UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

[X]

 

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

 

 

For the quarterly period ended June 30, 2005

Or

[   ]

 

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        X          No  ______

 

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

Yes        X          No  ______

 

Indicate the number of shares outstanding of each of the issuer’s classes of common shares as of the latest practicable date.

 

Class

 

Outstanding at July 28, 2005

Common Shares, $0.01 par value

 

35,274,505

 

 


 

ARCH CAPITAL GROUP LTD.

 

 

INDEX

 

 

Page No.

 

PART I.  Financial Information

 

 

 

 

 

Item 1 — Consolidated Financial Statements

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

2

 

 

 

 

Consolidated Balance Sheets
June 30, 2005 and December 31, 2004

3

 

 

 

 

Consolidated Statements of Income
For the three and six month periods ended June 30, 2005 and 2004

4

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity
For the six month periods ended June 30, 2005 and 2004

5

 

 

 

 

Consolidated Statements of Comprehensive Income
For the six month periods ended June 30, 2005 and 2004

6

 

 

 

 

Consolidated Statements of Cash Flows
For the six month periods ended June 30, 2005 and 2004

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

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

27

 

 

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

67

 

 

 

 

Item 4 — Controls and Procedures

67

 

 

 

 

PART II.  Other Information

 

 

 

 

 

Item 1 — Legal Proceedings

68

 

 

 

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

68

 

 

 

 

Item 4 – Submission of Matters to a Vote of Security Holders

69

 

 

 

 

Item 5 — Other Information

71

 

 

 

 

Item 6 — Exhibits

71

 

 

1


 

Report of Independent Registered Public Accounting Firm

 

 

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, 2005, and the related consolidated statements of income for each of the three-month and six-month periods ended June 30, 2005 and 2004, and the consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for the six-month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board, 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 statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, comprehensive income, and changes in shareholders’ equity and of cash flows for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 and the effectiveness of the Company’s internal control over financial reporting as of December 31,2004; and in our report dated March 14, 2005, we expressed unqualified opinions thereon. The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, 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

August 2, 2005

 

2


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except share data)

 

 

 

(Unaudited)

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2005

 

2004

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities available for sale, at fair value (amortized cost: 2005, $6,079,549; 2004, $5,506,193)

 

$6,124,248

 

$5,545,121

 

Short-term investments available for sale, at fair value (amortized cost: 2005, $177,156; 2004, $155,498)

 

176,268

 

155,771

 

Privately held securities, at fair value (cost: 2005, $13,619; 2004, $17,022)

 

22,251

 

21,571

 

Total investments

 

6,322,767

 

5,722,463

 

 

 

 

 

 

 

Cash

 

162,017

 

113,052

 

Accrued investment income

 

63,210

 

57,163

 

Premiums receivable

 

622,664

 

520,781

 

Funds held by reinsureds

 

199,283

 

209,946

 

Unpaid losses and loss adjustment expenses recoverable

 

798,752

 

695,582

 

Paid losses and loss adjustment expenses recoverable

 

31,611

 

26,874

 

Prepaid reinsurance premiums

 

336,721

 

321,422

 

Goodwill and intangible assets

 

16,666

 

16,666

 

Deferred income tax assets, net

 

54,101

 

58,745

 

Deferred acquisition costs, net

 

303,969

 

278,184

 

Other assets

 

216,883

 

197,876

 

Total Assets

 

$9,128,644

 

$8,218,754

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$4,175,403

 

$3,570,734

 

Unearned premiums

 

1,641,659

 

1,541,217

 

Reinsurance balances payable

 

143,838

 

169,502

 

Senior notes

 

300,000

 

300,000

 

Deposit accounting liabilities

 

50,337

 

44,023

 

Payable for securities purchased

 

20,152

 

53,642

 

Other liabilities

 

293,863

 

297,730

 

Total Liabilities

 

6,625,252

 

5,976,848

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Preference shares ($0.01 par value, 50,000,000 shares authorized, issued: 2005, 37,327,502; 2004, 37,348,150)

 

373

 

373

 

Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2005, 35,262,005; 2004, 34,902,923)

 

353

 

349

 

Additional paid-in capital

 

1,568,955

 

1,560,291

 

Deferred compensation under share award plan

 

(6,389)

 

