UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2006

 

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  x    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  x                Accelerated Filer  o                Non-Accelerated Filer  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  x

 

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 November 1, 2006

Common Shares, $0.01 par value

 

74,119,097

 

 




ARCH CAPITAL GROUP LTD.

 

INDEX

 

 

Page No.

PART I. Financial Information

 

 

 

 

 

Item 1 — Consolidated Financial Statements

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

2

 

 

 

Consolidated Balance Sheets
September 30, 2006 (unaudited) and December 31, 2005

 

3

 

 

 

Consolidated Statements of Income
For the three and nine month periods ended September 30, 2006 and 2005 (unaudited)

 

4

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity
For the nine month periods ended September 30, 2006 and 2005 (unaudited)

 

5

 

 

 

Consolidated Statements of Comprehensive Income
For the nine month periods ended September 30, 2006 and 2005 (unaudited)

 

6

 

 

 

Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2006 and 2005 (unaudited)

 

7

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

8

 

 

 

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

 

35

 

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

 

62

 

 

 

Item 4 — Controls and Procedures

 

62

 

 

 

PART II. Other Information

 

 

 

 

 

Item 1 — Legal Proceedings

 

62

 

 

 

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

 

63

 

 

 

Item 5 — Other Information

 

63

 

 

 

Item 6 — Exhibits

 

64

 

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 (the “Company”) as of September 30, 2006, and the related consolidated statements of income for each of the three-month and nine-month periods ended September 30, 2006 and 2005, and the consolidated statements of changes in shareholders’ equity, comprehensive income and cash flows for the nine-month periods ended September 30, 2006 and 2005. 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 (United States), 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, 2005, 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, 2005 and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005; and in our report dated March 13, 2006, 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, 2005, 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 8, 2006

2




ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)

 

 

(Unaudited)

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities available for sale, at fair value (amortized cost: 2006, $6,689,055; 2005, $5,310,712)

 

$

6,727,113

 

$

5,280,987

 

Short-term investments available for sale, at fair value (amortized cost: 2006, $883,673; 2005, $679,530)

 

887,187

 

681,887

 

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

 

844,430

 

893,379

 

Other investments, at fair value (cost: 2006, $275,442; 2005, $59,839)

 

290,305

 

70,233

 

Total investments

 

8,749,035

 

6,926,486

 

 

 

 

 

 

 

Cash

 

188,139

 

222,477

 

Accrued investment income

 

70,163

 

62,196

 

Fixed maturities and short-term investments pledged under securities lending agreements, at fair value

 

815,268

 

863,866

 

Premiums receivable

 

901,001

 

672,902

 

Funds held by reinsureds

 

93,980

 

167,739

 

Unpaid losses and loss adjustment expenses recoverable

 

1,562,459

 

1,389,768

 

Paid losses and loss adjustment expenses recoverable

 

116,966

 

80,948

 

Prepaid reinsurance premiums

 

514,490

 

322,435

 

Deferred income tax assets, net

 

76,765

 

71,139

 

Deferred acquisition costs, net

 

313,806

 

317,357

 

Receivable for securities sold

 

91,375

 

220

 

Other assets

 

460,429

 

390,903

 

Total Assets

 

$

13,953,876

 

$

11,488,436

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$

6,309,624

 

$

5,452,826

 

Unearned premiums

 

1,995,755

 

1,699,691

 

Reinsurance balances payable

 

312,881

 

150,451

 

Senior notes

 

300,000

 

300,000

 

Deposit accounting liabilities

 

44,590

 

43,104

 

Securities lending collateral

 

844,430

 

893,379

 

Payable for securities purchased

 

288,815

 

12,020

 

Other liabilities

 

511,532

 

456,438

 

Total Liabilities

 

10,607,627

 

9,007,909

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Non-cumulative preferred shares ($0.01 par value, 50,000,000 shares authorized)

 

 

 

 

 

- Series A (issued: 2006, 8,000,000)

 

80

 

 

- Series B (issued: 2006, 5,000,000)

 

50

 

 

Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2006, 74,006,652; 2005, 73,334,870)

 

740

 

733

 

Additional paid-in capital

 

1,928,914

 

1,595,440

 

Deferred compensation under share award plan

 

 

(9,646

)

Retained earnings

 

1,354,629

 

901,348

 

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

 

61,836

 

(7,348

)

Total Shareholders’ Equity

 

3,346,249

 

2,480,527

 

Total Liabilities and Shareholders’ Equity

 

$

13,953,876

 

$

11,488,436

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

 

 

 

 

 

 

 

 

Net premiums written

 

$

747,225

 

$

787,304

 

$

2,415,502

 

$

2,310,833

 

(Increase) decrease in unearned premiums

 

10,348

 

(39,529

)

(98,878

)

(126,098

)

Net premiums earned

 

757,573

 

747,775

 

2,316,624

 

2,184,735

 

Net investment income

 

101,622

 

59,270

 

272,451

 

162,846

 

Net realized losses

 

(11,115

)

(10,291

)

(46,700

)

