Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income
available to common shareholders for the 2006 first quarter was
$129.6 million, or $1.71 per share, compared to $115.9 million, or
$1.57 per share, for the 2005 first quarter. The Company also
reported after-tax operating income available to common
shareholders of $143.1 million, or $1.89 per share, for the 2006
first quarter, compared to $111.9 million, or $1.51 per share, for
the 2005 first quarter. The Company's after-tax operating income
available to common shareholders represented a 22.8% annualized
return on average common equity for the 2006 first quarter,
compared to 19.8% for the 2005 first quarter. After-tax operating
income available to common shareholders, a non-GAAP measure, is
defined as net income available to common shareholders, excluding
net realized gains or losses and net foreign exchange gains or
losses, net of income taxes. See page 6 for a further discussion of
after-tax operating income available to common shareholders and
Regulation G. The Company's book value per common share increased
to $34.53 at March 31, 2006 from $33.82 per share at December 31,
2005 (see "Calculation of Book Value Per Common Share" in the
Supplemental Financial Information section of this release). Gross
and net premiums written for the 2006 first quarter were $1.17
billion and $873.7 million, respectively, compared to $980.7
million and $799.8 million, respectively, for the 2005 first
quarter. The Company's combined ratio was 88.3% for the 2006 first
quarter, compared to 88.8% for the 2005 first quarter. All per
share amounts discussed in this release are on a diluted basis. The
following table summarizes the Company's underwriting results: -0-
*T (Unaudited) Three Months Ended March 31, (U.S. dollars in
thousands) 2006 2005 ----------- --------- Gross premiums written
$1,167,814 $980,692 Net premiums written 873,719 799,801 Net
premiums earned 761,601 697,068 Underwriting income 90,228 83,308
Combined ratio 88.3% 88.8% *T The following table summarizes, on an
after-tax basis, the Company's consolidated financial data,
including a reconciliation of after-tax operating income available
to common shareholders to net income available to common
shareholders and related diluted per share results: -0- *T
(Unaudited) Three Months Ended March 31, (U.S. dollars in
thousands, except per share data) 2006 2005 ---------- ----------
After-tax operating income available to common shareholders $
143,081 $ 111,935 Net realized gains (losses), net of tax (2,912)
318 Net foreign exchange gains (losses), net of tax (10,546) 3,639
---------- ---------- Net income available to common shareholders $
129,623 $ 115,892 ========== ========== Diluted per common share
results: After-tax operating income available to common
shareholders $ 1.89 $ 1.51 Net realized gains (losses), net of tax
(0.04) 0.01 Net foreign exchange gains (losses), net of tax (0.14)
0.05 ---------- ---------- Net income available to common
shareholders $ 1.71 $ 1.57 ========== ========== Weighted average
common shares and common share equivalents outstanding - diluted
75,855,309 74,013,546 *T The combined ratio represents a measure of
underwriting profitability, excluding investment income, and is the
sum of the loss ratio and expense ratio. A combined ratio under
100% represents an underwriting profit and a combined ratio over
100% represents an underwriting loss. The combined ratio of the
Company's insurance and reinsurance subsidiaries consisted of a
loss ratio of 61.5% and an underwriting expense ratio of 26.8% for
the 2006 first quarter, compared to a loss ratio of 61.0% and an
underwriting expense ratio of 27.8% for the 2005 first quarter. The
loss ratio of 61.5% for the 2006 first quarter was comprised of
29.0 points of paid losses, 12.2 points related to reserves for
reported losses and 20.3 points related to incurred but not
reported reserves. Of the 29.0 points of paid losses during the
2006 first quarter, 5.4 points related to claims resulting from the
2004 and 2005 catastrophic events. 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
primarily uses the expected loss method of reserving, 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
limited historical information has been reported to the Company
through March 31, 2006. For a discussion of underwriting activities
and a review of the Company's results by operating segment, see
"Segment Information" in the Supplemental Financial Information
section of this release. Consolidated cash flow provided by
operating activities for the 2006 first quarter was $423.2 million,
compared to $327.8 million for the 2005 first quarter. The increase
in operating cash flows in the 2006 period was due to growth in
premiums written and net investment income, partially offset by a
higher level of paid losses as the Company's insurance and
reinsurance loss reserves have continued to mature and due to
payments related to the 2004 and 2005 catastrophic events. Net
investment income for the 2006 first quarter increased to $80.3
million from $49.9 million for the 2005 first quarter. The higher
level of net investment income in the 2006 first quarter resulted
from a higher level of average invested assets in the 2006 period
and an increase in the pre-tax investment income yield to 4.3% for
