Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income
available to common shareholders for the 2013 first quarter was
$251.0 million, or $1.85 per share, compared to $157.8 million, or
$1.14 per share, for the 2012 first quarter. The Company also
reported after-tax operating income available to common
shareholders of $158.7 million, or $1.17 per share, for the 2013
first quarter, compared to after-tax operating income available to
common shareholders of $113.7 million, or $0.82, for the 2012 first
quarter. The Company's after-tax operating income or loss available
to common shareholders represented an annualized return on average
common equity of 12.9% for the 2013 first quarter, compared to
10.4% for the 2012 first quarter, while the Company's net income
available to common shareholders represented an annualized return
on average common equity of 20.4% for the 2013 first quarter,
compared to 14.4% for the 2012 first quarter. The Company's book
value per common share was $37.66 at March 31, 2013, a 4.1%
increase from $36.19 per share at December 31, 2012 and a 13.0%
increase from $33.33 per share at March 31, 2012.
After-tax operating income or loss available to common
shareholders, a non-GAAP measure, is defined as net income
available to common shareholders, excluding net realized gains or
losses, net impairment losses recognized in earnings, equity in net
income or loss of investment funds accounted for using the equity
method and net foreign exchange gains or losses, net of income
taxes. See 'Comments on Regulation G' for a further discussion of
after-tax operating income or loss available to common
shareholders. All earnings per share amounts discussed in this
release are on a diluted basis.
The following table summarizes the Company's underwriting
results:
Three Months Ended March 31,
(U.S. dollars in thousands)
2013 2012
Gross premiums written $ 1,163,699 $ 1,066,656 Net premiums written
952,776 863,611 Net premiums earned 752,770 680,312 Underwriting
income 116,398 67,193 Combined ratio (1) 84.6 % 90.1 %
(1)
The combined ratio represents a measure of
underwriting profitability, excluding investment income, and is the
sum of the loss ratio and expense ratio. A combined ratio under
100% represents an underwriting profit and a combined ratio over
100% represents an underwriting loss.
For the 2013 first quarter, the combined ratio of the Company's
insurance and reinsurance subsidiaries consisted of a loss ratio of
53.1% and an underwriting expense ratio of 31.5%, compared to a
loss ratio of 58.1% and an underwriting expense ratio of 32.0% for
the 2012 first quarter. For a discussion of underwriting activities
and a review of the Company's results by operating segment, see
“Segment Information” in the Supplemental Financial Information
section of this release.
The following table summarizes, on an after-tax basis, the
Company's consolidated financial data, including a reconciliation
of after-tax operating income available to common shareholders to
net income available to common shareholders and related diluted per
share results:
Three Months Ended March 31,
(U.S. dollars in thousands, except share data)
2013
2012 After-tax operating income available to common
shareholders $ 158,748 $ 113,660 Net realized gains, net of tax
54,923 40,873 Net impairment losses recognized in earnings, net of
tax (2,246 ) (1,023 ) Equity in net income of investment funds
accounted for using the equity method, net of tax 13,823 24,826 Net
foreign exchange gains (losses), net of tax 25,744 (20,541 )
Net income available to common shareholders $ 250,992 $
157,795
Diluted per common
share results:
After-tax operating income available to common shareholders $ 1.17
$ 0.82 Net realized gains, net of tax 0.41 0.30 Net impairment
losses recognized in earnings, net of tax (0.02 ) (0.01 ) Equity in
net income of investment funds accounted for using the equity
method, net of tax 0.10 0.18 Net foreign exchange gains (losses),
net of tax 0.19 (0.15 ) Net income available to common
shareholders $ 1.85 $ 1.14 Weighted average
common shares and common share equivalents outstanding - diluted
135,409,288 137,814,906
The Company's investment portfolio continues to be comprised
primarily of high quality fixed income securities with an average
credit quality of “AA-/Aa2.” The average effective duration of the
Company's investment portfolio was 2.94 years at March 31, 2013,
compared to 3.06 years at December 31, 2012. Including the effects
of foreign exchange, total return on the Company's investment
portfolio was 0.50% for the 2013 first quarter, compared to 1.87%
for the 2012 first quarter. Excluding the effects of foreign
exchange, total return was 1.01% for the 2013 first quarter,
compared to 1.60% for the 2012 first quarter. Total return for the
2013 first quarter reflected the impact of weakening foreign
currency rates, including the British Pound Sterling, Euro and
other major currencies, against the U.S. Dollar on our non-U.S.
investments.
