Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
Or
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
file number: 001-26456
ARCH CAPITAL GROUP LTD.
(Exact name of registrant as specified in its
charter)
Bermuda
(State or other jurisdiction of incorporation
or organization)
Not Applicable
(I.R.S. Employer Identification No.)
Wessex House, 45 Reid Street
Hamilton HM 12, Bermuda
(Address of principal executive offices)
(441) 278-9250
(Registrants telephone number, including
area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
The number of the registrants common shares (par value, $0.01 per
share) outstanding as of July 30, 2010 was 49,676,650.
Table of
Contents
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders of
Arch
Capital Group Ltd.:
We
have reviewed the accompanying consolidated balance sheet of Arch Capital Group
Ltd. and its subsidiaries (the Company) as of June 30, 2010, and the
related consolidated statements of income for the three-month and six-month
periods ended June 30, 2010 and June 30, 2009, and the consolidated
statements of changes in shareholders equity, comprehensive income and cash
flows for each of the six-month periods ended June 30, 2010 and June 30,
2009. These interim financial statements
are the responsibility of the Companys management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States).
A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for
financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole.
Accordingly, we do not express such an opinion.
Based
on our review, we are not aware of any material modifications that should be
made to the accompanying consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as
of December 31, 2009, and the related consolidated statements of income,
changes in shareholders equity, comprehensive income, and of cash flows for
the year then ended (not presented herein), and in our report dated February 26,
2010, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet information
as of December 31, 2009, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/
PricewaterhouseCoopers LLP
New York, NY
August 5,
2010
2
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
|
|
(Unaudited)
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Assets
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
Fixed maturities available for sale, at market
value (amortized cost: $9,214,640 and $9,227,432)
|
|
$
|
9,428,456
|
|
$
|
9,391,926
|
|
Short-term investments available for sale, at
market value (amortized cost: $558,283 and $570,469)
|
|
554,304
|
|
571,489
|
|
Investment of funds received under securities
lending agreements, at market value (amortized cost: $211,456 and $96,590)
|
|
209,635
|
|
91,160
|
|
TALF investments, at market value (amortized cost:
$396,499 and $247,192)
|
|
407,469
|
|
250,265
|
|
Other investments (cost: $337,141 and $162,505)
|
|
340,598
|
|
172,172
|
|
Investment funds accounted for using the equity
method
|
|
408,402
|
|
391,869
|
|
Total investments
|
|
11,348,864
|
|
10,868,881
|
|
|
|
|
|
|
|
Cash
|
|
341,469
|
|
334,571
|
|
Accrued investment income
|
|
72,102
|
|
70,673
|
|
Investment in joint venture (cost: $100,000)
|
|
103,540
|
|
102,855
|
|
Fixed maturities and short-term investments
pledged under securities lending agreements, at market value
|
|
214,564
|
|
212,820
|
|
Securities purchased under agreements to resell
using funds received under securities lending agreements
|
|
|
|
115,839
|
|
Premiums receivable
|
|
706,503
|
|
595,030
|
|
Unpaid losses and loss adjustment expenses
recoverable
|
|
1,673,911
|
|
1,659,500
|
|
Paid losses and loss adjustment expenses
recoverable
|
|
47,148
|
|
60,770
|
|
Prepaid reinsurance premiums
|
|
256,952
|
|
277,985
|
|
Deferred acquisition costs, net
|
|
293,982
|
|
280,372
|
|
Receivable for securities sold
|
|
1,084,122
|
|
187,171
|
|
Other assets
|
|
634,242
|
|
609,323
|
|
Total Assets
|
|
$
|
16,777,399
|
|
$
|
15,375,790
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
|
$
|
7,940,104
|
|
$
|
7,873,412
|
|
Unearned premiums
|
|
1,492,550
|
|
1,433,331
|
|
Reinsurance balances payable
|
|
128,723
|
|
156,500
|
|
Senior notes
|
|
300,000
|
|
300,000
|
|
Revolving credit agreement borrowings
|
|
125,000
|
|
100,000
|
|
TALF borrowings, at market value (par: $337,937
and $218,740)
|
|
336,213
|
|
217,565
|
|
Securities lending payable
|
|
219,796
|
|
219,116
|
|
Payable for securities purchased
|
|
1,192,181
|
|
136,381
|
|
Other liabilities
|
|
644,829
|
|
616,136
|
|
Total Liabilities
|
|
12,379,396
|
|
11,052,441
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
Non-cumulative preferred shares - Series A
and B
|
|
325,000
|
|
325,000
|
|
Common shares ($0.01 par, shares issued:
52,864,928 and 54,761,678)
|
|
529
|
|
548
|
|
Additional paid-in capital
|
|
83,828
|
|
253,466
|
|
Retained earnings
|
|
4,053,332
|
|
3,605,809
|
|
Accumulated other comprehensive income, net of
deferred income tax
|
|
173,231
|
|
138,526
|
|
Common shares held in treasury, at cost (shares:
3,234,358 and 0)
|
|
(237,917
|
)
|
|
|
Total Shareholders Equity
|
|
4,398,003
|
|
4,323,349
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
16,777,399
|
|
$
|
15,375,790
|
|
See Notes to Consolidated Financial Statements
3
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
624,258
|
|
$
|
693,854
|
|
$
|
1,392,012
|
|
$
|
1,516,717
|
|
Change in unearned premiums
|
|
(1,247
|
)
|
5,404
|
|
(99,084
|
)
|
(116,895
|
)
|
Net premiums earned
|
|
623,011
|
|
699,258
|
|
1,292,928
|
|
1,399,822
|
|
Net investment income
|
|
90,537
|
|
100,485
|
|
183,509
|
|
196,367
|
|
Net realized gains (losses)
|
|
62,114
|
|
(11,793
|
)
|
109,896
|
|
(16,957
|
)
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment losses
|
|
(4,718
|
)
|
(20,657
|
)
|
(7,054
|
)
|
(113,646
|
)
|
Less investment impairments recognized in other comprehensive
income, before taxes
|
|
308
|
|
(206
|
)
|
1,038
|
|
56,649
|
|
Net impairment losses recognized in earnings
|
|
(4,410
|
)
|
(20,863
|
)
|
(6,016
|
)
|
(56,997
|
)
|
|
|
|
|
|
|
|
|
|
|
Fee income
|
|
883
|
|
817
|
|
1,677
|
|
1,742
|
|
Equity in net income (loss) of investment funds
accounted for using the equity method
|
|
(348
|
)
|
75,890
|
|
28,702
|
|
66,309
|
|
Other income
|
|
4,528
|
|
4,950
|
|
10,506
|
|
8,901
|
|
Total revenues
|
|
776,315
|
|
848,744
|
|
1,621,202
|
|
1,599,187
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
363,145
|
|
398,858
|
|
791,196
|
|
799,400
|
|
Acquisition expenses
|
|
107,475
|
|
123,814
|
|
225,099
|
|
250,272
|
|
Other operating expenses
|
|
101,533
|
|
99,294
|
|
208,339
|
|
186,410
|
|
Interest expense
|
|
7,916
|
|
5,712
|
|
15,176
|
|
11,424
|
|
Net foreign exchange (gains) losses
|
|
(48,625
|
)
|
53,658
|
|
(87,226
|
)
|
28,453
|
|
Total expenses
|
|
531,444
|
|
681,336
|
|
1,152,584
|
|
1,275,959
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
244,871
|
|
167,408
|
|
468,618
|
|
323,228
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
1,420
|
|
8,818
|
|
8,173
|
|
18,308
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
243,451
|
|
158,590
|
|
460,445
|
|
304,920
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
|
6,461
|
|
6,461
|
|
12,922
|
|
12,922
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
236,990
|
|
$
|
152,129
|
|
$
|
447,523
|
|
$
|
291,998
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.65
|
|
$
|
2.52
|
|
$
|
8.60
|
|
$
|
4.84
|
|
Diluted
|
|
$
|
4.45
|
|
$
|
2.43
|
|
$
|
8.23
|
|
$
|
4.67
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
and common share
equivalents outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
50,987,540
|
|
60,417,391
|
|
52,007,616
|
|
60,365,758
|
|
Diluted
|
|
53,265,303
|
|
62,626,317
|
|
54,386,690
|
|
62,589,856
|
|
See Notes to Consolidated Financial Statements
4
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(U.S. dollars in thousands)
|
|
(Unaudited)
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
Non-Cumulative Preferred Shares
|
|
|
|
|
|
Balance at beginning and end of period
|
|
$
|
325,000
|
|
$
|
325,000
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
Balance at beginning of year
|
|
548
|
|
605
|
|
Common shares issued, net
|
|
11
|
|
5
|
|
Purchases of common shares under share repurchase
program
|
|
(30
|
)
|
(0
|
)
|
Balance at end of period
|
|
529
|
|
610
|
|
|
|
|
|
|
|
Additional Paid-in Capital
|
|
|
|
|
|
Balance at beginning of year
|
|
253,466
|
|
669,715
|
|
Common shares issued
|
|
3,289
|
|
2,557
|
|
Exercise of stock options
|
|
24,664
|
|
1,233
|
|
Common shares retired
|
|
(217,562
|
)
|
(6,243
|
)
|
Amortization of share-based compensation
|
|
19,376
|
|
14,267
|
|
Other
|
|
595
|
|
(84
|
)
|
Balance at end of period
|
|
83,828
|
|
681,445
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
Balance at beginning of year
|
|
3,605,809
|
|
2,693,239
|
|
Cumulative effect of change in accounting
principle (1)
|
|
|
|
61,469
|
|
Balance at beginning of year, as adjusted
|
|
3,605,809
|
|
2,754,708
|
|
Dividends declared on preferred shares
|
|
(12,922
|
)
|
(12,922
|
)
|
Net income
|
|
460,445
|
|
304,920
|
|
Balance at end of period
|
|
4,053,332
|
|
3,046,706
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive
Income (Loss)
|
|
|
|
|
|
Balance at beginning of year
|
|
138,526
|
|
(255,594
|
)
|
Cumulative effect of change in accounting
principle (1)
|
|
|
|
(61,469
|
)
|
Balance at beginning of year, as adjusted
|
|
138,526
|
|
(317,063
|
)
|
Change in unrealized appreciation in value of
investments, net of deferred income tax
|
|
43,716
|
|
360,865
|
|
Portion of other-than-temporary impairment losses
recognized in other comprehensive income, net of deferred income tax
|
|
(1,038
|
)
|
(77,806
|
)
|
Foreign currency translation adjustments, net of
deferred income tax
|
|
(7,973
|
)
|
10,211
|
|
Balance at end of period
|
|
173,231
|
|
(23,793
|
)
|
|
|
|
|
|
|
Common Shares Held in Treasury,
at Cost
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
Shares repurchased for treasury
|
|
(237,917
|
)
|
|
|
Balance at end of period
|
|
(237,917
|
)
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
$
|
4,398,003
|
|
$
|
4,029,968
|
|
(1) Adoption of accounting guidance regarding the recognition and
presentation of other-than-temporary impairments.
See Notes to Consolidated Financial Statements
5
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
|
|
(Unaudited)
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
Comprehensive Income
|
|
|
|
|
|
Net income
|
|
$
|
460,445
|
|
$
|
304,920
|
|
Other comprehensive income, net of deferred income
tax
|
|
|
|
|
|
Unrealized appreciation in value of investments:
|
|
|
|
|
|
Unrealized holding gains arising during period
|
|
113,934
|
|
282,405
|
|
Portion of other-than-temporary impairment losses
recognized in other comprehensive income, net of deferred income tax
|
|
(1,038
|
)
|
(77,806
|
)
|
Reclassification of net realized (gains) losses,
net of income taxes, included in net income
|
|
(70,218
|
)
|
78,460
|
|
Foreign currency translation adjustments
|
|
(7,973
|
)
|
10,211
|
|
Other comprehensive income
|
|
34,705
|
|
293,270
|
|
Comprehensive Income
|
|
$
|
495,150
|
|
$
|
598,190
|
|
See Notes to Consolidated Financial Statements
6
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(U.S. dollars in thousands)
|
|
(Unaudited)
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
Operating Activities
|
|
|
|
|
|
Net income
|
|
$
|
460,445
|
|
$
|
304,920
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Net realized (gains) losses
|
|
(111,889
|
)
|
17,451
|
|
Net impairment losses recognized in earnings
|
|
6,016
|
|
56,997
|
|
Equity in net (income) loss of investment funds
accounted for using the equity method and other income
|
|
(18,380
|
)
|
(70,234
|
)
|
Share-based compensation
|
|
19,376
|
|
14,267
|
|
Changes in:
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses, net
of unpaid losses and loss adjustment expenses recoverable
|
|
162,604
|
|
88,914
|
|
Unearned premiums, net of prepaid reinsurance
premiums
|
|
96,881
|
|
116,092
|
|
Premiums receivable
|
|
(136,851
|
)
|
(95,693
|
)
|
Deferred acquisition costs, net
|
|
(17,617
|
)
|
(10,420
|
)
|
Reinsurance balances payable
|
|
(17,402
|
)
|
17,465
|
|
Other liabilities
|
|
(15,771
|
)
|
7,991
|
|
Other items, net
|
|
(37,275
|
)
|
70,795
|
|
Net Cash Provided By Operating Activities
|
|
390,137
|
|
518,545
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
Fixed maturity investments
|
|
(9,483,319
|
)
|
(9,373,252
|
)
|
Other investments
|
|
(357,460
|
)
|
(32,351
|
)
|
Proceeds from the sales of:
|
|
|
|
|
|
Fixed maturity investments
|
|
9,111,774
|
|
8,657,765
|
|
Other investments
|
|
213,814
|
|
19,794
|
|
Proceeds from redemptions and maturities of fixed
maturity investments
|
|
456,937
|
|
377,034
|
|
Net purchases of short-term investments
|
|
(6,682
|
)
|
(61,105
|
)
|
Change in investment of securities lending
collateral
|
|
(680
|
)
|
179,514
|
|
Purchases of furniture, equipment and other assets
|
|
(7,860
|
)
|
(11,519
|
)
|
Net Cash Used For Investing Activities
|
|
(73,476
|
)
|
(244,120
|
)
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
Purchases of common shares under share repurchase
program
|
|
(450,326
|
)
|
(1,552
|
)
|
Proceeds from common shares issued, net
|
|
14,370
|
|
(1,380
|
)
|
Proceeds from borrowings
|
|
264,526
|
|
|
|
Repayments of borrowings
|
|
(120,339
|
)
|
|
|
Change in securities lending collateral
|
|
680
|
|
(179,514
|
)
|
Other
|
|
7,357
|
|
(549
|
)
|
Preferred dividends paid
|
|
(12,922
|
)
|
(12,922
|
)
|
Net Cash Used For Financing Activities
|
|
(296,654
|
)
|
(195,917
|
)
|
|
|
|
|
|
|
Effects of exchange rate changes on foreign
currency cash
|
|
(13,109
|
)
|
6,446
|
|
|
|
|
|
|
|
Increase in cash
|
|
6,898
|
|
84,954
|
|
Cash beginning of year
|
|
334,571
|
|
251,739
|
|
Cash end of period
|
|
$
|
341,469
|
|
$
|
336,693
|
|
See Notes to Consolidated Financial Statements
7
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1.
General
Arch Capital Group Ltd. (ACGL) is a Bermuda public limited liability
company which provides insurance and reinsurance on a worldwide basis through
its wholly owned subsidiaries.
The interim consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
of America (GAAP) and include the accounts of ACGL and its wholly owned
subsidiaries (together with ACGL, the Company). All significant intercompany
transactions and balances have been eliminated in consolidation. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and assumptions. In the opinion of management, the accompanying unaudited
interim consolidated financial statements reflect all adjustments (consisting
of normally recurring accruals) necessary for a fair statement of results on an
interim basis. The results of any interim period are not necessarily indicative
of the results for a full year or any future periods.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted; however, management believes that the disclosures are adequate to make
the information presented not misleading. This report should be read in
conjunction with the Companys Annual Report on Form 10-K for the year
ended December 31, 2009, including the Companys audited consolidated
financial statements and related notes.
The
Company has reclassified the presentation of certain prior year information to
conform to the current presentation. Such reclassifications had no effect on
the Companys net income, shareholders equity or cash flows. Tabular amounts
are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
2.
Recent Accounting Pronouncements
In March 2010,
the Financial
Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that clarifies the type of embedded credit
derivative that is exempt from embedded derivative bifurcation requirements.
Only one form of embedded credit derivative qualifies for the exemptionone
that is related only to the subordination of one financial instrument to
another. As a result, entities that have contracts containing an embedded
credit derivative feature in a form other than such subordination may need to
separately account for the embedded credit derivative feature. This ASU is
effective at the beginning of the first fiscal quarter beginning after June 15,
2010. The Company does not expect the adoption of this ASU to have a material
effect on the Companys consolidated financial position or results of
operations.
In January 2010, the FASB issued an ASU to improve disclosure
requirements related to fair value measurements. The ASU requires more robust
disclosures about (i) different classes of assets and liabilities measured
at fair value, (ii) the valuation techniques and inputs to fair value
measurements for both Levels 2 and 3, (iii) the activity within Level 3
fair value measurements (
i.e
., in the
reconciliation for fair value measurements using significant unobservable
inputs activity should be presented on a gross basis), and (iv) the
transfers between Levels 1, 2 and 3, (
i.e
., include
the reasons for significant transfers in and out of Levels 1 and 2 ).The ASU is
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward activity in Level 3 fair value measurements,
which will become effective for fiscal years beginning after December 15,
2010. Accordingly, the Company adopted the appropriate disclosure provisions of
the ASU on January 1, 2010.
8
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3.
Share
Transactions
Share Repurchases
The board of directors of ACGL has authorized the investment of up to
$2.5 billion in ACGLs common shares through a share repurchase program,
consisting of a $1.0 billion authorization in February 2007, a $500
million authorization in May 2008, and a $1.0 billion authorization in November 2009.
Repurchases under the program may be effected from time to time in open market
or privately negotiated transactions through December 2011. Since the
inception of the share repurchase program, ACGL has repurchased 28.1 million
common shares for an aggregate purchase price of $1.96 billion. During the 2010
second quarter, ACGL repurchased 3.6 million common shares for an aggregate
purchase price of $269.1 million, compared to nil during the 2009 second
quarter. During the six months ended June 30, 2010, ACGL repurchased 6.2
million common shares for an aggregate purchase price of $450.3 million,
compared to a de minimis number of shares for an aggregate purchase price of
$1.6 million during the 2009 period.
At June 30, 2010, approximately $541.1 million of share
repurchases were available under the program. 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.
Treasury Shares
In May 2010, ACGLs shareholders approved amendments to the
bye-laws to permit ACGL to hold its own acquired shares as treasury shares in
lieu of cancellation, at the discretion of ACGLs board of directors. From May 5
to June 30, 2010, all repurchases of ACGLs common shares in connection
with the share repurchase plan noted above and other share-based transactions
were held in the treasury under the cost method, and the cost of the common
shares acquired is included in Common shares held in treasury, at cost. Prior to May 5, 2010, such acquisitions
were reflected as a reduction in additional paid-in capital. At June 30,
2010, the Company held 3.2 million shares for an aggregate cost of $237.9
million in treasury, at cost.
Non-Cumulative Preferred Shares
ACGLs outstanding non-cumulative preferred shares consist of $200.0
million principal amount of 8.0% series A non-cumulative preferred shares (Series A
Preferred Shares) and $125.0 million principal amount of 7.875% series B
non-cumulative preferred shares (Series B Preferred Shares and together
with the Series A Preferred Shares, the Preferred Shares). ACGL has the
right to redeem all or a portion of each series of Preferred Shares at a
redemption price of $25.00 per share on or after (1) February 1, 2011
for the Series A Preferred Shares and (2) May 15, 2011 for the Series B
Preferred Shares. During the six month periods ended June 30, 2010 and
2009, the Company paid $12.9 million to holders of the Preferred Shares. At June 30,
2010, the Company had declared an aggregate of $3.3 million of dividends to be
paid to holders of the Preferred Shares.
Share-Based Compensation
During
the 2010 second quarter, the Company made a stock grant of 288,319 stock
appreciation rights and stock options and 298,655 restricted shares and units
to certain employees. The stock appreciation rights and stock options were
valued at the grant date using the Black-Scholes option pricing model. The
weighted average grant-date fair value of the stock appreciation rights and
options and restricted shares and units granted during the 2010 second quarter
were approximately $22.97 and $75.03 per share, respectively. During the 2009
second quarter, the Company made a stock grant of 367,825 stock appreciation
rights and stock options and 361,075 restricted shares and units to certain
employees. The weighted average grant-date fair value of the stock
9
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
appreciation
rights and options and restricted shares and units granted during the 2009
second quarter were approximately $17.64 and $57.63 per share, respectively.
Such values are being amortized over the respective substantive vesting period.
For awards granted to retirement-eligible employees where no service is
required for the employee to retain the award, the grant date fair value is
immediately recognized as compensation expense at the grant date because the
employee is able to retain the award without continuing to provide service. For
employees near retirement eligibility, attribution of compensation cost is over
the period from the grant date to the retirement eligibility date.
4.
Debt and Financing Arrangements
Senior Notes
On May 4, 2004, ACGL completed a public offering of $300 million
principal amount of 7.35% senior notes (Senior Notes) due May 1, 2034
and received net proceeds of $296.4 million. ACGL used $200 million of the net
proceeds to repay all amounts outstanding under a revolving credit agreement.
The Senior Notes are ACGLs senior unsecured obligations and rank equally with
all of its existing and future senior unsecured indebtedness. Interest payments
on the Senior Notes are due on May 1st and November 1st of each year.
ACGL may redeem the Senior Notes at any time and from time to time, in whole or
in part, at a make-whole redemption price. For the six month periods ended June 30,
2010 and 2009, interest expense on the Senior Notes was $11.0 million. The
market value of the Senior Notes at June 30, 2010 and December 31,
2009 was $312.4 million and $298.6 million, respectively.
Letter of Credit and Revolving Credit Facilities
As of June 30, 2010, the Company had a $300 million unsecured
revolving loan and letter of credit facility and a $1.0 billion secured letter
of credit facility (the Credit Agreement). Under the terms of the agreement,
Arch Reinsurance Company (Arch Re U.S.) is limited to issuing $100 million of
unsecured letters of credit as part of the $300 million unsecured revolving
loan. Borrowings of revolving loans may be made by ACGL and Arch Re U.S. at a
variable rate based on LIBOR or an alternative base rate at the option of the
Company. Secured letters of credit are available for issuance on behalf of the
Companys insurance and reinsurance subsidiaries. The Credit Agreement and
related documents are structured such that each party that requests a letter of
credit or borrowing does so only for itself and for only its own obligations.
Issuance of letters of credit and borrowings under the Credit Agreement are
subject to the Companys compliance with certain covenants and conditions,
including absence of a material adverse change. These covenants require, among
other things, that the Company maintain a debt to total capital ratio of not
greater than 0.35 to 1 and shareholders equity in excess of $1.95 billion plus
25% of future aggregate net income for each quarterly period (not including any
future net losses) beginning after June 30, 2006 and 25% of future
aggregate proceeds from the issuance of common or preferred equity and that the
Companys principal insurance and reinsurance subsidiaries maintain at least a B++
rating from A.M. Best. In addition, certain of the Companys subsidiaries
which are party to the Credit Agreement are required to maintain minimum
shareholders equity levels. The Company was in compliance with all covenants
contained in the Credit Agreement at June 30, 2010. The Credit Agreement
expires on August 30, 2011.
Including the secured letter of credit portion of the Credit Agreement,
the Company has access to letter of credit facilities for up to a total of
$1.45 billion. Arch Reinsurance Ltd. (Arch Re Bermuda) also has access to
other letter of credit facilities, some of which are available on a limited
basis and for limited purposes (together with the secured portion of the Credit
Agreement and these letter of credit facilities, the LOC Facilities). The
principal purpose of the LOC Facilities is to issue, as required, evergreen
standby letters of credit in favor of primary insurance or reinsurance
counterparties with which the Company has entered into reinsurance arrangements
to ensure that such counterparties are permitted to take credit for reinsurance
obtained from the
10
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Companys
reinsurance subsidiaries in United States jurisdictions where such subsidiaries
are not licensed or otherwise admitted as an insurer, as required under
insurance regulations in the United States, and to comply with requirements of
Lloyds of London in connection with qualifying quota share and other
arrangements. The amount of letters of credit issued is driven by, among other
things, the timing and payment of catastrophe losses, loss development of
existing reserves, the payment pattern of such reserves, the further expansion
of the Companys business and the loss experience of such business. When
issued, certain letters of credit are secured by a portion of the Companys
investment portfolio. In addition, the LOC Facilities also require the
maintenance of certain covenants, which the Company was in compliance with at June 30,
2010. At such date, the Company had $721.2 million in outstanding letters of credit
under the LOC Facilities, which were secured by investments with a market value
of $840.1 million. At June 30, 2010, the Company had $125.0 million of
borrowings outstanding under the Credit Agreement at a Company-selected
variable interest rate that is based on 1 month, 3 month or 6 month reset
option terms and their corresponding term LIBOR rates plus 27.5 basis points.
TALF Program
The Company participates in the Federal Reserve Bank of New Yorks (FRBNY)
Term Asset-Backed Securities Loan Facility (TALF). TALF provides secured
financing for asset-backed securities backed by certain types of consumer and
small business loans and for legacy commercial mortgage-backed securities. TALF
financing is non-recourse to the Company, except in certain limited instances,
and 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 a
special purpose vehicle created by the FRBNY in full defeasance of the
borrowings.
The Company elected to carry the securities and related borrowings at
fair value under the fair value option afforded by accounting guidance
regarding the fair value option for financial assets and financial liabilities.
As of June 30, 2010, the Company had $407.5 million of securities under
TALF which are reflected as TALF investments, at market value and $336.2
million of secured financing from the FRBNY which is reflected as TALF
borrowings, at market value. As of December 31, 2009, the Company had
$250.3 million of securities under TALF which are reflected as TALF
investments, at market value and $217.6 million of secured financing from the
FRBNY which is reflected as TALF borrowings, at market value. The original
maturity dates for the TALF borrowings vary between 2 to 5 years with floating
or fixed coupons depending on the related TALF investments.