(7,725

)

Fee income

 

2,269

 

2,239

 

7,542

 

9,376

 

Total revenues

 

850,349

 

798,993

 

2,549,917

 

2,349,232

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

445,748

 

672,224

 

1,376,181

 

1,541,678

 

Acquisition expenses

 

117,529

 

142,803

 

395,782

 

417,474

 

Other operating expenses

 

82,791

 

72,601

 

250,135

 

221,761

 

Interest expense

 

5,361

 

5,632

 

16,567

 

16,897

 

Net foreign exchange (gains) losses

 

4,251

 

(7,334

)

15,650

 

(20,769

)

Total expenses

 

655,680

 

885,926

 

2,054,315

 

2,177,041

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

194,669

 

(86,933

)

495,602

 

172,191

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

2,371

 

(642

)

28,127

 

16,598

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

192,298

 

(86,291

)

467,475

 

155,593

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

6,488

 

 

14,194

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

185,810

 

$

(86,291

)

$

453,281

 

$

155,593

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

2.54

 

$

(2.48

)

$

6.20

 

$

4.50

 

Diluted

 

$

2.44

 

$

(2.48

)

$

5.96

 

$

2.09

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and common share equivalents outstanding

 

 

 

 

 

 

 

 

 

Basic (1)

 

73,244,138

 

34,750,770

 

73,111,759

 

34,561,131

 

Diluted (1)

 

76,283,910

 

34,750,770

 

76,108,510

 

74,458,013

 

 

 

 

 

 

 

 

 

 

 

 


(1)          For the 2005 third quarter and nine months ended September 30, 2005, basic weighted average common shares and common share equivalents outstanding excluded 37,327,502 and 37,328,788 series A convertible preference shares, respectively. Such shares were included in the diluted weighted average common shares and common share equivalents outstanding. During the 2005 fourth quarter, all remaining series A convertible preference shares were converted into an equal number of common shares. In addition, due to the net loss recorded for the 2005 third quarter, diluted weighted average common shares and common share equivalents outstanding for the 2005 third quarter do not include 40.0 million shares of dilutive securities since the inclusion of such securities would have had an anti-dilutive effect on the loss per share under GAAP.

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,

 

 

 

2006

 

2005

 

Series A Convertible Preference Shares

 

 

 

 

 

Balance at beginning of year

 

$

 

$

373

 

Converted to common shares

 

 

(0

)

Balance at end of period

 

 

373

 

 

 

 

 

 

 

Non-Cumulative Preferred Shares

 

 

 

 

 

Series A preferred shares issued

 

80

 

 

Series B preferred shares issued

 

50

 

 

Balance at end of period

 

130

 

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Balance at beginning of year

 

733

 

349

 

Common shares issued, net

 

7

 

6

 

Balance at end of period

 

740

 

355

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

Balance at beginning of year

 

1,595,440

 

1,560,291

 

Cumulative effect of change in accounting for unearned stock grant compensation

 

(9,646

)

 

Series A non-cumulative preferred shares issued

 

193,377

 

 

Series B non-cumulative preferred shares issued

 

120,881

 

 

Common shares issued

 

410

 

2,893

 

Exercise of stock options

 

17,585

 

13,415

 

Common shares retired

 

(1,279

)

(1,398

)

Amortization of share-based compensation

 

11,621

 

 

Other

 

525

 

642

 

Balance at end of period

 

1,928,914

 

1,575,843

 

 

 

 

 

 

 

Deferred Compensation Under Share Award Plan

 

 

 

 

 

Balance at beginning of year

 

(9,646

)

(9,879

)

Cumulative effect of change in accounting for unearned stock grant compensation

 

9,646

 

 

Restricted common shares issued

 

 

(1,488

)

Deferred compensation expense recognized

 

 

5,742

 

Balance at end of period

 

 

(5,625

)

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

Balance at beginning of year

 

901,348

 

644,862

 

Dividends declared on preferred shares

 

(14,194

)

 

Net income

 

467,475

 

155,593

 

Balance at end of period

 

1,354,629

 

800,455

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance at beginning of year

 

(7,348

)

45,910

 

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

 

72,408

 

(64,571

)

Foreign currency translation adjustments, net of deferred income tax

 

(3,224

)

(1,209

)

Balance at end of period

 

61,836

 

(19,870

)

 

 

 

 

 

 

Total Shareholders’ Equity

 

$

3,346,249

 

$

2,351,531

 

 

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,

 

 

 

2006

 

2005

 

Comprehensive Income

 

 

 

 

 

Net income

 

$

467,475

 

$

155,593

 

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

 

 

 

 

 

Unrealized appreciation (decline) in value of investments:

 

 

 

 

 

Unrealized holding gains (losses) arising during period

 

22,675

 

(74,758

)

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

 

49,733

 

10,187

 

Foreign currency translation adjustments

 

(3,224

)

(1,209

)

Other comprehensive income (loss)

 

69,184

 

(65,780

)

Comprehensive Income

 

$

536,659

 

$

89,813

 

 

