Arch Capital Group Ltd. Reports Second Quarter Results.Business Editors HAMILTON Hamilton, city, Bermuda Hamilton, city (1990 est. pop. 3,100), capital of Bermuda, on Bermuda Island. It is a port at the head of Great Sound, a huge lagoon and deepwater harbor protected by coral reefs. , Bermuda--(BUSINESS WIRE)--Aug. 8, 2002 Arch Capital Group Ltd. (NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on : ACGL ACGL Arch Capital Group Ltd. ACGL Automobile Corporation of Goa Limited ACGL Alternative County Government Law ) reported that net premiums written for the 2002 second quarter were $223.0 million, of which the Company's 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. and insurance operations contributed net premiums written of $176.6 million and $46.4 million, respectively. For the six months ended June June: see month. 30, 2002, net premiums written were $503.7 million, of which the Company's reinsurance and insurance operations contributed net premiums written of $441.5 million and $62.2 million, respectively. The Company also reported that, for the period from January January: see month. 1 to July July: see month. 31, 2002, its reinsurance subsidiaries have entered into reinsurance treaties Reinsurance Treaty (June 18, 1887) Secret agreement between Germany and Russia. Arranged by Otto von Bismarck after the collapse of the Three Emperors' League, it provided that each party would remain neutral if either became involved in a war with a third nation, and that and other reinsurance arrangements that are expected to provide approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $800 million of annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. net reinsurance premiums, a substantial portion of which will be recorded in calendar year 2002. The following table summarizes the Company's financial performance for the three and six month periods ended June 30, 2002 and 2001. Comparisons of 2002 and 2001 results of operations are not meaningful due to the changes in the Company's business during 2001 resulting from the Company's new 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. initiatives and the related capital infusions Capital infusion Often refers to the cross-subsidization of divisions within a firm. When one division is not doing well, it might benefit from an infusion of new funds from the more successful divisions. . In addition, certain prior period information has been reclassified to conform to Verb 1. conform to - satisfy a condition or restriction; "Does this paper meet the requirements for the degree?" fit, meet coordinate - be co-ordinated; "These activities coordinate well" the current presentation. 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. is defined as net income, excluding net realized investment gains or losses on investment sales, equity in net income or loss of investees, non-cash compensation charges, and foreign exchange gains or losses. The increase in 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. average shares outstanding from 2001 to 2002 was primarily due to the issuance of convertible preference shares and Class A warrants in connection with the Company's capital infusion in November November: see month. 2001 and the issuance of 7,475,000 common shares in connection with a public offering completed by the Company in April 2002.
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
Summary of Results June 30, June 30,
------------------- -------------------
(in thousands) 2002 2001 2002 2001
--------- ------- --------- --------
Net premiums written $223,025 $6,719 $503,736 $9,557
Net premiums earned 113,459 5,565 180,986 7,198
Total revenues 135,807 23,191 215,300 40,073
Components of
Net Income:
Operating income 15,514 3,079 23,882 4,635
Net realized
investment gains
(losses) 389 5,633 (773) 11,837
Provision for non-cash
compensation (8,094) (270) (11,766) (577)
Reversal of deferred
tax asset valuation
allowance 7,421 -- 7,421 --
Net foreign exchange
gains 3,352 -- 3,244 --
Equity in net income
(loss) of investees 644 (42) 1,184 498
--------- ------- --------- --------
Net income $19,226 $8,400 $23,192 $16,393
========= ======= ========= ========
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
Summary of Results June 30, June 30,
---------------------- -----------------------
(continued) 2002 2001 2002 2001
----------- ----------- ----------- -----------
Per Share Results:
Operating income $0.27 $0.24 $0.43 $0.37
Net realized
investment gains
(losses) 0.01 0.43 (0.01) 0.92
Provision for
non-cash compensation (0.14) (0.02) (0.21) (0.05)
Reversal of deferred
tax asset valuation
allowance 0.12 -- 0.13 --
Net foreign exchange
gains 0.06 -- 0.06 --
Equity in net income
(loss) of investees 0.01 (0.00) 0.02 0.04
----------- ----------- ----------- -----------
Net income $0.33 $0.65 $0.42 $1.28
=========== =========== =========== ===========
Diluted average shares
outstanding 58,877,515 12,844,000 54,981,185 12,818,160