Interest Paid
During the six months ended June 30, 2010, the Company made
interest payments of $15.2 million related to its debt and financing
arrangements, compared to $11.5 million for the six months ended June 30,
2009.
11
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5.
Segment Information
The Company classifies its businesses into two underwriting segments
insurance and reinsurance and corporate and other (non-underwriting). The
Companys 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 Companys chief operating
decision makers, the Chairman, 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 accounting
guidance regarding 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
Companys consolidated financial statements. Intersegment business is allocated
to the segment accountable for the underwriting results.
The insurance segment consists of the Companys insurance underwriting
subsidiaries which primarily write on both an admitted and non-admitted basis.
Specialty product lines include: casualty; construction; executive assurance;
healthcare; national accounts casualty; professional liability; programs;
property, energy, marine and aviation; surety; travel and accident; and other
(consisting of excess workers compensation, employers liability, collateral
protection and alternative markets business).
The reinsurance segment consists of the Companys reinsurance
underwriting subsidiaries. The reinsurance segment generally seeks to write
significant lines on specialty property and casualty reinsurance contracts.
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).
Corporate and other (non-underwriting) includes net investment income,
other income (loss), other expenses incurred by the Company, interest expense,
net realized gains or losses, net impairment losses recognized in earnings,
equity in net income (loss) of investment funds accounted for using the equity
method, net foreign exchange gains or losses, income taxes and dividends on the
Companys non-cumulative preferred shares.
12
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables set forth an analysis of the Companys underwriting
income by segment, together with a reconciliation of underwriting income to net
income available to common shareholders, summary information regarding net
premiums written and earned by major line of business and net premiums written
by location:
|
|
Three Months Ended
June 30, 2010
|
|
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
|
|
|
|
|
|
|
|
Gross premiums written (1)
|
|
$
|
616,353
|
|
$
|
203,695
|
|
$
|
817,100
|
|
Net premiums written (1)
|
|
422,837
|
|
201,421
|
|
624,258
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
$
|
405,473
|
|
$
|
217,538
|
|
$
|
623,011
|
|
Fee income
|
|
874
|
|
9
|
|
883
|
|
Losses and loss adjustment expenses
|
|
(275,294
|
)
|
(87,851
|
)
|
(363,145
|
)
|
Acquisition expenses, net
|
|
(65,359
|
)
|
(42,116
|
)
|
(107,475
|
)
|
Other operating expenses
|
|
(71,727
|
)
|
(19,303
|
)
|
(91,030
|
)
|
Underwriting income (loss)
|
|
$
|
(6,033
|
)
|
$
|
68,277
|
|
62,244
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
90,537
|
|
Net realized gains
|
|
|
|
|
|
62,114
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
|
(4,410
|
)
|
Equity in net income of investment funds accounted
for using the equity method
|
|
|
|
|
|
(348
|
)
|
Other income
|
|
|
|
|
|
4,528
|
|
Other expenses
|
|
|
|
|
|
(10,503
|
)
|
Interest expense
|
|
|
|
|
|
(7,916
|
)
|
Net foreign exchange gains
|
|
|
|
|
|
48,625
|
|
Income before income taxes
|
|
|
|
|
|
244,871
|
|
Income tax expense
|
|
|
|
|
|
(1,420
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
243,451
|
|
Preferred dividends
|
|
|
|
|
|
(6,461
|
)
|
Net income available to common shareholders
|
|
|
|
|
|
$
|
236,990
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
Loss ratio
|
|
67.9
|
%
|
40.4
|
%
|
58.3
|
%
|
Acquisition expense ratio (2)
|
|
15.9
|
%
|
19.4
|
%
|
17.1
|
%
|
Other operating expense ratio
|
|
17.7
|
%
|
8.9
|
%
|
14.6
|
%
|
Combined ratio
|
|
101.5
|
%
|
68.7
|
%
|
90.0
|
%
|
(1)
Certain amounts
included in the gross premiums written of each segment are related to
intersegment transactions. 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.
The insurance segment and reinsurance segment results include nil and $2.9
million, respectively, of gross and net premiums written and $0.3 million and
$3.2 million, respectively, of net premiums earned assumed through intersegment
transactions.
(2)
The acquisition
expense ratio is adjusted to include policy-related fee income.
13
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Three Months Ended
|
|
|
|
June 30, 2009
|
|
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
|
|
|
|
|
|
|
|
Gross premiums written (1)
|
|
$
|
636,645
|
|
$
|
278,389
|
|
$
|
911,920
|
|
Net premiums written (1)
|
|
419,318
|
|
274,536
|
|
693,854
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
$
|
417,454
|
|
$
|
281,804
|
|
$
|
699,258
|
|
Fee income
|
|
795
|
|
22
|
|
817
|
|
Losses and loss adjustment expenses
|
|
(287,350
|
)
|
(111,508
|
)
|
(398,858
|
)
|
Acquisition expenses, net
|
|
(58,748
|
)
|
(65,066
|
)
|
(123,814
|
)
|
Other operating expenses
|
|
(70,836
|
)
|
(16,943
|
)
|
(87,779
|
)
|
Underwriting income
|
|
$
|
1,315
|
|
$
|
88,309
|
|
89,624
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
100,485
|
|
Net realized losses
|
|
|
|
|
|
(11,793
|
)
|
Net impairment losses recognized in earnings
|
|
|
|
|
|
(20,863
|
)
|
Equity in net loss of investment funds accounted
for using the equity method
|
|
|
|
|
|
75,890
|
|
Other income
|
|
|
|
|
|
4,950
|
|
Other expenses
|
|
|
|
|
|
(11,515
|
)
|
Interest expense
|
|
|
|
|
|
(5,712
|
)
|
Net foreign exchange losses
|
|
|
|
|
|
(53,658
|
)
|
Income before income taxes
|
|
|
|
|
|
167,408
|
|
Income tax expense
|
|
|
|
|
|
(8,818
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
158,590
|
|
Preferred dividends
|
|
|
|
|
|
(6,461
|
)
|
Net income available to common shareholders
|
|
|
|
|
|
$
|
152,129
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
Loss ratio
|
|
68.8
|
%
|
39.6
|
%
|
57.0
|
%
|
Acquisition expense ratio (2)
|
|
13.9
|
%
|
23.1
|
%
|
17.6
|
%
|
Other operating expense ratio
|
|
17.0
|
%
|
6.0
|
%
|
12.6
|
%
|
Combined ratio
|
|
99.7
|
%
|
68.7
|
%
|
87.2
|
%
|
(1)
Certain amounts
included in the gross premiums written of each segment are related to
intersegment transactions. 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.
The insurance segment and reinsurance segment results include nil and $3.1
million, respectively, of gross and net premiums written and $0.4 million and
$3.6 million, respectively, of net premiums earned assumed through intersegment
transactions.
(2)
The acquisition
expense ratio is adjusted to include policy-related fee income.
14
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Six Months Ended
June 30, 2010
|
|
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
|
|
|
|
|
|
|
|
Gross premiums written (1)
|
|
$
|
1,249,929
|
|
$
|
527,172
|
|
$
|
1,770,787
|
|
Net premiums written (1)
|
|
875,761
|
|
516,251
|
|
1,392,012
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
$
|
834,950
|
|
$
|
457,978
|
|
$
|
1,292,928
|
|
Fee income
|
|
1,627
|
|
50
|
|
1,677
|
|
Losses and loss adjustment expenses
|
|
(587,305
|
)
|
(203,891
|
)
|
(791,196
|
)
|
Acquisition expenses, net
|
|
(132,790
|
)
|
(92,309
|
)
|
(225,099
|
)
|
Other operating expenses
|
|
(152,447
|
)
|
(39,701
|
)
|
(192,148
|
)
|
Underwriting income (loss)
|
|
$
|
(35,965
|
)
|
$
|
122,127
|
|
86,162
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
183,509
|
|
Net realized gains
|
|
|
|
|
|
109,896
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
|
(6,016
|
)
|
Equity in net income of investment funds accounted
for using the equity method
|
|
|
|
|
|
28,702
|
|
Other income
|
|
|
|
|
|
10,506
|
|
Other expenses
|
|
|
|
|
|
(16,191
|
)
|
Interest expense
|
|
|
|
|
|
(15,176
|
)
|
Net foreign exchange gains
|
|
|
|
|
|
87,226
|
|
Income before income taxes
|
|
|
|
|
|
468,618
|
|
Income tax expense
|
|
|
|
|
|
(8,173
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
460,445
|
|
Preferred dividends
|
|
|
|
|
|
(12,922
|
)
|
Net income available to common shareholders
|
|
|
|
|
|
$
|
447,523
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
Loss ratio
|
|
70.3
|
%
|
44.5
|
%
|
61.2
|
%
|
Acquisition expense ratio (2)
|
|
15.7
|
%
|
20.2
|
%
|
17.3
|
%
|
Other operating expense ratio
|
|
18.3
|
%
|
8.7
|
%
|
14.9
|
%
|
Combined ratio
|
|
104.3
|
%
|
73.4
|
%
|
93.4
|
%
|
(1)
Certain amounts
included in the gross premiums written of each segment are related to
intersegment transactions. 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.
The insurance segment and reinsurance segment results include nil and $6.3
million, respectively, of gross and net premiums written and $0.5 million and
$6.7 million, respectively, of net premiums earned assumed through intersegment
transactions.
(2)
The acquisition
expense ratio is adjusted to include policy-related fee income.
15
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Six Months Ended
|
|
|
|
June 30, 2009
|
|
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
|
|
|
|
|
|
|
|
Gross premiums written (1)
|
|
$
|
1,275,054
|
|
$
|
668,518
|
|
$
|
1,936,891
|
|
Net premiums written (1)
|
|
860,904
|
|
655,813
|
|
1,516,717
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
$
|
818,551
|
|
$
|
581,271
|
|
$
|
1,399,822
|
|
Fee income
|
|
1,665
|
|
77
|
|
1,742
|
|
Losses and loss adjustment expenses
|
|
(557,365
|
)
|
(242,035
|
)
|
(799,400
|
)
|
Acquisition expenses, net
|
|
(116,371
|
)
|
(133,901
|
)
|
(250,272
|
)
|
Other operating expenses
|
|
(133,744
|
)
|
(35,135
|
)
|
(168,879
|
)
|
Underwriting income
|
|
$
|
12,736
|
|
$
|
170,277
|
|
183,013
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
196,367
|
|
Net realized losses
|
|
|
|
|
|
(16,957
|
)
|
Net impairment losses recognized in earnings
|
|
|
|
|
|
(56,997
|
)
|
Equity in net loss of investment funds accounted
for using the equity method
|
|
|
|
|
|
66,309
|
|
Other income
|
|
|
|
|
|
8,901
|
|
Other expenses
|
|
|
|
|
|
(17,531
|
)
|
Interest expense
|
|
|
|
|
|
(11,424
|
)
|
Net foreign exchange losses
|
|
|
|
|
|
(28,453
|
)
|
Income before income taxes
|
|
|
|
|
|
323,228
|
|
Income tax expense
|
|
|
|
|
|
(18,308
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
304,920
|
|
Preferred dividends
|
|
|
|
|
|
(12,922
|
)
|
Net income available to common shareholders
|
|
|
|
|
|
$
|
291,998
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
Loss ratio
|
|
68.1
|
%
|
41.6
|
%
|
57.1
|
%
|
Acquisition expense ratio (2)
|
|
14.0
|
%
|
23.0
|
%
|
17.8
|
%
|
Other operating expense ratio
|
|
16.3
|
%
|
6.0
|
%
|
12.1
|
%
|
Combined ratio
|
|
98.4
|
%
|
70.6
|
%
|
87.0
|
%
|
(1)
Certain amounts
included in the gross premiums written of each segment are related to
intersegment transactions. 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.
The insurance segment and reinsurance segment results include $0.1 million and
$6.6 million, respectively, of gross and net premiums written and $0.9 million
and $8.3 million, respectively, of net premiums earned assumed through
intersegment transactions.
(2)
The acquisition
expense ratio is adjusted to include policy-related fee income.
16
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
INSURANCE
SEGMENT
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (1)
|
|
|
|
|
|
|
|
|
|
Property, energy, marine and aviation
|
|
$
|
88,194
|
|
20.9
|
|
$
|
86,385
|
|
20.6
|
|
Programs
|
|
73,345
|
|
17.3
|
|
72,279
|
|
17.2
|
|
Professional liability
|
|
64,089
|
|
15.2
|
|
57,773
|
|
13.8
|
|
Executive assurance
|
|
52,892
|
|
12.5
|
|
52,919
|
|
12.6
|
|
Construction
|
|
50,435
|
|
11.9
|
|
56,190
|
|
13.4
|
|
Casualty
|
|
26,617
|
|
6.3
|
|
27,217
|
|
6.5
|
|
Travel and accident
|
|
15,272
|
|
3.6
|
|
19,557
|
|
4.7
|
|
Healthcare
|
|
9,989
|
|
2.4
|
|
9,667
|
|
2.3
|
|
Surety
|
|
7,012
|
|
1.7
|
|
9,254
|
|
2.2
|
|
National accounts casualty
|
|
3,877
|
|
0.9
|
|
7,582
|
|
1.8
|
|
Other (2)
|
|
31,115
|
|
7.3
|
|
20,495
|
|
4.9
|
|
Total
|
|
$
|
422,837
|
|
100.0
|
|
$
|
419,318
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
|
|
|
|
|
|
|
|
Property, energy, marine and aviation
|
|
$
|
80,818
|
|
19.9
|
|
$
|
78,570
|
|
18.8
|
|
Programs
|
|
68,381
|
|
16.9
|
|
71,809
|
|
17.2
|
|
Professional liability
|
|
57,903
|
|
14.3
|
|
56,549
|
|
13.5
|
|
Executive assurance
|
|
55,143
|
|
13.6
|
|
52,288
|
|
12.5
|
|
Construction
|
|
33,536
|
|
8.3
|
|
43,364
|
|
10.4
|
|
Casualty
|
|
28,148
|
|
6.9
|
|
31,246
|
|
7.5
|
|
Travel and accident
|
|
17,590
|
|
4.3
|
|
18,198
|
|
4.4
|
|
Healthcare
|
|
10,340
|
|
2.6
|
|
10,830
|
|
2.6
|
|
Surety
|
|
8,023
|
|
2.0
|
|
12,141
|
|
2.9
|
|
National accounts casualty
|
|
16,810
|
|
4.1
|
|
13,079
|
|
3.1
|
|
Other (2)
|
|
28,781
|
|
7.1
|
|
29,380
|
|
7.1
|
|
Total
|
|
$
|
405,473
|
|
100.0
|
|
$
|
417,454
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written by client
location (1)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
321,656
|
|
76.1
|
|
$
|
339,375
|
|
80.9
|
|
Europe
|
|
60,974
|
|
14.4
|
|
48,126
|
|
11.5
|
|
Other
|
|
40,207
|
|
9.5
|
|
31,817
|
|
7.6
|
|
Total
|
|
$
|
422,837
|
|
100.0
|
|
$
|
419,318
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written by
underwriting location (1)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
305,630
|
|
72.3
|
|
$
|
315,466
|
|
75.2
|
|
Europe
|
|
90,663
|
|
21.4
|
|
78,305
|
|
18.7
|
|
Other
|
|
26,544
|
|
6.3
|
|
25,547
|
|
6.1
|
|
Total
|
|
$
|
422,837
|
|
100.0
|
|
$
|
419,318
|
|
100.0
|
|
(1)
Insurance
segment results include premiums written and earned assumed through
intersegment transactions of nil and $0.3 million, respectively, for the 2010
second quarter and premiums written and earned of nil and $0.4 million,
respectively, for the 2009 second quarter. Insurance segment results exclude
premiums written and earned ceded through intersegment transactions of $2.9
million and $3.2 million, respectively, for the 2010 second quarter and
premiums written and earned of $3.1 million and $3.6 million, respectively, for
the 2009 second quarter.
(2)
Includes excess
workers compensation, employers liability, collateral protection and
alternative markets business.
17
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
REINSURANCE
SEGMENT
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (1)
|
|
|
|
|
|
|
|
|
|
Property catastrophe
|
|
$
|
70,403
|
|
35.0
|
|
$
|
91,981
|
|
33.5
|
|
Property excluding property catastrophe (2)
|
|
57,880
|
|
28.7
|
|
90,569
|
|
33.0
|
|
Casualty (3)
|
|
43,642
|
|
21.7
|
|
72,490
|
|
26.4
|
|
Other specialty
|
|
18,920
|
|
9.4
|
|
3,304
|
|
1.2
|
|
Marine and aviation
|
|
9,609
|
|
4.8
|
|
15,391
|
|
5.6
|
|
Other
|
|
967
|
|
0.4
|
|
801
|
|
0.3
|
|
Total
|
|
$
|
201,421
|
|
100.0
|
|
$
|
274,536
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
|
|
|
|
|
|
|
|
Property catastrophe
|
|
$
|
52,301
|
|
24.0
|
|
$
|
58,763
|
|
20.9
|
|
Property excluding property catastrophe (2)
|
|
65,742
|
|
30.2
|
|
87,304
|
|
31.0
|
|
Casualty (3)
|
|
59,501
|
|
27.4
|
|
84,078
|
|
29.8
|
|
Other specialty
|
|
22,292
|
|
10.2
|
|
25,912
|
|
9.2
|
|
Marine and aviation
|
|
16,263
|
|
7.5
|
|
25,063
|
|
8.9
|
|
Other
|
|
1,439
|
|
0.7
|
|
684
|
|
0.2
|
|
Total
|
|
$
|
217,538
|
|
100.0
|
|
$
|
281,804
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (1)
|
|
|
|
|
|
|
|
|
|
Pro rata
|
|
$
|
84,957
|
|
42.2
|
|
$
|
140,939
|
|
51.3
|
|
Excess of loss
|
|
116,464
|
|
57.8
|
|
133,597
|
|
48.7
|
|
Total
|
|
$
|
201,421
|
|
100.0
|
|
$
|
274,536
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
|
|
|
|
|
|
|
|
Pro rata
|
|
$
|
102,374
|
|
47.1
|
|
$
|
175,665
|
|
62.3
|
|
Excess of loss
|
|
115,164
|
|
52.9
|
|
106,139
|
|
37.7
|
|
Total
|
|
$
|
217,538
|
|
100.0
|
|
$
|
281,804
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written by client
location (1)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
135,374
|
|
67.2
|
|
$
|
193,190
|
|
70.4
|
|
Europe
|
|
33,378
|
|
16.6
|
|
39,782
|
|
14.5
|
|
Bermuda
|
|
23,022
|
|
11.4
|
|
32,665
|
|
11.9
|
|
Other
|
|
9,647
|
|
4.8
|
|
8,899
|
|
3.2
|
|
Total
|
|
$
|
201,421
|
|
100.0
|
|
$
|
274,536
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written by
underwriting location (1)
|
|
|
|
|
|
|
|
|
|
Bermuda
|
|
$
|
116,568
|
|
57.9
|
|
$
|
184,892
|
|
67.3
|
|
United States
|
|
70,295
|
|
34.9
|
|
79,152
|
|
28.8
|
|
Other
|
|
14,558
|
|
7.2
|
|
10,492
|
|
3.9
|
|
Total
|
|
$
|
201,421
|
|
100.0
|
|
$
|
274,536
|
|
100.0
|
|
(1)
Reinsurance segment results
include premiums written and earned assumed through intersegment transactions
of $2.9 million and $3.2 million, respectively, for the 2010 second quarter and
premiums written and earned of $3.1 million and $3.6 million, respectively, for
the 2009 second quarter. Reinsurance segment results exclude premiums written
and earned ceded through intersegment transactions of nil and $0.3 million,
respectively, for the 2010 second quarter and premiums written and earned of
nil and $0.4 million, respectively, for the 2009 second quarter.
(2)
Includes facultative
business.
(3)
Includes professional
liability, executive assurance and healthcare business.
18
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
INSURANCE
SEGMENT
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (1)
|
|
|
|
|
|
|
|
|
|
Property, energy, marine and aviation
|
|
$
|
188,859
|
|
21.6
|
|
$
|
192,414
|
|
22.4
|
|
Programs
|
|
143,843
|
|
16.4
|
|
147,086
|
|
17.1
|
|
Professional liability
|
|
122,815
|
|
14.0
|
|
109,781
|
|
12.8
|
|
Executive assurance
|
|
114,247
|
|
13.0
|
|
102,998
|
|
12.0
|
|
Construction
|
|
86,757
|
|
9.9
|
|
92,761
|
|
10.8
|
|
Casualty
|
|
52,080
|
|
5.9
|
|
53,756
|
|
6.2
|
|
Travel and accident
|
|
37,078
|
|
4.2
|
|
37,091
|
|
4.3
|
|
National accounts casualty
|
|
34,686
|
|
4.0
|
|
31,809
|
|
3.7
|
|
Healthcare
|
|
18,513
|
|
2.1
|
|
20,886
|
|
2.4
|
|
Surety
|
|
15,103
|
|
1.7
|
|
20,612
|
|
2.4
|
|
Other (2)
|
|
61,780
|
|
7.2
|
|
51,710
|
|
5.9
|
|
Total
|
|
$
|
875,761
|
|
100.0
|
|
$
|
860,904
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
|
|
|
|
|
|
|
|
Property, energy, marine and aviation
|
|
$
|
175,855
|
|
21.1
|
|
$
|
152,410
|
|
18.6
|
|
Programs
|
|
134,540
|
|
16.1
|
|
138,478
|
|
16.9
|
|
Professional liability
|
|
120,148
|
|
14.4
|
|
114,783
|
|
14.0
|
|
Executive assurance
|
|
111,465
|
|
13.3
|
|
100,104
|
|
12.2
|
|
Construction
|
|
68,021
|
|
8.1
|
|
83,784
|
|
10.2
|
|
Casualty
|
|
56,217
|
|
6.7
|
|
63,944
|
|
7.8
|
|
Travel and accident
|
|
33,668
|
|
4.0
|
|
31,354
|
|
3.8
|
|
National accounts casualty
|
|
38,583
|
|
4.6
|
|
27,518
|
|
3.4
|
|
Healthcare
|
|
20,283
|
|
2.4
|
|
21,758
|
|
2.7
|
|
Surety
|
|
18,281
|
|
2.2
|
|
25,532
|
|
3.1
|
|
Other (2)
|
|
57,889
|
|
7.1
|
|
58,886
|
|
7.3
|
|
Total
|
|
$
|
834,950
|
|
100.0
|
|
$
|
818,551
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written by client
location (1)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
624,824
|
|
71.3
|
|
$
|
656,419
|
|
76.2
|
|
Europe
|
|
163,463
|
|
18.7
|
|
140,522
|
|
16.3
|
|
Other
|
|
87,474
|
|
10.0
|
|
63,963
|
|
7.5
|
|
Total
|
|
$
|
875,761
|
|
100.0
|
|
$
|
860,904
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written by
underwriting location (1)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
608,067
|
|
69.4
|
|
$
|
636,295
|
|
73.9
|
|
Europe
|
|
224,402
|
|
25.6
|
|
183,618
|
|
21.3
|
|
Other
|
|
43,292
|
|
5.0
|
|
40,991
|
|
4.8
|
|
Total
|
|
$
|
875,761
|
|
100.0
|
|
$
|
860,904
|
|
100.0
|
|
(1)
Insurance segment results
include premiums written and earned assumed through intersegment transactions
of nil and $0.5 million, respectively, for the 2010 period and premiums written
and earned of $0.1 million and $0.9 million, respectively, for the 2009 period.
Insurance segment results exclude premiums written and earned ceded through
intersegment transactions of $6.3 million and $6.7 million, respectively, for
the 2010 period and premiums written and earned of $6.6 million and $8.3
million, respectively, for the 2009 period.
(2)
Includes excess workers
compensation, employers liability, collateral protection and alternative
markets business.
19
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
REINSURANCE
SEGMENT
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (1)
|
|
|
|
|
|
|
|
|
|
Property catastrophe
|
|
$
|
159,205
|
|
30.8
|
|
$
|
183,884
|
|
28.0
|
|
Property excluding property catastrophe (2)
|
|
132,807
|
|
25.7
|
|
209,657
|
|
32.0
|
|
Casualty (3)
|
|
116,224
|
|
22.5
|
|
171,922
|
|
26.2
|
|
Other specialty
|
|
73,682
|
|
14.3
|
|
44,016
|
|
6.7
|
|
Marine and aviation
|
|
30,847
|
|
6.0
|
|
43,914
|
|
6.7
|
|
Other
|
|
3,486
|
|
0.7
|
|
2,420
|
|
0.4
|
|
Total
|
|
$
|
516,251
|
|
100.0
|
|
$
|
655,813
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
|
|
|
|
|
|
|
|
Property catastrophe
|
|
$
|
106,174
|
|
23.2
|
|
$
|
117,364
|
|
20.2
|
|
Property excluding property catastrophe (2)
|
|
144,981
|
|
31.7
|
|
183,535
|
|
31.6
|
|
Casualty (3)
|
|
129,937
|
|
28.4
|
|
170,024
|
|
29.3
|
|
Other specialty
|
|
40,061
|
|
8.7
|
|
59,362
|
|
10.2
|
|
Marine and aviation
|
|
34,335
|
|
7.5
|
|
49,893
|
|
8.6
|
|
Other
|
|
2,490
|
|
0.5
|
|
1,093
|
|
0.1
|
|
Total
|
|
$
|
457,978
|
|
100.0
|
|
$
|
581,271
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written (1)
|
|
|
|
|
|
|
|
|
|
Pro rata
|
|
$
|
202,994
|
|
39.3
|
|
$
|
322,161
|
|
49.1
|
|
Excess of loss
|
|
313,257
|
|
60.7
|
|
333,652
|
|
50.9
|
|
Total
|
|
$
|
516,251
|
|
100.0
|
|
$
|
655,813
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned (1)
|
|
|
|
|
|
|
|
|
|
Pro rata
|
|
$
|
233,245
|
|
50.9
|
|
$
|
370,183
|
|
63.7
|
|
Excess of loss
|
|
224,733
|
|
49.1
|
|
211,088
|
|
36.3
|
|
Total
|
|
$
|
457,978
|
|
100.0
|
|
$
|
581,271
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written by client
location (1)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
306,375
|
|
59.3
|
|
$
|
423,158
|
|
64.5
|
|
Europe
|
|
140,520
|
|
27.2
|
|
141,283
|
|
21.5
|
|
Bermuda
|
|
45,697
|
|
8.9
|
|
70,232
|
|
10.7
|
|
Other
|
|
23,659
|
|
4.6
|
|
21,140
|
|
3.3
|
|
Total
|
|
$
|
516,251
|
|
100.0
|
|
$
|
655,813
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written by
underwriting location (1)
|
|
|
|
|
|
|
|
|
|
Bermuda
|
|
$
|
281,502
|
|
54.5
|
|
$
|
380,492
|
|
58.0
|
|
United States
|
|
174,021
|
|
33.7
|
|
225,345
|
|
34.4
|
|
Other
|
|
60,728
|
|
11.8
|
|
49,976
|
|
7.6
|
|
Total
|
|
$
|
516,251
|
|
100.0
|
|
$
|
655,813
|
|
100.0
|
|
(1)
Reinsurance segment results
include premiums written and earned assumed through intersegment transactions
of $6.3 million and $6.7 million, respectively, for the 2010 period and
premiums written and earned of $6.6 million and $8.3 million, respectively, for
the 2009 period. Reinsurance segment results exclude premiums written and
earned ceded through intersegment transactions of nil and $0.5 million,
respectively, for the 2010 period and premiums written and earned of $0.1
million and $0.9 million, respectively, for the 2009 period.
