Exhibit 99
ARCH CAPITAL GROUP LTD.
Earnings Release Supplement
As of December 31, 2003
INDEX TO SUPPLEMENT
ARCH CAPITAL GROUP LTD. REPORTS 2003 FOURTH QUARTER RESULTS
HAMILTON, BERMUDA, February 17, 2004 — Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income for the 2003 fourth quarter was $83.7 million, or $1.22 per share, compared to $43.5 million, or $0.65 per share, for the 2002 fourth quarter. Net income for the year ended December 31, 2003 was $280.6 million, or $4.14 per share, compared to $59.0 million, or $0.99 per share, for the year ended December 31, 2002. The Company’s diluted book value per share increased by 20.4% to $25.52 at December 31, 2003 from $21.20 at December 31, 2002. Net premiums written for the 2003 fourth quarter increased to $627.4 million from $439.2 million for the 2002 fourth quarter, and net premiums written for the year ended December 31, 2003 increased to $2.74 billion from $1.26 billion for the year ended December 31, 2002. The growth in net premiums written was due to substantial increases in business written by both the Company’s reinsurance and insurance segments. All per share amounts discussed in this release are on a fully diluted basis.
The Company also reported after-tax operating income for the 2003 fourth quarter of $87.9 million, or $1.29 per share, compared to $48.6 million, or $0.72 per share for the 2002 fourth quarter. After-tax operating income for the year ended December 31, 2003 was $266.5 million, or $3.93 per share, compared to $95.0 million, or $1.59 per share, for the year ended December 31, 2002. The Company’s after-tax operating income represented a 21.5% return on beginning equity for the 2003 fourth quarter, on an annualized basis, and a 18.9% return on beginning equity for the year ended December 31, 2003. Operating income, a non-GAAP measure, is defined as net income or loss before extraordinary items, excluding net realized investment gains or losses, net foreign exchange gains or losses, other income, reversal of deferred tax asset valuation allowances and non-cash compensation, net of tax. See page 6 for a further discussion of operating income and Regulation G.
The following table summarizes the Company’s underwriting results for the 2003 and 2002 periods.
| | Three Months Ended
December 31, | | Years Ended
December 31, | |
(in thousands) | | 2003 | | 2002 | | 2003 | | 2002 | |
| | | | | | | | | |
Gross premiums written | | $ | 761,653 | | $ | 521,899 | | $ | 3,226,001 | | $ | 1,487,212 | |
Net premiums written | | 627,383 | | 439,207 | | 2,738,415 | | 1,261,627 | |
Net premiums earned | | 690,336 | | 290,011 | | 2,212,599 | | 654,976 | |
Underwriting income | | 75,844 | | 36,039 | | 228,715 | | 59,219 | |
| | | | | | | | | |
Combined ratio | | 89.3 | % | 87.6 | % | 90.0 | % | 90.9 | % |
| | | | | | | | | | | | | |
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The following table summarizes, on an after-tax basis, the Company’s consolidated financial data, including a reconciliation of operating income to net income or loss and related diluted per share results.
| | Three Months Ended
December 31, | | Years Ended
December 31, | |
(in thousands, except per share data) | | 2003 | | 2002 | | 2003 | | 2002 | |
| | | | | | | | | |
Operating income | | $ | 87,921 | | $ | 48,618 | | $ | 266,534 | | $ | 94,952 | |
Net realized investment gains (losses) | | 3,757 | | (1,114 | ) | 23,072 | | (2,618 | ) |
Net foreign exchange (losses) gains | | (5,522 | ) | (69 | ) | 997 | | 2,449 | |
Non-cash compensation | | (2,903 | ) | (8,180 | ) | (13,789 | ) | (48,862 | ) |
Other income | | 481 | | 370 | | 2,188 | | 1,754 | |
Reversal of deferred tax asset valuation allowance | | — | | — | | 773 | | 7,421 | |
Extraordinary gain – excess of fair value of acquired net assets over cost | | — | | 3,886 | | 816 | | 3,886 | |
Net income | | $ | 83,734 | | $ | 43,511 | | $ | 280,591 | | $ | 58,982 | |
| | | | | | | | | |
Operating income | | $ | 1.29 | | $ | 0.72 | | $ | 3.93 | | $ | 1.59 | |
Net realized investment gains (losses) | | 0.05 | | (0.02 | ) | 0.34 | | (0.04 | ) |
Net foreign exchange (losses) gains | | (0.09 | ) | 0.00 | | 0.02 | | 0.04 | |
Non-cash compensation | | (0.04 | ) | (0.12 | ) | (0.20 | ) | (0.82 | ) |
Other income | | 0.01 | | 0.01 | | 0.03 | | 0.03 | |
Reversal of deferred tax asset valuation allowance | | — | | — | | 0.01 | | 0.12 | |
Extraordinary gain – excess of fair value of acquired net assets over cost | | — | | 0.06 | | 0.01 | | 0.07 | |
Net income | | $ | 1.22 | | $ | 0.65 | | $ | 4.14 | | $ | 0.99 | |
| | | | | | | | | |
Diluted average shares outstanding | | 68,361,549 | | 66,841,033 | | 67,777,794 | | 59,662,178 | |
The underwriting income of the Company’s insurance and reinsurance subsidiaries increased to $75.8 million for the 2003 fourth quarter from $36.0 million for the 2002 fourth quarter. For the year ended December 31, 2003, underwriting income was $228.7 million, compared to $59.2 million for the year ended December 31, 2002. The increase in underwriting income in the 2003 periods was primarily due to a significantly higher level of net premiums earned. In addition, underwriting results in the 2003 periods also benefited from increased profits recorded in property and other short-tail lines of business due, in part, to a low level of catastrophic activity.
The combined ratio of the Company’s insurance and reinsurance subsidiaries was 89.3% for the 2003 fourth quarter, compared to 87.6% for the 2002 fourth quarter, and 90.0% for the year ended December 31, 2003, compared to 90.9% for the year ended December 31, 2002. The loss ratio of the Company’s insurance and reinsurance subsidiaries was 61.9% for the 2003 fourth quarter, compared to 59.9% for the 2002 fourth quarter. The loss ratio was 63.9% for the year ended December 31, 2003, compared to 64.8% for the year ended December 31, 2002. The loss ratio of 63.9% for the year ended December 31, 2003 was comprised of 12.0 points of paid losses, 7.4 points related to reserves for reported losses and 44.5 points related to incurred but not reported reserves.
In establishing the reserves for losses and loss adjustment expenses, the Company has made various assumptions relating to the pricing of its reinsurance contracts and insurance policies and also has considered available historical industry experience and current industry conditions. The Company’s reserving method is primarily the expected loss method, which is commonly applied when limited loss experience exists. Any estimates and assumptions made as part of the reserving process could prove to be inaccurate due to several factors, including the fact that very limited historical information has been reported to the Company through December 31, 2003.
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The total expense ratio of the Company’s insurance and reinsurance subsidiaries, which includes acquisition expenses and other operating expenses, was 27.4% for the 2003 fourth quarter, compared to 27.7% for the 2002 fourth quarter. The total expense ratio for the years ended December 31, 2003 and 2002 was 26.1%.
