Arch Capital Group Ltd. Reports 2005 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 2005 second quarter was $126.0 million, or $1.69 per share, compared to $104.3 million, or $1.42 per share, for the 2004 second quarter, and $241.9 million, or $3.26 per share for the six months ended June June: see month. 30, 2005, compared to $191.7 million, or $2.69 per share, for the six months ended June 30, 2004. 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 11.2% to $34.49 at June 30, 2005 from $31.03 per share at December December: see month. 31, 2004 (see "Calculation of Book Value Per Share" in the Supplemental Financial Information section of this release). Gross and net premiums written for the 2005 second quarter were $940.8 million and $723.7 million, respectively, compared to $816.3 million and $677.6 million, respectively, for the 2004 second quarter, and $1.92 billion and $1.52 billion, respectively, for the six months ended June 30, 2005, compared to $1.83 billion and $1.56 billion, respectively, for the six months ended June 30, 2004. The Company's combined ratio was 89.3% for the 2005 second quarter, compared to 87.8% for the 2004 second quarter, and 89.0% for the six months ended June 30, 2005, compared to 88.4% for the six months ended June 30, 2004. 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 $113.7 million, or $1.53 per share, for the 2005 second quarter, compared to $106.9 million, or $1.45 per share, for the 2004 second quarter, and $226.3 million, or $3.05 per share, for the six months ended June 30, 2005, compared to $193.7 million, or $2.72 per share, for the six months ended June 30, 2004. The Company's after-tax operating income represented a 19.0% annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. return on average equity for the 2005 second quarter. 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, certain non-cash compensation and other income or loss, net of income taxes. See page 6 for a further discussion of operating income and Regulation G. The Company also reports that it currently expects to incur To become subject to and liable for; to have liabilities imposed by act or operation of law. Expenses are incurred, for example, when the legal obligation to pay them arises. An individual incurs a liability when a money judgment is rendered against him or her by a court. net losses of between $15 million and $25 million in the 2005 third quarter resulting from Hurricanes Dennis Dennis is a male first name derived from the Greco-Roman name Dionysius meaning "servant of Dionysus", the Thracian god of wine, which is ultimately derived from the Greek Dios (Διος, "of Zeus") combined with Nysos or Nysa (Νυσα), where the and Emily EMILY Early Money Is Like Yeast EMILY Electronic Membrane-Information Library EMILY Every Moment I Love You . The estimates relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc these events are based on currently available information derived de·rive v. de·rived, de·riv·ing, de·rives v.tr. 1. To obtain or receive from a source. 2. from modeling techniques, industry assessments of exposure and claims information obtained from the Company's clients and brokers. To date, the Company has received relatively few claims advices from clients and brokers. The Company's actual losses from these events may vary materially from the estimated net losses due to the inherent uncertainties in making such determinations resulting from several factors, including the potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques, as well as the frequency of recent catastrophic events and the effects of any resultant This article is about the resultant of polynomials. For the result of adding two or more vectors, see Parallelogram rule. For the technique in organ building, see Resultant (organ). In mathematics, the resultant of two monic polynomials demand surge See power surge. SURGE - Sorter, Updater, Report Generator, Etc. IBM 704, 1959. Sammet 1969, p.8. on claims activity. 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) 2005 2004 2005 2004
--------- --------------------- -----------
Gross premiums written $940,753 $816,323 $1,921,445 $1,826,111
Net premiums written 723,728 677,646 1,523,529 1,561,234
Net premiums earned 739,892 723,399 1,436,960 1,431,225
Underwriting income 79,347 88,671 163,010 165,730
Combined ratio 89.3% 87.8% 89.0% 88.4%
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)
(U.S. dollars in Three Months Ended Six Months Ended
thousands,except per June 30, June 30,
share data) 2005 2004 2005 2004
----------- ----------- ----------- -----------
Operating income $113,701 $106,875 $226,300 $193,685
Net realized gains
(losses) 1,951 (2,333) 2,269 5,365
Net foreign exchange
gains (losses) 10,989 5,102 14,628 (217)
Non-cash compensation (649) (2,512) (1,313) (4,923)
Other income (loss) -- (2,850) -- (2,173)
----------- ----------- ----------- -----------
Net income $125,992 $104,282 $241,884 $191,737
=========== =========== =========== ===========
Diluted per share
results:
Operating income $1.53 $1.45 $3.05 $2.72
Net realized gains
(losses) 0.02 (0.03) 0.03 0.07
Net foreign exchange
gains (losses) 0.15 0.07 0.20 0.00
Non-cash compensation (0.01) (0.03) (0.02) (0.07)
Other income (loss) -- (0.04) -- (0.03)
----------- ----------- ----------- -----------
Net income $1.69 $1.42 $3.26 $2.69
=========== =========== =========== ===========
Diluted average shares
outstanding 74,412,553 73,500,041 74,249,728 71,336,798