(2)
Includes facultative
business.
(3)
Includes professional
liability, executive assurance and healthcare business.
20
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. Reinsurance
In the normal course of business, the Companys insurance subsidiaries
cede a portion of their premium through pro rata and excess of loss reinsurance
agreements on a treaty or facultative basis. The Companys reinsurance
subsidiaries participate in common account retrocessional arrangements for
certain pro rata treaties. Such arrangements reduce the effect of individual or
aggregate losses to all companies participating on such treaties, including the
reinsurers, such as the Companys reinsurance subsidiaries, and the ceding
company. In addition, the Companys reinsurance subsidiaries may purchase
retrocessional coverage as part of their risk management program. Reinsurance
recoverables are recorded as assets, predicated on the reinsurers ability to
meet their obligations under the reinsurance agreements. If the reinsurers are
unable to satisfy their obligations under the agreements, the Companys
insurance or reinsurance subsidiaries would be liable for such defaulted
amounts.
The effects of reinsurance on the Companys written and earned premiums
and losses and loss adjustment expenses with unaffiliated reinsurers were as
follows:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Written
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
599,774
|
|
$
|
623,603
|
|
$
|
1,217,709
|
|
$
|
1,244,049
|
|
Assumed
|
|
217,326
|
|
288,317
|
|
553,078
|
|
692,842
|
|
Ceded
|
|
(192,842
|
)
|
(218,066
|
)
|
(378,775
|
)
|
(420,174
|
)
|
Net
|
|
$
|
624,258
|
|
$
|
693,854
|
|
$
|
1,392,012
|
|
$
|
1,516,717
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
578,002
|
|
$
|
607,670
|
|
$
|
1,178,647
|
|
$
|
1,195,430
|
|
Assumed
|
|
234,590
|
|
308,124
|
|
497,125
|
|
640,691
|
|
Ceded
|
|
(189,581
|
)
|
(216,536
|
)
|
(382,844
|
)
|
(436,299
|
)
|
Net
|
|
$
|
623,011
|
|
$
|
699,258
|
|
$
|
1,292,928
|
|
$
|
1,399,822
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Loss Adjustment
Expenses
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
394,107
|
|
$
|
399,926
|
|
$
|
793,058
|
|
$
|
751,419
|
|
Assumed
|
|
92,059
|
|
126,582
|
|
199,226
|
|
273,727
|
|
Ceded
|
|
(123,021
|
)
|
(127,650
|
)
|
(201,088
|
)
|
(225,746
|
)
|
Net
|
|
$
|
363,145
|
|
$
|
398,858
|
|
$
|
791,196
|
|
$
|
799,400
|
|
The Company monitors the financial condition of its reinsurers and
attempts to place coverages only with substantial, financially sound carriers.
At June 30, 2010, approximately 91.2% of the Companys reinsurance
recoverables on paid and unpaid losses (not including prepaid reinsurance
premiums) of $1.72 billion were due from carriers which had an A.M. Best
rating of A- or better and the largest reinsurance recoverables from any one
carrier was less than 5.7% of the Companys total shareholders equity. At December 31,
2009, approximately 90.0% of the Companys reinsurance recoverables on paid and
unpaid losses (not including prepaid reinsurance premiums) of $1.72 billion
were due from carriers which had an A.M. Best rating of A- or better and
the largest reinsurance recoverables from any one carrier was less than 5.8% of
the Companys total shareholders equity.
21
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. Investment
Information
The following table summarizes the Companys invested assets:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Fixed maturities available for sale, at market
value
|
|
$
|
9,428,456
|
|
$
|
9,391,926
|
|
Fixed maturities pledged under securities lending
agreements, at market value (1)
|
|
195,372
|
|
208,826
|
|
Total fixed maturities
|
|
9,623,828
|
|
9,600,752
|
|
Short-term investments available for sale, at
market value
|
|
554,304
|
|
571,489
|
|
Short-term investments pledged under securities
lending agreements, at market value (1)
|
|
19,192
|
|
3,994
|
|
TALF investments, at market value
|
|
407,469
|
|
250,265
|
|
Other investments
|
|
340,598
|
|
172,172
|
|
Investment funds accounted for using the equity
method
|
|
408,402
|
|
391,869
|
|
Total investments (1)
|
|
11,353,793
|
|
10,990,541
|
|
Securities transactions entered into but not
settled at the balance sheet date
|
|
(108,059
|
)
|
50,790
|
|
Total investments, net of securities transactions
|
|
$
|
11,245,734
|
|
$
|
11,041,331
|
|
(1)
In securities lending
transactions, the Company receives collateral in excess of the market 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 and reinvested of $209.6 million and $207.0 million at June 30,
2010 and December 31, 2009, respectively, and included the $214.6 million
and $212.8 million, respectively, of fixed maturities and short-term
investments pledged under securities lending agreements, at market value.
22
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Fixed Maturities
and Fixed Maturities Pledged Under Securities Lending Agreements
The following table summarizes the Companys fixed maturities and fixed
maturities pledged under securities lending agreements, excluding TALF
investments:
|
|
Estimated
|
|
Gross
|
|
Gross
|
|
|
|
OTTI
|
|
|
|
Market
|
|
Unrealized
|
|
Unrealized
|
|
Amortized
|
|
Unrealized
|
|
|
|
Value
|
|
Gains
|
|
Losses
|
|
Cost
|
|
Losses (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
2,849,589
|
|
$
|
93,365
|
|
$
|
(28,029
|
)
|
$
|
2,784,253
|
|
$
|
(18,636
|
)
|
Mortgage backed securities
|
|
1,900,291
|
|
39,409
|
|
(29,323
|
)
|
1,890,205
|
|
(41,887
|
)
|
U.S. government and government agencies
|
|
1,663,506
|
|
49,252
|
|
(65
|
)
|
1,614,319
|
|
(207
|
)
|
Commercial mortgage backed securities
|
|
1,057,395
|
|
36,820
|
|
(7,875
|
)
|
1,028,450
|
|
(3,750
|
)
|
Municipal bonds
|
|
989,917
|
|
47,217
|
|
(321
|
)
|
943,021
|
|
(125
|
)
|
Non-U.S. government securities
|
|
668,853
|
|
33,016
|
|
(25,190
|
)
|
661,027
|
|
(72
|
)
|
Asset backed securities
|
|
494,277
|
|
19,214
|
|
(7,842
|
)
|
482,905
|
|
(3,932
|
)
|
Total
|
|
$
|
9,623,828
|
|
$
|
318,293
|
|
$
|
(98,645
|
)
|
$
|
9,404,180
|
|
$
|
(68,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
3,134,088
|
|
$
|
99,446
|
|
$
|
(12,983
|
)
|
$
|
3,047,625
|
|
$
|
(19,667
|
)
|
Mortgage backed securities
|
|
1,449,382
|
|
13,158
|
|
(45,536
|
)
|
1,481,760
|
|
(43,930
|
)
|
U.S. government and government agencies
|
|
1,553,672
|
|
8,716
|
|
(12,999
|
)
|
1,557,955
|
|
(499
|
)
|
Commercial mortgage backed securities
|
|
1,185,799
|
|
35,161
|
|
(11,724
|
)
|
1,162,362
|
|
(3,750
|
)
|
Municipal bonds
|
|
957,752
|
|
44,043
|
|
(2,284
|
)
|
915,993
|
|
(145
|
)
|
Non-U.S. government securities
|
|
752,215
|
|
41,858
|
|
(7,712
|
)
|
718,069
|
|
(351
|
)
|
Asset backed securities
|
|
567,844
|
|
21,713
|
|
(8,220
|
)
|
554,351
|
|
(6,111
|
)
|
Total
|
|
$
|
9,600,752
|
|
$
|
264,095
|
|
$
|
(101,458
|
)
|
$
|
9,438,115
|
|
$
|
(74,453
|
)
|
(1)
Represents the total
other-than-temporary impairments (OTTI) recognized in accumulated other
comprehensive income (AOCI). It does not include the change in market value
subsequent to the impairment measurement date. At June 30, 2010, the net
unrealized loss related to securities for which a non-credit OTTI was
recognized in AOCI was $28.9 million, compared to $37.9 million at December 31,
2009.
23
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table provides an analysis of the length of time each of
those fixed maturities, fixed maturities pledged under securities lending
agreements, equity securities and short-term investments with an unrealized
loss has been in a continual unrealized loss position:
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
|
|
Market
|
|
Unrealized
|
|
Market
|
|
Unrealized
|
|
Market
|
|
Unrealized
|
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
390,706
|
|
$
|
(21,302
|
)
|
$
|
47,962
|
|
$
|
(6,727
|
)
|
$
|
438,668
|
|
$
|
(28,029
|
)
|
Mortgage backed securities
|
|
194,003
|
|
(20,779
|
)
|
57,001
|
|
(8,544
|
)
|
251,004
|
|
(29,323
|
)
|
U.S. government and government agencies
|
|
140,109
|
|
(62
|
)
|
151
|
|
(3
|
)
|
140,260
|
|
(65
|
)
|
Commercial mortgage backed securities
|
|
126,318
|
|
(1,045
|
)
|
59,041
|
|
(6,830
|
)
|
185,359
|
|
(7,875
|
)
|
Municipal bonds
|
|
41,896
|
|
(321
|
)
|
|
|
|
|
41,896
|
|
(321
|
)
|
Non-U.S. government securities
|
|
280,887
|
|
(21,663
|
)
|
22,258
|
|
(3,527
|
)
|
303,145
|
|
(25,190
|
)
|
Asset backed securities
|
|
40,286
|
|
(4,411
|
)
|
20,104
|
|
(3,431
|
)
|
60,390
|
|
(7,842
|
)
|
|
|
1,214,205
|
|
(69,583
|
)
|
206,517
|
|
(29,062
|
)
|
1,420,722
|
|
(98,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
112,379
|
|
(10,855
|
)
|
30,432
|
|
(3,847
|
)
|
142,811
|
|
(14,702
|
)
|
Short-term investments
|
|
64,696
|
|
(4,175
|
)
|
|
|
|
|
64,696
|
|
(4,175
|
)
|
Total
|
|
$
|
1,391,280
|
|
$
|
(84,613
|
)
|
$
|
236,949
|
|
$
|
(32,909
|
)
|
$
|
1,628,229
|
|
$
|
(117,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
547,376
|
|
$
|
(7,742
|
)
|
$
|
45,399
|
|
$
|
(5,241
|
)
|
$
|
592,775
|
|
$
|
(12,983
|
)
|
Mortgage backed securities
|
|
636,817
|
|
(33,388
|
)
|
62,382
|
|
(12,148
|
)
|
699,199
|
|
(45,536
|
)
|
U.S. government and government agencies
|
|
1,112,534
|
|
(12,510
|
)
|
5,309
|
|
(489
|
)
|
1,117,843
|
|
(12,999
|
)
|
Commercial mortgage backed securities
|
|
154,087
|
|
(4,808
|
)
|
67,744
|
|
(6,916
|
)
|
221,831
|
|
(11,724
|
)
|
Municipal bonds
|
|
151,412
|
|
(2,284
|
)
|
|
|
|
|
151,412
|
|
(2,284
|
)
|
Non-U.S. government securities
|
|
218,394
|
|
(7,712
|
)
|
|
|
|
|
218,394
|
|
(7,712
|
)
|
Asset backed securities
|
|
101,679
|
|
(5,838
|
)
|
22,915
|
|
(2,382
|
)
|
124,594
|
|
(8,220
|
)
|
|
|
2,922,299
|
|
(74,282
|
)
|
203,749
|
|
(27,176
|
)
|
3,126,048
|
|
(101,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
9,071
|
|
(304
|
)
|
29,439
|
|
(5,195
|
)
|
38,510
|
|
(5,499
|
)
|
Short-term investments
|
|
64,616
|
|
(1,858
|
)
|
|
|
|
|
64,616
|
|
(1,858
|
)
|
Total
|
|
$
|
2,995,986
|
|
$
|
(76,444
|
)
|
$
|
233,188
|
|
$
|
(32,371
|
)
|
$
|
3,229,174
|
|
$
|
(108,815
|
)
|
24
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
contractual maturities of the Companys fixed maturities and fixed maturities
pledged under securities lending agreements are shown in the following table.
Expected maturities, which are managements best estimates, will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Maturity
|
|
Market Value
|
|
Cost
|
|
Market Value
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
242,438
|
|
$
|
248,003
|
|
$
|
227,668
|
|
$
|
220,095
|
|
Due after one year through five years
|
|
3,303,548
|
|
3,220,333
|
|
3,988,306
|
|
3,885,111
|
|
Due after five years through 10 years
|
|
2,263,943
|
|
2,182,340
|
|
1,844,377
|
|
1,800,371
|
|
Due after 10 years
|
|
361,936
|
|
351,944
|
|
337,376
|
|
334,065
|
|
|
|
6,171,865
|
|
6,002,620
|
|
6,397,727
|
|
6,239,642
|
|
Mortgage backed securities
|
|
1,900,291
|
|
1,890,205
|
|
1,449,382
|
|
1,481,760
|
|
Commercial mortgage backed securities
|
|
1,057,395
|
|
1,028,450
|
|
1,185,799
|
|
1,162,362
|
|
Asset backed securities
|
|
494,277
|
|
482,905
|
|
567,844
|
|
554,351
|
|
Total
|
|
$
|
9,623,828
|
|
$
|
9,404,180
|
|
$
|
9,600,752
|
|
$
|
9,438,115
|
|
At June 30, 2010, on a lot level basis, approximately 900 security
lots out of a total of approximately 4,940 security lots were in an unrealized
loss position and the largest single unrealized loss from a single lot in the
Companys fixed maturity portfolio was $3.2 million. At December 31, 2009,
on a lot level basis, approximately 1,430 security lots out of a total of
approximately 4,520 security lots were in an unrealized loss position and the
largest single unrealized loss from a single lot in the Companys fixed
maturity portfolio was $2.2 million.
Other-Than-Temporary
Impairments
The Company performs quarterly reviews of its investments in order to
determine whether declines in market value below the amortized cost basis were
considered other-than-temporary in accordance with applicable guidance. For the
2010 second quarter and six months ended June 30, 2010, the Company
recorded $4.4 million and $6.0 million of net impairment losses recognized in earnings,
respectively, compared to $20.9 million and $57.0 million, respectively for the
2009 second quarter and six months ended June 30, 2009. A description of
the methodology and significant inputs used to measure the amount of OTTI
related to credit losses in the 2010 periods is as follows:
·
Asset backed securities
the Company recorded $0.8 million of OTTI related to credit losses in the 2010
second quarter, and $2.0 million for the six months ended June 30, 2010.
The Company utilized underlying data, where available, for each security
provided by asset managers, cash flow projections and additional information
from credit agencies in order to determine an expected recovery value for each
security. The analysis on home equity asset backed securities includes expected
cash flow projections under base case and stress case scenarios which modify
expected default expectations and loss severities and slow down prepayment
assumptions. The significant inputs in the models include the expected default
rates, delinquency rates and foreclosure costs. In the 2010 periods, the
expected recovery values were reduced on a number of asset backed securities
backed by sub-prime or Alt-A collateral due to reductions in the expected
recovery values on such securities. These reductions followed the quarterly
review of information received which indicated increases in expected default
rates, foreclosure costs and other factors. On an ongoing basis, the Company
reviews the process used by each asset manager in developing their analysis
and, following such reviews, the Company determines what the expected recovery
values are for each security, which incorporates both base case and stress case
scenarios. For non-home equity asset backed securities, the Company used
reports and
25
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
analysis from asset managers and rating agencies in order to determine
an expected recovery value for such securities. The amortized cost basis of the
asset backed securities were adjusted down, if required, to the expected
recovery value calculated in the OTTI review process;
·
Mortgage backed securities
the Company recorded $1.8 million of OTTI related to credit losses in the 2010
second quarter, and $2.2 million for the six months ended June 30, 2010.
The Company utilized underlying data, where available, for each security provided
by asset managers, cash flow projections and additional information from credit
agencies in order to determine an expected recovery value for each security.
The analysis provided by the asset managers includes expected cash flow
projections under base case and stress case scenarios which modify expected
default expectations and loss severities and slow down prepayment assumptions.
The significant inputs in the models include the expected default rates,
delinquency rates and foreclosure costs. In the 2010 periods, the expected
recovery values were reduced on a number of mortgage backed securities due to
reductions in the expected recovery values on such securities in each period.
These reductions followed the quarterly review of information received which
indicated increases in expected default expectations and foreclosure costs. On
an ongoing basis, the Company reviews the process used by each asset manager in
developing their analysis and, following such reviews, the Company determines
what the expected recovery values are for each security, which incorporates
both base case and stress case scenarios. The amortized cost basis of the
mortgage backed securities were adjusted down, if required, to the expected
recovery value calculated in the OTTI review process;
·
Investment of funds received
under securities lending agreements the Company recorded $1.7 million of OTTI
related to credit losses in the 2010 second quarter and for the six months
ended June 30, 2010. At June 30, 2010, the reinvested collateral
included sub-prime securities with a market value of $14.9 million and an
average credit quality of B- from Standard & Poors and Caa1 from
Moodys. The Company utilized analysis from its securities lending program
manager in order to determine an expected recovery value for certain securities
which are on a watch-list. The analysis provided expected cash flow projections
for the securities using similar criteria as described in the mortgage backed
securities section above. The amortized cost basis of the investment of funds
received under securities lending agreements was adjusted down, if required, to
the expected recovery value calculated in the OTTI review process;
·
Corporate bonds the
Company recorded $0.1 million of OTTI related to credit losses in the 2010
second quarter and for the six months ended June 30, 2010. The Company
reviewed the business prospects, credit ratings, estimated loss given default
factors and incorporated available information received from asset managers and
rating agencies for each security. The amortized cost basis of the corporate
bonds were adjusted down, if required, to the expected recovery value
calculated in the OTTI review process.
The Company believes that the $68.6 million of OTTI included in
accumulated other comprehensive income at June 30, 2010 on the securities
which were considered by the Company to be impaired was due to market and
sector-related factors, including limited liquidity and wide credit spreads (
i.e.
, not credit losses). At June 30, 2010, the Company
did not have the intent to sell such securities, and determined that it is more
likely than not that the Company will not be required to sell the securities
before recovery of their cost basis.
26
Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table provides a roll forward of the amount related to
credit losses recognized in earnings for which a portion of an OTTI was
recognized in accumulated other comprehensive income:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
85,488
|
|
$
|
57,256
|
|
$
|
84,147
|
|
$
|
35,474
|
|
Credit loss impairments recognized on securities
not previously impaired
|
|
350
|
|
2,699
|
|
554
|
|
15,346
|
|
Credit loss impairments recognized on securities
previously impaired
|
|
4,060
|
|
18,134
|
|
5,462
|
|
27,269
|
|
Reductions for increases in cash flows expected to
be collected that are recognized over the remaining life of the security
|
|
|
|
|
|
|
|
|
|
Reductions for securities sold during the period
|
|
(709
|
)
|
(2,381
|
)
|
(974
|
)
|
(2,381
|
)
|
Balance at end of period
|
|
$
|
89,189
|
|
$
|
75,708
|
|
$
|
89,189
|
|
$
|
75,708
|
|
TALF Program
As of June 30, 2010, the Company had $407.5 million of securities
under TALF which are reflected as TALF investments, at market value and
$336.2 million of secured financing from the FRBNY which is reflected as TALF
borrowings, at market value. As of December 31, 2009, the Company had
$250.3 million of TALF investments, at market value, and $217.6 million of TALF
borrowings, at market value. Changes in market value for both the securities
and borrowings are included in Net realized gains (losses) while interest
income on the TALF investments is reflected in net investment income and
interest expense on the TALF borrowings is reflected in interest expense. The
Company recorded net realized gains for the 2010 second quarter of $5.8 million
on the TALF program, consisting of realized gains of $4.3 million and realized
gains of $1.5 of million on the TALF investments and TALF borrowings,
respectively. The Company recorded net realized gains for the six months ended June 30,
2010 of $8.4 million on the TALF program, consisting of realized gains of $7.9
million and realized gains of $0.5 million on the TALF investments and TALF
borrowings, respectively. See Note 4, Debt and Financing ArrangementsTALF
Program, for further details.
27
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Investments
Other
investments include: (i) mutual funds which invest in fixed maturity
securities and (ii) other securities which include the Companys
investment in Aeolus LP, equity portfolios which include allocations to global
natural resource markets and other sectors and mutual funds which invest in
global equities, fixed income, commodities, property and emerging markets as
part of total return objectives. The Company elected to carry a portion of its
equity portfolio at fair value under the fair value option afforded by
accounting guidance regarding the fair value option for financial assets and
financial liabilities.
The
following table details the Companys other investments:
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
|
|
Market Value
|
|
Cost
|
|
Market Value
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income mutual funds
|
|
$
|
67,098
|
|
$
|
63,374
|
|
$
|
63,146
|
|
$
|
60,571
|
|
Other securities
|
|
273,500
|
|
273,767
|
|
109,026
|
|
101,934
|
|
Total
|
|
$
|
340,598
|
|
$
|
337,141
|
|
$
|
172,172
|
|
$
|
162,505
|
|
Investment Funds
Accounted for Using the Equity Method
The Company recorded $0.3 million of equity in net losses related to
investment funds accounted for using the equity method for the 2010 second
quarter, compared to $75.9 million of equity in net income for the 2009 second
quarter, and $28.7 million of equity in net income for the six months ended June 30,
2010, compared to $66.3 million of equity in net income for the six months
ended June 30, 2009. Due to the ownership structure of these investment
funds, which invest in fixed maturity securities, the Company uses the equity
method. In applying the equity method, these investments are initially recorded
at cost and are subsequently adjusted based on the Companys 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). Such investments are
generally recorded on a one month lag with some investments reported for on a
three month lag based on the availability of reports from the investment funds.
Changes in the carrying value of such investments are recorded in net income as
Equity in net income (loss) of investment funds accounted for using the equity
method while changes in the carrying value of the Companys other fixed income
investments are recorded as an unrealized gain or loss component of accumulated
other comprehensive income in shareholders equity. As such, fluctuations in
the carrying value of the investment funds accounted for using the equity
method may increase the volatility of the Companys reported results of
operations. Investment funds accounted for using the equity method totaled
$408.4 million at June 30, 2010, compared to $391.9 million at December 31,
2009. The Companys investment commitments, which are primarily related to
investment funds accounted for using the equity method totaled, were
approximately $133.9 million at June 30, 2010.
28
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Restricted Assets
The Company is required to maintain assets on deposit, which primarily
consist of fixed maturities, with various regulatory authorities to support its
insurance and reinsurance operations. The Company has investments in segregated
portfolios which are primarily used to provide collateral or guarantees for
letters of credit to third parties. See Note 4, Debt and Financing ArrangementsLetter
of Credit and Revolving Credit Facilities, for further details. In addition,
the Company maintains assets on deposit which are available to settle insurance
and reinsurance liabilities to third parties. In addition, certain of the
Companys operating subsidiaries maintain assets in trust accounts as
collateral for insurance and reinsurance transactions with affiliated
companies. At June 30, 2010 and December 31, 2009, such amounts
approximated $4.46 billion and $4.28 billion, respectively. The following table
details the value of restricted assets:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Assets used for collateral or guarantees
|
|
$
|
950,545
|
|
$
|
1,017,482
|
|
Deposits with U.S. regulatory authorities
|
|
289,533
|
|
279,136
|
|
Trust funds
|
|
80,755
|
|
115,585
|
|
Deposits with non-U.S. regulatory authorities
|
|
84,971
|
|
76,094
|
|
Total restricted assets
|
|
$
|
1,405,804
|
|
$
|
1,488,297
|
|
Net Investment Income
The components of net investment income were derived from the following
sources:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
94,181
|
|
$
|
103,349
|
|
$
|
191,842
|
|
$
|
200,307
|
|
Short-term investments
|
|
256
|
|
583
|
|
485
|
|
1,823
|
|
Other (1)
|
|
926
|
|
1,472
|
|
1,412
|
|
3,037
|
|
Gross investment income
|
|
95,363
|
|
105,404
|
|
193,739
|
|
205,167
|
|
Investment expenses
|
|
(4,826
|
)
|
(4,919
|
)
|
(10,230
|
)
|
(8,800
|
)
|
Net investment income
|
|
$
|
90,537
|
|
$
|
100,485
|
|
$
|
183,509
|
|
$
|
196,367
|
|
(1) Primarily
consists of interest income on operating cash accounts, other investments and
securities lending transactions.
