Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income
available to common shareholders for the 2008 first quarter was
$189.4 million, or $2.78 per share, compared to $198.6 million, or
$2.59 per share, for the 2007 first quarter. The Company also
reported after-tax operating income available to common
shareholders of $202.0 million, or $2.97 per share, for the 2008
first quarter, compared to $204.7 million, or $2.67 per share, for
the 2007 first quarter. All earnings per share amounts discussed in
this release are on a diluted basis. The Company�s book value per
common share, including the net effect of share repurchases,
increased to $56.92 at March 31, 2008 from $55.12 per share at
December 31, 2007. The Company�s after-tax operating income
available to common shareholders represented a 21.9% annualized
return on average common equity for the 2008 first quarter,
compared to 24.4% for the 2007 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, equity in net income or loss of
investment funds accounted for using the equity method and net
foreign exchange gains or losses, net of income taxes. See page 7
for a further discussion of after-tax operating income available to
common shareholders and Regulation G. The following table
summarizes the Company�s underwriting results: � Three Months Ended
March 31, (U.S. dollars in thousands) 2008 � 2007 � Gross premiums
written $ 1,053,152 $ 1,210,614 Net premiums written 811,342
871,745 Net premiums earned 708,234 745,493 Underwriting income
98,371 124,598 � Combined ratio 86.2% 83.4% 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 March 31, (U.S. dollars in thousands, except per share
data) 2008 � 2007 � After-tax operating income available to common
shareholders $ 201,983 $ 204,730 Net realized gains, net of tax
33,136 786 Equity in net income (loss) of investment funds
accounted for using the equity method, net of tax (22,313 ) 2,642
Net foreign exchange losses, net of tax � (23,384 ) � (9,607 ) Net
income available to common shareholders $ 189,422 � $ 198,551 � �
Diluted per common share results: After-tax operating income
available to common shareholders $ 2.97 $ 2.67 Net realized gains,
net of tax 0.48 0.01 Equity in net income (loss) of investment
funds accounted for using the equity method, net of tax (0.33 )
0.04 Net foreign exchange losses, net of tax � (0.34 ) � (0.13 )
Net income available to common shareholders $ 2.78 � $ 2.59 � �
Weighted average common shares and common share equivalents
outstanding � diluted 68,019,413 76,640,686 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 57.1% and an underwriting
expense ratio of 29.1% for the 2008 first quarter, compared to a
loss ratio of 56.3% and an underwriting expense ratio of 27.1% for
the 2007 first quarter. The loss ratio of 57.1% for the 2008 first
quarter was comprised of 35.2 points of paid losses, 10.8 points
related to reserves for reported losses and 11.1 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 relatively limited historical
information has been reported to the Company through March 31,
2008. 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. Net investment income for the 2008 first quarter was
$122.2 million, compared to $110.0 million for the 2007 first
quarter. The increase in net investment income in the 2008 first
quarter primarily resulted from a higher level of average invested
assets in the 2008 first quarter and also included $3.4 million of
interest income resulting from a favorable arbitration decision.
The pre-tax investment income yield increased to 4.88% (excluding
the arbitration interest) for the 2008 first quarter, compared to
4.84% for the 2007 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, 2008 and December 31, 2007. The average
effective duration of the Company�s investment portfolio was 3.50
years at March 31, 2008, compared to 3.29 years at December 31,
2007. The increase in the effective duration of the Company�s
investment portfolio in the 2008 first quarter was primarily
attributable to an increase in the duration of the Company�s
municipal bond holdings due to the method of calculating duration
on such securities, which relies on the yield relationship of
municipal bonds to U.S. Treasuries. The Company�s investment
portfolio includes certain funds that invest in fixed maturity
securities which, due to the ownership structure of the funds, 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 securities in the funds).
This method of accounting is different from the way the Company
accounts for its other fixed maturity securities. Investment funds
accounted for using the equity method totaled $294.4 million at
March 31, 2008, compared to $236.0 million at December 31, 2007 and
$153.6 million at March 31, 2007. For the 2008 and 2007 first
quarters, the effective tax rates on income before income taxes
were 3.9% and 4.0%, respectively, and the effective tax rates on
pre-tax operating income available to common shareholders were 2.5%
and 4.7%, respectively. 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. 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 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 reinsurer 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 2008 first quarter of $23.6 million
consisted of net unrealized losses of $22.3 million and net
realized losses of $1.3 million, compared to net foreign exchange
losses for the 2007 first quarter of $9.7 million which consisted
of net unrealized losses of $17.2 million and net realized gains of
$7.5 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. 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 68.0 million
in the 2008 first quarter, compared to 76.6 million in the 2007
first quarter. The lower level of weighted average shares
outstanding in the 2008 first quarter was primarily due to the
impact of share repurchases as discussed below. Share repurchases
during the 2007 first quarter had a minimal impact on the weighted
average shares outstanding in the period due to the timing of such
transactions. In February 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
2008 first quarter, ACGL repurchased approximately 2.7 million
common shares under the share repurchase program for an aggregate
purchase price of $189.8 million. Since the inception of the share
repurchase program, ACGL has repurchased approximately 10.5 million
common shares for an aggregate purchase price of $726.9 million. As
a result of the share repurchase transactions to date, book value
per common share was reduced by $1.70 per share at March 31, 2008,
compared to $1.45 at December 31, 2007, and weighted average shares
outstanding for the 2008 first quarter were reduced by 9.4 million
shares. 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 March 31, 2008, the Company�s capital of $4.3 billion
consisted of $300.0 million of senior notes, representing 7.0% of
the total, $325.0 million of preferred shares, representing 7.6% of
the total, and common shareholders� equity of $3.68 billion,
representing the balance. The Company will hold a conference call
for investors and analysts at 11:00 a.m. Eastern Time on Friday,
April 25, 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 April 25 through midnight Eastern Time on
May 25, 2008. A telephone replay of the conference call also will
be available beginning on April 25 at 1:00 p.m. Eastern Time until
May 2 at midnight Eastern Time. To access the replay, domestic
callers should dial 888-286-8010 (passcode 76628884), and
international callers should dial 617-801-6888 (passcode 76628884).
