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 September 30, 2009

 

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

(Registrant’s 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 o  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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common shares as of the latest practicable date.

 

Class

 

Outstanding at October 31, 2009

Common Shares, $0.01 par value

 

59,227,128

 

 

 



Table of Contents

 

ARCH CAPITAL GROUP LTD.

 

INDEX

 

 

Page No.

PART I. Financial Information

 

 

 

Item 1 — Consolidated Financial Statements

 

 

 

Report of Independent Registered Public Accounting Firm

2

 

 

Consolidated Balance Sheets September 30, 2009 (unaudited) and December 31, 2008

3

 

 

Consolidated Statements of Income For the three and nine month periods ended September 30, 2009 and 2008 (unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity For the nine month periods ended September 30, 2009 and 2008 (unaudited)

5

 

 

Consolidated Statements of Comprehensive Income For the nine month periods ended September 30, 2009 and 2008 (unaudited)

6

 

 

Consolidated Statements of Cash Flows For the nine month periods ended September 30, 2009 and 2008 (unaudited)

7

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

43

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

76

 

 

Item 4 — Controls and Procedures

76

 

 

PART II. Other Information

77

 

 

Item 1 — Legal Proceedings

77

 

 

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

77

 

 

Item 5 — Other Information

77

 

 

Item 6 — Exhibits

78

 

1



Table of Contents

 

 

 

PricewaterhouseCoopers LLP

 

300 Madison Avenue

 

New York NY 10017

 

Telephone (646) 471-3000

 

www.pwc.com

 

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 September 30, 2009, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2009 and September 30, 2008, and the consolidated statement of changes in shareholders’ equity, comprehensive income and cash flows for the nine-month periods ended September 30, 2009 and September 30, 2008.  These interim financial statements are the responsibility of the Company’s 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.

 

As discussed in Note 8 to the consolidated financial statements, the Company changed the manner in which it accounts for other-than-temporary impairment losses in 2009.

 

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, 2008, 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 March 2, 2009 we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2008 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

 

New York, New York

November 9, 2009

 

2



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except share data)

 

 

 

(Unaudited)

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities available for sale, at market value (amortized cost: 2009, $9,020,404; 2008, $8,314,615)

 

$

9,265,961

 

$

8,122,221

 

Short-term investments available for sale, at market value (amortized cost: 2009, $696,114; 2008, $478,088)

 

706,157

 

479,586

 

Investment of funds received under securities lending agreements, at market value (amortized cost: 2009, $621,095; 2008, $750,330)

 

611,496

 

730,194

 

TALF investments, at market value

 

250,517

 

 

Other investments (cost: 2009, $147,468; 2008, $125,858)

 

154,526

 

109,601

 

Investment funds accounted for using the equity method

 

376,381

 

301,027

 

Total investments

 

11,365,038

 

9,742,629

 

 

 

 

 

 

 

Cash

 

385,149

 

251,739

 

Accrued investment income

 

77,762

 

78,052

 

Investment in joint venture (cost: $100,000)

 

101,473

 

98,341

 

Fixed maturities and short-term investments pledged under securities lending agreements, at market value

 

609,334

 

728,065

 

Premiums receivable

 

697,806

 

628,951

 

Unpaid losses and loss adjustment expenses recoverable

 

1,709,756

 

1,729,135

 

Paid losses and loss adjustment expenses recoverable

 

58,588

 

63,294

 

Prepaid reinsurance premiums

 

283,290

 

303,707

 

Deferred acquisition costs, net

 

303,826

 

295,192

 

Receivable for securities sold

 

998,431

 

105,073

 

Other assets

 

592,701

 

592,367

 

Total Assets

 

$

17,183,154

 

$

14,616,545

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$

7,879,586

 

$

7,666,957

 

Unearned premiums

 

1,627,519

 

1,526,682

 

Reinsurance balances payable

 

159,898

 

138,509

 

Senior notes

 

300,000

 

300,000

 

Revolving credit agreement borrowings

 

100,000

 

100,000

 

TALF borrowings, at market value

 

219,843

 

 

Securities lending payable

 

625,706

 

753,528

 

Payable for securities purchased

 

1,197,411

 

123,309

 

Other liabilities

 

612,369

 

574,595

 

Total Liabilities

 

12,722,332

 

11,183,580

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Non-cumulative preferred shares ($0.01 par value, 50,000,000 shares authorized, issued: 13,000,000)

 

130

 

130

 

Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2009, 59,524,309; 2008, 60,511,974)

 

595

 

605

 

Additional paid-in capital

 

917,204

 

994,585

 

Retained earnings

 

3,321,113

 

2,693,239

 

Accumulated other comprehensive income (loss), net of deferred income tax

 

221,780

 

(255,594

)

Total Shareholders’ Equity

 

