Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income
available to common shareholders for the 2010 first quarter was
$210.5 million, or $3.79 per share, compared to $139.9 million, or
$2.24 per share, for the 2009 first quarter. The Company also
reported after-tax operating income available to common
shareholders of $98.7 million, or $1.78 per share, for the 2010
first quarter, compared to $169.0 million, or $2.70 per share, for
the 2009 first quarter. All earnings per share amounts discussed in
this release are on a diluted basis.
The Company’s book value per common share was $76.91 at March
31, 2010, a 5.3% increase from $73.01 per share at December 31,
2009. The growth in book value per common share was generated by
operating income and investment returns. The Company’s after-tax
operating income available to common shareholders represented a
9.8% annualized return on average common equity for the 2010 first
quarter, compared to 21.1% for the 2009 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, net impairment losses
recognized in earnings, 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)
2010 2009 Gross premiums
written $ 953,687 $ 1,024,971 Net premiums written 767,754 822,863
Net premiums earned 669,917 700,564 Underwriting income 23,918
93,389 Combined ratio 96.4 % 86.7 %
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 share data)
2010
2009 After-tax operating income available to common
shareholders $ 98,731 $ 169,001 Net realized gains (losses), net of
tax 45,503 (9,111 ) Net impairment losses recognized in earnings,
net of tax (1,606 ) (36,134 ) Equity in net income (loss) of
investment funds accounted for using the equity method, net of tax
29,050 (9,581 ) Net foreign exchange gains, net of tax
38,855 25,694 Net income available to common
shareholders $ 210,533 $ 139,869 Diluted per
common share results: After-tax operating income available to
common shareholders $ 1.78 $ 2.70 Net realized gains (losses), net
of tax 0.82 (0.14 ) Net impairment losses recognized in earnings,
net of tax (0.03 ) (0.58 ) Equity in net income (loss) of
investment funds accounted for using the equity method, net of tax
0.52 (0.15 ) Net foreign exchange gains, net of tax 0.70
0.41 Net income available to common
shareholders $ 3.79 $ 2.24 Weighted average
common shares and common share equivalents outstanding – diluted
55,513,827 62,559,969
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. For the 2010 first quarter, the
combined ratio of the Company’s insurance and reinsurance
subsidiaries consisted of a loss ratio of 63.9% and an underwriting
expense ratio of 32.5%, compared to a loss ratio of 57.2% and an
underwriting expense ratio of 29.5% for the 2009 first quarter. The
loss ratio of 63.9% for the 2010 first quarter was comprised of
50.3 points of paid losses, 1.7 points related to reserves for
reported losses and 11.9 points related to incurred but not
reported reserves. The 2010 first quarter loss ratio included
approximately 8.7 points related to current accident year
catastrophic events, primarily related to the Chilean earthquake,
European Windstorm Xynthia and the Australian hailstorms and
floods.
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. 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, 2010. As actual loss information is reported to the
Company and it develops its own loss experience, the Company will
give more emphasis to other actuarial techniques. 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.
The Company’s investment portfolio continues to be comprised
primarily of high quality fixed income securities with an average
credit quality of “AA+”, no direct holdings of collateralized debt
obligations (CDOs), collateralized loan obligations (CLOs) or
credit default swaps (CDSs). The Company’s portfolio does not
include a material amount of common stock or preferred stock of any
publicly-traded issuers or investments in hedge funds or private
equity funds. The average credit quality rating of the portfolio
remained at “AA+” at March 31, 2010 and the average effective
duration was 2.77 years at March 31, 2010, compared to 2.87 years
at December 31, 2009.
Including the effects of foreign exchange, total return on the
Company’s investment portfolio was approximately 1.58% for the 2010
first quarter, compared to 1.09% for the 2009 first quarter.
Excluding foreign exchange, total return was 1.98% for the 2010
first quarter, compared to 1.23% for the 2009 first quarter.
Net investment income for the 2010 first quarter was $93.0
million, or $1.67 per share, compared to $93.6 million, or $1.56
per share, for the 2009 fourth quarter and $95.9 million, or $1.53
per share, for the 2009 first quarter. The comparability of net
investment income between the 2010 and 2009 periods was influenced
by the Company’s share repurchase program described below. The
pre-tax investment income yield was 3.41% for the 2010 first
quarter, compared to 3.45% for the 2009 fourth quarter and 3.82%
for the 2009 first quarter, reflecting the lower prevailing
interest rates available in the market.
