UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended June 30, 2003

 

 

 

Or

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period                            to                                   

 

Commission file number:  0-26456

 

ARCH CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)

 

Bermuda

 

Not Applicable

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

 

 

Wessex House, 45 Reid Street
Hamilton HM 12 Bermuda

 

 

(Address of principal executive offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code:  (441) 278-9250

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   ý     No  o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   ý  No  o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common shares.

 

Class

 

Outstanding at July 31, 2003

Common Shares, $0.01 par value

 

28,084,950

 

 



 

ARCH CAPITAL GROUP LTD.

 

INDEX

 

 

PART I.  Financial Information

 

Item 1 — Consolidated Financial Statements

Pag­­e No­­.

 

Report of Independent Accountants

2

 

Consolidated Balance Sheets
June 30, 2003 and December 31, 2002

3

 

Consolidated Statements of Income
For the three and six month periods ended June 30, 2003 and 2002

4

 

Consolidated Statements of Changes in Shareholders’ Equity
For the six month periods ended June 30, 2003 and 2002

5

 

Consolidated Statements of Comprehensive Income
For the six month periods ended June 30, 2003 and 2002

6

 

Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2003 and 2002

7

 

Notes to Consolidated Financial Statements

8

 

Item 2 — Management’s Discussion and Analysis of Financial Condition And Results of Operations

24

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

54

 

Item 4 — Controls and Procedures

55

 

PART II.  Other Information

 

 

Item 1 — Legal Proceedings

55

 

Item 5 — Other Information

55

 

Item 6 — Exhibits and Reports on Form 8-K

56

 

1



 

Report of Independent Accountants

 

To the Board of Directors and Shareholders of

Arch Capital Group Ltd.:

 

We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries as of June 30, 2003, and the related consolidated statements of income for each of the three and six month periods ended June 30, 2003 and 2002, and the consolidated statements of comprehensive income, changes in shareholders’ equity, and cash flows for each of the six month periods ended June 30, 2003 and 2002. These interim financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

 

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 19, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2002, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

/s/ PricewaterhouseCoopers LLP

 

New York, New York

July 30, 2003

 

2



 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

(Unaudited)

 

 

 

 

 

June 30,
2003

 

December 31,
2002

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities available for sale, at fair value (amortized cost: 2003, $2,218,222; 2002, $1,334,637)

 

$

2,293,223

 

$

1,382,104

 

Short-term investments available for sale, at fair value (amortized cost:  2003, $244,950; 2002, $480,541)

 

244,950

 

480,541

 

Privately held securities (cost:  2003, $26,787; 2002, $31,630)

 

28,606

 

31,536

 

Total investments

 

2,566,779

 

1,894,181

 

 

 

 

 

 

 

Cash

 

62,013

 

91,717

 

Accrued investment income

 

25,570

 

17,127

 

Premiums receivable

 

560,861

 

343,716

 

Funds held by reinsureds

 

116,038

 

58,351

 

Unpaid losses and loss adjustment expenses recoverable

 

306,436

 

211,100

 

Paid losses and loss adjustment expenses recoverable

 

18,496

 

14,462

 

Prepaid reinsurance premiums

 

188,840

 

120,191

 

Goodwill and intangible assets

 

35,882

 

28,867

 

Deferred income tax asset

 

13,937

 

16,514

 

Deferred acquisition costs, net

 

240,300

 

148,960

 

Other assets

 

67,854

 

46,142

 

Total Assets

 

$

4,203,006

 

$

2,991,328

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$

1,185,593

 

$

592,432

 

Unearned premiums

 

1,253,518

 

761,310

 

Reinsurance balances payable

 

81,591

 

89,191

 

Investment accounts payable

 

5,658

 

45,960

 

Other liabilities

 

110,304

 

91,191

 

Total Liabilities

 

2,636,664

 

1,580,084

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 2003, 38,844,665; 2002, 38,844,665)

 

388

 

388

 

Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2003, 28,034,809; 2002, 27,725,334)

 

280

 

277

 

Additional paid-in capital

 

1,356,014

 

1,347,165

 

Deferred compensation under share award plan

 

(20,321

)

(25,290

)

Retained earnings

 

161,642

 

47,372

 

Accumulated other comprehensive income consisting of unrealized appreciation in value of investments, net of deferred income tax

 

68,339

 

41,332

 

Total Shareholders’ Equity

 

1,566,342

 

1,411,244

 

Total Liabilities and Shareholders’ Equity

 

$

4,203,006

 

$

2,991,328

 

 

See Notes to Consolidated Financial Statements

 

3



 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share data)

 

 

 

(Unaudited)
Three Months Ended
June 30,

 

(Unaudited)
Six Months Ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Revenues

 

 

 

 

 

 

 