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 2005 second quarter consisted of a loss ratio of 60.0% and an underwriting expense ratio of 29.3%, compared to a loss ratio of 60.4% and an underwriting expense ratio of 27.4% for the 2004 second quarter. The combined ratio of the Company's insurance and reinsurance subsidiaries for the six months ended June 30, 2005 consisted of a loss ratio of 60.5% and an underwriting expense ratio of 28.5%, compared to a loss ratio of 60.5% and an underwriting expense ratio of 27.9% for the six months ended June 30, 2004. The loss ratio of 60.0% for the 2005 second quarter was comprised of 23.2 points of paid losses, 10.0 points related to reserves for reported losses and 26.8 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 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, 2005. For a discussion of underwriting activities and a review of the Company's results by operating segment, see "Segment Information" in the Supplemental Financial Information section of this release. Consolidated cash flow provided by operating activities was $357.8 million for the 2005 second quarter, compared to $446.4 million for the 2004 second quarter, and $685.6 million for the six months ended June 30, 2005, compared to $843.4 million for the six months ended June 30, 2004. The decrease in operating cash flows Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. in the 2005 periods was primarily attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to a higher level of paid losses due, in part, to the continuing maturation maturation /mat·u·ra·tion/ (mach-u-ra´shun) 1. the process of becoming mature. 2. attainment of emotional and intellectual maturity. 3. of the Company's insurance and reinsurance loss reserves. Net investment income increased to $53.7 million for the 2005 second quarter from $32.8 million for the 2004 second quarter, and $103.6 million for the six months ended June 30, 2005 from $57.4 million for the six months ended June 30, 2004. The higher level of net investment income in the 2005 periods resulted from a higher level of average invested assets and an increase in the pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta investment income yield to 3.4% for the 2005 second quarter, compared to 2.9% for the 2004 second quarter, and 3.4% for the six months ended June 30, 2005, compared to 2.7% for the six months ended June 30, 2004. The Company's investment portfolio, which mainly consists of high quality fixed income securities, had an average Standard & Poor's quality rating of "AA+" at June 30, 2005 and December 31, 2004. The average effective duration of the Company's investment portfolio was 3.9 years at June 30, 2005, compared to 3.7 years at December 31, 2004, while the imbedded imbedded, adj See embedded. book yield increased to 3.7% at June 30, 2005 from 3.5% at December 31, 2004. The effective tax rate on income before income taxes was 5.8% for the 2005 second quarter, compared to 4.3% for the 2004 second quarter, and 6.7% for the six months ended June 30, 2005, compared to 7.6% for the six months ended June 30, 2004. The effective tax rate on pre-tax operating income was 7.0% for the 2005 second quarter, compared to 5.4% for the 2004 second quarter, and 7.5% for the six months ended June 30, 2005, compared to 7.5% for the six months ended June 30, 2004. Differences in the effective tax rates in the 2005 and 2004 periods 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. The Company's quarterly tax provision is adjusted to reflect changes in its expected annual effective tax rates, if any. The Company currently expects that its annual effective tax rate on pre-tax operating income for 2005 will be in the range of 6% to 9%. On a pre-tax basis, net foreign exchange gains for the 2005 second quarter of $10.2 million 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 $10.7 million 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 $0.5 million, compared to net foreign exchange gains for the 2004 second quarter of $5.5 million, which consisted of net unrealized gains of $6.0 million and net realized losses of $0.5 million. Net foreign exchange gains for the six months ended June 30, 2005 of $13.4 million consisted of net unrealized gains of $13.4 million and minimal net realized gains, compared to net foreign exchange gains for the six months ended June 30, 2004 of $0.2 million, which consisted of net unrealized gains of $0.5 million and net realized losses of $0.3 million. The net unrealized gains in the 2005 periods resulted from the effects of revaluing the Company's net insurance liabilities required to be settled in foreign currencies at June 30, 2005. The Company holds investments in foreign currencies, which are intended to mitigate mit·i·gate v. To moderate in force or intensity. mit  i·ga tion n. its exposure to foreign currency fluctuations in
its net insurance liabilities. However, changes in the value of such
investments due to foreign currency rate movements are reflected as a
direct increase or decrease to shareholders' equity Shareholders' EquityA 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. and are not included in the statement of income. For the 2005 periods, the net foreign exchange gains recorded by the Company were essentially offset by decreases in the Company's investments held in foreign currencies. Included in other income (loss) for the 2004 periods is an after-tax charge of $2.9 million which resulted 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 a subsidiary of the Company. Such subsidiary was subsequently sold in the 2004 fourth quarter. At June 30, 2005, the Company's capital of $2.8 billion consisted of senior notes of $300.0 million, representing 10.7% of the total, and shareholders' equity of $2.5 billion, representing the balance. The increase in the Company's capital during the six months ended June 30, 2005 of $261.5 million was primarily attributable to net income. Diluted weighted average shares outstanding, which is used in the calculation of net income per share and operating income per share, was 0.9 million shares higher for the 2005 second quarter than for the 2004 second quarter with the increase primarily due to the exercise of stock options in 2004 and 2005 and 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. Diluted weighted average shares outstanding was 2.9 million shares higher for the six months ended June 30, 2005 than for the six months ended June 30, 2004 with the increase primarily due to the full weighting of 4,688,750 common shares issued in March 2004 in the 2005 period. The Company will hold a conference call for investors and analysts at 10:00 a.m. Eastern Time on Friday Friday: see Sabbath; week. Friday young Indian rescued by Crusoe and kept as servant and companion. [Br. Lit.: Robinson Crusoe] See : Servant , July July: see month. 