The acquisition expense ratio of the Company’s insurance and reinsurance subsidiaries, which is reflected net of certain policy-related fee income, was 18.9% for the 2003 fourth quarter, compared to 17.9% for the 2002 fourth quarter, and was 18.5% for the year ended December 31, 2003, compared to 16.7% for the year ended December 31, 2002. The acquisition expense ratio fluctuates based on changes in the mix of business, as well as the amount of ceding commissions received from unaffiliated reinsurers and changes in the percentage of net premiums earned by the reinsurance segment relating to pro rata contracts. Pro rata contracts are typically written at a lower loss ratio and higher expense ratio than excess of loss business.
The other operating expense ratio of the Company’s insurance and reinsurance subsidiaries was 8.5% for the 2003 fourth quarter, compared to 9.8% for the 2002 fourth quarter, and 7.6% for the year ended December 31, 2003, compared to 9.4% for the year ended December 31, 2002. While aggregate other operating expenses were higher for the 2003 periods compared to the 2002 periods, the other operating expense ratio decreased primarily due to the significant growth in net premiums earned during the 2003 periods.
Net investment income for the 2003 fourth quarter was $22.2 million, compared to $15.6 million for the 2002 fourth quarter. Net investment income for the year ended December 31, 2003 was $81.0 million, compared to $51.2 million for the year ended December 31, 2002. The growth in net investment income in each of the 2003 periods was due to a significant increase in the Company’s invested assets primarily resulting from cash flow provided by operating activities during 2003 and 2002, which more than offset the effect of lower yields available in the financial markets in 2003 in comparison with 2002. The Company’s investment portfolio mainly consists of high quality fixed income securities, which had an average Standard & Poor’s quality rating of “AA+” and an average duration of 2.0 years at December 31, 2003.
The Company’s effective tax rate may fluctuate from period to period based on the relative mix of income reported by jurisdiction primarily due to the varying tax rates in each jurisdiction. The Company’s quarterly tax provision is adjusted to reflect changes in its expected annual effective tax rates, if any. For the year ended December 31, 2003, the Company’s effective tax rates on (i) pre-tax operating income and (ii) income before extraordinary items, excluding the reversal of a $773,000 deferred tax asset valuation allowance, were 8.7 % and 9.0% respectively. The reduction in the effective tax rate from the rate used at September 30, 2003 lowered the 2003 fourth quarter tax provision by $5.6 million, or $0.08 per share. The reduction in the effective tax rate in the 2003 fourth quarter resulted from a change in the relative mix of income reported by jurisdiction. The Company currently estimates that its effective tax rate for 2004 will approximate 11.0% on pre-tax income and pre-tax operating income, but recognizes that as noted above, the rate may fluctuate based on the relative mix of income reported by jurisdiction.
Consolidated cash flow provided by operating activities for the 2003 fourth quarter was $466.5 million, compared to $326.8 million for the 2002 fourth quarter. Operating cash flow for the year ended December 31, 2003 was approximately $1.61 billion, compared to $669.1 million for the year ended December 31, 2002. The significant increase in cash flow in the 2003 periods compared to the 2002 periods was primarily due to the substantial growth in premium volume and a low level of claim payments.
Non-cash compensation primarily results from restricted shares granted in connection with the Company’s November 2001 capital infusion and underwriting initiative. After-tax non-cash compensation expense for the 2003 fourth quarter was $2.9 million, compared to $8.2 million for the 2002 fourth quarter. After-tax non-cash compensation expense for the year ended December 31, 2003 was $13.8 million, compared to $48.9 million for the year ended December 31, 2002. Non-cash compensation for the year ended December 31, 2002 reflected the accelerated vesting of certain restricted common shares granted to the chairman of the Company’s board of
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directors. The accelerated recognition for the year ended December 31, 2002 had no effect on the Company’s shareholders’ equity and had the effect of reducing non-cash compensation expense in subsequent periods.
The United States dollar is the functional currency for all of the Company’s business. Net foreign exchange losses for the 2003 fourth quarter of $5,522,000 consisted of net unrealized losses of $7,012,000 and net realized gains of $1,490,000. Net foreign exchange losses for the 2002 fourth quarter of $69,000 consisted of net unrealized losses of $947,000 and net realized gains of $878,000. Net foreign exchange gains for the year ended December 31, 2003 of $997,000 consisted of net unrealized losses of $2,153,000 and net realized gains of $3,150,000. Net foreign exchange gains for the year ended December 31, 2002 of $2,449,000 consisted of net unrealized losses of $36,000 and net realized gains of $2,485,000.
The Company’s shareholders’ equity increased to $1.71 billion at December 31, 2003, compared to $1.41 billion at December 31, 2002. The increase in the Company’s shareholders’ equity and diluted per share book value was primarily attributable to the Company’s operating income for the year ended December 31, 2003. The calculation of the Company’s book value per share amounts is included in the accompanying supplemental financial information. At December 31, 2003, the Company had total capital of $1.91 billion.
Pursuant to the subscription agreement entered into in connection with the November 2001 capital infusion, an adjustment basket relating to certain non-core operations was calculated during the 2003 fourth quarter for purposes of determining whether the Company would be required to issue additional preference shares to the investors as a purchase price adjustment. In February 2004, the Company and the investors agreed that no purchase price adjustment would be required pursuant to the calculation and, accordingly, no additional preference shares will be issued to the investors. In connection with the resolution of the adjustment basket, the Company recorded expenses of $3.1 million in the 2003 fourth quarter. Additional information regarding the adjustment basket is included in the accompanying supplemental financial information (see “Calculation of Book Value Per Share”).
In January 2004, the Securities and Exchange Commission declared effective the Company’s universal shelf registration. This registration statement, which replaces the Company’s previous shelf registration statement with an unused portion of approximately $309 million, will allow for the possible future offer and sale by the Company of up to $500 million of various types of securities, including unsecured debt securities, preference shares, common shares, warrants, share purchase contracts and units and depositary shares. In addition, the registration statement will allow selling shareholders to resell up to an aggregate of 9,892,594 common shares that they own (or may acquire upon the conversion of outstanding preference shares or warrants) in one or more offerings from time to time pursuant to existing registration rights principally granted in connection with the 2001 capital infusion. The Company will not receive any proceeds from the shares offered by the selling shareholders. Securities described in the registration statement may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This release is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.
The Company will hold a conference call for investors and analysts at 10:00 a.m. Eastern Time on February 18, 2004. A live webcast of this call will be available at http://www.vcall.com/CEPage.asp?ID=85456 and will be archived on VCall’s website from 12:00 p.m. Eastern Time on February 18, 2004 through midnight Eastern Time on March 18, 2004. A telephone replay of the conference call also will be available beginning on February 18, 2004 at 12:00 p.m. Eastern Time until February 21, 2004 at midnight Eastern Time. To access the replay, domestic callers should dial 877-660-6853 (account 1628, conference number 89252), and international callers should dial 201-612-7415 (account 1628, conference number 89252). The webcast is also being distributed over CCBN’s Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through CCBN’s individual investor center at http://www.fulldisclosure.com or by visiting any of the investor sites in CCBN’s Individual Investor Network.
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Institutional investors can access the call via CCBN’s password-protected event management site, StreetEvents (http://www.streetevents.com).