Net investment income for the 2013 first quarter was $65.7
million, or $0.48 per share, compared to $73.8 million, or $0.53
per share, for the 2012 fourth quarter, and $74.3 million, or $0.54
per share, for the 2012 first quarter. The annualized pre-tax
investment income yield was 2.20% for the 2013 first quarter,
compared to 2.46% for the 2012 fourth quarter and 2.52% for the
2012 first quarter. The $8.1 million decline in net investment
income in the 2013 first quarter from the 2012 fourth quarter
resulted, in part, from (i) a $2.2 million increase in investment
expenses, including $1.3 million of costs on a fund investment
which are not expected to recur, (ii) $1.9 million related to
inflation adjustments on U.S. Treasury Inflation-Protected
Securities and (iii) a reduction in gross income related to TALF
assets, which contributed $1.0 million to income in the 2012 fourth
quarter (partially offset by $0.2 million of interest expense) and
were sold prior to year-end due to total return considerations. In
addition, the decline in the 2013 first quarter also reflects the
effects of lower prevailing interest rates available in the market,
the effects of share repurchases and the Company's investment
strategy which puts a priority on total return. Consolidated cash
flow provided by operating activities for the 2013 first quarter
was $205.7 million, compared to $144.8 million for the 2012 first
quarter. The increase in operating cash flows in the 2013 first
quarter reflected a higher level of premium receipts and income
distributions from investment funds than in the 2012 first
quarter.
For the 2013 first quarter, the Company's effective tax rate on
income before income taxes was an expense of 1.9%, compared to an
expense of 1.1% for the 2012 first quarter. For the 2013 first
quarter, the Company's effective tax rate on pre-tax operating
income was an expense of 1.7%, compared to a benefit of 1.0% for
the 2012 first quarter. The Company's effective tax rates may
fluctuate from period to period based on the relative mix of income
reported by jurisdiction primarily due to the varying tax rates in
each jurisdiction. In addition, the Company's Bermuda-based
reinsurer incurs federal excise taxes for premiums assumed on U.S.
risks. The Company incurred $2.0 million of federal excise taxes
for the 2013 first quarter, compared to $2.0 million for the 2012
first quarter. Such amounts are reflected as acquisition expenses
in the Company's consolidated statements of income.
On a pre-tax basis, net foreign exchange gains for the 2013
first quarter were $24.3 million (net unrealized gains of $25.9
million and net realized losses of $1.7 million), compared to net
foreign exchange losses for the 2012 first quarter of $20.7 million
(net unrealized losses of $20.2 million and net realized losses of
$0.5 million). The 2013 first quarter net foreign exchange gains
reflected the strengthening of the U.S. Dollar against the British
Pound Sterling, Euro and other major currencies during the period.
Net unrealized foreign exchange gains or losses result from the
effects of revaluing the Company's net insurance liabilities
required to be settled in foreign currencies at each balance sheet
date. Changes in the value of investments held in foreign
currencies 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. The Company has
not matched a portion of its projected liabilities in foreign
currencies with investments in the same currencies and may not
match such amounts in future periods, which could increase the
Company's exposure to foreign currency fluctuations and increase
the volatility of the Company's shareholders' equity.
At March 31, 2013, the Company's capital of $5.74 billion
consisted of $300.0 million of senior notes, representing 5.2% of
the total, $100.0 million of revolving credit agreement borrowings
due in August 2014, representing 1.7% of the total, $325.0 million
of preferred shares, representing 5.7% of the total, and common
shareholders' equity of $5.01 billion, representing the balance. At
December 31, 2012, the Company's capital of $5.57 billion consisted
of $300.0 million of senior notes, representing 5.4% of the total,
$100.0 million of revolving credit agreement borrowings,
representing 1.8% of the total, $325.0 million of preferred shares,
representing 5.8% of the total, and common shareholders' equity of
$4.84 billion, representing the balance.
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on Tuesday, April 30, 2013. A
live webcast of this call will be available via the Investor
Relations - Events & Presentations section of the Company's
website at http://www.archcapgroup.bm.