29, 2005. 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 29 through midnight Eastern Time on August 29, 2005. A telephone replay of the conference call also will be available beginning on July 29 at 12:00 p.m. Eastern Time until August 5 at midnight Eastern Time. To access the replay, domestic callers should dial 888-286-8010 (passcode 46331971), and international callers should dial 617-801-6888 (passcode 46331971). Arch Capital Group Ltd., a Bermuda-based company with over $2.8 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 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. , 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. and any determination to use the deposit method of accounting, which, 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 limited historical information has been reported to the Company through June 30, 2005; --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 regulations or tax laws applicable to the Company, its subsidiaries, brokers or customers, including, without limitation, any such changes resulting from the recent investigations and inquiries by the New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of Attorney General and others relating to the insurance industry and any attendant ATTENDANT. One who owes a duty or service to another, or in some sort depends upon him. Termes de la Ley, h.t. As to attendant terms, see Powell on Morts. Index, tit. Attendant term; Park on Dower, c. 1 7. litigation; 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 or loss 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, financial and foreign exchange 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. Non-cash compensation includes costs related to the Company's capital raising activities and the commencement of the Company's new underwriting initiative in 2001. Since these charges, in large part, do not relate to the Company's current operations, the Company has excluded such charges from operating income. In addition, other non-cash compensation expenses that primarily relate to incentive compensation have been included in other operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. and, accordingly, operating income. Non-cash compensation also does not have any impact on the Company's shareholders' equity. Other income or loss includes amounts generated by certain of the Company's privately held securities which were accounted for under the equity method of accounting prior to the sale of such securities in 2004 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 a subsidiary which was subsequently sold in the 2004 fourth quarter. 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 excluded such amounts from the calculation of operating income. 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 which follow the Company and the insurance industry as a whole generally 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,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues
Net premiums written $723,728 $677,646 $1,523,529 $1,561,234
(Increase) decrease in
unearned premiums 16,164 45,753 (86,569) (130,009)
----------- ----------- ----------- -----------
Net premiums earned 739,892 723,399 1,436,960 1,431,225
Net investment income 53,660 32,811 103,576 57,384
Net realized gains
(losses) 2,105 (2,321) 2,566 6,580
Fee income 1,025 4,304 7,137 8,298
Other income (loss) -- (4,385) -- (3,343)
----------- ----------- ----------- -----------
Total revenues 796,682 753,808 1,550,239 1,500,144
Expenses
Losses and loss
adjustment expenses 443,918 436,895 869,454 866,509
Acquisition expenses 148,538 136,889 274,671 289,745
Other operating
expenses 74,232 69,155 147,633 125,248
Interest expense 5,629 4,642 11,265 6,016
Net foreign exchange
gains (10,198) (5,503) (13,435) (184)
Non-cash compensation 753 2,756 1,527 5,394
----------- ----------- ----------- -----------
Total expenses 662,872 644,834 1,291,115 1,292,728
Income Before Income
Taxes 133,810 108,974 259,124 207,416
Income tax expense 7,818 4,692 17,240 15,679
----------- ----------- ----------- -----------
Net Income $125,992 $104,282 $241,884 $191,737
=========== =========== =========== ===========
Net Income Per Share
Data
Basic $3.65 $3.26 $7.02 $6.47
Diluted $1.69 $1.42 $3.26 $2.69
Weighted Average Shares
Outstanding
Basic 34,563,565 32,023,865 34,464,740 29,650,932
Diluted 74,412,553 73,500,041 74,249,728 71,336,798
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
(Unaudited)
June 30, December 31,
2005 2004
----------- -----------
Assets
Investments:
Fixed maturities available for sale, at fair
value (amortized cost:
2005, $6,079,549; 2004, $5,506,193) $6,124,248 $5,545,121
Short-term investments available for sale, at
fair value (amortized cost: 2005, $177,156;
2004, $155,498) 176,268 155,771
Privately held securities (cost: 2005,
$13,619; 2004, $17,022) 22,251 21,571
----------- -----------
Total investments 6,322,767 5,722,463
----------- -----------
Cash 162,017 113,052
Accrued investment income 63,210 57,163
Premiums receivable 622,664 520,781
Funds held by reinsureds 199,283 209,946
Unpaid losses and loss adjustment expenses
recoverable 798,752 695,582
Paid losses and loss adjustment expenses
recoverable 31,611 26,874
Prepaid reinsurance premiums 336,721 321,422
Goodwill and intangible assets 16,666 16,666
Deferred income tax assets, net 54,101 58,745
