Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income
available to common shareholders for the 2007 fourth quarter was
$234.4 million, or $3.31 per share, compared to $239.3 million, or
$3.12 per share, for the 2006 fourth quarter, and $832.1 million,
or $11.28 per share, for the year ended December 31, 2007, compared
to $692.6 million, or $9.08 per share, for the 2006 period. The
Company also reported after-tax operating income available to
common shareholders of $220.6 million, or $3.11 per share, for the
2007 fourth quarter, compared to $220.7 million, or $2.88 per
share, for the 2006 fourth quarter, and $846.3 million, or $11.47
per share, for the year ended December 31, 2007, compared to $734.9
million, or $9.63 per share, for the 2006 period. All earnings per
share amounts discussed in this release are on a diluted basis. The
Company�s after-tax operating income available to common
shareholders represented a 24.3% annualized return on average
common equity for the 2007 fourth quarter, compared to 28.1% for
the 2006 fourth quarter, and 24.3% for the year ended December 31,
2007, compared to 25.6% for the 2006 period. 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, including
the net effect of share repurchases, increased to $55.12 at
December 31, 2007 from $43.97 per share at December 31, 2006. Gross
and net premiums written for the 2007 fourth quarter were $828.2
million and $577.7 million, respectively, compared to $873.2
million and $601.9 million, respectively, for the 2006 fourth
quarter, and $4.14 billion and $2.9 billion, respectively, for the
year ended December 31, 2007, compared to $4.28 billion and $3.02
billion, respectively, for the 2006 period. The Company�s combined
ratio was 84.4% for the 2007 fourth quarter, compared to 83.0% for
the 2006 fourth quarter, and 84.1% for the year ended December 31,
2007, compared to 85.4% for the 2006 period. The following table
summarizes the Company�s underwriting results: Three Months Ended �
Year Ended December 31, December 31, (U.S. dollars in thousands)
2007 � 2006 2007 � 2006 � Gross premiums written $828,160 $873,196
$4,140,143 $4,282,449 Net premiums written 577,666 601,916
2,901,936 3,017,418 Net premiums earned 712,216 765,041 2,944,650
3,081,665 Underwriting income 112,826 131,179 470,038 453,849 �
Combined ratio 84.4 % 83.0 % 84.1 % 85.4 % 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: Three
Months Ended � Year Ended December 31, December 31, (U.S. dollars
in thousands, except per share data) 2007 � 2006 2007 � 2006 �
After-tax operating income available to common shareholders
$220,614 $220,733 $846,287 $734,919 Net realized gains (losses),
net of tax 18,211 26,981 30,085 (17,760 ) Net foreign exchange
losses, net of tax (4,416 ) (8,436 ) (44,273 ) (24,600 ) Net income
available to common shareholders $234,409 � $239,278 � $832,099 �
$692,559 � � Diluted per common share results: After-tax operating
income available to common shareholders $3.11 $2.88 $11.47 $9.63
Net realized gains (losses), net of tax 0.26 0.35 0.41 (0.23 ) Net
foreign exchange losses, net of tax (0.06 ) (0.11 ) (0.60 ) (0.32 )
Net income available to common shareholders $3.31 � $3.12 � $11.28
� $9.08 � � Weighted average common shares and common share
equivalents outstanding � diluted 70,901,361 76,622,078 73,762,419
76,246,725 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 55.6% and an underwriting expense ratio of 28.8% for
the 2007 fourth quarter, compared to a loss ratio of 54.2% and an
underwriting expense ratio of 28.8% for the 2006 fourth quarter.
The combined ratio of the Company�s insurance and reinsurance
subsidiaries consisted of a loss ratio of 55.8% and an underwriting
expense ratio of 28.3% for the year ended December 31, 2007,
compared to a loss ratio of 58.1% and an underwriting expense ratio
of 27.3% for the 2006 period. The loss ratio of 55.6% for the 2007
fourth quarter was comprised of 39.9 points of paid losses, 8.8
points related to reserves for reported losses and 6.9 points
related to incurred but not reported reserves. In establishing the
reserves for losses and loss adjustment expenses, the Company has
made various assumptions relating to the pricing of its reinsurance
contracts and insurance policies and also has considered available
historical industry experience and current industry conditions. The
Company�s reserving method to date has been, to a large extent, the
expected loss method, which is commonly applied when limited loss
experience exists. Any estimates and assumptions made as part of
the reserving process could prove to be inaccurate due to several
factors, including the fact that limited historical information has
been reported to the Company through December 31, 2007. 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
2007 fourth quarter was $332.9 million, compared to $359.0 million
for the 2006 fourth quarter, and $1.44 billion for the year ended
December 31, 2007, compared to $1.61 billion for the 2006 period.
The lower level of operating cash flows for the year ended December
31, 2007 primarily resulted from an increase in paid losses, as the
Company�s insurance and reinsurance loss reserves have continued to
mature, along with a lower level of premiums written and collected.
Net investment income was $119.9 million for the 2007 fourth
quarter (which included a $1.6 million reduction in the carrying
value of certain fixed income investments accounted for using the
equity method as discussed below), compared to $107.8 million for
the 2006 fourth quarter, and $463.1 million for the year ended
December 31, 2007 (which included a $1.7 million increase in the
carrying value of such investments), compared to $380.2 million for
the 2006 period. The increase in net investment income in the 2007
periods primarily resulted from a higher level of average invested
assets. 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 December 31, 2007, compared
to �AAA� at December 31, 2006. The average effective duration of
the Company�s investment portfolio was 3.29 years at December 31,
2007, compared to 3.23 years at December 31, 2006. For additional
information on the Company�s investment portfolio, refer to the
supplemental financial information portion of this release. The
Company�s investment portfolio includes certain funds that invest
in fixed income securities which, due to their ownership structure,
are accounted for by the Company using the equity method. In
applying the equity method, these investments are initially
recorded at cost and are subsequently adjusted based on the
Company�s proportionate share of the net income or loss of the
funds (which include changes in the market value of the underlying
fixed income securities in the funds). Changes in the carrying
value of such investments, which are primarily included in �other
investments� on the Company�s balance sheet, are recorded in net
investment income rather than as an unrealized gain or loss
component of accumulated other comprehensive income in
shareholders� equity as are changes in the carrying value of the
Company�s other fixed income investments. The Company recorded a
pre-tax investment income yield on the portfolio of 4.88% for the
2007 fourth quarter, compared to 4.89% for the 2006 fourth quarter,
and 4.88% for the year ended December 31, 2007, compared to 4.71%
for the 2006 period. The adjustments to the carrying value of the
investments accounted for using the equity method described above
reduced the reported pre-tax investment income yield by 0.07% for
the 2007 fourth quarter and increased the reported pre-tax
investment yield by 0.02% for the year ended December 31, 2007. For
the year ended December 31, 2007, the effective tax rates on income
before income taxes and pre-tax operating income were 1.8% and
1.9%, respectively, compared to 3.6% and 3.5%, respectively, for
the 2006 period. 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 and actual annual effective tax
rates, if any. As discussed below, the Company recorded a tax
benefit in the 2007 and 2006 fourth quarters. A significant portion
of the Company�s catastrophe-exposed property business is written
by a Bermuda-based subsidiary. As a result, on a relative basis,
the Company�s effective tax rate is likely to be favorably affected
in periods that have a low level of catastrophic losses incurred
and adversely impacted in periods with significant catastrophic
claims activity. The Company�s actual annual effective tax rate on
pre-tax operating income was reduced during the 2007 and 2006
fourth quarters, primarily due to the low level of catastrophic
losses incurred in the periods. The impact of applying the lower
effective tax rate on pre-tax operating income for the nine month
periods increased the Company�s after-tax results by $6.2 million,
or $0.09 per share, for the 2007 fourth quarter, while the impact
on the 2006 fourth quarter was $9.8 million, or $0.13 per share.