Arch Capital Group Ltd., a Bermuda-based company with over $1.9 billion in capital, provides insurance and reinsurance on a worldwide basis through its wholly owned subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company’s current views with respect to future events and financial performance. All statements other than statements of historical fact included in this release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology.
Forward-looking statements involve the Company’s current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this release and in the Company’s periodic reports filed with the Securities and Exchange Commission, and include:
• the Company’s ability to successfully implement its business strategy;
• acceptance of the Company’s products and services and security by brokers and its insureds and reinsureds;
• acceptance of the Company’s business strategy, security and financial condition by rating agencies and regulators;
• general economic and market conditions (including inflation, interest rates and foreign currency exchange rates) and conditions specific to the reinsurance and insurance markets in which the Company operates;
• competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;
• the Company’s ability to successfully integrate new management and operating personnel and to establish and maintain operating procedures to effectively support its underwriting initiatives and to develop accurate actuarial, financial and other data and develop and implement actuarial models and procedures;
• the loss of key personnel;
• the integration of businesses the Company has acquired or may acquire into its existing operations;
• estimates and judgments, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, for a relatively new insurance and reinsurance company, like the Company, are even more difficult to make than those for a mature company since very limited historical information has been reported to the Company through December 31, 2003;
• greater than expected loss ratios on business written by the Company and adverse development on reserves for losses and loss adjustment expenses related to business written by the Company;
• severity and/or frequency of losses;
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• claims for natural or man-made catastrophic events in the Company’s insurance or reinsurance business could cause large losses and substantial volatility in the Company’s results of operations;
• acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;
• losses relating to aviation business and business produced by a certain managing underwriting agency for which the Company may be liable to the purchaser of its prior reinsurance business or to others in connection with the May 5, 2000 asset sale;
• availability to the Company of reinsurance to manage its gross and net exposures and the cost of such reinsurance;
• the failure of reinsurers, managing general agents or others to meet their obligations to the Company;
• the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company;
• changes in accounting principles or the application of such principles by accounting firms or regulators;
• statutory or regulatory developments, including as to tax policy and matters and insurance and other regulatory matters (such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers); and
• rating agency policies and practices.
In addition, other general factors could affect the Company’s results, including: (a) developments in the world’s financial and capital markets and the Company’s access to such markets; (b) changes in regulation or tax laws applicable to the Company, its subsidiaries, brokers or customers; and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.
All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Comment on Regulation G
Throughout this release, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company. This presentation includes the use of operating income, which is defined as net income or loss before extraordinary items, excluding net realized investment gains or losses, net foreign exchange gains or losses, other income, reversal of deferred tax asset valuation allowances and non-cash compensation, net of tax. The Company believes that net realized investment gains or losses, net foreign exchange gains or losses, other income, reversal of deferred tax asset valuation allowances and non-cash compensation for any particular period are not indicative of the performance of, or trends in, the Company’s business performance. This presentation is a “non-GAAP financial measure” as defined in Regulation G. The reconciliation of such measure to net income (the most directly comparable GAAP financial measure) in accordance with Regulation G is included on page 2 of this release.
Extraordinary items have been excluded from the non-GAAP financial measure due to their non-recurring nature. In addition, although net realized investment gains or losses and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and
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result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic, and, under applicable GAAP accounting, losses on the Company’s investments can be realized as the result of other-than-temporary declines in value without actual realization. Due to these reasons, the Company excludes net realized investment gains or losses and net foreign exchange gains or losses from the calculation of operating income. Other income is generated by certain of our privately held securities which are accounted for under the equity method of accounting. The Company records a proportionate share of the investee company’s net income or loss based on its ownership percentage in such investment. As this is a non-cash item which fluctuates based on the underlying results of the investee companies, the Company excludes other income from the calculation of operating income. With respect to non-cash compensation, since these charges primarily relate to the Company’s capital raising activities during 2001 (and not its underlying insurance operations), the Company has excluded such charges from operating income. Non-cash compensation also does not have any impact on the Company’s shareholders’ equity.
The Company believes that showing net income exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income, the Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies who follow the Company and the insurance industry as a whole exclude these items from their analyses for the same reasons.
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
| | Three Months Ended
December 31, | | Years Ended
December 31, | |
| | 2003 | | 2002 | | 2003 | | 2002 | |
Revenues | | | | | | | | | |
Net premiums written | | $ | 627,383 | | $ | 439,207 | | $ | 2,738,415 | | $ | 1,261,627 | |
Decrease (increase) in unearned premiums | | 62,953 | | (149,196 | ) | (525,816 | ) | (606,651 | ) |
Net premiums earned | | 690,336 | | 290,011 | | 2,212,599 | | 654,976 | |
Net investment income | | 22,240 | | 15,602 | | 80,992 | | 51,249 | |
Net realized investment gains (losses) | | 3,863 | | (1,014 | ) | 25,317 | | (839 | ) |
Fee income | | 5,719 | | 3,166 | | 21,818 | | 14,208 | |
Other income | | 740 | | 414 | | 3,011 | | 2,175 | |
Total revenues | | 722,898 | | 308,179 | | 2,343,737 | | 721,769 | |
| | | | | | | | | |
Expenses | | | | | | | | | |
Losses and loss adjustment expenses | | 427,116 | | 173,574 | | 1,413,551 | | 424,538 | |
Acquisition expenses | | 134,385 | | 54,869 | | 424,008 | | 118,961 | |
Other operating expenses | | 66,667 | | 29,059 | | 185,943 | | 76,699 | |
Net foreign exchange losses (gains) | | 5,522 | | 69 | | (997 | ) | (2,449 | ) |
Non-cash compensation | | 3,071 | | 7,188 | | 14,732 | | 49,480 | |
Total expenses | | 636,761 | | 264,759 | | 2,037,237 | | 667,229 | |
| | | | | | | | | |
Income Before Income Taxes and Extraordinary Item | | 86,137 | | 43,420 | | 306,500 | | 54,540 | |
| | | | | | | | | |
Income tax expense (benefit) | | 2,403 | | 3,795 | | 26,725 | | (556 | ) |
| | | | | | | | | |
Income Before Extraordinary Item | | 83,734 | | 39,625 | | 279,775 | | 55,096 | |
| | | | | | | | | |
Extraordinary gain – excess of fair value of net assets acquired over cost (net of $0 tax) | | — | | 3,886 | | 816 | | 3,886 | |