Arch Capital Group Ltd., a Bermuda-based company with over $4.3
billion in capital at March 31, 2008, 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 (�PLSRA�)
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 or incorporated by reference in this
release are forward-looking statements. Forward-looking statements,
for purposes of the PLSRA or otherwise, can generally be identified
by the use of forward-looking terminology such as �may,� �will,�
�expect,� �intend,� �estimate,� �anticipate,� �believe� or
�continue� and similar statements of a forward-looking nature 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, foreign currency
exchange rates and prevailing credit terms) 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; 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 relatively
limited historical information has been reported to the Company
through March 31, 2008; 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; the Company�s investment performance; 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; changes in the political
environment of certain countries in which the Company operates or
underwrites business; 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; and the other matters set forth under Item 1A �Risk
Factors�, Item 7 �Management�s Discussion and Analysis of Financial
Condition and Results of Operations� and other sections of the
Company�s Annual Report on Form 10-K, as well as the other factors
set forth in the Company�s other documents on file with the SEC,
and management�s response to any of the aforementioned factors. 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, equity in net income or loss of
investment funds accounted for using the equity method 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, equity in net income or loss of investment funds
accounted for using the equity method 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, equity in net income or loss
of investment funds accounted for using the equity method and net
foreign exchange gains or losses are an integral part of the
Company�s operations, the decision to realize investment gains or
losses, the recognition of equity in net income or loss of
investment funds accounted for using the equity method 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. The use of the equity method on certain
of the Company�s investments in certain funds that invest in fixed
maturity securities is driven by the ownership structure of such
funds (either limited partnerships or limited liability companies).
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
securities in the funds). This method of accounting is different
from the way the Company accounts for its other fixed maturity
securities and the timing of the recognition of equity in net
income or loss of investment funds accounted for using the equity
method may differ from gains or losses in the future upon sale or
maturity of such investments. Due to these reasons, the Company
excludes net realized gains or losses, equity in net income or loss
of investment funds accounted for using the equity method 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 � March 31, � December 31, (U.S.
dollars in thousands, except share data) 2008 2007 � Calculation of
book value per common share: Total shareholders� equity $ 4,004,544
$ 4,035,811 Less preferred shareholders� equity � (325,000 ) �
(325,000 ) Common shareholders� equity $ 3,679,544 $ 3,710,811
Common shares outstanding (1) � 64,649,618 � � 67,318,466 � Book
value per common share $ 56.92 � $ 55.12 � � Three Months Ended �
Cumulative Results March 31, March 31, � December 31, (U.S. dollars
in thousands, except share data) 2008 � 2007 2008 2007 � Effect of
share repurchases: Aggregate purchase price of shares repurchased $
189,843 $ 44,475 $ 726,909 $ 537,066 Shares repurchased � 2,749,909
� � 682,767 � � 10,518,948 � � 7,769,039 � Average price per share
repurchased $ 69.04 $ 65.14 $ 69.10 $ 69.13 � Estimated dilutive
impact on ending book value per common share (2) � ($0.49 ) �
($0.17 ) � ($1.70 ) � ($1.45 ) Estimated net accretive impact on
diluted earnings per share (3): $ 0.26 � $ 0.00 � (1) Excludes the
effects of 5,400,266 and 5,486,033 stock options and 115,053 and
116,453 restricted stock units outstanding at March 31, 2008 and
December 31, 2007, respectively. (2) As the average price per share
repurchased during the periods exceeded the book value per common
share at March 31, 2008 and December 31, 2007, the repurchase of
shares during the periods reduced book value per common share in
the periods presented. (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 divided by (ii) weighted average diluted
shares outstanding excluding the weighted average impact of share
repurchases. The repurchase of shares was accretive to diluted
earnings per share in the 2008 first quarter. The repurchase of
shares during the 2007 first quarter had a minimal impact on
diluted earnings per share due to the timing of such transactions.