the 2006 first quarter, compared to 3.4% for the 2005 first
quarter. The Company's investment portfolio, which mainly consists
of high quality fixed income securities, had an average Standard
& Poor's quality rating of "AA+" at March 31, 2006, December
31, 2005 and March 31, 2005. The average effective duration of the
Company's investment portfolio was reduced to 3.0 years at March
31, 2006, from 3.3 years at December 31, 2005 and 3.8 years at
March 31, 2005, while the average yield to maturity (book yield)
increased to 4.6% at March 31, 2006, from 4.2% at December 31, 2005
and 3.6% at March 31, 2005. Net foreign exchange losses for the
2006 first quarter of $10.3 million consisted of net unrealized
losses of $7.9 million and net realized losses of $2.4 million,
compared to net foreign exchange gains for the 2005 first quarter
of $3.2 million, which consisted of net unrealized gains of $2.7
million and net realized gains of $0.5 million. Net unrealized
foreign exchange gains or losses result from the effects of
revaluing the Company's net insurance liabilities required to be
settled in foreign currencies at each balance sheet date. The
Company holds investments in foreign currencies which are intended
to mitigate its exposure to foreign currency fluctuations in its
net insurance liabilities. However, changes in the value of such
investments due to foreign currency rate movements are reflected as
a direct increase or decrease to shareholders' equity and are not
included in the statement of income. For the 2006 and 2005 first
quarters, the net unrealized foreign exchange gains or losses
recorded by the Company were largely offset by changes in the value
of the Company's investments held in foreign currencies. On January
1, 2006, the Company adopted the fair value method of accounting
for share-based awards using the modified prospective method of
transition as described by FASB Statement No. 123(revised 2004),
"Share-Based Payment." As required by the provisions of SFAS
123(R), the Company recorded after-tax share-based compensation
expense related to stock options of $1.1 million, or $0.01 per
share, in the 2006 first quarter. Under the modified prospective
method of transition, no expense related to stock options was
recorded in the 2005 first quarter. For the remaining nine months
of 2006, the Company expects to record after-tax share-based
compensation expense related to stock options of approximately $4.4
million, or $0.06 per share. For the 2006 and 2005 first quarters,
the effective tax rates on income before income taxes were 7.9% and
7.5%, respectively, and the effective tax rates on pre-tax
operating income available to common shareholders were 7.5% and
8.0%, respectively. The reduction in the effective tax rate on
pre-tax operating income available to common shareholders in the
2006 first quarter, compared to the 2005 first quarter, resulted
from a change in the relative mix of income reported by
jurisdiction. The Company's effective tax rates 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.
The Company currently expects that its annual effective tax rate on
pre-tax operating income available to common shareholders for 2006
will be in the range of 6.5% to 9.5%. On February 1, 2006, the
Company issued in a public offering $200.0 million of its 8.00%
series A non-cumulative preferred shares with a liquidation
preference of $25.00 per share and received net proceeds of
approximately $193.5 million. Dividends, as and if declared by the
Company's board of directors, are payable from the date of original
issue on a non-cumulative basis, quarterly in arrears, commencing
on May 15, 2006, at an annual rate of 8.00%. The Company declared a
dividend on its series A non-cumulative preferred shares and
recorded $2.7 million in the 2006 first quarter. At March 31, 2006,
the Company's capital of $3.05 billion consisted of $300.0 million
of senior notes, representing 9.8% of the total, $200.0 million of
series A preferred shares, representing 6.6% of the total, and
common shareholders' equity of $2.55 billion, representing the
balance. The increase in the Company's capital during the 2006
first quarter of $269.0 million was primarily attributable to the
issuance of series A non-cumulative preferred shares and net income
for the 2006 first quarter, partially offset by an after-tax
decline in the market value of the Company's investment portfolio
of $67.0 million which was primarily due to an increase in the
level of interest rates at March 31, 2006. Diluted weighted average
common shares and common share equivalents outstanding, used in the
calculation of after-tax operating income and net income per common
share, was 1.8 million shares, or 2.5%, higher in the 2006 first
quarter than in the 2005 first quarter. The increase was primarily
due to increases in the dilutive effects of stock options and
nonvested restricted stock calculated using the treasury stock
method and the exercise of stock options. Under the treasury stock
method, the dilutive impact of options and nonvested stock on
diluted weighted average shares outstanding increases as the market
price of the Company's common shares increases. The Company will
hold a conference call for investors and analysts at 11:00 a.m.