Net Income | | $ | 83,734 | | $ | 43,511 | | $ | 280,591 | | $ | 58,982 | |
| | | | | | | | | |
Net Income Per Share Data | | | | | | | | | |
Basic: | | | | | | | | | |
Income before extraordinary item | | $ | 3.15 | | $ | 1.56 | | $ | 10.65 | | $ | 2.74 | |
Extraordinary gain | | — | | $ | 0.15 | | $ | 0.03 | | $ | 0.19 | |
Net income | | $ | 3.15 | | $ | 1.71 | | $ | 10.68 | | $ | 2.93 | |
| | | | | | | | | |
Diluted: | | | | | | | | | |
Income before extraordinary item | | $ | 1.22 | | $ | 0.59 | | $ | 4.13 | | $ | 0.92 | |
Extraordinary gain | | — | | $ | 0.06 | | $ | 0.01 | | $ | 0.07 | |
Net income | | $ | 1.22 | | $ | 0.65 | | $ | 4.14 | | $ | 0.99 | |
| | | | | | | | | |
Average Shares Outstanding | | | | | | | | | |
Basic | | 26,591,467 | | 25,392,443 | | 26,264,055 | | 20,095,698 | |
Diluted | | 68,361,549 | | 66,841,033 | | 67,777,794 | | 59,662,178 | |
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | December 31,
2003 | | December 31,
2002 | |
Assets | | | | | |
Investments: | | | | | |
Fixed maturities available for sale, at fair value (amortized cost: 2003, $3,363,193; 2002, $1,334,637) | | $ | 3,398,424 | | $ | 1,382,104 | |
Short-term investments available for sale, at fair value | | 229,348 | | 480,541 | |
Privately held securities (cost: 2003, $27,632; 2002, $31,630) | | 32,476 | | 31,536 | |
Total investments | | 3,660,248 | | 1,894,181 | |
Cash | | 56,899 | | 91,717 | |
Accrued investment income | | 30,316 | | 17,127 | |
Premiums receivable | | 477,032 | | 343,716 | |
Funds held by reinsureds | | 211,944 | | 58,351 | |
Unpaid losses and loss adjustment expenses recoverable | | 409,451 | | 211,100 | |
Paid losses and loss adjustment expenses recoverable | | 18,549 | | 14,462 | |
Prepaid reinsurance premiums | | 236,061 | | 120,191 | |
Goodwill and intangible assets | | 35,882 | | 28,867 | |
Deferred income tax asset | | 33,979 | | 16,514 | |
Deferred acquisition costs, net | | 275,696 | | 148,960 | |
Other assets | | 139,264 | | 46,142 | |
Total Assets | | $ | 5,585,321 | | $ | 2,991,328 | |
| | | | | | | |
Liabilities | | | | | |
Reserve for losses and loss adjustment expenses | | $ | 1,951,967 | | $ | 592,432 | |
Unearned premiums | | 1,402,998 | | 761,310 | |
Reinsurance balances payable | | 117,916 | | 89,191 | |
Revolving credit agreement borrowings | | 200,000 | | — | |
Investment accounts payable | | — | | 45,960 | |
Other liabilities | | 201,711 | | 91,191 | |
Total Liabilities | | 3,874,592 | | 1,580,084 | |
| | | | | |
Commitments and Contingencies | | | | | |
| | | | | |
Shareholders’ Equity | | | | | |
Preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 2003 and 2002, 38,844,665) | | 388 | | 388 | |
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2003, 28,200,372; 2002, 27,725,334) | | 282 | | 277 | |
Additional paid-in capital | | 1,361,267 | | 1,347,165 | |
Deferred compensation under share award plan | | (15,004 | ) | (25,290 | ) |
Retained earnings | | 327,963 | | 47,372 | |
Accumulated other comprehensive income consisting of unrealized appreciation in value of investments, net of deferred income tax | | 35,833 | | 41,332 | |
Total Shareholders’ Equity | | 1,710,729 | | 1,411,244 | |
Total Liabilities and Shareholders’ Equity | | $ | 5,585,321 | | $ | 2,991,328 | |
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands)
| | Years Ended
December 31, | |
| | 2003 | | 2002 | |
Preference Shares | | | | | |
Balance at beginning of year | | $ | 388 | | $ | 357 | |
Preference shares issued | | — | | 31 | |
Balance at end of year | | 388 | | 388 | |
| | | | | |
Common Shares | | | | | |
Balance at beginning of year | | 277 | | 135 | |
Common shares issued | | 5 | | 142 | |
Balance at end of year | | 282 | | 277 | |
| | | | | |
Additional Paid-in Capital | | | | | |
Balance at beginning of year | | 1,347,165 | | 1,039,887 | |
Common shares issued | | 6,285 | | 319,580 | |
Exercise of stock options | | 7,326 | | 825 | |
Common shares retired | | (906 | ) | (13,097 | ) |
Other | | 1,397 | | (30 | ) |
Balance at end of year | | 1,361,267 | | 1,347,165 | |
| | | | | |
Deferred Compensation Under Share Award Plan | | | | | |
Balance at beginning of year | | (25,290 | ) | (8,230 | ) |
Restricted common shares issued | | (5,106 | ) | (66,245 | ) |
Deferred compensation expense recognized | | 15,392 | | 49,185 | |
Balance at end of year | | (15,004 | ) | (25,290 | ) |
| | | | | |
Retained Earnings (Deficit) | | | | | |
Balance at beginning of year | | 47,372 | | (11,610 | ) |
Net income | | 280,591 | | 58,982 | |
Balance at end of year | | 327,963 | | 47,372 | |
| | | | | |
Accumulated Other Comprehensive Income | | | | | |
Unrealized Appreciation (Decline) in Value of Investments, Net of Deferred Income Tax | | | | | |
Balance at beginning of year | | 41,332 | | (170 | ) |
Change in unrealized appreciation (decline) | | (5,499 | ) | 41,502 | |
Balance at end of year | | 35,833 | | 41,332 | |
Total Shareholders’ Equity | | $ | 1,710,729 | | $ | 1,411,244 | |
10
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | Years Ended
December 31, | |
| | 2003 | | 2002 | |
Comprehensive Income | | | | | |
Net income | | $ | 280,591 | | $ | 58,982 | |
Other comprehensive income, net of deferred income tax | | | | | |
Unrealized appreciation in value of investments: | | | | | |
Unrealized holding gains arising during year | | 17,334 | | 38,884 | |
Reclassification of net realized investment (gains) losses, net of tax, included in net income | | (22,833 | ) | 2,618 | |
Other comprehensive income (loss) | | (5,499 | ) | 41,502 | |
Comprehensive Income | | $ | 275,092 | | $ | 100,484 | |
11
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | Years Ended
December 31, | |
| | 2003 | | 2002 | |
Operating Activities | | | | | |
Net income | | $ | 280,591 | | $ | 58,982 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Net realized investment (gains) losses | | (25,078 | ) | 839 | |
Other income | | (3,011 | ) | (2,175 | ) |
Provision for non-cash compensation | | 14,732 | | 49,480 | |
Excess of fair value of net assets acquired over cost | | (816 | ) | (3,886 | ) |
Changes in: | | | | | |
Reserve for losses and loss adjustment expenses, net of unpaid losses
and loss adjustment expenses recoverable | | 1,161,184 | | 348,911 | |
Unearned premiums, net of prepaid reinsurance premiums | | 525,818 | | 606,360 | |
Premiums receivable | | (133,316 | ) | (279,925 | ) |
Deferred acquisition costs, net | | (126,736 | ) | (143,548 | ) |
Funds held by reinsureds | | (153,593 | ) | (58,351 | ) |
Reinsurance balances payable | | 28,725 | | 41,554 | |
Accrued investment income | | (13,157 | ) | (9,332 | ) |
Paid losses and loss adjustment expenses recoverable | | (4,087 | ) | 6,823 | |
Deferred income tax asset | | (15,488 | ) | (8,099 | ) |
Other liabilities | | 113,395 | | 57,870 | |
Other items, net | | (36,619 | ) | 3,549 | |
Net Cash Provided By Operating Activities | | 1,612,544 | | 669,052 | |
| | | | | |
Investing Activities | | | | | |
Purchases of fixed maturity investments | | (4,738,500 | ) | (1,253,637 | ) |
Release of escrowed assets | | — | | (18,833 | ) |
Sales of fixed maturity investments | | 2,674,867 | | 407,144 | |
Sales of equity securities | | 7,601 | | 13,726 | |
Net sales of short-term investments | | 246,749 | | 45,666 | |
Acquisitions, net of cash | | (11,774 | ) | (4,829 | ) |
Purchases of furniture, equipment and other | | (31,489 | ) | (17,710 | ) |
Net Cash Used For Investing Activities | | (1,852,546 | ) | (828,473 | ) |
| | | | | |
Financing Activities | | | | | |
Proceeds from common shares issued | | 6,090 | | 254,338 | |
Repurchase of common shares | | (906 | ) | (13,102 | ) |
Revolving credit agreement borrowings | | 200,000 | | — | |
Debt retirement and other | | — | | (68 | ) |
Net Cash Provided By Financing Activities | | 205,184 | | 241,168 | |
(Decrease) increase in cash | | (34,818 | ) | 81,747 | |
Cash beginning of year | | 91,717 | | 9,970 | |
Cash end of year | | $ | 56,899 | | $ | 91,717 | |
Income taxes paid, net | | $ | 44,554 | | $ | 2,863 | |
Interest paid | | — | | — | |
12
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
The following table provides information on the Company’s investing activities, including investment income yield, average duration and average credit quality.
