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 September 30, 2005

 

 

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 by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o     No  ý

 

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 October 31, 2005

 

Common Shares, $0.01 par value

 

35,524,092

 

 

 



 

ARCH CAPITAL GROUP LTD.

 

INDEX

 

PART I. Financial Information

 

 

 

Item 1 — Consolidated Financial Statements

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

Consolidated Balance Sheets

 

September 30, 2005 and December 31, 2004

 

 

 

Consolidated Statements of Income

 

For the three and nine month periods ended September 30, 2005 and 2004

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity

 

For the nine month periods ended September 30, 2005 and 2004

 

 

 

Consolidated Statements of Comprehensive Income

 

For the nine month periods ended September 30, 2005 and 2004

 

 

 

Consolidated Statements of Cash Flows

 

For the nine month periods ended September 30, 2005 and 2004

 

 

 

Notes to Consolidated Financial Statements

 

 

 

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

 

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

 

 

 

Item 4 — Controls and Procedures

 

 

 

PART II. Other Information

 

 

 

Item 1 — Legal Proceedings

 

 

 

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

 

 

 

Item 5 — Other Information

 

 

 

Item 6 — Exhibits

 

 

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 September 30, 2005, and the related consolidated statements of income for each of the three month and nine month periods ended September 30, 2005 and 2004, and the consolidated statements of changes in shareholders’ equity, comprehensive income and cash flows for the nine month periods ended September 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, changes in shareholders’ equity, comprehensive income and 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

November 7, 2005

 

2



 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

 

 

(Unaudited)

 

 

 

 

 

September 30,
2005

 

December 31,
2004

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities available for sale, at fair value (amortized cost: 2005, $5,201,166; 2004, $5,506,193)

 

$

5,153,953

 

$

5,545,121

 

Short-term investments available for sale, at fair value (amortized cost: 2005, $485,571; 2004, $155,498)

 

485,157

 

155,771

 

Short-term investment of funds received under securities lending agreements, at fair value

 

954,684

 

 

Privately held securities, at fair value (cost: 2005, $5,371; 2004, $17,022)

 

12,945

 

21,571

 

Total investments

 

6,606,739

 

5,722,463

 

 

 

 

 

 

 

Cash

 

161,759

 

113,052

 

Accrued investment income

 

56,017

 

57,163

 

Fixed maturities pledged under securities lending agreements

 

918,882

 

 

Premiums receivable

 

678,335

 

520,781

 

Funds held by reinsureds

 

198,908

 

209,946

 

Unpaid losses and loss adjustment expenses recoverable

 

1,239,815

 

695,582

 

Paid losses and loss adjustment expenses recoverable

 

30,051

 

26,874

 

Prepaid reinsurance premiums

 

334,229

 

321,422

 

Deferred income tax assets, net

 

57,320

 

58,745

 

Deferred acquisition costs, net

 

313,942

 

278,184

 

Receivable for securities sold

 

68,247

 

5,285

 

Other assets

 

262,509

 

209,257

 

Total Assets

 

$

10,926,753

 

$

8,218,754

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$

5,098,327

 

$

3,570,734

 

Unearned premiums

 

1,678,198

 

1,541,217

 

Reinsurance balances payable

 

196,728

 

169,502

 

Senior notes

 

300,000

 

300,000

 

Deposit accounting liabilities

 

49,782

 

44,023

 

Securities lending collateral

 

954,684

 

 

Payable for securities purchased

 

10,096

 

53,642

 

Other liabilities

 

287,407

 

297,730

 

Total Liabilities

 

8,575,222

 

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, 35,504,734; 2004, 34,902,923)

 

355

 

349

 

Additional paid-in capital

 

1,575,843

 

1,560,291

 

Deferred compensation under share award plan

 

(5,625

)

(9,879

)

Retained earnings

 

800,455

 

644,862

 

Accumulated other comprehensive income (loss), net of deferred income tax

 

(19,870

)

45,910

 