Deferred acquisition costs, net 303,969 278,184
Other assets 216,883 197,876
----------- -----------
Total Assets $9,128,644 $8,218,754
=========== ===========
Liabilities
Reserve for losses and loss adjustment
expenses $4,175,403 $3,570,734
Unearned premiums 1,641,659 1,541,217
Reinsurance balances payable 143,838 169,502
Senior notes 300,000 300,000
Deposit accounting liabilities 50,337 44,023
Payable for securities purchased 20,152 53,642
Other liabilities 293,863 297,730
----------- -----------
Total Liabilities 6,625,252 5,976,848
----------- -----------
Commitments and Contingencies
Shareholders' Equity
Preference shares ($0.01 par value, 50,000,000
shares authorized, issued: 2005, 37,327,502;
2004, 37,348,150) 373 373
Common shares ($0.01 par value, 200,000,000
shares authorized, issued: 2005, 35,262,005;
2004, 34,902,923) 353 349
Additional paid-in capital 1,568,955 1,560,291
Deferred compensation under share award plan (6,389) (9,879)
Retained earnings 886,746 644,862
Accumulated other comprehensive income, net of
deferred income tax 53,354 45,910
----------- -----------
Total Shareholders' Equity 2,503,392 2,241,906
----------- -----------
Total Liabilities and Shareholders' Equity $9,128,644 $8,218,754
=========== ===========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2005 2004
----------- -----------
Preference Shares
Balance at beginning of year $373 $388
Converted to common shares (0) (4)
----------- -----------
Balance at end of period 373 384
----------- -----------
Common Shares
Balance at beginning of year 349 282
Common shares issued 4 49
Converted from preference shares 0 4
----------- -----------
Balance at end of period 353 335
----------- -----------
Additional Paid-in Capital
Balance at beginning of year 1,560,291 1,361,267
Common shares issued 1,698 184,437
Exercise of stock options 7,430 3,592
Common shares retired (846) (2,708)
Other 382 1,854
----------- -----------
Balance at end of period 1,568,955 1,548,442
----------- -----------
Deferred Compensation Under Share Award Plan
Balance at beginning of year (9,879) (15,004)
Restricted common shares issued (291) (2,142)
Deferred compensation expense recognized 3,781 5,354
----------- -----------
Balance at end of period (6,389) (11,792)
----------- -----------
Retained Earnings
Balance at beginning of year 644,862 327,963
Net income 241,884 191,737
----------- -----------
Balance at end of period 886,746 519,700
----------- -----------
Accumulated Other Comprehensive Income
Balance at beginning of year 45,910 35,833
Change in unrealized appreciation (decline) in
value of investments, net of deferred income
tax 8,514 (53,958)
Foreign currency translation adjustments, net
of deferred income tax (1,070) (1,440)
----------- -----------
Balance at end of period 53,354 (19,565)
----------- -----------
Total Shareholders' Equity $2,503,392 $2,037,504
=========== ===========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2005 2004
--------- ---------
Comprehensive Income
Net income $241,884 $191,737
Other comprehensive income (loss), net of deferred
income tax
Unrealized appreciation (decline) in value of
investments:
Unrealized holding gains (losses) arising during
period 9,239 (50,987)
Reclassification of net realized gains, net of
income taxes, included in net income (725) (2,971)
Foreign currency translation adjustments (1,070) (1,440)
--------- ---------
Other comprehensive income (loss) 7,444 (55,398)
--------- ---------
Comprehensive Income $249,328 $136,339
========= =========
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2005 2004
----------- -----------
Operating Activities
Net income $241,884 $191,737
Adjustments to reconcile net income to net
cash provided by
operating activities:
Net realized gains (1,022) (5,630)
Other (income) loss -- 3,343
Non-cash compensation 4,073 5,394
Changes in:
Reserve for losses and loss adjustment
expenses, net of unpaid losses and loss
adjustment expenses recoverable 501,499 653,127
Unearned premiums, net of prepaid
reinsurance premiums 85,143 130,009
Premiums receivable (101,883) (125,830)
Deferred acquisition costs, net (25,785) (26,373)
Funds held by reinsureds 10,663 5,148
Reinsurance balances payable (25,664) (13,534)
Accrued investment income (6,047) (11,903)
Paid losses and loss adjustment expenses
recoverable (4,737) (4,634)
Deferred income tax assets, net 5,142 (13,213)
Deposit accounting liabilities 6,314 15,733
Other liabilities (1,395) 24,360
Other items, net (2,592) 15,671
----------- -----------
Net Cash Provided By Operating Activities 685,593 843,405
----------- -----------
Investing Activities
Purchases of fixed maturity investments (1,985,427) (3,413,832)
Proceeds from sales of fixed maturity
investments 1,194,890 2,152,504
Proceeds from redemptions and maturities of
fixed maturity investments 163,973 124,585
Sales of equity securities 1,986 11,043
Net purchases (sales) of short-term investments (9,528) 148,182
Purchases of furniture, equipment and other (7,588) (10,878)
----------- -----------
Net Cash Used For Investing Activities (641,694) (988,396)
----------- -----------
Financing Activities
Proceeds from common shares issued 6,348 182,090
Proceeds from issuance of senior notes -- 296,442
Repayment of revolving credit agreement
borrowings -- (200,000)
Repurchase of common shares (780) (879)
----------- -----------
Net Cash Provided By Financing Activities 5,568 277,653
----------- -----------
Effects of exchange rate changes on foreign
currency cash (502) (1,440)
----------- -----------
Increase in cash 48,965 131,222
Cash beginning of year 113,052 56,899
----------- -----------
Cash end of period $162,017 $188,121
=========== ===========
Income taxes paid, net $34,958 $22,663
=========== ===========
Interest paid $11,141 $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 (net of investment expenses), average effective duration and average credit quality.