| | Three Months Ended
December 31, | | Years Ended
December 31, | |
Investment income yield (at amortized cost) | | 2003 | | 2002 | | 2003 | | 2002 | |
| | | | | | | | | |
Pre-tax | | 2.7 | % | 3.6 | % | 3.1 | % | 3.7 | % |
After-tax | | 2.4 | % | 3.2 | % | 2.9 | % | 3.2 | % |
| | | | | | | | | |
Fixed Maturities and Short-term Investments | | December 31,
2003 | | December 31,
2002 | | | | | |
| | | | | | | | | |
Average duration (in years) | | 2.0 | | 2.1 | | | | | |
Average credit quality (Standard & Poors) | | AA | + | AA | - | | | | |
| | | | | | | | | |
| | Three Months Ended
December 31, | | Years Ended
December 31, | |
| | 2003 | | 2002 | | 2003 | | 2002 | |
| | | | | | | | | |
Annualized operating return on beginning equity (1) | | 21.5 | %(2) | 14.2 | % | 18.9 | % | 9.3 | % |
(1) Annualized operating return on beginning equity, a non-GAAP measure, equals annualized operating income divided by shareholders’ equity as of the beginning of the period. See “Comment on Regulation G” above.
(2) The 2003 fourth quarter annualized operating return on beginning equity includes the effects of (a) a lower tax rate during the 2003 fourth quarter and (b) the impact of certain non-recurring expenses. Excluding the effects of such items, the annualized operating return on beginning equity would have been 20.1%.
Segment Information
The determination of the Company’s business segments is based on the manner in which the Company monitors the performance of its underwriting operations. The Company classifies its businesses into two underwriting segments — reinsurance and insurance — and a corporate and other segment (non-underwriting). The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment. In addition, other revenue and expense items are not evaluated by segment. Management measures segment performance based on underwriting income or loss. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Inter-segment insurance business is allocated to the segment accountable for the underwriting results in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”
The reinsurance segment consists of the Company’s reinsurance underwriting subsidiaries. The reinsurance segment generally seeks to write significant lines on specialty property and casualty reinsurance treaties. Classes of business focused on include casualty, casualty clash, marine, aviation and space, non-traditional, other specialty, property catastrophe and property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata).
The insurance segment consists of the Company’s insurance underwriting subsidiaries which primarily write on a direct basis. The insurance segment currently consists of eight product lines, including casualty, construction and surety, executive assurance, healthcare, professional liability, programs, property, and other (primarily non-standard auto, collateralized protection business and accident and health and corporate risk programs).
The corporate and other segment (non-underwriting) includes net investment income, other fee income and other expenses incurred by the Company, net realized investment gains or losses, net foreign exchange gains or losses and non-cash compensation. The corporate and other segment also includes the results of the Company’s merchant banking operations.
13
The following table sets forth underwriting income or loss by segment, together with a reconciliation of underwriting income to net income for the three months ended December 31, 2003:
| | Three Months Ended
December 31, 2003 | |
(in thousands) | | Reinsurance | | Insurance | | Total | |
| | | | | | | |
Gross premiums written (1) | | $ | 313,561 | | $ | 483,211 | | $ | 761,653 | |
Net premiums written | | 298,445 | | 328,938 | | 627,383 | |
| | | | | | | |
Net premiums earned | | $ | 397,339 | | $ | 292,997 | | $ | 690,336 | |
Policy-related fee income | | — | | 3,670 | | 3,670 | |
Other underwriting-related fee income | | 524 | | 1,733 | | 2,257 | |
Losses and loss adjustment expenses | | (248,286 | ) | (178,830 | ) | (427,116 | ) |
Acquisition expenses, net | | (96,814 | ) | (37,571 | ) | (134,385 | ) |
Other operating expenses | | (11,095 | ) | (47,823 | ) | (58,918 | ) |
Underwriting income | | $ | 41,668 | | $ | 34,176 | | $ | 75,844 | |
| | | | | | | |
Net investment income | | | | | | 22,240 | |
Net realized investment gains | | | | | | 3,863 | |
Other fee income, net of related expenses | | | | | | (208 | ) |
Other income | | | | | | 740 | |
Other expenses | | | | | | (7,749 | ) |
Net foreign exchange losses | | | | | | (5,522 | ) |
Non-cash compensation | | | | | | (3,071 | ) |
Income before income taxes | | | | | | 86,137 | |
Income tax expense | | | | | | (2,403 | ) |
| | | | | | | |
Net income | | | | | | $ | 83,734 | |
| | | | | | | |
Underwriting Ratios | | | | | | | |
Loss ratio | | 62.5 | % | 61.0 | % | 61.9 | % |
Acquisition expense ratio (2) | | 24.4 | % | 11.6 | % | 18.9 | % |
Other operating expense ratio | | 2.8 | % | 16.3 | % | 8.5 | % |
Combined ratio | | 89.7 | % | 88.9 | % | 89.3 | % |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2) The acquisition expense ratio is adjusted to include policy-related fee income.