Total Shareholders’ Equity

 

2,351,531

 

2,241,906

 

Total Liabilities and Shareholders’ Equity

 

$

10,926,753

 

$

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Revenues

 

 

 

 

 

 

 

 

 

Net premiums written

 

$

787,304

 

$

743,229

 

$

2,310,833

 

$

2,304,463

 

Increase in unearned premiums

 

(39,529

)

(7,821

)

(126,098

)

(137,830

)

Net premiums earned

 

747,775

 

735,408

 

2,184,735

 

2,166,633

 

Net investment income

 

59,270

 

40,752

 

162,846

 

98,136

 

Net realized gains (losses)

 

(10,291

)

13,503

 

(7,725

)

20,083

 

Fee income

 

2,239

 

5,853

 

9,376

 

14,151

 

Other income (loss)

 

 

95

 

 

(3,248

)

Total revenues

 

798,993

 

795,611

 

2,349,232

 

2,295,755

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

672,224

 

561,602

 

1,541,678

 

1,428,111

 

Acquisition expenses

 

142,803

 

137,480

 

417,474

 

427,225

 

Other operating expenses

 

71,960

 

70,331

 

219,593

 

195,579

 

Interest expense

 

5,632

 

6,334

 

16,897

 

12,350

 

Net foreign exchange (gains) losses

 

(7,334

)

1,787

 

(20,769

)

1,603

 

Non-cash compensation

 

641

 

2,330

 

2,168

 

7,724

 

Total expenses

 

885,926

 

779,864

 

2,177,041

 

2,072,592

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

(86,933

)

15,747

 

172,191

 

223,163

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

(642

)

(2,282

)

16,598

 

13,397

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

(86,291

)

$

18,029

 

$

155,593

 

$

209,766

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Per Share Data

 

 

 

 

 

 

 

 

 

Basic

 

$

(2.48

)

$

0.55

 

$

4.50

 

$

6.82

 

Diluted

 

$

(2.48

)

$

0.25

 

$

2.09

 

$

2.91

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

 

 

 

Basic

 

34,750,770

 

32,985,085

 

34,561,131

 

30,770,428

 

Diluted

 

34,750,770

 

73,547,450

 

74,458,013

 

72,090,798

 

 

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)

 

 

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

Preference Shares

 

 

 

 

 

Balance at beginning of year

 

$

373

 

$

388

 

Converted to common shares

 

(0

)

(15

)

Balance at end of period

 

373

 

373

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Balance at beginning of year

 

349

 

282

 

Common shares issued

 

6

 

50

 

Converted from preference shares

 

0

 

15

 

Balance at end of period

 

355

 

347

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

Balance at beginning of year

 

1,560,291

 

1,361,267

 

Common shares issued

 

2,893

 

189,542

 

Exercise of stock options

 

13,415

 

5,430

 

Common shares retired

 

(1,398

)

(3,019

)

Other

 

642

 

2,064

 

Balance at end of period

 

1,575,843

 

1,555,284

 

 

 

 

 

 

 

Deferred Compensation Under Share Award Plan

 

 

 

 

 

Balance at beginning of year

 

(9,879

)

(15,004

)

Restricted common shares issued

 

(1,488

)

(7,395

)

Deferred compensation expense recognized

 

5,742

 

10,137

 

Balance at end of period

 

(5,625

)

(12,262

)

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

Balance at beginning of year

 

644,862

 

327,963

 

Net income

 

155,593

 

209,766

 

Balance at end of period

 

800,455

 

537,729

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance at beginning of year

 

45,910

 

35,833

 

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

 

(64,571

)

12,735

 

Foreign currency translation adjustments, net of deferred income tax

 

(1,209

)

(1,585

)

Balance at end of period

 

(19,870

)

46,983

 

 

 

 

 

 

 

Total Shareholders’ Equity

 

$

2,351,531

 

$

2,128,454

 

 

See Notes to Consolidated Financial Statements

 

5



 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

Comprehensive Income

 

 