As set forth in the above table, for the three months ended June 30, 2002, the Company's after-tax operating income was $15.5 million, or $0.27 per share, and for the six months ended June 30, 2002, after-tax operating income was $23.9 million, or $0.43 per share. Net income for the 2002 second quarter was $19.2 million, or $0.33 per share, and for the six months ended June 30, 2002, net income was $23.2 million, or $0.42 per share. Net income for the 2002 second quarter and for the six months ended June 30, 2002 included a benefit of $7.4 million, or $0.12 and $0.13 per diluted share, respectively, resulting from a reversal reversal n. the decision of a court of appeal ruling that the judgment of a lower court was incorrect and is reversed. The result is that the lower court which tried the case is instructed to dismiss the original action, retry the case, or is ordered to change its of a valuation allowance on certain of the Company's deferred tax assets. Such reversal was based on the Company's recently completed restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). of its U.S.-based insurance underwriting operations and its business plan. In addition, the Company recorded an after-tax provision for non-cash compensation in the 2002 second quarter and for the six months ended June 30, 2002 of $8.1 million, or $0.14 per diluted share, and $11.8 million, or $0.21 per diluted share, respectively, related to 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 common shares. In the 2002 second quarter, net foreign exchange gains of $3,352,000 consisted of an unrealized gain 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 $3,263,000 and a realized gain Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. of $89,000. Net foreign exchange gains for the six months ended June 30, 2002 of $3,244,000 consisted of an unrealized gain of $3,263,000 and a realized loss 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 $19,000. The net unrealized gain resulted from the translation of foreign denominated monetary assets and liabilities Monetary assets and liabilities Assets and liabilities with contractual payoffs. at June 30, 2002 as required by generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting ("GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). "). Under GAAP, accounts that are classified as monetary assets and liabilities, such as premiums receivable and the reserve for losses and loss adjustment expenses, are revalued at each balance sheet date. Accounts that are classified as non-monetary are not revalued. Pursuant to GAAP, the unearned premium reserve is classified as non-monetary and, accordingly, was not revalued at June 30, 2002. If the unearned premium reserve was considered a monetary asset under GAAP, the unrealized foreign exchange gain would have been reduced by $3.3 million for the three and six month periods ended June 30, 2002. In establishing the reserves for losses and loss adjustment expenses, the Company 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, historical industry experience and current industry conditions. In its reserving process, the Company recognized that there is a possibility of adverse deviation DEVIATION, insurance, contracts. A voluntary departure, without necessity, or any reasonable cause, from the regular and usual course of the voyage insured. 2. from the assumptions made due to several factors primarily related to the Company's start-up Start-up The earliest stage of a new business venture. nature, including the fact that very limited historical information has been reported to the Company as of June 30, 2002. 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. were $14.9 million for the 2002 second quarter, compared to $4.8 million for the 2001 second quarter. For the first six months of 2002, other operating expenses were $28.2 million, compared to $8.4 million for the same prior year period. The increase in other operating expenses was due to acquisitions completed by the Company in 2001 and the operating expenses associated with the Company's new underwriting initiatives. Net investment income for the 2002 second quarter was $11.6 million, compared to $3.1 million in the 2001 second quarter. For the first six months of 2002, net investment income was $20.8 million, compared to $6.2 million for the same prior year period. The increase in net investment income was due to the significant increase in the Company's invested assets resulting from (i) the capital infusion completed in November 2001, (ii) the proceeds received from the public offering of the Company's common shares in April 2002 and (iii) cash flow from operations Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses . The Company invested these funds in high quality fixed income securities which had an average Standard & Poor's quality rating of "AA-" and an average duration of 2.8 years at June 30, 2002. Net realized investment gains for the 2002 second quarter on a pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta and 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. were $2.5 million and $389,000, respectively. The net realized gain consisted of a $5.9 million gain on the sale of a privately held equity investment, which was partially offset by the sale of certain fixed income securities. The following table details components of the combined ratio for the reinsurance, insurance and total underwriting operations of the Company on both a GAAP and statutory basis for the three and six month periods ended June 30, 2002. The difference between the GAAP and statutory ratios shown below results from the difference in the expense ratios. The statutory expense ratios are based on net premiums written, while the GAAP expense ratios are based on net premiums earned. In calculating expenses incurred under GAAP, the Company is deferring a portion of its underwriting expenses.