14
The following table sets forth underwriting income or loss by segment, together with a reconciliation of underwriting income to net income for the three months ended December 31, 2002:
| | Three Months Ended
December 31, 2002 | |
(in thousands) | | Reinsurance | | Insurance | | Total | |
| | | | | | | |
Gross premiums written (1) | | $ | 248,206 | | $ | 305,866 | | $ | 521,899 | |
Net premiums written | | 236,690 | | 202,517 | | 439,207 | |
| | | | | | | |
Net premiums earned | | $ | 205,620 | | $ | 84,391 | | $ | 290,011 | |
Policy-related fee income | | — | | 2,913 | | 2,913 | |
Losses and loss adjustment expenses | | (117,545 | ) | (56,029 | ) | (173,574 | ) |
Acquisition expenses, net | | (45,692 | ) | (9,177 | ) | (54,869 | ) |
Other operating expenses | | (8,608 | ) | (19,834 | ) | (28,442 | ) |
Underwriting income | | $ | 33,775 | | $ | 2,264 | | $ | 36,039 | |
| | | | | | | |
Net investment income | | | | | | 15,602 | |
Net realized investment losses | | | | | | (1,014 | ) |
Other fee income, net of related expenses | | | | | | (131 | ) |
Other income | | | | | | 414 | |
Other expenses | | | | | | (233 | ) |
Net foreign exchange losses | | | | | | (69 | ) |
Non-cash compensation | | | | | | (7,188 | ) |
Income before income taxes and extraordinary item | | | | | | 43,420 | |
Income tax expense | | | | | | (3,795 | ) |
| | | | | | | |
Income before extraordinary item | | | | | | 39,625 | |
Extraordinary gain, net of $0 tax expense | | | | | | 3,886 | |
| | | | | | | |
Net income | | | | | | $ | 43,511 | |
| | | | | | | |
Underwriting Ratios | | | | | | | |
Loss ratio | | 57.2 | % | 66.4 | % | 59.9 | % |
Acquisition expense ratio (2) | | 22.2 | % | 7.4 | % | 17.9 | % |
Other operating expense ratio | | 4.2 | % | 23.5 | % | 9.8 | % |
Combined ratio | | 83.6 | % | 97.3 | % | 87.6 | % |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2) The acquisition expense ratio is adjusted to include policy-related fee income.
15
The following table sets forth underwriting income or loss by segment, together with a reconciliation of underwriting income to net income for the year ended December 31, 2003:
| | Year Ended
December 31, 2003 | |
(in thousands) | | Reinsurance | | Insurance | | Total | |
| | | | | | | |
Gross premiums written (1) | | $ | 1,624,703 | | $ | 1,766,987 | | $ | 3,226,001 | |
Net premiums written | | 1,566,819 | | 1,171,596 | | 2,738,415 | |
| | | | | | | |
Net premiums earned | | $ | 1,329,673 | | $ | 882,926 | | $ | 2,212,599 | |
Policy-related fee income | | — | | 14,028 | | 14,028 | |
Other underwriting-related fee income | | 5,621 | | 1,733 | | 7,354 | |
Losses and loss adjustment expenses | | (839,417 | ) | (574,134 | ) | (1,413,551 | ) |
Acquisition expenses, net | | (314,193 | ) | (109,815 | ) | (424,008 | ) |
Other operating expenses | | (33,739 | ) | (133,968 | ) | (167,707 | ) |
Underwriting income | | $ | 147,945 | | $ | 80,770 | | $ | 228,715 | |
| | | | | | | |
Net investment income | | | | | | 80,992 | |
Net realized investment gains | | | | | | 25,317 | |
Other fee income, net of related expenses | | | | | | 436 | |
Other income | | | | | | 3,011 | |
Other expenses | | | | | | (18,236 | ) |
Net foreign exchange gains | | | | | | 997 | |
Non-cash compensation | | | | | | (14,732 | ) |
Income before income taxes and extraordinary item | | | | | | 306,500 | |
Income tax expense | | | | | | (26,725 | ) |
| | | | | | | |
Income before extraordinary item | | | | | | 279,775 | |
Extraordinary gain, net of $0 tax expense | | | | | | 816 | |
| | | | | | | |
Net income | | | | | | $ | 280,591 | |
| | | | | | | |
Underwriting Ratios | | | | | | | |
Loss ratio | | 63.1 | % | 65.0 | % | 63.9 | % |
Acquisition expense ratio (2) | | 23.6 | % | 10.8 | % | 18.5 | % |
Other operating expense ratio | | 2.5 | % | 15.2 | % | 7.6 | % |
Combined ratio | | 89.2 | % | 91.0 | % | 90.0 | % |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2) The acquisition expense ratio is adjusted to include policy-related fee income.
16
The following table sets forth underwriting income or loss by segment, together with a reconciliation of underwriting income to net income for the year ended December 31, 2002:
| | Year Ended
December 31, 2002 | |
(in thousands) | | Reinsurance | | Insurance | | Total | |
| | | | | | | |
Gross premiums written (1) | | $ | 908,732 | | $ | 664,559 | | $ | 1,487,212 | |
Net premiums written | | 882,700 | | 378,927 | | 1,261,627 | |
| | | | | | | |
Net premiums earned | | $ | 500,980 | | $ | 153,996 | | $ | 654,976 | |
Policy-related fee income | | — | | 9,418 | | 9,418 | |
Losses and loss adjustment expenses | | (315,766 | ) | (108,772 | ) | (424,538 | ) |
Acquisition expenses, net | | (105,391 | ) | (13,570 | ) | (118,961 | ) |
Other operating expenses | | (18,849 | ) | (42,827 | ) | (61,676 | ) |
Underwriting income (loss) | | $ | 60,974 | | $ | (1,755 | ) | $ | 59,219 | |
| | | | | | | |
Net investment income | | | | | | 51,249 | |
Net realized investment losses | | | | | | (839 | ) |
Other fee income, net of related expenses | | | | | | (910 | ) |
Other income | | | | | | 2,175 | |
Other expenses | | | | | | (9,323 | ) |
Net foreign exchange gains | | | | | | 2,449 | |
Non-cash compensation | | | | | | (49,480 | ) |
Income before income taxes and extraordinary item | | | | | | 54,540 | |
Income tax benefit | | | | | | 556 | |
| | | | | | | |
Income before extraordinary item | | | | | | 55,096 | |
Extraordinary gain, net of $0 tax expense | | | | | | 3,886 | |
| | | | | | | |
Net income | | | | | | $ | 58,982 | |
| | | | | | | |
Underwriting Ratios | | | | | | | |
Loss ratio | | 63.0 | % | 70.6 | % | 64.8 | % |
Acquisition expense ratio (2) | | 21.0 | % | 2.7 | % | 16.7 | % |
Other operating expense ratio | | 3.8 | % | 27.8 | % | 9.4 | % |
Combined ratio | | 87.8 | % | 101.1 | % | 90.9 | % |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2) The acquisition expense ratio is adjusted to include policy-related fee income.