A telephone replay of the conference call also will be available
beginning on April 30, 2013 at 1:00 p.m. Eastern Time until May 7,
2013 at midnight Eastern Time. To access the replay, domestic
callers should dial 888-286-8010 (passcode 96104883), and
international callers should dial 617-801-6888 (passcode
96104883).
Please refer to the Company's Financial Supplement dated March
31, 2013, which is posted on the Company's website at http://www.archcapgroup.bm/EarningsReleases.aspx.
The Financial Supplement provides additional detail regarding the
financial performance of the Company. From time to time, the
Company posts additional financial information and presentations to
its website, including information with respect to its
subsidiaries. Investors and other recipients of this information
are encouraged to check the Company's website regularly, including
the Investor Relations - Events & Presentations section of the
Company's website at http://www.archcapgroup.bm/presentations.aspx for
additional information regarding the Company.
Arch Capital Group Ltd., a Bermuda-based company with
approximately $5.74 billion in capital at March 31, 2013, provides
insurance and reinsurance on a worldwide basis through its wholly
owned subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (“PSLRA”)
provides a “safe harbor” for forward-looking statements. This
release or any other written or oral statements made by or on
behalf of the Company may include forward-looking statements, which
reflect the Company's current views with respect to future events
and financial performance. All statements other than statements of
historical fact included in or incorporated by reference in this
release are forward-looking statements. Forward-looking statements,
for purposes of the PSLRA or otherwise, can generally be identified
by the use of forward-looking terminology such as “may,” “will,”
“expect,” “intend,” “estimate,” “anticipate,” “believe” or
“continue” and similar statements of a future or forward-looking
nature or their negative or variations or similar terminology.
Forward-looking statements involve the Company's current
assessment of risks and uncertainties. Actual events and results
may differ materially from those expressed or implied in these
statements. Important factors that could cause actual events or
results to differ materially from those indicated in such
statements are discussed below and elsewhere in this release and in
the Company's periodic reports filed with the Securities and
Exchange Commission (the “SEC”), and include:
- the Company's ability to successfully
implement its business strategy during “soft” as well as “hard”
markets;
- acceptance of the Company's business
strategy, security and financial condition by rating agencies and
regulators, as well as by brokers and its insureds and
reinsureds;
- the Company's ability to maintain or
improve its ratings, which may be affected by its ability to raise
additional equity or debt financings, by ratings agencies' existing
or new policies and practices, as well as other factors described
herein;
- general economic and market conditions
(including inflation, interest rates, foreign currency exchange
rates, prevailing credit terms and the depth and duration of a
recession) and conditions specific to the reinsurance and insurance
markets (including the length and magnitude of the current “soft”
market) in which the Company operates;
- competition, including increased
competition, on the basis of pricing, capacity, coverage terms or
other factors;
- developments in the world's financial
and capital markets and the Company's access to such markets;
- the Company's ability to successfully
enhance, integrate and maintain operating procedures (including
information technology) to effectively support its current and new
business;
- the loss of key personnel;
- the integration of businesses the
Company has acquired or may acquire into its existing
operations;
- accuracy of those estimates and
judgments utilized in the preparation of the Company's financial
statements, including those related to revenue recognition,
insurance and other reserves, reinsurance recoverables, investment
valuations, intangible assets, bad debts, income taxes,
contingencies and litigation, and any determination to use the
deposit method of accounting, which for a relatively new insurance
and reinsurance company, like the Company, are even more difficult
to make than those made in a mature company since relatively
limited historical information has been reported to the Company
through March 31, 2013;
- greater than expected loss ratios on
business written by the Company and adverse development on claim
and/or claim expense liabilities related to business written by its
insurance and reinsurance subsidiaries;
- severity and/or frequency of
losses;
- claims for natural or man-made
catastrophic events in the Company's insurance or reinsurance
business could cause large losses and substantial volatility in its
results of operations;
- acts of terrorism, political unrest and
other hostilities or other unforecasted and unpredictable
events;
- availability to the Company of
reinsurance to manage its gross and net exposures and the cost of
such reinsurance;
- the failure of reinsurers, managing
general agents, third party administrators or others to meet their
obligations to the Company;
- the timing of loss payments being
faster or the receipt of reinsurance recoverables being slower than
anticipated by the Company;
- the Company's investment performance,
including legislative or regulatory developments that may adversely
affect the fair value of the Company's investments;
- the impact of the continued weakness of
the U.S., European countries and other key economies, projected
budget deficits for the U.S., European countries and other
governments and the consequences associated with possible
