399
Policy-related fee income -- 3,608 3,608
Other underwriting-related fee
income 56 296 352
Losses and loss adjustment expenses (218,479) (218,416) (436,895)
Acquisition expenses, net (98,265) (38,624) (136,889)
Other operating expenses (10,380) (54,524) (64,904)
----------- ----------- -----------
Underwriting income $51,806 $36,865 88,671
=========== ===========
Net investment income 32,811
Net realized losses (2,321)
Other fee income, net of related
expenses 344
Other (loss) income (4,385)
Other expenses (4,251)
Interest expense (4,642)
Net foreign exchange gains 5,503
Non-cash compensation (2,756)
-----------
Income before income taxes 108,974
Income tax expense (4,692)
-----------
Net income $104,282
===========
Underwriting Ratios
Loss ratio 57.7% 63.4% 60.4%
Acquisition expense ratio (2) 25.9% 10.2% 18.4%
Other operating expense ratio 2.7% 15.8% 9.0%
----------- ----------- -----------
Combined ratio 86.3% 89.4% 87.8%
=========== =========== ===========
(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
June 30, 2003
-----------------------------------
(U.S. dollars in thousands) Reinsurance Insurance Total
----------- ----------- -----------
Gross premiums written (1) $337,038 $379,607 $676,005
Net premiums written 323,520 236,482 560,002
Net premiums earned $317,504 $191,352 $508,856
Policy-related fee income -- 3,562 3,562
Other underwriting-related fee
income 1,801 -- 1,801
Losses and loss adjustment expenses (203,797) (127,536) (331,333)
Acquisition expenses, net (73,702) (21,918) (95,620)
Other operating expenses (7,663) (30,402) (38,065)
----------- ----------- -----------
Underwriting income $34,143 $15,058 49,201
=========== ===========
Net investment income 19,772
Net realized gains 3,889
Other fee income, net of related
expenses (429)
Other income 587
Other expenses (2,930)
Net foreign exchange gains 1,761
Non-cash compensation (3,498)
-----------
Income before income taxes 68,353
Income tax expense (6,569)
-----------
Net income $61,784
===========
Underwriting Ratios
Loss ratio 64.2% 66.6% 65.1%
Acquisition expense ratio (2) 23.2% 9.6% 18.1%
Other operating expense ratio 2.4% 15.9% 7.5%
----------- ----------- -----------
Combined ratio 89.8% 92.1% 90.7%
=========== =========== ===========
(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)
Six Months Ended
June 30, 2004
-----------------------------------
(U.S. dollars in thousands) Reinsurance Insurance Total
----------- ----------- -----------
Gross premiums written (1) $948,726 $947,085 $1,826,111
Net premiums written (1) 915,159 646,075 1,561,234
Net premiums earned $761,924 $669,301 $1,431,225
Policy-related fee income -- 7,393 7,393
Other underwriting-related fee
income 376 424 800
Losses and loss adjustment expenses (438,296) (428,213) (866,509)
Acquisition expenses, net (205,393) (84,352) (289,745)
Other operating expenses (19,651) (97,783) (117,434)
----------- ----------- -----------
Underwriting income $98,960 $66,770 165,730
=========== ===========
Net investment income 57,384
Net realized gains 6,580
Other fee income, net of related
expenses 105
Other (loss) income (3,343)
Other expenses (7,814)
Interest expense (6,016)
Net foreign exchange gains 184
Non-cash compensation (5,394)
-----------
Income before income taxes 207,416
Income tax expense (15,679)
-----------
Net income $191,737
===========
Underwriting Ratios
Loss ratio 57.5% 64.0% 60.5%
Acquisition expense ratio (2) 27.0% 11.5% 19.7%
Other operating expense ratio 2.6% 14.6% 8.2%
----------- ----------- -----------
Combined ratio 87.1% 90.1% 88.4%
=========== =========== ===========
(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)
Six Months Ended
June 30, 2003
-----------------------------------
(U.S. dollars in thousands) Reinsurance Insurance Total
----------- ----------- -----------
Gross premiums written (1) $899,699 $724,913 $1,536,105
Net premiums written (1) 870,956 465,909 1,336,865
Net premiums earned $583,451 $329,856 $913,307
Policy-related fee income -- 6,775 6,775
Other underwriting-related fee
income 3,728 -- 3,728
Losses and loss adjustment expenses (367,712) (226,749) (594,461)
Acquisition expenses, net (138,368) (35,404) (173,772)
Other operating expenses (13,782) (52,491) (66,273)
----------- ----------- -----------
Underwriting income $67,317 $21,987 89,304
=========== ===========
Net investment income 38,210
Net realized gains 10,088
Other fee income, net of related
expenses 107
Other income 1,726
Other expenses (5,802)
Net foreign exchange gains 2,811