4,460,822

 

3,432,965

 

Total Liabilities and Shareholders’ Equity

 

$

17,183,154

 

$

14,616,545

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues

 

 

 

 

 

 

 

 

 

Net premiums written

 

$

727,308

 

$

692,692

 

$

2,244,025

 

$

2,190,152

 

Decrease (increase) in unearned premiums

 

7,077

 

40,339

 

(109,818

)

(43,212

)

Net premiums earned

 

734,385

 

733,031

 

2,134,207

 

2,146,940

 

Net investment income

 

100,213

 

117,022

 

296,580

 

356,335

 

Net realized gains (losses)

 

70,638

 

(23,001

)

53,681

 

23,765

 

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment losses

 

(7,860

)

(82,533

)

(142,663

)

(105,993

)

Less investment impairments recognized in other comprehensive income, before taxes

 

3,217

 

 

81,023

 

 

Net impairment losses recognized in earnings

 

(4,643

)

(82,533

)

(61,640

)

(105,993

)

 

 

 

 

 

 

 

 

 

 

Fee income

 

826

 

944

 

2,568

 

3,250

 

Equity in net income (loss) of investment funds accounted for using the equity method

 

69,119

 

(1,731

)

135,428

 

(4,461

)

Other income

 

5,687

 

3,067

 

14,588

 

12,071

 

Total revenues

 

976,225

 

746,799

 

2,575,412

 

2,431,907

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

444,914

 

548,886

 

1,244,314

 

1,357,928

 

Acquisition expenses

 

122,739

 

133,413

 

373,011

 

367,278

 

Other operating expenses

 

99,743

 

95,652

 

286,153

 

295,417

 

Interest expense

 

6,001

 

6,241

 

17,425

 

17,553

 

Net foreign exchange (gains) losses

 

19,755

 

(68,395

)

48,208

 

(45,106

)

Total expenses

 

693,152

 

715,797

 

1,969,111

 

1,993,070

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

283,073

 

31,002

 

606,301

 

438,837

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

2,205

 

(1,849

)

20,513

 

11,360

 

 

 

 

 

 

 

 

 

 

 

Net income

 

280,868

 

32,851

 

585,788

 

427,477

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

6,461

 

6,461

 

19,383

 

19,383

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

274,407

 

$

26,390

 

$

566,405

 

$

408,094

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

4.56

 

$

0.44

 

$

9.39

 

$

6.50

 

Diluted

 

$

4.39

 

$

0.42

 

$

9.05

 

$

6.23

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and common share equivalents outstanding

 

 

 

 

 

 

 

 

 

Basic

 

60,156,219

 

60,109,932

 

60,295,144

 

62,790,514

 

Diluted

 

62,533,816

 

62,830,910

 

62,590,228

 

65,530,570

 

 

See Notes to Consolidated Financial Statements

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2009

 

2008

 

Non-Cumulative Preferred Shares

 

 

 

 

 

Balance at beginning and end of period

 

$

130

 

$

130

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Balance at beginning of year

 

605

 

673

 

Common shares issued, net

 

6

 

3

 

Purchases of common shares under share repurchase program

 

(16

)

(74

)

Balance at end of period

 

595

 

602

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

Balance at beginning of year

 

994,585

 

1,451,667

 

Common shares issued

 

2,557

 

3,511

 

Exercise of stock options

 

4,138

 

13,219

 

Common shares retired

 

(104,875

)

(515,286

)

Amortization of share-based compensation

 

20,843

 

24,303

 

Other

 

(44

)

(355

)

Balance at end of period

 

917,204

 

977,059

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

Balance at beginning of year

 

2,693,239

 

2,428,117

 

Cumulative effect of change in accounting principle (1)

 

61,469

 

 

Balance at beginning of year, as adjusted

 

2,754,708

 

2,428,117

 

Dividends declared on preferred shares

 

(19,383

)

(19,383

)

Net income

 

585,788

 

427,477

 

Balance at end of period

 

3,321,113

 

2,836,211

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance at beginning of year

 

(255,594

)

155,224

 

Cumulative effect of change in accounting principle (1)

 

(61,469

)

 

Balance at beginning of year, as adjusted

 

(317,063

)

155,224

 

Change in unrealized appreciation (decline) in value of investments, net of deferred income tax

 

609,446

 

(440,254

)

Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax

 

(81,023

)

 

Foreign currency translation adjustments, net of deferred income tax

 

10,420

 

(12,262

)

Balance at end of period

 

221,780

 

(297,292

)

 

 

 

 

 

 

Total Shareholders’ Equity

 

$

4,460,822

 

$

3,516,710

 

 


(1)          Adoption of recent 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)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2009

 

2008

 

Comprehensive Income (Loss)

 

 

 

 

 

Net income

 