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,

 

 

 

2006

 

2005

 

Operating Activities

 

 

 

 

 

Net income

 

$

467,475

 

$

155,593

 

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

 

 

 

 

 

Net realized losses

 

46,788

 

9,601

 

Share-based compensation

 

11,621

 

6,486

 

Changes in:

 

 

 

 

 

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

 

684,107

 

983,360

 

Unearned premiums, net of prepaid reinsurance premiums

 

104,009

 

124,174

 

Premiums receivable

 

(228,099

)

(157,554

)

Deferred acquisition costs, net

 

3,551

 

(35,758

)

Funds held by reinsureds

 

73,759

 

11,038

 

Reinsurance balances payable

 

162,430

 

27,226

 

Paid losses and loss adjustment expenses recoverable

 

(36,018

)

(3,377

)

Deferred income tax assets, net

 

(6,419

)

6,649

 

Other liabilities

 

40,646

 

11,679

 

Other items, net

 

(73,864

)

(33,623

)

Net Cash Provided By Operating Activities

 

1,249,986

 

1,105,494

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of fixed maturity investments

 

(11,905,546

)

(6,212,818

)

Proceeds from sales of fixed maturity investments

 

10,328,588

 

5,178,452

 

Proceeds from redemptions and maturities of fixed maturity investments

 

371,202

 

282,552

 

Purchases of other investments

 

(215,052

)

 

Proceeds from sale of other investments

 

6,329

 

12,701

 

Net purchases of short-term investments

 

(182,394

)

(317,043

)

Change in short-term investment of funds received under securities lending agreements, at fair value

 

48,949

 

(954,684

)

Purchases of furniture, equipment and other

 

(9,032

)

(10,548

)

Net Cash Used For Investing Activities

 

(1,556,956

)

(2,021,388

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from common shares issued, net of repurchases

 

12,165

 

10,081

 

Proceeds from preferred shares issued, net of issuance costs

 

314,388

 

 

Change in securities lending collateral

 

(48,949

)

954,684

 

Excess tax benefits from share-based compensation

 

3,706

 

 

Preferred dividends paid

 

(10,892

)

 

Net Cash Provided By Financing Activities

 

270,418

 

964,765

 

 

 

 

 

 

 

Effects of exchange rate changes on foreign currency cash

 

2,214

 

(164

)

 

 

 

 

 

 

Increase (decrease) in cash

 

(34,338

)

48,707

 

Cash beginning of year

 

222,477

 

113,052

 

Cash end of period

 

$

188,139

 

$

161,759

 

 

 

 

 

 

 

Income taxes paid, net

 

$

35,446

 

$

37,099

 

Interest paid

 

$

11,067

 

$

11,141

 

 

See Notes to Consolidated Financial Statements

7




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

1.      General

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

The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States 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 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/A for the year ended December 31, 2005, including the Company’s audited consolidated financial statements and related notes and the section entitled “Risk Factors.”

To facilitate period-to-period comparisons, certain amounts in the 2005 consolidated financial statements have been reclassified to conform to the 2006 presentation. Such reclassifications had no effect on the Company’s consolidated net income.

2.      Share-Based Compensation

Stock Options

Effective January 1, 2006, the Company adopted the fair value method of accounting for share-based compensation arrangements in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), using the modified prospective method of transition. Under the fair value method of accounting, compensation expense is estimated based on the fair value of the award at the grant date and is recognized in net income over the requisite service period. Such compensation cost is reduced by assumed forfeitures and adjusted based on actual forfeitures until vesting. 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, compensation expense for unvested stock options that are outstanding as of January 1, 2006 will be recognized in net income as the requisite service is rendered based on the grant date fair value of those options as previously calculated under pro forma disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Therefore, under the modified prospective method, compensation expense is recognized beginning with the effective date of adoption of SFAS No.123(R) for all stock option awards (i) granted after the effective date of adoption and (ii) granted prior to the effective date of adoption and that remain unvested on the date of adoption.

Prior to January 1, 2006, the Company accounted for its share-based compensation related to stock option awards using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and its related interpretations permitted by SFAS No. 123, which did not require the recognition of compensation expense related to the issuance of

8




stock options so long as the quoted market price of the Company’s stock at the date of grant was less than or equal to the amount an employee must pay to acquire the stock.

As required by the provisions of SFAS No. 123(R), the Company recorded after-tax share-based compensation expense of $1.6 million, or $0.02 per basic and diluted share, related to stock option awards for the 2006 third quarter, net of tax benefits of $0.4 million. For the nine months ended September 30, 2006, the Company recorded after-tax share-based compensation expense of $4.4 million, or $0.06 per basic and diluted share, net of tax benefits of $1.1 million. The share-based compensation expense associated with stock options that have graded vesting features and vest based on service conditions only (i) granted after the effective date of adoption is calculated on a straight-line basis over the requisite service periods of the related options and (ii) granted prior to the effective date of adoption and that remain unvested as of the date of adoption is calculated on a graded-vesting basis as prescribed under FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans—an interpretation of APB Opinions No. 15 and 25,” over the remaining requisite service periods of the related options. These charges had no impact on the Company’s cash flows or total shareholders’ equity.