29
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net Realized
Gains (Losses)
The following table provides an analysis of net realized gains
(losses):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
30,499
|
|
$
|
4,138
|
|
$
|
70,714
|
|
$
|
10,308
|
|
Other investments
|
|
(1,607
|
)
|
(104
|
)
|
(2,307
|
)
|
(18,690
|
)
|
Other (1)
|
|
33,222
|
|
(15,827
|
)
|
41,489
|
|
(8,575
|
)
|
Net realized gains (losses)
|
|
$
|
62,114
|
|
$
|
(11,793
|
)
|
$
|
109,896
|
|
$
|
(16,957
|
)
|
(1) Primarily
consists of net realized gains or losses related to investment-related
derivatives and foreign currency forward contracts (see Note 9) and changes in
the market value of TALF investments and TALF borrowings.
Proceeds from the sales of fixed maturities for the 2010 second quarter
were $4.67 billion, compared to $5.88 billion for the 2009 second quarter, and
$9.11 billion for the six months ended June 30, 2010, compared to $8.66
billion for the six months ended June 30, 2009. For the 2010 second
quarter, gross gains and losses from such transactions were $55.5 million and
$25.0 million, respectively, compared to $64.4 million and $60.3 million for
the 2009 second quarter, respectively. For the six months ended June 30,
2010, gross gains and losses from such transactions were $116.3 million and
$45.6 million, respectively, compared to $135.9 million and $125.6 million for
the six months ended June 30, 2009, respectively. Realized gains or losses
on fixed maturities include changes in the market value of certain hybrid
securities pursuant to applicable guidance. The fair market values of such
securities at June 30, 2010 were approximately $99.6 million, compared to
$84.8 million at December 31, 2009. The Company recorded realized losses
of $7.4 million on such securities for the 2010 second quarter, compared to
realized gains of $5.8 million for the 2009 second quarter, and realized losses
of $8.7 million for the six months ended June 30, 2010, compared to
realized gains of $9.8 million for the six months ended June 30, 2009.
30
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8.
Fair Value
Accounting guidance regarding fair value measurements addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under GAAP and provides a common
definition of fair value to be used throughout GAAP. It defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly fashion between market participants at the measurement
date. In addition, it establishes a three-level valuation hierarchy for the
disclosure of fair value measurements. The valuation hierarchy is based upon
the transparency of inputs to the valuation of an asset or liability as of the
measurement date. The level in the hierarchy within which a given fair value
measurement falls is determined based on the lowest level input that is
significant to the measurement (Level 1 being the highest priority and Level 3
being the lowest priority).
The three levels are defined as follows:
Level 1:
Inputs to the
valuation methodology are observable inputs that reflect quoted prices
(unadjusted) for
identical
assets
or liabilities in
active markets
Level 2:
Inputs to the
valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial
instrument
Level 3:
Inputs to the
valuation methodology are unobservable and significant to the fair value
measurement
Following is a description of the valuation methodologies used for
securities measured at fair value, as well as the general classification of
such securities pursuant to the valuation hierarchy.
The Company determines the existence of an active market based on its
judgment as to whether transactions for the financial instrument occur in such
market with sufficient frequency and volume to provide reliable pricing
information. The independent pricing sources obtain market quotations and
actual transaction prices for securities that have quoted prices in active
markets. The Company uses quoted values and other data provided by nationally
recognized independent pricing sources as inputs into its process for
determining fair values of its fixed maturity investments. To validate the
techniques or models used by pricing sources, the Companys review process
includes, but is not limited to: (i) quantitative analysis (
e.g.
, comparing the quarterly return for each managed
portfolio to its target benchmark, with significant differences identified and
investigated); (ii) a review of the average number of prices obtained in
the pricing process and the range of resulting market values; (iii) initial
and ongoing evaluation of methodologies used by outside parties to calculate
fair value including a review of deep dive reports on selected securities which
indicated the use of observable inputs in the pricing process; (iv) comparing
the fair value estimates to its knowledge of the current market; (v) a
comparison of the pricing services fair values to other pricing services fair
values for the same investments; and (vi) back-testing, which includes
randomly selecting purchased or sold securities and comparing the executed
prices to the fair value estimates from the pricing service. At June 30,
2010, the Company obtained an average of 3.0 quotes per investment, compared to
2.6 quotes at December 31, 2009. Where multiple quotes or prices were
obtained, a price source hierarchy was maintained in order to determine which
price source provided the fair value (i.e., a price obtained from a pricing
service with more seniority in the hierarchy will be used from a less senior
one in all cases). The hierarchy prioritizes pricing services based on
availability and reliability and assigns the highest priority to index
providers. Based on the above review, the Company will challenge any prices for
a security or portfolio which are considered not to be representative of fair
value. The Company did not adjust the prices or quotes provided by the pricing services
at June 30, 2010 or December 31, 2009.
31
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The independent pricing sources obtain market quotations and actual
transaction prices for securities that have quoted prices in active markets.
Each source has its own proprietary method for determining the fair value of
securities that are not actively traded. In general, these methods involve the
use of matrix pricing in which the independent pricing source uses observable
market inputs including, but not limited to, investment yields, credit risks
and spreads, benchmarking of like securities, broker-dealer quotes, reported
trades and sector groupings to determine a reasonable fair market value. In
addition, pricing vendors use model processes, such as an Option Adjusted
Spread model, to develop prepayment and interest rate scenarios. The Option
Adjusted Spread model is commonly used to estimate fair value for securities
such as mortgage backed and asset backed securities. In certain circumstances,
when fair market values are unavailable from these independent pricing sources,
quotes are obtained directly from broker-dealers who are active in the
corresponding markets. Such quotes are subject to the validation procedures
noted above. Of the $11.2 billion of financial assets and liabilities measured
at fair value at June 30, 2010, approximately $1.65 billion, or 14.7%,
were priced using non-binding broker-dealer quotes. Of the $10.74 billion of
financial assets and liabilities measured at fair value at December 31,
2009, approximately $1.17 billion, or 10.8%, were priced using non-binding
broker-dealer quotes.
The Company reviews its securities measured at fair value and discusses
the proper classification of such investments with investment advisors and
others. Upon adoption of the accounting guidance regarding fair value
measurement, the Company determined that Level 1 securities included highly
liquid, recent issue U.S. Treasuries and certain of its short-term investments
held in highly liquid money market-type funds where it believes that quoted
prices are available in an active market. On January 1, 2010, the Company
determined that all U.S. Treasuries would be classified as Level 1 securities
due to observed levels of trading activity, the high number of strongly
correlated pricing quotes received on U.S. Treasuries and other factors. Such
determination resulted in $1.09 billion of U.S. Treasuries which were previously
classified as Level 2 being moved into Level 1.
Where the Company believes that quoted market prices are not available
or that the market is not active, fair values are estimated by using quoted
prices of securities with similar characteristics, pricing models or matrix
pricing and are generally classified as Level 2 securities. The Company
determined that Level 2 securities included corporate bonds, mortgage backed
securities, municipal bonds, asset backed securities, non-U.S. government
securities, TALF investments and TALF borrowings, certain short-term securities
and certain other investments.
The Company determined that three Euro-denominated corporate bonds
which invest in underlying portfolios of fixed income securities for which
there is a low level of transparency around inputs to the valuation process
should be classified within Level 3 of the valuation hierarchy. In addition,
the Company determined that two mutual funds, included in other investments,
which invest in underlying portfolios of fixed income securities for which
there is a low level of transparency around inputs to the valuation process
should be classified within Level 3 of the valuation hierarchy. In addition,
Level 3 securities include a small number of premium-tax bonds. The Company
reviews the classification of its investments each quarter. No securities were
reclassified between Level 2 and Level 3 during the 2010 periods.
32
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the Companys financial assets and
liabilities measured at fair value by level:
|
|
|
|
Fair Value Measurement Using:
|
|
|
|
Estimated
Market
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value:
|
|
|
|
|
|
|
|
|
|
Fixed maturities: (1)
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
2,849,589
|
|
$
|
|
|
$
|
2,701,698
|
|
$
|
147,891
|
|
Mortgage backed securities
|
|
1,900,291
|
|
|
|
1,900,291
|
|
|
|
U.S. government and government agencies
|
|
1,663,506
|
|
1,663,506
|
|
|
|
|
|
Commercial mortgage backed securities
|
|
1,057,395
|
|
|
|
1,057,395
|
|
|
|
Municipal bonds
|
|
989,917
|
|
|
|
989,917
|
|
|
|
Non-U.S. government securities
|
|
668,853
|
|
|
|
668,853
|
|
|
|
Asset backed securities
|
|
494,277
|
|
|
|
494,277
|
|
|
|
Total
|
|
9,623,828
|
|
1,663,506
|
|
7,812,431
|
|
147,891
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
573,496
|
|
531,556
|
|
41,940
|
|
|
|
TALF investments, at market value
|
|
407,469
|
|
|
|
407,469
|
|
|
|
Other investments
|
|
274,029
|
|
62,790
|
|
162,451
|
|
48,788
|
|
Total assets measured at fair value
|
|
$
|
10,878,822
|
|
$
|
2,257,852
|
|
$
|
8,424,291
|
|
$
|
196,679
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
TALF borrowings, at market value
|
|
$
|
336,213
|
|
$
|
|
|
$
|
336,213
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value:
|
|
|
|
|
|
|
|
|
|
Fixed maturities: (1)
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
3,134,088
|
|
$
|
|
|
$
|
2,955,703
|
|
$
|
178,385
|
|
Mortgage backed securities
|
|
1,449,382
|
|
|
|
1,449,382
|
|
|
|
U.S. government and government agencies
|
|
1,553,672
|
|
466,779
|
|
1,086,893
|
|
|
|
Commercial mortgage backed securities
|
|
1,185,799
|
|
|
|
1,185,799
|
|
|
|
Municipal bonds
|
|
957,752
|
|
|
|
957,752
|
|
|
|
Non-U.S. government securities
|
|
752,215
|
|
|
|
752,215
|
|
|
|
Asset backed securities
|
|
567,844
|
|
|
|
567,844
|
|
|
|
Total
|
|
9,600,752
|
|
466,779
|
|
8,955,588
|
|
178,385
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
575,483
|
|
564,281
|
|
11,202
|
|
|
|
TALF investments, at market value
|
|
250,265
|
|
|
|
250,265
|
|
|
|
Other investments
|
|
95,374
|
|
36,374
|
|
9,332
|
|
49,668
|
|
Total assets measured at fair value
|
|
$
|
10,521,874
|
|
$
|
1,067,434
|
|
$
|
9,226,387
|
|
$
|
228,053
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
TALF borrowings, at market value
|
|
$
|
217,565
|
|
$
|
|
|
$
|
217,565
|
|
$
|
|
|
(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 and reinvested of $209.6 million and $207.0 million at June 30,
2010 and December 31, 2009, respectively, and included the $214.6 million
and $212.8 million, respectively, of fixed maturities and short-term
investments pledged under securities lending agreements, at market value.
33
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents a reconciliation of the beginning and
ending balances for all investments measured at fair value on a recurring basis
using Level 3 inputs:
|
|
Fair Value Measurements Using:
|
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
Corporate
Bonds
|
|
Other
Investments
|
|
Total
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2010:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
177,674
|
|
$
|
51,487
|
|
$
|
229,161
|
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
Included in earnings (1)
|
|
(855
|
)
|
411
|
|
(444
|
)
|
Included in other comprehensive income
|
|
(17,851
|
)
|
(2,699
|
)
|
(20,550
|
)
|
Purchases, issuances and settlements
|
|
(11,077
|
)
|
(411
|
)
|
(11,488
|
)
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
147,891
|
|
$
|
48,788
|
|
$
|
196,679
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2009:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
130,561
|
|
$
|
32,759
|
|
$
|
163,320
|
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
Included in earnings (1)
|
|
1,710
|
|
|
|
1,710
|
|
Included in other comprehensive income
|
|
26,180
|
|
8,471
|
|
34,651
|
|
Purchases, issuances and settlements
|
|
|
|
(119
|
)
|
(119
|
)
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
158,451
|
|
$
|
41,111
|
|
$
|
199,562
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
2010:
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
178,385
|
|
$
|
49,668
|
|
$
|
228,053
|
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
Included in earnings (1)
|
|
4,942
|
|
429
|
|
5,371
|
|
Included in other comprehensive income
|
|
(24,359
|
)
|
(880
|
)
|
(25,239
|
)
|
Purchases, issuances and settlements
|
|
(11,077
|
)
|
(429
|
)
|
(11,506
|
)
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
147,891
|
|
$
|
48,788
|
|
$
|
196,679
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
2009:
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
142,571
|
|
$
|
40,339
|
|
$
|
182,910
|
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
Included in earnings (1)
|
|
1,191
|
|
(14,307
|
)
|
(13,116
|
)
|
Included in other comprehensive income
|
|
14,689
|
|
15,193
|
|
29,882
|
|
Purchases, issuances and settlements
|
|
|
|
(114
|
)
|
(114
|
)
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
158,451
|
|
$
|
41,111
|
|
$
|
199,562
|
|
(1)
Gains or losses on fixed
maturities were recorded as a component of net investment income while gains or
losses on other investments were recorded in net realized gains (losses).
34
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The amount of total losses for the 2010 second quarter included in
earnings attributable to the change in unrealized gains or losses relating to
assets still held at June 30, 2010 was $0.4 million. The amount of total
gains for the six months ended June 30, 2010 included in earnings
attributable to the change in unrealized gains or losses relating to assets
still held at June 30, 2010 was $5.4 million. The amount of total gains
for the 2009 second quarter and six months ended June 30, 2009 included in
earnings attributable to the change in unrealized gains or losses relating to
assets still held at June 30, 2009 was $1.7 million and $1.2 million,
respectively.
9. Derivative
Instruments
The Companys investment strategy allows for the use of derivative
securities. The Companys derivative instruments are recorded on its
consolidated balance sheets at market value. The market values of those
derivatives are based on quoted market prices. All realized and unrealized
contract gains and losses are reflected in the Companys results of operations.
The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other
futures contracts and commodity futures to manage portfolio duration or
replicate investment positions in its portfolios. Certain of the Companys
corporate bonds are managed in a global bond portfolio which incorporates the
use of foreign currency forward contracts which are intended to provide an
economic hedge against foreign currency movements on the portfolios non-U.S.
Dollar denominated holdings. In
addition, the Company utilizes other foreign currency forward contracts and
currency options as part of its investment strategy.
In addition, the Company purchases to-be-announced mortgage backed
securities (TBAs) as part of its investment strategy. TBAs represent
commitments to purchase a future issuance of agency mortgage backed securities.
For the period between purchase of a TBA and issuance of the underlying security,
the Companys position is accounted for as a derivative. The Company purchases
TBAs in both long and short positions to enhance investment performance and as
part of its overall investment strategy. The Company did not hold any
derivatives which were designated as hedging instruments at June 30, 2010
or December 31, 2009.
The following table summarizes information on the balance sheet
locations, market values and notional values of the Companys derivative
instruments:
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
Balance Sheet
Location
|
|
Estimated
Market
Value
|
|
Notional
Value
|
|
Estimated
Market
Value
|
|
Notional
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
|
|
Other
investments
|
|
$
|
377
|
|
$
|
1,048,829
|
|
$
|
(11
|
)
|
$
|
150,712
|
|
Foreign currency forwards
|
|
Other
investments
|
|
12,322
|
|
230,556
|
|
(3,289
|
)
|
133,202
|
|
TBAs
|
|
Fixed
maturities
|
|
927,657
|
|
877,600
|
|
(944,350
|
)
|
892,500
|
|
Other
|
|
Other
investments
|
|
4,626
|
|
83,859
|
|
(811
|
)
|
552,238
|
|
Total
|
|
|
|
$
|
944,982
|
|
|
|
$
|
(948,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Futures
|
|
Other
investments
|
|
$
|
577
|
|
$
|
472,904
|
|
$
|
(208
|
)
|
$
|
513,034
|
|
Foreign currency forwards
|
|
Other
investments
|
|
757
|
|
73,340
|
|
(12,408
|
)
|
310,030
|
|
TBAs
|
|
Fixed
maturities
|
|
11,070
|
|
11,000
|
|
(616
|
)
|
600
|
|
Other
|
|
Other
investments
|
|
26
|
|
1,975
|
|
(1,010
|
)
|
143,870
|
|
Total
|
|
|
|
$
|
12,430
|
|
|
|
$
|
(14,242
|
)
|
|
|
35
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes derivative instrument activity, which is
reflected as net realized gains or losses in the consolidated statements of
operations:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Derivatives
not designated as
|
|
June 30,
|
|
June 30,
|
|
hedging
instruments
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Futures
|
|
$
|
15,555
|
|
$
|
(9,063
|
)
|
$
|
15,717
|
|
$
|
(9,490
|
)
|
Foreign currency forwards
|
|
10,301
|
|
(6,806
|
)
|
15,408
|
|
419
|
|
TBAs
|
|
1,073
|
|
|
|
2,394
|
|
|
|
Other
|
|
1,206
|
|
42
|
|
2,033
|
|
496
|
|
Total
|
|
$
|
28,135
|
|
$
|
(15,827
|
)
|
$
|
35,552
|
|
$
|
(8,575
|
)
|
10. Earnings Per
Common Share
The following table sets forth the computation of basic and diluted
earnings per common share:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
243,451
|
|
$
|
158,590
|
|
$
|
460,445
|
|
$
|
304,920
|
|
Preferred dividends
|
|
(6,461
|
)
|
(6,461
|
)
|
(12,922
|
)
|
(12,922
|
)
|
Net income available to common shareholders
(numerator)
|
|
$
|
236,990
|
|
$
|
152,129
|
|
$
|
447,523
|
|
$
|
291,998
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and effect of
dilutive common share equivalents used in the computation of earnings per
common share:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
(denominator)
|
|
50,987,540
|
|
60,417,391
|
|
52,007,616
|
|
60,365,758
|
|
Effect of dilutive common share equivalents:
|
|
|
|
|
|
|
|
|
|
Nonvested restricted shares
|
|
338,914
|
|
265,419
|
|
367,671
|
|
268,266
|
|
Stock options (1)
|
|
1,938,849
|
|
1,943,507
|
|
2,011,403
|
|
1,955,832
|
|
Weighted average common shares and common share
equivalents outstanding diluted (denominator)
|
|
53,265,303
|
|
62,626,317
|
|
54,386,690
|
|
62,589,856
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.65
|
|
$
|
2.52
|
|
$
|
8.60
|
|
$
|
4.84
|
|
Diluted
|
|
$
|
4.45
|
|
$
|
2.43
|
|
$
|
8.23
|
|
$
|
4.67
|
|
(1)
Certain stock options were
not included in the computation of diluted earnings per share where the
exercise price of the stock options exceeded the average market price and would
have been anti-dilutive or where, when applying the treasury stock method to
in-the-money options, the sum of the proceeds, including unrecognized
compensation, exceeded the average market price and would have been
anti-dilutive. For the 2010 second quarter and six months ended June 30,
2010, the number of stock options excluded were 254,686 and 215,354,
respectively. For the 2009 second quarter and six months ended June 30,
2009, the number of stock options excluded were 915,611 and 807,046,
respectively.
36
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
11. Legal Proceedings
The
Company, in common with the insurance industry in general, is subject to
litigation and arbitration in the normal course of its business. As of June 30,
2010, the Company was not a party to any litigation or arbitration which is
expected by management to have a material adverse effect on the Companys
results of operations and financial condition and liquidity.
12. Income Taxes
ACGL is incorporated under the laws of Bermuda and, under current
Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or
capital gains. The Company has received a written undertaking from the Minister
of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966
that, in the event that any legislation is enacted in Bermuda imposing any tax
computed on profits, income, gain or appreciation on any capital asset, or any
tax in the nature of estate duty or inheritance tax, such tax will not be
applicable to ACGL or any of its operations until March 28, 2016. This
undertaking does not, however, prevent the imposition of taxes on any person
ordinarily resident in Bermuda or any company in respect of its ownership of
real property or leasehold interests in Bermuda.
ACGL and its non-U.S. subsidiaries will be subject to U.S. federal
income tax only to the extent that they derive U.S. source income that is
subject to U.S. withholding tax or income that is effectively connected with
the conduct of a trade or business within the U.S. and is not exempt from U.S.
tax under an applicable income tax treaty with the U.S. ACGL and its non-U.S.
subsidiaries will be subject to a withholding tax on dividends from U.S.
investments and interest from certain U.S. payors (subject to reduction by any
applicable income tax treaty). ACGL and its non-U.S. subsidiaries intend to
conduct their operations in a manner that will not cause them to be treated as
engaged in a trade or business in the United States and, therefore, will not be
required to pay U.S. federal income taxes (other than U.S. excise taxes on
insurance and reinsurance premium and withholding taxes on dividends and
certain other U.S. source investment income). However, because there is
uncertainty as to the activities which constitute being engaged in a trade or
business within the United States, there can be no assurances that the U.S.
Internal Revenue Service will not contend successfully that ACGL or its non-U.S.
subsidiaries are engaged in a trade or business in the United States. If ACGL
or any of its non-U.S. subsidiaries were subject to U.S. income tax, ACGLs
shareholders equity and earnings could be materially adversely affected. ACGL
has subsidiaries and branches that operate in various jurisdictions around the
world that are subject to tax in the jurisdictions in which they operate. The
significant jurisdictions in which ACGLs subsidiaries and branches are subject
to tax are the United States, United Kingdom, Ireland, Canada, Switzerland
and Denmark.
The Companys income tax provision resulted in an effective tax rate on
income before income taxes of 0.6% and 1.7%, respectively, for the 2010 second
quarter and six months ended June 30, 2010, compared to 5.3% and 5.7%,
respectively, for the 2009 second quarter and six months ended June 30,
2009. The Companys effective tax rate, which is based upon the expected annual
effective tax rate, may fluctuate from period to period based on the relative
mix of income reported by jurisdiction due primarily to the varying tax rates
in each jurisdiction. The Company had a net deferred tax asset of $48.3 million
at June 30, 2010, compared to $56.3 million at December 31, 2009. In
addition, the Company paid $2.1 million for income taxes, net of recoveries,
during the six months ended June 30, 2010, compared to $22.1 million for
the six months ended June 30, 2009.
The United States also imposes an excise tax on insurance and
reinsurance premiums paid to non-U.S. insurers or reinsurers with respect to
risks located in the United States. The rates of tax, unless reduced by an
applicable U.S. tax treaty, are four percent for non-life insurance premiums
and one percent for life insurance and all reinsurance premiums. The Company
incurs federal excise taxes on certain of its reinsurance transactions,
including amounts ceded through intercompany transactions. The Company incurred
$2.9 million
37
Table of
Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
of
federal excise taxes in the 2010 second quarter, compared to $3.0 million in
the 2009 second quarter. The Company incurred $5.9 million of federal excise
taxes in the six months ended June 30, 2010, compared to $6.3 million in
the six months ended June 30, 2009. Such amounts are reflected as
acquisition expenses in the Companys consolidated statements of income.
38
Table of
Contents
ITEM 2
. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition
and results of operations. This should be read in conjunction with our
consolidated financial statements included in Item 1 of this report and also
our Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the year ended December 31,
2009 (2009 Form 10-K). In addition, readers should review Risk Factors
set forth in Item 1A of Part I of our 2009 Form 10-K. Tabular amounts
are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
Arch Capital Group Ltd. (ACGL and, together with its subsidiaries, we
or us) is a Bermuda public limited liability company with approximately $4.82
billion in capital at June 30, 2010 and, through operations in Bermuda,
the United States, Europe and Canada, writes insurance and reinsurance on a
worldwide basis. While we are positioned to provide a full range of property
and casualty insurance and reinsurance lines, we focus on writing specialty
lines of insurance and reinsurance. It is our belief that our underwriting
platform, our experienced management team and our strong capital base that is
unencumbered by significant pre-2002 risks have enabled us to establish a
strong presence in the insurance and reinsurance markets.
Current Outlook
During the second half of 2008, the financial markets experienced
significant adverse credit events and a loss of liquidity, which reduced the
amount and availability of capital in the insurance industry. In addition,
certain of our competitors experienced significant financial difficulties.
During the first six months of 2009, we experienced rate stabilization and some
improvements in rates. However, with no significant catastrophic activity in
the 2009 third quarter and substantial improvements in market values across
most investment sectors, the degree of rate improvement we saw in the first six
months of 2009 was moderated and the pricing environment was basically
unchanged at the end of 2009.
During 2010, in general, rates for all lines of business were slightly
down from previous periods, with increased competition experienced in executive
assurance and certain property lines of business. The current economic
conditions could continue to have a material impact on the frequency and
severity of claims and, therefore, could negatively impact our underwriting
returns. In addition, volatility in the financial markets could continue to
significantly affect our investment returns, reported results and shareholders
equity. We consider the potential impact of economic trends in the estimation
process for establishing unpaid losses and loss adjustment expenses and in
determining our investment strategies. We continue to believe that the most
attractive area from a pricing point of view remains U.S. catastrophe-exposed
business. We expect that our writings in this business will continue to
represent a significant proportion of our overall book, which could increase
the volatility of our operating results.