Annualized Operating Return on Average Common Equity � Three Months
Ended March 31, (U.S. dollars in thousands) 2008 � 2007 � After-tax
operating income available to common shareholders $ 201,983 $
204,730 Annualized operating income available to common
shareholders 807,932 818,920 � Beginning common shareholders�
equity $ 3,710,811 $ 3,265,619 Ending common shareholders� equity �
3,679,544 � 3,458,348 Average common shareholders� equity $
3,695,178 $ 3,361,984 � Annualized operating return on average
common equity 21.9% 24.4% Selected Information on Losses and Loss
Adjustment Expenses � Three Months Ended March 31, (U.S. dollars in
thousands) 2008 � 2007 � Components of losses and loss adjustment
expenses Paid losses and loss adjustment expenses $ 249,499 $
274,367 Increase in unpaid losses and loss adjustment expenses �
154,918 � � 145,694 � Total losses and loss adjustment expenses $
404,417 � $ 420,061 � � Estimated net (favorable) adverse
development in prior year loss reserves, net of related adjustments
Net impact on underwriting results: Insurance ($5,610 ) $ 2,926
Reinsurance � (51,050 ) � (46,227 ) Total � ($56,660 ) � ($43,301 )
� Impact on losses and loss adjustment expenses: Insurance ($5,776
) ($899 ) Reinsurance � (51,086 ) � (46,754 ) Total � ($56,862 ) �
($47,653 ) � Impact on acquisition expenses, net: Insurance $ 166 $
3,825 Reinsurance � 36 � � 527 � Total $ 202 � $ 4,352 � � Impact
on combined ratio: Insurance (1.3 %) 0.7 % Reinsurance (17.7 %)
(13.9 %) Total (8.0 %) (5.8 %) � Impact on loss ratio: Insurance
(1.4 %) (0.2 %) Reinsurance (17.7 %) (14.1 %) Total (8.0 %) (6.4 %)
� Impact on acquisition expense ratio: Insurance 0.1 % 0.9 %
Reinsurance 0.0 % 0.2 % Total 0.0 % 0.6 % � Estimated net losses
incurred from current period catastrophic events (1) Insurance $
20,300 � Reinsurance � 5,774 � � 15,758 � Total $ 26,074 � $ 15,758
� � Impact on loss ratio: Insurance 4.8 % � Reinsurance 2.0 % 4.8 %
Total 3.7 % 2.1 % (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. Investment
Information � Three Months Ended March 31, (U.S. dollars in
thousands) 2008 � 2007 � Net investment income: Total $ 122,193 $
110,047 Per share $ 1.80 $ 1.44 � Pre-tax investment income yield
(at amortized cost) 4.88 % 4.84 % After-tax investment income yield
(at amortized cost) 4.75 % 4.68 % � Cash flow from operations $
334,545 $ 403,131 � March 31, � December 31, (U.S. dollars in
thousands) 2008 2007 � Investable assets: Fixed maturities
available for sale, at fair value $ 7,591,695 $ 7,137,998 Fixed
maturities pledged under securities lending agreements, at fair
value (1) � 1,189,050 � � 1,462,826 � Total fixed maturities
8,780,745 8,600,824 Short-term investments available for sale, at
fair value 631,285 699,036 Short-term investments pledged under
securities lending agreements, at fair value (1) 1,036 219 Cash
258,680 239,915 Other investments (2) Mutual funds 253,947 286,146
Privately held securities and other 62,305 67,548 Investment funds
accounted for using the equity method (3) 294,379 235,975
Securities transactions entered into but not settled at the balance
sheet date � (39,640 ) � (5,796 ) Total investable assets (1) $
10,242,737 � $ 10,123,867 � � Fixed income portfolio (1): Average
effective duration (in years) 3.50 3.29 Average credit quality
(Standard & Poors) AA+ AA+ Imbedded book yield (before
investment expenses) 4.82 % 5.03 % (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 March 31, 2008
and December 31, 2007 of $1.23 billion and $1.5 billion,
respectively, which is reflected as �short-term investment of funds
received under securities lending agreements, at fair value� and
included the $1.19 billion and $1.46 billion, respectively, of
�fixed maturities and short-term investments pledged under
securities lending agreements, at fair value.� (2) Other
investments include (i) mutual funds which invest in fixed maturity
securities and international equity index funds; and (ii) privately
held securities and other which include the Company�s investment in
Aeolus LP and other privately held securities and preferred stocks.
(3) The Company�s investment portfolio includes certain funds that
invest in fixed maturity securities which, due to the ownership
structure of the funds, 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
securities in the funds). Changes in the carrying value of such
investments are recorded as �Equity in net income (loss) of
investment funds accounted for using the equity method� 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) � The following table summarizes
the Company�s fixed maturities and fixed maturities pledged under
securities lending agreements: � (U.S. dollars in thousands) �
Estimated Fair Value � Gross Unrealized Gains � Gross Unrealized
Losses � Amortized Cost � March 31, 2008: Corporate bonds $
2,380,756 $ 63,605 ($32,568 ) $ 2,349,719 Commercial mortgage
backed securities 1,334,521 17,326 (6,536 ) 1,323,731 Mortgage
backed securities 1,333,473 19,605 (41,664 ) 1,355,532 Municipal
bonds 1,184,123 17,156 (3,156 ) 1,170,123 Asset backed securities
1,082,196 15,956 (7,020 ) 1,073,260 U.S. government and government
agencies 1,028,256 29,468 (735 ) 999,523 Non-U.S. government
securities � 437,420 � 34,497 (2,259 ) � 405,182 Total $ 8,780,745
$ 197,613 ($93,938 ) $ 8,677,070 � 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
Municipal bonds 990,325 13,213 (195 ) 977,307 Asset backed
securities 1,008,030 9,508 (4,030 ) 1,002,552 U.S. government and
government agencies 1,165,423 21,598 (447 ) 1,144,272 Non-U.S.