(9,879)

 

Retained earnings

 

886,746

 

644,862

 

Accumulated other comprehensive income, net of deferred income tax

 

53,354

 

45,910

 

Total Shareholders’ Equity

 

2,503,392

 

2,241,906

 

Total Liabilities and Shareholders’ Equity

 

$9,128,644

 

$8,218,754

 

 

See Notes to Consolidated Financial Statements

 

3


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(U.S. dollars in thousands, except share data)

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Revenues

 

 

 

 

 

 

 

 

 

Net premiums written

 

$723,728

 

$677,646

 

$1,523,529

 

$1,561,234

 

(Increase) decrease in unearned premiums

 

16,164

 

45,753

 

(86,569)

 

(130,009)

 

Net premiums earned

 

739,892

 

723,399

 

1,436,960

 

1,431,225

 

Net investment income

 

53,660

 

32,811

 

103,576

 

57,384

 

Net realized gains (losses)

 

2,105

 

(2,321)

 

2,566

 

6,580

 

Fee income

 

1,025

 

4,304

 

7,137

 

8,298

 

Other income (loss)

 

 

(4,385)

 

 

(3,343)

 

Total revenues

 

796,682

 

753,808

 

1,550,239

 

1,500,144

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

443,918

 

436,895

 

869,454

 

866,509

 

Acquisition expenses

 

148,538

 

136,889

 

274,671

 

289,745

 

Other operating expenses

 

74,232

 

69,155

 

147,633

 

125,248

 

Interest expense

 

5,629

 

4,642

 

11,265

 

6,016

 

Net foreign exchange gains

 

(10,198)

 

(5,503)

 

(13,435)

 

(184)

 

Non-cash compensation

 

753

 

2,756

 

1,527

 

5,394

 

Total expenses

 

662,872

 

644,834

 

1,291,115

 

1,292,728

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

133,810

 

108,974

 

259,124

 

207,416

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

7,818

 

4,692

 

17,240

 

15,679

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$125,992

 

$104,282

 

$241,884

 

$191,737

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Share Data

 

 

 

 

 

 

 

 

 

Basic

 

$3.65

 

$3.26

 

$7.02

 

$6.47

 

Diluted

 

$1.69

 

$1.42

 

$3.26

 

$2.69

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

 

 

 

Basic

 

34,563,565

 

32,023,865

 

34,464,740

 

29,650,932

 

Diluted

 

74,412,553

 

73,500,041

 

74,249,728

 

71,336,798

 

 

See Notes to Consolidated Financial Statements

 

4


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

Preference Shares

 

 

 

 

 

Balance at beginning of year

 

$373

 

$388

 

Converted to common shares

 

(0)

 

(4)

 

Balance at end of period

 

373

 

384

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Balance at beginning of year

 

349

 

282

 

Common shares issued

 

4

 

49

 

Converted from preference shares

 

0

 

4

 

Balance at end of period

 

353

 

335

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

Balance at beginning of year

 

1,560,291

 

1,361,267

 

Common shares issued

 

1,698

 

184,437

 

Exercise of stock options

 

7,430

 

3,592

 

Common shares retired

 

(846)

 

(2,708)

 

Other

 

382

 

1,854

 

Balance at end of period

 

1,568,955

 

1,548,442

 

 

 

 

 

 

 

Deferred Compensation Under Share Award Plan

 

 

 

 

 

Balance at beginning of year

 

(9,879)

 

(15,004)

 

Restricted common shares issued

 

(291)

 

(2,142)

 

Deferred compensation expense recognized

 

3,781

 

5,354

 

Balance at end of period

 

(6,389)

 

(11,792)

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

Balance at beginning of year

 

644,862

 

327,963

 

Net income

 

241,884

 

191,737

 

Balance at end of period

 

886,746

 

519,700

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income

 

 

 

 

 

Balance at beginning of year

 

45,910

 

35,833

 

Change in unrealized appreciation (decline) in value of investments, net of deferred income tax

 

8,514

 

(53,958)

 

Foreign currency translation adjustments, net of deferred income tax

 

(1,070)

 

(1,440)

 

Balance at end of period

 

53,354

 

(19,565)

 

 

 

 

 

 

 

Total Shareholders’ Equity

 

$2,503,392

 

$2,037,504

 