 

 

Net premiums written

 

$

560,002

 

$

223,025

 

$

1,336,865

 

$

503,736

 

Increase in unearned premiums

 

(51,146

)

(109,566

)

(423,558

)

(322,750

)

Net premiums earned

 

508,856

 

113,459

 

913,307

 

180,986

 

Net investment income

 

19,772

 

11,611

 

38,210

 

20,778

 

Net realized investment gains

 

3,889

 

2,476

 

10,088

 

1,011

 

Fee income

 

4,934

 

2,733

 

10,610

 

5,488

 

Other income

 

587

 

778

 

1,726

 

1,576

 

Total revenues

 

538,038

 

131,057

 

973,941

 

209,839

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

331,333

 

80,304

 

594,461

 

130,844

 

Acquisition expenses

 

95,620

 

17,755

 

173,772

 

25,065

 

Other operating expenses

 

40,995

 

13,456

 

72,075

 

25,961

 

Net foreign exchange gains

 

(1,761

)

(3,352

)

(2,811

)

(3,244

)

Non-cash compensation

 

3,498

 

8,636

 

7,762

 

12,764

 

Total expenses

 

469,685

 

116,799

 

845,259

 

191,390

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

68,353

 

14,258

 

128,682

 

18,449

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

6,569

 

(4,968

)

14,412

 

(4,743

)

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

61,784

 

$

19,226

 

$

114,270

 

$

23,192

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Share Data

 

 

 

 

 

 

 

 

 

Basic

 

$

2.36

 

$

0.95

 

$

4.38

 

$

1.39

 

Diluted

 

$

0.91

 

$

0.33

 

$

1.70

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

Average Shares Outstanding

 

 

 

 

 

 

 

 

 

Basic

 

26,185,445

 

20,323,114

 

26,101,843

 

16,691,051

 

Diluted

 

67,728,798

 

58,877,515

 

67,381,859

 

54,981,185

 

 

See Notes to Consolidated Financial Statements

 

4



 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands)

 

 

 

(Unaudited)
Six Months Ended
June 30,

 

 

 

2003

 

2002

 

Preference Shares

 

 

 

 

 

Balance at beginning of year

 

$

388

 

$

357

 

Preference shares issued

 

 

9

 

Balance at end of period

 

388

 

366

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Balance at beginning of year

 

277

 

135

 

Common shares issued

 

3

 

103

 

Balance at end of period

 

280

 

238

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

Balance at beginning of year

 

1,347,165

 

1,039,887

 

Common shares issued

 

8,337

 

242,354

 

Common shares retired

 

(646

)

 

Stock options issued

 

1,158

 

160

 

Balance at end of period

 

1,356,014

 

1,282,401

 

 

 

 

 

 

 

Deferred Compensation Under Share Award Plan

 

 

 

 

 

Balance at beginning of year

 

(25,290

)

(8,230

)

Restricted common shares issued

 

(2,686

)

(63,615

)

Deferred compensation expense recognized

 

7,655

 

12,604

 

Balance at end of period

 

(20,321

)

(59,241

)

 

 

 

 

 

 

Retained Earnings (Deficit)

 

 

 

 

 

Balance at beginning of year

 

47,372

 

(11,610

)

Net income

 

114,270

 

23,192

 

Balance at end of period

 

161,642

 

11,582

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income
Unrealized Appreciation (Decline) in Value of Investments,
Net of Deferred Income Tax

 

 

 

 

 

Balance at beginning of year

 

41,332

 

(170

)

Change in unrealized appreciation (decline)

 

27,007

 

10,871

 

Balance at end of period

 

68,339

 

10,701

 

 

 

 

 

 

 

Total Shareholders’ Equity

 

$

1,566,342

 

$

1,246,047

 

 

See Notes to Consolidated Financial Statements

 

5



 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

(Unaudited)
Six Months Ended
June 30,

 

 

 

2003

 

2002

 

Comprehensive Income

 

 

 

 

 

Net income

 

$

114,270

 

$

23,192

 

Other comprehensive income, net of deferred income tax

 

 

 

 

 

Unrealized appreciation in value of investments:

 

 

 

 

 

Unrealized holding gains arising during period

 

35,868

 

10,098

 

Reclassification of net realized (gains) losses, net of tax, included in net income

 

(8,861

)

773

 

Other comprehensive income

 

27,007

 

10,871

 

Comprehensive Income

 

$

141,277

 

$

34,063

 

 

See Notes to Consolidated Financial Statements

 

6



 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

(Unaudited)
Six Months Ended
June 30,

 

 

 

2003

 

2002

 

Operating Activities

 

 

 

 

 

Net income

 

$

114,270

 

$

23,192

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Net realized investment gains

 

(10,088

)

(1,011

)