(Unaudited)
Three Months Ended
Operating Information by Segment June 30, 2002
-------------------------------------------
(in thousands) Reinsurance Insurance Total
----------- --------- ----------
Net premiums written $176,619 $46,406 $223,025
Net premiums earned 96,330 17,129 113,459
GAAP underwriting income
(loss) 10,389 (3,425) 6,964
Combined Ratio:
Statutory Basis 92.5% 104.5% 94.6%
GAAP Basis 89.2% 120.0% 93.9%
(Unaudited)
Six Months Ended
June 30, 2002
-------------------------------------------
Reinsurance Insurance Total
----------- --------- ----------
Net premiums written $441,480 $62,256 $503,736
Net premiums earned 151,863 29,123 180,986
GAAP underwriting income
(loss) 14,238 (3,449) 10,789
Combined Ratio:
Statutory Basis 89.4% 102.5% 91.3%
GAAP Basis 90.6% 111.8% 94.0%
Paul Paul, 1901–64, king of the Hellenes (1947–64), brother and successor of George II. He married (1938) Princess Frederika of Brunswick. During Paul's reign Greece followed a pro-Western policy, and the Cyprus question was temporarily resolved. Ingrey, Chairman and Chief Executive Officer of Arch Reinsurance Ltd., stated, "We remain very pleased with the level and quality of the business opportunities presented to us. We expect to continue to add to our current portfolio of business, which is diversified diversified (di·verˑ·s across various classes of business, in an insurance marketplace that continues to strengthen." For the three and six month periods ended June 30, 2002, the statutory expense ratios for the insurance segment were 27.4% and 24.1%, respectively. On a GAAP basis, the expense ratios were 42.9% and 33.4%, respectively. The insurance segment expenses are reflected net of certain policy-related fee income. The statutory and GAAP combined ratios for the insurance operating segment reflect "start-up" operating expenses of $2.1 million and $3.7 million, respectively, for the three and six month periods ended June 30, 2002. Commenting on the progress of the Company's insurance group, Constantine Constantine, city, Algeria Constantine (kŏn`stəntēn), ancient Cirta, city (1998 pop. 462,187), capital of Constantine dept., NE Algeria, on the gorge of the Rhumel River. Iordanou, President and Chief Executive Officer of Arch Insurance Group, said "Our insurance activity continues to increase at a very rapid pace. Our experienced and talented management team and strong financial position have resulted in a very robust level of submissions. We expect that the progress we have made during the last six months will produce an even higher level of future activity." At June 30, 2002 and December December: see month. 31, 2001, 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: shareholders' equity Shareholders' Equity A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares. was $1.25 billion and $1.02 billion, respectively. On a diluted basis, the per share book value at June 30, 2002 increased to $20.27 from $19.59 at December 31, 2001. The increase in diluted book value per share was primarily attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to the net effects of issuing 7,475,000 common shares at $25.50 per share in the stock offering completed by the Company in April 2002, and an increase in unrealized appreciation of investments of $10.9 million. These increases were partially offset by the effects of the issuance on June 28, 2002 of 875,753 additional Series A convertible preference shares pursuant to a post-closing purchase price adjustment mechanism under the Subscription Agreement. The diluted per share book value reflects the Company's outstanding convertible preference shares and Class A warrants, but does not take into account certain potential adjustments. If such potential adjustments were triggered, the diluted pro forma As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase pro forma book value at June 30, 2002 would have been reduced by $0.91 per share. The calculation of the Company's book value per share amounts and the potential adjustments to book value per share are included in (and described in) the accompanying ac·com·pa·ny v. ac·com·pa·nied, ac·com·pa·ny·ing, ac·com·pa·nies v.tr. 1. To be or go with as a companion. 2. supplemental financial information. The Company will hold a conference call for investors and analysts at 10:00 a.m. Eastern Time on August 9. A live webcast of this call will be available at http://www.vcall.com/EventPage.asp?ID=82027 and will be archived on VCall's website from 12:00 p.m. Eastern Time on August 9 through midnight Eastern Time on September September: see month. 9, 2002. A telephone replay of the conference call also will be available beginning on August 9 at 12:00 p.m. Eastern Time until August 12 at 10:00 a.m. Eastern Time. To access the replay, domestic callers should dial 877-660-6853, passcode 39793, and international callers should dial 201-612-7415, passcode 39793. Arch Capital Group Ltd., a Bermuda-based company with over $1.2 billion in equity capital, provides insurance and reinsurance on a worldwide basis through its wholly owned subsidiaries Wholly Owned Subsidiary A subsidiary whose parent company owns 100% of its common stock. Notes: In other words, the parent company owns the company outright and there are no minority owners. . Cautionary Note Regarding Forward-Looking Statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. The Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995 provides a "safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. " for forward-looking statements. This release or any other written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company's current views with respect to future events and financial performance. All statements other than statements of historical fact included in this release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking for·ward-look·ing adj. Concerned with or making provision for the future: forward-looking educators; a forward-looking corporate plan. Adj. 1. terminology The terminology used in the computer and telecommunications field adds tremendous confusion not only for the lay person, but