 

See Notes to Consolidated Financial Statements

 

5


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

Comprehensive Income

 

 

 

 

 

Net income

 

$241,884

 

$191,737

 

Other comprehensive income (loss), net of deferred income tax

 

 

 

 

 

Unrealized appreciation (decline) in value of investments:

 

 

 

 

 

Unrealized holding gains (losses) arising during period

 

9,239

 

(50,987)

 

Reclassification of net realized gains, net of income taxes, included in net income

 

(725)

 

(2,971)

 

Foreign currency translation adjustments

 

(1,070)

 

(1,440)

 

Other comprehensive income (loss)

 

7,444

 

(55,398)

 

Comprehensive Income

 

$249,328

 

$136,339

 

 

See Notes to Consolidated Financial Statements

 

6


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2005

 

2004

 

Operating Activities

 

 

 

 

 

Net income

 

$241,884

 

$191,737

 

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

 

 

 

 

 

Net realized gains

 

(1,022)

 

(5,630)

 

Other (income) loss

 

 

3,343

 

Non-cash compensation

 

4,073

 

5,394

 

Changes in:

 

 

 

 

 

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

 

501,499

 

653,127

 

Unearned premiums, net of prepaid reinsurance premiums

 

85,143

 

130,009

 

Premiums receivable

 

(101,883)

 

(125,830)

 

Deferred acquisition costs, net

 

(25,785)

 

(26,373)

 

Funds held by reinsureds

 

10,663

 

5,148

 

Reinsurance balances payable

 

(25,664)

 

(13,534)

 

Accrued investment income

 

(6,047)

 

(11,903)

 

Paid losses and loss adjustment expenses recoverable

 

(4,737)

 

(4,634)

 

Deferred income tax assets, net

 

5,142

 

(13,213)

 

Deposit accounting liabilities

 

6,314

 

15,733

 

Other liabilities

 

(1,395)

 

24,360

 

Other items, net

 

(2,592)

 

15,671

 

Net Cash Provided By Operating Activities

 

685,593

 

843,405

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of fixed maturity investments

 

(1,985,427)

 

(3,413,832)

 

Proceeds from sales of fixed maturity investments

 

1,194,890

 

2,152,504

 

Proceeds from redemptions and maturities of fixed maturity investments

 

163,973

 

124,585

 

Sales of equity securities

 

1,986

 

11,043

 

Net (purchases) sales of short-term investments

 

(9,528)

 

148,182

 

Purchases of furniture, equipment and other

 

(7,588)

 

(10,878)

 

Net Cash Used For Investing Activities

 

(641,694)

 

(988,396)

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from common shares issued

 

6,348

 

182,090

 

Proceeds from issuance of senior notes

 

 

296,442

 

Repayment of revolving credit agreement borrowings

 

 

(200,000)

 

Repurchase of common shares

 

(780)

 

(879)

 

Net Cash Provided By Financing Activities

 

5,568

 

277,653

 

Effects of exchange rate changes on foreign currency cash

 

(502)

 

(1,440)

 

Increase in cash

 

48,965

 

131,222

 

Cash beginning of year

 

113,052

 

56,899

 

Cash end of period

 

$162,017

 

$188,121

 

Income taxes paid, net

 

$34,958

 

$22,663

 

Interest paid

 

$11,141

 

$1,861

 

 

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 unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of ACGL and its wholly owned 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 consolidated 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 (consisting of normally recurring accruals) necessary 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; 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, 2004, 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 2004 consolidated financial statements have been reclassified to conform to the 2005 presentation. Such reclassifications had no effect on the Company’s consolidated net income.

 

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


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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)

 

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(U.S. dollars in thousands, except share data)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$125,992

 

$104,282

 

$241,884

 

$191,737

 

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

 

(1,119)

 

(427)

 

(2,196)

 

(937)

 

Pro forma net income

 

$124,873

 

$103,855

 

$239,688

 

$190,800

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – basic:

 

 

 

 

 

 

 

 

 

As reported

 

$3.65

 

$3.26

 

$7.02

 

$6.47

 

Pro forma

 

$3.61

 

$3.24

 

$6.95

 

$6.43

 

Earnings per share – diluted:

 

 

 

 

 

 

 

 

 

As reported

 

$1.69

 