 

 

 

Net income

 

$

155,593

 

$

209,766

 

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

 

 

 

 

 

Unrealized appreciation (decline) in value of investments:

 

 

 

 

 

Unrealized holding gains (losses) arising during period

 

(74,758

)

28,948

 

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

 

10,187

 

(16,213

)

Foreign currency translation adjustments

 

(1,209

)

(1,585

)

Other comprehensive income (loss)

 

(65,780

)

11,150

 

Comprehensive Income

 

$

89,813

 

$

220,916

 

 

See Notes to Consolidated Financial Statements

 

6



 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

Operating Activities

 

 

 

 

 

Net income

 

$

155,593

 

$

209,766

 

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

 

 

 

 

 

Net realized (gains) losses

 

9,601

 

(19,570

)

Other (income) loss

 

 

3,248

 

Non-cash compensation

 

6,486

 

11,719

 

Changes in:

 

 

 

 

 

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

 

983,360

 

1,063,950

 

Unearned premiums, net of prepaid reinsurance premiums

 

124,174

 

137,828

 

Premiums receivable

 

(157,554

)

(124,188

)

Deferred acquisition costs, net

 

(35,758

)

(28,758

)

Funds held by reinsureds

 

11,038

 

8,126

 

Reinsurance balances payable

 

27,226

 

8,471

 

Accrued investment income

 

1,146

 

(19,390

)

Paid losses and loss adjustment expenses recoverable

 

(3,177

)

(1,682

)

Deferred income tax assets, net

 

6,649

 

(8,285

)

Deposit accounting liabilities

 

5,759

 

29,515

 

Other liabilities

 

(9,026

)

68,202

 

Other items, net

 

(20,023

)

13,537

 

Net Cash Provided By Operating Activities

 

1,105,494

 

1,352,489

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of fixed maturity investments

 

(6,212,818

)

(5,260,351

)

Proceeds from sales of fixed maturity investments

 

5,178,452

 

3,412,623

 

Proceeds from redemptions and maturities of fixed maturity investments

 

282,552

 

154,094

 

Sales of equity securities

 

12,701

 

13,332

 

Net (purchases) sales of short-term investments

 

(317,043

)

99,062

 

Investment of securities lending collateral

 

(954,684

)

 

Purchases of furniture, equipment and other

 

(10,548

)

(13,809

)

Net Cash Used For Investing Activities

 

(2,021,388

)

(1,595,049

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from common shares issued

 

11,415

 

183,775

 

Proceeds from issuance of senior notes

 

 

296,442

 

Repayment of revolving credit agreement borrowings

 

 

(200,000

)

Securities lending collateral received

 

954,684

 

 

Repurchase of common shares

 

(1,334

)

(1,525

)

Net Cash Provided By Financing Activities

 

964,765

 

278,692

 

Effects of exchange rate changes on foreign currency cash

 

(164

)

(268

)

Increase in cash

 

48,707

 

35,864

 

Cash beginning of year

 

113,052

 

56,899

 

Cash end of period

 

$

161,759

 

$

92,763

 

 

 

 

 

 

 

Income taxes paid, net

 

$

37,099

 

$

25,304

 

Interest paid

 

$

11,141

 

$

1,967

 

 

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 (loss).

 

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 (loss) and earnings (loss) per share would have instead been reported as the pro forma amounts indicated below:

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

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

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income (loss), as reported

 

$

(86,291

)

$

18,029

 

$

155,593

 

$

209,766

 

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

 

(1,342

)

(2,349

)

(3,538

)

(3,286

)

Pro forma net income (loss)

 

$

(87,633

)

$

15,680

 

$

152,055

 

$

206,480

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share – basic:

 

 

 

 

 

 

 

 

 

As reported

 

$

(2.48

)

$

0.55

 

$

4.50

 

$

6.82

 

Pro forma

 

$

(2.52

)

$

0.48

 

$

4.40

 

$

6.71

 

Earnings (loss) per share – diluted:

 

 

 

 

 

 

 

 

 

As reported

 

$

(2.48

)

$

0.25

 

$

2.09

 

$

2.91

 

Pro forma

 

$

(2.52

)

$

0.21

 

$

2.04

 

$

2.86

 

 

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 approach. 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 approach, 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 total shareholders’ equity.