additional downgrades of securities of the U.S., European countries
and other governments by credit rating agencies, and the resulting
effect on the value of securities in the Company's investment
portfolio as well as the uncertainty in the market generally;
- losses relating to aviation business
and business produced by a certain managing underwriting agency for
which the Company may be liable to the purchaser of its prior
reinsurance business or to others in connection with the
May 5, 2000 asset sale described in the Company's periodic
reports filed with the SEC;
- changes in accounting principles or
policies or in the Company's application of such accounting
principles or policies;
- changes in the political environment of
certain countries in which the Company operates, underwrites
business or invests;
- statutory or regulatory developments,
including as to tax policy matters and insurance and other
regulatory matters such as the adoption of proposed legislation
that would affect Bermuda-headquartered companies and/or
Bermuda-based insurers or reinsurers and/or changes in regulations
or tax laws applicable to the Company, its subsidiaries, brokers or
customers; and
- the other matters set forth under Item
1A “Risk Factors”, Item 7 “Management's Discussion and Analysis of
Financial Condition and Results of Operations” and other sections
of the Company's Annual Report on Form 10-K, as well as the other
factors set forth in the Company's other documents on file with the
SEC, and management's response to any of the aforementioned
factors.
All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary
statements. The foregoing review of important factors should not be
construed as exhaustive and should be read in conjunction with
other cautionary statements that are included herein or elsewhere.
The Company undertakes no obligation to publicly update or revise
any forward-looking statement, whether as a result of new
information, future events or otherwise.
Comment on Regulation G
Throughout this release, the Company presents its operations in
the way it believes will be the most meaningful and useful to
investors, analysts, rating agencies and others who use the
Company's financial information in evaluating the performance of
the Company. This presentation includes the use of after-tax
operating income or loss 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 or loss available to common shareholders is a
“non-GAAP financial measure” as defined in Regulation G. The
reconciliation of such measure to net income available to common
shareholders (the most directly comparable GAAP financial measure)
in accordance with Regulation G is included on page 2 of this
release.
The Company believes that net realized gains or losses, net
impairment losses 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, the Company's
business performance. 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 the
Company's operations, the decision to realize investment gains or
losses, the recognition of the change in the carrying value of
investments accounted for using the fair value option in net
realized gains or losses, the recognition of net impairment losses,
the recognition of equity in net income or loss of investment funds
accounted for using the equity method and the recognition of
foreign exchange gains or losses are independent of the insurance
underwriting process and result, in large part, from general
economic and financial market conditions. Furthermore, certain
users of the Company's financial information believe that, for many
companies, the timing of the realization of investment gains or
losses is largely opportunistic. In addition, net impairment losses
recognized in earnings on the Company's investments represent
other-than-temporary declines in expected recovery values on
securities without actual realization. The use of the equity method
on certain of the Company's investments in certain funds that
invest in fixed maturity securities is driven by the ownership
structure of such funds (either limited partnerships or limited
liability companies). In applying the equity method, these
investments are initially recorded at cost and are subsequently
adjusted based on the Company's proportionate share of the net
income or loss of the funds (which include changes in the fair
value of the underlying securities in the funds). This method of
accounting is different from the way the Company accounts for its
other fixed maturity securities and the timing of the recognition
of equity in net income or loss of investment funds accounted for
using the equity method may differ from gains or losses in the
future upon sale or maturity of such investments. Due to these
reasons, the Company excludes net realized gains or losses, 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 or loss available to common
shareholders.
The Company believes that showing net income available to common
shareholders exclusive of the items referred to above reflects the
underlying fundamentals of the Company's business since the Company
evaluates the performance of and manages its business to produce an
underwriting profit. In addition to presenting net income available
to common shareholders, the Company believes that this presentation
enables investors and other users of the Company's financial
information to analyze the Company's performance in a manner
similar to how the Company's management analyzes performance. The
Company also believes that this measure follows industry practice
and, therefore, allows the users of the Company's financial
information to compare the Company's performance with its industry
peer group. The Company believes that the equity analysts and
certain rating agencies which follow the Company and the insurance
industry as a whole generally exclude these items from their
analyses for the same reasons.