(Unaudited) (Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
Net investment income yield 2005 2004 2005 2004
(at amortized cost) ----------- -------- ----- -----
Pre-tax 3.4% 2.9% 3.4% 2.7%
After-tax 3.3% 2.7% 3.2% 2.5%
(Unaudited)
Fixed maturities and short-term June 30, December 31,
investments 2005 2004
----------- ------------
Average effective duration (in years) 3.9 3.7
Average credit quality (Standard & AA+ AA+
Poors)
Imbedded book yield (1) 3.7% 3.5%
(Unaudited) (Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2004 2005 2004
----------- -------- ----- -----
Annualized operating return on
average equity (2) 19.0% 21.1% 19.1% 20.7%
(1) Before investment expenses. (2) 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 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; marine and aviation; other specialty; property catastrophe Catastrophe, from the Greek Καταστροφή (katastrephein), literally means "to turn" (strephein) "downwards" (kata-). ; 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. ); and other (consisting of non-traditional and casualty clash business). The insurance segment consists of the Company's insurance underwriting subsidiaries which primarily write on both an admitted and non-admitted 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 prior to the sale of such operations in December 2004, 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, interest expense, 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 prior to the sale of such operations in October October: see month. 2004. The following tables set forth underwriting income or loss by segment, together with a reconciliation of underwriting income to net income:
(Unaudited)
Three Months Ended
June 30, 2005
-------------------------------
(U.S. dollars in thousands) Reinsurance Insurance Total
----------- --------- ---------
Gross premiums written (1) $376,803 $577,420 $940,753
Net premiums written 350,056 373,672 723,728
Net premiums earned $385,806 $354,086 $739,892
Policy-related fee income -- 732 732
Other underwriting-related fee income 22 271 293
Losses and loss adjustment expenses (213,947) (229,971) (443,918)
Acquisition expenses, net (113,443) (35,095) (148,538)
Other operating expenses (11,882) (57,232) (69,114)
----------- --------- ---------
Underwriting income $46,556 $32,791 79,347
=========== =========
Net investment income 53,660
Net realized gains 2,105
Other expenses (5,118)
Interest expense (5,629)
Net foreign exchange gains 10,198
Non-cash compensation (753)
---------
Income before income taxes 133,810
Income tax expense (7,818)
---------
Net income $125,992
=========
Underwriting Ratios
Loss ratio 55.5% 64.9% 60.0%
Acquisition expense ratio (2) 29.4% 9.7% 20.0%
Other operating expense ratio 3.1% 16.2% 9.3%
----------- --------- ---------
Combined ratio 88.0% 90.8% 89.3%
=========== ========= =========
(1) Certain amounts included in the 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. of each segment are related to intersegment transactions. 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.
(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 income (loss) (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. 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.
(Unaudited)
Six Months Ended
June 30, 2005
-----------------------------------
(U.S. dollars in thousands) Reinsurance Insurance Total
----------- ----------- -----------
Gross premiums written (1) $865,598 $1,084,164 $1,921,445
Net premiums written 827,749 695,780 1,523,529
Net premiums earned $761,838 $675,122 $1,436,960
Policy-related fee income -- 1,649 1,649
Other underwriting-related fee
income 4,645 843 5,488
Losses and loss adjustment expenses (432,621) (436,833) (869,454)
Acquisition expenses, net (212,895) (61,776) (274,671)
Other operating expenses (22,775) (114,187) (136,962)
----------- ----------- -----------
Underwriting income $98,192 $64,818 163,010
=========== ===========
Net investment income 103,576
Net realized gains 2,566
Other expenses (10,671)
Interest expense (11,265)
Net foreign exchange gains 13,435
Non-cash compensation (1,527)
-----------
Income before income taxes 259,124
Income tax expense (17,240)
-----------
Net income $241,884
===========
Underwriting Ratios
Loss ratio 56.8% 64.7% 60.5%
Acquisition expense ratio (2) 27.9% 8.9% 19.0%
Other operating expense ratio 3.0% 16.9% 9.5%
----------- ----------- -----------
Combined ratio 87.7% 90.5% 89.0%
=========== =========== ===========
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.
(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 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 income (loss) (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. 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 tables set 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,
2005 2004
---------------- ----------------
REINSURANCE SEGMENT % of % of
(U.S. dollars in thousands) Amount Total Amount Total
--------- ------ --------- ------
Net premiums written
Casualty (1) $160,646 45.9% $223,626 61.4%
Property excluding property
catastrophe 81,341 23.2% 65,987 18.1%
Other specialty 74,988 21.4% 42,234 11.6%
Marine and aviation 18,089 5.2% 12,067 3.3%
Property catastrophe 9,362 2.7% 13,019 3.6%
Other 5,630 1.6% 7,338 2.0%
--------- ------ --------- ------
Total $350,056 100.0% $364,271 100.0%
========= ====== ========= ======
Net premiums earned
Casualty (1) $176,399 45.7% $189,777 50.1%
Property excluding property
catastrophe 87,488 22.7% 56,878 15.0%
Other specialty 68,545 17.8% 73,800 19.5%
Marine and aviation 20,619 5.3% 21,682 5.7%
Property catastrophe 21,768 5.6% 23,397 6.2%
Other 10,987 2.9% 13,340 3.5%
--------- ------ --------- ------
Total $385,806 100.0% $378,874 100.0%
========= ====== ========= ======
Net premiums written
Pro rata $305,842 87.4% $287,312 78.9%
Excess of loss 44,214 12.6% 76,959 21.1%
--------- ------ --------- ------
Total $350,056 100.0% $364,271 100.0%
========= ====== ========= ======
Net premiums earned
Pro rata $294,526 76.3% $279,940 73.9%
Excess of loss 91,280 23.7% 98,934 26.1%
--------- ------ --------- ------
Total $385,806 100.0% $378,874 100.0%
========= ====== ========= ======
Net premiums written by client
location
United States and Canada $205,837 58.8% $239,841 65.9%
Europe 109,970 31.4% 78,079 21.4%
Bermuda 17,314 5.0% 26,282 7.2%
Asia and Pacific 9,829 2.8% 12,419 3.4%
Other 7,106 2.0% 7,650 2.1%
--------- ------ --------- ------
Total $350,056 100.0% $364,271 100.0%
========= ====== ========= ======
(1) Includes professional liability business.