Investment funds accounted for using the equity method, which
are primarily related to the Company’s investments in bank loan
funds, totaled $405.6 million at March 31, 2010, compared to $391.9
million at December 31, 2009. The Company recorded $29.1 million of
net income related to investment funds accounted for using the
equity method for the 2010 first quarter, compared to net losses of
$9.6 million for the 2009 first quarter.
Consolidated cash flow provided by operating activities for the
2010 first quarter was $184.6 million, compared to $294.8 million
for the 2009 first quarter. Comparability between the two periods
was affected by an unearned premium portfolio transfer which
lowered the 2010 first quarter cash flow by $15 million but
increased 2009 first quarter cash flow by $25 million. The
remaining decline in cash flow in the 2010 first quarter reflected
a lower level of premium collections and an increase in paid losses
as the Company’s insurance and reinsurance loss reserves continue
to mature.
For the 2010 first quarter, the Company’s effective tax rates on
income before income taxes and pre-tax operating income were 3.0%
and 4.3%, respectively, compared to 6.1% and 3.3%, respectively,
for the 2009 first quarter. 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 currently expects that its annual
effective tax rate on pre-tax operating income available to common
shareholders for the year ended December 31, 2010 will be in the
range of 3.0% to 5.0%. In addition, the Company’s Bermuda-based
reinsurer incurs federal excise taxes for premiums assumed on U.S.
risks. The Company incurred $3.0 million of federal excise taxes in
the 2010 first quarter, compared to $3.3 million in the 2009 first
quarter. Such amounts are reflected as acquisition expenses in the
Company’s consolidated statements of income.
Net foreign exchange gains for the 2010 first quarter of $38.6
million consisted of net unrealized gains of $37.9 million and net
realized gains of $0.7 million, compared to net foreign exchange
gains for the 2009 first quarter of $25.2 million which consisted
of net unrealized gains of $25.9 million and net realized losses of
$0.7 million. The 2010 first quarter net foreign exchange gains
primarily resulted from the strengthening of the U.S. Dollar
against the Euro and British Pound during the period. 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.
Historically, the Company has held 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 consolidated
statements of income. As a result of the current financial and
economic environment as well as the potential for additional
investment returns, the Company may not match a portion of its
projected liabilities in foreign currencies with investments in the
same currencies, which could increase the Company’s exposure to
foreign currency fluctuations and increase the volatility in the
Company’s shareholders’ equity.
In November 2009, the board of directors of ACGL authorized the
Company to invest up to an additional $1.0 billion in ACGL’s common
shares through the share repurchase program. Repurchases under the
program may be effected from time to time in open market or
privately negotiated transactions through December 2011. During the
2010 first quarter, the Company repurchased 2.5 million common
shares for an aggregate purchase price of $181.3 million. Since the
inception of the share repurchase program through March 31, 2010,
ACGL has repurchased 24.5 million common shares for an aggregate
purchase price of $1.69 billion. At March 31, 2010, $810.1 million
of repurchases were available under the share repurchase
program.
At March 31, 2010, the Company’s capital of $4.78 billion
consisted of $300.0 million of senior notes, representing 6.3% of
the total, $100.0 million of revolving credit agreement borrowings
due in August 2011, representing 2.1% of the total, $325.0 million
of preferred shares, representing 6.8% of the total, and common
shareholders’ equity of $4.05 billion, representing the balance. At
December 31, 2009, the Company’s capital of $4.72 billion consisted
of $300.0 million of senior notes, representing 6.4% of the total,
$100.0 million of revolving credit agreement borrowings due in
August 2011, representing 2.1% of the total, $325.0 million of
preferred shares, representing 6.9% of the total, and common
shareholders’ equity of $4.0 billion, representing the balance.
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on Tuesday, April 27, 2010. A
live webcast of this call will be available via the Investor
Relations – Events & Presentations section of the Company's
website at http://www.archcapgroup.bm. A telephone replay of the
conference call also will be available beginning on April 27 at
2:00 p.m. Eastern Time until May 4, 2010 at midnight Eastern Time.
To access the replay, domestic callers should dial 888-286-8010
(passcode 52643811), and international callers should dial
617-801-6888 (passcode 52643811).