ARCH CAPITAL GROUP LTD. AND
SUBSIDIARIES SUPPLEMENTAL FINANCIAL INFORMATION
Book Value Per Common Share (U.S. dollars in
thousands, except share data)
March 31, 2013
December 31, 2012 Calculation of book value
per common share: Total shareholders' equity $ 5,335,530 $
5,168,878 Less preferred shareholders' equity 325,000
325,000 Common shareholders' equity 5,010,530 4,843,878 Common
shares outstanding, net of treasury shares (1) 133,063,225
133,842,613 Book value per common share $ 37.66 $ 36.19
(1) Excludes the effects of 8,324,285 and 8,221,444
stock options and 475,435 and 480,406 restricted stock units
outstanding at March 31, 2013 and December 31, 2012, respectively.
Investment Information
Three Months Ended March 31, (U.S. dollars in
thousands, except share data)
2013 2012
Components of net investment income: Fixed maturities $
62,006 $ 73,450 Term loan investments (1) 4,217 2,299 Equity
securities 1,423 1,664 Short-term investments 392 372 Other 6,299
3,193 Gross investment income 74,337 80,978
Investment expenses (8,665 ) (6,681 ) Net investment income $
65,672 $ 74,297 Per share $ 0.48 $ 0.54
Investment income yield, at amortized cost (2): Pre-tax 2.20
% 2.52 % After-tax 2.07 % 2.40 %
Total return (3):
Including effects of foreign exchange 0.50 % 1.87 % Excluding
effects of foreign exchange 1.01 % 1.60 % Cash flow from
operations $ 205,659 $ 144,821
(1)
Included in “investments accounted for
using the fair value option” on the Company's balance sheet.
(2)
Investment income yield is presented on an
annualized basis and excludes the impact of investments for which
returns are not included within investment income, such as
investments accounted for using the equity method and certain
equities.
(3)
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 or losses generated by the Company's investment
portfolio. Total return is calculated on a pre-tax basis and before
investment expenses.
Investment Information
(continued) (U.S. dollars in thousands)
March 31,
2013 December 31, 2012 Investable
assets: Fixed maturities available for sale, at fair value $
9,890,425 $ 9,839,988 Fixed maturities, at fair value (1) 364,385
363,541 Fixed maturities pledged under securities lending
agreements, at fair value (2) 89,941 42,600 Total
fixed maturities 10,344,751 10,246,129 Short-term investments
available for sale, at fair value 943,414 722,121 Short-term
investments pledged under securities lending agreements, at fair
value (2) 860 8,248 Cash 356,767 371,041 Equity securities
available for sale, at fair value 342,091 312,749 Equity
securities, at fair value (1) — 25,954 Other investments available
for sale, at fair value 585,277 549,280 Other investments, at fair
value (1) 537,845 527,971 Investments accounted for using the
equity method (3) 219,674 307,105 Securities sold but not yet
purchased (4) — (6,924 ) Securities transactions entered into but
not settled at the balance sheet date (198,563 ) (18,540 ) Total
investable assets $ 13,132,116 $ 13,045,134
Investment portfolio statistics (2): Average effective
duration (in years) 2.94 3.06 Average credit quality (Standard
& Poor's/Moody's Investors Service) AA-/Aa2 AA-/Aa2 Imbedded
book yield (before investment expenses) (5) 2.45% 2.60%
(1)
Represents investments which are carried
at fair value under the fair value option and reflected as
“investments accounted for using the fair value option” on the
Company's balance sheet. Changes in the carrying value of such
investments are recorded in net realized gains or losses.
(2)
This table excludes the collateral
received and reinvested and includes the fixed maturities and
short-term investments pledged under securities lending agreements,
at fair value.
(3)
Changes in the carrying value of
investment funds accounted for using the equity method are recorded
as “equity in net income (loss) of investment funds accounted for
using the equity method” rather than as an unrealized gain or loss
component of accumulated other comprehensive income.
(4)
Represents the Company's obligation to
deliver securities that it did not own at the time of sale. Such
amounts are included in “other liabilities” on the Company's
balance sheet.
(5)
Calculated before investment expenses.