17
The following table sets forth the reinsurance segment’s net premiums written and earned by major line of business and type of business, together with net premiums written by client location for the three months ended December 31, 2003 and 2002:
| | Three Months Ended
December 31, | |
| | 2003 | | 2002 | |
REINSURANCE SEGMENT
(in thousands) | | Amount | | % of
Total | | Amount | | % of
Total | |
| | | | | | | | | |
Major line of business: | | | | | | | | | |
Net premiums written | | | | | | | | | |
Casualty (1) | | $ | 167,351 | | 56.1 | % | $ | 111,472 | | 47.1 | % |
Other specialty | | 48,568 | | 16.3 | % | 33,297 | | 14.1 | % |
Property excluding property catastrophe | | 43,717 | | 14.6 | % | 40,276 | | 17.0 | % |
Marine and aviation | | 31,388 | | 10.5 | % | 22,061 | | 9.3 | % |
Property catastrophe | | 5,580 | | 1.9 | % | 8,854 | | 3.8 | % |
Non-traditional | | 1,559 | | 0.5 | % | 20,637 | | 8.7 | % |
Casualty clash | | 282 | | 0.1 | % | 93 | | 0.0 | % |
Total | | $ | 298,445 | | 100.0 | % | $ | 236,690 | | 100.0 | % |
| | | | | | | | | |
Net premiums earned | | | | | | | | | |
Casualty (1) | | $ | 168,945 | | 42.5 | % | $ | 48,944 | | 23.8 | % |
Other specialty | | 86,895 | | 21.9 | % | 40,523 | | 19.7 | % |
Property excluding property catastrophe | | 73,824 | | 18.5 | % | 39,448 | | 19.2 | % |
Property catastrophe | | 26,500 | | 6.7 | % | 26,507 | | 12.9 | % |
Marine and aviation | | 23,324 | | 5.9 | % | 11,397 | | 5.5 | % |
Non-traditional | | 15,157 | | 3.8 | % | 34,655 | | 16.9 | % |
Casualty clash | | 2,694 | | 0.7 | % | 4,146 | | 2.0 | % |
Total | | $ | 397,339 | | 100.0 | % | $ | 205,620 | | 100.0 | % |
| | | | | | | | | |
Type of business: | | | | | | | | | |
Net premiums written | | | | | | | | | |
Pro rata | | $ | 265,824 | | 89.1 | % | $ | 196,275 | | 82.9 | % |
Excess of loss | | 32,621 | | 10.9 | % | 40,415 | | 17.1 | % |
Total | | $ | 298,445 | | 100.0 | % | $ | 236,690 | | 100.0 | % |
| | | | | | | | | |
Net premiums earned | | | | | | | | | |
Pro rata | | $ | 286,193 | | 72.0 | % | $ | 109,050 | | 53.0 | % |
Excess of loss | | 111,146 | | 28.0 | % | 96,570 | | 47.0 | % |
Total | | $ | 397,339 | | 100.0 | % | $ | 205,620 | | 100.0 | % |
| | | | | | | | | |
Client location: | | | | | | | | | |
Net premiums written | | | | | | | | | |
North America | | $ | 187,006 | | 62.7 | % | $ | 155,286 | | 65.6 | % |
Europe | | 90,987 | | 30.5 | % | 58,010 | | 24.5 | % |
Bermuda | | 16,998 | | 5.7 | % | 16,008 | | 6.8 | % |
Asia and Pacific | | (2,884 | ) | (1.0 | )% | 2,471 | | 1.0 | % |
Other | | 6,338 | | 2.1 | % | 4,915 | | 2.1 | % |
Total | | $ | 298,445 | | 100.0 | % | $ | 236,690 | | 100.0 | % |
(1) Includes executive assurance and professional liability business.
18
The following table sets forth the reinsurance segment’s net premiums written and earned by major line of business and type of business, together with net premiums written by client location for the years ended December 31, 2003 and 2002:
| | Years Ended
December 31, | |
| | 2003 | | 2002 | |
REINSURANCE SEGMENT
(in thousands) | | Amount | | % of
Total | | Amount | | % of
Total | |
| | | | | | | | | |
Major line of business: | | | | | | | | | |
Net premiums written | | | | | | | | | |
Casualty (1) | | $ | 648,119 | | 41.4 | % | $ | 245,236 | | 27.8 | % |
Other specialty | | 360,148 | | 23.0 | % | 173,087 | | 19.6 | % |
Property excluding property catastrophe | | 302,560 | | 19.3 | % | 166,344 | | 18.8 | % |
Property catastrophe | | 99,562 | | 6.4 | % | 110,989 | | 12.6 | % |
Marine and aviation | | 91,706 | | 5.8 | % | 60,383 | | 6.8 | % |
Non-traditional | | 52,911 | | 3.4 | % | 109,978 | | 12.5 | % |
Casualty clash | | 11,813 | | 0.7 | % | 16,683 | | 1.9 | % |
Total | | $ | 1,566,819 | | 100.0 | % | $ | 882,700 | | 100.0 | % |
| | | | | | | | | |
Net premiums earned | | | | | | | | | |
Casualty (1) | | $ | 483,393 | | 36.4 | % | $ | 94,291 | | 18.8 | % |
Other specialty | | 291,467 | | 21.9 | % | 109,293 | | 21.8 | % |
Property excluding property catastrophe | | 287,220 | | 21.6 | % | 87,908 | | 17.6 | % |
Property catastrophe | | 108,153 | | 8.1 | % | 82,702 | | 16.5 | % |
Marine and aviation | | 78,928 | | 5.9 | % | 30,127 | | 6.0 | % |
Non-traditional | | 67,618 | | 5.1 | % | 82,423 | | 16.5 | % |
Casualty clash | | 12,894 | | 1.0 | % | 14,236 | | 2.8 | % |
Total | | $ | 1,329,673 | | 100.0 | % | $ | 500,980 | | 100.0 | % |
| | | | | | | | | |
Type of business: | | | | | | | | | |
Net premiums written | | | | | | | | | |
Pro rata | | $ | 1,148,202 | | 73.3 | % | $ | 520,474 | | 59.0 | % |
Excess of loss | | 418,617 | | 26.7 | % | 362,226 | | 41.0 | % |
Total | | $ | 1,566,819 | | 100.0 | % | $ | 882,700 | | 100.0 | % |
| | | | | | | | | |
Net premiums earned | | | | | | | | | |
Pro rata | | $ | 922,167 | | 69.4 | % | $ | 229,449 | | 45.8 | % |
Excess of loss | | 407,506 | | 30.6 | % | 271,531 | | 54.2 | % |
Total | | $ | 1,329,673 | | 100.0 | % | $ | 500,980 | | 100.0 | % |
| | | | | | | | | |
Client location: | | | | | | | | | |
Net premiums written | | | | | | | | | |
North America | | $ | 972,012 | | 62.0 | % | $ | 515,334 | | 58.4 | % |
Europe | | 446,086 | | 28.5 | % | 254,901 | | 28.9 | % |
Bermuda | | 92,006 | | 5.9 | % | 51,562 | | 2.8 | % |
Asia and Pacific | | 20,912 | | 1.3 | % | 24,796 | | 5.8 | % |
Other | | 35,803 | | 2.3 | % | 36,107 | | 4.1 | % |
Total | | $ | 1,566,819 | | 100.0 | % | $ | 882,700 | | 100.0 | % |
(1) Includes executive assurance and professional liability business.