Eastern Time on Friday, April 28, 2006. A live webcast of this call
will be available via the Media-Earnings Webcasts section of the
Company's website at http://www.archcapgroup.bm and will be
archived on the website from 1:00 p.m. Eastern Time on April 28
through midnight Eastern Time on May 28, 2006. A telephone replay
of the conference call also will be available beginning on April 28
at 1:00 p.m. Eastern Time until May 5 at midnight Eastern Time. To
access the replay, domestic callers should dial 888-286-8010
(passcode 87029197), and international callers should dial
617-801-6888 (passcode 87029197). Arch Capital Group Ltd., a
Bermuda-based company with approximately $3.05 billion in capital
at March 31, 2006, 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
(the "SEC"), and include: -- the Company's ability to successfully
implement its business strategy during "soft" as well as "hard"
markets; -- acceptance of the Company's business strategy, security
and financial condition by rating agencies and regulators, as well
as by brokers and the Company's insureds and reinsureds; -- the
Company's ability to maintain or improve its ratings, which may be
affected by the Company's ability to raise additional equity or
debt financings, by ratings agencies' existing or new policies and
practices, as well as other factors described herein; -- 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, establish and maintain
operating procedures (including the implementation of improved
computerized systems and programs to replace and support manual
systems) to effectively support its underwriting initiatives and to
develop accurate actuarial data, especially in the light of the
rapid growth of the Company's business; -- the loss of key
personnel; -- the integration of businesses the Company has
acquired or may acquire into its existing operations; -- accuracy
of those estimates and judgments utilized in the preparation of the
Company's financial statements, including those related to revenue
recognition, insurance and other reserves, reinsurance
recoverables, investment valuations, intangible assets, bad debts,
income taxes, contingencies and litigation, and any determination
to use the deposit method of accounting, which for a relatively new
insurance and reinsurance company, like the Company, are even more
difficult to make than those made in a mature company since limited
historical information has been reported to the Company through
March 31, 2006; -- greater than expected loss ratios on business
written by the Company and adverse development on claim and/or
claim expense liabilities related to business written by the
Company's insurance and reinsurance subsidiaries; -- severity
and/or frequency of losses; -- 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 the Company's
prior reinsurance business or to others in connection with the May
5, 2000 asset sale described in the Company's periodic reports
filed with the SEC; -- 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,
third party administrators 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; -- material differences between actual and expected
assessments for guaranty funds and mandatory pooling arrangements;
-- changes in accounting principles or the application of such
principles by accounting firms or regulators; and -- 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/or
changes in regulations or tax laws applicable to the Company, its
subsidiaries, brokers or customers. In addition, other general
factors could affect the Company's results, including developments
in the world's financial and capital markets and the Company's
access to such markets. 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 after-tax
operating income available to common shareholders, which is defined
as net income available to common shareholders, excluding net
realized gains or losses and net foreign exchange gains or losses,
net of income taxes. The presentation of after-tax operating income
available to common shareholders is a "non-GAAP financial measure"
as defined in Regulation G. The reconciliation of such measure to
net income available to common shareholders (the most directly
comparable GAAP financial measure) in accordance with Regulation G
is included on page 2 of this release. The Company believes that
net realized gains or losses and net foreign exchange gains or
losses in any particular period are not indicative of the
performance of, or trends in, the Company's business performance.
Although net realized 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 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 gains or losses and net foreign exchange
gains or losses from the calculation of after-tax operating income
available to common shareholders. The Company believes that showing
net income available to common shareholders 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 available to common shareholders,
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 which
follow the Company and the insurance industry as a whole generally
exclude these items from their analyses for the same reasons. -0-
*T ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS
OF INCOME (U.S. dollars in thousands, except share data)