Selected Information on Losses and
Loss Adjustment Expenses Three Months Ended
March 31, (U.S. dollars in thousands)
2013
2012 Components of losses and loss adjustment
expenses incurred Paid losses and loss adjustment expenses $
421,586 $ 352,145 Change in unpaid losses and loss adjustment
expenses (22,183 ) 43,062 Total losses and loss adjustment
expenses $ 399,403 $ 395,207
Estimated net (favorable) adverse
development in prior year loss reserves, net of related
adjustments
Net impact on underwriting results: Insurance $ (5,338 ) $ 4,067
Reinsurance (48,268 ) (52,108 ) Total $ (53,606 ) $ (48,041 )
Impact on losses and loss adjustment expenses: Insurance $ (5,001 )
$ (465 ) Reinsurance (49,403 ) (52,805 ) Total $ (54,404 ) $
(53,270 ) Impact on acquisition expenses: Insurance $ (337 ) $
4,532 Reinsurance 1,135 697 Total $ 798 $
5,229 Impact on combined ratio: Insurance (1.2 )% 0.9 %
Reinsurance (15.7 )% (21.8 )% Total (7.1 )% (7.1 )% Impact on loss
ratio: Insurance (1.1 )% (0.1 )% Reinsurance (16.1 )% (22.1 )%
Total (7.2 )% (7.8 )% Impact on acquisition expense ratio:
Insurance (0.1 )% 1.0 % Reinsurance 0.4 % 0.3 % Total 0.1 % 0.7 %
Estimated net losses incurred from current accident year
catastrophic events (1) Insurance $ — $ 5,364 Reinsurance
11,206 17,631 Total $ 11,206 $ 22,995
Impact on combined ratio: Insurance — % 1.2 % Reinsurance 3.6 % 7.4
% Total 1.5 % 3.4 %
(1)
Equals estimated losses from catastrophic
events occurring in the current accident year, net of reinsurance
and reinstatement premiums. Amounts shown for the insurance segment
are for named catastrophic events only. Amounts shown for the
reinsurance segment include (i) named events with over $5 million
of losses incurred by its Bermuda and Europe operations and (ii)
all catastrophe losses incurred by its U.S. operations.
Segment Information
The following section provides analysis on the Company's 2013
first quarter performance by operating segment. For additional
details regarding the Company's operating segments, please refer to
the Company's Financial Supplement dated March 31, 2013 on the
Company's website at http://www.archcapgroup.bm/EarningsReleases.aspx.
Insurance Segment
Three Months Ended March 31, (U.S.
dollars in thousands)
2013 2012 %
Change Gross premiums written $ 688,817 $ 688,113 0.1
Net premiums written 504,550 490,680 2.8 Net premiums earned
444,965 441,740 0.7 Underwriting income (loss) 14,950 (8,134 ) n/m
Underwriting Ratios
% Point Change
Loss ratio 63.7 % 68.6 % (4.9 ) Acquisition expense ratio
15.8 % 16.6 % (0.8 ) Other operating expense ratio 17.2 % 16.6 %
0.6 Combined ratio 96.7 % 101.8 % (5.1 ) Catastrophic
activity and prior year development: Current accident year
catastrophic events, net of reinsurance and reinstatement premiums
— % 1.2 % (1.2 ) Net (favorable) adverse development in prior year
loss reserves, net of related adjustments (1.2 )% 0.9 % (2.1 )
Combined ratio excluding such items 97.9 % 99.7 % (1.8 )
Gross premiums written by the insurance segment in the 2013
first quarter were flat from the 2012 first quarter, while net
premiums written were 2.8% higher than in the 2012 first quarter.
The higher level of net premiums written primarily resulted from
increases in programs, national accounts, construction and accident
and health lines. The increase in program business was primarily
due to growth within existing programs and the impact of rate
movements while the increase in construction and national accounts
primarily resulted from new business, high renewal retention ratios
and increased ratable exposures. The higher level of
construction business resulted, in part, from a mix of rate and
exposure increases while growth in accident and health primarily
resulted from new business. Net premiums earned by the insurance
segment in the 2013 first quarter were 0.7% higher than in the 2012
first quarter, and reflect changes in net premiums written over the
previous five quarters.
The 2013 first quarter loss ratio did not reflect any current
year catastrophic event activity, compared to 1.2 points in the
2012 first quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 1.1 points in the 2013 first quarter, compared to 0.1
points in the 2012 first quarter. The estimated net favorable
development in the 2013 first quarter primarily resulted from
better than expected claims emergence in short-tail lines of
business.