$1.42

 

$3.26

 

$2.69

 

Pro forma

 

$1.68

 

$1.41

 

$3.22

 

$2.67

 

 

3.      Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB No. 25 and requires that the estimated expense resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) eliminates the alternative to disclose, on a pro forma basis, the effects of the fair value based method. Pursuant to a Securities and Exchange Commission ruling released on April 14, 2005, which deferred the effective date of SFAS No. 123(R) for calendar year companies from July 1, 2005 to January 1, 2006, the Company will adopt the fair value recognition provisions of accounting for employee stock option awards as defined in SFAS No. 123(R) on January 1, 2006 under the modified prospective application. Under the fair value method of accounting, compensation expense is estimated based on the fair value of the award at the grant date and recognized over the requisite service period. Under the modified prospective application, the fair value based method described in SFAS No. 123(R) is applied to new awards granted after January 1, 2006. Additionally, the unrecognized expense related to the unvested portions of option awards that were outstanding as of the effective date will be recognized as compensation expense as the requisite service is rendered. The Company is currently evaluating the impact of adopting SFAS No. 123(R) on the results of its operations. However, the impact of adopting SFAS No. 123(R) will have no effect on the Company’s cash flows or shareholders’ equity.

 

9


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.      Segment Information

 

The Company classifies its businesses into two underwriting segments – reinsurance and insurance – and a corporate and other segment (non-underwriting). The Company’s reinsurance and insurance operating segments each have segment managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the President and Chief Executive Officer of ACGL and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. The Company determined its reportable operating segments using the management approach described in SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.”

 

Management measures segment performance based on underwriting income or loss. The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment. In addition, other revenue and expense items are not evaluated by segment. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Inter-segment insurance business is allocated to the segment accountable for the underwriting results.

 

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

 

The insurance segment consists of the Company’s insurance underwriting subsidiaries which primarily write on both an admitted and non-admitted basis. The insurance segment consists of eight product lines: casualty; construction and surety; executive assurance; healthcare; professional liability; programs; property, marine and aviation; and other (primarily non-standard auto prior to the sale of such operations in December 2004, collateralized protection business and certain programs).

 

The corporate and other segment (non-underwriting) includes net investment income, other fee income, net of related expenses, other income, other expenses incurred by the Company, interest expense, net realized gains or losses, net foreign exchange gains or losses and non-cash compensation. The corporate and other segment also includes the results of the Company’s merchant banking operations prior to the sale of such operations in October 2004.

 

10


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables set forth an analysis of the Company’s underwriting income by segment, together with a reconciliation of underwriting income to net income:

 

 

 

(Unaudited)

 

 

 

Three Months Ended
June 30, 2005

 

(U.S. dollars in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$376,803

 

$577,420

 

$940,753

 

Net premiums written (1)

 

350,056

 

373,672

 

723,728

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$385,806

 

$354,086

 

$739,892

 

Policy-related fee income

 

 

732

 

732

 

Other underwriting-related fee income

 

22

 

271

 

293

 

Losses and loss adjustment expenses

 

(213,947)

 

(229,971)

 

(443,918)

 

Acquisition expenses, net

 

(113,443)

 

(35,095)

 

(148,538)

 

Other operating expenses

 

(11,882)

 

(57,232)

 

(69,114)

 

Underwriting income

 

$46,556

 

$32,791

 

79,347

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

53,660

 

Net realized gains

 

 

 

 

 

2,105

 

Other expenses

 

 

 

 

 

(5,118)

 

Interest expense

 

 

 

 

 

(5,629)

 

Net foreign exchange gains

 

 

 

 

 

10,198

 

Non-cash compensation

 

 

 

 

 

(753)

 

Income before income taxes

 

 

 

 

 

133,810

 

Income tax expense

 

 

 

 

 

(7,818)

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$125,992

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

55.5%

 

64.9%

 

60.0%

 

Acquisition expense ratio (2)

 

29.4%

 

9.7%

 

20.0%

 

Other operating expense ratio

 

3.1%

 

16.2%

 

9.3%

 

Combined ratio

 

88.0%

 

90.8%

 

89.3%

 

 

(1)          Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The reinsurance segment and insurance segment results include $12.8 million and $0.7 million, respectively, of gross and net premiums written and $14.7 million and $1.2 million, respectively, of net premiums earned assumed through intersegment transactions.