(Unaudited)
Six Months Ended
June 30,
2005 2004
---------------- ----------------
REINSURANCE SEGMENT % of % of
(U.S. dollars in thousands) Amount Total Amount Total
--------- ------ --------- ------
Net premiums written
Casualty (1) $371,515 44.9% $452,177 49.4%
Property excluding property
catastrophe 169,536 20.5% 174,576 19.1%
Other specialty 166,017 20.1% 148,531 16.2%
Property catastrophe 53,924 6.5% 71,223 7.8%
Marine and aviation 48,118 5.8% 42,710 4.7%
Other 18,639 2.2% 25,942 2.8%
--------- ------ --------- ------
Total $827,749 100.0% $915,159 100.0%
========= ====== ========= ======
Net premiums earned
Casualty (1) $389,660 51.1% $342,353 44.9%
Property excluding property
catastrophe 144,983 19.0% 141,675 18.6%
Other specialty 119,299 15.7% 159,915 21.0%
Property catastrophe 46,529 6.1% 50,610 6.6%
Marine and aviation 42,610 5.6% 42,464 5.6%
Other 18,757 2.5% 24,907 3.3%
--------- ------ --------- ------
Total $761,838 100.0% $761,924 100.0%
========= ====== ========= ======
Net premiums written
Pro rata $625,489 75.6% $611,418 66.8%
Excess of loss 202,260 24.4% 303,741 33.2%
--------- ------ --------- ------
Total $827,749 100.0% $915,159 100.0%
========= ====== ========= ======
Net premiums earned
Pro rata $572,138 75.1% $564,222 74.1%
Excess of loss 189,700 24.9% 197,702 25.9%
--------- ------ --------- ------
Total $761,838 100.0% $761,924 100.0%
========= ====== ========= ======
Net premiums written by client
location
United States and Canada $486,587 58.8% $580,739 63.5%
Europe 265,465 32.1% 236,681 25.9%
Bermuda 44,378 5.4% 63,407 6.9%
Asia and Pacific 15,399 1.8% 17,871 1.9%
Other 15,920 1.9% 16,461 1.8%
--------- ------ --------- ------
Total $827,749 100.0% $915,159 100.0%
========= ====== ========= ======
(1) Includes professional liability business. The following tables set 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,
2005 2004
---------------- ----------------
INSURANCE SEGMENT % of % of
(U.S. dollars in thousands) Amount Total Amount Total
--------- ------ --------- ------
Net premiums written
Casualty $72,503 19.4% $52,712 16.8%
Property, marine and aviation 68,090 18.2% 35,792 11.4%
Programs 58,524 15.7% 92,197 29.4%
Professional liability 57,795 15.5% 41,318 13.2%
Executive assurance 48,131 12.9% 30,533 9.7%
Construction and surety 40,552 10.8% 27,745 8.9%
Healthcare 12,626 3.4% 10,367 3.3%
Other 15,451 4.1% 22,711 7.3%
--------- ------ --------- ------
Total $373,672 100.0% $313,375 100.0%
========= ====== ========= ======
Net premiums earned
Casualty $73,686 20.8% $57,560 16.7%
Property, marine and aviation 55,534 15.7% 33,643 9.8%
Programs 53,154 15.0% 102,496 29.7%
Professional liability 52,922 15.0% 44,619 13.0%
Executive assurance 37,149 10.5% 31,373 9.1%
Construction and surety 46,910 13.2% 41,260 12.0%
Healthcare 16,339 4.6% 12,149 3.5%
Other 18,392 5.2% 21,425 6.2%
--------- ------ --------- ------
Total $354,086 100.0% $344,525 100.0%
========= ====== ========= ======
Net premiums written by client
location
United States and Canada $327,754 87.7% $303,075 96.7%
Europe 29,195 7.8% 5,890 1.9%
Other 16,723 4.5% 4,410 1.4%
--------- ------ --------- ------
Total $373,672 100.0% $313,375 100.0%
========= ====== ========= ======
(Unaudited)
Six Months Ended
June 30,
2005 2004
---------------- ----------------
INSURANCE SEGMENT % of % of
(U.S. dollars in thousands) Amount Total Amount Total
--------- ------ --------- ------
Net premiums written
Casualty $136,301 19.6% $116,259 18.0%
Programs 111,791 16.1% 181,977 28.2%
Property, marine and aviation 110,182 15.8% 65,523 10.1%
Professional liability 108,235 15.6% 92,882 14.4%
Construction and surety 92,594 13.2% 65,988 10.2%
Executive assurance 74,161 10.7% 58,016 9.0%
Healthcare 29,062 4.2% 23,793 3.7%
Other 33,454 4.8% 41,637 6.4%
--------- ------ --------- ------
Total $695,780 100.0% $646,075 100.0%
========= ====== ========= ======
Net premiums earned
Casualty $142,953 21.2% $112,340 16.8%
Programs 108,465 16.1% 190,567 28.5%
Property, marine and aviation 99,083 14.7% 68,355 10.2%
Professional liability 101,672 15.0% 85,246 12.8%
Construction and surety 89,689 13.3% 91,172 13.6%
Executive assurance 64,371 9.5% 62,411 9.3%
Healthcare 33,339 4.9% 23,666 3.5%
Other 35,550 5.3% 35,544 5.3%
--------- ------ --------- ------
Total $675,122 100.0% $669,301 100.0%
========= ====== ========= ======
Net premiums written by client
location
United States and Canada $614,296 88.3% $627,910 97.2%
Europe 56,301 8.1% 6,885 1.1%
Other 25,183 3.6% 11,280 1.7%
--------- ------ --------- ------
Total $695,780 100.0% $646,075 100.0%
========= ====== ========= ======