39
Table of
Contents
Natural Catastrophe Risk
We monitor our natural catastrophe risk globally for all perils and
regions, in each case, where we believe there is significant exposure. Our
models employ both proprietary and vendor-based systems and include cross-line
correlations for property, marine, offshore energy, aviation, workers
compensation and personal accident. Currently, we seek to limit our 1-in-250 year
return period net probable maximum pre-tax loss from a severe catastrophic
event in any geographic zone to approximately 25% of total shareholders
equity. We reserve the right to change this threshold at any time. Based on
in-force exposure estimated as of July 1, 2010, our modeled peak zone
catastrophe exposure is a windstorm affecting the Florida Tri-County area, with
a net probable maximum pre-tax loss of $797 million. Based on in-force exposure
estimated as of January 1, 2010, our modeled peak zone exposure was a
windstorm affecting the Florida Tri-County area, with a net probable maximum
pre-tax loss of $750 million. Our exposures to other perils, such as U.S.
earthquake and international events, are less than the exposures arising from
U.S. windstorms and hurricanes. As of July 1, 2010, our modeled peak zone
earthquake exposure (Los Angeles area earthquake) represented less than 65% of
our peak zone catastrophe exposure, and our modeled peak zone international
exposure (United Kingdom windstorm) is substantially less than both our peak
zone windstorm and earthquake exposures. Net probable maximum pre-tax loss
estimates are net of expected reinsurance recoveries, before income tax and
before excess reinsurance reinstatement premiums. Loss estimates are reflective
of the zone indicated and not the entire portfolio. Since hurricanes and
windstorms can affect more than one zone and make multiple landfalls, our loss
estimates include clash estimates from other zones.
The loss estimates shown above do not represent our maximum exposures
and it is highly likely that our actual incurred losses would vary materially
from the modeled estimates. There can be no assurances that we will not suffer
a net loss greater than 25% of our total shareholders equity from one or more
catastrophic events due to several factors, including the inherent
uncertainties in estimating the frequency and severity of such events and the
margin of error in making such determinations resulting from potential
inaccuracies and inadequacies in the data provided by clients and brokers, the
modeling techniques and the application of such techniques or as a result of a
decision to change the percentage of shareholders equity exposed to a single
catastrophic event. In addition, actual losses may increase if our reinsurers
fail to meet their obligations to us or the reinsurance protections purchased
by us are exhausted or are otherwise unavailable. See Risk FactorsRisk
Relating to Our Industry and Managements Discussion and Analysis of Financial
Condition and Results of OperationsNatural and Man-Made Catastrophic Events
in our 2009 Form 10-K.
40
Table of
Contents
Financial Measures
Management uses the following three key financial indicators in
evaluating our performance and measuring the overall growth in value generated
for ACGLs common shareholders:
Book Value per Common Share
Book value per common share represents total common shareholders
equity divided by the number of common shares outstanding. Management uses
growth in book value per common share as a key measure of the value generated
for our common shareholders each period and believes that book value per common
share is the key driver of ACGLs share price over time. Book value per common
share is impacted by, among other factors, our underwriting results, investment
returns and share repurchase activity, which has an accretive or dilutive
impact on book value per common share depending on the purchase price.
Book value per common share was $82.07 at June 30, 2010, a 6.7%
increase from $76.91 at March 31, 2010 and a 12.4% increase from $73.01 at
December 31, 2009. The growth in the 2010 second quarter and six months
ended June 30, 2010 was generated through underwriting results and
investment returns and also reflects the accretive impact of share repurchases
made during those periods.
Operating Return on Average Common Equity
Operating return on average common equity (Operating ROAE) represents
after-tax operating income available to common shareholders divided by the
average of beginning and ending common shareholders equity during the period.
After-tax operating income available to common shareholders, a non-GAAP
measure as defined in the SEC rules, represents 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. Management uses Operating ROAE as a key measure of the
return generated to common shareholders and has set an objective to achieve an
average Operating ROAE of 15% or greater over the insurance cycle, which it
believes to be an attractive return to common shareholders given the risks we
assume. See Comment on Non-GAAP Financial Measures.
Our Operating ROAE was 13.0% and 11.4% for the 2010 second quarter and
six months ended June 30, 2010, respectively, compared to 18.6% and 19.5%
for the 2009 second quarter and six months ended June 30, 2009,
respectively. The lower Operating ROAE for the 2010 periods resulted from a
higher level of catastrophic events than in the 2009 periods along with the
impacts of current insurance and reinsurance market conditions and lower
interest yields.
Total Return on Investments
Total return on investments includes net investment income, equity in
net income or loss of investment funds accounted for using the equity method,
net realized gains and losses and the change in unrealized gains and losses
generated by our investment portfolio. Total return is calculated on a pre-tax
basis and before investment expenses and includes the effect of financial
market conditions along with foreign currency fluctuations. Management uses
total return on investments as a key measure of the return generated to common
shareholders on the capital held in the business, and compares the return
generated by our investment portfolio against a benchmark return index.
The benchmark return index is a customized combination of indices
intended to approximate a target portfolio by asset mix and average credit
quality while also matching the approximate estimated duration and currency mix
of our insurance and reinsurance liabilities. Although the estimated duration
and average credit quality of this index will move as the duration and rating
of its constituent securities change, generally we do not adjust the composition
of the benchmark return index. The benchmark return index should not be
interpreted as
41
Table of Contents
expressing
a preference for or aversion to any particular sector or sector weight. The
index is intended solely to provide, unlike many master indices that change
based on the size of their constituent indices, a relatively stable basket of
investable indices.
At June 30, 2010, the benchmark return index had an average credit
quality of AA+, an estimated duration of 3.14 years and included weightings to
the following indices:
|
|
Weighting
|
|
|
|
|
|
Merrill Lynch Unsubordinated U.S.
Treasuries/Agencies, 1-10 Years Index
|
|
30.875
|
%
|
Merrill Lynch U.S. Corporates and All Yankees,
1-10 Years Index
|
|
20.875
|
%
|
Merrill Lynch Mortgage Master Index
|
|
11.875
|
%
|
Barclays Capital CMBS, AAA Index
|
|
10.000
|
%
|
Merrill Lynch Municipals, 1-10 Years Index
|
|
7.125
|
%
|
MSCI World Free Index
|
|
5.000
|
%
|
Merrill Lynch U.S. Treasury Bills, 0-3 Months
Index
|
|
4.750
|
%
|
Merrill Lynch U.S. High Yield Master II
Constrained Index
|
|
2.375
|
%
|
Barclays Capital U.S. High-Yield Corporate Loan
Index
|
|
2.375
|
%
|
Merrill Lynch U.K. Gilts, 1-10 Years Index
|
|
2.375
|
%
|
Merrill Lynch EMU Direct Government 1-10 Years
Index
|
|
2.375
|
%
|
Total
|
|
100.000
|
%
|
The following table summarizes the pre-tax total return (before
investment expenses) of our investment portfolio compared to the benchmark
return against which we measured our portfolio during the periods:
|
|
Arch
|
|
Benchmark
|
|
|
|
Portfolio (1)
|
|
Return Index
|
|
|
|
|
|
|
|
Pre-tax total return (before investment expenses):
|
|
|
|
|
|
2010 second quarter
|
|
1.74
|
%
|
1.19
|
%
|
2009 second quarter
|
|
3.89
|
%
|
4.37
|
%
|
|
|
|
|
|
|
Six months ended June 30, 2010
|
|
3.35
|
%
|
3.17
|
%
|
Six months ended June 30, 2009
|
|
5.03
|
%
|
3.90
|
%
|
(1)
Our investment
expenses were approximately 0.18% of average invested assets in the 2010 second
quarter, compared to 0.19% in the 2009 second quarter.
Total return for our investment portfolio outperformed the benchmark
return index in the 2010 second quarter largely because of its more defensive
credit posture, a lower weighting to equities and a higher weighting to U.S.
Dollar-denominated securities versus the British Pound and Euro as compared to
the benchmark return index. In addition, a number of our investment portfolios
external managers outperformed their specific benchmarks during the period.
42
Table of
Contents
Comment on Non-GAAP Financial
Measures
Throughout this filing, we present our operations in the way we believe
will be the most meaningful and useful to investors, analysts, rating agencies
and others who use our financial information in evaluating the performance of
our 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 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. 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 under Results of Operations below.
We believe that 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
in any particular period are not indicative of the performance of, or trends
in, our business. Although 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
are an integral part of our 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 our
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 recognized in earnings on our investments represent
other-than-temporary declines in expected recovery values on securities without
actual realization. The use of the equity method on certain of our 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 our
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 we account for our 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, we exclude 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
from the calculation of after-tax operating income available to common
shareholders.
We believe that showing net income available to common shareholders
exclusive of the items referred to above reflects the underlying fundamentals
of our business since we evaluate the performance of and manage our business to
produce an underwriting profit. In addition to presenting net income available
to common shareholders, we believe that this presentation enables investors and
other users of our financial information to analyze our performance in a manner
similar to how management analyzes performance. We also believe that this measure
follows industry practice and, therefore, allows the users of financial
information to compare our performance with our industry peer group. We believe
that the equity analysts and certain rating agencies which follow us and the
insurance industry as a whole generally exclude these items from their analyses
for the same reasons.
43
Table of
Contents
RESULTS OF OPERATIONS
The following table summarizes, on an after-tax basis, our consolidated
financial data, including a reconciliation of after-tax operating income
available to common shareholders to net income available to common
shareholders:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
After-tax operating income available to common
shareholders
|
|
$
|
132,182
|
|
$
|
163,041
|
|
$
|
230,913
|
|
$
|
332,042
|
|
Net realized gains (losses), net of tax
|
|
61,119
|
|
(11,243
|
)
|
106,622
|
|
(20,354
|
)
|
Net impairment losses recognized in earnings, net
of tax
|
|
(4,410
|
)
|
(20,786
|
)
|
(6,016
|
)
|
(56,920
|
)
|
Equity in net income (loss) of investment funds
accounted for using the equity method, net of tax
|
|
(348
|
)
|
75,890
|
|
28,702
|
|
66,309
|
|
Net foreign exchange gains (losses), net of tax
|
|
48,447
|
|
(54,773
|
)
|
87,302
|
|
(29,079
|
)
|
Net income available to common shareholders
|
|
$
|
236,990
|
|
$
|
152,129
|
|
$
|
447,523
|
|
$
|
291,998
|
|
The lower level of after-tax operating income in the 2010 second
quarter and six months ended June 30, 2010 compared to the 2009 periods
resulted from a higher level of catastrophic events in 2010 than in 2009 along
with the impacts of current insurance and reinsurance market conditions and
lower interest yields.
Segment Information
We classify our businesses into two underwriting segments insurance
and reinsurance and corporate and other (non-underwriting). Accounting
guidance regarding disclosures about segments of an enterprise and related
information requires certain disclosures about operating segments in a manner
that is consistent with how management evaluates the performance of the
segment. For a description of our underwriting segments, refer to Note 5, Segment
Information, of the notes accompanying our consolidated financial statements.
Management measures segment performance based on underwriting income or loss.
44
Table of
Contents
Insurance Segment
The following table sets forth our insurance segments underwriting
results:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
616,353
|
|
$
|
636,645
|
|
$
|
1,249,929
|
|
$
|
1,275,054
|
|
Net premiums written
|
|
422,837
|
|
419,318
|
|
875,761
|
|
860,904
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
405,473
|
|
$
|
417,454
|
|
$
|
834,950
|
|
$
|
818,551
|
|
Fee income
|
|
874
|
|
795
|
|
1,627
|
|
1,665
|
|
Losses and loss adjustment expenses
|
|
(275,294
|
)
|
(287,350
|
)
|
(587,305
|
)
|
(557,365
|
)
|
Acquisition expenses, net
|
|
(65,359
|
)
|
(58,748
|
)
|
(132,790
|
)
|
(116,371
|
)
|
Other operating expenses
|
|
(71,727
|
)
|
(70,836
|
)
|
(152,447
|
)
|
(133,744
|
)
|
Underwriting income (loss)
|
|
$
|
(6,033
|
)
|
$
|
1,315
|
|
$
|
(35,965
|
)
|
$
|
12,736
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
67.9
|
%
|
68.8
|
%
|
70.3
|
%
|
68.1
|
%
|
Acquisition expense ratio (1)
|
|
15.9
|
%
|
13.9
|
%
|
15.7
|
%
|
14.0
|
%
|
Other operating expense ratio
|
|
17.7
|
%
|
17.0
|
%
|
18.3
|
%
|
16.3
|
%
|
Combined ratio
|
|
101.5
|
%
|
99.7
|
%
|
104.3
|
%
|
98.4
|
%
|
(1)
The acquisition expense
ratio is adjusted to include certain fee income.
The components of the insurance segments underwriting results are
discussed below.
Premiums Written
.
Second quarter 2010 versus 2009:
Gross premiums written by the insurance
segment in the 2010 second quarter were 3.2% lower than in the 2009 second
quarter as reductions in aviation (which includes commercial and general
aviation and aerospace), property and construction lines of business were
partially offset by increases in alternative markets and collateral protection
business. The reduction in aviation business primarily resulted from a
strategic decision to reduce exposure, while the lower level of property and
construction business was due to the current market environment. Growth in the
alternative markets business, which is significantly reinsured, primarily resulted
from increased renewal premiums on existing accounts, while the higher level of
collateral protection business was generated through new business
opportunities. Net premiums written increased 0.8%, reflecting changes in the
mix of business, reinstatement premiums and the impact of changes in
reinsurance structure.
Six months ended June 30, 2010 versus 2009:
Gross premiums written by the insurance
segment in the six months ended June 30, 2010 were 2.0% lower than in the
2009 period, as reductions in aviation,
property and construction lines of business were partially offset by
increases in professional liability, collateral protection and executive
assurance business. The reduction in aviation business primarily resulted from
a strategic decision to reduce exposure, while the lower level of property and
construction business was due to the current market environment. Growth in the
professional liability and executive assurance business primarily resulted from
contributions from business written by the insurance segments European
operations, while the higher level of collateral protection business was
generated through new business opportunities. Net premiums written increased
1.7%, reflecting changes in the mix of business, reinstatement premiums and the
impact of changes in reinsurance structure.
45
Table of
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For information regarding net premiums written produced by major line
of business and geographic location, refer to note 5, Segment Information, of
the notes accompanying our consolidated financial statements.
Net Premiums Earned
. Net premiums earned by the insurance segment
in the 2010 second quarter were 2.9% lower than in the 2009 second quarter, and
were 2.0% higher in the six months ended June 30, 2010 than the 2009
period, reflecting changes in net premiums written over the previous five
quarters.
Losses and Loss Adjustment Expenses
. The table below shows the
components of the insurance segments loss ratio:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
69.8
|
%
|
73.3
|
%
|
70.8
|
%
|
71.5
|
%
|
Prior period reserve development
|
|
(1.9
|
)%
|
(4.5
|
)%
|
(0.5
|
)%
|
(3.4
|
)%
|
Loss ratio
|
|
67.9
|
%
|
68.8
|
%
|
70.3
|
%
|
68.1
|
%
|
Current Year Loss Ratio
.
Second quarter 2010 versus 2009:
The 2010 second quarter loss ratio included
0.8 points for current year catastrophic event activity, while the 2009 second
quarter did not include any significant catastrophic activity. In addition, the
2009 second quarter loss ratio included a higher level of large loss activity
than in the 2010 second quarter.
Six months ended June 30, 2010 versus 2009:
The 2010 loss ratio included 3.3 points for
current year catastrophic event activity, while the 2009 loss ratio did not
include any significant catastrophic activity. In addition, the 2009 loss ratio
included a higher level of large loss activity than in the 2010 period.
Prior Period Reserve Development
.
2010 second quarter
: The insurance segments
net favorable development of $7.9 million, or 1.9 points, reflected reductions
in property reserves (including special risk other than marine) from the 2007
and 2008 accident years (
i.e.
, the year
in which a loss occurred) of $1.5 million and $7.2 million, respectively,
reductions in professional liability reserves of $6.4 million, primarily from
the 2007 accident year, a reduction in executive assurance reserves of $6.9
million from the 2007 accident year and reductions in healthcare reserves of
$2.8 million from the 2005 to 2008 accident years. Such amounts were partially
offset by adverse development in executive assurance reserves from the 2008 and
2009 accident years of $6.8 million and $6.4 million, respectively, and in
casualty business from the 2003 to 2005 accident years of $1.8 million, $1.3
million and $3.7 million, respectively.
2009 second quarter
: The insurance segments
net favorable development of $18.7 million, or 4.5 points, reflected reductions
in property reserves from the 2005, 2007 and 2008 accident years of $3.3
million, $3.8 million and $4.4 million, respectively, and reductions in
casualty and construction reserves from the 2005 accident year of $6.2 million
and $5.9 million, respectively. Such amounts were partially offset by an
increase in marine reserves for the 2007 accident year of $5.7 million.
Six months ended June 30, 2010
: The insurance segments
net favorable development of $4.1 million, or 0.5 points, reflected reductions
in property reserves from the 2006 to 2008 accident years of $2.3 million, $4.5
million and $14.7 million, respectively, reductions in professional liability
reserves of $7.1 million, $3.1 million and $5.0 million from the 2007 to 2009
accident years, reductions in executive assurance reserves from the 2006 and
2007
46
Table of
Contents
accident
years of $2.3 million and $9.5 million, respectively, and reductions in
healthcare reserves of $5.1 million from the 2005 to 2008 accident years. The
loss ratio for the six months ended June 30, 2010 reflected adverse
development in casualty reserves from the 2003 to 2005 accident years of $11.7
million, $7.4 million and $4.3 million, respectively, which was primarily due
to a small number of high severity claims, in executive assurance reserves from
the 2008 and 2009 accident years of $7.1 million and $11.0 million,
respectively, in professional liability reserves from the 2006 accident year of
$12.8 million and in collateral protection business from the 2009 accident year
of $4.8 million.
Six months ended June 30, 2009
: The insurance segments
net favorable development of $27.8 million, or 3.4 points, reflected reductions
in professional liability reserves of $17.8 million driven by accident years
2005 to 2008, reserves for construction of $6.2 million from the 2005 accident
year, a reduction in property reserves of $6.0 million from the 2008 accident
year, and reductions in healthcare reserves of $5.7 million driven by accident
years 2003 to 2005. These were partially offset by adverse development on
executive assurance reserves of $6.7 million, driven by unfavorable development
from the 2006 and 2007 accident years combined with favorable development from
the 2004 and 2005 accident years, and travel and accident losses from the 2008
accident year of $5.2 million.
Underwriting Expenses
.
Second quarter 2010 versus 2009
: The insurance segments underwriting expense
ratio was 33.6% in the 2010 second quarter, compared to 30.9% in the 2009
second quarter. The acquisition expense ratio was 15.9% for the 2010 second
quarter, compared to 13.9% for the 2009 second quarter. The 2010 second quarter
ratio included 1.0 point related to prior year reserve development and also
reflected changes in the form of reinsurance ceded and mix of business. The
operating expense ratio was 17.7% in the 2010 second quarter, compared to 17.0%
in the 2009 second quarter, reflecting the lower level of net premiums earned
in the 2010 second quarter.
Six months ended June 30, 2010 versus 2009
: The insurance segments underwriting expense
ratio was 34.0% in the 2010 period, compared to 30.3% in the 2009 period. The
acquisition expense ratio was 15.7% for the 2010 period, compared to 14.0% for
the 2009 period. The 2010 ratio included 0.8 points related to prior year
reserve development and also reflected changes in the form of reinsurance ceded
and mix of business. The operating expense ratio was 18.3% in the 2010 period,
compared to 16.3% in the 2009 period. The operating expense ratio for the 2010
period included 0.7 points of costs incurred in the first quarter which are not
currently expected to impact the insurance segments operating expense ratio
for the balance of 2010, while the 2009 ratio benefitted from 0.8 points of
reductions in compensation costs which were non-recurring.
47
Table of
Contents
Reinsurance Segment
The following table sets forth our reinsurance segments underwriting
results:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
203,695
|
|
$
|
278,389
|
|
$
|
527,172
|
|
$
|
668,518
|
|
Net premiums written
|
|
201,421
|
|
274,536
|
|
516,251
|
|
655,813
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
217,538
|
|
$
|
281,804
|
|
$
|
457,978
|
|
$
|
581,271
|
|
Fee income
|
|
9
|
|
22
|
|
50
|
|
77
|
|
Losses and loss adjustment expenses
|
|
(87,851
|
)
|
(111,508
|
)
|
(203,891
|
)
|
(242,035
|
)
|
Acquisition expenses, net
|
|
(42,116
|
)
|
(65,066
|
)
|
(92,309
|
)
|
(133,901
|
)
|
Other operating expenses
|
|
(19,303
|
)
|
(16,943
|
)
|
(39,701
|
)
|
(35,135
|
)
|
Underwriting income
|
|
$
|
68,277
|
|
$
|
88,309
|
|
$
|
122,127
|
|
$
|
170,277
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
40.4
|
%
|
39.6
|
%
|
44.5
|
%
|
41.6
|
%
|
Acquisition expense ratio
|
|
19.4
|
%
|
23.1
|
%
|
20.2
|
%
|
23.0
|
%
|
Other operating expense ratio
|
|
8.9
|
%
|
6.0
|
%
|
8.7
|
%
|
6.0
|
%
|
Combined ratio
|
|
68.7
|
%
|
68.7
|
%
|
73.4
|
%
|
70.6
|
%
|
The components of the reinsurance segments underwriting results are
discussed below.
Premiums Written
.
Second quarter 2010 versus 2009:
Gross premiums written by the reinsurance
segment in the 2010 second quarter were 26.8% lower than in the 2009 second
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 segments other specialty and property catastrophe
lines. Gross premiums written in the 2009 second quarter also included the
renewal of a two-year treaty of approximately $43 million. Net premiums written
by the reinsurance segment in the 2010 second quarter were 26.6% lower than in
the 2009 second quarter, primarily due to the items noted above.
Six months ended June 30, 2010 versus 2009:
Gross premiums written by the reinsurance
segment in the 2010 period were 21.1% lower than in the 2009 period, 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 segments other specialty lines. Gross premiums written in the 2009
period also included the renewal of the two-year treaty noted above. Net
premiums written by the reinsurance segment in the 2010 period were 21.3% lower
than in the 2009 period, primarily due to the items noted above.
For information regarding net premiums written produced by major line
of business and geographic location, refer to note 5, Segment Information, of
the notes accompanying our consolidated financial statements.
Net Premiums Earned
. Net premiums earned in the 2010 second
quarter were 22.8% lower than in the 2009 second quarter, and 21.2% lower in
the six months ended June 30, 2010 than the 2009 period, reflecting
changes in net premiums written over the previous five quarters, including the
mix and type of business written.
48
Table of
Contents
Losses and Loss Adjustment Expenses
. The table below shows the
components of the reinsurance segments loss ratio:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
53.8
|
%
|
55.0
|
%
|
58.8
|
%
|
56.3
|
%
|
Prior period reserve development
|
|
(13.4
|
)%
|
(15.4
|
)%
|
(14.3
|
)%
|
(14.7
|
)%
|
Loss ratio
|
|
40.4
|
%
|
39.6
|
%
|
44.5
|
%
|
41.6
|
%
|
Current Year Loss Ratio
.
Second quarter 2010 versus 2009:
The 2010 second quarter loss ratio included
1.7 points for current year catastrophic event activity, while the 2009 second
quarter did not include any significant catastrophic activity. In addition, the
2010 second quarter loss ratio reflected an increase in the underwriting profit
of the reinsurance segments property facultative operations and changes in the
mix of business.
Six months ended June 30, 2010 versus 2009:
The 2010 period loss ratio included 8.3
points for current year catastrophic event activity, compared to 1.4 points in
the 2009 period. Specific 2010 catastrophic events included the Chilean
earthquake, European Windstorm Xynthia and the Australian hailstorms and
floods. In addition, the loss ratio for the six months ended June 30, 2010
period reflected an increase in the underwriting profit of the reinsurance
segments property facultative operations and changes in the mix of business,
while the 2009 period loss ratio included 0.6 points of losses related to trade
credit business.
Prior Period Reserve Development
.
2010 second quarter
: The reinsurance segments
net favorable development of $29.1 million, or 13.4 points, was primarily due
to reductions in reserves for short-tailed lines of business. Such amount
included reductions in property catastrophe and property other than property
catastrophe reserves of $22.2 million, including $3.5 million, $5.2 million and
$8.9 million from the 2007 to 2009 underwriting years (
i.e.
,
all premiums and losses attributable to contracts having an inception or
renewal date within the given twelve-month period), respectively, and $4.6
million from prior underwriting years. The 2010 second quarter loss ratio also
benefitted from reductions in casualty reserves, including $4.4 million and
$9.3 million from the 2003 and 2004 underwriting years, respectively. Such
amounts were partially offset by adverse development in marine reserves from
the 2008 underwriting year of $5.0 million and in casualty reserves from the
2006 underwriting year of $4.4 million.
2009 second quarter
: The reinsurance segments
net favorable development of $43.4 million, or 15.4 points, reflected
reductions in short-tailed and long-tailed lines of business. Such amount
included reductions in casualty reserves of $25.5 million, including $6.7
million, $4.7 million, $6.1 million and $6.9 million from the 2002 to 2005
underwriting years, respectively, and reductions in property catastrophe and
property other than property catastrophe reserves of $17.0 million, including
$4.0 million, $4.7 million and $7.0 million from the 2006 to 2008 underwriting
years, respectively. In addition, favorable development included $10.6 million
from other specialty reserves, including $1.8 million, $2.6 million and $3.5
million from the 2005, 2007 and 2008 underwriting years, respectively. Such
amounts were partially offset by adverse development in marine reserves from
the 2007 and 2008 underwriting years of $6.2 million and $6.1 million,
respectively.
Six months ended June 30, 2010
: The reinsurance segments
net favorable development of $65.6 million, or 14.3 points, was primarily due
to reductions in reserves for short-tailed lines of business. Such amount included
reductions in property catastrophe and property other than property catastrophe
reserves of $42.0 million, including $10.6 million and $17.7 million from the
2008 and 2009 underwriting years, respectively, and $13.7 million from prior
underwriting years. The loss ratio also benefitted from reductions in other
specialty reserves, including $3.5
49
Table of
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million,
$2.0 million, $1.3 million and $6.6 million from the 2004, 2007, 2008 and 2009
underwriting years, respectively, and reductions in casualty reserves,
including $3.9 million, $2.8 million, $11.6 million and $4.9 million from the
2002 to 2005 underwriting years, partially offset by adverse development of
$3.1 million and $11.2 million from the 2006 and 2008 underwriting years.