Provision for non-cash compensation

 

7,762

 

12,764

 

Net unrealized foreign exchange gains

 

(1,647

)

(3,263

)

Changes in:

 

 

 

 

 

Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable

 

494,838

 

106,430

 

Unearned premiums, net of prepaid reinsurance premiums

 

423,559

 

322,458

 

Premiums receivable

 

(214,277

)

(240,069

)

Deferred acquisition costs, net

 

(91,340

)

(56,391

)

Funds held by reinsureds

 

(57,626

)

(27,247

)

Reinsurance balances payable

 

(7,600

)

(9,490

)

Accrued investment income

 

(8,411

)

(5,894

)

Paid losses and loss adjustment expenses recoverable

 

(4,039

)

(2,436

)

Deferred income tax asset

 

27

 

(4,626

)

Other liabilities

 

20,790

 

16,801

 

Loan to Chairman

 

 

(13,530

)

Other items, net

 

1,635

 

(3,983

)

Net Cash Provided By Operating Activities

 

667,853

 

113,705

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of fixed maturity investments

 

(1,602,839

)

(885,654

)

Release of escrowed assets

 

 

(18,833

)

Sales of fixed maturity investments

 

683,660

 

300,277

 

Sales of equity securities

 

7,019

 

13,802

 

Net sales of short-term investments

 

235,943

 

329,843

 

Acquisitions, net of cash

 

(11,774

)

(2,513

)

Purchases of furniture, equipment and other

 

(12,802

)

(2,073

)

Net Cash Used For Investing Activities

 

(700,793

)

(265,151

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from common shares issued

 

3,882

 

179,154

 

Repurchase of common shares

 

(646

)

 

Debt retirement and other

 

 

(37

)

Net Cash Provided By Financing Activities

 

3,236

 

179,117

 

 

 

 

 

 

 

(Decrease) increase in cash

 

(29,704

)

27,671

 

Cash beginning of year

 

91,717

 

9,970

 

Cash end of period

 

$

62,013

 

$

37,641

 

 

 

 

 

 

 

Income taxes paid, net

 

$

22,213

 

$

2,597

 

 

See Notes to Consolidated Financial Statements

 

7



 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.      General

 

Arch Capital Group Ltd. (“ACGL”) is a Bermuda public limited liability company which provides insurance and reinsurance on a worldwide basis through its wholly owned subsidiaries.

 

The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of ACGL and its subsidiaries (together with ACGL, the “Company”).  All significant intercompany transactions and balances have been eliminated in consolidation.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and assumptions.  In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments necessary (consisting mainly of normal recurring accruals) for a fair statement of results on an interim basis.  The results of any interim period are not necessarily indicative of the results for a full year or any future periods.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading.  This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, including the Company’s audited consolidated financial statements and related notes and the section entitled “Business—Risk Factors.”

 

To facilitate period-to-period comparisons, certain amounts in the 2002 consolidated financial statements have been reclassified to conform to the 2003 presentation.  Such reclassifications had no effect on the Company’s consolidated net income, shareholders’ equity or cash flows.

 

 

2.      Stock Options

 

The Company has adopted the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations in accounting for its employee stock options.  Accordingly, under APB No. 25, compensation expense for stock option grants is recognized by the Company to the extent that the fair value of the underlying stock exceeds the exercise price of the option at the measurement date.  As provided under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to continue to account for stock-based compensation in accordance with APB No. 25 and has provided the required additional pro forma disclosures.

 

8



 

If compensation expense for stock-based employee compensation plans had been determined using the fair value recognition provisions of SFAS No. 123, the Company’s net income and earnings per share would have instead been reported as the pro forma amounts indicated below:

 

 

 

(Unaudited)
Three Months Ended
June 30,

 

(Unaudited)
Six Months Ended
June 30,

 

(in thousands, except share data)

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

61,784

 

$

19,226

 

$

114,270

 

$

23,192

 

Total stock-based employee compensation expense under fair value method, net of income tax

 

(1,547

)

(3,363

)

(3,292

)

(7,799

)

Pro forma net income

 

$

60,237

 

$

15,863

 

$

110,978

 

$

15,393

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – basic:

 

 

 

 

 

 

 

 

 

As reported

 

$

2.36

 

$

0.95

 

$

4.38

 

$

1.39

 

Pro forma

 

$

2.30

 

$

0.78

 

$

4.25

 

$

0.92

 

Earnings per share – diluted:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.91

 

$

0.33

 

$

1.70

 

$

0.42

 

Pro forma

 

$

0.89

 

$

0.27

 

$

1.65

 

$

0.28

 

 