The Company currently expects that its annual effective tax rate on
pre-tax operating income available to common shareholders for the
year ended December 31, 2008 will be in the range of 2.0% to 4.0%.
In addition, the Company�s Bermuda-based reinsurance subsidiary
incurs federal excise taxes for premiums assumed on U.S. risks.
Such expenses are included in the Company�s acquisition expenses.
Net foreign exchange losses for the 2007 fourth quarter of $4.1
million consisted of net unrealized losses of $3.1 million and net
realized losses of $1.0 million, compared to net foreign exchange
losses for the 2006 fourth quarter of $8.3 million, which consisted
of net unrealized losses of $8.4 million and net realized gains of
$0.1 million. Net foreign exchange losses for the year ended
December 31, 2007 of $44.0 million consisted of net unrealized
losses of $48.8 million and net realized gains of $4.8 million,
compared to net foreign exchange losses for the 2006 period of
$23.9 million, which consisted of net unrealized losses of $27.3
million and net realized gains of $3.4 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 net
foreign exchange losses for the 2007 periods resulted from a
weakening of the U.S. Dollar. 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 2007 and 2006 periods, 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. 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, were 70.9 million in the 2007 fourth quarter, compared to
76.6 million in the 2006 fourth quarter, and 73.8 million for the
year ended December 31, 2007, compared to 76.2 million in the 2006
period. The lower level of weighted average shares outstanding in
the 2007 periods was primarily due to the weighted average impact
of share repurchases as discussed below, partially offset by
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. On February 28, 2007, ACGL�s
Board of Directors authorized the investment of up to $1 billion in
ACGL�s common shares through a share repurchase program.
Repurchases under the program may be effected from time to time in
open market or privately negotiated transactions through February
2009. During the 2007 fourth quarter and year ended December 31,
2007, ACGL repurchased approximately 2.0 million and 7.8 million
common shares, respectively, under the share repurchase program for
an aggregate purchase price of $136.4 million and $537.1 million,
respectively. As a result of the share repurchase transactions,
book value per common share was reduced by $1.45 per share at
December 31, 2007 and weighted average shares outstanding for the
2007 fourth quarter and year ended December 31, 2007 were reduced
by 6.5 million and 3.3 million shares, respectively. The timing and
amount of the repurchase transactions under this program will
depend on a variety of factors, including market conditions and
corporate and regulatory considerations. For additional information
on the Company�s share repurchase program, refer to the
supplemental financial information portion of this release. At
December 31, 2007, the Company�s capital of $4.34 billion consisted
of $300.0 million of senior notes, representing 6.9% of the total,
$325.0 million of preferred shares, representing 7.5% of the total,
and common shareholders� equity of $3.71 billion, representing the
balance. The increase in the Company�s capital during 2007 of
$445.2 million was primarily attributable to operating income for
2007 and an after-tax increase in the fair value of the Company�s
investment portfolio, partially offset by $537.1 million of share
repurchases during the period. The increase in the fair value of
the Company�s investment portfolio primarily resulted from changes
in the level of interest rates and foreign exchange rates in the
second half of 2007. The Company will hold a conference call for
investors and analysts at 11:00 a.m. Eastern Time on Tuesday,
February 12, 2008. 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 February 12 through midnight Eastern Time
on March 12, 2008. A telephone replay of the conference call also
will be available beginning on February 12 at 1:00 p.m. Eastern
Time until February 19 at midnight Eastern Time. To access the
replay, domestic callers should dial 888-286-8010 (passcode
57998007), and international callers should dial 617-801-6888
(passcode 57998007). Arch Capital Group Ltd., a Bermuda-based
company with approximately $4.34 billion in capital at December 31,
2007, 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 its insureds and reinsureds; the Company�s ability
to maintain or improve its ratings, which may be affected by its
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 light of the rapid growth of its 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
December 31, 2007; 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 its
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 its results of operations;
acts of terrorism, political unrest and other hostilities or other
unforecasted and unpredictable events; losses relating to aviation
business and business produced by a certain managing underwriting
agency for which the Company may be liable to the purchaser of its
prior reinsurance business or to others in connection with the
May�5, 2000 asset sale 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 policies or in the Company�s
application of such accounting principles or policies; 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 its 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. ARCH
CAPITAL GROUP LTD. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL
INFORMATION � Book Value Per Common Share and Share Repurchases �
December 31, � (U.S. dollars in thousands, except share data) 2007
� 2006 � Calculation of book value per common share: Total
shareholders� equity $4,035,811 $3,590,619 Less preferred
shareholders� equity (325,000 ) (325,000 ) Common shareholders�
equity $3,710,811 $3,265,619 Common shares outstanding (1)
67,318,466 � 74,270,466 � Book value per common share $55.12 �
$43.97 � � Effect of share repurchases during year-to-date period:
Aggregate market price of shares repurchased $537,066 Shares
repurchased 7,769,039 � Average market price per share repurchased
$69.13 � Estimated net dilutive impact on ending book value per
common share (2) ($1.45 ) Estimated net accretive impact on diluted
earnings per share (3): 2007 fourth quarter $0.19 � Year ended
December 31, 2007 $0.34 � (1) Excludes the effects of 5,486,033 and
5,669,994 stock options and 116,453 and 91,514 restricted stock
units outstanding at December 31, 2007 and 2006, respectively. (2)
As the average price per share repurchased during the period
exceeded the book value per common share at December 31, 2007, the
repurchase of shares during the period reduced book value per
common share. (3) The estimated impact on diluted earnings per
share was calculated comparing reported results versus (i) net
income per share plus an estimate of lost net investment income on
the share repurchases during 2007 divided by (ii) weighted average
diluted shares outstanding plus an estimate of the weighted average
shares repurchased during 2007. The repurchase of shares was
accretive to diluted earnings per share in the 2007 periods.