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

 

11


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(Unaudited)

 

 

 

Three Months Ended
June 30, 2004

 

(U.S. dollars in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$382,987

 

$465,516

 

$816,323

 

Net premiums written (1)

 

364,271

 

313,375

 

677,646

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$378,874

 

$344,525

 

$723,399

 

Policy-related fee income

 

 

3,608

 

3,608

 

Other underwriting-related fee income

 

56

 

296

 

352

 

Losses and loss adjustment expenses

 

(218,479)

 

(218,416)

 

(436,895)

 

Acquisition expenses, net

 

(98,265)

 

(38,624)

 

(136,889)

 

Other operating expenses

 

(10,380)

 

(54,524)

 

(64,904)

 

Underwriting income

 

$51,806

 

$36,865

 

88,671

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

32,811

 

Net realized losses

 

 

 

 

 

(2,321)

 

Other fee income, net of related expenses

 

 

 

 

 

344

 

Other income (loss)

 

 

 

 

 

(4,385)

 

Other expenses

 

 

 

 

 

(4,251)

 

Interest expense

 

 

 

 

 

(4,642)

 

Net foreign exchange gains

 

 

 

 

 

5,503

 

Non-cash compensation

 

 

 

 

 

(2,756)

 

Income before income taxes

 

 

 

 

 

108,974

 

Income tax expense

 

 

 

 

 

(4,692)

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$104,282

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

57.7%

 

63.4%

 

60.4%

 

Acquisition expense ratio (2)

 

25.9%

 

10.2%

 

18.4%

 

Other operating expense ratio

 

2.7%

 

15.8%

 

9.0%

 

Combined ratio

 

86.3%

 

89.4%

 

87.8%

 

 

(1)          Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The reinsurance segment and insurance segment results include $29.8 million and $2.4 million, respectively, of gross and net premiums written and $34.7 million and $1.9 million, respectively, of net premiums earned assumed through intersegment transactions.

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

 

12


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(Unaudited)

 

 

 

Six Months Ended
June 30, 2005

 

(U.S. dollars in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$865,598

 

$1,084,164

 

$1,921,445

 

Net premiums written (1)

 

827,749

 

695,780

 

1,523,529

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$761,838

 

$675,122

 

$1,436,960

 

Policy-related fee income

 

 

1,649

 

1,649

 

Other underwriting-related fee income

 

4,645

 

843

 

5,488

 

Losses and loss adjustment expenses

 

(432,621)

 

(436,833)

 

(869,454)

 

Acquisition expenses, net

 

(212,895)

 

(61,776)

 

(274,671)

 

Other operating expenses

 

(22,775)

 

(114,187)

 

(136,962)

 

Underwriting income

 

$98,192

 

$64,818

 

163,010

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

103,576

 

Net realized gains

 

 

 

 

 

2,566

 

Other expenses

 

 

 

 

 

(10,671)

 

Interest expense

 

 

 

 

 

(11,265)

 

Net foreign exchange gains

 

 

 

 

 

13,435

 

Non-cash compensation

 

 

 

 

 

(1,527)

 

Income before income taxes

 

 

 

 

 

259,124

 

Income tax expense

 

 

 

 

 

(17,240)

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$241,884

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

56.8%

 

64.7%

 

60.5%

 

Acquisition expense ratio (2)

 

27.9%

 

8.9%

 

19.0%

 

Other operating expense ratio

 

3.0%

 

16.9%

 

9.5%

 

Combined ratio

 

87.7%

 

90.5%

 

89.0%

 

 

(1)          Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The reinsurance segment and insurance segment results include $26.8 million and $1.5 million, respectively, of gross and net premiums written and $31.1 million and $2.4 million, respectively, of net premiums earned assumed through intersegment transactions.