(Unaudited) Three Months Ended March 31, 2006 2005 -------------
------------ Revenues Net premiums written $ 873,719 $ 799,801
Increase in unearned premiums (112,118) (102,733) -------------
------------ Net premiums earned 761,601 697,068 Net investment
income 80,326 49,916 Net realized gains (losses) (3,383) 461 Fee
income 1,805 6,112 ------------- ------------ Total revenues
840,349 753,557 Expenses Losses and loss adjustment expenses
468,178 425,536 Acquisition expenses 129,672 126,133 Other
operating expenses 82,977 74,175 Interest expense 5,555 5,636 Net
foreign exchange (gains) losses 10,253 (3,237) -------------
------------ Total expenses 696,635 628,243 Income before income
taxes 143,714 125,314 Income tax expense 11,424 9,422 -------------
------------ Net Income 132,290 115,892 Preferred dividends 2,667
-- ------------- ------------ Net income available to common
shareholders $ 129,623 $ 115,892 ============= ============ Net
income per common share Basic $ 1.78 $ 3.37 Diluted $ 1.71 $ 1.57
Weighted average common shares and common share equivalents
outstanding Basic (1) 72,899,249 34,364,818 Diluted (1) 75,855,309
74,013,546 (1) For the 2005 period, basic weighted average common
shares and common share equivalents outstanding excluded 37,331,402
series A convertible preference shares. 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. ARCH CAPITAL GROUP LTD. AND
SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars in
thousands, except share data) (Unaudited) March 31, December 31,
2006 2005 ------------ ------------ Assets Investments and cash:
Fixed maturities available for sale, at fair value (amortized cost:
2006, $5,488,075; 2005, $5,310,712) $ 5,414,156 $ 5,280,987
Short-term investments available for sale, at fair value (amortized
cost: 2006, $1,052,669; 2005, $679,530) 1,052,753 681,887
Short-term investment of funds received under securities lending
agreements, at fair value 882,950 893,379 Other investments, at
fair value (cost: 2006, $89,100; 2005, $59,839) 102,351 70,233 Cash
247,906 222,477 ------------ ------------ Total investments and
cash 7,700,116 7,148,963 ------------ ------------ Accrued
investment income 59,936 62,196 Fixed maturities and short-term
investments pledged under securities lending agreements, at fair
value 858,283 863,866 Premiums receivable 872,975 672,902 Funds
held by reinsureds 131,968 167,739 Unpaid losses and loss
adjustment expenses recoverable 1,441,412 1,389,768 Paid losses and
loss adjustment expenses recoverable 63,803 80,948 Prepaid
reinsurance premiums 376,815 322,435 Deferred income tax assets,
net 83,595 71,139 Deferred acquisition costs, net 327,491 317,357
Other assets 444,746 391,123 ------------ ------------ Total Assets
$12,361,140 $11,488,436 ============ ============ Liabilities
Reserve for losses and loss adjustment expenses $ 5,760,939 $
5,452,826 Unearned premiums 1,867,250 1,699,691 Reinsurance
balances payable 226,892 150,451 Senior notes 300,000 300,000
Deposit accounting liabilities 49,646 43,104 Securities lending
collateral 882,950 893,379 Payable for securities purchased 35,690
12,020 Other liabilities 488,219 456,438 ------------ ------------
Total Liabilities 9,611,586 9,007,909 ------------ ------------
Commitments and Contingencies Shareholders' Equity Series A
non-cumulative preferred shares ($0.01 par value, 50,000,000 shares
authorized, issued: 2006, 8,000,000) 80 -- Common shares ($0.01 par
value, 200,000,000 shares authorized, issued: 2006, 73,827,467;
2005, 73,334,870) 738 733 Additional paid-in capital 1,794,410
1,595,440 Deferred compensation under share award plan -- (9,646)
Retained earnings 1,030,971 901,348 Accumulated other comprehensive
income (loss), net of deferred income tax (76,645) (7,348)
------------ ------------ Total Shareholders' Equity 2,749,554
2,480,527 ------------ ------------ Total Liabilities and
Shareholders' Equity $12,361,140 $11,488,436 ============
============ ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. dollars in
thousands) (Unaudited) Three Months Ended March 31, 2006 2005
----------- ----------- Series A Convertible Preference Shares
Balance at beginning of year $ -- $ 373 Converted to common shares
-- (0) ----------- ----------- Balance at end of period -- 373
----------- ----------- Series A Non-Cumulative Preferred Shares
Balance at beginning of year -- -- Preferred shares issued 80 --
----------- ----------- Balance at end of period 80 -- -----------
----------- Common Shares Balance at beginning of year 733 349
Common shares issued, net 5 2 ----------- ----------- Balance at
end of period 738 351 ----------- ----------- 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 193,378 -- Common shares issued 160 1,127 Exercise of stock
options 12,152 3,710 Common shares retired (647) (838) Amortization
of share-based compensation 3,299 -- Other 274 198 -----------
----------- Balance at end of period 1,794,410 1,564,488
----------- ----------- 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 -- -- Deferred compensation
expense recognized -- 1,985 ----------- ----------- Balance at end
of period -- (7,894) ----------- ----------- Retained Earnings
Balance at beginning of year 901,348 644,862 Dividends declared on
preferred shares (2,667) -- Net income 132,290 115,892 -----------