Selected Information on Losses and Loss Adjustment Expenses � Three
Months Ended Year Ended December 31, December 31, (U.S. dollars in
thousands) 2007 � 2006 2007 � 2006 � Components of losses and loss
adjustment expenses Paid losses and loss adjustment expenses
$284,397 $264,302 $1,117,413 $990,434 Increase in unpaid losses and
loss adjustment expenses 111,354 � 150,066 � 526,757 � 800,115 �
Total losses and loss adjustment expenses $395,751 � $414,368 �
$1,644,170 � $1,790,549 � � Estimated net (favorable) adverse
development in prior year loss reserves, net of related adjustments
Net impact on underwriting results: Insurance ($2,480 ) ($6,309 )
($3,128 ) ($8,301 ) Reinsurance (29,746 ) (26,573 ) (154,217 )
(60,710 ) Total ($32,226 ) ($32,882 ) ($157,345 ) ($69,011 ) �
Impact on losses and loss adjustment expenses: Insurance ($6,815 )
($6,309 ) ($12,654 ) ($8,301 ) Reinsurance (32,541 ) (40,711 )
(172,707 ) (68,494 ) Total ($39,356 ) ($47,020 ) ($185,361 )
($76,795 ) � Impact on acquisition expenses, net: Insurance $4,335
� $9,526 � Reinsurance 2,795 � $14,138 � 18,490 � $7,784 � Total
$7,130 � $14,138 � $28,016 � $7,784 � � Impact on combined ratio:
Insurance (0.6 %) (1.5 %) (0.2 %) (0.5 %) Reinsurance (10.4 %) (7.5
%) (12.4 %) (4.1 %) Total (4.5 %) (4.3 %) (5.3 %) (2.2 %) � Impact
on loss ratio: Insurance (1.6 %) (1.5 %) (0.7 %) (0.5 %)
Reinsurance (11.4 %) (11.5 %) (13.9 %) (4.6 %) Total (5.5 %) (6.1
%) (6.3 %) (2.5 %) � Impact on acquisition expense ratio: Insurance
1.0 % � 0.5 % � Reinsurance 1.0 % 4.0 % 1.5 % 0.5 % Total 1.0 % 1.8
% 1.0 % 0.3 % � Estimated net losses incurred from current period
catastrophic events (1) Insurance � � � � Reinsurance $5,078 �
$9,231 � $52,847 � $45,851 � Total $5,078 � $9,231 � $52,847 �
$45,851 � � Impact on loss ratio: Insurance � � � � Reinsurance 1.8
% 2.6 % 4.3 % 3.1 % Total 0.7 % 1.2 % 1.8 % 1.5 % (1) Equals
estimated losses from catastrophic events occurring in the current
accident year, net of reinsurance and reinstatement premiums.
Amounts shown for the insurance segment are for named catastrophic
events only. Amounts shown for the reinsurance segment include (i)
named events with over $5 million of losses incurred by its Bermuda
operations and (ii) all catastrophe losses incurred by its U.S.
operations. Annualized Operating Return on Average Common Equity �
Three Months Ended Year Ended December 31, December 31, (U.S.
dollars in thousands) 2007 � 2006 2007 � 2006 � After-tax operating
income available to common shareholders $220,614 $220,733 $846,287
$734,919 Annualized after-tax operating income available to common
shareholders 882,456 882,932 846,287 734,919 � Beginning common
shareholders� equity $3,549,795 $3,021,249 $3,265,619 $2,480,527
Ending common shareholders� equity 3,710,811 3,265,619 3,710,811
3,265,619 Average common shareholders� equity $3,630,303 $3,143,434
$3,488,215 $2,873,073 � Annualized operating return on average
common equity 24.3% 28.1% 24.3% 25.6% Investment Information �
Three Months Ended Year Ended December 31, December 31, (U.S.
dollars in thousands) 2007 � 2006 2007 � 2006 � Net investment
income: Before equity method adjustments to market value $121,527
$107,754 $461,342 $380,205 Investments accounted for using the
equity method (1) (1,626 ) � � 1,728 � � � As reported $119,901 �
$107,754 � $463,070 � $380,205 � � Contribution to pre-tax
investment income yield (at amortized cost): Before equity method
adjustments to market value 4.95 % 4.89 % 4.86 % 4.71 % Investments
accounted for using the equity method (1) (0.07 %) � � 0.02 % � �
As reported 4.88 % 4.89 % 4.88 % 4.71 % � After-tax investment
income yield (at amortized cost) 4.73 % 4.72 % 4.72 % 4.54 % � Cash
flow from operations $332,870 $358,970 $1,436,456 $1,608,956 � (1)
The Company�s investment portfolio includes certain funds that
invest in fixed income securities which, due to their ownership
structure, are accounted for by the Company using the equity
method. In applying the equity method, these investments are
initially recorded at cost and are subsequently adjusted based on
the Company�s proportionate share of the net income or loss of the
funds (which include changes in the market value of the underlying
fixed income securities in the funds). Changes in the carrying
value of such investments, which are primarily included in �other
investments� on the Company�s balance sheet, are recorded in net
investment income rather than as an unrealized gain or loss
component of accumulated other comprehensive income in
shareholders� equity as are changes in the carrying value of the
Company�s other fixed income investments. Investment Information
(continued) � December 31, (U.S. dollars in thousands) 2007 � 2006
� Investable assets: Fixed maturities available for sale, at fair
value $7,137,998 $6,876,548 Fixed maturities pledged under
securities lending agreements, at fair value (1) 1,462,826 �
860,803 � Total fixed maturities 8,600,824 7,737,351 Short-term
investments available for sale, at fair value 699,036 957,698
Short-term investments pledged under securities lending agreements,
at fair value (1) 219 � Cash 239,915 317,017 Other investments (2)
Alternative investment funds 424,896 167,497 Equity securities
93,831 75,496 Privately held securities 70,942 64,089 Securities
transactions entered into but not settled at the balance sheet date
(5,796 ) (227,941 ) Total investable assets (1) $10,123,867 �
$9,091,207 � � Fixed income portfolio (3): Average effective
duration (in years) 3.29 3.23 Average credit quality (Standard
& Poors) AA+ AAA Imbedded book yield (before investment
expenses) 5.03 % 4.97 % � (1) In securities lending transactions,
the Company receives collateral in excess of the fair value of the
fixed maturities and short-term investments pledged under
securities lending agreements. For purposes of this table, the
Company has excluded the collateral received at December 31, 2007
and 2006 of $1.5 billion and $891.4 million, respectively, which is
reflected as �short-term investment of funds received under
securities lending agreements, at fair value� and included the
$1.46 billion and $860.8 million, respectively, of �fixed