The underwriting expense ratio was 33.0% in the 2013 first
quarter, compared to 33.2% in the 2012 first quarter. The
acquisition expense ratio was 15.8% in the 2013 first quarter,
compared to 16.6% in the 2012 first quarter. The comparison of the
2013 first quarter and 2012 first quarter acquisition expense
ratios is influenced by, among other things, the mix and type of
business written and earned and the level of ceding commissions. In
addition, the 2013 first quarter acquisition expense ratio included
a reduction of 0.1 points of commission expense related to
development in prior year loss reserves, compared to an increase of
1.0 point in the 2012 first quarter. The operating expense ratio
was 17.2% in the 2013 first quarter, compared to 16.6% in the 2012
first quarter. The 2013 first quarter operating expense ratio
reflected a higher level of aggregate expenses than in the 2012
first quarter due, in part, to selected expansion of the insurance
segment's operating platform, consistent with our 2012 full year
ratio.
Reinsurance Segment
Three Months Ended March 31, (U.S.
dollars in thousands)
2013 2012 %
Change Gross premiums written $ 476,205 $ 379,976 25.3
Net premiums written 448,226 372,931 20.2 Net premiums earned
307,805 238,572 29.0 Underwriting income 101,448 75,327 34.7
Underwriting Ratios % Point Change Loss ratio 37.7 %
38.6 % (0.9 ) Acquisition expense ratio 18.5 % 18.9 % (0.4 ) Other
operating expense ratio 10.9 % 10.9 % — Combined ratio 67.1
% 68.4 % (1.3 ) Catastrophic activity and prior year
development: Current accident year catastrophic events, net of
reinsurance and reinstatement premiums 3.6 % 7.4 % (3.8 ) Net
(favorable) adverse development in prior year loss reserves, net of
related adjustments (15.7 )% (21.8 )% 6.1 Combined ratio
excluding such items 79.2 % 82.8 % (3.6 )
Gross premiums written by the reinsurance segment in the 2013
first quarter were 25.3% higher than in the 2012 first quarter,
while net premiums written were 20.2% higher than in the 2012 first
quarter. The higher level of net premiums written reflected
increases to most lines of business, including mortgage business
resulting from a reinsurance treaty covering newly originated U.S.
residential mortgages which incepted in the 2012 second quarter,
casualty and other specialty lines. Growth in casualty business
primarily resulted from new accounts while the increase in other
specialty primarily resulted from renewals of the credit and surety
business acquired from Ariel Reinsurance Company Ltd. ("Ariel") in
April 2012. The change in net premiums written in property and
marine lines was substantially impacted by a higher amount of
retrocessions in the 2013 first quarter.
Net premiums earned in the 2013 first quarter were 29.0% higher
than in the 2012 first quarter, and primarily reflect changes in
net premiums written over the previous five quarters, including the
mix and type of business written. Net premiums earned also included
$12 million related to the credit and surety business acquired from
Ariel with remaining acquired unearned premiums of approximately
$24 million at March 31, 2013.
The 2013 first quarter loss ratio reflected 3.6 points of
current year catastrophic activity, compared to 7.4 points of
catastrophic activity in the 2012 first quarter. Estimated net
favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 16.1 points in the 2013
first quarter, compared to 22.1 points in the 2012 first quarter.
The estimated net favorable development in the 2013 first quarter
primarily resulted from better than expected claims emergence in
short-tail lines of business. The 2013 first quarter loss ratio
also reflects changes in the mix of business written and
earned.
The underwriting expense ratio was 29.4% in the 2013 first
quarter, compared to 29.8% in the 2012 first quarter. The
acquisition expense ratio for the 2013 first quarter was 18.5%,
compared to 18.9% for the 2012 first quarter. The comparison of the
2013 first quarter and 2012 first quarter acquisition expense
ratios is influenced by, among other things, the mix and type of
business written and earned and the level of ceding commissions. In
addition, the 2013 first quarter acquisition expense ratio included
an increase of 0.4 points of commission expense related to
favorable development in prior year loss reserves, compared to 0.3
points in the 2012 first quarter. The operating expense ratio was
10.9% in the 2013 first quarter, compared to 10.9% in the 2012
first quarter. The 2013 first quarter operating expense ratio
reflected an increase in aggregate expenses due, in part, to
selected expansion of the reinsurance segment's operating platform,
offset by the benefit of a higher level of net premiums earned.