$

585,788

 

$

427,477

 

Other comprehensive income (loss), net of deferred income tax

 

 

 

 

 

Unrealized appreciation (decline) in value of investments:

 

 

 

 

 

Unrealized holding gains (losses) arising during period

 

583,138

 

(513,176

)

Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax

 

(81,023

)

 

Reclassification of net realized losses, net of income taxes, included in net income

 

26,308

 

72,922

 

Foreign currency translation adjustments

 

10,420

 

(12,262

)

Other comprehensive income (loss)

 

538,843

 

(452,516

)

Comprehensive Income (Loss)

 

$

1,124,631

 

$

(25,039

)

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2009

 

2008

 

Operating Activities

 

 

 

 

 

Net income

 

$

585,788

 

$

427,477

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Net realized gains

 

(53,161

)

(19,631

)

Net impairment losses recognized in earnings

 

61,640

 

105,993

 

Equity in net income of investment funds accounted for using the equity method and other income

 

(145,219

)

(7,345

)

Share-based compensation

 

20,843

 

24,303

 

Changes in:

 

 

 

 

 

Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable

 

168,615

 

432,217

 

Unearned premiums, net of prepaid reinsurance premiums

 

109,109

 

33,870

 

Premiums receivable

 

(54,585

)

(10,865

)

Deferred acquisition costs, net

 

(6,064

)

(20,581

)

Reinsurance balances payable

 

17,380

 

(122,091

)

Other liabilities

 

2,142

 

50,421

 

Other items, net

 

102,176

 

79,229

 

Net Cash Provided By Operating Activities

 

808,664

 

972,997

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of fixed maturity investments

 

(15,798,216

)

(11,186,713

)

Proceeds from sales of fixed maturity investments

 

14,723,846

 

10,506,784

 

Proceeds from redemptions and maturities of fixed maturity investments

 

638,638

 

444,681

 

Purchases of TALF investments

 

(250,231

)

 

Purchases of other investments

 

(40,879

)

(225,688

)

Proceeds from sales of other investments

 

67,879

 

235,712

 

Investment in joint venture

 

 

(100,000

)

Net purchases of short-term investments

 

(109,500

)

(219,985

)

Change in investment of securities lending collateral

 

127,822

 

553,396

 

Purchases of furniture, equipment and other assets

 

(15,586

)

(6,756

)

Net Cash Provided By (Used For) Investing Activities

 

(656,227

)

1,431

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Purchases of common shares under share repurchase program

 

(99,746

)

(513,130

)

Proceeds from common shares issued, net

 

772

 

11,384

 

Revolving credit agreement borrowings

 

 

100,000

 

TALF borrowings

 

219,843

 

 

Change in securities lending collateral

 

(127,822

)

(553,396

)

Other

 

(461

)

1,778

 

Preferred dividends paid

 

(19,383

)

(19,383

)

Net Cash Used For Financing Activities

 

(26,797

)

(972,747

)

 

 

 

 

 

 

Effects of exchange rate changes on foreign currency cash

 

7,770

 

(2,499

)

 

 

 

 

 

 

Increase (decrease) in cash

 

133,410

 

(818

)

Cash beginning of year

 

251,739

 

239,915

 

Cash end of period

 

$

385,149

 

$

239,097

 

 

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2008, including the Company’s audited consolidated financial statements and related notes and the section entitled “Risk Factors.”

 

To facilitate period-to-period comparisons, certain amounts in the 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation. Such reclassifications had no effect on the Company’s consolidated net income. Additionally, the Company adopted recent accounting guidance regarding the recognition and presentation of other-than-temporary impairments, effective for its interim period ending March 31, 2009. See Note 8, “Investment Information—Other-Than-Temporary Impairments” for further details.

 

2.      Recent Accounting Pronouncements

 

In September 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding the estimation of the fair value of investments in certain entities that calculate net asset value per share (or its equivalent). This ASU provides additional guidance on estimating the fair value of certain alternative investments and its provisions create a practical expedient to measure the fair value of an alternative investment on the basis of the net asset value per share of the investment. The ASU also requires additional disclosures about the attributes of alternative investments. The ASU is effective for interim and annual reporting periods ending after December 15, 2009 and, accordingly, the Company will adopt it on January 1, 2010. The Company is currently evaluating the impact that this ASU may have on its financial condition and results of operations.