maturities and short-term investments pledged under securities
lending agreements, at fair value.� (2) Other investments include
(i) alternative investment funds which primarily include funds that
invest in investment grade and non-investment grade fixed income
securities and funds that invest in senior floating rate loans;
(ii) equity securities which include certain investments in mutual
funds and other preferred stocks; and (iii) privately held
securities which include the Company�s investment in Aeolus LP. (3)
Includes fixed maturities pledged under securities lending
agreements and excludes short-term investment of funds received
under securities lending agreements. The following table summarizes
the Company�s total fixed maturities: � � � (U.S. dollars in
thousands) Estimated Fair Value Gross Unrealized Gains Gross
Unrealized Losses Amortized Cost � December 31, 2007: Corporate
bonds $2,452,527 $40,296 ($10,994 ) $2,423,225 Commercial mortgage
backed securities 1,315,680 17,339 (558 ) 1,298,899 Mortgage backed
securities 1,234,596 14,211 (4,087 ) 1,224,472 U.S. government and
government agencies 1,165,423 21,598 (447 ) 1,144,272 Asset backed
securities 1,008,030 9,508 (4,030 ) 1,002,552 Municipal bonds
990,325 13,213 (195 ) 977,307 Non-U.S. government securities
434,243 28,032 (3,056 ) 409,267 Total $8,600,824 $144,197 ($23,367
) $8,479,994 � December 31, 2006: Corporate bonds $1,504,989 $9,196
($5,634 ) $1,501,427 Commercial mortgage backed securities 868,586
4,953 (1,098 ) 864,731 Mortgage backed securities 1,183,805 7,866
(1,678 ) 1,177,617 U.S. government and government agencies
1,922,511 12,835 (10,806 ) 1,920,482 Asset backed securities
907,829 923 (1,457 ) 908,363 Municipal bonds 815,204 1,323 (3,885 )
817,766 Non-U.S. government securities 534,427 15,776 (4,718 )
523,369 Total $7,737,351 $52,872 ($29,276 ) $7,713,755 Investment
Information (continued) The following table provides information on
the Company�s mortgage-related securities at December 31, 2007,
which consist of investments classified as mortgage backed
securities (�MBS�), commercial mortgage backed securities (�CMBS�)
and certain subprime mortgage holdings, home equity, Alt-A and
other investments included in asset backed securities: � � �
Estimated Fair Value (U.S. dollars in thousands) Issuance Year Par
Value Average Credit Quality Total � % of Mortgage Holdings � % of
Investable Assets � MBS: Agency MBS � $767,134 AAA $767,888 29.4
7.6 � Prime non-agency MBS 2002 $8,904 AAA $8,894 0.3 0.1 2003
27,915 AAA 27,569 1.1 0.3 2004 70,608 AAA 69,602 2.7 0.7 2005
80,389 AAA 78,049 3.0 0.8 2006 117,232 AAA 115,510 4.4 1.1 2007
168,642 � AAA 167,084 6.4 1.7 $473,690 AAA $466,708 17.9 4.7 � � �
� � Total MBS $1,240,824 � AAA $1,234,596 47.3 12.3 � CMBS: Agency
CMBS � $550,436 Gov�t $545,020 20.9 5.4 � Non-agency CMBS 1998
$5,708 AAA $6,000 0.2 0.1 1999 43,719 AAA 44,690 1.7 0.4 2000
116,387 AAA 121,348 4.7 1.2 2001 81,898 AAA 84,468 3.2 0.8 2002
82,538 AAA 82,635 3.2 0.8 2003 181,927 AAA 178,756 6.8 1.8 2004
78,207 AAA 77,679 3.0 0.8 2005 63,517 AAA 62,253 2.4 0.6 2006
66,670 AAA 67,586 2.6 0.7 2007 44,255 � AAA 45,245 1.7 0.4 $764,826
AAA $770,660 29.5 7.6 � � � � � Total CMBS $1,315,262 � AAA
$1,315,680 50.4 13.0 � Other Mortgage-Related Securities: Subprime
mortgage holdings All $58,266 AA+ $44,844 1.7 0.4 Home equity All
11,364 AAA 9,179 0.4 0.1 Alt-A and other All 4,727 AAA 4,635 0.2
0.1 � � � � � Total Other $74,357 � AA+ $58,658 2.3 0.6 � Total
mortgage-related securities $2,630,443 � AAA $2,608,934 100.0 25.9
Additional Statistics: Prime Non-Agency MBS Non-Agency CMBS (1)
Weighted average loan age (months) 26 58 Weighted average life
(months) (2) 60 51 Weighted average loan-to-value % (3) 66.0 % 69.0
% Total delinquencies (4) 3.2 % 0.3 % Current credit support % (5)
13.1 % 27.0 % � (1) Loans defeased with government/agency
obligations represented approximately 21% of the collateral
underlying the Company�s non-agency CMBS holdings. (2) The weighted
average life for MBS is based on the interest rates in effect at
December 31, 2007. The weighted average life for non-agency CMBS
reflects the average life of the collateral underlying the
Company�s non-agency CMBS holdings. (3) The range of loan-to-values
on MBS is 41% to 89% while the range of loan-to-values on CMBS is
53% to 73%. (4) Total delinquencies for MBS includes 60 days and
over while CMBS includes 30 days and over. (5) Current credit
support % represents the percentage for a collateralized mortgage
obligation (�CMO�) or CMBS class/tranche from other subordinate
classes in the same CMO or CMBS deal. ARCH CAPITAL GROUP LTD. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in
thousands, except share data) � Three Months Ended Year Ended
December 31, December 31, 2007 � � 2006 � 2007 � � 2006 � Revenues
Net premiums written $577,666 $601,916 $2,901,936 $3,017,418
Decrease in unearned premiums 134,550 � 163,125 � 42,714 � 64,247 �
Net premiums earned 712,216 765,041 2,944,650 3,081,665 Net
investment income 119,901 107,754 463,070 380,205 Net realized
gains (losses) 18,732 27,263 28,141 (19,437 ) Fee income 1,866
2,272 7,536 9,814 Other income 5,483 � 431 � 9,048 � 431 � Total
revenues 858,198 � 902,761 � 3,452,445 � 3,452,678 � � Expenses
Losses and loss adjustment expenses 395,751 414,368 1,644,170
1,790,549 Acquisition expenses 111,702 148,129 480,531 543,911
Other operating expenses 101,275 82,167 388,138 332,302 Interest
expense 5,523 5,523 22,093 22,090 Net foreign exchange losses 4,121
� 8,283 � 43,969 � 23,933 � Total expenses 618,372 � 658,470 �
2,578,901 � 2,712,785 � � Income before income taxes 239,826
244,291 873,544 739,893 Income tax benefit (expense) 1,044 � 1,448
� (15,601 ) (26,679 ) � Net income 240,870 245,739 857,943 713,214
� Preferred dividends (6,461 ) (6,461 ) (25,844 ) (20,655 ) � Net
income available to common shareholders $234,409 � $239,278 �
$832,099 � $692,559 � � Net income per common share Basic $3.44
$3.25 $11.72 $9.46 Diluted $3.31 $3.12 $11.28 $9.08 � Weighted
average common shares and common share equivalents outstanding
Basic 68,074,208 73,511,166 70,995,672 73,212,432 Diluted
70,901,361 76,622,078 73,762,419 76,246,725 ARCH CAPITAL GROUP LTD.
AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars in
thousands, except share data) � December 31, 2007 2006 Assets
Investments and cash: Fixed maturities available for sale, at fair
value (amortized cost: 2007, $7,037,272; 2006, $6,858,970)
$7,137,998 $6,876,548 Short-term investments available for sale, at
fair value (amortized cost: 2007, $700,262; 2006, $956,926) 699,036
957,698 Short-term investment of funds received under securities
lending agreements, at fair value 1,503,723 891,376 Other
investments (cost: 2007, $559,925; 2006, $282,923) 589,669 307,082
Cash 239,915 317,017 Total investments and cash 10,170,341
9,349,721 � Accrued investment income 73,862 68,440 Fixed
maturities and short-term investments pledged under securities
lending agreements, at fair value 1,463,045 860,803 Premiums
receivable 729,628 749,961 Funds held by reinsureds 74,752 82,385
Unpaid losses and loss adjustment expenses recoverable 1,609,619
1,552,157 Paid losses and loss adjustment expenses recoverable
132,289 122,149 Prepaid reinsurance premiums 480,462 470,138
Deferred income tax assets, net 57,051 63,606 Deferred acquisition
costs, net 290,059 290,999 Receivable for securities sold 17,359
190,168 Other assets 525,800 511,940 Total Assets $15,624,267
$14,312,467 � Liabilities Reserve for losses and loss adjustment
expenses $7,092,452 $6,463,041 Unearned premiums 1,765,881
1,791,922 Reinsurance balances payable 301,309 301,679 Senior notes
300,000 300,000 Deposit accounting liabilities 43,506 45,107
Securities lending collateral 1,503,723 891,376 Payable for
securities purchased 23,155 418,109 Other liabilities 558,430
510,614 Total Liabilities 11,588,456 10,721,848 � Commitments and
Contingencies � Shareholders� Equity Non-cumulative preferred
shares ($0.01 par value, 50,000,000 shares authorized) - Series A
(issued: 2007 and 2006, 8,000,000) 80 80 - Series B (issued: 2007
and 2006, 5,000,000) 50 50 Common shares ($0.01 par value,
200,000,000 shares authorized, issued: 2007, 67,318,466; 2006,
74,270,466) 673 743 Additional paid-in capital 1,451,667 1,944,304
Retained earnings 2,428,117 1,593,907 Accumulated other
comprehensive income, net of deferred income tax 155,224 51,535
Total Shareholders� Equity 4,035,811 3,590,619 Total Liabilities
and Shareholders� Equity $15,624,267 $14,312,467 ARCH CAPITAL GROUP
LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS� EQUITY (U.S. dollars in thousands) � Year Ended
December 31, 2007 � 2006 Non-Cumulative Preferred Shares Balance at
beginning of year $130 $� Preferred shares issued � � 130 � Balance
at end of year 130 � 130 � � Common Shares Balance at beginning of
year 743 733 Common shares issued, net 8 10 Purchases of common
shares under share repurchase program (78 ) � � Balance at end of
year 673 � 743 � � Additional Paid-in Capital Balance at beginning
of year 1,944,304 1,595,440 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 2,577 379 Exercise of stock options 18,599 27,578 Common
shares retired (539,384 ) (1,657 ) Amortization of share-based
compensation 24,605 17,259 Other 966 � 693 � Balance at end of year
1,451,667 � 1,944,304 � � Deferred Compensation Under Share Award
Plan Balance at beginning of year � (9,646 ) Cumulative effect of
change in accounting for unearned stock grant compensation � �
9,646 � Balance at end of year � � � � � Retained Earnings Balance
at beginning of year 1,593,907 901,348 Adjustment to adopt SFAS No.
155, �Accounting for Certain Hybrid Financial Instruments�an
amendment of FASB Statements No. 133 and 140� 2,111 � � � Balance
at beginning of year, as adjusted 1,596,018 901,348 Dividends
declared on preferred shares (25,844 ) (20,655 ) Net income 857,943
� 713,214 � Balance at end of year 2,428,117 � 1,593,907 � �
Accumulated Other Comprehensive Income (Loss) Balance at beginning
of year 51,535 (7,348 ) Adjustment to adopt SFAS No. 155,
�Accounting for Certain Hybrid Financial Instruments�an amendment
of FASB Statements No. 133 and 140� (2,111 ) � � Balance at
beginning of year, as adjusted 49,424 (7,348 ) Change in unrealized
appreciation in value of investments, net of deferred income tax
92,657 61,205 Foreign currency translation adjustments, net of
deferred income tax 13,143 � (2,322 ) Balance at end of year
155,224 � 51,535 � � Total Shareholders� Equity $4,035,811 �
$3,590,619 � ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in thousands) �
Year Ended December 31, 2007 � 2006 Comprehensive Income Net income
$857,943 $713,214 Other comprehensive income, net of deferred
income tax Unrealized appreciation in value of investments:
Unrealized holding gains arising during period 134,783 39,690
Reclassification of net realized (gains) losses, net of income
taxes, included in net income (42,126 ) 21,515 Foreign currency
translation adjustments 13,143 � (2,322 ) Other comprehensive
income 105,800 � 58,883 � Comprehensive Income $963,743 � $772,097
� ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS
OF CASH FLOWS (U.S. dollars in thousands) � Year Ended December 31,
2007 � 2006 Operating Activities Net income $857,943 $713,214
Adjustments to reconcile net income to net cash provided by
operating activities: Net realized (gains) losses (27,912 ) 21,056
Other income (9,048 ) (431 ) Share-based compensation 24,605 17,259
Changes in: Reserve for losses and loss adjustment expenses, net of
unpaid losses and loss adjustment expenses recoverable 569,490
847,826 Unearned premiums, net of prepaid reinsurance premiums
(36,775 ) (55,472 ) Premiums receivable 24,414 (77,059 ) Deferred
acquisition costs, net 997 26,358 Funds held by reinsureds 7,633
85,354 Reinsurance balances payable (3,933 ) 151,228 Deferred
income tax assets, net (5,401 ) 8,274 Other liabilities 25,961
27,250 Other items, net 8,482 � (155,901 ) Net Cash Provided By
Operating Activities 1,436,456 � 1,608,956 � � Investing Activities
Purchases of fixed maturity investments (20,454,932 ) (15,728,141 )
Proceeds from sales of fixed maturity investments 18,919,430
13,860,575 Proceeds from redemptions and maturities of fixed
maturity investments 644,047 513,982 Purchases of other investments
(542,615 ) (241,703 ) Proceeds from sales of other investments
204,026 15,192 Net sales (purchases) of short-term investments
285,310 (245,005 ) Change in securities lending collateral (612,347
) 2,003 Purchases of furniture, equipment and other assets (27,996
) (13,240 ) Net Cash Used For Investing Activities (1,585,077 )
(1,836,337 ) � Financing Activities Purchases of common shares
under share repurchase program (537,066 ) � Proceeds from common
shares issued, net 13,498 19,683 Proceeds from preferred shares
issued, net of issuance costs � 314,388 Change in securities
lending collateral 612,347 (2,003 ) Excess tax benefits from
share-based compensation 4,923 5,448 Preferred dividends paid
(25,844 ) (17,353 ) Net Cash Provided By Financing Activities
67,858 � 320,163 � � Effects of exchange rate changes on foreign
currency cash 3,661 � 1,758 � � (Decrease) increase in cash (77,102
) 94,540 Cash beginning of year 317,017 � 222,477 � Cash end of
period $239,915 � $317,017 � � Income taxes paid, net $3,863 �
$43,967 � Interest paid $22,050 � $22,050 � ARCH CAPITAL GROUP LTD.