for the technicians themselves. What many do not realize is that terms are made up by anybody and everybody in a nonchalant, casual manner without any regard or such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology. Forward-looking statements involve the Company's current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied Inferred from circumstances; known indirectly. In its legal application, the term implied is used in contrast with express, where the intention regarding the subject matter is explicitly and directly indicated. in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this release and include: - the Company's ability to successfully implement its business strategy, including implementing procedures and internal controls to support the value of the Company's business and its regulatory and reporting requirements; - acceptance of the Company's products and services and security by brokers and insureds; - acceptance of the Company's business strategy, security and financial condition by rating agencies and regulators; - general economic and market conditions (including as to inflation and foreign currency exchange rates) and conditions specific to the reinsurance and insurance markets in which the Company operates; - competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors; - the Company's ability to successfully integrate new management and operating personnel and to establish and maintain operating procedures to effectively support the Company's new underwriting initiatives and to develop accurate actuarial data and develop and implement actuarial models and procedures; - the loss of key personnel; - the integration of businesses the Company has acquired or may acquire into its existing operations; - greater than expected loss ratios on business written by the Company's insurance and reinsurance subsidiaries and adverse development on claim and/or claim expense liabilities related to business written by its insurance and reinsurance subsidiaries; - severity and/or frequency of losses; - claims for natural or man-made catastrophic events in the Company's insurance or reinsurance business could cause large losses and substantial volatility in the Company's results of operations; - acts of terrorism, other hostilities or other unforecasted and unpredictable events; - losses relating to aviation business and business produced by a certain managing underwriting agency for which the Company may be liable to the purchaser of its prior reinsurance business or to others in connection with the May 5, 2000 asset sale; - availability to the Company of reinsurance to manage its gross and net exposures; - the failure of reinsurers, managing general agents or others to meet their obligations to the Company's insurance and reinsurance subsidiaries; - the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company; - changes in the financial environment, including interest rates; - 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 government provision or back-stopping of insurance (including for acts of terrorism); 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 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. or other hostilities hos·til·i·ty 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. . All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety The whole, in contradistinction to a moiety or part only. When land is conveyed to Husband and Wife, they do not take by moieties, but both are seised of the entirety. by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction conjunction, in astronomy conjunction, in astronomy, alignment of two celestial bodies as seen from the earth. Conjunction of the moon and the planets is often determined by reference to the sun. with other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues
Net premiums written $223,025 $6,719 $503,736 $9,557
Increase in unearned
premiums (109,566) (1,154) (322,750) (2,359)
----------- ----------- ----------- -----------
Net premiums earned 113,459 5,565 180,986 7,198
Net investment income 11,611 3,078 20,778 6,238
Net realized investment
gains 2,476 9,605 1,011 18,609
Equity in net income of
investees 778 33 1,576 921
Fee income 4,131 3,711 7,705 5,426
Net commission income -- 1,199 -- 1,681
Net foreign exchange
gains 3,352 -- 3,244 --
----------- ----------- ----------- -----------
Total revenues 135,807 23,191 215,300 40,073
Expenses
Losses and loss
adjustment expenses 80,304 5,526 130,844 7,071
Acquisition expenses 17,755 -- 25,065 --
Other operating
expenses 14,854 4,761 28,178 8,440
Provision for non-cash
compensation 8,636 275 12,764 634
----------- ----------- ----------- -----------
Total expenses 121,549 10,562 196,851 16,145
Income Before Income
Taxes 14,258 12,629 18,449 23,928
Income tax (benefit)
expense (4,968) 4,229 (4,743) 7,535
----------- ----------- ----------- -----------
Net Income $19,226 $8,400 $23,192 $16,393
=========== =========== =========== ===========
Net Income Per Share
Data
Basic $0.95 $0.65 $1.39 $1.28
Diluted $0.33 $0.65 $0.42 $1.28
Average Shares
Outstanding
Basic 20,323,114 12,832,261 16,691,051 12,809,572
Diluted 58,877,515 12,844,000 54,981,185 12,818,160
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
Assets
Investments:
Fixed maturities available for
sale, at fair value
(amortized cost: 2002,
$1,043,700; 2001, $467,154) $1,056,780 $468,269
Short-term investments
available for sale, at fair
value (amortized cost: 2002,
$176,119; 2001, $477,058) 175,720 476,820
Publicly traded equity
securities available for
sale, at fair value
(cost: 2002,-- ; 2001, $960) -- 235
Securities held in escrow, at
fair value (amortized cost:
2002,--; 2001, $22,156) -- 22,156
Privately held securities
(cost: 2002, $31,537; 2001,
$41,587) 31,571 41,608
------------ ------------
Total investments 1,264,071 1,009,088
------------ ------------
Cash 37,641 9,970
Accrued investment income 13,681 7,572
Premiums receivable 330,086 59,463
Unpaid losses and loss
adjustment expenses
recoverable 137,051 90,442
Paid losses and loss
adjustment expenses
recoverable 22,315 14,418
Prepaid reinsurance premiums 56,430 58,961