 

9



 

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. Intersegment 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 (loss), other expenses incurred by the Company, interest expense, net realized gains or losses, net foreign exchange gains or losses, non-cash compensation and income taxes. 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



 

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

 

 

 

(Unaudited)

 

 

 

Three Months Ended
September 30, 2005

 

(U.S. dollars in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

445,628

 

$

617,499

 

$

1,048,042

 

Net premiums written (1)

 

409,768

 

377,536

 

787,304

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

407,813

 

$

339,962

 

$

747,775

 

Policy-related fee income

 

 

833

 

833

 

Other underwriting-related fee income

 

74

 

1,332

 

1,406

 

Losses and loss adjustment expenses

 

(371,453

)

(300,771

)

(672,224

)

Acquisition expenses, net

 

(107,827

)

(34,976

)

(142,803

)

Other operating expenses

 

(12,397

)

(53,444

)

(65,841

)

Underwriting loss

 

$

(83,790

)

$

(47,064

)

(130,854

)

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

59,270

 

Net realized losses

 

 

 

 

 

(10,291

)

Other expenses

 

 

 

 

 

(6,119

)

Interest expense

 

 

 

 

 

(5,632

)

Net foreign exchange gains

 

 

 

 

 

7,334

 

Non-cash compensation

 

 

 

 

 

(641

)

Income (loss) before income taxes

 

 

 

 

 

(86,933

)

Income tax benefit

 

 

 

 

 

642

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

$

(86,291

)

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

91.1

%

88.5

%

89.9

%

Acquisition expense ratio (2)

 

26.4

%

10.0

%

19.0

%

Other operating expense ratio

 

3.0

%

15.7

%

8.8

%

Combined ratio

 

120.5

%

114.2

%

117.7

%

 


(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 $14.3 million and $0.8 million, respectively, of gross and net premiums written and $12.4 million and $1.1 million, respectively, of net premiums earned assumed through intersegment transactions.

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

 

11



 

 

 

(Unaudited)

 

 

 

Three Months Ended
September 30, 2004

 

(U.S. dollars in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

412,355

 

$

552,608

 

$

927,658

 

Net premiums written (1)

 

394,495

 

348,734

 

743,229

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

403,113

 

$

332,295

 

$

735,408

 

Policy-related fee income

 

 

4,915

 

4,915

 

Other underwriting-related fee income

 

184

 

635

 

819

 

Losses and loss adjustment expenses

 

(329,451

)

(232,151

)

(561,602

)

Acquisition expenses, net

 

(101,622

)

(35,858

)

(137,480

)

Other operating expenses

 

(11,562

)

(54,264

)

(65,826

)

Underwriting income (loss)

 

$

(39,338

)

$

15,572

 

(23,766

)

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

40,752

 

Net realized gains

 

 

 

 

 

13,503

 

Other fee income, net of related expenses

 

 

 

 

 

119

 

Other income (loss)

 

 

 

 

 

95

 

Other expenses

 

 

 

 

 

(4,505

)

Interest expense

 

 

 

 

 

(6,334

)

Net foreign exchange losses

 

 

 

 

 

(1,787

)

Non-cash compensation

 

 

 

 

 

(2,330

)

Income before income taxes

 

 

 

 

 

15,747

 

Income tax benefit

 

 

 

 

 

2,282

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

18,029

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

81.7

%

69.9

%

76.4

%

Acquisition expense ratio (2)

 

25.2

%

9.3

%

18.0

%

Other operating expense ratio

 

2.9

%

16.3

%

9.0

%

Combined ratio

 

109.8

%

95.5

%

103.4

%

 


(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 $36.3 million and $1.0 million, respectively, of gross and net premiums written and $37.5 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