 

In August 2009, the FASB issued an ASU to amend the guidance regarding the fair value measurement of liabilities. This ASU provides clarification that in circumstances in which a quoted price in an active market for an identical liability is not available, a reporting entity is required to measure fair value using other valuation techniques, including a technique that uses: (a) the quoted price of the identical liability when traded as an asset; and (b) quoted prices for similar liabilities or similar liabilities when traded as assets. The amendments in this ASU also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. Lastly, this ASU clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This

 

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Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

ASU was effective for the Company in the interim period ending September 30, 2009, and the adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In June 2009, the FASB approved the “FASB Accounting Standards Codification” (the “Codification”) as the single source of authoritative nongovernmental U.S. GAAP effective July 1, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered nonauthoritative. The Codification was effective for the Company in the interim period ending September 30, 2009, and the adoption did not impact its consolidated financial position or results of operations.

 

In June 2009, the FASB issued amendments to the guidance regarding the consolidation of variable interest entities (“VIEs”), which affect all entities currently within the scope of the December 2003 revised version of the guidance, as well as qualifying special-purpose entities that are currently excluded from the scope of the guidance. The amendments require an analysis to determine whether a variable interest gives a company a controlling financial interest in a VIE. In addition, they require an ongoing reassessment of all VIEs and eliminate the quantitative approach previously required for determining whether a company is the primary beneficiary. The amendments are effective for fiscal years beginning after November 15, 2009. Accordingly, the Company will adopt them on January 1, 2010. The Company is currently evaluating the impact that these amendments may have on its financial condition and results of operations.

 

In June 2009, the FASB issued an amendment to the guidance regarding accounting for transfers of financial assets. This amendment removes the concept of a qualifying special-purpose entity from the guidance regarding the accounting for transfers and servicing of financial assets and extinguishment of liabilities, and removes the exception from applying to the consolidation of VIEs. This amendment also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting and enhances disclosures about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This amendment is effective prospectively to transfers of financial assets occurring in fiscal years beginning after November 15, 2009. Accordingly, the Company will adopt this amendment on January 1, 2010. The Company is currently evaluating the impact that this amendment may have on its financial condition and results of operations.

 

In May 2009, the FASB issued guidance regarding subsequent events, which establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether that date represents the date the financial statements were issued or were available to be issued. This guidance was effective with interim and annual financial periods ending after June 15, 2009, and the adoption did not impact the Company’s consolidated financial position or results of operations. See Note 16, “Subsequent Events.”

 

In April 2009, the FASB issued guidance regarding the recognition and presentation of other-than-temporary impairments, which requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors (e.g., interest rates, market conditions, etc.) is recorded as a component of other comprehensive income (loss). This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company elected to adopt this guidance effective for its interim period ending March 31, 2009. See Note 8, “Investment Information—Other-Than-Temporary Impairments.”

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

In April 2009, the FASB issued guidance regarding the determination of fair value when the volume and level of activity for the asset or liability have significantly decreased and the identification of transactions that are not orderly. This guidance also amended guidance regarding fair value measurements to expand certain disclosure requirements. This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company elected to adopt this guidance effective for its interim period ending March 31, 2009, and its adoption did not have a material impact on the Company’s consolidated financial condition or results of operations. See Note 8, “Investment Information—Fair Value.”

 

In April 2009, the FASB issued guidance regarding the interim disclosures about fair value of financial instruments, which requires disclosures about fair value of financial instruments in interim and annual financial statements. This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company elected to adopt this guidance effective for its interim period ending March 31, 2009, and has included the required disclosures in its notes to consolidated financial statements where applicable.

 

3.       Share Transactions

 

Share Repurchases

 

The board of directors of ACGL has authorized the investment of up to $1.5 billion in ACGL’s common shares through a share repurchase program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through February 2010. During the third quarter, ACGL repurchased 1.5 million common shares for an aggregate purchase price of $98.2 million and for the nine months ended September 30, 2009, repurchased 1.6 million common shares for an aggregate purchase price of $99.7 million of common shares through the share repurchase program, respectively. Since the inception of the share repurchase program through September 30, 2009, ACGL has repurchased 16.8 million common shares for an aggregate purchase price of $1.15 billion. As a result of the share repurchase transactions to date, weighted average shares outstanding for the 2009 third quarter and nine months ended September 30, 2009 were reduced by 15.7 million and 15.4 million shares, respectively. Weighted average shares outstanding for the 2008 third quarter and nine months ended September 30, 2008 were reduced by 14.9 million and 12.1 million shares, respectively.

 

At September 30, 2009, $350.1 million of repurchases were available under the share repurchase 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. In connection with the share repurchase program, the Warburg Pincus funds waived their rights relating to share repurchases under its shareholders agreement with ACGL for all repurchases of common shares by ACGL under the share repurchase program in open market transactions and certain privately negotiated transactions.

 

Non-Cumulative Preferred Shares

 

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 ACGL’s 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

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

not be payable. Holders of Preferred Shares will be entitled to receive dividend payments only when, as and if declared by ACGL’s board of directors or a duly authorized committee of the 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 nine month periods ended September 30, 2009 and 2008, the Company paid $19.4 million to holders of the Preferred Shares. At September 30, 2009, the Company had declared an aggregate of $3.3 million of dividends to be paid to holders of the Preferred Shares.