government securities � 434,243 � 28,032 (3,056 ) � 409,267 Total $
8,600,824 $ 144,197 ($23,367 ) $ 8,479,994 The following table
provides information on the Company�s asset backed securities
(�ABS�) at March 31, 2008: � � � � Estimated Fair Value (U.S.
dollars in thousands) Par Value Average Credit Quality Effective
Duration Total � % of Class � % of Investable Assets � Sector:
Autos $ 323,570 AAA 1.10 $ 326,153 30.2 3.2 Credit cards 565,907
AAA 2.49 573,992 53.0 5.6 Rate reduction bonds 114,750 AAA 2.57
118,163 10.9 1.2 Other � 22,609 AAA 0.41 � 22,226 2.1 � 0.2 $
1,026,836 AAA 2.02 $ 1,040,534 96.2 10.2 � Home equity (1) $ 34,718
AAA 0.01 $ 31,527 2.9 0.3 18,992 AA 0.01 7,644 0.7 0.1 513 A 0.01
321 0.0 0.0 3,862 BBB 0.06 1,272 0.1 0.0 � 3,679 CCC 0.02 � 898 0.1
0.0 $ 61,764 AA+ 0.01 $ 41,662 3.8 0.4 � � � � � � Total ABS $
1,088,600 AAA 1.94 $ 1,082,196 100.0 10.6 � (1) The home equity ABS
category includes the following subprime mortgage holdings: $
58,482 AA+ 0.01 $ 39,677 Investment Information (continued) � The
following table provides information on the Company�s mortgage
backed securities (�MBS�) and commercial mortgage backed securities
(�CMBS�) at March 31, 2008: � � � � � Estimated Fair Value (U.S.
dollars in thousands) Issuance Year Par Value Average Credit
Quality Total � % of Asset Class � % of Investable Assets � MBS:
Agency MBS � $ 796,449 AAA $ 811,342 60.9 7.9 � Prime non-agency
MBS 2002 $ 8,448 AAA $ 8,331 0.6 0.1 2003 23,371 AAA 22,798 1.7 0.2
2004 79,484 AAA 76,136 5.7 0.8 2005 109,070 AAA 96,116 7.2 0.9 2006
157,673 AAA 144,008 10.8 1.4 2007 � 194,428 � AAA � 174,742 13.1
1.7 $ 572,474 AAA $ 522,131 39.1 5.1 � � � � � Total MBS $
1,368,923 � AAA $ 1,333,473 100.0 13.0 � CMBS: Agency CMBS � $
545,934 Gov�t $ 548,130 41.1 5.3 � Non-agency CMBS 1998 $ 3,400 AAA
$ 3,605 0.3 0.0 1999 39,624 AAA 40,129 3.0 0.4 2000 137,877 AAA
140,948 10.6 1.4 2001 111,573 AAA 114,125 8.5 1.1 2002 81,664 AAA
80,870 6.0 0.8 2003 135,590 AAA 130,586 9.8 1.3 2004 77,932 AAA
75,591 5.7 0.7 2005 78,610 AAA 74,999 5.6 0.7 2006 37,033 AAA
36,219 2.7 0.4 2007 � 90,495 � AAA � 89,319 6.7 0.9 $ 793,798 AAA $
786,391 58.9 7.7 � � � � � Total CMBS $ 1,339,732 � AAA $ 1,334,521
100.0 13.0 � Additional Statistics: Prime Non- Agency MBS
Non-Agency CMBS (1) Weighted average loan age (months) 28 60
Weighted average life (months) (2) 67 49 Weighted average
loan-to-value % (3) 65.0 % 66.0 % Total delinquencies (4) 3.7 % 0.7
% Current credit support % (5) 11.6 % 25.0 % � (1) Loans defeased
with government/agency obligations represented approximately 24% 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 March 31, 2008. 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 23% to 89% while the range of
loan-to-values on CMBS is 50% 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) � �
(Unaudited) Three Months Ended March 31, 2008 � 2007 Revenues Net
premiums written $ 811,342 $ 871,745 Increase in unearned premiums
� (103,108 ) � (126,252 ) Net premiums earned 708,234 745,493 Net
investment income 122,193 110,047 Net realized gains (losses)
35,975 (981 ) Fee income 1,068 1,969 Equity in net income (loss) of
investment funds accounted for using the equity method (22,313 )
2,642 Other income � 4,036 � � 604 � Total revenues � 849,193 � �
859,774 � � Expenses Losses and loss adjustment expenses 404,417
420,061 Acquisition expenses 114,639 120,128 Other operating
expenses 97,187 90,813 Interest expense 5,524 5,523 Net foreign
exchange losses � 23,587 � � 9,742 � Total expenses � 645,354 � �
646,267 � � Income before income taxes 203,839 213,507 � Income tax
expense � 7,956 � � 8,495 � � Net income 195,883 205,012 �
Preferred dividends � 6,461 � � 6,461 � � Net income available to
common shareholders $ 189,422 � $ 198,551 � � Net income per common
share Basic $ 2.90 $ 2.69 Diluted $ 2.78 $ 2.59 � Weighted average
common shares and common share equivalents outstanding Basic
65,295,516 73,931,996 Diluted 68,019,413 76,640,686 ARCH CAPITAL
GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S.
