Arch Capital Group Ltd. Unveils 4thQ, 2002 Numbers

Bermuda-based Arch Capital Group Ltd. reported that net premiums written for the 2002 fourth quarter were $439.2 million, of which the company’s reinsurance and insurance operations contributed net premiums written of $236.7 million and $202.5 million, respectively.

For the year ended Dec. 31, 2002, net premiums written were $1.26 billion, of which the Company’s reinsurance and insurance operations contributed net premiums written of $882.7 million and $378.9 million, respectively.

The company also reported after-tax operating income for the 2002 fourth quarter of $48.6 million, or $0.72 per share, and $95.0 million, or $1.59 per share, for the year ended Dec. 31, 2002. Operating income is defined as net income or loss before extraordinary items, excluding net realized investment gains or losses, net foreign exchange gains or losses, other income and non-cash compensation charges. A reconciliation of after-tax operating income to net income or loss is included in the accompanying supplemental financial information.

For the 2002 fourth quarter, net income of $43.5 million, or $0.65 per share, includes operating income of $48.6 million, or $0.72 per share. Compared to the 2002 third quarter, operating income for the 2002 fourth quarter increased by $26.2 million. Due to the level of catastrophic losses during 2002, the company reduced its loss reserves in the reinsurance segment by approximately $12.0 million, after-tax, or $0.18 per share. After-tax non-cash compensation expense included in net income for the 2002 fourth quarter was $8.2 million, or $0.12 per share, of which $4.4 million, or $0.07 per share, related to certain restricted common shares for which the vesting terms had been accelerated during 2002.

Net income in the 2002 fourth quarter also includes an extraordinary gain of $3.9 million, or $0.06 per share, resulting from the company’s acquisition of Personal Service Insurance Company (“PSIC”), a non-standard automobile insurer located in Columbus, Ohio. The extraordinary gain represents the excess of the fair value of acquired net assets of $6.4 million over the purchase price of $2.5 million. PSIC is licensed in Ohio and Indiana and was assigned an “A-” (Excellent) rating by A.M. Best.

Net income for the year ended Dec. 31, 2002 of $59.0 million, or $0.99 per share, includes net foreign exchange gains of $2.4 million, or $0.04 per share, and a benefit of $7.4 million, or $0.12 per share, resulting from a reversal of a valuation allowance relating to certain of the company’s deferred tax assets. Such reversal was based on the company’s restructuring of its U.S.-based insurance underwriting operations and its business plan.

After-tax non-cash compensation expense included in net income for the year ended Dec. 31, 2002 was $48.9 million, or $0.82 per share, of which $39.5 million, or $0.66 per share, related to certain restricted common shares for which the vesting terms had been accelerated during 2002. Non-cash compensation expense has no effect on the company’s operating income or shareholders’ equity. The related restricted common shares are included in diluted average shares outstanding using the treasury stock method.

The following table details components of the combined ratio for the reinsurance, insurance and total underwriting operations of the Company on both a GAAP and statutory basis for the 2002 fourth quarter and the year ended Dec. 31, 2002. The difference between the GAAP and statutory ratios shown below results from the fact that the statutory expense ratios are based on net premiums written, while the GAAP expense ratios are based on net premiums earned.

Gross premiums written for the 2002 fourth quarter were $516.6 million, of which 47.0 percent were attributable to the company’s reinsurance operations and 53.0 percent were attributable to the insurance operations. For the year ended Dec. 31, 2002, gross premiums written were $1.5 billion, of which 61.1 percent were attributable to the company’s reinsurance operations and 38.9 percent were attributable to the insurance operations.

For the 2002 fourth quarter, with respect to the company’s reinsurance operations, 82.9 percent of net premiums written were generated from pro rata contracts and 17.1 percent were derived from excess of loss treaties. For the year ended Dec. 31, 2002, 59.0 percent of net premiums written were generated from pro rata contracts and 41.0 percent were derived from excess of loss treaties. Of net premiums earned in the reinsurance segment for the 2002 fourth quarter, 53.0 percent were generated from pro rata contracts and 47.0 percent were derived from excess of loss treaties. For the year ended Dec. 31, 2002, 45.8 percent of net premiums earned in the reinsurance segment were generated from pro rata contracts and 54.2 percent were derived from excess of loss treaties. Typically, pro rata business is written at a higher expense ratio and lower loss ratio than excess of loss business.

The combined ratio of the company’s operating units, on a GAAP basis, was 87.6 percent for the 2002 fourth quarter and 90.9% for the year ended Dec. 31, 2002. The company’s loss ratio was 59.9 percent for the 2002 fourth quarter and 64.8 percent for the year ended Dec. 31, 2002. The fourth quarter loss ratio benefited from the reduction of loss reserves described above.

The total expense ratio of the company’s operating units, on a GAAP basis, which includes acquisition expenses and other operating expenses, was 27.7 percent for the 2002 fourth quarter and 26.1 percent for the year ended Dec. 31, 2002. For the 2002 fourth quarter and year ended Dec. 31, 2002, the acquisition expense ratio, net of certain policy-related fee income, was 17.9 percent and 16.7 percent, respectively. For the 2002 fourth quarter and year ended Dec. 31, 2002, the other operating expense ratio was 9.8 percent and 9.4 percent, respectively.

Net investment income for the 2002 fourth quarter was $15.6 million, compared to $14.9 million in the 2002 third quarter. The growth in net investment income was primarily due to a significant increase in the company’s invested assets resulting from cash flow provided by operating activities. Consolidated cash flow provided by operating activities for the 2002 fourth quarter and the year ended Dec. 31, 2002 was $326.8 million and $669.1 million, respectively. The company’s investment portfolio primarily consists of high quality fixed income securities, which had an average Standard & Poor’s quality rating of “AA-” and an average duration of 2.1 years at Dec. 31, 2002.