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

 

13


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(Unaudited)

 

 

 

Six Months Ended
June 30, 2004

 

(U.S. dollars in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$948,726

 

$947,085

 

$1,826,111

 

Net premiums written (1)

 

915,159

 

646,075

 

1,561,234

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$761,924

 

$669,301

 

$1,431,225

 

Policy-related fee income

 

 

7,393

 

7,393

 

Other underwriting-related fee income

 

376

 

424

 

800

 

Losses and loss adjustment expenses

 

(438,296)

 

(428,213)

 

(866,509)

 

Acquisition expenses, net

 

(205,393)

 

(84,352)

 

(289,745)

 

Other operating expenses

 

(19,651)

 

(97,783)

 

(117,434)

 

Underwriting income

 

$98,960

 

$66,770

 

165,730

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

57,384

 

Net realized gains

 

 

 

 

 

6,580

 

Other fee income, net of related expenses

 

 

 

 

 

105

 

Other income (loss)

 

 

 

 

 

(3,343)

 

Other expenses

 

 

 

 

 

(7,814)

 

Interest expense

 

 

 

 

 

(6,016)

 

Net foreign exchange gains

 

 

 

 

 

184

 

Non-cash compensation

 

 

 

 

 

(5,394)

 

Income before income taxes

 

 

 

 

 

207,416

 

Income tax expense

 

 

 

 

 

(15,679)

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$191,737

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

57.5%

 

64.0%

 

60.5%

 

Acquisition expense ratio (2)

 

27.0%

 

11.5%

 

19.7%

 

Other operating expense ratio

 

2.6%

 

14.6%

 

8.2%

 

Combined ratio

 

87.1%

 

90.1%

 

88.4%

 

 

(1)          Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The reinsurance segment and insurance segment results include $64.5 million and $5.2 million, respectively, of gross and net premiums written and $68.7 million and $3.5 million, respectively, of net premiums earned assumed through intersegment transactions.

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

 

14


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables provide summary information regarding net premiums written and earned by major line of business and type of business, together with net premiums written by client location for the reinsurance segment:

 

 

 

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

 

2005

 

2004

 

REINSURANCE SEGMENT
(U.S. dollars in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$160,646

 

45.9%

 

$223,626

 

61.4%

 

Property excluding property catastrophe

 

81,341

 

23.2%

 

65,987

 

18.1%

 

Other specialty

 

74,988

 

21.4%

 

42,234

 

11.6%

 

Marine and aviation

 

18,089

 

5.2%

 

12,067

 

3.3%

 

Property catastrophe

 

9,362

 

2.7%

 

13,019

 

3.6%

 

Other

 

5,630

 

1.6%

 

7,338

 

2.0%

 

Total

 

$350,056

 

100.0%

 

$364,271

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$176,399

 

45.7%

 

$189,777

 

50.1%

 

Property excluding property catastrophe

 

87,488

 

22.7%

 

56,878

 

15.0%

 

Other specialty

 

68,545

 

17.8%

 

73,800

 

19.5%

 

Marine and aviation

 

20,619

 

5.3%

 

21,682

 

5.7%

 

Property catastrophe

 

21,768

 

5.6%

 

23,397

 

6.2%

 

Other

 

10,987

 

2.9%

 

13,340

 

3.5%

 

Total

 

$385,806

 

100.0%

 

$378,874

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$305,842

 

87.4%

 

$287,312

 

78.9%

 

Excess of loss

 

44,214

 

12.6%

 

76,959

 

21.1%

 

Total

 

$350,056

 

100.0%

 

$364,271

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$294,526

 

76.3%

 

$279,940

 

73.9%

 

Excess of loss

 

91,280

 

23.7%

 

98,934

 

26.1%

 

Total

 

$385,806

 

100.0%

 

$378,874

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States and Canada

 

$205,837

 

58.8%

 

$239,841

 

65.9%

 

Europe

 

109,970

 

31.4%

 

78,079

 

21.4%

 

Bermuda

 

17,314

 

5.0%

 

26,282

 

7.2%

 

Asia and Pacific

 

9,829

 

2.8%

 

12,419

 

3.4%

 

Other

 

7,106

 

2.0%

 

7,650

 

2.1%

 

Total

 

$350,056

 

100.0%

 

$364,271

 

100.0%

 

 

(1)          Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $12.8 million and $14.7 million, respectively, for the 2005 second quarter and $29.8 million and $34.7 million, respectively, for the 2004 second quarter. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $0.7 million and $1.2 million, respectively, for the 2005 second quarter and $2.4 million and $1.9 million, respectively, for the 2004 second quarter.