Six months ended June 30, 2009
: The reinsurance segments
net favorable development of $85.4 million, or 14.7 points, reflected reductions
in short-tailed and long-tailed lines of business. Such amount included
reductions in property catastrophe and property other than property catastrophe
reserves of $28.0 million, including $7.3 million and $11.2 million from the
2007 and 2008 underwriting years, respectively, and $9.5 million from prior
underwriting years, and reductions in other specialty reserves of $21.6
million, including $7.0 million from the 2004 underwriting year, $7.3 million
from the 2008 underwriting year and $7.3 million from other underwriting years.
The loss ratio also benefitted from reductions in casualty reserves of $43.2
million, including $9.7 million, $11.1 million, $12.6 million and $9.5 million
from the 2002 to 2005 underwriting years. Adverse development in marine reserves
from the 2007 and 2008 underwriting years of $5.9 million and $12.1 million,
respectively, were partially offset by favorable development of $5.2 million
from prior underwriting years.
Underwriting Expenses
.
Second quarter 2010 versus 2009:
The underwriting expense
ratio for the reinsurance segment was 28.3% in the 2010 second quarter,
compared to 29.1% in the 2009 second quarter. The acquisition expense ratio for
the 2010 second quarter was 19.4%, compared to 23.1% for the 2009 second
quarter. The comparison of the 2010 second quarter and 2009 second 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 2010 second quarter operating expense ratio of 8.9% was consistent with the
2010 first quarter ratio and the 2.9 point increase from the 2009 second
quarter ratio primarily resulted from the lower level of net premiums earned in
the 2010 period.
Six months ended June 30, 2010 versus 2009:
The
underwriting expense ratio for the reinsurance segment was 28.9% in the 2010
period, compared to 29.0% in the 2009 period. The acquisition expense ratio for
the 2010 period was 20.2%, compared to 23.0% for the 2009 period. The
comparison of the 2010 and 2009 period 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 operating expense ratio for the 2010
period of 8.7% was 2.7 points higher than the 2009 ratio and primarily resulted
from the lower level of net premiums earned in the 2010 period.
50
Table of
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Net Investment Income
The components of net investment income were derived from the following
sources:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
94,181
|
|
$
|
103,349
|
|
$
|
191,842
|
|
$
|
200,307
|
|
Short-term investments
|
|
256
|
|
583
|
|
485
|
|
1,823
|
|
Other (1)
|
|
926
|
|
1,472
|
|
1,412
|
|
3,037
|
|
Gross investment income
|
|
95,363
|
|
105,404
|
|
193,739
|
|
205,167
|
|
Investment expenses
|
|
(4,826
|
)
|
(4,919
|
)
|
(10,230
|
)
|
(8,800
|
)
|
Net investment income
|
|
$
|
90,537
|
|
$
|
100,485
|
|
$
|
183,509
|
|
$
|
196,367
|
|
(1) Primarily
consists of interest income on operating cash accounts, other investments and
securities lending transactions.
During the 2010 second quarter, we recorded a reduction to net
investment income following a review of prepayment assumptions on certain
commercial mortgage backed securities. The 2010 investment income yields were
calculated excluding $3.7 million of amortization expense which was recorded in
the 2010 second quarter but is not expected to impact yields during the balance
of 2010. The pre-tax investment income yield was 3.48% for the 2010 second
quarter, compared to 3.91% for the 2009 second quarter, and 3.46% for the six
months ended June 30, 2010, compared to 3.87% for the six months ended June 30,
2009. The lower yields in the 2010 periods primarily reflect lower prevailing
interest rates available in the market. The pre-tax investment income yields
were calculated based on amortized cost. Yields on future investment income may
vary based on financial market conditions, investment allocation decisions and
other factors.
Equity in Net Income (Loss) of Investment Funds
Accounted for Using the Equity Method
We recorded $0.3 million of equity in net losses related to investment
funds accounted for using the equity method in the 2010 second quarter,
compared to $75.9 million of equity in net income for the 2009 second quarter.
We recorded $28.7 million of equity in net income related to investment funds
accounted for using the equity method in the six months ended June 30,
2010, compared to $66.3 million of equity in net income for the six months
ended June 30, 2009. Due to the ownership structure of these investment
funds, which invest in fixed maturity securities, we use the equity method. In
applying the equity method, these investments are initially recorded at cost
and are subsequently adjusted based on our 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). Fluctuations in the carrying value of the
investment funds accounted for using the equity method may increase the
volatility of our reported results of operations. Investment funds accounted
for using the equity method totaled $408.4 million at June 30, 2010, compared
to $391.9 million at December 31, 2009. At June 30, 2010, our
portfolio included $409.7 million of investments in bank loan funds, of which
$268.8 million are reflected in the investment funds accounted for using the
equity method.
51
Table of
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Net Realized Gains or Losses
The following table provides an analysis of net realized gains
(losses):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
30,499
|
|
$
|
4,138
|
|
$
|
70,714
|
|
$
|
10,308
|
|
Other investments
|
|
(1,607
|
)
|
(104
|
)
|
(2,307
|
)
|
(18,690
|
)
|
Other (1)
|
|
33,222
|
|
(15,827
|
)
|
41,489
|
|
(8,575
|
)
|
Net realized gains (losses)
|
|
$
|
62,114
|
|
$
|
(11,793
|
)
|
$
|
109,896
|
|
$
|
(16,957
|
)
|
(1) Primarily
consists of realized gains or losses related to investment-related derivatives
and foreign currency forward contracts.
Net realized gains or losses from the sale of fixed maturities primarily
resulted from our decisions to reduce credit exposure, changes in duration
targets, relative value determinations and sales related to rebalancing
investment portfolios. In addition, net realized gains or losses include
changes in the market value of certain hybrid securities pursuant to applicable
guidance. The fair market values of such securities at June 30, 2010 were
approximately $99.6 million, compared to $84.8 million at December 31,
2009. We recorded realized losses of $7.4 million on such securities for the
2010 second quarter, compared to realized gains of $5.8 million for the 2009
second quarter, and realized losses of $8.7 million for the six months ended June 30,
2010, compared to realized gains of $9.8 million for the six months ended June 30,
2009.
Net Impairment Losses Recognized in Earnings
We review our investment portfolio each quarter to determine if
declines in market value are other-than-temporary. The process for identifying
declines in the market value of investments that are other-than-temporary
involves consideration of several factors. These factors include (i) an
analysis of the liquidity, business prospects and overall financial condition
of the issuer, (ii) the time period in which there was a significant
decline in value, and (iii) the significance of the decline. For the 2010
second quarter, we recorded $4.4 million of credit related impairments in
earnings, compared to $20.9 million for the 2009 second quarter. For the six
months ended June 30, 2010, we recorded $6.0 million of credit related
impairments in earnings, compared to $57.0 million for the six months ended June 30,
2009. The OTTI recorded in the 2010 periods primarily resulted from reductions
in estimated recovery values on certain mortgage-backed and asset-backed
securities following the review of such securities. See note 7, Investment
InformationOther-Than-Temporary Impairments, of the notes accompanying our
consolidated financial statements for additional information.
Other Expenses
Other expenses, which are included in our other operating expenses and
part of corporate and other (non-underwriting), were $10.5 million for the 2010
second quarter, compared to $11.5 million for the 2009 second quarter, and
$16.2 million for the six months ended June 30, 2010, compared to $17.5
million for the six months ended June 30, 2009. Such amounts primarily
represent certain holding company costs necessary to support our worldwide
insurance and reinsurance operations, share based compensation expense and
costs associated with operating as a publicly traded company.
Net Foreign Exchange Gains or Losses
Net foreign exchange gains for the 2010 second quarter of $48.6 million
consisted of net unrealized gains of $49.1 million and net realized losses of
$0.5 million, compared to net foreign exchange losses for the 2009 second
quarter of $53.7 million which consisted of net unrealized losses of $52.2
million and net realized losses
52
Table of
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of
$1.5 million. Net foreign exchange gains for the six months ended June 30,
2010 of $87.2 million consisted of net unrealized gains of $87 million and net
realized gains of $0.2 million, compared to net foreign exchange losses for the
six months ended June 30, 2009 of $28.5 million which consisted of net
unrealized losses of $26.2 million and net realized losses of $2.3 million. Net
foreign exchange gains for the 2010 periods primarily resulted from
strengthening of the U.S. Dollar against the Euro and British Pound. Net
unrealized foreign exchange gains or losses result from the effects of
revaluing our net insurance liabilities required to be settled in foreign currencies
at each balance sheet date. Historically, we have held investments in foreign
currencies which are intended to mitigate our exposure to foreign currency
fluctuations in our 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, we may not match a portion of our projected liabilities in foreign
currencies with investments in the same currencies, which could increase our
exposure to foreign currency fluctuations and increase the volatility in our
shareholders equity.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Critical accounting policies, estimates and recent accounting
pronouncements are discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our 2009 Form 10-K,
updated where applicable in the notes accompanying our consolidated financial
statements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Investable Assets
The finance and investment committee of our board of directors
establishes our investment policies and sets the parameters for creating
guidelines for our investment managers. The finance and investment committee
reviews the implementation of the investment strategy on a regular basis. Our
current approach stresses preservation of capital, market liquidity and
diversification of risk. While maintaining our emphasis on preservation of
capital and liquidity, we expect our portfolio to become more diversified and,
as a result, we may expand into areas which are not currently part of our
investment strategy. Our Chief Investment Officer administers the investment
portfolio, oversees our investment managers, formulates investment strategy in
conjunction with our finance and investment committee and directly manages
certain portions of our fixed income portfolio.
53
Table of Contents
The following table summarizes our investable assets:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Fixed maturities available for sale, at market
value
|
|
$
|
9,428,456
|
|
$
|
9,391,926
|
|
Fixed maturities pledged under securities lending
agreements, at market value (1)
|
|
195,372
|
|
208,826
|
|
Total fixed maturities
|
|
9,623,828
|
|
9,600,752
|
|
Short-term investments available for sale, at
market value
|
|
554,304
|
|
571,489
|
|
Short-term investments pledged under securities
lending agreements, at market value (1)
|
|
19,192
|
|
3,994
|
|
Cash
|
|
341,469
|
|
334,571
|
|
TALF investments, at market value (2)
|
|
407,469
|
|
250,265
|
|
Other investments
|
|
|
|
|
|
Fixed income mutual funds
|
|
67,098
|
|
63,146
|
|
Other securities
|
|
273,500
|
|
109,026
|
|
Investment funds accounted for using the equity
method
|
|
408,402
|
|
391,869
|
|
Total cash and investments (1)
|
|
11,695,262
|
|
11,325,112
|
|
Securities transactions entered into but not
settled at the balance sheet date
|
|
(108,059
|
)
|
50,790
|
|
Total investable assets
|
|
$
|
11,587,203
|
|
$
|
11,375,902
|
|
(1)
In our securities lending
transactions, we receive collateral in excess of the market value of the fixed
maturities and short-term investments pledged under securities lending
agreements. For purposes of this table, we have excluded the investment of
collateral received and reinvested at June 30, 2010 and December 31,
2009 of $209.6 million and $207.0 million, respectively, and included the
$214.6 million and $212.8 million, respectively, of fixed maturities and
short-term investments pledged under securities lending agreements, at market
value.
(2)
We participate in the
Federal Reserve Bank of New Yorks (FRBNY) Term Asset-Backed Securities Loan
Facility (TALF). TALF provides secured financing for asset-backed securities
backed by certain types of consumer and small business loans and for legacy
commercial mortgage-backed securities.
At June 30, 2010, our fixed income portfolio, which includes fixed
maturity securities and short-term investments, had a AA+ average Standard &
Poors quality rating, an average effective duration of 2.90 years, and an
average yield to maturity (imbedded book yield), before investment expenses, of
3.39%. At December 31, 2009, our fixed income portfolio had a AA+
average Standard & Poors quality rating, an average effective
duration of 2.87 years, and an average yield to maturity (imbedded book yield),
before investment expenses, of 3.64%. At June 30, 2010, approximately
$6.49 billion, or 58%, of our total investments and cash was internally
managed, compared to $6.6 billion, or 58%, at December 31, 2009.
54
Table of
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The following table summarizes our fixed maturities and fixed
maturities pledged under securities lending agreements, excluding TALF
investments:
|
|
Estimated
|
|
Gross
|
|
Gross
|
|
|
|
OTTI
|
|
|
|
Market
|
|
Unrealized
|
|
Unrealized
|
|
Amortized
|
|
Unrealized
|
|
|
|
Value
|
|
Gains
|
|
Losses
|
|
Cost
|
|
Losses (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
2,849,589
|
|
$
|
93,365
|
|
$
|
(28,029
|
)
|
$
|
2,784,253
|
|
$
|
(18,636
|
)
|
Mortgage backed securities
|
|
1,900,291
|
|
39,409
|
|
(29,323
|
)
|
1,890,205
|
|
(41,887
|
)
|
U.S. government and government agencies
|
|
1,663,506
|
|
49,252
|
|
(65
|
)
|
1,614,319
|
|
(207
|
)
|
Commercial mortgage backed securities
|
|
1,057,395
|
|
36,820
|
|
(7,875
|
)
|
1,028,450
|
|
(3,750
|
)
|
Municipal bonds
|
|
989,917
|
|
47,217
|
|
(321
|
)
|
943,021
|
|
(125
|
)
|
Non-U.S. government securities
|
|
668,853
|
|
33,016
|
|
(25,190
|
)
|
661,027
|
|
(72
|
)
|
Asset backed securities
|
|
494,277
|
|
19,214
|
|
(7,842
|
)
|
482,905
|
|
(3,932
|
)
|
Total
|
|
$
|
9,623,828
|
|
$
|
318,293
|
|
$
|
(98,645
|
)
|
$
|
9,404,180
|
|
$
|
(68,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
3,134,088
|
|
$
|
99,446
|
|
$
|
(12,983
|
)
|
$
|
3,047,625
|
|
$
|
(19,667
|
)
|
Mortgage backed securities
|
|
1,449,382
|
|
13,158
|
|
(45,536
|
)
|
1,481,760
|
|
(43,930
|
)
|
U.S. government and government agencies
|
|
1,553,672
|
|
8,716
|
|
(12,999
|
)
|
1,557,955
|
|
(499
|
)
|
Commercial mortgage backed securities
|
|
1,185,799
|
|
35,161
|
|
(11,724
|
)
|
1,162,362
|
|
(3,750
|
)
|
Municipal bonds
|
|
957,752
|
|
44,043
|
|
(2,284
|
)
|
915,993
|
|
(145
|
)
|
Non-U.S. government securities
|
|
752,215
|
|
41,858
|
|
(7,712
|
)
|
718,069
|
|
(351
|
)
|
Asset backed securities
|
|
567,844
|
|
21,713
|
|
(8,220
|
)
|
554,351
|
|
(6,111
|
)
|
Total
|
|
$
|
9,600,752
|
|
$
|
264,095
|
|
$
|
(101,458
|
)
|
$
|
9,438,115
|
|
$
|
(74,453
|
)
|
(1)
Represents the total
other-than-temporary impairments (OTTI) recognized in accumulated other
comprehensive income (AOCI). It does not include the change in market value
subsequent to the impairment measurement date. At June 30, 2010, the net
unrealized loss related to securities for which a non-credit OTTI was
recognized in AOCI was $28.9 million, compared to $37.9 million at December 31,
2009.
The following table provides the credit quality distribution of our
fixed maturities and fixed maturities pledged under securities lending
agreements, excluding TALF investments:
|
|
June 30, 2010
|
|
December 31, 2009
|
|
Rating
(1)
|
|
Estimated
Market
Value
|
|
% of Total
|
|
Estimated
Market
Value
|
|
% of Total
|
|
AAA
|
|
$
|
7,278,291
|
|
75.6
|
|
$
|
7,072,381
|
|
73.7
|
|
AA
|
|
1,011,324
|
|
10.5
|
|
1,281,377
|
|
13.3
|
|
A
|
|
543,359
|
|
5.7
|
|
547,104
|
|
5.7
|
|
BBB
|
|
274,738
|
|
2.9
|
|
231,988
|
|
2.4
|
|
BB
|
|
109,407
|
|
1.1
|
|
85,952
|
|
0.9
|
|
B
|
|
202,476
|
|
2.1
|
|
209,417
|
|
2.2
|
|
Lower than B
|
|
117,419
|
|
1.2
|
|
80,871
|
|
0.8
|
|
Not rated
|
|
86,814
|
|
0.9
|
|
91,662
|
|
1.0
|
|
Total
|
|
$
|
9,623,828
|
|
100.0
|
|
$
|
9,600,752
|
|
100.0
|
|
(1) Ratings as assigned by the major rating agencies.
55
Table of
Contents
The following table provides information on the severity of the
unrealized loss position as a percentage of amortized cost for all fixed
maturities and fixed maturities pledged under securities lending agreements
which were in an unrealized loss position:
|
|
June 30, 2010
|
|
December 31, 2009
|
|
Severity
of
Unrealized
Loss
|
|
Estimated
Market
Value
|
|
Gross
Unrealized
Losses
|
|
% of
Total Gross
Unrealized
Losses
|
|
Estimated
Market
Value
|
|
Gross
Unrealized
Losses
|
|
% of
Total Gross
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-10%
|
|
$
|
1,133,657
|
|
$
|
(35,288
|
)
|
35.8
|
|
$
|
2,892,977
|
|
$
|
(39,362
|
)
|
38.8
|
|
10-20%
|
|
230,152
|
|
(41,557
|
)
|
42.1
|
|
162,875
|
|
(28,542
|
)
|
28.1
|
|
20-30%
|
|
46,975
|
|
(13,973
|
)
|
14.2
|
|
36,872
|
|
(10,957
|
)
|
10.8
|
|
30-40%
|
|
7,060
|
|
(3,839
|
)
|
3.9
|
|
24,214
|
|
(12,204
|
)
|
12.0
|
|
40-50%
|
|
1,900
|
|
(1,489
|
)
|
1.5
|
|
8,031
|
|
(6,316
|
)
|
6.2
|
|
50-60%
|
|
82
|
|
(112
|
)
|
0.1
|
|
158
|
|
(171
|
)
|
0.2
|
|
60-70%
|
|
330
|
|
(528
|
)
|
0.5
|
|
69
|
|
(136
|
)
|
0.1
|
|
70-100%
|
|
566
|
|
(1,859
|
)
|
1.9
|
|
852
|
|
(3,770
|
)
|
3.8
|
|
Total
|
|
$
|
1,420,722
|
|
$
|
(98,645
|
)
|
100.0
|
|
$
|
3,126,048
|
|
$
|
(101,458
|
)
|
100.0
|
|
The following table provides information on the severity of the
unrealized loss position as a percentage of amortized cost for non-investment
grade fixed maturities and fixed maturities pledged under securities lending
agreements which were in an unrealized loss position:
|
|
June 30, 2010
|
|
December 31, 2009
|
|
Severity
of
Unrealized
Loss
|
|
Estimated
Market
Value
|
|
Gross
Unrealized
Losses
|
|
% of
Total Gross
Unrealized
Losses
|
|
Estimated
Market
Value
|
|
Gross
Unrealized
Losses
|
|
% of
Total Gross
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-10%
|
|
$
|
199,075
|
|
$
|
(7,195
|
)
|
7.3
|
|
$
|
64,198
|
|
$
|
(2,384
|
)
|
2.3
|
|
10-20%
|
|
79,894
|
|
(14,351
|
)
|
14.5
|
|
75,235
|
|
(13,139
|
)
|
12.9
|
|
20-30%
|
|
21,779
|
|
(6,331
|
)
|
6.4
|
|
8,550
|
|
(2,309
|
)
|
2.3
|
|
30-40%
|
|
4,856
|
|
(2,643
|
)
|
2.7
|
|
19,673
|
|
(9,704
|
)
|
9.6
|
|
40-50%
|
|
1,900
|
|
(1,489
|
)
|
1.5
|
|
3,303
|
|
(2,603
|
)
|
2.6
|
|
50-60%
|
|
82
|
|
(112
|
)
|
0.1
|
|
158
|
|
(171
|
)
|
0.2
|
|
60-70%
|
|
330
|
|
(528
|
)
|
0.5
|
|
69
|
|
(136
|
)
|
0.1
|
|
70-100%
|
|
566
|
|
(1,859
|
)
|
1.9
|
|
851
|
|
(3,028
|
)
|
3.0
|
|
Total
|
|
$
|
308,482
|
|
$
|
(34,508
|
)
|
34.9
|
|
$
|
172,037
|
|
$
|
(33,474
|
)
|
33.0
|
|
At June 30, 2010 and December 31, 2009, below-investment
grade securities comprised approximately 5% of our fixed maturities and fixed
maturities pledged under securities lending agreements. In accordance with our
investment strategy, we invest in high yield fixed income securities which are
included in Corporate bonds. Upon issuance, these securities are typically
rated below investment grade (i.e., rating assigned by the major rating
agencies of BB or less). In the table above, corporate bonds represented 54%
of the total below investment grade securities at market value, mortgage backed
securities represented 43% of the total and 3% were in other classes at June 30,
2010. At December 31, 2009, corporate bonds represented 27% of the total
below investment grade securities at market value, mortgage backed securities
represented 69% of the total and 4% were in other classes.
We determine estimated recovery values for our fixed maturities and
fixed maturities pledged under securities lending agreements following a review
of the business prospects, credit ratings, estimated loss given
56
Table of
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default
factors and information received from asset managers and rating agencies for
each security. For structured securities, we utilize underlying data, where
available, for each security provided by asset managers and additional
information from credit agencies in order to determine an expected recovery
value for each security. The analysis provided by the asset managers includes
expected cash flow projections under base case and stress case scenarios which
modify expected default expectations and loss severities and slow down
prepayment assumptions. In the tables above, securities at June 30, 2010
which were in an unrealized loss position of greater than 40% of amortized cost
were primarily in asset backed and mortgage backed securities where the
estimated market value for the securities was lower than our expected recovery
value.
The
following table summarizes our top ten exposures to fixed income corporate
issuers by market value at June 30, 2010, excluding guaranteed amounts:
|
|
Estimated
Market Value
|
|
Credit
Rating
|
|
|
|
|
|
|
|
JPMorgan Chase & Co.
|
|
$
|
84,347
|
|
AA
|
|
General Electric Co.
|
|
59,004
|
|
AA+
|
|
Banco Santander SA
|
|
58,603
|
|
AA+
|
|
Citigroup Inc.
|
|
50,421
|
|
AA
|
|
Bank of America Corp.
|
|
43,490
|
|
A+
|
|
Sovrisc BV
|
|
41,807
|
|
AAA
|
|
Royal Dutch Shell PLC
|
|
41,487
|
|
AA
|
|
Morgan Stanley
|
|
35,886
|
|
A+
|
|
The Goldman Sachs Group Inc.
|
|
35,171
|
|
AA+
|
|
Wells Fargo & Company
|
|
34,348
|
|
AA-
|
|
Total
|
|
$
|
484,564
|
|
|
|
At June 30, 2010, we held insurance enhanced municipal bonds, net
of prerefunded bonds that are escrowed in U.S. government obligations, the
estimated market value of which was approximately $270 million, or
approximately 2.5% of our total investable assets. These securities had an
average rating of Aa2 by Moodys and AA by Standard & Poors.
Giving no effect to the insurance enhancement, the overall credit quality of
our insured municipal bond portfolio had an average underlying rating of Aa2
by Moodys and AA by Standard & Poors. The ratings were obtained
from the individual rating agencies and were assigned a numerical amount with 1
being the highest rating. The average ratings were calculated using the
weighted average market values of the individual bonds. The average ratings
with and without the insurance enhancement are substantially the same at June 30,
2010. This is due to the fact that, in cases where the claims paying ratings of
the guarantors are below investment grade, those ratings have been withdrawn
from the bonds by the relevant rating agencies, and the insured ratings have
been equated to the underlying ratings. Guarantors of our insurance enhanced
municipal bonds, net of prerefunded bonds that are escrowed in U.S. government
obligations, included National Public Finance Guarantee (f.k.a. MBIA Insurance
Corporation) ($115 million), Assured Guaranty Ltd. ($73.7 million), Ambac
Financial Group, Inc. ($46.4 million), Financial Guaranty Insurance
Company ($21.9 million) and the Texas Permanent School Fund ($12.9 million). We
do not have a significant exposure to insurance enhanced asset-backed or
mortgage-backed securities. We do not have any significant investments in
companies which guarantee securities at June 30, 2010.
Our portfolio includes investments, such as mortgage-backed securities,
which are subject to prepayment risk. At June 30, 2010, our investments in
mortgage-backed securities (MBS), excluding commercial mortgage-backed
securities, amounted to approximately $1.9 billion, or 16.4% of total investable
assets, compared to $1.45 billion, or 12.7%, at December 31, 2009. As with
other fixed income investments, the market value of these securities fluctuates
depending on market and other general economic conditions and the interest rate
environment. Changes in interest rates can expose us to changes in the
prepayment rate on these investments. In periods of declining interest rates,
mortgage prepayments generally increase and MBS are
57
Table of
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prepaid
more quickly, requiring us to reinvest the proceeds at the then current market
rates. Conversely, in periods of rising rates, mortgage prepayments generally
fall, preventing us from taking full advantage of the higher level of rates.
However, current economic conditions may curtail prepayment activity as
refinancing becomes more difficult, thus limiting prepayments on MBS.