Please refer to the Company’s Financial Supplement dated March
31, 2010, which is posted on the Company’s website at
http://www.archcapgroup.bm/EarningsReleases.aspx. The Financial
Supplement provides additional detail regarding the financial
performance of the Company. From time to time, the Company posts
additional financial information and presentations to its website,
including information with respect to its subsidiaries. Investors
and other recipients of this information are encouraged to check
the Company’s website regularly, including the Investor Relations —
Events & Presentations section of the Company’s website at
http://www.archcapgroup.bm/presentations.aspx for additional
information regarding the Company.
Arch Capital Group Ltd., a Bermuda-based company with
approximately $4.78 billion in capital at March 31, 2010, 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 future or 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;
- developments in the world’s
financial and capital markets and the Company’s access to such
markets;
- 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, 2010;
- 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, including legislative or regulatory developments that
may adversely affect the market value of the Company’s
investments;
- 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 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.
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, net impairment losses included in
earnings, 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, net
impairment losses included in earnings, 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, net
impairment losses included in earnings, 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 net impairment 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. In addition, net impairment losses included
in earnings on the Company’s investments represent
other-than-temporary declines in expected recovery values on
securities 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 March 31, December
31, (U.S. dollars in thousands, except share data)
2010
2009 Calculation of book value per common share:
Total shareholders’ equity $ 4,378,757 $ 4,323,349 Less preferred
shareholders’ equity (325,000 ) (325,000 ) Common
shareholders’ equity $ 4,053,757 $ 3,998,349 Common shares
outstanding (1) 52,709,934 54,761,678
Book value per common share $ 76.91 $ 73.01
(1) Excludes the effects of 4,595,975 and 5,016,104 stock
options and 258,213 and 261,012 restricted stock units outstanding
at March 31, 2010 and December 31, 2009, respectively.
Share Repurchase Activity
Three Months Ended Cumulative March 31,
March 31, (U.S. dollars in thousands, except share data)
2010 2009 2010 Effect of share
repurchases: Aggregate cost of shares repurchased $ 181,272 $ 1,552
$ 1,689,869 Shares repurchased 2,529,913 33,305
24,501,025 Average price per share repurchased $ 71.65 $
46.60 $ 68.97 Estimated net accretive impact on ending book value
per common share (1) $ 0.25 $ 0.01 $ 2.52 Estimated net accretive
impact on diluted earnings per share (2) $ 0.36 $ 0.40
(1) As the average price per share repurchased during the 2010
and 2009 periods and cumulative through March 31, 2010 was lower
than the ending book value per common share, the repurchase of
shares increased ending book value per common share.
(2) The estimated impact on diluted earnings per share was
calculated comparing reported results versus (i) net income (loss)
per share plus an estimate of lost net investment income on the
cumulative share repurchases divided by (ii) weighted average
diluted shares outstanding excluding the weighted average impact of
cumulative share repurchases. The impact of cumulative share
repurchases was accretive to diluted earnings per share in the
periods presented.
Investment Information Three Months
Ended March 31, (U.S. dollars in thousands, except share
data)
2010 2009 Components of net
investment income: Fixed maturities and short-term investments
$ 97,891 $ 98,198 Securities lending transactions 67 1,018 Other
418 547 Gross investment income 98,376
99,763 Investment expense (5,404 ) (3,881 ) Net
investment income $ 92,972 $ 95,882 Per share
$ 1.67 $ 1.53
Investment income yield (at amortized
cost): Pre-tax 3.41 % 3.82 % After-tax 3.30 % 3.70 %
Cash flow from operations $ 184,623 $ 294,803
March
31, December 31, (U.S. dollars in thousands)
2010
2009 Investable assets: Fixed maturities
available for sale, at market value $ 9,295,680 $ 9,391,926 Fixed
maturities pledged under securities lending agreements, at market
value (1) 181,871 208,826 Total fixed
maturities 9,477,551 9,600,752 Short-term investments available for
sale, at market value 669,798 571,490 Short-term investments
pledged under securities lending agreements, at market value (1)
2,350 3,993 Cash 338,708 334,571 TALF investments, at market value
(2) 406,997 250,265 Other investments Fixed income mutual funds
70,204 63,146 Privately held securities and other 193,404 109,027
Investment funds accounted for using the equity method (3) 405,584
391,869 Securities transactions entered into but not settled at the
balance sheet date (2,444 ) 50,790 Total
investable assets (1) $ 11,562,152 $ 11,375,903
Fixed income portfolio (1): Average effective
duration (in years) 2.77 2.87 Average credit quality AA+ AA+
Imbedded book yield (before investment expenses) 3.57 % 3.64 %
(1) This table excludes the collateral received and reinvested
in fixed maturities, short term investments and securities
purchased under agreements to resell, and includes the fixed
maturities and short-term investments pledged under securities
lending agreements, at market value.