dollars in thousands, except share data) � � (Unaudited) � March
31, December 31, 2008 2007 Assets Investments: Fixed maturities
available for sale, at fair value (amortized cost: 2008,
$7,511,224; 2007, $7,037,272) $ 7,591,695 $ 7,137,998 Short-term
investments available for sale, at fair value (amortized cost:
2008, $629,249; 2007, $700,262) 631,285 699,036 Short-term
investment of funds received under securities lending agreements,
at fair value 1,228,868 1,503,723 Other investments (cost: 2008,
$308,075; 2007, $323,950) 316,252 353,694 Investment funds
accounted for using the equity method � 294,379 � 235,975 Total
investments 10,062,479 9,930,426 � Cash 258,680 239,915 Accrued
investment income 73,686 73,862 Fixed maturities and short-term
investments pledged under securities lending agreements, at fair
value 1,190,086 1,463,045 Premiums receivable 880,946 729,628 Funds
held by reinsureds 72,844 74,752 Unpaid losses and loss adjustment
expenses recoverable 1,652,117 1,609,619 Paid losses and loss
adjustment expenses recoverable 110,962 132,289 Prepaid reinsurance
premiums 419,046 480,462 Deferred income tax assets, net 55,645
57,051 Deferred acquisition costs, net 311,364 290,059 Receivable
for securities sold 671,354 17,359 Other assets � 595,266 � 525,800
Total Assets $ 16,354,475 $ 15,624,267 � Liabilities Reserve for
losses and loss adjustment expenses $ 7,319,141 $ 7,092,452
Unearned premiums 1,810,324 1,765,881 Reinsurance balances payable
322,280 301,309 Senior notes 300,000 300,000 Securities lending
collateral 1,228,868 1,503,723 Payable for securities purchased
710,994 23,155 Other liabilities � 658,324 � 601,936 Total
Liabilities � 12,349,931 � 11,588,456 � Commitments and
Contingencies � Shareholders� Equity Non-cumulative preferred
shares ($0.01 par value, 50,000,000 shares authorized) - Series A
(issued: 2008 and 2007, 8,000,000) 80 80 - Series B (issued: 2008
and 2007, 5,000,000) 50 50 Common shares ($0.01 par value,
200,000,000 shares authorized, issued: 2008, 64,649,618; 2007,
67,318,466) 646 673 Additional paid-in capital 1,269,821 1,451,667
Retained earnings 2,617,539 2,428,117 Accumulated other
comprehensive income, net of deferred income tax � 116,408 �
155,224 Total Shareholders� Equity � 4,004,544 � 4,035,811 Total
Liabilities and Shareholders� Equity $ 16,354,475 $ 15,624,267 ARCH
CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS� EQUITY (U.S. dollars in thousands) � �
(Unaudited) Three Months Ended March 31, 2008 � 2007 Non-Cumulative
Preferred Shares Balance at beginning and end of period $ 130 $ 130
� Common Shares Balance at beginning of year 673 743 Common shares
issued, net 0 1 Purchases of common shares under share repurchase
program � (27 ) � (7 ) Balance at end of period � 646 � � 737 � �
Additional Paid-in Capital Balance at beginning of year 1,451,667
1,944,304 Common shares issued 0 109 Exercise of stock options
3,749 6,997 Common shares retired (190,278 ) (46,291 ) Amortization
of share-based compensation 4,600 4,306 Other � 83 � � 700 �
Balance at end of period � 1,269,821 � � 1,910,125 � � Retained
Earnings Balance at beginning of year 2,428,117 1,593,907
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
2,428,117 1,596,018 Dividends declared on preferred shares (6,461 )
(6,461 ) Net income � 195,883 � � 205,012 � Balance at end of
period � 2,617,539 � � 1,794,569 � � Accumulated Other
Comprehensive Income (Loss) Balance at beginning of year 155,224
51,535 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 155,224 49,424 Change in unrealized appreciation (decline)
in value of investments, net of deferred income tax (37,577 )
20,587 Foreign currency translation adjustments, net of deferred
income tax � (1,239 ) � 7,776 � Balance at end of period � 116,408
� � 77,787 � � Total Shareholders� Equity $ 4,004,544 � $ 3,783,348
� ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (U.S. dollars in thousands) � � (Unaudited)
Three Months Ended March 31, 2008 � 2007 Comprehensive Income Net
income $ 195,883 $ 205,012 Other comprehensive income (loss), net
of deferred income tax Unrealized decline in value of investments:
Unrealized holding gains arising during period 12,707 22,014
Reclassification of net realized gains, net of income taxes,
included in net income (50,284 ) (1,427 ) Foreign currency
translation adjustments � (1,239 ) � 7,776 � Other comprehensive
(loss) income � (38,816 ) � 28,363 � Comprehensive Income $ 157,067
� $ 233,375 � ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS (U.S. dollars in thousands) � �
(Unaudited) Three Months Ended March 31, 2008 � 2007 Operating
Activities Net income $ 195,883 $ 205,012 Adjustments to reconcile
net income to net cash provided by operating activities: Net
realized (gains) losses (33,791 ) 1,097 Equity in net (income) loss
of investment funds accounted for using the equity method and other
income 18,277 (3,246 ) Share-based compensation 4,600 4,306 Changes
in: Reserve for losses and loss adjustment expenses, net of unpaid