----------- Balance at end of period 1,030,971 760,754 -----------
----------- 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 (67,032) (74,772) Foreign currency translation
adjustments, net of deferred income tax (2,265) (346) -----------
----------- Balance at end of period (76,645) (29,208) -----------
----------- Total Shareholders' Equity $2,749,554 $2,288,864
=========== =========== ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in
thousands) (Unaudited) Three Months Ended March 31, 2006 2005
--------- --------- Comprehensive Income Net income $132,290
$115,892 Other comprehensive income (loss), net of deferred income
tax Unrealized decline in value of investments: Unrealized holding
losses arising during period (67,987) (75,341) Reclassification of
net realized losses, net of income taxes, included in net income
955 569 Foreign currency translation adjustments (2,265) (346)
--------- --------- Other comprehensive loss (69,297) (75,118)
--------- --------- Comprehensive Income $ 62,993 $ 40,774
========= ========= ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands)
(Unaudited) Three Months Ended March 31, 2006 2005 ---------
--------- Operating Activities Net income $132,290 $115,892
Adjustments to reconcile net income to net cash provided by
operating activities: Net realized losses 783 426 Share-based
compensation 3,299 2,095 Changes in: Reserve for losses and loss
adjustment expenses, net of unpaid losses and loss adjustment
expenses recoverable 256,469 250,323 Unearned premiums, net of
prepaid reinsurance premiums 113,179 103,071 Premiums receivable
(200,073) (122,096) Deferred acquisition costs, net (10,134)
(19,429) Funds held by reinsureds 35,771 19,927 Reinsurance
balances payable 76,441 (20,032) Accrued investment income 2,260
185 Paid losses and loss adjustment expenses recoverable 17,145
(2,861) Deferred income tax assets, net (7,352) 3,646 Deposit
accounting liabilities 6,542 4,180 Other liabilities 22,460 7,155
Other items, net (25,902) (14,642) --------- --------- Net Cash
Provided By Operating Activities 423,178 327,840 ---------
--------- Investing Activities Purchases of fixed maturity
investments (4,330,266) (938,227) Proceeds from sales of fixed
maturity investments 4,121,591 548,030 Proceeds from redemptions
and maturities of fixed maturity investments 83,394 74,943 Net
(purchases) sales of other investments (27,237) 1,786 Net purchases
of short-term investments (444,527) (39,102) Change in securities
lending collateral 10,429 -- Purchases of furniture, equipment and
other (4,602) (3,020) --------- --------- Net Cash Used For
Investing Activities (591,218) (355,590) --------- ---------
Financing Activities Proceeds from common shares issued, net of
repurchases 8,690 2,125 Net proceeds from preferred shares issued
193,527 -- Change in securities lending collateral (10,429) --
Excess tax benefits from share-based compensation 2,450 --
--------- --------- Net Cash Provided By Financing Activities
194,238 2,125 --------- --------- Effects of exchange rate changes
on foreign currency cash (769) (704) --------- --------- Increase
(decrease) in cash 25,429 (26,329) Cash beginning of year 222,477
113,052 --------- --------- Cash end of period $247,906 $ 86,723
========= ========= Income taxes paid, net $ 9,591 $ 15,796
========= ========= Interest paid $ 42 $ 58 ========= =========
Declaration of preferred dividends to be paid $ 2,667 -- =========
========= ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES SUPPLEMENTAL
FINANCIAL INFORMATION The following table provides information on
the Company's investing activities, including investment income
yield (net of investment expenses), average effective duration and
average credit quality. (Unaudited) Three Months Ended March 31,
Net investment income yield (at amortized cost) 2006 2005
------------ ------------ Pre-tax 4.3% 3.4% After-tax 4.1% 3.2%
(Unaudited) March 31, December 31, Fixed maturities and short-term
investments (1) 2006 2005 ------------ ------------ Average
effective duration (in years) 3.0 3.3 Average credit quality
(Standard & Poors) AA+ AA+ Imbedded book yield (2) 4.6% 4.2%
(Unaudited) Three Months Ended March 31, 2006 2005 ------------
------------ Annualized operating return on average common equity
(3) 22.8% 19.8% (1) Includes fixed maturities pledged under
securities lending agreements and excludes short- term investment
of funds received under securities lending agreements. (2) Before
investment expenses. (3) Annualized operating return on average
common equity, a non-GAAP measure, equals annualized operating
income available to common shareholders divided by average common
shareholders' equity (calculated using the beginning and ending
values during the period). See "Comment on Regulation G" above. *T
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, including: 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 fee income, net of related expenses, 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 series A non-cumulative preferred shares. The
following tables set forth underwriting income or loss by segment,
together with a reconciliation of underwriting income to net income
available to common shareholders: -0- *T (Unaudited) Three Months
Ended March 31, 2006 ----------------------------------- (U.S.