 

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 ACGL’s 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 nine month periods ended September 30, 2009 and 2008, interest expense on the Senior Notes was $16.6 million. The market value of the Senior Notes at September 30, 2009 and December 31, 2008 was $282.5 million and $246.1 million, respectively.

 

Letter of Credit and Revolving Credit Facilities

 

As of September 30, 2009, 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 Company’s insurance and reinsurance subsidiaries. Issuance of letters of credit and borrowings under the Credit Agreement are subject to the Company’s 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 Company’s principal insurance and reinsurance subsidiaries maintain at least a “B++” rating from A.M. Best. In addition, certain of the Company’s 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 September 30, 2009. The Credit Agreement expires on August 30, 2011.

 

Including the secured letter of credit portion of the Credit Agreement and another letter of credit facility (together, the “LOC Facilities”), the Company has access to letter of credit facilities for up to a total of $1.45 billion. 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 Company’s 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 Lloyd’s 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,

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

loss development of existing reserves, the payment pattern of such reserves, the further expansion of the Company’s business and the loss experience of such business. When issued, certain letters of credit are secured by a portion of the Company’s investment portfolio. In addition, the LOC Facilities also require the maintenance of certain covenants, which the Company was in compliance with at September 30, 2009. At such date, the Company had $712.1 million in outstanding letters of credit under the LOC Facilities, which were secured by investments with a market value of $848.1 million. In May 2008, the Company borrowed $100.0 million 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. The proceeds from such borrowings, which are repayable in August 2011, were contributed as additional share capital to Arch Reinsurance Ltd. (“Arch Re Bermuda”) and used to fund the investment in Gulf Re. See Note 7, “Investment in Joint Venture,” for additional information.

 

Term Asset-Backed Securities Loan Facility Program

 

During the 2009 third quarter, the Company purchased asset-backed and commercial mortgage-backed securities under the Federal Reserve Bank of New York’s (“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 September 30, 2009, the Company had $250.5 million of securities under TALF which are reflected as “TALF investments, at market value” and $219.8 million of secured financing from the FRBNY which is reflected as “TALF borrowings, at market value.” The maturity dates for the TALF borrowings vary between 3 to 5 years with floating or fixed coupons depending on the related TALF investments. See Note 8, “Investment Information—TALF Program,” for additional information.

 

Interest Paid

 

During the nine month periods ended September 30, 2009 and 2008, the Company made interest payments of $12.0 million related to its debt and financing arrangements.

 

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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 Company’s insurance and reinsurance operating segments each have segment managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the President and Chief Executive Officer of ACGL and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. The Company determined its reportable operating segments using the management approach described in 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 Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.

 

The insurance segment consists of the Company’s insurance underwriting subsidiaries which primarily write on both an admitted and non-admitted basis. The insurance segment consists of eleven specialty product lines: 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 and collateral protection business).

 

The reinsurance segment consists of the Company’s reinsurance underwriting subsidiaries. The reinsurance segment generally seeks to write significant lines on specialty property and casualty reinsurance 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 Company’s non-cumulative preferred shares.

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following tables set forth an analysis of the Company’s underwriting income by segment, together with a reconciliation of underwriting income to net income available to common shareholders:

 

 

 

Three Months Ended

 

 

 

September 30, 2009

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

673,986

 

$

266,193

 

$

937,328

 

Net premiums written (1)

 

473,676

 

253,632

 

727,308

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

443,319

 

$

291,066

 

$

734,385

 

Fee income

 

814

 

12

 

826

 

Losses and loss adjustment expenses

 

(303,304

)

(141,610

)

(444,914

)

Acquisition expenses, net

 

(60,964

)

(61,775

)

(122,739

)

Other operating expenses

 

(72,452

)

(21,271

)

(93,723

)

Underwriting income

 

$

7,413

 

$

66,422

 

73,835

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

100,213

 

Net realized gains

 

 

 

 

 

70,638

 

Net impairment losses recognized in earnings

 

 

 

 

 

(4,643

)

Equity in net income of investment funds accounted for using the equity method

 

 

 

 

 

69,119

 

Other income

 

 

 

 

 

5,687

 

Other expenses

 

 

 

 

 

(6,020

)

Interest expense

 

 

 

 

 

(6,001

)

Net foreign exchange losses

 

 

 

 

 

(19,755

)

Income before income taxes

 

 

 

 

 

283,073

 

Income tax expense

 

 

 

 

 

(2,205

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

280,868

 

Preferred dividends

 

 

 

 

 

(6,461

)

Net income available to common shareholders

 

 

 

 

 

$

274,407

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

68.4

%

48.7

%

60.6

%

Acquisition expense ratio (2)

 

13.6

%

21.2

%

16.6

%

Other operating expense ratio

 

16.3

%

7.3

%

12.8

%

Combined ratio

 

98.3

%

77.2

%

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 $2.8 million, respectively, of gross and net premiums written and $0.4 million and $3.0 million, respectively, of net premiums earned assumed through intersegment transactions.