Under the modified prospective method of transition under SFAS No.123(R), the Company is not required to restate its prior period financial statements to reflect expensing of share-based compensation under SFAS No. 123(R). Therefore, the results for the 2006 periods are not comparable to the 2005 periods. As required by SFAS No.123(R), the Company has presented pro forma disclosures of its net income and earnings per share for the 2005 third quarter and nine months ended September 30, 2005 assuming the estimated fair value of the options granted prior to January 1, 2006 is amortized to expense over the requisite service period, as indicated below:

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

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

 

September 30, 2005

 

September 30, 2005

 

 

 

 

 

 

 

Net income (loss), as reported

 

$

(86,291

)

$

155,593

 

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

 

(1,342

)

(3,538

)

Pro forma net income

 

$

(87,633

)

$

152,055

 

 

 

 

 

 

 

Earnings per share – basic:

 

 

 

 

 

As reported

 

$

(2.48

)

$

4.50

 

Pro forma

 

$

(2.52

)

$

4.40

 

Earnings per share – diluted:

 

 

 

 

 

As reported

 

$

(2.48

)

$

2.09

 

Pro forma

 

$

(2.52

)

$

2.04

 

 

For purposes of disclosure in the foregoing table and for purposes of determining estimated fair value under SFAS No. 123(R), the Company has computed the estimated fair values of share-based compensation related to stock options using the Black-Scholes option valuation model and has applied the assumptions set forth in the following table. Awards granted prior to September 2005 generally vest over a two year period: one-third immediately on the grant date and one-third on the first and second anniversaries of the grant date. In September 2005, the Company’s board of directors approved a longer vesting period for future awards to vest over a three year period: one-third on the first, second and third anniversaries of the grant date. The Company increased the expected life assumption for stock options granted beginning in September 2005 to six years after considering the increase in the vesting period, the ten year contractual term of the option awards, the historical share option exercise experience, peer data and guidance from the Securities and Exchange Commission as contained in Staff Accounting Bulletin No. 107 permitting the initial application of a “simplified” method, which is based on the average of the vesting term and the contractual term of the option. Previously, the Company calculated the estimated life based on the expectation that options would be exercised within five years on average after consideration of the vesting and contractual terms, historical share option exercise experience and peer data.  The Company based its estimate of expected volatility for options granted in the 2006 third quarter and nine

9




months ended September 30, 2006 on daily historical trading data of its common shares from September 20, 2002, the date marking the completion of the Company’s transition as a worldwide insurance and reinsurance company, through the last day of the applicable period. For options granted in the 2005 third quarter and nine months ended September 30, 2005, the Company based its volatility estimate under the same method as the 2006 third quarter and nine months ended September 30, 2006, using the period from September 20, 2002 through the last day of the applicable period.

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Dividend yield

 

0.0

%

0.0

%

Expected volatility

 

20.4

%

21.0

%

Risk free interest rate

 

4.9

%

4.08

%

Expected option life

 

6.0 years

 

5.0 years

 

 

The Black-Scholes option pricing model requires the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not provide a reliable single measure of the fair value of its employee stock options. In addition, management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which result in changes to these assumptions and methodologies, and which could materially impact the Company’s fair value determination.

A summary of option activity under the Company’s Long term Incentive and Share Award Plans during the nine months ended September 30, 2006 is presented below:

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30, 2006

 

 

 

Number of
Options

 

Weighted Average
Exercise Price

 

Outstanding, beginning of year

 

5,637,108

 

$

26.30

 

Granted

 

883,750

 

$

56.39

 

Exercised

 

(557,330

)

$

24.12

 

Forfeited or expired

 

(22,599

)

$

48.88

 

Outstanding, end of period

 

5,940,929

 

$

30.89

 

Exercisable, end of period

 

4,856,415

 

$

25.39

 

 

The weighted average remaining contractual life of the Company’s outstanding and exercisable stock options at September 30, 2006 was 6.2 years and 5.5 years, respectively. The aggregate intrinsic value of the Company’s outstanding and exercisable stock options at September 30, 2006 was $190.8 million and $182.6 million, respectively. The Company received proceeds of approximately $13.4 million from the exercise of stock options during the nine months ended September 30, 2006.

The weighted average grant-date fair value of options during the nine months ended September 30, 2006 was $18.17 per option based on the Black-Scholes option pricing model. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2006 was approximately $17.6 million and represents the difference between the exercise price of the option and the closing market price of the Company’s common shares on the exercise dates. As of September 30, 2006, there was approximately $14.8 million of

10




unrecognized compensation cost related to nonvested stock options. Such cost is expected to be recognized over a weighted average period of 2.29 years.