AND SUBSIDIARIES 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, surety and national accounts;
executive assurance; healthcare; professional liability; programs;
property, marine and aviation; and other (consisting of collateral
protection, excess workers� compensation and employers� liability
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 income (loss), 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. 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: Three Months Ended December 31, 2007 (U.S.
dollars in thousands) Insurance � Reinsurance � Total � Gross
premiums written (1) $591,679 $245,371 $828,160 Net premiums
written 377,357 200,309 577,666 � Net premiums earned $426,352
$285,864 $712,216 Fee income 1,326 540 1,866 Losses and loss
adjustment expenses (271,893 ) (123,858 ) (395,751 ) Acquisition
expenses, net (54,596 ) (57,106 ) (111,702 ) Other operating
expenses (68,677 ) (25,126 ) (93,803 ) Underwriting income $32,512
� $80,314 � 112,826 � Net investment income 119,901 Net realized
gains 18,732 Other income 5,483 Other expenses (7,472 ) Interest
expense (5,523 ) Net foreign exchange losses (4,121 ) Income before
income taxes 239,826 Income tax benefit 1,044 � � Net income
240,870 Preferred dividends (6,461 ) Net income available to common
shareholders $234,409 � � Underwriting Ratios Loss ratio 63.8 %
43.3 % 55.6 % Acquisition expense ratio (2) 12.6 % 20.0 % 15.6 %
Other operating expense ratio 16.1 % 8.8 % 13.2 % Combined ratio
92.5 % 72.1 % 84.4 % (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 certain fee income. Three Months Ended December
31, 2006 (U.S. dollars in thousands) Insurance � Reinsurance �
Total � Gross premiums written (1) $610,847 $273,054 $873,196 Net
premiums written 374,881 227,035 601,916 � Net premiums earned
$410,066 $354,975 $765,041 Fee income 1,135 1,137 2,272 Losses and
loss adjustment expenses (256,536 ) (157,832 ) (414,368 )
Acquisition expenses, net (53,418 ) (94,711 ) (148,129 ) Other
operating expenses (60,522 ) (13,115 ) (73,637 ) Underwriting
income $40,725 � $90,454 � 131,179 � Net investment income 107,754
Net realized losses 27,263 Other income 431 Other expenses (8,530 )
Interest expense (5,523 ) Net foreign exchange losses (8,283 )
Income before income taxes 244,291 Income tax benefit 1,448 � � Net
income 245,739 Preferred dividends (6,461 ) Net income available to
common shareholders $239,278 � � Underwriting Ratios Loss ratio
62.6 % 44.5 % 54.2 % Acquisition expense ratio (2) 12.8 % 26.7 %
19.2 % Other operating expense ratio 14.8 % 3.7 % 9.6 % Combined
ratio 90.2 % 74.9 % 83.0 % (1) Certain amounts included in the
gross premiums written of each segment are related to intersegment
transactions and are included in the gross premiums written of each
segment. Accordingly, the sum of gross premiums written for each
segment does not agree to the total gross premiums written as shown
in the table above due to the elimination of intersegment
transactions in the total. (2) The acquisition expense ratio is
adjusted to include certain fee income. Year Ended December 31,
2007 (U.S. dollars in thousands) Insurance � Reinsurance � Total �
Gross premiums written (1) $2,660,302 $1,517,645 $4,140,143 Net
premiums written 1,717,548 1,184,388 2,901,936 � Net premiums
earned $1,702,343 $1,242,307 $2,944,650 Fee income 5,063 2,473
7,536 Losses and loss adjustment expenses (1,077,769 ) (566,401 )
(1,644,170 ) Acquisition expenses, net (201,703 ) (278,828 )
(480,531 ) Other operating expenses (276,388 ) (81,059 ) (357,447 )
Underwriting income $151,546 � $318,492 � 470,038 � Net investment
income 463,070 Net realized gains 28,141 Other income 9,048 Other
expenses (30,691 ) Interest expense (22,093 ) Net foreign exchange
losses (43,969 ) Income before income taxes 873,544 Income tax
expense (15,601 ) � Net income 857,943 Preferred dividends (25,844
) Net income available to common shareholders $832,099 � �
Underwriting Ratios Loss ratio 63.3 % 45.6 % 55.8 % Acquisition
expense ratio (2) 11.7 % 22.4 % 16.2 % Other operating expense
ratio 16.2 % 6.5 % 12.1 % Combined ratio 91.2 % 74.5 % 84.1 % (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 certain fee
income. Year Ended December 31, 2006 (U.S. dollars in thousands)
Insurance � Reinsurance � Total � Gross premiums written (1)
$2,624,757 $1,703,796 $4,282,449 Net premiums written 1,652,056
1,365,362 3,017,418 � Net premiums earned $1,600,854 $1,480,811
$3,081,665 Fee income 5,085 4,729 9,814 Losses and loss adjustment
expenses (1,017,263 ) (773,286 ) (1,790,549 ) Acquisition expenses,
net (175,740 ) (368,171 ) (543,911 ) Other operating expenses
(249,637 ) (53,533 ) (303,170 ) Underwriting income $163,299 �
$290,550 � 453,849 � Net investment income 380,205 Net realized
losses (19,437 ) Other income 431 Other expenses (29,132 ) Interest
expense (22,090 ) Net foreign exchange losses (23,933 ) Income
before income taxes 739,893 Income tax expense (26,679 ) � Net