Goodwill 28,823 26,336
Deferred income tax asset 18,342 13,716
Deferred acquisition costs 61,803 5,412
Other assets 37,493 18,323
------------ ------------
Total Assets $2,007,736 $1,313,701
============ ============
Liabilities
Reserve for losses and loss
adjustment expenses $266,590 $113,507
Unearned premiums 408,759 88,539
Reinsurance balances payable 38,147 47,029
Reserve for loss of escrowed
assets -- 18,833
Other liabilities 48,193 25,424
------------ ------------
Total Liabilities 761,689 293,332
------------ ------------
Commitments and Contingencies
Shareholders' Equity
Preferred shares
($0.01 par value, 50,000,000
shares authorized, issued:
2002, 36,563,488, 2001,
35,687,735) 366 357
Common shares ($0.01 par value,
200,000,000 shares authorized,
issued: 2002, 23,795,740,
2001, 13,513,538) 238 135
Additional paid-in capital 1,282,401 1,039,887
Deferred compensation under
share award plan (59,241) (8,230)
Retained earnings (deficit) 11,582 (11,610)
Accumulated other
comprehensive income
consisting of unrealized
appreciation (decline) in
value of investments, net of
income tax 10,701 (170)
------------ ------------
Total Shareholders' Equity 1,246,047 1,020,369
------------ ------------
Total Liabilities &
Shareholders' Equity $2,007,736 $1,313,701
============ ============
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
------------ ------------
Preference Shares
Balance at beginning of year $357 --
Preference shares issued 9 --
------------ ------------
Balance at end of period 366 --
------------ ------------
Common Shares
Balance at beginning of year 135 $127
Common shares issued 103 2
------------ ------------
Balance at end of period 238 129
------------ ------------
Additional Paid-in Capital
Balance at beginning of year 1,039,887 288,016
Common shares issued 242,514 2,360
------------ ------------
Balance at end of period 1,282,401 290,376
------------ ------------
Deferred Compensation Under
Share Award Plan
Balance at beginning of year (8,230) (341)
Restricted common shares
issued (63,615) (1,772)
Deferred compensation expense
recognized 12,604 634
------------ ------------
Balance at end of period (59,241) (1,479)
------------ ------------
Retained Earnings (Deficit)
Balance at beginning of year,
as previously reported (11,610) (30,916)
Adjustment to retroactively
adopt the equity method of
accounting for the original
investment in ART Services -- (2,710)
------------ ------------
Balance at beginning of year,
as adjusted (11,610) (33,626)
Net income 23,192 16,393
------------ ------------
Balance at end of period 11,582 (17,233)
------------ ------------
Accumulated Other
Comprehensive Income
Unrealized Appreciation
(Decline) in Value of
Investments, Net of Income
Tax
Balance at beginning of year (170) 18,432
Adjustment to retroactively
adopt the equity method of
accounting for the original
investment in ART Services -- (309)
------------ ------------
Balance at beginning of year,
as adjusted (170) 18,123
Change in unrealized
appreciation (decline) in
value of investments 10,871 (18,264)
------------ ------------
Balance at end of period 10,701 (141)
------------ ------------
Total Shareholders' Equity $1,246,047 $271,652
============ ============
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
------------ ------------
Comprehensive Income (Loss)
Net income $23,192 $16,393
Other comprehensive income
(loss), net of tax
Unrealized appreciation
(decline) in value of
investments:
Unrealized holding gains
(losses) arising during
period 10,098 (6,427)
Reclassification of net
realized losses (gains)
included in net income 773 (11,837)
------------ ------------
Other comprehensive income
(loss) 10,871 (18,264)
------------ ------------
Comprehensive Income (Loss) $34,063 ($1,871)
============ ============
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended,
June 30,
2002 2001
------------ ------------
Operating Activities
Net income $23,192 $16,393
Adjustments to reconcile net
income to net cash provided
by operating activities:
Net realized investment
gains (1,011) (18,610)
Provision for non-cash
compensation 12,764 634
Net unrealized foreign
exchange gains (3,263) --
Changes in:
Reserve for losses and
loss adjustment
expenses, net 106,430 (253)
Unearned premiums 322,458 5,163
Premiums receivable (267,316) (5,971)
Accrued investment income (5,894) (326)
Reinsurance recoverables (2,436) (2,668)
Reinsurance balances
payable (9,490) 205
Deferred acquisition
costs (56,391) (473)
Deferred income tax asset (4,626) 302
Other liabilities 16,801 (3,017)
Other items, net (17,513) 8,329
------------ ------------
Net Cash Provided By (Used For)
Operating Activities 113,705 (292)
------------ ------------
Investing Activities
Purchases of fixed maturity
investments (885,654) (112,225)
Release of escrowed assets (18,833) --
Sales of fixed maturity
investments 300,277 65,899
Purchases of equity securities -- (19)
Sales of equity securities 13,802 44,468
Net sales of short-term
investments 329,843 37,500
Acquisition of Rock River
Insurance Company, net of cash
and investments (2,513) --
Acquisition of ART Services,
net of cash -- (34,159)
Acquisition of American
Independent Insurance Holding
Company, net of cash -- 224
Purchases of furniture,
equipment and other (2,073) (633)
------------ ------------
Net Cash (Used For) Provided
By Investing Activities (265,151) 1,055
------------ ------------
Financing Activities
Common stock issued 179,154 --
Purchase of treasury shares -- (48)
Debt retirement and other (37) (73)
------------ ------------
Net Cash Provided By (Used For)
Financing Activities 179,117 (121)
------------ ------------
Increase in cash 27,671 642
Cash beginning of year 9,970 11,481
------------ ------------
Cash end of period $37,641 $12,123
============ ============
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
(dollars in thousands, except per share data)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
=========================================
Investment Portfolio Statistics
Investment income yield
(at amortized cost):
Pre-tax 4.1% 5.2% 3.6% 4.9%
After-tax 3.6% 4.6% 3.1% 4.5%