(2) The Federal Reserve's Term Asset-Backed Securities Loan
Facility ("TALF") provides secured financing for certain
asset-backed securities and legacy commercial mortgage-backed
securities. TALF financing is non-recourse to the Company, is
collateralized by the purchased securities and provides financing
for the purchase price of the securities, less a 'haircut' that
varies based on the type of collateral. The Company can deliver the
collateralized securities to the Federal Reserve in full defeasance
of the loan.
(3) Changes in the carrying value of investments accounted for
using the equity method 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.
Selected Information on Losses and Loss Adjustment Expenses
Three Months Ended March 31,
(U.S. dollars in thousands)
2010 2009
Components of losses and loss adjustment expenses incurred
Paid losses and loss adjustment expenses $ 336,662 $ 318,541
Increase in unpaid losses and loss adjustment expenses
91,389 82,001 Total losses and loss adjustment
expenses $ 428,051 $ 400,542
Estimated net
(favorable) adverse development in prior year loss reserves,
net of related adjustments Net impact on underwriting
results: Insurance $ 6,406 $ (8,178 ) Reinsurance (36,097 )
(39,693 ) Total $ (29,691 ) $ (47,871 ) Impact on
losses and loss adjustment expenses: Insurance $ 3,830 $ (9,126 )
Reinsurance (36,504 ) (42,016 ) Total $ (32,674 ) $
(51,142 ) Impact on acquisition expenses: Insurance $ 2,576
$ 948 Reinsurance 407 2,323 Total $
2,983 $ 3,271 Impact on combined ratio:
Insurance 1.5 % (2.0 %) Reinsurance (15.0 %) (13.3 %) Total (4.4 %)
(6.8 %) Impact on loss ratio: Insurance 0.9 % (2.3 %)
Reinsurance (15.2 %) (14.0 %) Total (4.9 %) (7.3 %) Impact
on acquisition expense ratio: Insurance 0.6 % 0.3 % Reinsurance 0.2
% 0.7 % Total 0.5 % 0.5 %
Estimated net losses incurred
from current accident year catastrophic events (1) Insurance $
23,962 $ - Reinsurance 34,133 8,012
Total $ 58,095 $ 8,012 Impact on loss ratio:
Insurance 5.6 % 0.0 % Reinsurance 14.2 % 2.7 % Total 8.7 % 1.1 %
(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 and Europe operations and (ii) all catastrophe losses
incurred by its U.S. operations.
Segment Information
For additional details regarding the Company’s operating
segments, please refer to the Company’s Financial Supplement dated
March 31, 2010 on the Company’s website at
http://www.archcapgroup.bm/EarningsReleases.aspx.
Discussion of 2010 First Quarter Performance Insurance
Segment Three Months Ended March 31, (U.S.
dollars in thousands)
2010 2009 Gross
premiums written $ 633,576 $ 638,409 Net premiums written 452,924
441,586 Net premiums earned 429,477 401,097 Underwriting income
(loss) (29,932 ) 11,421 Loss ratio 72.6 % 67.3 % Acquisition
expense ratio 15.5 % 14.1 % Other operating expense ratio
18.8 % 15.7 % Combined ratio 106.9 % 97.1 %
Catastrophic activity and prior year development: Current
accident year catastrophic events 5.6 % 0.0 % Net (favorable)
adverse development in prior year loss reserves, net of related
adjustments 1.5 % (2.0 %) Combined ratio excluding
such items 99.8 % 99.1 %
Gross premiums written by the insurance segment in the 2010
first quarter were 0.8% lower than in the 2009 first quarter as
reductions in commercial aviation and casualty lines of business
were partially offset by increases in executive assurance and
professional liability business. The reduction in commercial
aviation business primarily resulted from a strategic decision to
reduce exposure while the lower level of casualty business was due
to underwriting actions relating to the current market environment.