income 713,214 Preferred dividends (20,655 ) Net income available
to common shareholders $692,559 � � Underwriting Ratios Loss ratio
63.5 % 52.2 % 58.1 % Acquisition expense ratio (2) 10.8 % 24.9 %
17.5 % Other operating expense ratio 15.6 % 3.6 % 9.8 % Combined
ratio 89.9 % 80.7 % 85.4 % (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 certain fee income. 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 and underwriting location: Three Months Ended December 31,
2007 � 2006 INSURANCE SEGMENT(U.S. dollars in thousands) Amount � %
of Total Amount � % of Total � Net premiums written Professional
liability (1) $81,547 21.6 $74,371 19.8 Construction, surety and
national accounts 68,510 18.2 52,244 13.9 Property, marine and
aviation 55,531 14.7 70,175 18.7 Programs 50,523 13.4 44,049 11.8
Executive assurance 46,511 12.3 42,493 11.3 Casualty 35,235 9.3
51,192 13.7 Healthcare 13,891 3.7 18,661 5.0 Other (2) 25,609 6.8
21,696 5.8 Total $377,357 100.0 $374,881 100.0 � Net premiums
earned Professional liability (1) $83,841 19.7 $75,678 18.5
Construction, surety and national accounts 73,476 17.2 65,626 16.0
Property, marine and aviation 79,948 18.8 84,074 20.5 Programs
58,248 13.7 51,908 12.7 Executive assurance 44,885 10.5 43,871 10.7
Casualty 47,086 11.0 57,218 13.9 Healthcare 15,256 3.6 18,606 4.5
Other (2) 23,612 5.5 13,085 3.2 Total $426,352 100.0 $410,066 100.0
� Net premiums written by client location United States $285,392
75.6 $307,868 82.1 Europe 57,235 15.2 26,290 7.0 Other 34,730 9.2
40,723 10.9 Total $377,357 100.0 $374,881 100.0 � Net premiums
written by underwriting location United States $282,684 74.9
$287,824 76.8 Europe 72,864 19.3 62,240 16.6 Other 21,809 5.8
24,817 6.6 Total $377,357 100.0 $374,881 100.0 (1) Includes travel
and accident business. (2) Includes excess workers� compensation
and employers� liability business. Year Ended December 31, 2007 �
2006 INSURANCE SEGMENT(U.S. dollars in thousands) Amount � % of
Total Amount � % of Total � Net premiums written Property, marine
and aviation $330,460 19.3 $320,928 19.4 Professional liability (1)
328,369 19.1 289,328 17.5 Construction, surety and national
accounts 283,997 16.5 274,460 16.6 Programs 235,793 13.7 225,653
13.7 Executive assurance 185,351 10.8 193,694 11.8 Casualty 181,774
10.6 220,244 13.3 Healthcare 63,757 3.7 68,026 4.1 Other (2)
108,047 6.3 59,723 3.6 Total $1,717,548 100.0 $1,652,056 100.0 �
Net premiums earned Property, marine and aviation $335,569 19.7
$291,119 18.2 Professional liability (1) 324,838 19.1 266,527 16.6
Construction, surety and national accounts 280,201 16.5 265,992
16.6 Programs 231,012 13.6 224,841 14.0 Executive assurance 184,154
10.8 193,295 12.2 Casualty 201,247 11.8 243,050 15.2 Healthcare
68,456 4.0 70,747 4.4 Other (2) 76,866 4.5 45,283 2.8 Total
$1,702,343 100.0 $1,600,854 100.0 � Net premiums written by client
location United States $1,323,376 77.1 $1,340,792 81.2 Europe
250,824 14.6 182,815 11.0 Other 143,348 8.3 128,449 7.8 Total
$1,717,548 100.0 $1,652,056 100.0 � Net premiums written by
underwriting location United States $1,309,401 76.2 $1,297,974 78.6
Europe 330,746 19.3 269,128 16.3 Other 77,401 4.5 84,954 5.1 Total
$1,717,548 100.0 $1,652,056 100.0 (1) Includes travel and accident
business. (2) Includes excess workers� compensation and employers�
liability business. 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
and underwriting location: Three Months Ended December 31, 2007 �
2006 REINSURANCE SEGMENT (U.S. dollars in thousands) Amount � % of
Total Amount � % of Total � Net premiums written Casualty (1)
$107,909 53.9 $120,396 53.0 Property excluding property catastrophe
(2) 40,729 20.3 44,529 19.6 Marine and aviation 29,156 14.6 26,113
11.5 Other specialty 13,664 6.8 23,602 10.4 Property catastrophe
8,762 4.4 11,577 5.1 Other 89 0.0 818 0.4 Total $200,309 100.0
$227,035 100.0 � Net premiums earned Casualty (1) $118,160 41.3
$161,595 45.5 Property excluding property catastrophe (2) 63,676
22.3 77,562 21.9 Marine and aviation 25,950 9.1 30,285 8.5 Other
specialty 30,741 10.8 42,887 12.1 Property catastrophe 44,951 15.7
39,141 11.0 Other 2,386 0.8 3,505 1.0 Total $285,864 100.0 $354,975
100.0 � Net premiums written Pro rata $171,103 85.4 $205,866 90.7
Excess of loss 29,206 14.6 21,169 9.3 Total $200,309 100.0 $227,035
100.0 � Net premiums earned Pro rata $192,073 67.2 $261,130 73.6
Excess of loss 93,791 32.8 93,845 26.4 Total $285,864 100.0
$354,975 100.0 � Net premiums written by client location United
States $99,315 49.6 $118,670 52.3 Europe 53,423 26.7 62,342 27.5
Bermuda 32,215 16.1 26,651 11.7 Other 15,356 7.6 19,372 8.5 Total
$200,309 100.0 $227,035 100.0 � Net premiums written by
underwriting location Bermuda $102,934 51.4 $130,688 57.6 United
States 91,466 45.7 96,347 42.4 Other 5,909 2.9 � � Total $200,309
100.0 $227,035 100.0 (1) Includes professional liability and
executive assurance business. (2) Includes facultative business.
Year Ended December 31, 2007 � 2006 REINSURANCE SEGMENT (U.S.