(Unaudited)
June 30, December 31,
2002 2001
--------------------------
Average duration (in years) 2.8 1.9
Average credit quality
(Standard & Poors) AA- AA-
Segment Information The Company classifies its businesses into two underwriting segments - reinsurance and insurance - and a corporate segment (non-underwriting). Segment performance is evaluated based on underwriting income Underwriting income For an insurance company, the difference between the premiums earned and the costs of settling claims. or loss. Other revenue and expense items are not evaluated by segment. The accounting policies of the segments are the same as those used for the 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 . The reinsurance segment consists of the Company's reinsurance underwriting subsidiaries, Arch Reinsurance Ltd., based in 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 , and
Arch Reinsurance Company, based in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . The reinsurance
segment's strategy is to write significant portions of business on
a select number of 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 treaties. Classes of business focused on by the Company's reinsurance subsidiaries include property catastrophe Catastrophe, from the Greek Καταστροφή (katastrephein), literally means "to turn" (strephein) "downwards" (kata-). reinsurance; other property business (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. ); casualty; other specialty business (which includes non-standard auto, surety An individual who undertakes an obligation to pay a sum of money or to perform some duty or promise for another in the event that person fails to act. surety n. and workers' compensation workers' compensation, payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work. ); marine, aviation and space; casualty clash; and non-traditional business. The insurance segment includes the Company's primary underwriting subsidiaries, Arch Insurance Company (formerly known as First American First American may refer to:
The corporate segment (non-underwriting) includes net investment income and net realized gains or losses and other corporate expenses incurred by the Company. Other items of revenue and expenses of the Company are not evaluated at the segment level. The corporate segment also includes the results 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. The following tables set forth an analysis of the Company's underwriting income or loss by segment for the three and six month periods ended June 30, 2002, together with a reconciliation of underwriting income or loss to net income. Due to the significant changes in the Company's operations due to the new underwriting initiative, comparisons between 2002 and 2001 results are not meaningful.
(Unaudited)
Three Months Ended
June 30, 2002
-----------------------------------------
Operating Information
by Segment (in thousands) Reinsurance Insurance Total
------------- ------------- ------------
Net premiums written $176,619 $46,406 $223,025
Net premiums earned 96,330 17,129 113,459
Fee income -- 2,767 2,767
Losses and loss
adjustment expenses (67,100) (13,204) (80,304)
Acquisition expenses (16,226) (1,529) (17,755)
Operating expenses (2,615) (8,588) (11,203)
------------- ------------- ------------
GAAP underwriting
income (loss) $10,389 ($3,425) $6,964
============= =============
Net investment income 11,611
Net realized gains
on investments 2,476
Equity in net income
of investees 778
Net foreign exchange
gains 3,352
Other fee income 1,364
Other corporate expenses (3,651)
Provision for non-cash
compensation (8,636)
Income tax benefit 4,968
------------
Net income $19,226
============
Statutory Basis (1)
Loss ratio 69.7% 77.1% 70.8%
Acquisition expense
ratio (2) 19.0% 0.6% 15.3%
Other operating
expense ratio 3.8% 26.8% 8.5%
------------- ------------- ------------
Combined ratio 92.5% 104.5% 94.6%
------------- ------------- ------------
GAAP Basis (1)
Loss ratio 69.7% 77.1% 70.8%
Acquisition
expense ratio (2) 16.8% (7.2%) 13.2%
Other operating
expense ratio 2.7% 50.1% 9.9%
------------- ------------- ------------
Combined ratio 89.2% 120.0% 93.8%
------------- ------------- ------------
(1) The loss ratios for statutory and GAAP are based on earned
premiums. The statutory expense ratios are based on net premiums
written, while the GAAP expense ratios are based on net premiums
earned.
(2) The acquisition expense ratio is adjusted to include certain
policy-related fee income.
(Unaudited)
Six Months Ended
June 30, 2002
---------------------------------------
Operating Information
by Segment (in thousands) Reinsurance Insurance Total
----------- ------------- -------------
Net premiums written $441,480 $62,256 $503,736
Net premiums earned 151,863 29,123 180,986
Fee income -- 3,935 3,935
Losses and loss
adjustment expenses (108,005) (22,839) (130,844)
Acquisition expenses (23,487) (1,578) (25,065)
Operating expenses (6,133) (12,090) (18,223)
----------- ------------- -------------
GAAP underwriting
income (loss) $14,238 ($3,449) $10,789
=========== ==============
Net investment income 20,778
Net realized gains
on investments 1,011
Equity in net income
of investees 1,576
Net foreign exchange gains 3,244
Other fee income 3,770
Other corporate expenses (9,955)
Provision for non-cash
compensation (12,764)
Income tax benefit 4,743
-------------
Net income $23,192
=============
Statutory Basis (1)
Loss ratio 71.1% 78.4% 72.3%
Acquisition expense
ratio (2) 15.5% (2.9%) 13.2%
Other operating
expense ratio 2.8% 27.0% 5.8%
----------- ------------- -------------
Combined ratio 89.4% 102.5% 91.3%
----------- ------------- -------------
GAAP Basis (1)
Loss ratio 71.1% 78.4% 72.3%
Acquisition
expense ratio (2) 15.5% (8.1%) 11.7%
Other operating
expense ratio 4.0% 41.5% 10.0%
----------- ------------- -------------
Combined ratio 90.6% 111.8% 94.0%
----------- ------------- -------------
(1) The loss ratios for statutory and GAAP are based on earned
premiums. The statutory expense ratios are based on net premiums
written, while the GAAP expense ratios are based on net premiums
earned.