At September 30, 2006, approximately 1,538,000 and 14,000 shares are available for grant under the 2005 and 2002 share award plans, respectively. The Company issues new shares upon exercise of stock options and when granting restricted shares. For a description of the Company’s share award plans and the number of shares authorized for awards of options or other equity instruments, refer to Note 13, “Share Capital–Long Term Incentive and Share Award Plans,” of the notes accompanying the Company’s consolidated financial statements contained in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2005.

Restricted Common Shares and Restricted Units

As discussed above, effective January 1, 2006, the Company adopted the fair value method of accounting for share-based compensation arrangements in accordance with SFAS No.123(R), which governs the accounting for all share-based compensation. Under the fair value method of accounting pursuant to SFAS No. 123(R), the fair value for restricted shares and units is measured by the grant-date price of the Company’s shares. No value is attributed to awards that employees forfeit because they fail to satisfy vesting conditions. As such, the number of shares granted is reduced by assumed forfeitures and adjusted based on actual forfeitures until vesting. Such expense is amortized over the requisite service period of the related awards. Restricted share and unit awards granted prior to September 2005 generally vest over a two year period: one-third immediately on the grant date and one-third on the first and second anniversaries of the grant date. In September 2005, the Company’s board of directors approved a longer vesting period for future restricted share and unit awards to vest over a three year period: one-third on the first, second and third anniversaries of the grant date.

Prior to January 1, 2006, the Company accounted for its share-based compensation related to restricted share and unit awards using the intrinsic value method of accounting in accordance with APB No. 25 and its related interpretations. Compensation expense equal to the market value of the restricted share awards at the measurement date was amortized and recorded in net income over the vesting period. The Company’s unearned compensation balance of $9.6 million as of December 31, 2005, which was accounted for under APB No. 25, was reclassified into additional paid-in capital upon adoption of SFAS No.123(R).

The Company recorded $1.8 million of share-based compensation expense, net of a tax benefit of $0.3 million, related to restricted share and unit awards for the 2006 third quarter as required by the provisions of SFAS No.123(R), compared to $2.0 million, net of a tax benefit of $0.4 million, for the 2005 third quarter. The Company recorded $5.3 million of share-based compensation expense, net of a tax benefit of $0.8 million, related to restricted share and unit awards for the nine months ended September 30, 2006, compared to $5.3 million, net of a tax benefit of $1.2 million, for the nine months ended September 30, 2005. The share-based compensation expense associated with restricted share and unit awards have graded vesting features and vest based on service conditions only (i) granted after the effective date of adoption is calculated on a straight-line basis over the requisite service periods of the related awards and (ii) granted prior to the effective date of adoption and that remain unvested as of the date of adoption is calculated on a graded-vesting basis over the remaining requisite service periods of the related awards. These charges had no impact on the Company’s cash flows or total shareholders’ equity.

11




A summary of restricted share activity under the Company’s Long Term Incentive and Share Award Plans during the nine months ended September 30, 2006 is presented below:

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30, 2006

 

 

 

Nonvested
Shares

 

Weighted Average
Grant Date 
Fair Value

 

Unvested balance, beginning of year

 

666,504

 

$

33.14

 

Granted

 

130,316

 

$

56.76

 

Vested

 

(107,803

)

$

39.05

 

Forfeited

 

(2,945

)

$

52.46

 

Unvested balance, end of period

 

686,072

 

$

36.62

 

 

As of September 30, 2006, 93,469 restricted units were outstanding with an aggregate intrinsic value of $5.9 million. The aggregate intrinsic value of 8,776 restricted units converted during the nine months ended September 30, 2006 was $0.5 million. As of September 30, 2006, there were $10.9 million and $0.5 million, respectively, of unrecognized compensation costs related to unvested restricted share and unit awards which are expected to be recognized over a weighted-average period of 1.01 years and 1.36 years, respectively. The total weighted average fair value of restricted shares that vested during the nine months ended September 30, 2006 was $6.4 million, or $59.24 per share.

3.      Share Transactions

During 2006, ACGL completed two public offerings of non-cumulative preferred shares (“Preferred Shares”). On February 1, 2006, $200.0 million principal amount of 8.0% series A non-cumulative preferred shares (“Series A Preferred Shares”) were issued with net proceeds of $193.5 million and, on May 24, 2006, $125.0 million principal amount of 7.875% series B non-cumulative preferred shares (“Series B Preferred Shares”) were issued with net proceeds of $120.9 million. The net proceeds of the offerings were used to support the underwriting activities of ACGL’s insurance and reinsurance subsidiaries. ACGL has the right to redeem all or a portion of each series of Preferred Shares at a redemption price of $25.00 per share on or after (1) February 1, 2011 for the Series A Preferred Shares and (2) May 15, 2011 for the Series B Preferred Shares. Dividends on the Preferred Shares are non-cumulative. Consequently, in the event dividends are not declared on the Preferred Shares for any dividend period, holders of Preferred Shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accrue and will not be payable. Holders of Preferred Shares will be entitled to receive dividend payments only when, as and if declared by ACGL’s board of directors or a duly authorized committee of the board of directors. Any such dividends will be payable from the date of original issue on a non-cumulative basis, quarterly in arrears. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 8.0% of the $25.00 liquidation preference per annum for the Series A Preferred Shares and 7.875% of the $25.00 liquidation preference per annum for the Series B Preferred Shares. At September 30, 2006, the Company had declared an aggregate of $3.3 million of dividends to be paid to holders of the Preferred Shares.