3.      Accounting Pronouncements

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities — an interpretation of ARB No. 51” (“FIN 46”), which requires the consolidation of certain entities considered to be variable interest entities (“VIEs”).  An entity is considered to be a VIE when it has equity investors which lack the characteristics of a controlling financial interest or its capital is insufficient to permit it to finance its activities without additional subordinated financial support.  Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE’s expected losses or residual returns if they occur.  FIN 46 provides certain exceptions to these rules, including qualifying special purpose entities subject to the requirements of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”  VIEs created after January 31, 2003 must be consolidated immediately, while VIEs that existed prior to February 1, 2003 must be consolidated as of July 1, 2003.  Certain ceding companies may meet the definition of a VIE due to the protection provided to the ceding company’s equity investors from the absorption of expected losses.  The Company is currently evaluating this standard.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133.  SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.  The Company is currently evaluating this standard.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”  SFAS No. 150 establishes standards for the classification and measurement of financial instruments with characteristics of both liabilities and equity.  SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective beginning in the 2003 third quarter.  The Company is currently evaluating this standard.

 

9



 

4.      Segment Information

 

The determination of the Company’s business segments is based on how the Company monitors the performance of its underwriting operations.  The Company classifies its businesses into two underwriting segments – reinsurance and insurance – and a corporate and other segment (non-underwriting).  The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment.  In addition, other revenue and expense items are not evaluated by segment.  Management measures segment performance based on underwriting income or loss.  The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements.  Inter-segment insurance business is allocated to the segment accountable for the underwriting results in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.”

 

The reinsurance segment consists of the Company’s reinsurance underwriting subsidiaries.  The reinsurance segment generally seeks to write significant lines on specialty property and casualty reinsurance treaties.  Classes of business focused on include casualty, casualty clash, marine, aviation and space, non-traditional, other specialty, property catastrophe, and property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata).

 

The insurance segment consists of the Company’s insurance underwriting subsidiaries which primarily write on a direct basis.  The insurance segment consists of eight profit centers, including casualty, construction and surety, executive assurance, healthcare, professional liability, programs, property, and other (primarily non-standard automobile, collateralized protection business and accident and health and corporate risk programs).

 

The corporate and other segment (non-underwriting) includes net investment income, other fee income and other expenses incurred by the Company, net realized investment gains or losses, net foreign exchange gains or losses and non-cash compensation.  The corporate and other segment also includes the results of the Company’s merchant banking operations.

 

10



 

4.      Segment Information (continued)

 

The following table sets forth an analysis of the Company’s underwriting income by segment, together with a reconciliation of underwriting income to net income for the three months ended June 30, 2003:

 

 

 

(Unaudited)
Three Months Ended
June 30, 2003

 

(in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

337,038

 

$

379,607

 

$

676,005

 

Net premiums written (1)

 

323,520

 

236,482

 

560,002

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

317,504

 

$

191,352

 

$

508,856

 

Policy-related fee income

 

 

3,562

 

3,562

 

Other underwriting-related fee income

 

1,801

 

 

1,801

 

Losses and loss adjustment expenses

 

(203,797

)

(127,536

)

(331,333

)

Acquisition expenses, net

 

(73,702

)

(21,918

)

(95,620

)

Other operating expenses

 

(7,663

)

(30,402

)

(38,065

)

Underwriting income

 

$

34,143

 

$

15,058

 

49,201

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

19,772

 

Net realized investment gains

 

 

 

 

 

3,889

 

Other fee income, net of related expenses

 

 

 

 

 

(429

)

Other income

 

 

 

 

 

587

 

Other expenses

 

 

 

 

 

(2,930

)

Net foreign exchange gains

 

 

 

 

 

1,761

 

Non-cash compensation

 

 

 

 

 

(3,498

)

Income before income taxes

 

 

 

 

 

68,353

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

(6,569

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

61,784

 

 

 

 

 

 

 

 

 

Underwriting Ratios (2)

 

 

 

 

 

 

 

Loss ratio

 

64.2

%

66.6

%

65.1

%

Acquisition expense ratio (3)

 

23.2

%

9.6

%

18.1

%

Other operating expense ratio

 

2.4

%

15.9

%

7.5

%

Combined ratio

 

89.8

%

92.1

%

90.7

%

 


(1)          Gross premiums written by the insurance segment have been ceded to, and are also included in, the reinsurance segment’s gross premiums written.  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 intercompany transactions in the total.  Due to such cessions, the reinsurance segment results include $40.6 million of gross and net premiums written assumed from the insurance segment.

(2)          Underwriting ratios are calculated based on net premiums earned.

(3)          The acquisition expense ratio is adjusted to include policy-related fee income.