(2)   The acquisition expense ratio is adjusted to include policy-related fee income.

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

September 30, 2008

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

678,338

 

$

228,593

 

$

903,533

 

Net premiums written (1)

 

466,115

 

226,577

 

692,692

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

441,049

 

$

291,982

 

$

733,031

 

Fee income

 

872

 

72

 

944

 

Losses and loss adjustment expenses

 

(337,456

)

(211,430

)

(548,886

)

Acquisition expenses, net

 

(62,752

)

(70,661

)

(133,413

)

Other operating expenses

 

(71,861

)

(18,331

)

(90,192

)

Underwriting loss

 

$

(30,148

)

$

(8,368

)

(38,516

)

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

117,022

 

Net realized losses

 

 

 

 

 

(23,001

)

Net impairment losses recognized in earnings

 

 

 

 

 

(82,533

)

Equity in net income (loss) of investment funds accounted for using the equity method

 

 

 

 

 

(1,731

)

Other income

 

 

 

 

 

3,067

 

Other expenses

 

 

 

 

 

(5,460

)

Interest expense

 

 

 

 

 

(6,241

)

Net foreign exchange gains

 

 

 

 

 

68,395

 

Income before income taxes

 

 

 

 

 

31,002

 

Income tax benefit

 

 

 

 

 

1,849

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

32,851

 

Preferred dividends

 

 

 

 

 

(6,461

)

Net income available to common shareholders

 

 

 

 

 

$

26,390

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

76.5

%

72.4

%

74.9

%

Acquisition expense ratio (2)

 

14.0

%

24.2

%

18.1

%

Other operating expense ratio

 

16.3

%

6.3

%

12.3

%

Combined ratio

 

106.8

%

102.9

%

105.3

%

 


(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 $3.4 million, respectively, of gross and net premiums written and nil and $7.2 million, respectively, of net premiums earned assumed through intersegment transactions.

(2)   The acquisition expense ratio is adjusted to include certain fee income.

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Nine Months Ended

 

 

 

September 30, 2009

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

1,949,040

 

$

934,711

 

$

2,874,219

 

Net premiums written (1)

 

1,334,580

 

909,445

 

2,244,025

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

1,261,870

 

$

872,337

 

$

2,134,207

 

Fee income

 

2,479

 

89

 

2,568

 

Losses and loss adjustment expenses

 

(860,669

)

(383,645

)

(1,244,314

)

Acquisition expenses, net

 

(177,335

)

(195,676

)

(373,011

)

Other operating expenses

 

(206,196

)

(56,406

)

(262,602

)

Underwriting income

 

$

20,149

 

$

236,699

 

256,848

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

296,580

 

Net realized gains

 

 

 

 

 

53,681

 

Net impairment losses recognized in earnings

 

 

 

 

 

(61,640

)

Equity in net income of investment funds accounted for using the equity method

 

 

 

 

 

135,428

 

Other income

 

 

 

 

 

14,588

 

Other expenses

 

 

 

 

 

(23,551

)

Interest expense

 

 

 

 

 

(17,425

)

Net foreign exchange losses

 

 

 

 

 

(48,208

)

Income before income taxes

 

 

 

 

 

606,301

 

Income tax expense

 

 

 

 

 

(20,513

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

585,788

 

Preferred dividends

 

 

 

 

 

(19,383

)

Net income available to common shareholders

 

 

 

 

 

$

566,405

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

68.2

%

44.0

%

58.3

%

Acquisition expense ratio (2)

 

13.9

%

22.4

%

17.4

%

Other operating expense ratio

 

16.3

%

6.5

%

12.3

%

Combined ratio

 

98.4

%

72.9

%

88.0

%

 


(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 $9.4 million, respectively, of gross and net premiums written and $1.3 million and $11.3 million, respectively, of net premiums earned assumed through intersegment transactions.

(2)   The acquisition expense ratio is adjusted to include policy-related fee income.