dollars in thousands) Insurance Reinsurance Total -----------
----------- ----------- Gross premiums written (1) $615,484
$564,668 $1,167,814 Net premiums written 397,254 476,465 873,719
Net premiums earned $380,254 $381,347 $ 761,601 Policy-related fee
income 937 -- 937 Other underwriting-related fee income 467 401 868
Losses and loss adjustment expenses (248,002) (220,176) (468,178)
Acquisition expenses, net (37,885) (91,787) (129,672) Other
operating expenses (62,076) (13,252) (75,328) --------- ---------
----------- Underwriting income $ 33,695 $ 56,533 90,228 =========
========= Net investment income 80,326 Net realized losses (3,383)
Other expenses (7,649) Interest expense (5,555) Net foreign
exchange losses (10,253) ----------- Income before income taxes
143,714 Income tax expense (11,424) ----------- Net income 132,290
Preferred dividends (2,667) ----------- Net income available to
common shareholders $ 129,623 =========== Underwriting Ratios Loss
ratio 65.2% 57.7% 61.5% Acquisition expense ratio (2) 9.7% 24.1%
16.9% Other operating expense ratio 16.3% 3.5% 9.9% ---------
--------- ----------- Combined ratio 91.2% 85.3% 88.3% =========
========= =========== (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. (Unaudited) Three
Months Ended March 31, 2005 -----------------------------------
(U.S. dollars in thousands) Insurance Reinsurance Total -----------
----------- ----------- Gross premiums written (1) $506,744
$488,795 $ 980,692 Net premiums written 322,108 477,693 799,801 Net
premiums earned $321,036 $376,032 $ 697,068 Policy-related fee
income 917 -- 917 Other underwriting-related fee income 572 4,623
5,195 Losses and loss adjustment expenses (206,862) (218,674)
(425,536) Acquisition expenses, net (26,681) (99,452) (126,133)
Other operating expenses (57,287) (10,916) (68,203) ---------
--------- ----------- Underwriting income $ 31,695 $ 51,613 83,308
========= ========= Net investment income 49,916 Net realized gains
461 Other expenses (5,972) Interest expense (5,636) Net foreign
exchange gains 3,237 ----------- Income before income taxes 125,314
Income tax expense (9,422) ----------- Net income 115,892 Preferred
dividends -- ----------- Net income available to common
shareholders $ 115,892 =========== Underwriting Ratios Loss ratio
64.4% 58.2% 61.0% Acquisition expense ratio (2) 8.0% 26.4% 18.0%
Other operating expense ratio 17.8% 2.9% 9.8% --------- ---------
----------- Combined ratio 90.2% 87.5% 88.8% ========= =========
=========== (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. *T 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:
-0- *T (Unaudited) Three Months Ended March 31, 2006 2005
--------------------- --------------------- INSURANCE SEGMENT % of
% of (U.S. dollars in thousands) Amount Total Amount Total
---------- ---------- ---------- ---------- Net premiums written
Construction and surety $ 80,629 20.3 $ 62,440 19.4 Property,
marine and aviation 68,646 17.3 42,092 13.1 Professional liability
62,454 15.7 46,901 14.6 Programs 60,534 15.2 53,267 16.5 Casualty
50,750 12.8 63,799 19.8 Executive assurance 45,591 11.5 24,017 7.4
Healthcare 18,115 4.6 16,436 5.1 Other 10,535 2.6 13,156 4.1
--------- ---------- --------- ---------- Total $397,254 100.0
$322,108 100.0 ========= ========== ========= ========== Net
premiums earned Construction and surety $ 66,703 17.5 $ 50,664 15.8
Property, marine and aviation 62,968 16.6 43,549 13.6 Professional
liability 54,045 14.2 46,802 14.5 Programs 57,389 15.1 55,311 17.2
Casualty 62,808 16.5 69,266 21.6 Executive assurance 50,076 13.2
24,635 7.7 Healthcare 16,677 4.4 17,000 5.3 Other 9,588 2.5 13,809
4.3 --------- ---------- --------- ---------- Total $380,254 100.0
$321,036 100.0 ========= ========== ========= ========== Net
premiums written by client location United States $324,465 81.7
$285,924 88.8 Europe 47,580 12.0 27,106 8.4 Other 25,209 6.3 9,078
2.8 --------- ---------- --------- ---------- Total $397,254 100.0
$322,108 100.0 ========= ========== ========= ========== *T 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: -0- *T
(Unaudited) Three Months Ended March 31, 2006 2005
--------------------- --------------------- REINSURANCE SEGMENT %
of % of (U.S. dollars in thousands) Amount Total Amount Total
---------- ---------- ---------- ---------- Net premiums written
Casualty $162,988 34.2 $210,869 44.1 Property excluding property
catastrophe 106,782 22.4 88,195 18.5 Other specialty 93,264 19.6
91,029 19.1 Property catastrophe 70,336 14.7 44,563 9.3 Marine and
aviation 41,352 8.7 30,029 6.3 Other 1,743 0.4 13,008 2.7 ---------
---------- --------- ---------- Total $476,465 100.0 $477,693 100.0
========= ========== ========= ========== Net premiums earned
Casualty $171,197 44.9 $213,260 56.7 Property excluding property
catastrophe 79,620 20.9 57,495 15.3 Other specialty 57,919 15.2
50,754 13.5 Property catastrophe 49,106 12.8 24,761 6.6 Marine and
aviation 23,650 6.2 21,991 5.8 Other (145) (0.0) 7,771 2.1
--------- ---------- --------- ---------- Total $381,347 100.0
$376,032 100.0 ========= ========== ========= ========== Net
premiums written Pro rata $272,534 57.2 $319,647 66.9 Excess of
loss 203,931 42.8 158,046 33.1 --------- ---------- ---------
---------- Total $476,465 100.0 $477,693 100.0 ========= ==========
========= ========== Net premiums earned Pro rata $295,288 77.4
$277,612 73.8 Excess of loss 86,059 22.6 98,420 26.2 ---------