 

 

 

(Unaudited)

 

 

 

Nine Months Ended
September 30, 2005

 

(U.S. dollars in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

1,311,226

 

$

1,701,663

 

$

2,969,487

 

Net premiums written (1)

 

1,237,517

 

1,073,316

 

2,310,833

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

1,169,651

 

$

1,015,084

 

$

2,184,735

 

Policy-related fee income

 

 

2,482

 

2,482

 

Other underwriting-related fee income

 

4,719

 

2,175

 

6,894

 

Losses and loss adjustment expenses

 

(804,074

)

(737,604

)

(1,541,678

)

Acquisition expenses, net

 

(320,722

)

(96,752

)

(417,474

)

Other operating expenses

 

(35,172

)

(167,631

)

(202,803

)

Underwriting income

 

$

14,402

 

$

17,754

 

32,156

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

162,846

 

Net realized losses

 

 

 

 

 

(7,725

)

Other expenses

 

 

 

 

 

(16,790

)

Interest expense

 

 

 

 

 

(16,897

)

Net foreign exchange gains

 

 

 

 

 

20,769

 

Non-cash compensation

 

 

 

 

 

(2,168

)

Income before income taxes

 

 

 

 

 

172,191

 

Income tax expense

 

 

 

 

 

(16,598

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

155,593

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

68.7

%

72.7

%

70.6

%

Acquisition expense ratio (2)

 

27.4

%

9.3

%

19.0

%

Other operating expense ratio

 

3.0

%

16.5

%

9.3

%

Combined ratio

 

99.1

%

98.5

%

98.9

%

 


(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 $41.1 million and $2.3 million, respectively, of gross and net premiums written and $43.5 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.

 

13



 

 

 

(Unaudited)

 

 

 

Nine Months Ended
September 30, 2004

 

(U.S. dollars in thousands)

 

Reinsurance

 

Insurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

1,361,081

 

$

1,499,693

 

$

2,753,769

 

Net premiums written (1)

 

1,309,654

 

994,809

 

2,304,463

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

1,165,037

 

$

1,001,596

 

$

2,166,633

 

Policy-related fee income

 

 

12,308

 

12,308

 

Other underwriting-related fee income

 

560

 

1,059

 

1,619

 

Losses and loss adjustment expenses

 

(767,747

)

(660,364

)

(1,428,111

)

Acquisition expenses, net

 

(307,015

)

(120,210

)

(427,225

)

Other operating expenses

 

(31,213

)

(152,047

)

(183,260

)

Underwriting income

 

$

59,622

 

$

82,342

 

141,964

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

98,136

 

Net realized gains

 

 

 

 

 

20,083

 

Other fee income, net of related expenses

 

 

 

 

 

224

 

Other income (loss)

 

 

 

 

 

(3,248

)

Other expenses

 

 

 

 

 

(12,319

)

Interest expense

 

 

 

 

 

(12,350

)

Net foreign exchange losses

 

 

 

 

 

(1,603

)

Non-cash compensation

 

 

 

 

 

(7,724

)

Income before income taxes

 

 

 

 

 

223,163

 

Income tax expense

 

 

 

 

 

(13,397

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

$

209,766

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

65.9

%

65.9

%

65.9

%

Acquisition expense ratio (2)

 

26.4

%

10.8

%

19.2

%

Other operating expense ratio

 

2.7

%

15.2

%

8.5

%

Combined ratio

 

95.0

%

91.9

%

93.6

%

 


(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 $100.8 million and $6.2 million, respectively, of gross and net premiums written and $106.2 million and $5.4 million, respectively, of net premiums earned assumed through intersegment transactions.