Non-cash compensation (7,762)
-----------
Income before income taxes 128,682
Income tax expense (14,412)
-----------
Net income $114,270
===========
Underwriting Ratios
Loss ratio 63.0% 68.7% 65.1%
Acquisition expense ratio (2) 23.7% 8.7% 18.3%
Other operating expense ratio 2.4% 15.9% 7.3%
----------- ----------- -----------
Combined ratio 89.1% 93.3% 90.7%
=========== =========== ===========
(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
June 30,
2004 2003
----------------------- -----------------------
REINSURANCE SEGMENT
(U.S. dollars in
thousands) Amount % of Total Amount % of Total
----------- ----------- ----------- -----------
Net premiums written
Casualty $223,626 61.4% $141,864 43.9%
Property excluding
property catastrophe 65,987 18.1% 69,248 21.4%
Other specialty 42,234 11.6% 67,926 21.0%
Property catastrophe 13,019 3.6% 23,337 7.2%
Marine and aviation 12,067 3.3% 14,349 4.4%
Non-traditional 5,751 1.6% 3,948 1.2%
Casualty clash 1,587 0.4% 2,848 0.9%
----------- ----------- ----------- -----------
Total $364,271 100.0% $323,520 100.0%
=========== =========== =========== ===========
Net premiums earned
Casualty $189,777 50.1% $112,101 35.3%
Other specialty 73,800 19.5% 62,916 19.8%
Property excluding
property catastrophe 56,878 15.0% 70,684 22.3%
Property catastrophe 23,397 6.2% 29,634 9.3%
Marine and aviation 21,682 5.7% 21,689 6.8%
Non-traditional 10,743 2.8% 16,423 5.2%
Casualty clash 2,597 0.7% 4,057 1.3%
----------- ----------- ----------- -----------
Total $378,874 100.0% $317,504 100.0%
=========== =========== =========== ===========
Net premiums written
Pro rata $287,312 78.9% $245,381 75.8%
Excess of loss 76,959 21.1% 78,139 24.2%
----------- ----------- ----------- -----------
Total $364,271 100.0% $323,520 100.0%
=========== =========== =========== ===========
Net premiums earned
Pro rata $279,940 73.9% $209,894 66.1%
Excess of loss 98,934 26.1% 107,610 33.9%
----------- ----------- ----------- -----------
Total $378,874 100.0% $317,504 100.0%
=========== =========== =========== ===========
Net premiums written by
client location
North America $239,841 65.9% $206,364 63.8%
Europe 78,079 21.4% 79,308 24.5%
Bermuda 26,282 7.2% 13,973 4.3%
Asia and Pacific 12,419 3.4% 17,802 5.5%
Other 7,650 2.1% 6,073 1.9%
----------- ----------- ----------- -----------
Total $364,271 100.0% $323,520 100.0%
=========== =========== =========== ===========
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)
Six Months Ended
June 30,
2004 2003
----------------------- -----------------------
REINSURANCE SEGMENT
(U.S. dollars in
thousands) Amount % of Total Amount % of Total
----------- ----------- ----------- -----------
Net premiums written
Casualty $452,177 49.4% $305,824 35.1%
Property excluding
property catastrophe 174,576 19.1% 181,848 20.9%
Other specialty 148,531 16.2% 203,941 23.4%
Property catastrophe 71,223 7.8% 72,110 8.3%
Marine and aviation 42,710 4.7% 45,770 5.3%
Non-traditional 17,479 1.9% 51,583 5.9%
Casualty clash 8,463 0.9% 9,880 1.1%
----------- ----------- ----------- -----------
Total $915,159 100.0% $870,956 100.0%
=========== =========== =========== ===========
Net premiums earned
Casualty $342,353 44.9% $190,608 32.7%
Other specialty 159,915 21.0% 120,588 20.6%
Property excluding
property catastrophe 141,675 18.6% 131,751 22.6%
Property catastrophe 50,610 6.6% 57,245 9.8%
Marine and aviation 42,464 5.6% 37,271 6.4%
Non-traditional 19,522 2.6% 38,451 6.6%
Casualty clash 5,385 0.7% 7,537 1.3%
----------- ----------- ----------- -----------
Total $761,924 100.0% $583,451 100.0%
=========== =========== =========== ===========
Net premiums written
Pro rata $611,418 66.8% $557,539 64.0%
Excess of loss 303,741 33.2% 313,417 36.0%
----------- ----------- ----------- -----------
Total $915,159 100.0% $870,956 100.0%
=========== =========== =========== ===========
Net premiums earned
Pro rata $564,222 74.1% $379,208 65.0%
Excess of loss 197,702 25.9% 204,243 35.0%
----------- ----------- ----------- -----------
Total $761,924 100.0% $583,451 100.0%
=========== =========== =========== ===========
Net premiums written by
client location
North America $580,739 63.5% $551,428 63.3%
Europe 236,681 25.9% 230,664 26.5%
Bermuda 63,407 6.9% 48,297 5.5%
Asia and Pacific 17,871 1.9% 22,523 2.6%
Other 16,461 1.8% 18,044 2.1%
----------- ----------- ----------- -----------
Total $915,159 100.0% $870,956 100.0%
=========== =========== =========== ===========
The following table sets forth the insurance 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