Growth in executive assurance and professional liability business
primarily resulted from contributions from business written by the
insurance segment’s European operations.
Net premiums written increased 2.6%, reflecting changes in the
mix of business, reinstatement premiums and the impact of changes
in reinsurance structure. Net premiums earned by the insurance
segment in the 2010 first quarter were 7.1% higher than in the 2009
first quarter, and reflect changes in net premiums written over the
previous five quarters.
The 2010 first quarter loss ratio included 5.6 points for
significant current year catastrophic event activity, primarily
from the Chilean earthquake in February 2010, while the 2009 first
quarter did not include any significant catastrophic activity.
Estimated net adverse development, before related adjustments,
increased the loss ratio by 0.9 points in the 2010 first quarter,
compared to 2.3 points of estimated net favorable development in
the 2009 first quarter. The 2010 first quarter reflected adverse
development in a small number of high severity casualty claims from
the 2003 and 2004 accident years, partially offset by favorable
development in short-tail lines which primarily reflected better
than expected claims emergence from the 2007 and 2008 accident
years. In addition, the 2010 first quarter loss ratio benefitted
from a higher contribution of property net premiums earned to the
mix of business than in the 2009 first quarter.
The underwriting expense ratio was 34.3% in the 2010 first
quarter, compared to 29.8% in the 2009 first quarter. The
acquisition expense ratio reflects changes in the form of
reinsurance ceded and mix of business compared to the 2009 first
quarter. The other operating expense ratio for the 2010 first
quarter included 1.4 points of costs incurred which are not
currently expected to impact the insurance segment’s operating
expense ratio for the balance of 2010 while the 2009 first quarter
ratio benefitted from 1.6 points of reductions in compensation
costs which were non-recurring.
Reinsurance Segment Three Months Ended
March 31, (U.S. dollars in thousands)
2010
2009 Gross premiums written $ 323,477 $ 390,129 Net
premiums written 314,830 381,277 Net premiums earned 240,440
299,467 Underwriting income 53,850 81,968 Loss ratio 48.3 %
43.6 % Acquisition expense ratio 20.9 % 23.0 % Other operating
expense ratio 8.5 % 6.1 % Combined ratio 77.7 % 72.7 %
Catastrophic activity and prior year development: Current accident
year catastrophic events 14.2 % 2.7 % Net (favorable) adverse
development in prior year loss reserves, net of related adjustments
(15.0 %) (13.3 %) Combined ratio excluding such items 78.5 % 83.3 %
Gross premiums written by the reinsurance segment in the 2010
first quarter were 17.1% lower than in the 2009 first quarter,
primarily due to share decreases and non-renewals in property other
than property catastrophe business and casualty business, partially
offset by growth in the reinsurance segment’s other specialty
lines. Net premiums written by the reinsurance segment in the 2010
first quarter were 17.4% lower than in the 2009 first quarter,
primarily due to the items noted above. Net premiums earned in the
2010 first quarter were 19.7% lower than in the 2009 first quarter,
and reflect changes in net premiums written over the previous five
quarters, including the mix and type of business written.
The 2010 first quarter loss ratio included 14.2 points related
to current year catastrophic activity, compared to 2.7 points in
the 2009 first quarter. Specific 2010 first quarter catastrophic
events included the Chilean earthquake, European Windstorm Xynthia
and the Australian hailstorms and floods. Estimated net favorable
development, before related adjustments, reduced the loss ratio by
15.2 points in the 2010 first quarter, compared to 14.0 points in
the 2009 first quarter. The estimated net favorable development in
the 2010 first quarter primarily resulted from better than expected
claims emergence in property and other short-tail lines, primarily
from the 2007 to 2009 underwriting years. The reinsurance segment’s
2010 first quarter loss ratio also reflected an increase of the
underwriting profit in its property facultative operations while
the 2009 first quarter loss ratio included 1.2 points of losses
related to trade credit business.