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

 

14



 

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
September 30,

 

 

 

2005

 

2004

 

REINSURANCE SEGMENT

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty (2)

 

$

194,871

 

47.5

%

$

222,448

 

56.4

%

Property excluding property catastrophe

 

92,853

 

22.7

%

57,943

 

14.7

%

Other specialty

 

56,441

 

13.8

%

51,792

 

13.1

%

Marine and aviation

 

24,264

 

5.9

%

23,263

 

5.9

%

Property catastrophe

 

22,008

 

5.4

%

23,052

 

5.8

%

Other

 

19,331

 

4.7

%

15,997

 

4.1

%

Total

 

$

409,768

 

100.0

%

$

394,495

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty (2)

 

$

193,891

 

47.6

%

$

212,371

 

52.7

%

Property excluding property catastrophe

 

72,865

 

17.9

%

68,654

 

17.0

%

Other specialty

 

71,529

 

17.5

%

64,047

 

15.9

%

Marine and aviation

 

31,089

 

7.6

%

26,195

 

6.5

%

Property catastrophe

 

20,387

 

5.0

%

23,357

 

5.8

%

Other

 

18,052

 

4.4

%

8,489

 

2.1

%

Total

 

$

407,813

 

100.0

%

$

403,113

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

323,133

 

78.9

%

$

288,349

 

73.1

%

Excess of loss

 

86,635

 

21.1

%

106,146

 

26.9

%

Total

 

$

409,768

 

100.0

%

$

394,495

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

304,425

 

74.6

%

$

298,309

 

74.0

%

Excess of loss

 

103,388

 

25.4

%

104,804

 

26.0

%

Total

 

$

407,813

 

100.0

%

$

403,113

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

245,755

 

60.0

%

$

245,538

 

62.2

%

Europe

 

95,241

 

23.2

%

75,898

 

19.2

%

Bermuda

 

38,507

 

9.4

%

35,706

 

9.1

%

Canada

 

17,549

 

4.3

%

22,423

 

5.7

%

Asia and Pacific

 

5,134

 

1.2

%

5,746

 

1.5

%

Other

 

7,582

 

1.9

%

9,184

 

2.3

%

Total

 

$

409,768

 

100.0

%

$

394,495

 

100.0

%

 


(1)          Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $14.3 million and $12.4 million, respectively, for the 2005 third quarter and $36.3 million and $37.5 million, respectively, for the 2004 third quarter. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $0.8 million and $1.1 million, respectively, for the 2005 third quarter and $1.0 million and $1.9 million, respectively, for the 2004 third quarter.

(2)          Includes professional liability business.

 

15



 

 

 

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

REINSURANCE SEGMENT

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty (2)

 

$

566,386

 

45.8

%

$

674,624

 

51.5

%

Property excluding property catastrophe

 

262,389

 

21.2

%

232,519

 

17.8

%

Other specialty

 

222,458

 

18.0

%

200,323

 

15.3

%

Property catastrophe

 

75,932

 

6.1

%

94,276

 

7.2

%

Marine and aviation

 

72,382

 

5.8

%

65,973

 

5.0

%

Other

 

37,970

 

3.1

%

41,939

 

3.2

%

Total

 

$

1,237,517

 

100.0

%

$

1,309,654

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty (2)

 

$

583,551

 

49.9

%

$

554,724

 

47.6

%

Property excluding property catastrophe

 

217,848

 

18.6

%

210,329

 

18.1

%

Other specialty

 

190,828

 

16.3

%

223,962

 

19.2

%

Property catastrophe

 

66,916

 

5.7

%

73,968

 

6.3

%

Marine and aviation

 

73,699

 

6.3

%

68,658

 

5.9

%

Other

 

36,809

 

3.2

%

33,396

 

2.9

%

Total

 

$

1,169,651

 

100.0

%

$

1,165,037

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

948,622

 

76.7

%

$

899,767

 

68.7

%

Excess of loss

 

288,895

 

23.3

%

409,887

 

31.3

%

Total

 

$

1,237,517

 

100.0

%

$

1,309,654

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

876,563

 

74.9

%

$

862,531

 

74.0

%

Excess of loss

 

293,088

 

25.1

%

302,506

 

26.0

%

Total

 