 

11



 

4.      Segment Information (continued)

 

The following table sets forth an analysis of the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income for the three months ended June 30, 2002:

 

 

 

(Unaudited)
Three Months Ended
June 30, 2002

 

(in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

180,339

 

$

91,546

 

$

253,655

 

Net premiums written (1)

 

176,619

 

46,406

 

223,025

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

96,330

 

$

17,129

 

113,459

 

Policy-related fee income

 

 

2,767

 

2,767

 

Losses and loss adjustment expenses

 

(67,100

)

(13,204

)

(80,304

)

Acquisition expenses, net

 

(16,226

)

(1,529

)

(17,755

)

Other operating expenses

 

(2,615

)

(8,588

)

(11,203

)

Underwriting income (loss)

 

$

10,389

 

$

(3,425

)

6,964

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

11,611

 

Net realized investment gains

 

 

 

 

 

2,476

 

Other fee income, net of related expenses

 

 

 

 

 

(34

)

Other income

 

 

 

 

 

778

 

Other expenses

 

 

 

 

 

(2,253

)

Net foreign exchange gains

 

 

 

 

 

3,352

 

Non-cash compensation

 

 

 

 

 

(8,636

)

Income before income taxes

 

 

 

 

 

14,258

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

 

 

 

4,968

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

19,226

 

 

 

 

 

 

 

 

 

Underwriting Ratios (2)

 

 

 

 

 

 

 

Loss ratio

 

69.7

%

77.1

%

70.8

%

Acquisition expense ratio (3)

 

16.8

%

(7.2

%)

13.2

%

Other operating expense ratio

 

2.7

%

50.1

%

9.9

%

Combined ratio

 

89.2

%

120.0

%

93.9

%

 


(1)          Gross premiums written by the insurance segment have been ceded to, and are also included in, the reinsurance segment’s gross premiums written.  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 intercompany transactions in the total.  Due to such cessions, the reinsurance segment results include $18.2 million of gross and net premiums written assumed from the insurance segment.

(2)          Underwriting ratios are calculated based on net premiums earned.

(3)          The acquisition expense ratio is adjusted to include policy-related fee income.

 

12



 

4.      Segment Information (continued)

 

The following table sets forth an analysis of the Company’s underwriting income by segment, together with a reconciliation of underwriting income to net income for the six months ended June 30, 2003:

 

 

 

(Unaudited)
Six Months Ended
June 30, 2003

 

(in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

899,699

 

$

724,913

 

$

1,536,105

 

Net premiums written (1)

 

870,956

 

465,909

 

1,336,865

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

583,451

 

$

329,856

 

$

913,307

 

Policy-related fee income

 

 

6,775

 

6,775

 

Other underwriting-related fee income

 

3,728

 

 

3,728

 

Losses and loss adjustment expenses

 

(367,712

)

(226,749

)

(594,461

)

Acquisition expenses, net

 

(138,368

)

(35,404

)

(173,772

)

Other operating expenses

 

(13,782

)

(52,491

)

(66,273

)

Underwriting income

 

$

67,317

 

$

21,987

 

89,304

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

38,210

 

Net realized investment gains

 

 

 

 

 

10,088

 

Other fee income, net of related expenses

 

 

 

 

 

107

 

Other income

 

 

 

 

 

1,726

 

Other expenses

 

 

 

 

 

(5,802

)

Net foreign exchange gains

 

 

 

 

 

2,811

 

Non-cash compensation

 

 

 

 

 

(7,762

)

Income before income taxes

 

 

 

 

 

128,682

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

(14,412

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

114,270

 

 

 

 

 

 

 

 

 

Underwriting Ratios (2)

 

 

 

 

 

 

 

Loss ratio

 

63.0

%

68.7

%

65.1

%

Acquisition expense ratio (3)

 

23.7

%

8.7

%

18.3

%

Other operating expense ratio

 

2.4

%

15.9

%

7.3

%

Combined ratio

 

89.1

%

93.3

%

90.7

%

 


(1)          Gross premiums written by the insurance segment have been ceded to, and are also included in, the reinsurance segment’s gross premiums written.  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 intercompany transactions in the total.  Due to such cessions, the reinsurance segment results include $88.5 million of gross and net premiums written assumed from the insurance segment.

(2)          Underwriting ratios are calculated based on net premiums earned.

(3)          The acquisition expense ratio is adjusted to include policy-related fee income.