 

15


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

REINSURANCE SEGMENT
(U.S. dollars in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$371,515

 

44.9%

 

$452,177

 

49.4%

 

Property excluding property catastrophe

 

169,536

 

20.5%

 

174,576

 

19.1%

 

Other specialty

 

166,017

 

20.1%

 

148,531

 

16.2%

 

Property catastrophe

 

53,924

 

6.5%

 

71,223

 

7.8%

 

Marine and aviation

 

48,118

 

5.8%

 

42,710

 

4.7%

 

Other

 

18,639

 

2.2%

 

25,942

 

2.8%

 

Total

 

$827,749

 

100.0%

 

$915,159

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$389,660

 

51.1%

 

$342,353

 

44.9%

 

Property excluding property catastrophe

 

144,983

 

19.0%

 

141,675

 

18.6%

 

Other specialty

 

119,299

 

15.7%

 

159,915

 

21.0%

 

Property catastrophe

 

46,529

 

6.1%

 

50,610

 

6.6%

 

Marine and aviation

 

42,610

 

5.6%

 

42,464

 

5.6%

 

Other

 

18,757

 

2.5%

 

24,907

 

3.3%

 

Total

 

$761,838

 

100.0%

 

$761,924

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$625,489

 

75.6%

 

$611,418

 

66.8%

 

Excess of loss

 

202,260

 

24.4%

 

303,741

 

33.2%

 

Total

 

$827,749

 

100.0%

 

$915,159

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$572,138

 

75.1%

 

$564,222

 

74.1%

 

Excess of loss

 

189,700

 

24.9%

 

197,702

 

25.9%

 

Total

 

$761,838

 

100.0%

 

$761,924

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States and Canada

 

$486,587

 

58.8%

 

$580,739

 

63.5%

 

Europe

 

265,465

 

32.1%

 

236,681

 

25.9%

 

Bermuda

 

44,378

 

5.4%

 

63,407

 

6.9%

 

Asia and Pacific

 

15,399

 

1.8%

 

17,871

 

1.9%

 

Other

 

15,920

 

1.9%

 

16,461

 

1.8%

 

Total

 

$827,749

 

100.0%

 

$915,159

 

100.0%

 

 

(1)          Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $26.8 million and $31.1 million, respectively, for the six months ended June 30, 2005 and $64.5 million and $68.7 million, respectively, for the six months ended June 30, 2004. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $1.5 million and $2.4 million, respectively, for the 2005 second quarter and $5.2 million and $3.5 million, respectively, for the 2004 second quarter.

 

16


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables provide summary information regarding net premiums written and earned by major line of business and type of business, together with net premiums written by client location for the insurance segment:

 

 

 

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

 

2005

 

2004

 

INSURANCE SEGMENT
(U.S. dollars in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$72,503

 

19.4%

 

$52,712

 

16.8%

 

Property, marine and aviation

 

68,090

 

18.2%

 

35,792

 

11.4%

 

Programs

 

58,524

 

15.7%

 

92,197

 

29.4%

 

Professional liability

 

57,795

 

15.5%

 

41,318

 

13.2%

 

Executive assurance

 

48,131

 

12.9%

 

30,533

 

9.7%

 

Construction and surety

 

40,552

 

10.8%

 

27,745

 

8.9%

 

Healthcare

 

12,626

 

3.4%

 

10,367

 

3.3%

 

Other

 

15,451

 

4.1%

 

22,711

 

7.3%

 

Total

 

$373,672

 

100.0%

 

$313,375

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$73,686

 

20.8%

 

$57,560

 

16.7%

 

Property, marine and aviation

 

55,534

 

15.7%

 

33,643

 

9.8%

 

Programs

 

53,154

 

15.0%

 

102,496

 

29.7%

 

Professional liability

 

52,922

 

15.0%

 

44,619

 

13.0%

 

Executive assurance

 

37,149

 

10.5%

 

31,373

 

9.1%

 

Construction and surety

 

46,910

 

13.2%

 

41,260

 

12.0%

 

Healthcare

 

16,339

 

4.6%

 

12,149

 

3.5%

 

Other

 

18,392

 

5.2%

 

21,425

 

6.2%

 

Total

 

$354,086

 

100.0%

 

$344,525

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States and Canada

 

$327,754

 

87.7%

 

$303,075

 

96.7%

 

Europe

 

29,195

 

7.8%

 

5,890

 

1.9%

 

Other

 

16,723

 

4.5%

 

4,410

 

1.4%

 

Total

 

$373,672

 

100.0%

 

$313,375

 

100.0%

 

 

(1)          Insurance segment results include premiums written and earned assumed through intersegment transactions of $0.7 million and $1.2 million, respectively, for the 2005 second quarter and $2.4 million and $1.9 million, respectively, for the 2004 second quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $12.8 million and $14.7 million, respectively, for the 2005 second quarter and $29.8 million and $34.7 million, respectively, for the 2004 second quarter.