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Nine Months Ended

 

 

 

September 30, 2008

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

1,926,349

 

$

935,738

 

$

2,843,611

 

Net premiums written (1)

 

1,290,380

 

899,772

 

2,190,152

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

1,276,734

 

$

870,206

 

$

2,146,940

 

Fee income

 

2,634

 

616

 

3,250

 

Losses and loss adjustment expenses

 

(887,392

)

(470,536

)

(1,357,928

)

Acquisition expenses, net

 

(170,041

)

(197,237

)

(367,278

)

Other operating expenses

 

(217,064

)

(56,660

)

(273,724

)

Underwriting income

 

$

4,871

 

$

146,389

 

151,260

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

356,335

 

Net realized gains

 

 

 

 

 

23,765

 

Net impairment losses recognized in earnings

 

 

 

 

 

(105,993

)

Equity in net income (loss) of investment funds accounted for using the equity method

 

 

 

 

 

(4,461

)

Other income

 

 

 

 

 

12,071

 

Other expenses

 

 

 

 

 

(21,693

)

Interest expense

 

 

 

 

 

(17,553

)

Net foreign exchange gains

 

 

 

 

 

45,106

 

Income before income taxes

 

 

 

 

 

438,837

 

Income tax expense

 

 

 

 

 

(11,360

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

427,477

 

Preferred dividends

 

 

 

 

 

(19,383

)

Net income available to common shareholders

 

 

 

 

 

$

408,094

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

69.5

%

54.1

%

63.2

%

Acquisition expense ratio (2)

 

13.1

%

22.7

%

17.0

%

Other operating expense ratio

 

17.0

%

6.5

%

12.7

%

Combined ratio

 

99.6

%

83.3

%

92.9

%

 


(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 $18.4 million, respectively, of gross and net premiums written and $0.2 million and $24.4 million, respectively, of net premiums earned assumed through intersegment transactions.

(2)   The acquisition expense ratio is adjusted to include certain fee income.

 

17



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Set forth below is summary information regarding net premiums written and earned by major line of business and net premiums written by client location for the insurance segment:

 

 

 

Three Months Ended
September 30,

 

 

 

2009

 

2008

 

INSURANCE SEGMENT
(U.S. dollars in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

118,536

 

25.0

 

$

91,461

 

19.6

 

Programs

 

66,964

 

14.1

 

78,045

 

16.7

 

Professional liability

 

66,002

 

13.9

 

70,778

 

15.2

 

Executive assurance

 

58,529

 

12.4

 

53,665

 

11.5

 

Construction

 

36,823

 

7.8

 

43,916

 

9.4

 

National accounts casualty

 

30,726

 

6.5

 

16,609

 

3.6

 

Casualty

 

26,753

 

5.6

 

28,456

 

6.1

 

Travel and accident

 

15,998

 

3.4

 

16,949

 

3.6

 

Surety

 

12,025

 

2.5

 

16,599

 

3.6

 

Healthcare

 

10,854

 

2.3

 

11,411

 

2.4

 

Other (2)

 

30,466

 

6.5

 

38,226

 

8.3

 

Total

 

$

473,676

 

100.0

 

$

466,115

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

94,471

 

21.3

 

$

88,903

 

20.2

 

Programs

 

69,436

 

15.7

 

71,576

 

16.2

 

Professional liability

 

57,540

 

13.0

 

62,987

 

14.3

 

Executive assurance

 

56,094

 

12.7

 

47,237

 

10.7

 

Construction

 

42,495

 

9.6

 

45,601

 

10.3

 

National accounts casualty

 

19,969

 

4.5

 

13,503

 

3.1

 

Casualty

 

30,004

 

6.8

 

37,351

 

8.5

 

Travel and accident

 

18,193

 

4.1

 

17,671

 

4.0

 

Surety

 

12,239

 

2.8

 

13,891

 

3.1

 

Healthcare

 

12,303

 

2.8

 

12,292

 

2.8

 

Other (2)

 

30,575

 

6.7

 

30,037

 

6.8

 

Total

 

$

443,319

 

100.0

 

$

441,049

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

342,112

 

72.2

 

$

348,306

 

74.7

 

Europe

 

68,109

 

14.4

 

57,155

 

12.3

 

Other

 

63,455

 

13.4

 

60,654

 

13.0

 

Total

 

$

473,676

 

100.0

 

$

466,115

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by underwriting location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

336,552

 

71.1

 

$

354,002

 

75.9

 

Europe

 

117,900

 

24.9

 

97,548

 

20.9

 

Other

 

19,224

 

4.0

 

14,565

 

3.2

 

Total

 

$

473,676

 

100.0

 

$

466,115

 

100.0

 

 


(1)          Insurance segment results include premiums written and earned assumed through intersegment transactions of nil and $0.4 million, respectively, for the 2009 third quarter and premiums written and earned of nil for the 2008 third quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $2.8 million and $3.0 million, respectively, for the 2009 third quarter and $3.4 million and $7.2 million, respectively, for the 2008 third quarter.

(2)          Includes excess workers’ compensation, employers’ liability, and collateral protection business.