---------- --------- ---------- Total $381,347 100.0 $376,032 100.0
========= ========== ========= ========== Net premiums written by
client location United States $277,315 58.2 $259,414 54.3 Europe
127,263 26.7 155,495 32.5 Bermuda 43,839 9.2 27,064 5.7 Canada
9,556 2.0 21,336 4.5 Asia and Pacific 6,389 1.4 5,570 1.2 Other
12,103 2.5 8,814 1.8 --------- ---------- --------- ----------
Total $476,465 100.0 $477,693 100.0 ========= ========== =========
========== *T Discussion of 2006 First Quarter Performance The
insurance segment had underwriting income of $33.7 million for the
2006 first quarter, compared to $31.7 million for the 2005 first
quarter. The combined ratio for the insurance segment was 91.2% for
the 2006 first quarter, compared to 90.2% for the 2005 first
quarter. Gross premiums written by the insurance segment were
$615.5 million for the 2006 first quarter, compared to $506.7
million for the 2005 first quarter, and ceded premiums written were
35.5% of gross premiums written for the 2006 first quarter,
compared to 36.4% for the 2005 first quarter. Net premiums written
by the insurance segment were $397.3 million for the 2006 first
quarter, compared to $322.1 million for the 2005 first quarter.
Roughly half of the growth in net premiums written was generated by
the insurance segment's U.S. operations through increases in the
executive assurance, construction and surety, property and program
lines, partially offset by a reduction in U.S. primary casualty
business. The balance of the growth was generated by the insurance
segment's European and Canadian operations through increases in the
professional liability, property and executive assurance lines. Of
the $21.6 million increase in executive assurance net premiums
written, approximately 40% resulted from adjustments to ceded
reinsurance related to prior periods with the balance due, in part,
to additional premiums associated with Side A coverage (of which
the insurance segment retains a higher percentage than other
executive assurance business) and additional premiums from
geographic expansion, coverage for non-public entities and runoff
policies. Growth in net premiums written in the insurance segment's
program business of $7.3 million resulted, in part, from a lag in
the reporting of premiums on one program in the 2005 first quarter
which resulted in lower reported gross premiums written, a full
quarter contribution from a program which commenced during the 2005
first quarter and rate increases on certain programs. Net premiums
earned by the insurance segment were $380.3 million for the 2006
first quarter, compared to $321.0 million for the 2005 first
quarter, and reflect changes in net premiums written over the
previous five quarters, including the mix and type of business
written. The loss ratio for the insurance segment was 65.2% for the
2006 first quarter, compared to 64.4% for the 2005 first quarter.
The loss ratio for the 2006 first quarter reflected estimated net
adverse development in prior year loss reserves of $7.9 million,
compared to net favorable development of $0.6 million in the 2005
first quarter. The net impact of the change in prior year
development was a 2.2 point increase in the 2006 first quarter loss
ratio. The net adverse development in the 2006 first quarter
reflected an increase in losses incurred of $18.5 million related
to Hurricane Wilma and $3.3 million related to the 2005 third
quarter hurricanes, partially offset by favorable development in
healthcare, construction and surety and program business. The
underwriting expense ratio for the insurance segment was 26.0% in
the 2006 first quarter, compared to 25.8% in the 2005 first
quarter. The acquisition expense ratio was 9.7% for the 2006 first
quarter, compared to 8.0% for the 2005 first quarter. The
acquisition expense ratio is influenced by, among other things, (1)
the amount of ceding commissions received from unaffiliated
reinsurers and (2) the amount of business written on a surplus
lines (non-admitted) basis. The increase in the acquisition expense
ratio was due, in part, to changes in the mix of business. The
insurance segment's other operating expense ratio was 16.3% for the
2006 first quarter, compared to 17.8% for the 2005 first quarter.
The lower ratio in the 2006 first quarter resulted from growth in
net premiums earned which was higher than the attendant growth in
operating expenses. The reinsurance segment had underwriting income
of $56.5 million for the 2006 first quarter, compared to $51.6
million for the 2005 first quarter. The combined ratio for the
reinsurance segment was 85.3% for the 2006 first quarter, compared
to 87.5% for the 2005 first quarter. Gross premiums written by the
reinsurance segment were $564.7 million in the 2006 first quarter,
compared to $488.8 million for the 2005 first quarter. Ceded
premiums written by the reinsurance segment were 15.6% of gross
premiums written for the 2006 first quarter, compared to 2.3% for
the 2005 first quarter. The higher ceded percentage in the 2006
first quarter resulted from the cession of $82.4 million of
business to Flatiron Re Ltd. under a 45% quota-share reinsurance
treaty of certain lines of property and marine business
underwritten by Arch Reinsurance Ltd. ("Arch Re Bermuda"), the
reinsurance segment's Bermuda operations, for unaffiliated third
parties. The quota-share reinsurance treaty with Flatiron Re Ltd.