dollars in thousands) Amount � % of Total Amount � % of Total � Net
premiums written Casualty (1) $466,209 39.4 $591,219 43.3 Property
excluding property catastrophe (2) 248,367 21.0 297,080 21.8
Property catastrophe 202,203 17.1 146,751 10.7 Other specialty
148,776 12.5 218,157 16.0 Marine and aviation 110,586 9.3 109,865
8.0 Other 8,247 0.7 2,290 0.2 Total $1,184,388 100.0 $1,365,362
100.0 � Net premiums earned Casualty (1) $505,578 40.7 $668,086
45.1 Property excluding property catastrophe (2) 264,151 21.3
310,042 20.9 Property catastrophe 171,496 13.8 176,106 11.9 Other
specialty 184,597 14.8 220,641 14.9 Marine and aviation 104,482 8.4
100,565 6.8 Other 12,003 1.0 5,371 0.4 Total $1,242,307 100.0
$1,480,811 100.0 � Net premiums written Pro rata $803,352 67.8
$987,391 72.3 Excess of loss 381,036 32.2 377,971 27.7 Total
$1,184,388 100.0 $1,365,362 100.0 � Net premiums earned Pro rata
$874,647 70.4 $1,121,329 75.7 Excess of loss 367,660 29.6 359,482
24.3 Total $1,242,307 100.0 $1,480,811 100.0 � Net premiums written
by client location United States $688,841 58.1 $770,309 56.4 Europe
258,952 21.9 368,332 27.0 Bermuda 179,935 15.2 132,618 9.7 Other
56,660 4.8 94,103 6.9 Total $1,184,388 100.0 $1,365,362 100.0 � Net
premiums written by underwriting location Bermuda $691,782 58.4
$813,356 59.6 United States 471,551 39.8 552,006 40.4 Other 21,055
1.8 � � Total $1,184,388 100.0 $1,365,362 100.0 (1) Includes
professional liability and executive assurance business. (2)
Includes facultative business. Discussion of 2007 Fourth Quarter
Performance � Insurance Segment � Three Months Ended December 31,
(U.S. dollars in thousands) 2007 � 2006 � Gross premiums written
$591,679 $610,847 Net premiums written 377,357 374,881 Net premiums
earned 426,352 410,066 Underwriting income 32,512 40,725 � Loss
ratio 63.8% 62.6% Acquisition expense ratio 12.6% 12.8% Other
operating expense ratio 16.1% 14.8% Combined ratio 92.5% 90.2%
Gross premiums written by the insurance segment in the 2007 fourth
quarter were 3.1% lower than in the 2006 fourth quarter, while net
premiums written were 0.7% higher. The growth in net premiums
written primarily reflects changes in the mix of business,
including a higher percentage in the 2007 fourth quarter of
business written in lines in which the insurance segment buys a
lower level of reinsurance. The growth in net premiums written
resulted from increases in national accounts casualty business,
excess workers� compensation and employers� liability business
(included in �Other�) and European professional lines business,
partially offset by decreases in U.S. specialty casualty and
property lines of business in response to competition and the
current rate environment. Net premiums earned by the insurance
segment in the 2007 fourth quarter were 4.0% higher than in the
2006 fourth 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
63.8% in the 2007 fourth quarter, compared to 62.6% for the 2006
fourth quarter. The 2007 fourth quarter loss ratio was unchanged
from the 2007 third quarter and reflected a 1.6 point reduction
related to estimated net favorable development in prior year loss
reserves, compared to a 1.5 point reduction in prior year loss
reserves in the 2006 fourth quarter. The insurance segment�s loss
ratio in the 2007 fourth quarter also reflects an increase in
expected loss ratios across a number of lines of business and
changes in the mix of business. The insurance segment�s
underwriting expense ratio was 28.7% in the 2007 fourth quarter,
compared to 27.6% in the 2006 fourth quarter. The acquisition
expense ratio was 12.6% for the 2007 fourth quarter, compared to
12.8% for the 2006 fourth quarter. The acquisition expense ratio is
influenced by, among other things, (1) the amount of ceding
commissions received from unaffiliated reinsurers, (2) the amount
of business written on a surplus lines (non-admitted) basis and (3)
mix of business. The acquisition expense ratio in the 2007 fourth
quarter reflects changes in the form of reinsurance ceded and the
mix of business and also included 1.0 point related to favorable
prior year loss development. The insurance segment�s other
operating expense ratio was 16.1% for the 2007 fourth quarter,
compared to 16.0% in the 2007 third quarter and 14.8% for the 2006
fourth quarter. The higher operating expense ratio in the 2007
fourth quarter compared to the 2006 fourth quarter was primarily
due to growth in compensation-related expenses without an attendant
growth in net premiums earned. Reinsurance Segment � Three Months
Ended December 31, (U.S. dollars in thousands) 2007 � 2006 � Gross
premiums written $245,371 $273,054 Net premiums written 200,309
227,035 Net premiums earned 285,864 354,975 Underwriting income
80,314 90,454 � Loss ratio 43.3% 44.5% Acquisition expense ratio
20.0% 26.7% Other operating expense ratio 8.8% 3.7% Combined ratio
72.1% 74.9% Gross premiums written by the reinsurance segment in
the 2007 fourth quarter were 10.1% lower than in the 2006 fourth
quarter, with reductions in casualty, non-catastrophe exposed
property and other specialty lines. The reductions were a result of
continued competition which resulted in either non-renewals or
lower shares written by the reinsurance segment. Ceded premiums
written by the reinsurance segment were 18.4% of gross premiums
written for the 2007 fourth quarter, compared to 16.9% for the 2006
fourth quarter. In the 2007 fourth quarter, Arch Re Bermuda ceded
$35.2 million, or 14.3% of gross premiums written, of certain lines
of property and marine premiums written under the quota share
reinsurance treaty (the �Treaty�) to Flatiron Re Ltd., compared to
$35.3 million, or 12.9%, in the 2006 fourth quarter. On an earned
basis, Arch Re Bermuda ceded $75.6 million to Flatiron Re Ltd. in
the 2007 fourth quarter, compared to $61.8 million in the 2006
fourth quarter. Under the Treaty, Flatiron Re Ltd. assumed a 45%
quota share of certain lines of property and marine business
underwritten by Arch Re Bermuda for the 2006 and 2007 underwriting
years (the percentage ceded was increased from 45% to 70% of
covered business bound from June 28, 2006 until August 15, 2006
provided such business did not incept beyond September 30, 2006).
On December 31, 2007, the Treaty expired by its terms.�At December
31, 2007, $144.9 million of premiums ceded to Flatiron Re Ltd. were
unearned. The attendant premiums earned, losses incurred and
acquisition expenses will be reflected in the reinsurance segment�s
results of operations in 2008. Net premiums earned by the
reinsurance segment in the 2007 fourth quarter were 19.5% lower
than in the 2006 fourth quarter. The decrease in net premiums
earned in the 2007 fourth quarter primarily resulted from changes
in net premiums written over the previous five quarters, including
the mix and type of business written. The reinsurance segment�s
loss ratio was 43.3% in the 2007 fourth quarter, compared to 44.5%
for the 2006 fourth quarter. The loss ratio for the 2007 fourth
quarter reflected an 11.4 point reduction related to estimated net
favorable development in prior year loss reserves, compared to an
11.5 point reduction in the 2006 fourth quarter. The 2007 fourth
quarter loss ratio also reflected approximately 1.8 points of
catastrophic activity, while the 2006 fourth quarter loss ratio
reflected approximately 2.6 points of catastrophic activity. The
reinsurance segment�s loss ratio in the 2007 fourth quarter also
reflects an increase in expected loss ratios across a number of
lines of business and changes in the mix of business. The
underwriting expense ratio for the reinsurance segment was 28.8% in
the 2007 fourth quarter, compared to 30.4% in the 2006 fourth
quarter. The acquisition expense ratio for the 2007 fourth quarter
was 20.0%, compared to 26.7% for the 2006 fourth quarter. The
acquisition expense ratio is influenced by, among other things, the
mix and type of business written and earned and the level of ceding
commission income. The acquisition expense ratio for the 2007
fourth quarter included 1.0 point related to favorable prior year
loss development, compared to 4.0 points in the 2006 fourth
quarter. In addition, the acquisition expense ratio included
commission income (in excess of the reimbursement of direct
acquisition expenses) on the quota-share reinsurance treaty with
Flatiron Re Ltd. which reduced the 2007 fourth quarter acquisition
expense ratio by 4.1 points, compared to 2.5 points in the 2006
fourth quarter. The reinsurance segment�s other operating expense
ratio was 8.8% for the 2007 fourth quarter, compared to 3.7% for
the 2006 fourth quarter. The higher ratio in the 2007 fourth
quarter primarily resulted from expenses related to the reinsurance
segment�s property facultative reinsurance operation, which
commenced operations during the 2007 second quarter, and a lower
level of net premiums earned.
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