 

17


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

INSURANCE SEGMENT
(U.S. dollars in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$136,301

 

19.6%

 

$116,259

 

18.0%

 

Programs

 

111,791

 

16.1%

 

181,977

 

28.2%

 

Property, marine and aviation

 

110,182

 

15.8%

 

65,523

 

10.1%

 

Professional liability

 

108,235

 

15.6%

 

92,882

 

14.4%

 

Construction and surety

 

92,594

 

13.2%

 

65,988

 

10.2%

 

Executive assurance

 

74,161

 

10.7%

 

58,016

 

9.0%

 

Healthcare

 

29,062

 

4.2%

 

23,793

 

3.7%

 

Other

 

33,454

 

4.8%

 

41,637

 

6.4%

 

Total

 

$695,780

 

100.0%

 

$646,075

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$142,953

 

21.2%

 

$112,340

 

16.8%

 

Programs

 

108,465

 

16.1%

 

190,567

 

28.5%

 

Property, marine and aviation

 

99,083

 

14.7%

 

68,355

 

10.2%

 

Professional liability

 

101,672

 

15.0%

 

85,246

 

12.8%

 

Construction and surety

 

89,689

 

13.3%

 

91,172

 

13.6%

 

Executive assurance

 

64,371

 

9.5%

 

62,411

 

9.3%

 

Healthcare

 

33,339

 

4.9%

 

23,666

 

3.5%

 

Other

 

35,550

 

5.3%

 

35,544

 

5.3%

 

Total

 

$675,122

 

100.0%

 

$669,301

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States and Canada

 

$614,296

 

88.3%

 

$627,910

 

97.2%

 

Europe

 

56,301

 

8.1%

 

6,885

 

1.1%

 

Other

 

25,183

 

3.6%

 

11,280

 

1.7%

 

Total

 

$695,780

 

100.0%

 

$646,075

 

100.0%

 

 

(1)          Insurance segment results include premiums written and earned assumed through intersegment transactions of $1.5 million and $2.4 million, respectively, for the six months ended June 30, 2005 and $5.2 million and $3.5 million, respectively, for the six months ended June 30, 2004. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $26.8 million and $31.1 million, respectively, for the six months ended June 30, 2005 and $64.5 million and $68.7 million, respectively, for the six months ended June 30, 2004.

 

18


 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 purchase a limited amount of retrocessional coverage as part of their aggregate risk management program. In addition, 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 subsidiaries would be liable for such defaulted amounts.

 

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

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(U.S. dollars in thousands)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Premiums Written:

 

 

 

 

 

 

 

 

 

Direct

 

$559,357

 

$446,137

 

$1,057,682

 

$907,168

 

Assumed

 

381,396

 

370,186

 

863,763

 

918,943

 

Ceded

 

(217,025)

 

(138,677)

 

(397,916)

 

(264,877)

 

Net

 

$723,728

 

$677,646

 

$1,523,529

 

$1,561,234

 

 

 

 

 

 

 

 

 

 

 

Premiums Earned:

 

 

 

 

 

 

 

 

 

Direct

 

$535,780

 

$474,416

 

$1,025,591

 

$906,244

 

Assumed

 

401,109

 

388,256

 

792,500

 

793,593

 

Ceded

 

(196,997)

 

(139,273)

 

(381,131)

 

(268,612)

 

Net

 

$739,892

 

$723,399

 

$1,436,960

 

$1,431,225

 

 

 

 

 

 

 

 

 

 

 

Losses and Loss Adjustment Expenses Incurred:

 

 

 

 

 

 

 

 

 

Direct

 

$326,084

 

$304,902

 

$626,798

 

$583,700

 

Assumed