 

12




4.      Segment Information

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

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

The 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 specialty product lines: casualty; construction and surety; executive assurance; healthcare; professional liability; programs; property, marine and aviation; and other (consisting of collateralized protection business).

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 corporate and other segment (non-underwriting) includes net investment income, other expenses incurred by the Company, interest expense, net realized gains or losses, net foreign exchange gains or losses and income taxes. In addition, results for the corporate and other segment include dividends on the Company’s non-cumulative preferred shares.

13




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

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30, 2006

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

750,609

 

$

366,833

 

$

1,105,165

 

Net premiums written (1)

 

470,619

 

276,606

 

747,225

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

424,657

 

$

332,916

 

$

757,573

 

Fee income

 

1,293

 

976

 

2,269

 

Losses and loss adjustment expenses

 

(261,553

)

(184,195

)

(445,748

)

Acquisition expenses, net

 

(43,162

)

(74,367

)

(117,529

)

Other operating expenses

 

(63,350

)

(12,987

)

(76,337

)

Underwriting income

 

$

57,885

 

$

62,343

 

120,228

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

101,622

 

Net realized losses

 

 

 

 

 

(11,115

)

Other expenses

 

 

 

 

 

(6,454

)

Interest expense

 

 

 

 

 

(5,361

)

Net foreign exchange losses

 

 

 

 

 

(4,251

)

Income before income taxes

 

 

 

 

 

194,669

 

Income tax expense

 

 

 

 

 

(2,371

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

192,298

 

Preferred dividends

 

 

 

 

 

(6,488

)

Net income available to common shareholders

 

 

 

 

 

$

185,810

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

61.6

%

55.3

%

58.8

%

Acquisition expense ratio (2)

 

10.0

%

22.3

%

15.4

%

Other operating expense ratio

 

14.9

%

3.9

%

10.1

%

Combined ratio

 

86.5

%

81.5

%

84.3

%

 


(1)             Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The insurance segment and reinsurance segment results include $0.2 million and $12.0 million, respectively, of gross and net premiums written and $0.3 million and $12.3 million, respectively, of net premiums earned assumed through intersegment transactions.

(2)             The acquisition expense ratio is adjusted to include certain fee income.

14




 

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30, 2005

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

617,499

 

$

445,628

 

$

1,048,042

 

Net premiums written (1)

 

377,536

 

409,768

 

787,304

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

339,962

 

$

407,813

 

$

747,775

 

Fee income

 

2,165

 

74

 

2,239

 

Losses and loss adjustment expenses

 

(300,771

)

(371,453

)

(672,224

)

Acquisition expenses, net

 

(34,976

)

(107,827

)

(142,803

)

Other operating expenses

 

(53,644

)

(12,420

)

(66,064

)

Underwriting income (loss)

 

$

(47,264

)

$

(83,813

)

(131,077

)

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

59,270

 

Net realized losses

 

 

 

 

 

(10,291

)

Other expenses

 

 

 

 

 

(6,537

)

Interest expense

 

 

 

 

 

(5,632

)

Net foreign exchange gains

 

 

 

 

 

7,334

 

Income (loss) before income taxes

 

 

 

 

 

(86,933

)

Income tax benefit

 

 

 

 

 

642

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

(86,291

)

Preferred dividends

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

 

 

 

 

$

(86,291

)

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

88.5

%

91.1

%

89.9

%

Acquisition expense ratio (2)

 

10.0

%

26.4

%

19.0

%

Other operating expense ratio

 

15.8

%

3.0

%

8.8

%

Combined ratio

 

114.3

%

120.5

%

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 insurance segment and reinsurance segment results include $0.8 million and $14.3 million, respectively, of gross and net premiums written and $1.1 million and $12.4 million, respectively, of net premiums earned assumed through intersegment transactions.

(2)             The acquisition expense ratio is adjusted to include certain fee income.

15




 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30, 2006

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

2,013,910

 

$

1,430,742

 

$

3,409,253

 

Net premiums written (1)

 

1,277,175

 

1,138,327

 

2,415,502

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

1,190,788

 

$

1,125,836

 

$

2,316,624

 

Fee income

 

3,950

 

3,592

 

7,542

 

Losses and loss adjustment expenses

 

(760,727

)

(615,454

)

(1,376,181

)

Acquisition expenses, net

 

(122,322

)

(273,460

)

(395,782

)

Other operating expenses

 

(189,115

)

(40,418

)

(229,533

)

Underwriting income

 

$

122,574

 

$

200,096

 

322,670

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

272,451

 

Net realized losses

 

 

 

 

 

(46,700

)

Other expenses

 

 

 

 

 

(20,602

)

Interest expense

 

 

 

 

 

(16,567

)

Net foreign exchange losses

 

 

 

 