19
The following table sets forth the insurance segment’s net premiums written and earned by major line of business, together with net premiums written by client location for the three months ended December 31, 2003 and 2002:
| | Three Months Ended
December 31, | |
| | 2003 | | 2002 | |
INSURANCE SEGMENT
(in thousands) | | Amount | | % of
Total | | Amount | | % of
Total | |
| | | | | | | | | |
Major line of business: | | | | | | | | | |
Net premiums written | | | | | | | | | |
Programs | | $ | 81,167 | | 24.7 | % | $ | 56,376 | | 27.8 | % |
Casualty | | 55,481 | | 16.9 | % | 33,966 | | 16.8 | % |
Construction and surety | | 47,993 | | 14.6 | % | 17,556 | | 8.7 | % |
Property | | 43,882 | | 13.3 | % | 27,089 | | 13.4 | % |
Executive assurance | | 33,685 | | 10.2 | % | 21,308 | | 10.5 | % |
Professional liability | | 28,110 | | 8.6 | % | 12,806 | | 6.3 | % |
Healthcare | | 13,471 | | 4.1 | % | 20,171 | | 10.0 | % |
Other | | 25,149 | | 7.6 | % | 13,245 | | 6.5 | % |
Total | | $ | 328,938 | | 100.0 | % | $ | 202,517 | | 100.0 | % |
| | | | | | | | | |
Net premiums earned | | | | | | | | | |
Programs | | $ | 97,858 | | 33.4 | % | $ | 20,384 | | 24.1 | % |
Casualty | | 55,658 | | 19.0 | % | 13,301 | | 15.8 | % |
Property | | 27,850 | | 9.5 | % | 10,939 | | 13.0 | % |
Executive assurance | | 27,750 | | 9.5 | % | 11,129 | | 13.2 | % |
Professional liability | | 26,532 | | 9.0 | % | 3,907 | | 4.6 | % |
Construction and surety | | 22,199 | | 7.6 | % | 5,478 | | 6.5 | % |
Healthcare | | 11,076 | | 3.8 | % | 4,936 | | 5.8 | % |
Other | | 24,074 | | 8.2 | % | 14,317 | | 17.0 | % |
Total | | $ | 292,997 | | 100.0 | % | $ | 84,391 | | 100.0 | % |
| | | | | | | | | |
Client location: | | | | | | | | | |
Net premiums written | | | | | | | | | |
North America | | $ | 314,125 | | 95.5 | % | $ | 200,925 | | 99.2 | % |
Other | | 14,813 | | 4.5 | % | 1,592 | | 0.8 | % |
Total | | $ | 328,938 | | 100.0 | % | $ | 202,517 | | 100.0 | % |
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The following table sets forth the insurance segment’s net premiums written and earned by major line of business, together with net premiums written by client location for the years ended December 31, 2003 and 2002:
| | Years Ended
December 31, | |
| | 2003 | | 2002 | |
INSURANCE SEGMENT
(in thousands) | | Amount | | % of
Total | | Amount | | % of
Total | |
| | | | | | | | | |
Major line of business: | | | | | | | | | |
Net premiums written | | | | | | | | | |
Programs | | $ | 344,915 | | 29.4 | % | $ | 88,178 | | 23.3 | % |
Casualty | | 224,596 | | 19.2 | % | 64,165 | | 16.9 | % |
Construction and surety | | 143,581 | | 12.3 | % | 31,254 | | 8.2 | % |
Property | | 121,393 | | 10.4 | % | 50,772 | | 13.4 | % |
Executive assurance | | 114,268 | | 9.7 | % | 49,479 | | 13.1 | % |
Professional liability | | 105,648 | | 9.0 | % | 20,436 | | 5.4 | % |
Healthcare | | 38,127 | | 3.3 | % | 23,624 | | 6.2 | % |
Other | | 79,068 | | 6.7 | % | 51,019 | | 13.5 | % |
Total | | $ | 1,171,596 | | 100.0 | % | $ | 378,927 | | 100.0 | % |
| | | | | | | | | |
Net premiums earned | | | | | | | | | |
Programs | | $ | 280,730 | | 31.8 | % | $ | 33,948 | | 22.0 | % |
Casualty | | 164,329 | | 18.6 | % | 18,998 | | 12.3 | % |
Executive assurance | | 87,259 | | 9.9 | % | 18,288 | | 11.9 | % |
Property | | 85,199 | | 9.6 | % | 16,638 | | 10.8 | % |
Construction and surety | | 73,601 | | 8.3 | % | 7,071 | | 4.6 | % |
Professional liability | | 71,087 | | 8.1 | % | 5,817 | | 3.8 | % |
Healthcare | | 37,873 | | 4.3 | % | 5,263 | | 3.4 | % |
Other | | 82,848 | | 9.4 | % | 47,973 | | 31.2 | % |
Total | | $ | 882,926 | | 100.0 | % | $ | 153,996 | | 100.0 | % |
| | | | | | | | | |
Client location: | | | | | | | | | |
Net premiums written | | | | | | | | | |
North America | | $ | 1,140,064 | | 97.3 | % | $ | 375,725 | | 99.2 | % |
Other | | 31,532 | | 2.7 | % | 3,202 | | 0.8 | % |
Total | | $ | 1,171,596 | | 100.0 | % | $ | 378,927 | | 100.0 | % |
21
Calculation of Book Value Per Share
The following actual book value per share calculations are based on shareholders’ equity of $1.71 billion and $1.41 billion at December 31, 2003 and December 31, 2002, respectively. Book value per share excludes the effects of stock options and Class B warrants.
| | December 31, 2003 | | December 31, 2002 | |
| | Common
Shares and
Potential
Common
Shares | | Cumulative
Book Value
Per Share | | Common
Shares and
Potential
Common
Shares | | Cumulative
Book Value
Per Share | |
Common shares (1) | | 28,200,372 | | $ | 31.74 | | 27,725,334 | | $ | 21.48 | |
Series A convertible preference shares | | 38,844,665 | | $ | 25.52 | | 38,844,665 | | $ | 21.20 | |
Common shares and potential common shares | | 67,045,037 | | | | 66,569,999 | | | |
(1) Book value per common share at December 31, 2003 and December 31, 2002 was determined by dividing (i) the difference between total shareholders’ equity and the aggregate liquidation preference of the Series A convertible preference shares of $815.7 million, by (ii) the number of common shares outstanding. Restricted common shares are included in the number of common shares outstanding as if such shares were issued on the date of grant.
Pursuant to the subscription agreement entered into in connection with the November 2001 capital infusion (the “Subscription Agreement”), an adjustment basket relating to certain non-core operations was calculated during the 2003 fourth quarter for purposes of determining whether the Company would be required to issue additional preference shares to the investors as a purchase price adjustment. The adjustment basket was equal to (1) the difference between value realized upon sale and the GAAP book value at the closing of the capital infusion (November 2001) (as adjusted based on a pre-determined growth rate) of agreed upon non-core businesses; plus (2) the difference between GAAP net book value of the Company’s insurance balances attributable to the Company’s core insurance operations with respect to any policy or contract written or having a specified effective date at the time of the final adjustment and those balances at the closing; minus (3) reductions in book value arising from costs and expenses relating to the transaction provided under the Subscription Agreement, actual losses arising out of breach of representations under the Subscription Agreement and certain other costs and expenses. If the adjustment basket had been calculated as less than zero, the Company would have been required to issue additional preference shares to the investors based on the decrease in value of the components of the adjustment basket. In February 2004, the Company and the investors agreed that no purchase price adjustment was required pursuant to the above calculation and, accordingly, no additional preference shares were issued to the investors.
In addition, on the fourth anniversary of the closing, there will be a calculation of a further adjustment basket based on (1) liabilities owed to Folksamerica (if any) under the Asset Purchase Agreement, dated as of January 10, 2000, between the Company and Folksamerica, and (2) specified tax and ERISA matters under the Subscription Agreement.
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