losses and loss adjustment expenses recoverable 182,498 147,462
Unearned premiums, net of prepaid reinsurance premiums 105,497
127,107 Premiums receivable (148,197 ) (203,707 ) Deferred
acquisition costs, net (21,319 ) (23,700 ) Funds held by reinsureds
1,908 21,602 Reinsurance balances payable 19,677 91,498 Other
liabilities 40,490 1,296 Other items, net � (30,978 ) � 34,404 �
Net Cash Provided By Operating Activities � 334,545 � � 403,131 � �
Investing Activities Purchases of fixed maturity investments
(3,772,652 ) (5,047,868 ) Proceeds from sales of fixed maturity
investments 3,523,338 4,326,607 Proceeds from redemptions and
maturities of fixed maturity investments 136,932 183,984 Purchases
of other investments (146,815 ) (151,978 ) Proceeds from sales of
other investments 65,226 54,754 Net sales of short-term investments
74,201 188,663 Change in securities lending collateral 274,855
(268,722 ) Purchases of furniture, equipment and other � (3,045 ) �
(4,138 ) Net Cash Provided By (Used For) Investing Activities �
152,040 � � (718,698 ) � Financing Activities Purchases of common
shares under share repurchase program (189,843 ) (44,475 ) Proceeds
from common shares issued, net 2,540 3,145 Change in securities
lending collateral (274,855 ) 268,722 Excess tax benefits from
share-based compensation 660 2,355 Preferred dividends paid �
(6,461 ) � (6,461 ) Net Cash (Used For) Provided By Financing
Activities � (467,959 ) � 223,286 � � Effects of exchange rate
changes on foreign currency cash � 139 � � 513 � � Increase
(decrease) in cash 18,765 (91,768 ) Cash beginning of year �
239,915 � � 317,017 � Cash end of period $ 258,680 � $ 225,249 � �
Income taxes paid, net $ 2,510 � $ 596 � Interest paid � � � � � �
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 nine
specialty product lines: casualty; construction and national
accounts; executive assurance; healthcare; professional liability;
programs; property, marine and aviation; surety; and other
(consisting of collateral protection business, excess workers�
compensation and employers� liability business and travel and
accident 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
income (loss), other expenses incurred by the Company, interest
expense, net realized gains or losses, equity in net income (loss)
of investment funds accounted for using the equity method, net
foreign exchange gains or losses and income taxes. In addition,
results for the corporate and other segment included 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 March 31, 2008 (U.S.
dollars in thousands) Insurance � Reinsurance � Total � Gross
premiums written (1) $ 626,348 $ 433,827 $ 1,053,152 Net premiums
written 402,764 408,578 811,342 � Net premiums earned $ 419,100 $
289,134 $ 708,234 Fee income 882 186 1,068 Losses and loss
adjustment expenses (287,303 ) (117,114 ) (404,417 ) Acquisition
expenses, net (51,889 ) (62,750 ) (114,639 ) Other operating
expenses � (73,637 ) � (18,238 ) � (91,875 ) Underwriting income $
7,153 � $ 91,218 � 98,371 � Net investment income 122,193 Net
realized gains 35,975 Equity in net income (loss) of investment
funds accounted for using the equity method (22,313 ) Other income
4,036 Other expenses (5,312 ) Interest expense (5,524 ) Net foreign
exchange losses � (23,587 ) Income before income taxes 203,839
Income tax expense � (7,956 ) � Net income 195,883 Preferred
dividends � (6,461 ) Net income available to common shareholders $
189,422 � � Underwriting Ratios Loss ratio 68.6 % 40.5 % 57.1 %
Acquisition expense ratio (2) 12.2 % 21.7 % 16.1 % Other operating
expense ratio � 17.6 % � 6.3 % � 13.0 % Combined ratio � 98.4 % �
68.5 % � 86.2 % (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 March 31, 2007 (U.S.
dollars in thousands) Insurance � Reinsurance � Total � Gross
premiums written (1) $ 661,210 $ 558,654 $ 1,210,614 Net premiums
written 428,344 443,401 871,745 � Net premiums earned $ 413,847 $
331,646 $ 745,493 Fee income 1,425 544 1,969 Losses and loss
adjustment expenses (259,322 ) (160,739 ) (420,061 ) Acquisition
expenses, net (46,695 ) (73,433 ) (120,128 ) Other operating
expenses � (68,894 ) � (13,781 ) � (82,675 ) Underwriting income $
40,361 � $ 84,237 � 124,598 � Net investment income 110,047 Net
realized losses (981 ) Equity in net income (loss) of investment
funds accounted for using the equity method 2,642 Other income 604
Other expenses (8,138 ) Interest expense (5,523 ) Net foreign
exchange losses � (9,742 ) Income before income taxes 213,507
Income tax expense � (8,495 ) � Net income 205,012 Preferred
dividends � (6,461 ) Net income available to common shareholders $
198,551 � � Underwriting Ratios Loss ratio 62.7 % 48.5 % 56.3 %
Acquisition expense ratio (2) 11.1 % 22.1 % 16.0 % Other operating
expense ratio � 16.6 % � 4.2 % � 11.1 % Combined ratio � 90.4 % �
74.8 % � 83.4 % (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 location: �
Three Months Ended March 31, 2008 � 2007 INSURANCE SEGMENT(U.S.