 

(15,650

)

Income before income taxes

 

 

 

 

 

495,602

 

Income tax expense

 

 

 

 

 

(28,127

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

467,475

 

Preferred dividends

 

 

 

 

 

(14,194

)

Net income available to common shareholders

 

 

 

 

 

$

453,281

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

63.9

%

54.7

%

59.4

%

Acquisition expense ratio (2)

 

10.1

%

24.3

%

17.0

%

Other operating expense ratio

 

15.9

%

3.6

%

9.9

%

Combined ratio

 

89.9

%

82.6

%

86.3

%

 


(1)          Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The insurance segment and reinsurance segment results include $1.0 million and $34.4 million, respectively, of gross and net premiums written and $1.7 million and $37.4 million, respectively, of net premiums earned assumed through intersegment transactions.

(2)          The acquisition expense ratio is adjusted to include certain fee income.

16




 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30, 2005

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

1,701,663

 

$

1,311,226

 

$

2,969,487

 

Net premiums written (1)

 

1,073,316

 

1,237,517

 

2,310,833

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

1,015,084

 

$

1,169,651

 

$

2,184,735

 

Fee income

 

4,657

 

4,719

 

9,376

 

Losses and loss adjustment expenses

 

(737,604

)

(804,074

)

(1,541,678

)

Acquisition expenses, net

 

(96,752

)

(320,722

)

(417,474

)

Other operating expenses

 

(168,474

)

(35,241

)

(203,715

)

Underwriting income

 

$

16,911

 

$

14,333

 

31,244

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

162,846

 

Net realized losses

 

 

 

 

 

(7,725

)

Other expenses

 

 

 

 

 

(18,046

)

Interest expense

 

 

 

 

 

(16,897

)

Net foreign exchange gains

 

 

 

 

 

20,769

 

Income before income taxes

 

 

 

 

 

172,191

 

Income tax expense

 

 

 

 

 

(16,598

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

155,593

 

Preferred dividends

 

 

 

 

 

 

Net income available to common shareholders

 

 

 

 

 

$

155,593

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

72.7

%

68.7

%

70.6

%

Acquisition expense ratio (2)

 

9.3

%

27.4

%

19.0

%

Other operating expense ratio

 

16.6

%

3.0

%

9.3

%

Combined ratio

 

98.6

%

99.1

%

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 insurance segment and reinsurance segment results include $2.3 million and $41.1 million, respectively, of gross and net premiums written and $3.5 million and $43.5 million, respectively, of net premiums earned assumed through intersegment transactions.

(2)          The acquisition expense ratio is adjusted to include certain fee income.

17




The following tables set forth the insurance segment’s net premiums written and earned by major line of business, together with net premiums written by client location:

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2006

 

2005

 

INSURANCE SEGMENT

 

 

 

% of

 

 

 

% of

 

(U.S. dollars in thousands)

 

Amount

 

Total

 

Amount

 

Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Property, marine and aviation

 

$

107,395

 

22.8

 

$

46,407

 

12.3

 

Professional liability

 

88,948

 

18.9

 

64,216

 

17.0

 

Construction and surety

 

74,870

 

15.9

 

59,353

 

15.7

 

Programs

 

64,558

 

13.7

 

56,335

 

14.9

 

Executive assurance

 

51,769

 

11.0

 

49,257

 

13.0

 

Casualty

 

51,659

 

11.0

 

70,924

 

18.8

 

Healthcare

 

17,051

 

3.6

 

19,507

 

5.2

 

Other

 

14,369

 

3.1

 

11,537

 

3.1

 

Total

 

$

470,619

 

100.0

 

$

377,536

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Property, marine and aviation

 

$

89,294

 

21.0

 

$

32,484

 

9.6

 

Professional liability

 

71,165

 

16.7

 

53,212

 

15.6

 

Construction and surety

 

65,696

 

15.5

 

56,965

 

16.8

 

Programs

 

58,066

 

13.7

 

54,392

 

16.0

 

Executive assurance

 

49,641

 

11.7

 

37,791

 

11.1

 

Casualty

 

61,903

 

14.6

 

76,200

 

22.4

 

Healthcare

 

17,595

 

4.1

 

18,099

 

5.3

 

Other

 

11,297

 

2.7

 

10,819

 

3.2

 

Total

 

$

424,657

 

100.0

 

$

339,962

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

364,726

 

77.5

 

$

324,525

 

86.0

 

Europe

 

69,012

 

14.7

 

22,680

 

6.0

 

Other

 

36,881

 

7.8

 

30,331

 

8.0

 

Total

 

$

470,619

 

100.0

 

$

377,536

 

100.0

 

 


(1)          Insurance segment results include premiums written and earned assumed through intersegment transactions of $0.2 million and $0.3 million, respectively, for the 2006 third quarter and $0.8 million and $1.1 million, respectively, for the 2005 third quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $12.0 million and $12.3 million, respectively, for the 2006 third quarter and $14.3 million and $12.4 million, respectively, for the 2005 third quarter.