Since 2007, the residential mortgage market in the U.S. has experienced
a variety of difficulties. During this time, delinquencies and losses with
respect to residential mortgage loans generally have increased and may continue
to increase, particularly in the subprime sector. In addition, during this period,
residential property values in many states have declined or remained stable,
after extended periods during which those values appreciated. A continued
decline or an extended flattening in those values may result in additional
increases in delinquencies and losses on residential mortgage loans generally,
especially with respect to second homes and investment properties, and with
respect to any residential mortgage loans where the aggregate loan amounts
(including any subordinate loans) are close to or greater than the related
property values. These developments may have a significant adverse effect on
the prices of loans and securities, including those in our investment
portfolio. The situation continues to have wide ranging consequences, including
downward pressure on economic growth and the potential for increased insurance
and reinsurance exposures, which could have an adverse impact on our results of
operations, financial condition, business and operations. Our portfolio
includes commercial mortgage backed securities (CMBS). At June 30, 2010,
CMBS constituted approximately $1.06 billion, or 9.1% of total investable
assets, compared to $1.19 billion, or 10.4%, at December 31, 2009. The
commercial real estate market has experienced price deterioration, which could
lead to increased delinquencies and defaults on commercial real estate
mortgages.
58
Table of
Contents
The following table provides information on our mortgage backed
securities (MBS) and CMBS at June 30, 2010, excluding amounts guaranteed
by the U.S. government and TALF investments:
|
|
|
|
|
|
|
|
Estimated Market Value
|
|
|
|
Issuance
Year
|
|
Amortized
Cost
|
|
Average
Credit
Quality
|
|
Total
|
|
% of
Amortized
Cost
|
|
% of
Investable
Assets
|
|
Non-agency MBS:
|
|
2003
|
|
$
|
3,083
|
|
AAA
|
|
$
|
2,992
|
|
97.0
|
%
|
0.0
|
%
|
|
|
2004
|
|
21,053
|
|
A-
|
|
18,786
|
|
89.2
|
%
|
0.2
|
%
|
|
|
2005
|
|
67,496
|
|
BB+
|
|
57,645
|
|
85.4
|
%
|
0.5
|
%
|
|
|
2006
|
|
54,028
|
|
B-
|
|
47,973
|
|
88.8
|
%
|
0.4
|
%
|
|
|
2007
|
|
65,656
|
|
CCC-
|
|
57,770
|
|
88.0
|
%
|
0.5
|
%
|
|
|
2008
|
|
11,140
|
|
CC+
|
|
9,153
|
|
82.2
|
%
|
0.1
|
%
|
|
|
2009
|
(6)
|
140,935
|
|
AAA
|
|
147,601
|
|
104.7
|
%
|
1.3
|
%
|
|
|
2010
|
(6)
|
45,285
|
|
AAA
|
|
45,222
|
|
99.9
|
%
|
0.4
|
%
|
Total non-agency MBS
|
|
|
|
$
|
408,676
|
|
A-
|
|
$
|
387,142
|
|
94.7
|
%
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency CMBS:
|
|
1998
|
|
3,665
|
|
AAA
|
|
3,826
|
|
104.4
|
%
|
0.0
|
%
|
|
|
1999
|
|
147
|
|
AAA
|
|
147
|
|
100.0
|
%
|
0.0
|
%
|
|
|
2000
|
|
2,014
|
|
AAA
|
|
1,990
|
|
98.8
|
%
|
0.0
|
%
|
|
|
2001
|
|
181,140
|
|
AAA
|
|
182,410
|
|
100.7
|
%
|
1.6
|
%
|
|
|
2002
|
|
44,232
|
|
AAA
|
|
44,592
|
|
100.8
|
%
|
0.4
|
%
|
|
|
2003
|
|
63,325
|
|
AAA
|
|
66,977
|
|
105.8
|
%
|
0.6
|
%
|
|
|
2004
|
|
183,997
|
|
AAA
|
|
185,842
|
|
101.0
|
%
|
1.6
|
%
|
|
|
2005
|
|
50,751
|
|
AAA
|
|
50,470
|
|
99.4
|
%
|
0.4
|
%
|
|
|
2006
|
|
20,479
|
|
AAA
|
|
20,595
|
|
100.6
|
%
|
0.2
|
%
|
|
|
2007
|
|
50,221
|
|
AAA
|
|
55,738
|
|
111.0
|
%
|
0.5
|
%
|
|
|
2009
|
|
5,093
|
|
AAA
|
|
5,242
|
|
102.9
|
%
|
0.0
|
%
|
|
|
2010
|
|
30,130
|
|
AAA
|
|
30,720
|
|
102.0
|
%
|
0.3
|
%
|
Total non-agency CMBS
|
|
|
|
$
|
635,194
|
|
AAA
|
|
$
|
648,549
|
|
102.1
|
%
|
5.6
|
%
|
Additional Statistics:
|
|
Non-Agency MBS
|
|
Non-
Agency
|
|
|
|
|
|
|
|
Re-REMICs
|
|
All Other
|
|
CMBS (1)
|
|
|
|
|
|
Weighted average loan age (months)
|
|
42
|
|
49
|
|
80
|
|
|
|
|
|
Weighted average life (months) (2)
|
|
26
|
|
60
|
|
27
|
|
|
|
|
|
Weighted average loan-to-value % (3)
|
|
72.1
|
%
|
68.3
|
%
|
63.1
|
%
|
|
|
|
|
Total delinquencies (4)
|
|
21.4
|
%
|
18.4
|
%
|
5.1
|
%
|
|
|
|
|
Current credit support % (5)
|
|
42.9
|
%
|
12.2
|
%
|
26.1
|
%
|
|
|
|
|
(1)
Loans defeased with
government/agency obligations represented approximately 20% of the collateral
underlying our CMBS holdings.
(2)
The weighted average life
for MBS is based on the interest rates in effect at June 30, 2010. The weighted average life for CMBS reflects
the average life of the collateral underlying our CMBS holdings.
(3)
The range of loan-to-values
is 37% to 87% on MBS and 57% to 113% on CMBS.
(4)
Total delinquencies includes
60 days and over.
(5)
Current credit support %
represents the % for a collateralized mortgage obligation (CMO) or CMBS
class/tranche from other subordinate classes in the same CMO or CMBS deal.
(6)
Primarily represents
Re-REMICs issued in 2009 and 2010 with an average credit quality of AAA from
Fitch Ratings.
59
Table of
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The following table provides information on our asset backed securities
(ABS), excluding TALF investments, at June 30, 2010:
|
|
|
|
|
|
Estimated Market Value
|
|
|
|
Amortized
Cost
|
|
Average
Credit
Quality
|
|
Total
|
|
% of
Amortized
Cost
|
|
% of
Investable Assets
|
|
Sector:
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards (1)
|
|
$
|
221,788
|
|
AAA
|
|
$
|
229,989
|
|
103.7
|
%
|
2.0
|
%
|
Autos (2)
|
|
169,815
|
|
AAA
|
|
173,483
|
|
102.2
|
%
|
1.5
|
%
|
Rate reduction bonds (3)
|
|
34,150
|
|
AAA
|
|
36,523
|
|
106.9
|
%
|
0.3
|
%
|
Student loans (4)
|
|
23,714
|
|
AAA
|
|
24,788
|
|
104.5
|
%
|
0.2
|
%
|
Other
|
|
15,978
|
|
AA
|
|
14,968
|
|
93.7
|
%
|
0.1
|
%
|
|
|
465,445
|
|
AAA
|
|
479,751
|
|
103.1
|
%
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity (5)
|
|
$
|
6,029
|
|
AAA
|
|
$
|
5,296
|
|
87.8
|
%
|
0.0
|
%
|
|
|
256
|
|
A
|
|
256
|
|
100.0
|
%
|
0.0
|
%
|
|
|
298
|
|
BBB
|
|
295
|
|
99.0
|
%
|
0.0
|
%
|
|
|
8,872
|
|
BB to B
|
|
6,413
|
|
72.3
|
%
|
0.1
|
%
|
|
|
1,767
|
|
CCC to C
|
|
2,186
|
|
123.7
|
%
|
0.0
|
%
|
|
|
238
|
|
D
|
|
80
|
|
33.6
|
%
|
0.0
|
%
|
|
|
17,460
|
|
BBB-
|
|
14,526
|
|
83.2
|
%
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ABS
|
|
$
|
482,905
|
|
AAA
|
|
$
|
494,277
|
|
102.4
|
%
|
4.3
|
%
|
The effective duration of the total ABS was 1.26 years at June 30,
2010.
(1) The average excess spread % on credit cards is 31.3%.
(2) The weighted average credit support % on autos is 38.2%.
(3) The weighted average credit support % on rate reduction bonds
is 19.8%.
(4) The weighted average credit support % on student loans is
7.0%.
(5) The weighted average credit support % on home equity is 23.8%.
At June 30, 2010, our fixed income portfolio included $48.0
million par value in sub-prime securities with an estimated market value of
$17.8 million and an average credit quality of BBB from Standard &
Poors and Ba1 from Moodys. At December 31, 2009, our fixed income
portfolio included $52.1 million par value in sub-prime securities with an
estimated market value of $18.5 million and an average credit quality of BBB+
from Standard & Poors and Baa3 from Moodys. Such amounts were
primarily in the home equity sector of our asset backed securities, with the
balance in other ABS, MBS and CMBS sectors. We define sub-prime mortgage-backed
securities as investments in which the underlying loans primarily exhibit one
or more of the following characteristics: low FICO scores, above-prime interest
rates, high loan-to-value ratios or high debt-to-income ratios. In addition,
the portfolio of collateral backing our securities lending program contains
approximately $14.9 million estimated market value of sub-prime securities with
an average credit quality of B- from Standard & Poors and Caa1
from Moodys at June 30, 2010, compared to approximately $18.9 million
estimated market value with an average credit quality of BB from Standard &
Poors and B2 from Moodys at December 31, 2009.
Other investments totaled $340.6 million at June 30, 2010,
compared to $172.2 million at December 31, 2009. Investment funds
accounted for using the equity method totaled $408.4 million at June 30,
2010, compared to $391.9 million at December 31, 2009. See note 7, Investment
InformationOther Investments and Investment InformationInvestment Funds
Accounted for Using the Equity Method of the notes accompanying our
consolidated financial statements for further details.
60
Table of
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Certain of our investments, primarily those included in other
investments and investment funds accounted for using the equity method on
our balance sheet, may use leverage to achieve a higher rate of return. While
leverage presents opportunities for increasing the total return of such
investments, it may increase losses as well. Accordingly, any event that
adversely affects the value of the underlying securities held by such
investments would be magnified to the extent leverage is used and our potential
losses from such investments would be magnified. In addition, the structures
used to generate leverage may lead to such investment funds being required to
meet covenants based on market valuations and asset coverage. Market valuation
declines in the funds could force the sale of investments into a depressed
market, which may result in significant additional losses. Alternatively, the
funds may attempt to deleverage by raising additional equity or potentially
changing the terms of the established financing arrangements. We may choose to
participate in the additional funding of such investments. Our investment
commitments related to investment funds accounted for using the equity method
and other investments totaled approximately $133.9 million at June 30,
2010.
Our investment strategy allows for the use of derivative instruments.
We utilize various derivative instruments such as futures contracts to enhance
investment performance, replicate investment positions or manage market
exposures and duration risk that would be allowed under our investment
guidelines if implemented in other ways. See note 9, Derivative Instruments,
of the notes accompanying our consolidated financial statements for additional
disclosures concerning derivatives.
Accounting guidance regarding fair value measurements addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under GAAP and provides a common
definition of fair value to be used throughout GAAP. See note 8, Fair Value
of the notes accompanying our consolidated financial statements for a summary
of our financial assets and liabilities measured at fair value at June 30,
2010 and December 31, 2009 by level.
Reinsurance Recoverables
We monitor the financial condition of our reinsurers and attempt to
place coverages only with substantial, financially sound carriers. At June 30,
2010, approximately 91.2% of reinsurance recoverables on paid and unpaid losses
(not including prepaid reinsurance premiums) of $1.72 billion were due from
carriers which had an A.M. Best rating of A- or better and the largest
reinsurance recoverables from any one carrier was less than 5.7% of our total
shareholders equity. At December 31, 2009, approximately 90.0% of
reinsurance recoverables on paid and unpaid losses (not including prepaid
reinsurance premiums) of $1.72 billion were due from carriers which had
an A.M. Best rating of A- or better and the largest reinsurance
recoverables from any one carrier was less than 5.8% of our total shareholders
equity.
Reinsurance recoverables from Flatiron Re Ltd. (Flatiron), which is
not rated by A.M. Best, were $75.4 million at June 30, 2010, compared
to $97.6 million at December 31, 2009. Flatiron is required to contribute
funds into a trust for the benefit of Arch Re Bermuda. The recoverable from
Flatiron was fully collateralized through such trust at June 30, 2010 and December 31,
2009.
Reserves for Losses and Loss Adjustment Expenses
We establish reserves for losses and loss adjustment expenses (Loss
Reserves) which represent estimates involving actuarial and statistical
projections, at a given point in time, of our expectations of the ultimate
settlement and administration costs of losses incurred. Estimating Loss
Reserves is inherently difficult, which is exacerbated by the fact that we are
a relatively new company with relatively limited historical experience upon
which to base such estimates. We utilize actuarial models as well as available
historical insurance industry loss ratio experience and loss development
patterns to assist in the establishment of Loss Reserves. Actual losses and
loss adjustment expenses paid will deviate, perhaps substantially, from the
reserve estimates reflected in our financial statements.
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At June 30, 2010 and December 31, 2009, our Loss Reserves,
net of unpaid losses and loss adjustment expenses recoverable, by type and by
operating segment were as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Insurance:
|
|
|
|
|
|
Case reserves
|
|
$
|
1,210,399
|
|
$
|
1,166,441
|
|
IBNR reserves
|
|
2,525,100
|
|
2,431,193
|
|
Total net reserves
|
|
$
|
3,735,499
|
|
$
|
3,597,634
|
|
|
|
|
|
|
|
Reinsurance:
|
|
|
|
|
|
Case reserves.
|
|
$
|
789,107
|
|
$
|
812,455
|
|
Additional case reserves
|
|
22,293
|
|
61,226
|
|
IBNR reserves
|
|
1,719,294
|
|
1,742,597
|
|
Total net reserves
|
|
$
|
2,530,694
|
|
$
|
2,616,278
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
Case reserves.
|
|
$
|
1,999,506
|
|
$
|
1,978,896
|
|
Additional case reserves
|
|
22,293
|
|
61,226
|
|
IBNR reserves
|
|
4,244,394
|
|
4,173,790
|
|
Total net reserves
|
|
$
|
6,266,193
|
|
$
|
6,213,912
|
|
At June 30, 2010 and December 31, 2009, the insurance segments
Loss Reserves by major line of business, net of unpaid losses and loss
adjustment expenses recoverable, were as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Casualty
|
|
$
|
660,551
|
|
$
|
641,793
|
|
Executive assurance
|
|
578,440
|
|
536,151
|
|
Property, energy, marine and aviation.
|
|
538,478
|
|
533,859
|
|
Professional liability
|
|
495,860
|
|
504,454
|
|
Programs
|
|
476,903
|
|
452,143
|
|
Construction
|
|
442,935
|
|
421,729
|
|
Healthcare
|
|
143,172
|
|
139,414
|
|
National accounts casualty
|
|
115,973
|
|
96,251
|
|
Surety
|
|
87,337
|
|
89,501
|
|
Travel and accident
|
|
28,077
|
|
29,033
|
|
Other
|
|
167,773
|
|
153,306
|
|
Total net reserves
|
|
$
|
3,735,499
|
|
$
|
3,597,634
|
|
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At
June 30, 2010 and December 31, 2009, the reinsurance segments Loss
Reserves by major line of business, net of unpaid losses and loss adjustment
expenses recoverable, were as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Casualty
|
|
$
|
1,764,900
|
|
$
|
1,792,750
|
|
Property excluding property catastrophe
|
|
277,333
|
|
322,476
|
|
Marine and aviation
|
|
218,764
|
|
228,708
|
|
Property catastrophe
|
|
121,474
|
|
111,784
|
|
Other specialty.
|
|
99,405
|
|
116,799
|
|
Other
|
|
48,818
|
|
43,761
|
|
Total net reserves
|
|
$
|
2,530,694
|
|
$
|
2,616,278
|
|
Shareholders Equity
Our shareholders equity was $4.40 billion at June 30, 2010,
compared to $4.32 billion at December 31, 2009. The increase in the six
months ended June 30, 2010 of $74.7 million was attributable to net
income, partially offset by share repurchase activity.
Book Value per Common Share
The following table presents the calculation of book value per common
share at June 30, 2010 and December 31, 2009:
|
|
June 30,
|
|
December 31,
|
|
(U.S.
dollars in thousands, except share data)
|
|
2010
|
|
2009
|
|
Calculation of book value per common share:
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
4,398,003
|
|
$
|
4,323,349
|
|
Less preferred shareholders equity
|
|
(325,000
|
)
|
(325,000
|
)
|
Common shareholders equity
|
|
$
|
4,073,003
|
|
$
|
3,998,349
|
|
Common shares outstanding, net of treasury shares
(1)
|
|
49,630,570
|
|
54,761,678
|
|
Book value per common share
|
|
$
|
82.07
|
|
$
|
73.01
|
|
(1)
Excludes the effects of
4,650,209 and 5,016,104 stock options and 175,055 and 261,012 restricted stock
units outstanding at June 30, 2010 and December 31, 2009,
respectively.
Liquidity and Capital Resources
ACGL is a holding company whose assets primarily consist of the shares
in its subsidiaries. Generally, ACGL depends on its available cash resources,
liquid investments and dividends or other distributions from its subsidiaries
to make payments, including the payment of debt service obligations and
operating expenses it may incur and any dividends or liquidation amounts with
respect to the series A non-cumulative and series B non-cumulative preferred
shares and common shares. ACGLs readily available cash, short-term investments
and marketable securities, excluding amounts held by our regulated insurance
and reinsurance subsidiaries, totaled $23.9 million at June 30, 2010,
compared to $25.7 million at December 31, 2009. During the six months
ended June 30, 2010, ACGL received dividends of $445.0 million from Arch
Re Bermuda which were primarily used to fund the share repurchase program
described below.
The ability of our regulated insurance and reinsurance subsidiaries to
pay dividends or make distributions or other payments to us is dependent on
their ability to meet applicable regulatory standards. Under Bermuda law, Arch
Re Bermuda is required to maintain an enhanced capital requirement which must
equal or exceed its
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minimum
solvency margin (
i.e.
, the amount by which the
value of its general business assets must exceed its general business
liabilities) equal to the greatest of (1) $100.0 million, (2) 50% of
net premiums written (being gross premiums written less any premiums ceded by
Arch Re Bermuda, but Arch Re Bermuda may not deduct more than 25% of gross
premiums when computing net premiums written) and (3) 15% of net
discounted aggregated losses and loss expense provisions and other insurance
reserves. Arch Re Bermuda is prohibited from declaring or paying any dividends
during any financial year if it is not in compliance with its enhanced capital
requirement, minimum solvency margin or minimum liquidity ratio. In addition,
Arch Re Bermuda is prohibited from declaring or paying in any financial year
dividends of more than 25% of its total statutory capital and surplus (as shown
on its previous financial years statutory balance sheet) unless it files, at
least seven days before payment of such dividends, with the Bermuda Monetary
Authority (BMA) an affidavit stating that it will continue to meet the
required margins. In addition, Arch Re Bermuda is prohibited, without prior
approval of the BMA, from reducing by 15% or more its total statutory capital,
as set out in its previous years statutory financial statements. Arch Re
Bermuda is required to meet enhanced capital requirements and a target capital
level (defined as 120% of the enhanced capital requirements) as calculated
using a new risk based capital model called the Bermuda Solvency Capital
Requirement (BSCR) model. At December 31, 2009, as determined under
Bermuda law, Arch Re Bermuda had statutory capital of $2.23 billion and
statutory capital and surplus of $4.26 billion, which amounts were in
compliance with Arch Re Bermudas enhanced capital requirement at such date.
Such amounts include ownership interests in U.S. insurance and reinsurance
subsidiaries. Accordingly, Arch Re Bermuda can pay approximately $1.07 billion
to ACGL during 2010 without providing an affidavit to the BMA, as discussed
above. In addition to meeting applicable regulatory standards, the ability of
our insurance and reinsurance subsidiaries to pay dividends to intermediate
parent companies owned by Arch Re Bermuda is also constrained by our dependence
on the financial strength ratings of our insurance and reinsurance subsidiaries
from independent rating agencies. The ratings from these agencies depend to a
large extent on the capitalization levels of our insurance and reinsurance
subsidiaries. We believe that ACGL has sufficient cash resources and available
dividend capacity to service its indebtedness and other current outstanding
obligations.
Our insurance and reinsurance subsidiaries are required to maintain
assets on deposit, which primarily consist of fixed maturities, with various
regulatory authorities to support their operations. The assets on deposit are
available to settle insurance and reinsurance liabilities to third parties. Our
insurance and reinsurance subsidiaries also have investments in segregated
portfolios primarily to provide collateral or guarantees for letters of credit
to third parties. At June 30, 2010 and December 31, 2009, such
amounts approximated $1.41 billion and $1.49 billion, respectively. In
addition, certain of our operating subsidiaries maintain assets in trust
accounts as collateral for insurance and reinsurance transactions with
affiliated companies. At June 30, 2010 and December 31, 2009, such
amounts approximated $4.46 billion and $4.28 billion, respectively.
ACGL, through its subsidiaries, provides financial support to certain
of its insurance subsidiaries and affiliates, through certain reinsurance
arrangements essential to the ratings of such subsidiaries. Except as described
in the preceding sentence, or where express reinsurance, guarantee or other
financial support contractual arrangements are in place, each of ACGLs subsidiaries
or affiliates is solely responsible for its own liabilities and commitments
(and no other ACGL subsidiary or affiliate is so responsible). Any reinsurance
arrangements, guarantees or other financial support contractual arrangements
that are in place are solely for the benefit of the ACGL subsidiary or
affiliate involved and third parties (creditors or insureds of such entity) are
not express beneficiaries of such arrangements.
Our insurance and reinsurance operations provide liquidity in that premiums
are received in advance, sometimes substantially in advance, of the time losses
are paid. The period of time from the occurrence of a claim through the
settlement of the liability may extend many years into the future. Sources of
liquidity include cash flows from operations, financing arrangements or routine
sales of investments.
As part of our investment strategy, we seek to establish a level of
cash and highly liquid short-term and intermediate-term securities which,
combined with expected cash flow, is believed by us to be adequate to meet
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our
foreseeable payment obligations. However, due to the nature of our operations,
cash flows are affected by claim payments that may comprise large payments on a
limited number of claims and which can fluctuate from year to year. We believe
that our liquid investments and cash flow will provide us with sufficient liquidity
in order to meet our claim payment obligations. However, the timing and amounts
of actual claim payments related to recorded Loss Reserves vary based on many
factors, including large individual losses, changes in the legal environment,
as well as general market conditions. The ultimate amount of the claim payments
could differ materially from our estimated amounts. Certain lines of business
written by us, such as excess casualty, have loss experience characterized as
low frequency and high severity. The foregoing may result in significant
variability in loss payment patterns. The impact of this variability can be
exacerbated by the fact that the timing of the receipt of reinsurance
recoverables owed to us may be slower than anticipated by us. Therefore, the
irregular timing of claim payments can create significant variations in cash
flows from operations between periods and may require us to utilize other
sources of liquidity to make these payments, which may include the sale of
investments or utilization of existing or new credit facilities or capital
market transactions. If the source of liquidity is the sale of investments, we
may be forced to sell such investments at a loss, which may be material.
Our investments in certain securities, including certain fixed income
and structured securities, investments in funds accounted for using the equity
method, other investments and our investment in Gulf Re (joint venture) may be
illiquid due to contractual provisions or investment market conditions. If we require
significant amounts of cash on short notice in excess of anticipated cash
requirements, then we may have difficulty selling these investments in a timely
manner or may be forced to sell or terminate them at unfavorable values.
Consolidated net cash provided by operating activities was $390.1
million for the six months ended June 30, 2010, compared to $518.5 million
for the six months ended June 30, 2009. The decline in cash flow from
operations reflected a lower level of premium collections, partially offset by
a decrease in paid losses. Cash flow from operating activities are provided by
premiums collected, fee income, investment income and collected reinsurance
recoverables, offset by losses and loss adjustment expense payments,
reinsurance premiums paid, operating costs and current taxes paid.
On a consolidated basis, our aggregate investable assets totaled $11.59
billion at June 30, 2010, compared to $11.38 billion at December 31,
2009. The primary goals of our asset liability management process are to
satisfy the insurance liabilities, manage the interest rate risk embedded in
those insurance liabilities and maintain sufficient liquidity to cover
fluctuations in projected liability cash flows, including debt service
obligations. Generally, the expected principal and interest payments
produced by our fixed income portfolio adequately fund the estimated runoff of
our insurance reserves. Although this is not an exact cash flow match in
each period, the substantial degree by which the market value of the fixed
income portfolio exceeds the expected present value of the net insurance
liabilities, as well as the positive cash flow from newly sold policies and the
large amount of high quality liquid bonds, provide assurance of our ability to
fund the payment of claims and to service our outstanding debt without having
to sell securities at distressed prices in an illiquid market or access credit
facilities.
We expect that our liquidity needs, including our anticipated insurance
obligations and operating and capital expenditure needs, for the next twelve
months, at a minimum, will be met by funds generated from underwriting
activities and investment income, as well as by our balance of cash, short-term
investments, proceeds on the sale or maturity of our investments, and our
credit facilities.
We monitor our capital adequacy on a regular basis and will seek to
adjust our capital base (up or down) according to the needs of our business.
The future capital requirements of our business will depend on many factors,
including our ability to write new business successfully and to establish
premium rates and reserves at levels sufficient to cover losses. Our ability to
underwrite is largely dependent upon the quality of our claims paying and
financial strength ratings as evaluated by independent rating agencies. In
particular, we require (1) sufficient capital to maintain our financial
strength ratings, as issued by several ratings agencies, at a level
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considered
necessary by management to enable our key operating subsidiaries to compete; (2) sufficient
capital to enable our underwriting subsidiaries to meet the capital adequacy
tests performed by statutory agencies in the U.S. and other key markets; and (3) letters
of credit and other forms of collateral that are necessary for our non-U.S.
operating companies because they are non-admitted under U.S. state insurance
regulations.