 

13



 

4.      Segment Information (continued)

 

The following table sets forth an analysis of the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income for the six months ended June 30, 2002:

 

 

 

(Unaudited)
Six Months Ended
June 30, 2002

 

(in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

445,200

 

$

150,268

 

$

558,450

 

Net premiums written (1)

 

441,480

 

62,256

 

503,736

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

151,863

 

$

29,123

 

$

180,986

 

Policy-related fee income

 

 

3,935

 

3,935

 

Losses and loss adjustment expenses

 

(108,005

)

(22,839

)

(130,844

)

Acquisition expenses, net

 

(23,487

)

(1,578

)

(25,065

)

Other operating expenses

 

(6,133

)

(12,090

)

(18,223

)

Underwriting income (loss)

 

$

14,238

 

$

(3,449

)

10,789

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

20,778

 

Net realized investment gains

 

 

 

 

 

1,011

 

Other fee income, net of related expenses

 

 

 

 

 

(646

)

Other income

 

 

 

 

 

1,576

 

Other expenses

 

 

 

 

 

(5,539

)

Net foreign exchange gains

 

 

 

 

 

3,244

 

Non-cash compensation

 

 

 

 

 

(12,764

)

Income before income taxes

 

 

 

 

 

18,449

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

 

 

 

4,743

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

23,192

 

 

 

 

 

 

 

 

 

Underwriting Ratios (2)

 

 

 

 

 

 

 

Loss ratio

 

71.1

%

78.4

%

72.3

%

Acquisition expense ratio (3)

 

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)          Gross premiums written by the insurance segment have been ceded to, and are also included in, the reinsurance segment’s gross premiums written.  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 intercompany transactions in the total.  Due to such cessions, the reinsurance segment results include $37.0 million of gross and net premiums written assumed from the insurance segment.

(2)          Underwriting ratios are calculated based on net premiums earned.

(3)          The acquisition expense ratio is adjusted to include policy-related fee income.

 

14



 

4.      Segment Information (continued)

 

Set forth below is summary information regarding net premiums written and earned by major line of business and by client location for the reinsurance segment for the three months ended June 30, 2003 and 2002:

 

 

 

(Unaudited)
Three Months Ended
June 30,

 

 

 

2003

 

2002

 

REINSURANCE SEGMENT
(in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Major line of business:

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$

141,864

 

43.9

%

$

16,128

 

9.1

%

Property excluding property catastrophe

 

69,248

 

21.4

%

41,203

 

23.3

%

Other specialty

 

67,926

 

21.0

%

71,194

 

40.3

%

Property catastrophe

 

23,337

 

7.2

%

28,315

 

16.0

%

Marine, aviation and space

 

14,349

 

4.4

%

9,639

 

5.5

%

Non-traditional

 

3,948

 

1.2

%

8,361

 

4.8

%

Casualty clash

 

2,848

 

0.9

%

1,779

 

1.0

%

Total

 

$

323,520

 

100.0

%

$

176,619

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$

112,101

 

35.3

%

$

12,628

 

13.1

%

Property excluding property catastrophe

 

70,684

 

22.3

%

16,509

 

17.1

%

Other specialty

 

62,916

 

19.8

%

25,492

 

26.5

%

Property catastrophe

 

29,634

 

9.3

%

19,922

 

20.7

%

Marine, aviation and space

 

21,689

 

6.8

%

5,992

 

6.2

%

Non-traditional

 

16,423

 

5.2

%

12,513

 

13.0

%

Casualty clash

 

4,057

 

1.3

%

3,274

 

3.4

%

Total

 

$

317,504

 

100.0

%

$

96,330

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Client location:

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

United States

 

$

195,170

 

60.3

%

$

97,103

 

55.0

%

United Kingdom

 

57,286

 

17.7

%

28,689

 

16.2

%

Bermuda

 

13,973

 

4.3

%

6,448

 

3.7

%

Japan

 

13,870

 

4.3

%

12,005

 

6.8

%

Canada

 

11,194

 

3.5

%

9,978

 

5.6

%

Germany

 

8,097

 

2.5

%

3,021

 

1.7

%

France

 

6,456

 

2.0

%

4,778

 

2.7

%

Switzerland

 

3,179

 

1.0

%

372

 

0.2

%

Other

 

14,295

 

4.4

%

14,225

 

8.1

%

Total

 

$

323,520

 

100.0

%

$

176,619

 

100.0

%

 


(1)          Reinsurance segment results include premiums written and earned assumed from the insurance segment of $40.6 million and $39.7 million, respectively, for the 2003 second quarter and $18.2 million and $7.9 million, respectively, for the 2002 second quarter.