dollars in thousands) Amount � % of Total Amount � % of Total � Net
premiums written Property, marine and aviation $ 98,162 24.4 $
84,863 19.8 Construction and national accounts 61,211 15.2 60,483
14.1 Programs 54,583 13.5 58,323 13.6 Professional liability 54,081
13.4 58,355 13.6 Executive assurance 42,169 10.5 44,091 10.3
Casualty 27,618 6.9 43,091 10.1 Healthcare 10,997 2.7 21,530 5.0
Surety 10,867 2.7 18,747 4.4 Other (1) � 43,076 10.7 � 38,861 9.1
Total $ 402,764 100.0 $ 428,344 100.0 � Net premiums earned
Property, marine and aviation $ 84,992 20.3 $ 81,804 19.8
Construction and national accounts 57,115 13.6 47,975 11.6 Programs
56,987 13.6 56,209 13.6 Professional liability 68,810 16.4 67,884
16.4 Executive assurance 44,408 10.6 45,378 11.0 Casualty 41,772
10.0 51,542 12.4 Healthcare 13,445 3.2 19,844 4.8 Surety 13,499 3.2
19,129 4.6 Other (1) � 38,072 9.1 � 24,082 5.8 Total $ 419,100
100.0 $ 413,847 100.0 � Net premiums written by client location
United States $ 279,255 69.3 $ 320,005 74.7 Europe 86,300 21.4
74,935 17.5 Other � 37,209 9.3 � 33,404 7.8 Total $ 402,764 100.0 $
428,344 100.0 � Net premiums written by underwriting location
United States $ 287,207 71.3 $ 331,557 77.4 Europe 102,011 25.3
82,016 19.1 Other � 13,546 3.4 � 14,771 3.5 Total $ 402,764 100.0 $
428,344 100.0 (1) Includes excess workers� compensation and
employers� liability business and travel and accident 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 location: � � Three
Months Ended March 31, 2008 � 2007 REINSURANCE SEGMENT (U.S.
dollars in thousands) Amount � % of Total Amount � % of Total � Net
premiums written Property catastrophe $ 106,224 26.0 $ 80,659 18.2
Casualty (1) 105,987 26.0 144,476 32.6 Property excluding property
catastrophe (2) 95,922 23.5 94,944 21.4 Other specialty 75,680 18.5
73,996 16.7 Marine and aviation 22,164 5.4 43,715 9.8 Other � 2,601
0.6 � 5,611 1.3 Total $ 408,578 100.0 $ 443,401 100.0 � Net
premiums earned Property catastrophe $ 50,281 17.4 $ 34,691 10.5
Casualty (1) 107,648 37.2 140,444 42.4 Property excluding property
catastrophe (2) 63,341 21.9 73,039 22.0 Other specialty 38,484 13.3
52,042 15.7 Marine and aviation 27,431 9.5 26,622 8.0 Other � 1,949
0.7 � 4,808 1.4 Total $ 289,134 100.0 $ 331,646 100.0 � Net
premiums written Pro rata $ 215,419 52.7 $ 263,815 59.5 Excess of
loss � 193,159 47.3 � 179,586 40.5 Total $ 408,578 100.0 $ 443,401
100.0 � Net premiums earned Pro rata $ 192,076 66.4 $ 242,439 73.1
Excess of loss � 97,058 33.6 � 89,207 26.9 Total $ 289,134 100.0 $
331,646 100.0 � Net premiums written by client location United
States $ 217,179 53.2 $ 253,991 57.3 Europe 143,920 35.2 124,338
28.0 Bermuda 34,060 8.3 50,841 11.5 Other � 13,419 3.3 � 14,231 3.2
Total $ 408,578 100.0 $ 443,401 100.0 � Net premiums written by
underwriting location Bermuda $ 220,669 54.0 $ 252,028 56.8 United
States 154,480 37.8 180,362 40.7 Other � 33,429 8.2 � 11,011 2.5
Total $ 408,578 100.0 $ 443,401 100.0 (1) Includes professional
liability, executive assurance and healthcare business. (2)
Includes facultative business. Discussion of 2008 First Quarter
Performance � Insurance Segment � � Three Months Ended March 31,
(U.S. dollars in thousands) 2008 � 2007 � Gross premiums written $
626,348 $ 661,210 Net premiums written 402,764 428,344 Net premiums
earned 419,100 413,847 Underwriting income 7,153 40,361 � Loss
ratio 68.6 % 62.7 % Acquisition expense ratio 12.2 % 11.1 % Other
operating expense ratio � 17.6 % � 16.6 % Combined ratio � 98.4 % �
90.4 % Gross premiums written by the insurance segment in the 2008
first quarter were 5.3% lower than in the 2007 first quarter, while
net premiums written were 6.0% lower as the insurance segment
maintained underwriting discipline in response to the current rate
environment. Net premiums earned by the insurance segment in the
2008 first quarter were 1.3% higher than in the 2007 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 68.6% in the 2008 first
quarter, compared to 62.7% for the 2007 first quarter. The 2008
first quarter loss ratio included 4.8 points related to the
Australian floods in the period and 2.8 points related to large
specific risk losses in short-tail lines in the period, while the
2007 first quarter loss ratio included 1.3 points related to large
specific risk losses. The 2008 first quarter loss ratio reflected a
1.4 point reduction related to estimated net favorable development
in prior year loss reserves, compared to a 0.2 point reduction in
prior year loss reserves in the 2007 first quarter. The estimated
net favorable development in the 2008 first quarter was primarily
in medium-tail and longer-tail lines, partially offset by adverse
development from short-tail lines which primarily resulted from