June 30,
2004 2003
----------------------- -----------------------
INSURANCE SEGMENT
(U.S. dollars in
thousands) Amount % of Total Amount % of Total
----------- ----------- ----------- -----------
Net premiums written
Programs $92,197 29.4% $76,949 32.5%
Casualty 52,712 16.8% 50,992 21.5%
Property, marine and
aviation 35,792 11.4% 20,503 8.7%
Professional liability 34,329 11.0% 28,845 12.2%
Executive assurance 30,533 9.7% 20,502 8.7%
Construction and surety 27,745 8.9% 22,504 9.5%
Healthcare 10,367 3.3% (1,463) (0.6%)
Other 29,700 9.5% 17,650 7.5%
----------- ----------- ----------- -----------
Total $313,375 100.0% $236,482 100.0%
=========== =========== =========== ===========
Net premiums earned
Programs $102,496 29.8% $61,328 32.1%
Casualty 57,560 16.7% 36,756 19.2%
Construction and surety 41,260 12.0% 15,901 8.3%
Professional liability 37,630 10.9% 14,752 7.7%
Property, marine and
aviation 33,643 9.8% 17,124 8.9%
Executive assurance 31,373 9.1% 18,855 9.9%
Healthcare 12,149 3.5% 7,084 3.7%
Other 28,414 8.2% 19,552 10.2%
----------- ----------- ----------- -----------
Total $344,525 100.0% $191,352 100.0%
=========== =========== =========== ===========
Net premiums written by
client location
North America $303,075 96.7% $232,743 98.4%
Other 10,300 3.3% 3,739 1.6%
----------- ----------- ----------- -----------
Total $313,375 100.0% $236,482 100.0%
=========== =========== =========== ===========
The following table sets forth the insurance 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)
Six Months Ended
June 30,
2004 2003
----------------------- -----------------------
INSURANCE SEGMENT
(U.S. dollars in
thousands) Amount % of Total Amount % of Total
----------- ----------- ----------- -----------
Net premiums written
Programs $181,977 28.2% $147,576 31.7%
Casualty 116,259 18.0% 100,327 21.5%
Professional liability 80,051 12.4% 48,688 10.4%
Construction and surety 65,988 10.2% 42,214 9.1%
Property, marine and
aviation 65,523 10.1% 34,741 7.5%
Executive assurance 58,016 9.0% 45,766 9.8%
Healthcare 23,793 3.7% 14,801 3.2%
Other 54,468 8.4% 31,796 6.8%
----------- ----------- ----------- -----------
Total $646,075 100.0% $465,909 100.0%
=========== =========== =========== ===========
Net premiums earned
Programs $190,567 28.6% $101,160 30.7%
Casualty 112,340 16.8% 62,011 18.8%
Construction and surety 91,172 13.6% 25,730 7.8%
Professional liability 72,416 10.8% 23,127 7.0%
Property, marine and
aviation 68,355 10.2% 29,619 9.0%
Executive assurance 62,411 9.3% 35,129 10.6%
Healthcare 23,666 3.5% 15,897 4.8%
Other 48,374 7.2% 37,183 11.3%
----------- ----------- ----------- -----------
Total $669,301 100.0% $329,856 100.0%
=========== =========== =========== ===========
Net premiums written by
client location
North America $627,910 97.2% $461,071 99.0%
Other 18,165 2.8% 4,838 1.0%
----------- ----------- ----------- -----------
Total $646,075 100.0% $465,909 100.0%
=========== =========== =========== ===========
Discussion of 2004 Second Quarter Performance The reinsurance division's underwriting income increased to $51.8 million for the 2004 second quarter, compared to $34.1 million for the 2003 second quarter. The increase in underwriting income was primarily due to an improvement in the reinsurance division's combined ratio and a higher level of net premiums earned. The combined ratio for the reinsurance division was 86.3% for the 2004 second quarter, compared to 89.8% for the 2003 second quarter. Gross premiums written for the reinsurance division increased by 13.6% to $383.0 million for the 2004 second quarter, compared to $337.0 million for the 2003 second quarter, primarily due to increases in casualty and U.S. regional property business. A significant portion of the growth in premiums written was attributable to an increase in estimated premiums on business originally recorded in prior periods. Net premiums earned for the reinsurance division increased to $378.9 million for the 2004 second quarter, compared to $317.5 million for the 2003 second quarter, reflecting an increased contribution from 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 57.7% for the 2004 second quarter, compared to 64.2% for the 2003 second quarter. The loss ratio for the 2004 second 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 $16.9 million, or a 4.5 point reduction in the loss ratio. Both the frequency and the severity of reported losses have been less than the levels anticipated 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 second