The underwriting expense ratio was 29.4% in the 2010 first
quarter, compared to 29.1% in the 2009 first quarter. The
acquisition expense ratio for the 2010 first quarter was 20.9%,
compared to 23.0% for the 2009 first quarter. The comparison of the
2010 first quarter and 2009 first quarter acquisition expense
ratios is influenced by, among other things, the mix and type of
business written and earned and the level of ceding commission
income. The increase in the other operating expense ratio primarily
resulted from the lower level of net premiums earned in the 2010
first quarter.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF INCOME (U.S. dollars in thousands, except
share data) (Unaudited) Three Months Ended
March 31, 2010 2009 Revenues Net
premiums written $ 767,754 $ 822,863 Increase in unearned premiums
(97,837 ) (122,299 ) Net premiums earned 669,917
700,564 Net investment income 92,972 95,882 Net realized gains
(losses) 47,782 (5,164 ) Other-than-temporary impairment
losses (2,336 ) (97,422 ) Less investment impairments recognized in
other comprehensive income, before taxes 730
61,288 Net impairment losses recognized in earnings (1,606 )
(36,134 ) Fee income 794 925 Equity in net income (loss) of
investment funds accounted for using the equity method 29,050
(9,581 ) Other income 5,978 3,951 Total
revenues 844,887 750,443
Expenses Losses and loss adjustment expenses 428,051 400,542
Acquisition expenses 117,624 126,458 Other operating expenses
106,806 87,116 Interest expense 7,260 5,712 Net foreign exchange
gains (38,601 ) (25,205 ) Total expenses
621,140 594,623 Income before income
taxes 223,747 155,820 Income tax expense 6,753
9,490 Net Income 216,994 146,330
Preferred dividends 6,461 6,461
Net income available to common shareholders $ 210,533 $
139,869
Net income per common share Basic $
3.97 $ 2.32 Diluted $ 3.79 $ 2.24
Weighted average common
shares and common share equivalents outstanding Basic
53,039,026 60,313,550 Diluted 55,513,827 62,559,969
ARCH CAPITAL
GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
(Unaudited) March 31, December 31, 2010
2009 Assets Investments: Fixed maturities available
for sale, at market value (amortized cost: 2010, $9,129,065; 2009,
$9,227,432) $ 9,295,680 $ 9,391,926 Short-term investments
available for sale, at market value (amortized cost: 2010,
$671,902; 2009, $570,469) 669,798 571,489 Investment of funds
received under securities lending agreements, at market value
(amortized cost: 2010, $182,338; 2009, $96,590) 177,954 91,160 TALF
investments, at market value (amortized cost: 2010, $400,347; 2009,
$247,192) 406,997 250,265 Other investments (cost: 2010, $251,917;
2009, $162,505) 263,608 172,172 Investment funds accounted for
using the equity method 405,584 391,869 Total
investments 11,219,621 10,868,881 Cash 338,708 334,571
Accrued investment income 74,214 70,673 Investment in joint venture
(cost: $100,000) 102,946 102,855 Fixed maturities and short-term
investments pledged under securities lending agreements, at market
value 184,221 212,820 Securities purchased under agreements to
resell using funds received under securities lending agreements -
115,839 Premiums receivable 699,385 595,030 Unpaid losses and loss
adjustment expenses recoverable 1,643,573 1,659,500 Paid losses and
loss adjustment expenses recoverable 67,734 60,770 Prepaid
reinsurance premiums 250,841 277,985 Deferred acquisition costs,
net 298,371 280,372 Receivable for securities sold 1,427,085
187,171 Other assets 628,407 609,323 Total Assets $
16,935,106 $ 15,375,790
Liabilities Reserve for
losses and loss adjustment expenses $ 7,898,162 $ 7,873,412
Unearned premiums 1,495,265 1,433,331 Reinsurance balances payable
114,254 156,500 Senior notes 300,000 300,000 Revolving credit
agreement borrowings 100,000 100,000 TALF borrowings, at market
value (par: 2010, $346,950; 2009, $218,740) 346,746 217,565
Securities lending payable 189,024 219,116 Payable for securities
purchased 1,429,529 136,381 Other liabilities 683,369
616,136 Total Liabilities 12,556,349 11,052,441
Commitments and Contingencies Shareholders’
Equity Non-cumulative preferred shares ($0.01 par, issued and
outstanding: 13,000,000) 130 130 Common shares ($0.01 par, issued
and outstanding: 2010, 52,709,934; 2009, 54,761,678) 527 548
Additional paid-in capital 420,796 578,336 Retained earnings
3,816,342 3,605,809 Accumulated other comprehensive income, net of
deferred income tax 140,962 138,526 Total
Shareholders’ Equity 4,378,757 4,323,349 Total
Liabilities and Shareholders’ Equity $ 16,935,106 $ 15,375,790
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