higher than expected claims development on property, marine and
aviation business. The insurance segment�s loss ratio in the 2008
first 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
29.8% in the 2008 first quarter, compared to 27.7% in the 2007
first quarter. The acquisition expense ratio was 12.2% for the 2008
first quarter, compared to 11.1% for the 2007 first 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 2008 first quarter reflects changes in the
form of reinsurance ceded and the mix of business. The insurance
segment�s other operating expense ratio was 17.6% for the 2008
first quarter, compared to 16.6% in the 2007 first quarter. The
higher operating expense ratio in the 2008 first quarter compared
to the 2007 first quarter was primarily due to growth in operating
expenses without a proportionate increase in net premiums earned.
Reinsurance Segment � � Three Months Ended March 31, (U.S. dollars
in thousands) 2008 � 2007 � Gross premiums written $ 433,827 $
558,654 Net premiums written 408,578 443,401 Net premiums earned
289,134 331,646 Underwriting income 91,218 84,237 � Loss ratio 40.5
% 48.5 % Acquisition expense ratio 21.7 % 22.1 % Other operating
expense ratio � 6.3 % � 4.2 % Combined ratio � 68.5 % � 74.8 %
Gross premiums written by the reinsurance segment in the 2008 first
quarter were 22.3% lower than in the 2007 first quarter, with
reductions in all treaty lines of business. The reinsurance
segment�s Bermuda-based reinsurer, Arch Re Bermuda, ceded certain
lines of property and marine premiums written under a quota share
reinsurance treaty (the �Treaty�) to Flatiron Re Ltd. 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.�For its January 1 renewals, Arch Re Bermuda
adjusted its book of business in light of the expiration of the
Treaty. In addition, other reductions in the reinsurance segment�s
book of business resulted from continued competition which led to
non-renewals or lower shares written. Ceded premiums written by the
reinsurance segment were 5.8% of gross premiums written for the
2008 first quarter, compared to 20.6% for the 2007 first quarter.
In the 2008 first quarter, Arch Re Bermuda ceded $18.4 million, or
4.2% of gross premiums written, of certain lines of property and
marine premiums written under the Treaty to Flatiron Re Ltd.,
compared to $108.9 million, or 19.5%, in the 2007 first quarter,
with the lower level due to the expiration of the Treaty. On an
earned basis, Arch Re Bermuda ceded $58.9 million to Flatiron Re
Ltd. in the 2008 first quarter, compared to $66.0 million in the
2007 first quarter. Commission income from the Treaty (in excess of
the reimbursement of direct acquisition expenses) reduced the
reinsurance segment�s acquisition expense ratio by 3.3 points in
the 2008 first quarter, compared to 2.8 points in the 2007 first
quarter. At March 31, 2008, $104.5 million of premiums ceded to
Flatiron Re Ltd. were unearned. The attendant premiums earned,
losses incurred and acquisition expenses will primarily be
reflected in the reinsurance segment�s results during the balance
of 2008. Net premiums written by the reinsurance segment in the
2008 first quarter were 7.9% lower than in the 2007 first quarter,
while net premiums earned in the 2008 first quarter were 12.8%
lower than in the 2007 first quarter. The decrease in net premiums
earned in the 2008 first 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 40.5% in the 2008 first quarter, compared to 48.5% for
the 2007 first quarter. The loss ratio for the 2008 first quarter
reflected a 17.7 point reduction related to estimated net favorable
development in prior year loss reserves, compared to a 14.1 point
reduction in the 2007 first quarter. The estimated net favorable
development in the 2008 first quarter was primarily in short-tail
lines and resulted from better than anticipated loss emergence. The
2008 first quarter loss ratio also reflected approximately 2.0
points of catastrophic activity, while the 2007 first quarter loss
ratio reflected approximately 4.8 points of catastrophic activity.
The reinsurance segment�s loss ratio in the 2008 first quarter also
reflected 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 28.0% in
the 2008 first quarter, compared to 26.3% in the 2007 first
quarter. The acquisition expense ratio for the 2008 first quarter
was 21.7%, compared to 22.1% for the 2007 first 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 reinsurance segment�s other operating
expense ratio was 6.3% for the 2008 first quarter, compared to 4.2%
for the 2007 first quarter. The higher ratio in the 2008 first
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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