allows the reinsurance segment to participate further in the
greatly improved market conditions without significantly increasing
its probable maximum loss. The quota-share reinsurance treaty also
provides for a profit commission to Arch Re Bermuda based on the
underwriting results for the 2006 and 2007 underwriting years on a
cumulative basis. Arch Re Bermuda will record such profit
commission based on underwriting experience recorded each quarter.
As a result, the profit commission arrangement with Flatiron Re
Ltd. may increase the volatility of the reinsurance segment's
reported results of operations on both a quarterly and annual
basis. Net premiums written by the reinsurance segment were $476.5
million for the 2006 first quarter, compared to $477.7 million for
the 2005 first quarter. Growth in international property and marine
lines was offset by a reduction in casualty and other business. The
growth in property and marine lines was in response to current
market opportunities as prices for catastrophe-exposed property and
marine lines have increased significantly in the wake of the 2005
storms. The reduction in casualty business was primarily in
response to increased competition for European business. Net
premiums earned by the reinsurance segment were $381.3 million for
the 2006 first quarter, compared to $376.0 million for the 2005
first quarter, and generally reflect changes in net premiums
written over the previous five quarters, including the mix and type
of business written. Underwriting income for the reinsurance
segment in the 2006 first quarter benefited from estimated net
favorable development in prior year loss reserves, net of related
adjustments, of $1.5 million. Such amount consisted of $20.8
million of favorable development, primarily in other specialty and
other short-tail lines, partially offset by $13.1 million related
to Hurricane Wilma and $6.2 million related to the 2005 third
quarter hurricanes and the European floods. For the 2005 first
quarter, underwriting income benefited from estimated net favorable
development in prior year loss reserves, net of related
adjustments, of $21.7 million. The loss ratio for the reinsurance
segment was 57.7% for the 2006 first quarter, compared to 58.2% for
the 2005 first quarter. The reinsurance segment's losses incurred
for the 2006 first quarter included approximately $8.2 million
related to U.S. storm activity and $8.1 million related to Cyclone
Larry, which impacted Australia in March 2006, compared to losses
of $10.0 million for Windstorm Erwin in the 2005 first quarter. The
higher level of catastrophic activity in the 2006 first quarter
resulted in a 1.6 point increase in the 2006 first quarter loss
ratio. As noted above, the 2006 first quarter benefited from
estimated net favorable development in prior year loss reserves,
net of related adjustments, of $1.5 million. Such amount consisted
of an increase to losses incurred of $2.4 million, offset by $3.9
million of reductions in acquisition expenses. Estimated net
favorable development in the 2005 first quarter of $21.7 million
consisted of a decrease in losses incurred of $24.7 million, offset
by an increase to acquisition expenses of $3.0 million. The net
impact of the change in estimated net prior year development was a
7.1 point increase in the 2006 first quarter loss ratio. The 2006
first quarter loss ratio also reflected a lower level of claims
recorded in property excluding property catastrophe and other
short-tail lines of business than in the 2005 first quarter, and
changes in the reinsurance segment's mix of business. The
underwriting expense ratio for the reinsurance segment was 27.6% in
the 2006 first quarter, compared to 29.3% in the 2005 first
quarter. The acquisition expense ratio for the 2006 first quarter
was 24.1%, compared to 26.4% for the 2005 first quarter. The net
impact of the change in acquisition expenses related to the
estimated net prior year development noted above was a 1.8 point
decrease in the 2006 first quarter acquisition expense ratio. The
reinsurance segment's other operating expense ratio was 3.5% for
the 2006 first quarter, compared to 2.9% for the 2005 first
quarter. Calculation of Book Value Per Common Share The following
presents the calculation of book value per common share for March
31, 2006 and December 31, 2005. The shares and per share numbers
set forth below exclude the effects of 6,073,040 and 5,637,108
stock options and 95,870 and 93,545 restricted stock units
outstanding at March 31, 2006 and December 31, 2005, respectively.
-0- *T (Unaudited) March 31, December 31, (U.S. dollars in
thousands, except share data) 2006 2005 ----------- ------------
Total shareholders' equity $2,749,554 $2,480,527 Less preferred
shareholders' equity (200,000) -- ----------- ----------- Common
shareholders' equity $2,549,554 $2,480,527 Common shares
outstanding 73,827,467 73,334,870 ----------- ----------- Book
value per common share $ 34.53 $ 33.82 =========== =========== *T
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