quarter. In addition, primarily as a result of the commutation of certain treaties, the reinsurance division experienced favorable development in its non-traditional business of approximately $9.5 million, or a 2.5 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 $7.8 million, or 2.0 points of the acquisition expense ratio. As a result, the net effect was an increase of $1.7 million in underwriting income in the 2004 second quarter, or a 0.5 point decrease in the reinsurance division's combined ratio. In addition, in its reserving process in 2002 and 2003, 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 1.9 points in the loss ratio from the 2003 second quarter to the 2004 second quarter. The remainder of the change in the loss ratio compared to the 2003 second quarter resulted from changes in the mix of business earned. The reinsurance division's acquisition expense ratio for the 2004 second quarter was 25.9%, compared to 23.2% for the 2003 second quarter. The increase was primarily due to additional profit commissions recorded in the reinsurance division's non-traditional business as discussed above. 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 increased to 2.7% for the 2004 second quarter, compared to 2.4% for the 2003 second quarter, reflecting additional expenses incurred in 2004 as a result of the continued development of the reinsurance division's operating platform. The insurance division's underwriting income was $36.9 million for the 2004 second quarter, compared to $15.1 million for the 2003 second 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 89.4% for the 2004 second quarter from 92.1% for the 2003 second quarter. Gross premiums written for the insurance division increased by 22.6% to $465.5 million for the 2004 second quarter, compared to $379.6 million for the 2003 second quarter. Net premiums written for the insurance division increased to $313.4 million for the 2004 second quarter, compared to $236.5 million for the 2003 second quarter. Gross and net premiums written in the 2004 second quarter were higher in most lines of business than in the 2003 second quarter as a result of an increase in the number of policies written. Net premiums earned for the insurance division increased to $344.5 million for the 2004 second quarter, compared to $191.4 million for the 2003 second quarter. The insurance division's loss ratio for the 2004 second quarter was 63.4%, compared to 66.6% for the 2003 second quarter. The decrease in the 2004 second quarter loss ratio compared to the 2003 second quarter primarily resulted from better experience recorded in property and other short-tail lines. 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 10.2% for the 2004 second quarter (net of 1.0 points of policy-related fee income), compared to 9.6% for the 2003 second quarter (net of 1.9 points of policy-related fee income). The insurance division's other operating expense ratio for the 2004 second quarter was 15.8%, compared to 15.9% for the 2003 second 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 second quarter compared to the 2003 second quarter, the operating expense ratio of the insurance division was slightly lower in the 2004 second quarter primarily due to the substantial growth in net premiums earned in the 2004 period. Calculation of Book Value Per Share The following book value per share calculations are based on shareholders' equity of $2.04 billion and $1.71 billion at June 30, 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)
June 30, 2004 December 31, 2003
------------------------- -------------------------
Cumulative Cumulative
Outstanding Book Value Outstanding Book Value
Shares Per Share Shares Per Share
------------ ------------ ------------ ------------
Common shares (1) 33,548,012 $36.72 28,200,372 $31.74
Series A
convertible
preference shares 38,364,972 38,844,665
------------ ------------
Total 71,912,984 $28.33 67,045,037 $25.52
============ ============
(1) Book value per common share at June 30, 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 November: see month. 2001 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. (the "Subscription Agreement"), in November 2005, there will be a calculation of a final adjustment basket basket filled with treats, representative of feast on Easter Sunday. [Folklore: Misc.] See : Easter 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 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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