 

15



 

4.      Segment Information (continued)

 

Set forth below is summary information regarding net premiums written and earned by major line of business and by client location for the reinsurance segment for the six months ended June 30, 2003 and 2002:

 

 

 

(Unaudited)
Six Months Ended
June 30,

 

 

 

2003

 

2002

 

REINSURANCE SEGMENT
(in thousands)

 

Amount 

 

% of
Total

 

Amount 

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Major line of business:

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$

305,824

 

35.1

%

$

56,868

 

12.9

%

Other specialty

 

203,941

 

23.4

%

101,449

 

23.0

%

Property excluding property catastrophe

 

181,848

 

20.9

%

83,875

 

19.0

%

Property catastrophe

 

72,110

 

8.3

%

79,030

 

17.9

%

Non-traditional

 

51,583

 

5.9

%

78,731

 

17.8

%

Marine, aviation and space

 

45,770

 

5.3

%

28,598

 

6.5

%

Casualty clash

 

9,880

 

1.1

%

12,929

 

2.9

%

Total

 

$

870,956

 

100.0

%

$

441,480

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$

190,608

 

32.7

%

$

19,144

 

12.6

%

Other specialty

 

120,588

 

20.6

%

32,974

 

21.7

%

Property excluding property catastrophe

 

131,751

 

22.6

%

24,339

 

16.0

%

Property catastrophe

 

57,245

 

9.8

%

31,854

 

21.0

%

Non-traditional

 

38,451

 

6.6

%

27,463

 

18.1

%

Marine, aviation and space

 

37,271

 

6.4

%

10,012

 

6.6

%

Casualty clash

 

7,537

 

1.3

%

6,077

 

4.0

%

Total

 

$

583,451

 

100.0

%

$

151,863

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Client location:

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

United States

 

$

524,058

 

60.2

%

$

208,850

 

47.3

%

United Kingdom

 

166,784

 

19.2

%

107,072

 

24.3

%

Bermuda

 

48,297

 

5.5

%

18,772

 

4.2

%

Canada

 

27,370

 

3.1

%

17,909

 

4.0

%

France

 

25,887

 

3.0

%

20,119

 

4.6

%

Germany

 

21,824

 

2.5

%

26,724

 

6.1

%

Japan

 

14,336

 

1.6

%

12,056

 

2.7

%

Switzerland

 

7,460

 

0.9

%

899

 

0.2

%

Other

 

34,940

 

4.0

%

29,079

 

6.6

%

Total

 

$

870,956

 

100.0

%

$

441,480

 

100.0

%

 


(1)  Reinsurance segment results include premiums written and earned assumed from the insurance segment of $88.5 million and $61.5 million, respectively, for the six months ended June 30, 2003 and $37.0 million and $10.5 million, respectively, for the six months ended June 30, 2002.

 

16



 

4.      Segment Information (continued)

 

Set forth below is summary information regarding net premiums written and earned by major line of business and by client location for the insurance segment for the three months ended June 30, 2003 and 2002:

 

 

 

(Unaudited)
Three Months Ended
June 30,

 

 

 

2003

 

2002

 

INSURANCE SEGMENT
(in thousands)

 

Amount

 

%of
Total

 

Amount

 

%of
Total

 

 

 

 

 

 

 

 

 

 

 

Major line of business:

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Programs

 

$

76,949

 

32.5

%

$

6,429

 

13.8

%

Casualty

 

50,992

 

21.5

%

7,936

 

17.1

%

Professional liability

 

28,845

 

12.2

%

2,138

 

4.6

%

Construction and surety

 

22,504

 

9.5

%

2,643

 

5.7

%

Property

 

20,503

 

8.7

%

5,130

 

11.1

%

Executive assurance

 

20,502

 

8.7

%

10,871

 

23.4

%

Healthcare

 

(1,463

)

(0.6

)%

 

 

Other

 

17,650

 

7.5

%

11,259

 

24.3

%

Total

 

$

236,482

 

100.0

%

$

46,406

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Programs

 

$

61,328

 

32.1

%

$

3,251

 

19.0

%

Casualty

 

36,756

 

19.2

%

318

 

1.8

%

Professional liability

 

14,752

 

7.7

%

317

 

1.8

%

Construction and surety

 

15,901

 

8.3

%

319

 

1.9

%

Property

 

17,124

 

8.9

%

387

 

2.3

%

Executive assurance

 

18,855

 

9.9

%

1,671

 

9.8

%

Healthcare

 

7,084

 

3.7

%

 

 

Other

 

19,552

 

10.2

%

10,866

 

63.4

%

Total

 

$

191,352

 

100.0

%

$

17,129

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Client location:

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

United States

 

$

232,743

 

98.4

%

$

45,300

 

97.6

%

United Kingdom

 

936

 

0.4

%

880

 

1.9

%

Indonesia

 

691

 

0.3

%

 

 

Taiwan

 

527

 

0.2

%

 

 

U.S. Virgin Islands

 

415

 

0.2

%

 

 

Venezuela

 

44

 

0.0

%

 

 

Other

 

1,126

 

0.5

%

226

 

0.5

%

Total

 

$

236,482

 

100.0

%

$

46,406

 

100.0

%

 


(1)          Insurance segment results exclude premiums written and earned ceded to the reinsurance segment of $40.6 million and $39.7 million, respectively, for the 2003 second quarter and $18.2 million and $7.9 million, respectively, for the 2002 second quarter.