 

18



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

INSURANCE SEGMENT
(U.S. dollars in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

310,950

 

23.3

 

$

278,372

 

21.6

 

Programs

 

214,050

 

16.0

 

205,830

 

16.0

 

Professional liability

 

175,783

 

13.2

 

188,442

 

14.6

 

Executive assurance

 

161,527

 

12.1

 

139,574

 

10.8

 

Construction

 

129,584

 

9.7

 

133,501

 

10.3

 

Casualty

 

80,509

 

6.0

 

88,160

 

6.8

 

National accounts casualty

 

62,535

 

4.7

 

39,080

 

3.0

 

Travel and accident

 

53,089

 

4.0

 

49,550

 

3.8

 

Surety

 

32,637

 

2.4

 

37,672

 

2.9

 

Healthcare

 

31,740

 

2.4

 

33,435

 

2.6

 

Other (2)

 

82,176

 

6.2

 

96,764

 

7.6

 

Total

 

$

1,334,580

 

100.0

 

$

1,290,380

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

246,881

 

19.6

 

$

257,191

 

20.1

 

Programs

 

207,914

 

16.5

 

190,648

 

14.9

 

Professional liability

 

172,323

 

13.7

 

197,997

 

15.5

 

Executive assurance

 

156,198

 

12.4

 

136,141

 

10.7

 

Construction

 

126,279

 

10.0

 

127,543

 

10.0

 

Casualty

 

93,948

 

7.4

 

117,949

 

9.2

 

National accounts casualty

 

47,487

 

3.8

 

31,178

 

2.4

 

Travel and accident

 

49,547

 

3.9

 

49,150

 

3.8

 

Surety

 

37,771

 

3.0

 

39,447

 

3.1

 

Healthcare

 

34,061

 

2.7

 

38,874

 

3.0

 

Other (2)

 

89,461

 

7.0

 

90,616

 

7.3

 

Total

 

$

1,261,870

 

100.0

 

$

1,276,734

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

998,531

 

74.8

 

$

957,715

 

74.2

 

Europe

 

208,631

 

15.6

 

200,112

 

15.5

 

Other

 

127,418

 

9.6

 

132,553

 

10.3

 

Total

 

$

1,334,580

 

100.0

 

$

1,290,380

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by underwriting location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

972,847

 

72.9

 

$

959,440

 

74.4

 

Europe

 

301,518

 

22.6

 

279,413

 

21.7

 

Other

 

60,215

 

4.5

 

51,527

 

3.9

 

Total

 

$

1,334,580

 

100.0

 

$

1,290,380

 

100.0

 

 


(1)          Insurance segment results include premiums written and earned assumed through intersegment transactions of $0.1 million and $1.3 million, respectively, for the 2009 period and premiums written and earned of $0.1 million and $0.2 million, respectively, for the 2008 period. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $9.4 million and $11.3 million, respectively, for the 2009 period and $18.4 million and $24.4 million, respectively, for the 2008 period.

(2)          Includes excess workers’ compensation, employers’ liability, and collateral protection business.

 

19



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following table sets forth the reinsurance segment’s net premiums written and earned by major line of business and type of business, together with net premiums written by client location:

 

 

 

Three Months Ended
September 30,

 

 

 

2009

 

2008

 

REINSURANCE SEGMENT
(U.S. dollars in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Property excluding property catastrophe (2)

 

$

90,845

 

35.8

 

$

56,105

 

24.8

 

Casualty (3)

 

85,084

 

33.5

 

82,497

 

36.4

 

Property catastrophe

 

50,539

 

19.9

 

44,591

 

19.7

 

Marine and aviation

 

16,187

 

6.4

 

18,727

 

8.3

 

Other specialty

 

10,595

 

4.2

 

24,013

 

10.6

 

Other

 

382

 

0.2

 

644

 

0.2

 

Total

 

$

253,632

 

100.0

 

$

226,577

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Property excluding property catastrophe (2)

 

$

94,837

 

32.6

 

$

68,670

 

23.5

 

Casualty (3)

 

88,721

 

30.5

 

106,146

 

36.4

 

Property catastrophe

 

61,772

 

21.2

 

57,015

 

19.5

 

Marine and aviation

 

21,666

 

7.4

 

22,395

 

7.7

 

Other specialty

 

23,251

 

8.0

 

36,388

 

12.5

 

Other

 

819

 

0.3

 

1,368

 

0.4

 

Total

 

$

291,066

 

100.0

 

$

291,982

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

147,132

 

58.0

 

$

149,023

 

65.8

 

Excess of loss

 

106,500

 

42.0

 

77,554

 

34.2

 

Total

 

$

253,632

 

100.0

 

$

226,577

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

170,571

 

58.6

 

$

187,656

 

64.3

 

Excess of loss

 

120,495

 

41.4

 

104,326

 

35.7

 

Total

 

$

291,066

 

100.0

 

$

291,982

 

100.0