ARCH CAPITAL GROUP LTD. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (U.S.
dollars in thousands, except share data)
(Unaudited) Three Months Ended March 31,
2013 2012 Revenues Net premiums written
$ 952,776 $ 863,611 Change in unearned premiums (200,006 ) (183,299
) Net premiums earned 752,770 680,312 Net investment income 65,672
74,297 Net realized gains 58,340 44,121 Other-than-temporary
impairment losses (2,248 ) (1,031 ) Less investment impairments
recognized in other comprehensive income, before taxes 2 8
Net impairment losses recognized in earnings (2,246 ) (1,023
) Fee income 538 543 Equity in net income of investment
funds accounted for using the equity method 13,823 24,826 Other
income (loss) 1,244 (8,068 ) Total revenues 890,141
815,008
Expenses Losses and loss adjustment
expenses 399,403 395,207 Acquisition expenses 127,592 118,962 Other
operating expenses 120,183 106,472 Interest expense 5,898 7,521 Net
foreign exchange (gains) losses (24,264 ) 20,688 Total
expenses 628,812 648,850 Income before income
taxes 261,329 166,158 Income tax expense 4,853 1,902
Net income 256,476 164,256 Preferred dividends
5,484 6,461 Net income available to common
shareholders $ 250,992 $ 157,795
Net income
per common share Basic $ 1.92 $ 1.18 Diluted $ 1.85 $ 1.14
Weighted average common shares and common share
equivalents outstanding Basic 130,907,902 133,954,623 Diluted
135,409,288 137,814,906
ARCH
CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE
SHEETS (U.S. dollars in thousands, except share data)
(Unaudited) March 31, 2013 December
31, 2012 Assets Investments: Fixed maturities
available for sale, at fair value (amortized cost: $9,682,653 and
$9,567,290) $ 9,890,425 $ 9,839,988 Short-term investments
available for sale, at fair value (amortized cost: $944,691 and
$719,848) 943,414 722,121 Investment of funds received under
securities lending, at fair value (amortized cost: $83,319 and
$42,302) 84,315 42,531 Equity securities available for sale, at
fair value (cost: $300,890 and $298,414) 342,091 312,749 Other
investments available for sale, at fair value (cost: $551,797 and
$519,955) 585,277 549,280 Investments accounted for using the fair
value option 902,230 917,466 Investments accounted for using the
equity method 219,674 307,105 Total investments
12,967,426 12,691,240 Cash 356,767 371,041 Accrued
investment income 65,023 71,748 Investment in joint venture (cost:
$100,000) 108,038 107,284 Fixed maturities and short-term
investments pledged under securities lending, at fair value 90,801
50,848 Premiums receivable 870,575 688,873 Reinsurance recoverable
on unpaid and paid losses and loss adjustment expenses 1,846,064
1,870,037 Contractholder receivables 908,034 865,728 Prepaid
reinsurance premiums 301,736 298,484 Deferred acquisition costs,
net 306,505 262,822 Receivable for securities sold 395,958 19,248
Other assets 540,134 519,409 Total Assets $
18,757,061 $ 17,816,762
Liabilities
Reserve for losses and loss adjustment expenses $ 8,835,710 $
8,933,292 Unearned premiums 1,841,870 1,647,978 Reinsurance
balances payable 204,233 188,546 Contractholder payables 908,034
865,728 Senior notes 300,000 300,000 Revolving credit agreement
borrowings 100,000 100,000 Securities lending payable 93,375 52,356
Payable for securities purchased 594,521 37,788 Other liabilities
543,788 522,196 Total Liabilities 13,421,531
12,647,884
Commitments and Contingencies
Shareholders' Equity Non-cumulative preferred shares
325,000 325,000 Common shares ($0.0033 par, shares issued:
168,419,936 and 168,255,572) 561 561 Additional paid-in capital
242,492 227,778 Retained earnings 5,605,353 5,354,361 Accumulated
other comprehensive income, net of deferred income tax 229,563
287,017 Common shares held in treasury, at cost (shares: 35,356,711
and 34,412,959) (1,067,439 ) (1,025,839 ) Total Shareholders'
Equity 5,335,530 5,168,878 Total Liabilities and
Shareholders' Equity $ 18,757,061 $ 17,816,762
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