Discussion of 2005 Second Quarter Performance The reinsurance segment's underwriting income was $46.6 million for the 2005 second quarter, compared to $51.8 million for the 2004 second quarter. The combined ratio for the reinsurance segment was 88.0% for the 2005 second quarter, compared to 86.3% for the 2004 second quarter. Gross premiums written for the reinsurance segment were $376.8 million for the 2005 second quarter, compared to $383.0 million for the 2004 second quarter. Net premiums written were $350.1 million for the 2005 second quarter, compared to $364.3 million for the 2004 second quarter. During the 2005 second quarter, based on additional information provided by ceding cede tr.v. ced·ed, ced·ing, cedes 1. To surrender possession of, especially by treaty. See Synonyms at relinquish. 2. companies, the reinsurance segment recorded adjustments on certain treaties written in 2002 and 2003. These adjustments, which had no impact on cash flow or underwriting income, had the effect of increasing gross and net premiums written, premiums earned and acquisition expenses by approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $11.3 million. The decrease in premium volume, adjusted for such item, was primarily due to a reduction in U.S. casualty business and in response to softening softening /sof·ten·ing/ (sof´en-ing) malacia. softening a change of consistency, with loss of firmness or hardness. market conditions. Net premiums earned for the reinsurance segment were $385.8 million for the 2005 second quarter, compared to $378.9 million for the 2004 second quarter, and generally reflect changes in net premiums written over the previous five quarters, including the mix and type of business written. Underwriting income for the reinsurance segment in the 2005 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 loss reserves, net of related adjustments, of $15.1 million, primarily attributable to property and other short tail business. The net impact of such development was a 3.9 point reduction in the 2005 second quarter combined ratio. For the 2004 second quarter, underwriting income benefited from estimated net favorable development on prior year loss reserves of $26.4 million, or a 7.0 point reduction in the combined ratio, primarily in property and other short-tail business. Such amount included estimated net favorable development on non-traditional business of approximately $9.5 million, or a 2.5 point reduction in the loss ratio, primarily as a result of the commutation of certain treaties. 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. The underwriting expense ratio for the reinsurance segment was 32.5% in the 2005 second quarter, compared to 28.6% in the 2004 second quarter. The acquisition expense ratio for the 2005 second quarter was 29.4%, compared to 25.9% for the 2004 second quarter. The 2005 second quarter ratio included 2.9 points from the adjustments on certain treaties written in 2002 and 2003 discussed above, and a 0.4 point increase under a sliding scale slid·ing scale n. A scale in which indicated prices, taxes, or wages vary in accordance with another factor, as wages with the cost-of-living index or medical charges with a patient's income. arrangement on a certain treaty which resulted from a decrease in the loss ratio of the same percentage. In addition, a higher percentage of net premiums earned in the 2005 second quarter were from pro rata business than in the 2004 second quarter. As pro rata contracts are typically written at a higher acquisition expense ratio and lower loss ratio than excess of loss business, this resulted in an increase in the acquisition expense ratio in the 2005 period. The balance of the increase in the acquisition expense ratio was due to changes in the reinsurance segment's mix of business. 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 3.1% for the 2005 second quarter, compared to 2.7% for the 2004 second quarter. The higher ratio in the 2005 second quarter reflected additional expenses incurred in the 2005 second quarter as a result of the continued development of the reinsurance segment's operating platform and the leveling off of net premiums earned. The insurance segment's underwriting income was $32.8 million for the 2005 second quarter, compared to $36.9 million for the 2004 second quarter. The insurance segment's combined ratio was 90.8% for the 2005 second quarter, compared to 89.4% for the 2004 second quarter. Gross premiums written for the insurance segment were $577.4 million for the 2005 second quarter, compared to $465.5 million for the 2004 second quarter. The growth in gross premiums written in the 2005 second quarter primarily resulted from contributions in the property, executive assurance and professional liability lines from the insurance segment's European European emanating from or pertaining to Europe. European bat lyssavirus see lyssavirus. European beech tree fagussylvaticus. European blastomycosis see cryptococcosis. operations, which became fully operational in the 2004 third quarter. In addition, growth in certain U.S. specialty lines, mainly in the primary casualty, property and professional liability lines, was partially offset by reductions in program business and from the sale of the insurance segment's non-standard auto insurance operations in late 2004. The reduction in program business in the 2005 second quarter primarily resulted from the non-renewal of certain programs in 2004. Ceded premiums written were 35.3% of gross premiums written for the 2005 second quarter, compared to 32.7% for the 2004 second quarter. The growth in the 2005 ceded percentage was due, in part, to the cession The act of relinquishing one's right. A surrender, relinquishment, or assignment of territory by one state or government to another. The territory of a foreign government gained by the transfer of sovereignty. CESSION, contracts. of 30% of certain program