(2) The acquisition expense ratio is adjusted to include certain
policy-related fee income.
Summary information about net premiums written produced by line of
business for the reinsurance segment for the three and six month
periods ended June 30, 2002 is as follows:
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
--------------------- ----------------------
(in thousands) Premiums % Of Total Premiums % Of Total
Written Written
--------------------- ----------------------
Reinsurance Segment
Net Premiums Written by
Class of Business:
Property catastrophe $28,315 16.0% $79,030 17.9%
Other property business 41,203 23.3% 83,875 19.0%
Casualty 16,128 9.1% 56,868 12.9%
Other specialty business 71,194 40.3% 101,449 23.0%
Marine, aviation
and space 9,639 5.5% 28,598 6.5%
Casualty clash 1,779 1.0% 12,929 2.9%
Non-traditional business 8,361 4.8% 78,731 17.8%
---------------------- ---------------------
Total $176,619 100.0% $441,480 100.0%
====================== =====================
Summary information about net premiums written produced by line of
business for the insurance segment for the three and six month periods
ended June 30, 2002 is as follows:
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
--------------------- ---------------------
(in thousands) Premiums % Of Total Premiums % Of Total
Written Written
--------------------- ---------------------
Insurance Segment
Net Premiums Written by
Class of Business:
Executive assurance $10,871 23.4% $12,783 20.5%
Casualty 10,579 22.8% 10,579 17.0%
Program business 6,429 13.8% 8,696 14.0%
Property 5,130 11.1% 5,130 8.3%
Professional liability 2,138 4.6% 2,138 3.4%
Other 11,259 24.3% 22,930 36.8%
---------------------- --------------------
Total $46,406 100.0% $62,256 100.0%
====================== ====================
Calculation of Book Value Per Share
The following actual book value per share calculations are based
on shareholders' equity of $1,246,047 at June 30, 2002 (unaudited) and
$1,020,369 at December 31, 2001 (audited).
(Unaudited)
June 30, 2002
-------------------------------
Common Shares
and Potential
Common Shares Cumulative
Book Value
Per Share
----------------------------
Per common share (1) 23,795,740 $20.10
Series A convertible
preference shares (2) 36,563,488 $20.64
Dilutive Class A
warrants (3) 1,112,468 $20.27
Restricted common
shares (4) --
---------------
Common shares and
potential common
shares 61,471,696
===============
December 31, 2001
-------------------------------------
Common Shares
and Potential
Common Shares Cumulative
Book Value
Per Share
--------------- ---------------
Per common share (1) 13,513,538 $20.05
Series A convertible
preference shares (2) 35,687,735 $20.74
Dilutive Class A
warrants (3) 1,206,206 $20.24
Restricted common
shares (4) 1,689,629 $19.59
---------------
Common shares and
potential common
shares 52,097,108
===============
(1) Book value per common share at June 30, 2002 and December 31, 2001
was determined by dividing (i) the difference between total
shareholders' equity and the aggregate liquidation preference of
the Series A convertible preference shares of $767.8 million and
$749.4 million, respectively, by (ii) the number of common shares
outstanding.
(2) Includes preference shares that were issued by the Company on
November 20, 2001 in exchange for $763.1 million of cash. The
number of preference shares issued was based on the estimated per
share price of $21.38. The estimated per share price was based on
(i) the Company's total shareholders' equity as of June 30, 2001
(adjusted for certain amounts as described in the Subscription
Agreement entered in connection with the capital infusion (the
"Subscription Agreement")), divided by (ii) the total number of
common shares outstanding as of June 30, 2001, which was
12,863,079. In addition, the amount of preference shares at June
30, 2002 includes 875,753 preference shares that were issued by
the Company on June 28, 2002 pursuant to a post-closing purchase
price adjustment mechanism under the Subscription Agreement. Each
preference share is convertible at any time and from time to time
at the option of the holder thereof into one fully paid and
nonassessable common share, subject to possible adjustment.
(3) Includes the net number of common shares that would be issued
under the Class A warrants, primarily issued in connection with
the capital infusion transaction, calculated using the treasury
stock method. Class A warrants to purchase an aggregate of
3,842,450 and 5,401,707 common shares were outstanding as of June
30, 2002 and December 31, 2001, respectively. Class A warrants are
immediately exercisable at $20 per share and expire September 19,
2002. In April 2002, 1,559,257 Class A warrants were canceled in
exchange for 446,608 newly issued common shares.