$

1,169,651

 

100.0

%

$

1,165,037

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

690,284

 

55.8

%

$

748,341

 

57.1

%

Europe

 

360,706

 

29.1

%

325,558

 

24.9

%

Bermuda

 

82,885

 

6.7

%

109,661

 

8.4

%

Canada

 

59,607

 

4.8

%

74,965

 

5.7

%

Asia and Pacific

 

20,533

 

1.7

%

26,134

 

2.0

%

Other

 

23,502

 

1.9

%

24,995

 

1.9

%

Total

 

$

1,237,517

 

100.0

%

$

1,309,654

 

100.0

%

 


(1)          Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $41.1 million and $43.5 million, respectively, for the nine months ended September 30, 2005 and $100.8 million and $106.2 million, respectively, for the nine months ended September 30, 2004. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $2.3 million and $3.5 million, respectively, for the nine months ended September 30, 2005 and $6.2 million and $5.4 million, respectively, for the nine months ended September 30, 2004.

(2)          Includes professional liability business.

 

16



 

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

 

 

 

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

 

2005

 

2004

 

INSURANCE SEGMENT

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$

70,924

 

18.8

%

$

67,250

 

19.3

%

Professional liability

 

66,257

 

17.5

%

52,252

 

15.0

%

Programs

 

56,335

 

14.9

%

62,327

 

17.9

%

Executive assurance

 

51,654

 

13.7

%

31,342

 

9.0

%

Construction and surety

 

50,401

 

13.3

%

45,799

 

13.1

%

Property, marine and aviation

 

46,407

 

12.3

%

48,886

 

14.0

%

Healthcare

 

19,507

 

5.2

%

18,036

 

5.2

%

Other

 

16,051

 

4.3

%

22,842

 

6.5

%

Total

 

$

377,536

 

100.0

%

$

348,734

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$

76,200

 

22.4

%

$

57,687

 

17.4

%

Professional liability

 

54,993

 

16.2

%

51,894

 

15.6

%

Programs

 

54,392

 

16.0

%

72,239

 

21.7

%

Executive assurance

 

40,693

 

12.0

%

29,873

 

9.0

%

Construction and surety

 

46,812

 

13.8

%

45,264

 

13.6

%

Property, marine and aviation

 

32,484

 

9.5

%

39,446

 

11.9

%

Healthcare

 

18,099

 

5.3

%

14,676

 

4.4

%

Other

 

16,289

 

4.8

%

21,216

 

6.4

%

Total

 

$

339,962

 

100.0

%

$

332,295

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

324,525

 

86.0

%

$

327,697

 

94.0

%

Europe

 

22,680

 

6.0

%

6,627

 

1.9

%

Other

 

30,331

 

8.0

%

14,410

 

4.1

%

Total

 

$

377,536

 

100.0

%

$

348,734

 

100.0

%

 


(1)          Insurance segment results include premiums written and earned assumed through intersegment transactions of $0.8 million and $1.1 million, respectively, for the 2005 third quarter and $1.0 million and $1.9 million, respectively, for the 2004 third quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $14.3 million and $12.4 million, respectively, for the 2005 third quarter and $36.3 million and $37.5 million, respectively, for the 2004 third quarter.

 

17



 

 

 

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

INSURANCE SEGMENT

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty

 

$

207,225

 

19.3

%

$

183,509

 

18.4

%

Professional liability

 

174,492

 

16.3

%

145,134

 

14.6

%

Programs

 

168,126

 

15.7

%

244,304

 

24.6

%

Property, marine and aviation

 

156,589

 

14.6

%

114,409

 

11.5

%

Construction and surety

 

142,995

 

13.3

%

111,787

 

11.2

%

Executive assurance

 

125,815

 

11.7

%

89,357

 

9.0

%

Healthcare

 

48,569

 

4.5

%

41,830

 

4.2

%

Other

 

49,505

 

4.6

%

64,479

 

6.5

%

Total

 

$

1,073,316

 

100.0

%