business with effective dates subsequent to March 31, 2004. In addition, the insurance segment's property business was a higher percentage of written premium in the 2005 second quarter than in the 2004 period. As a higher percentage of property business is ceded to third parties than most other lines, this had the effect of increasing the ceded ratio in the 2005 second quarter. In addition, the ceded ratio on property business increased in the 2005 period as the insurance segment built capacity in order to increase its penetration The successful unauthorized breach of a security perimeter. See penetration test. of global businesses, primarily through the use of reinsurance. Net premiums written for the insurance segment were $373.7 million for the 2005 second quarter, compared to $313.4 million for the 2004 second quarter, with the increase due to the reasons discussed above. Net premiums earned for the insurance segment were $354.1 million for the 2005 second quarter, compared to $344.5 million for the 2004 second quarter, and reflect changes in net premiums written over the previous five quarters, including the mix and type of business written. Underwriting income for the insurance segment in the 2005 second quarter was impacted by estimated net adverse development in prior year loss reserves of $8.0 million, or a 2.3 point increase in the combined ratio, compared to minimal estimated net favorable development in the 2004 second quarter. The estimated net adverse development in the 2005 second quarter included $6.0 million of additional losses incurred related to the 2004 third quarter hurricane hurricane, tropical cyclone in which winds attain speeds greater than 74 mi (119 km) per hr. Wind speeds reach over 190 mi (289 km) per hr in some hurricanes. activity as well as adverse development on the insurance segment's marine business. The underwriting expense ratio for the insurance segment was 25.9% in the 2005 second quarter, compared to 26.0% in the 2004 second quarter. The acquisition expense ratio was 9.7% for the 2005 second quarter, compared to 10.2% for the 2004 second quarter. The acquisition expense ratio is calculated net of certain policy-related fee income and is influenced by, among other things, (1) the amount of ceding commissions received from unaffiliated reinsurers and (2) the amount of business written on a surplus lines (non-admitted) basis. The acquisition expense ratio for the insurance segment in the 2005 second quarter decreased from the 2004 second quarter as the percentage of ceded business was higher in the 2005 period and the contribution of program business (which operates at a higher acquisition expense ratio) to net premiums earned was lower in the 2005 period. The insurance segment's other operating expense ratio for the 2005 second quarter was 16.2%, compared to 15.8% for the 2004 second quarter, reflecting additional expenses incurred in the 2005 second quarter as the insurance segment has expanded its operating platform, including the addition of operations in Canada Canada (kăn`ədə), independent nation (2001 pop. 30,007,094), 3,851,787 sq mi (9,976,128 sq km), N North America. Canada occupies all of North America N of the United States (and E of Alaska) except for Greenland and the French islands of , and the leveling off of net premiums earned. Calculation of Book Value Per Share The following book value per share calculations are based on shareholders' equity of $2.50 billion and $2.24 billion at June 30, 2005 and December 31, 2004, respectively. The shares and per share numbers set forth below exclude the effects of 5,915,645 and 6,172,199 stock options, 98,125 and 150,000 Class B warrants and 96,651 and 84,992 restricted stock units Restricted stock units Similar to restricted stock. However, the unit represents a promise that employees will receive stock in the future. The units do not pay dividends until the stock is vested. outstanding at June 30, 2005 and December 31, 2004, respectively.
(Unaudited)
June 30, 2005 December 31, 2004
---------------------- ----------------------
Cumulative Cumulative
Book Book
Outstanding Value Per Outstanding Value Per
Shares Share Shares Share
----------- ---------- ----------- ----------
Common shares (1) 35,262,005 $48.76 34,902,923 $41.76
Series A convertible
preference shares 37,327,502 37,348,150
----------- -----------
Total 72,589,507 $34.49 72,251,073 $31.03
=========== ===========
(1) Book value per common share Book Value Per Common Share A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly. Formula: at June 30, 2005 and December 31, 2004 was determined by dividing (i) the difference between total shareholders' equity and the aggregate liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy preference of the Series A convertible preference shares of $783.9 million and $784.3 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 spec·i·fy tr.v. spec·i·fied, spec·i·fy·ing, spec·i·fies 1. To state explicitly or in detail: specified the amount needed. 2. To include in a specification. 3. tax and ERISA See Employee Retirement Income Security Act. ERISA See Employee Retirement Income Security Act (ERISA). matters under the Subscription Agreement. |
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