18




 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2006

 

2005

 

INSURANCE SEGMENT

 

 

 

% of

 

 

 

% of

 

(U.S. dollars in thousands)

 

Amount

 

Total

 

Amount

 

Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Property, marine and aviation

 

$

250,753

 

19.6

 

$

156,589

 

14.6

 

Construction and surety

 

222,216

 

17.4

 

170,155

 

15.9

 

Professional liability

 

214,957

 

16.8

 

167,874

 

15.6

 

Programs

 

181,604

 

14.2

 

168,126

 

15.7

 

Casualty

 

169,052

 

13.2

 

207,225

 

19.3

 

Executive assurance

 

151,201

 

11.9

 

117,777

 

11.0

 

Healthcare

 

49,365

 

3.9

 

48,569

 

4.5

 

Other

 

38,027

 

3.0

 

37,001

 

3.4

 

Total

 

$

1,277,175

 

100.0

 

$

1,073,316

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Property, marine and aviation

 

$

207,045

 

17.4

 

$

131,567

 

13.0

 

Construction and surety

 

200,366

 

16.8

 

164,077

 

16.2

 

Professional liability

 

190,849

 

16.0

 

150,509

 

14.8

 

Programs

 

172,933

 

14.5

 

162,857

 

16.0

 

Casualty

 

185,832

 

15.6

 

219,153

 

21.6

 

Executive assurance

 

149,424

 

12.6

 

97,084

 

9.5

 

Healthcare

 

52,141

 

4.4

 

51,438

 

5.1

 

Other

 

32,198

 

2.7

 

38,399

 

3.8

 

Total

 

$

1,190,788

 

100.0

 

$

1,015,084

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

1,032,924

 

80.9

 

$

934,181

 

87.0

 

Europe

 

156,525

 

12.2

 

78,981

 

7.4

 

Other

 

87,726

 

6.9

 

60,154

 

5.6

 

Total

 

$

1,277,175

 

100.0

 

$

1,073,316

 

100.0

 

 


(1)          Insurance segment results include premiums written and earned assumed through intersegment transactions of $1.0 million and $1.7 million, respectively, for the nine months ended September 30, 2006 and $2.3 million and $3.5 million, respectively, for the nine months ended September 30, 2005. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $34.4 million and $37.4 million, respectively, for the nine months ended September 30, 2006 and $41.1 million and $43.5 million, respectively, for the nine months ended September 30, 2005.

19




The following tables set 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:

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2006

 

2005

 

REINSURANCE SEGMENT 
(U.S. dollars in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Casualty (2)

 

$

131,719

 

47.6

 

$

194,871

 

47.5

 

Property excluding property catastrophe

 

56,984

 

20.6

 

92,853

 

22.7

 

Other specialty

 

36,798

 

13.3

 

56,441

 

13.8

 

Property catastrophe

 

31,052

 

11.2

 

22,008

 

5.4

 

Marine and aviation

 

21,774

 

7.9

 

24,264

 

5.9

 

Other

 

(1,721

)

(0.6

)

19,331

 

4.7

 

Total

 

$

276,606

 

100.0

 

$

409,768

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Casualty (2)

 

$

151,820

 

45.6

 

$

193,891

 

47.6

 

Property excluding property catastrophe

 

71,192

 

21.4

 

72,865

 

17.9

 

Other specialty

 

48,865

 

14.7

 

71,529

 

17.5

 

Property catastrophe

 

38,378

 

11.5

 

20,387

 

5.0

 

Marine and aviation

 

22,929

 

6.9

 

31,089

 

7.6

 

Other

 

(268

)

(0.1

)

18,052

 

4.4

 

Total

 

$

332,916

 

100.0

 

$

407,813

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

220,552

 

79.7

 

$

323,133

 

78.9

 

Excess of loss

 

56,054

 

20.3

 

86,635

 

21.1

 

Total

 

$

276,606

 

100.0

 

$

409,768

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

243,473

 

73.1

 

$

304,425

 

74.6

 

Excess of loss

 

89,443

 

26.9

 

103,388

 

25.4

 

Total

 

$

332,916

 

100.0

 

$

407,813

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

145,647

 

52.7

 

$

245,755

 

60.0

 

Europe

 

67,064

 

24.2

 

95,241

 

23.2

 

Bermuda

 

38,285

 

13.8

 

38,507

 

9.4

 

Canada

 

6,867

 

2.5

 

17,549

 

4.3

 

Asia and Pacific

 

3,913

 

1.4

 

5,134

 

1.2

 

Other

 

14,830

 

5.4

 

7,582

 

1.9

 

Total

 

$

276,606

 

100.0

 

$

409,768

 

100.0

 

 


(1)          Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $12.0 million and $12.3 million, respectively, for the 2006 third quarter and $14.3 million and $12.4 million, respectively, for the 2005 third quarter. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $0.2 million and $0.3 million, respectively, for the 2006 third quarter and $0.8 million and $1.1 million, respectively, for the 2005 third quarter.

(2)          Includes professional liability and executive assurance business.

20




 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 <