On July 29, 2010, Standard & Poors Ratings Services
raised the counterparty credit and financial strength ratings on our insurance
and reinsurance subsidiaries to A+ (Strong) with a stable outlook from A
(Strong) and ACGLs counterparty (issuer) credit rating was raised to A- with
a stable outlook from BBB+.
As part of our capital management program, we may seek to raise
additional capital or may seek to return capital to our shareholders through
share repurchases, cash dividends or other methods (or a combination of such
methods). Any such determination will be at the discretion of our board of
directors and will be dependent upon our profits, financial requirements and
other factors, including legal restrictions, rating agency requirements and
such other factors as our board of directors deems relevant.
The board of directors of ACGL has authorized the investment of up to
$2.5 billion in ACGLs common shares through a share repurchase program. Such
amount consisted of a $1.0 billion authorization in February 2007, a $500
million authorization in May 2008, and a $1.0 billion authorization in November 2009.
Repurchases under the program may be effected from time to time in open market
or privately negotiated transactions through December 2011. Since the
inception of the share repurchase program, ACGL has repurchased approximately
28.1 million common shares for an aggregate purchase price of $1.96 billion.
During the six months ended June 30, 2010, ACGL repurchased 6.2 million
common shares for an aggregate purchase price of $450.3 million. Weighted
average shares outstanding for the six months ended June 30, 2010 were
reduced by 24.8 million shares, compared to 15.3 million shares for the 2009
period. At June 30, 2010, approximately $541.1 million of share
repurchases were available under the program.
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. We will continue to monitor our share price and,
depending upon results of operations, market conditions and the development of
the economy, as well as other factors, we will consider share repurchases on an
opportunistic basis.
To the extent that our existing capital is insufficient to fund our
future operating requirements or maintain such ratings, we may need to raise
additional funds through financings or limit our growth. Given the recent
severe disruptions in the public debt and equity markets, including among other
things, widening of credit spreads, lack of liquidity and bankruptcies, we can
provide no assurance that, if needed, we would be able to obtain additional
funds through financing on satisfactory terms or at all. Continued adverse
developments in the financial markets, such as disruptions, uncertainty or
volatility in the capital and credit markets, may result in realized and
unrealized capital losses that could have a material adverse effect on our
results of operations, financial position and our businesses, and may also
limit our access to capital required to operate our business.
If we are not able to obtain adequate capital, our business, results of
operations and financial condition could be adversely affected, which could
include, among other things, the following possible outcomes: (1) potential
downgrades in the financial strength ratings assigned by ratings agencies to
our operating subsidiaries, which could place those operating subsidiaries at a
competitive disadvantage compared to higher-rated competitors; (2) reductions
in the amount of business that our operating subsidiaries are able to write in
order to meet capital adequacy-based tests enforced by statutory agencies; and (3) any
resultant ratings downgrades could, among other things, affect our ability to
write business and increase the cost of bank credit and letters of credit. In
addition, under certain of the reinsurance agreements assumed by our
reinsurance operations, upon the occurrence of a ratings downgrade or other
specified triggering event with respect to our reinsurance operations, such as
a reduction in surplus by specified amounts during specified periods, our
ceding company clients may be provided with certain rights, including, among
other things, the right to terminate the subject reinsurance agreement and/or
to require that our reinsurance operations post additional collateral.
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In addition to common share capital, we depend on external sources of
finance to support our underwriting activities, which can be in the form (or
any combination) of debt securities, preference shares, common equity and bank
credit facilities providing loans and/or letters of credit. As noted above,
equity or debt financing, if available at all, may be on terms that are
unfavorable to us. In the case of equity financings, dilution to our
shareholders could result, and, in any case, such securities may have rights,
preferences and privileges that are senior to those of our outstanding
securities.
In 2006, we entered into a five-year agreement for a $300.0 million
unsecured revolving loan and letter of credit facility and a $1.0 billion
secured letter of credit facility. Under the terms of the agreement, Arch
Reinsurance Company (Arch Re U.S.) is limited to issuing $100.0 million of
unsecured letters of credit as part of the $300.0 million unsecured revolving
loan. Arch Re Bermuda also has access to other letter of credit facilities,
some of which are available on a limited basis for limited purposes. Refer to
note 4, Debt and Financing ArrangementsLetter of Credit and Revolving Credit
Facilities, of the notes accompanying our consolidated financial statements
for a discussion of our available facilities, applicable covenants on such
facilities and available capacity. It is anticipated that the available
facilities will be renewed (or replaced) on expiry, but such renewal (or
replacement) will be subject to the availability of credit from banks which we
utilize. Given the recent disruptions in the capital markets, we can provide no
assurance that we will be able to renew the facilities in August 2011 on
satisfactory terms and, if renewed, the costs of the facilities may be
significantly higher than the costs of our existing facilities.
During 2006, ACGL completed two public offerings of non-cumulative
preferred shares. On February 1, 2006, $200.0 million principal amount of
8.0% series A non-cumulative preferred shares (series A preferred shares)
were issued with net proceeds of $193.5 million and, on May 24, 2006,
$125.0 million principal amount of 7.875% series B non-cumulative preferred
shares (series B preferred shares and together with the series A preferred
shares, the preferred shares) were issued with net proceeds of $120.9
million. The net proceeds of the offerings were used to support the
underwriting activities of ACGLs insurance and reinsurance subsidiaries. ACGL
has the right to redeem all or a portion of each series of preferred shares at
a redemption price of $25.00 per share on or after (1) February 1,
2011 for the series A preferred shares and (2) May 15, 2011 for the
series B preferred shares. Dividends on the preferred shares are non-cumulative.
Consequently, in the event dividends are not declared on the preferred shares
for any dividend period, holders of preferred shares will not be entitled to
receive a dividend for such period, and such undeclared dividend will not
accrue and will not be payable. Holders of preferred shares will be entitled to
receive dividend payments only when, as and if declared by ACGLs board of
directors or a duly authorized committee of ACGLs board of directors. Any such
dividends will be payable from the date of original issue on a non-cumulative
basis, quarterly in arrears. To the extent declared, these dividends will
accumulate, with respect to each dividend period, in an amount per share equal
to 8.0% of the $25.00 liquidation preference per annum for the series A
preferred shares and 7.875% of the $25.00 liquidation preference per annum for
the series B preferred shares. During the six month periods ended June 30,
2010 and 2009, we paid $12.9 million to holders of the preferred shares and, at
June 30, 2010, had declared an aggregate of $3.3 million of dividends to
be paid to holders of the preferred shares.
In March 2009, ACGL and Arch Capital Group (U.S.) Inc. filed a
universal shelf registration statement with the SEC. This registration
statement allows for the possible future offer and sale by us of various types
of securities, including unsecured debt securities, preference shares, common
shares, warrants, share purchase contracts and units and depositary shares. The
shelf registration statement enables us to efficiently access the public debt
and/or equity capital markets in order to meet our future capital needs. The
shelf registration statement also allows selling shareholders to resell common
shares that they own in one or more offerings from time to time. We will not
receive any proceeds from any shares offered by the selling shareholders. This
report is not an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer, solicitation
or sale would be unlawful prior to registration or qualification under the
securities laws of any such state.
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We purchased asset-backed and commercial mortgage-backed securities
under the FRBNYs TALF program. As of June 30, 2010, we had $407.5 million
of securities under TALF which are reflected as TALF investments, at market
value and $336.2 million of secured financing from the FRBNY which is
reflected as TALF borrowings, at market value. As of December 31, 2009,
we had $250.3 million of TALF investments, at market value and $217.6 million
of TALF borrowings, at market value. Refer to note 4, Debt and Financing
ArrangementsTALF Program, of the notes accompanying our consolidated
financial statements for further details on the TALF Program.
At June 30, 2010, ACGLs capital of $4.82 billion consisted of
$300.0 million of senior notes, representing 6.2% of the total, $125.0 million
of revolving credit agreement borrowings due in August 2011, representing
2.6% of the total, $325.0 million of preferred shares, representing 6.7% of the
total, and common shareholders equity of $4.07 billion, representing the
balance. At December 31, 2009, ACGLs 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 $4.00
billion, representing the balance. The increase in capital during the six
months ended June 30, 2010 was primarily attributable to net income,
partially offset by share repurchase activity.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are discussed in Managements Discussion
and Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the year ended December 31, 2009.
Market Sensitive Instruments and Risk Management
In accordance with the SECs Financial Reporting Release No. 48,
we performed a sensitivity analysis to determine the effects that market risk
exposures could have on the future earnings, fair values or cash flows of our
financial instruments as of June 30, 2010 (See section captioned Managements
Discussion and Analysis of Financial Condition and Results of OperationsMarket
Sensitive Instruments and Risk Management included in our 2009 Annual Report
on Form 10-K.) Market risk represents the risk of changes in the fair
value of a financial instrument and is comprised of several components,
including liquidity, basis and price risks. An analysis of material changes in
market risk exposures at June 30, 2010 that affect the quantitative and
qualitative disclosures presented as of December 31, 2009 were as follows:
Investment Market Risk
Fixed Income Securities
. We invest in interest rate
sensitive securities, primarily debt securities. We consider the effect of
interest rate movements on the market value of our fixed maturities, fixed
maturities pledged under securities lending agreements, short-term investments
and certain of our other investments which invest in fixed income securities
and the corresponding change in unrealized appreciation. As interest rates
rise, the market value of our interest rate sensitive securities falls, and the
converse is also true. Based on historical observations, there is a low
probability that all interest rate yield curves would shift in the same
direction at the same time. Furthermore, in recent months interest rate
movements in many credit sectors have exhibited a much lower correlation to
changes in U.S. Treasury yields. Accordingly, the actual effect of interest
rate movements may differ materially from the amounts set forth in the
following tables.
68
Table of Contents
The following table summarizes the effect that an immediate, parallel
shift in the interest rate yield curve would have had on the portfolio at June 30,
2010 and December 31, 2009:
|
|
Interest Rate Shift in Basis Points
|
|
(U.S.
dollars in millions)
|
|
-100
|
|
-50
|
|
-
|
|
50
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
Total market value
|
|
$
|
10,854.5
|
|
$
|
10,722.4
|
|
$
|
10,573.8
|
|
$
|
10,415.5
|
|
$
|
10,255.9
|
|
Market value change from base
|
|
2.65
|
%
|
1.41
|
%
|
|
|
(1.50
|
)%
|
(3.01
|
)%
|
Change in unrealized value
|
|
$
|
280.7
|
|
$
|
148.6
|
|
$
|
|
|
$
|
(158.3
|
)
|
$
|
(317.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Total market value
|
|
$
|
11,227.5
|
|
$
|
11,078.3
|
|
$
|
10,920.7
|
|
$
|
10,757.7
|
|
$
|
10,593.9
|
|
Market value change from base
|
|
2.81
|
%
|
1.44
|
%
|
|
|
(1.49
|
)%
|
(2.99
|
)%
|
Change in unrealized value
|
|
$
|
306.8
|
|
$
|
157.6
|
|
$
|
|
|
$
|
(163.0
|
)
|
$
|
(326.8
|
)
|
In addition, we consider the effect of credit spread movements on the
market value of our fixed maturities, fixed maturities pledged under securities
lending agreements, short-term investments and certain of our other investments
and investment funds accounted for using the equity method which invest in
fixed income securities and the corresponding change in unrealized appreciation.
As credit spreads widen, the market value of our fixed income securities falls,
and the converse is also true.
The following table summarizes the effect that an immediate, parallel
shift in credit spreads in a static interest rate environment would have had on
the portfolio at June 30, 2010 and December 31, 2009:
|
|
Credit Spread Shift in Basis Points
|
|
(U.S.
dollars in millions)
|
|
-100
|
|
-50
|
|
-
|
|
50
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
Total market value
|
|
$
|
10,820.9
|
|
$
|
10,697.4
|
|
$
|
10,573.8
|
|
$
|
10,695.4
|
|
$
|
10,327.6
|
|
Market value change from base
|
|
2.34
|
%
|
1.17
|
%
|
|
|
1.15
|
%
|
(2.33
|
)%
|
Change in unrealized value
|
|
$
|
247.1
|
|
$
|
123.6
|
|
$
|
|
|
$
|
121.6
|
|
$
|
(246.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Total market value
|
|
$
|
11,198.4
|
|
$
|
11,061.6
|
|
$
|
10,920.7
|
|
$
|
10,775.8
|
|
$
|
10,627.8
|
|
Market value change from base
|
|
2.54
|
%
|
1.29
|
%
|
|
|
(1.33
|
)%
|
(2.68
|
)%
|
Change in unrealized value
|
|
$
|
277.7
|
|
$
|
140.9
|
|
$
|
|
|
$
|
(144.9
|
)
|
$
|
(292.9
|
)
|
Another method that attempts to measure portfolio risk is Value-at-Risk
(VaR). VaR attempts to take into account a broad cross-section of risks
facing a portfolio by utilizing relevant securities volatility data skewed
towards the most recent months and quarters. VaR measures the amount of a
portfolio at risk for outcomes 1.65 standard deviations from the mean based on
normal market conditions over a one year time horizon and is expressed as a
percentage of the portfolios initial value. In other words, 95% of the time,
should the risks taken into account in the VaR model perform per their historical
tendencies, the portfolios loss in any one year period is expected to be less
than or equal to the calculated VaR, stated as a percentage of the measured
portfolios initial value. As of June 30, 2010, our portfolios VaR was
estimated to be 3.74%, compared to an estimated 4.79% at December 31,
2009.
Privately Held Securities
and Equity Securities.
Our investment portfolio includes an allocation to privately held
securities and equity
securities. At June 30, 2010 and December 31,
2009, the market value of our investments in privately held securities and
equity securities (excluding our investment in Aeolus LP which is accounted for
using the equity method) totaled $193.7 million and $44.5 million,
respectively. These securities are exposed to price risk, which is the
potential loss arising from decreases in market value. An immediate
hypothetical 10% depreciation in the value of each position would reduce the
market value of such investments
69
Table of
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by
approximately $19.4 million and $4.5 million at June 30, 2010 and December 31
2009, respectively, and would have decreased book value per common share by
approximately $0.39 and $0.08, respectively.
Investment-Related
Derivatives.
Derivative instruments may be used to enhance investment performance, replicate
investment positions or manage market exposures and duration risk that would be
allowed under our
investment guidelines if implemented in other ways.
The market values of those derivatives are based on quoted market prices. See
note 9, Derivative Instruments, of the notes accompanying our consolidated
financial Statements for additional disclosures concerning derivatives. At June 30,
2010, the notional value of the net long position of derivative instruments
(excluding to-be-announced mortgage backed securities which are included in the
fixed income securities analysis above and foreign currency forward contracts
which are included in the foreign currency exchange risk analysis below) was
$1.84 billion, compared to $1.13 billion at December 31, 2009. A 100 basis
point depreciation of the underlying exposure to these derivative instruments
at June 30, 2010 and December 31, 2009 would have resulted in a
reduction in net income of approximately $18.4 million and $11.3 million,
respectively, and would have decreased book value per common share by $0.37 and $0.21,
respectively.
For further discussion on
investment activity, please refer to Financial Condition, Liquidity and
Capital ResourcesFinancial ConditionInvestable Assets.
Foreign Currency Exchange Risk
Foreign currency rate risk is the potential change in value, income and
cash flow arising from adverse changes in foreign currency exchange rates.
Through our subsidiaries and branches located in various foreign countries, we
conduct our insurance and reinsurance operations in a variety of local
currencies other than the U.S. Dollar. We generally hold investments in foreign
currencies which are intended to mitigate our exposure to foreign currency
fluctuations in our net insurance liabilities. We may also utilize foreign
currency forward contracts and currency options as part of our investment
strategy. In addition, as a result of the current financial and economic
environment as well as the potential for additional investment returns, we may
not match a portion of our projected liabilities in foreign currencies with
investments in the same currencies, which would increase our exposure to
foreign currency fluctuations and increase the volatility in our results of
operations. A 10% appreciation of the U.S. Dollar against the major foreign
currencies for our outstanding contracts at June 30, 2010 and December 31,
2009, net of unrealized depreciation on our securities denominated in
currencies other than the U.S. Dollar, would have resulted in unrealized losses
of approximately $33.1 million and $40.1 million, respectively, and would have
decreased book value per common share by approximately $0.67 and $0.73,
respectively. Historical observations indicate a low probability that all
foreign currency exchange rates would shift against the U.S. Dollar in the same
direction and at the same time and, accordingly, the actual effect of foreign
currency rate movements may differ materially from the amounts set forth above.
For further discussion on foreign exchange activity, please refer to Results
of Operations.
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 us may include forward-looking
statements, which reflect our 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 our 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
70
Table of
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cause
actual events or results to differ materially from those indicated in such
statements are discussed below and elsewhere in this release and in our
periodic reports filed with the Securities and Exchange Commission (the SEC),
and include:
·
our ability to successfully implement its
business strategy during soft as well as hard markets;
·
acceptance of our business strategy, security
and financial condition by rating agencies and regulators, as well as by
brokers and our insureds and reinsureds;
·
our ability to maintain or improve our
ratings, which may be affected by our 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 we operate;
·
competition, including increased competition,
on the basis of pricing, capacity, coverage terms or other factors;
·
developments in the worlds financial and
capital markets and our access to such markets;
·
our 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 we have
acquired or may acquire into our existing operations;
·
accuracy of those estimates and judgments
utilized in the preparation of our 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 our company, are even more difficult to make than those made in a
mature company since relatively limited historical information has been
reported to us through June 30, 2010;
·
greater than expected loss ratios on business
written by us and adverse development on claim and/or claim expense liabilities
related to business written by our insurance and reinsurance subsidiaries;
·
severity and/or frequency of losses;
·
claims for natural or man-made catastrophic
events in our insurance or reinsurance business could cause large losses and
substantial volatility in our 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 we 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 our periodic
reports filed with the SEC;
·
availability to us of reinsurance to manage
our 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 us;
·
the timing of loss payments being faster or
the receipt of reinsurance recoverables being slower than anticipated by us;
·
our investment performance, including
legislative or regulatory developments that may adversely affect the market
value of our investments;
71
Table of
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·
material differences between actual and
expected assessments for guaranty funds and mandatory pooling arrangements;
·
changes in accounting principles or policies
or in our application of such accounting principles or policies;
·
changes in the political environment of
certain countries in which we operate or underwrite 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 us, our subsidiaries,
brokers or customers; and
·
the other matters set forth under Item 1A Risk
Factors, Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations and other sections of our Annual Report on
Form 10-K, as well as the other factors set forth in our other documents
on file with the SEC, and managements response to any of the aforementioned
factors.
All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our 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. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
Other Financial Information
The consolidated financial statements as of June 30, 2010 and for
the six month periods ended June 30, 2010 and 2009 have been reviewed by
PricewaterhouseCoopers LLP, an independent registered public accounting firm.
Their report (dated August 5, 2010) is included on page 2. The report
of PricewaterhouseCoopers LLP states that they did not audit and they do not
express an opinion on that unaudited financial information. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied.
PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11
of the Securities Act of 1933 for their report on the unaudited financial
information because that report is not a report or a part of the
registration statement prepared or certified by PricewaterhouseCoopers LLP
within the meaning of Sections 7 and 11 of the Securities Act of 1933.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information appearing above under the
subheading Market Sensitive Instruments and Risk Management under the caption
Managements Discussion and Analysis of Financial Condition and Results of
Operations, which information is hereby incorporated by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
In connection with the filing of this Form 10-Q, our management,
including the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to applicable Exchange Act Rules as of the end of the period covered by
this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were
effective as of the end of and during the period covered by this report with
respect to information being recorded, processed, summarized and reported
within time periods specified in the SECs rules and forms and with
respect to timely communication to them and other members of management
72
Table of
Contents
responsible
for preparing periodic reports of all material information required to be
disclosed in this report as it relates to ACGL and its consolidated
subsidiaries.
We continue to enhance our operating procedures and internal controls
to effectively support our business and our regulatory and reporting
requirements. Our management does not expect that our disclosure controls or
our internal controls will prevent all errors and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs.
As a result of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons or by collusion of two or more people. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. As a result of
the inherent limitations in a cost-effective control system, misstatement due
to error or fraud may occur and not be detected. Accordingly, our disclosure
controls and procedures are designed to provide reasonable, not absolute,
assurance that the disclosure controls and procedures are met.
Changes in Internal Controls Over Financial Reporting
There have been no changes in internal control over financial reporting
that occurred during the fiscal quarter ended June 30, 2010 that have
materially affected, or are reasonably likely to materially affect, internal
control over financial reporting.
73
Table of
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We, in common with the insurance industry in general, are subject to
litigation and arbitration in the normal course of our business. As of June 30,
2010, we were not a party to any litigation or arbitration which is expected by
management to have a material adverse effect on our results of operations and
financial condition and liquidity.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
The following table summarizes our purchases of our common shares for
the 2010 second quarter:
(U.S.
dollars in thousands, except share data)
|
|
Issuer Purchases of Equity Securities
|
|
|
|
Period
|
|
Total Number
of Shares
Purchased (1)
|
|
Average Price
Paid per Share
|
|
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (2)
|
|
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plan
or Programs (2)
|
|
4/1/2010-4/30/2010
|
|
78,593
|
|
$
|
74.74
|
|
76,177
|
|
$
|
804,439
|
|
5/1/2010-5/31/2010
|
|
2,280,561
|
|
74.46
|
|
2,221,906
|
|
$
|
638,969
|
|
6/1/2010-6/30/2010
|
|
1,353,797
|
|
72.73
|
|
1,346,144
|
|
$
|
541,077
|
|
Total
|
|
3,712,951
|
|
$
|
73.83
|
|
3,644,227
|
|
$
|
541,077
|
|
(1)
Includes repurchases by ACGL
of shares, from time to time, from employees in order to facilitate the payment
of withholding taxes on restricted shares granted and the exercise of stock
appreciation rights. We purchased these shares at their fair market value, as
determined by reference to the closing price of our common shares on the day
the restricted shares vested or the stock appreciation rights were exercised.
(2)
The Board of Directors of
ACGL has authorized the investment of up to $2.5 billion in ACGLs common
shares through a share repurchase program. Such amount consisted of a $1.0
billion authorization in February 2007, a $500 million authorization in May 2008,
and a $1.0 billion authorization in November 2009. Repurchases under this
authorization may be effected from time to time in open market or privately
negotiated transactions through December 31, 2011. Since the inception of
the share repurchase program, ACGL has repurchased approximately 28.1 million
common shares for an aggregate purchase price of $1.96 billion. 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.
Item 5. Other Information
In accordance with Section 10A(i)(2) of the Securities
Exchange Act of 1934, as amended, we are responsible for disclosing non-audit
services to be provided by our independent auditor, PricewaterhouseCoopers LLP,
which are approved by the Audit Committee of our board of directors. During the
2010 second quarter, the Audit Committee approved engagements of
PricewaterhouseCoopers LLP for permitted non-audit services, the substantial
majority of which consisted of tax services, tax consulting and tax compliance.
74
Table of
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Item 6. Exhibits
Exhibit No.
|
|
Description
|
|
|
|
15
|
|
Accountants
Awareness Letter (regarding unaudited interim financial information)
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
101
|
|
The
following financial information from Arch Capital Group Ltd.s Quarterly
Report for the quarter ended June 30, 2010 formatted in XBRL: (i) Consolidated Balance Sheets at June 30,
2010 and December 31, 2009; (ii) Consolidated Statements of Income for the
three and six month periods ended June 30, 2010 and 2009; (iii) Consolidated
Statements of Changes in Shareholders Equity for the six month periods ended
June 30, 2010 and 2009; (iv) Consolidated Statements of Comprehensive Income
for the six month periods ended June 30, 2010 and 2009; (v) Consolidated
Statements of Cash Flows for the six month periods ended June 30, 2010 and
2009; and (vi) Notes to Consolidated Financial Statements.*
|
*
This exhibit will not be deemed filed for the purposes of Section 18 of the
Securities Exchange Act of 1934 (15 U.S.C. 78r) , or otherwise subject to the
liability of that section. Such exhibit will not be deemed to be incorporated
by reference into any filing under the Securities Act or Securities Exchange
Act, except to the extent that Arch Capital Group Ltd. specifically
incorporates it by reference.
75
Table of
Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ARCH
CAPITAL GROUP LTD.
|
|
(REGISTRANT)
|
|
|
|
|
|
/s/
Constantine Iordanou
|
Date:
August 5, 2010
|
Constantine
Iordanou
|
|
President
and Chief Executive Officer (Principal Executive Officer) and Chairman of the
Board of Directors
|
|
|
|
|
|
/s/
John C.R. Hele
|
Date:
August 5, 2010
|
John
C.R. Hele
|
|
Executive
Vice President, Chief Financial Officer and Treasurer (Principal Financial
and Accounting Officer)
|
76
Table of
Contents
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
|
|
15
|
|
Accountants
Awareness Letter (regarding unaudited interim financial information)
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
101
|
|
The
following financial information from Arch Capital Group Ltd.s Quarterly
Report for the quarter ended June 30, 2010 formatted in XBRL: (i) Consolidated Balance Sheets at June 30,
2010 and December 31, 2009; (ii) Consolidated Statements of Income for the
three and six month periods ended June 30, 2010 and 2009; (iii) Consolidated
Statements of Changes in Shareholders Equity for the six month periods ended
June 30, 2010 and 2009; (iv) Consolidated Statements of Comprehensive Income
for the six month periods ended June 30, 2010 and 2009; (v) Consolidated
Statements of Cash Flows for the six month periods ended June 30, 2010 and
2009; and (vi) Notes to Consolidated Financial Statements.*
|
*
This exhibit will not be deemed filed for the purposes of Section 18 of the
Securities Exchange Act of 1934 (15 U.S.C. 78r) , or otherwise subject to the
liability of that section. Such exhibit will not be deemed to be incorporated
by reference into any filing under the Securities Act or Securities Exchange
Act, except to the extent that Arch Capital Group Ltd. specifically
incorporates it by reference.
77
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