 

17



 

4.      Segment Information (continued)

 

Set forth below is summary information regarding net premiums written and earned by major line of business and by client location for the insurance segment for the six months ended June 30, 2003 and 2002:

 

 

 

(Unaudited)
Six Months Ended
June 30,

 

 

 

2003

 

2002

 

INSURANCE SEGMENT
(in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Major line of business:

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Programs

 

$

147,576

 

31.7

%

$

8,696

 

14.0

%

Casualty

 

100,327

 

21.5

%

7,936

 

12.8

%

Professional liability

 

48,688

 

10.4

%

2,138

 

3.4

%

Executive assurance

 

45,766

 

9.8

%

12,783

 

20.5

%

Construction and surety

 

42,214

 

9.1

%

2,643

 

4.2

%

Property

 

34,741

 

7.5

%

5,130

 

8.3

%

Healthcare

 

14,801

 

3.2

%

 

 

Other

 

31,796

 

6.8

%

22,930

 

36.8

%

Total

 

$

465,909

 

100.0

%

$

62,256

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Programs

 

$

101,160

 

30.7

%

$

4,983

 

17.1

%

Casualty

 

62,011

 

18.8

%

318

 

1.1

%

Professional liability

 

23,127

 

7.0

%

317

 

1.1

%

Executive assurance

 

35,129

 

10.6

%

1,767

 

6.1

%

Construction and surety

 

25,730

 

7.8

%

319

 

1.1

%

Property

 

29,619

 

9.0

%

387

 

1.3

%

Healthcare

 

15,897

 

4.8

%

 

 

Other

 

37,183

 

11.3

%

21,032

 

72.2

%

Total

 

$

329,856

 

100.0

%

$

29,123

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Client location:

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

United States

 

$

461,071

 

99.0

%

$

61,150

 

98.2

%

United Kingdom

 

971

 

0.2

%

880

 

1.4

%

Indonesia

 

691

 

0.1

%

 

 

U.S. Virgin Islands

 

547

 

0.1

%

 

 

Taiwan

 

527

 

0.1

%

 

 

Venezuela

 

385

 

0.1

%

 

 

Other

 

1,717

 

0.4

%

226

 

0.4

%

Total

 

$

465,909

 

100.0

%

$

62,256

 

100.0

%

 


(1)          Insurance segment results exclude premiums written and earned ceded to the reinsurance segment of $88.5 million and $61.5 million, respectively, for the six months ended June 30, 2003 and $37.0 million and $10.5 million, respectively, for the six months ended June 30, 2002.

 

18



 

5.      Reinsurance

 

In the normal course of business, the Company’s insurance subsidiaries cede a substantial portion of their premium through pro rata, excess of loss and facultative reinsurance agreements.  The Company’s reinsurance subsidiaries are currently retaining substantially all of their assumed reinsurance premiums written.  However, the Company’s reinsurance subsidiaries participate in “common account” retrocessional arrangements for certain pro rata treaties.  Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties, including the reinsurers, such as the Company’s reinsurance subsidiaries, and the ceding company.

 

Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements.  If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance and reinsurance subsidiaries would be liable for such defaulted amounts.

 

The following table sets forth the effects of reinsurance on the Company’s reinsurance and insurance subsidiaries with unaffiliated reinsurers:

 

 

 

(Unaudited)
Three Months Ended
June 30,

 

(Unaudited)
Six Months Ended
June 30,

 

(in thousands)

 

2003

 

2002

 

2003

 

2002

 

 
 
 
 
 
 
 
 
 
 
Premiums Written:
 
 
 
 
 
 
 
 
 

Direct

 

$

348,381

 

$

88,925

 

$

671,680

 

$

147,672

 

Assumed

 

327,624

 

164,730

 

864,425

 

410,778

 

Ceded

 

(116,003

)

(30,630

)

(199,240

)

(54,714

)

Net

 

$

560,002

 

$

223,025

 

$

1,336,865

 

$

503,736

 

 

 

 

 

 

 

 

 

 

 

Premiums Earned:

 

 

 

 

 

 

 

 

 

Direct

 

$

283,972

 

$

49,574

 

$

499,075

 

$

93,070

 

Assumed

 

285,381

 

92,146

 

574,251

 

145,160

 

Ceded

 

(60,497

)

(28,261

)

(160,019

)

(57,244

)

Net

 

$

508,856

 

$

113,459

 

$

913,307

 

$

180,986

 

 

 

 

 

 

 

 

 

 

 

Losses and Loss Adjustment Expenses Incurred:

 

 

 

 

 

 

 

 

 

Direct

 

$

223,352

 

$

85,542

 

$

382,893

 

$

127,249

 

Assumed

 

177,552