(4) Represents restricted common shares issued in connection with the
November 2001 capital infusion transaction. These restricted
common shares are included in common shares at June 30, 2002.
Potential Adjustments to Book Value Per Share
The following are potential adjustments to book value per share at
June 30, 2002 and December 31, 2001, excluding the effects of stock
options, that could be made if certain future events described below
occur.
(Unaudited)
June 30, 2002
---------------------------------
Cumulative
Potential
Contingently Adjustments
Issuable to Book
Common Shares Value Per
Share
--------------- --------------
--------------
Contingently issuable:
Series A convertible
preference shares (1) -- --
Series A convertible
preference shares (2) 2,831,174 ($0.89)
Class B warrants (3) 43,428 ($0.91)
December 31, 2001
----------------------------------
Cumulative
Potential
Contingently Adjustments
Issuable to Book Value
Common Shares Per Share
--------------- -- ---------------
Contingently issuable:
Series A convertible
preference shares (1) 875,765 ($0.33)
Series A convertible
preference shares (2) 2,831,174 ($1.31)
Class B warrants (3) 33,495 ($1.32)
(1) Amount at December 31, 2001 represents an estimate of the amount
of additional Series A convertible preference shares that will be
issued to the new investors during the second quarter of 2002
pursuant to a post-closing purchase price adjustment mechanism
under the Subscription Agreement. The per share price was based on
(i) the Company's total shareholders' equity as of June 30, 2001
as set forth on the audited balance sheet, adjusted for certain
items as described in the Subscription Agreement, divided by (ii)
the total number of common shares outstanding as of June 30, 2001.
Consistent with such estimate, 875,753 preference shares were
issued to the new investors on June 28, 2002 and are reflected in
the amount of preference shares at June 30, 2002.
(2) Represents an estimate of the amount of additional Series A
preference shares that would be issued under the Subscription
Agreement in the event that on or prior to September 19, 2005 (1)
the closing price of the Company's common shares is at least $30
per share for at least 20 out of 30 consecutive trading days or
(2) a change in control occurs (either case, a "Triggering
Event"). Pursuant to the Subscription Agreement, the Company has
agreed to issue to the new investors additional Series A
preference shares such that the audited per share price is
adjusted downward by $1.50 per preference share.
(3) Includes the number of common shares that would be issued under
the Class B warrants for purposes of calculating diluted book
value per share under the treasury stock method. Class B warrants
to purchase an aggregate of 150,000 common shares were outstanding
as of June 30, 2002 and December 31, 2001 and expire September 19,
2005. Class B warrants are exercisable at $20 per share when (1)
the closing price of the Company's common shares is at least $30
per share for at least 20 out of 30 consecutive trading days or
(2) a change in control occurs.
Pursuant to the Subscription Agreement, a post-closing purchase price adjustment will be calculated in November 2003 (or such earlier date as agreed upon Adj. 1. agreed upon - constituted or contracted by stipulation or agreement; "stipulatory obligations" stipulatory noncontroversial, uncontroversial - not likely to arouse controversy by the Company and the investors thereunder) based on an adjustment basket basket filled with treats, representative of feast on Easter Sunday. [Folklore: Misc.] See : Easter . The adjustment basket will be equal to (1) the difference between value realized upon sale and the GAAP book value at the closing of the capital infusion (November 2001) (as adjusted based on a pre-determined growth rate) of agreed upon non-core businesses; plus (2) the difference between GAAP net book value of the Company's insurance balances attributable to the Company's core insurance operations with respect to any policy or contract written or having an effective date prior to November 20, 2001 at the time of the final adjustment and those balances at the closing; minus (3) reductions in book value arising from costs and expenses relating to the transaction provided under the Subscription Agreement, actual losses arising out of breach of representations under the Subscription Agreement and certain other costs and expenses. If the adjustment basket, which will be calculated by the Company's independent auditors Independent Auditor An external auditor with a certified public accounting designation that qualifies him or her to provide an auditor's report. Notes: These auditors aren't affiliated with the company being audited. , is less than zero, the Company will issue additional preference shares to the investors based on the decrease in value of the components of the adjustment basket. If the adjustment basket is greater than zero, the Company is allowed to use cash in an amount based on the increase in value of the components of the adjustment basket to repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. common shares (other than any common shares issued upon conversion of the preference shares or exercise of the Class A warrants). If the adjustment basket is less than zero and in the event that a Triggering Event Triggering Event A certain milestone or event that a participant in a qualified plan must experience in order to be eligible to receive a distribution from a qualified plan. occurs, the Company agreed to issue additional preference shares to the investors as a further adjustment. In addition, on the fourth anniversary of the closing, there will be a calculation of a further adjustment basket based on (1) liabilities owed to Folksamerica (if any) under the Asset Purchase Agreement, dated as of January 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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