UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
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, 5th Floor, 45 Reid Street
Hamilton HM 12, Bermuda
(Address of principal executive offices)
(441) 278-9250
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
The number of the registrants common shares (par value, $0.0033 per share) outstanding as of August 1, 2012 was 136,314,789.
ARCH CAPITAL GROUP LTD.
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Page No. |
PART I. Financial Information |
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Item 1 Consolidated Financial Statements |
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2 | |
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Consolidated Balance Sheets |
3 |
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4 | |
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5 | |
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6 | |
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7 | |
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8 | |
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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations |
30 |
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Item 3 Quantitative and Qualitative Disclosures About Market Risk |
69 |
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69 | |
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70 | |
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds |
70 |
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70 | |
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71 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Arch Capital Group Ltd.:
We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries (the Company) as of June 30, 2012, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2012 and June 30, 2011, and the consolidated statements of comprehensive income, changes in shareholders equity and cash flows for the six-month periods ended June 30, 2012 and June 30, 2011. These interim financial statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders equity, and cash flows for the year then ended (not presented herein), and in our report dated February 29, 2012, we expressed an unqualified opinion on those consolidated financial statements. As discussed in Note 3 to the accompanying consolidated financial statements, the Company changed its method of accounting for costs associated with acquiring or renewing insurance contracts. The accompanying December 31, 2011 consolidated balance sheet reflects this change.
/s/ PricewaterhouseCoopers LLP |
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New York, NY |
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August 8, 2012 |
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
(U.S. dollars in thousands, except share data)
|
|
(Unaudited) |
|
|
| ||
|
|
June 30, |
|
December 31, |
| ||
|
|
2012 |
|
2011 |
| ||
Assets |
|
|
|
|
| ||
Investments: |
|
|
|
|
| ||
Fixed maturities available for sale, at fair value (amortized cost: $9,325,208 and $9,165,438) |
|
$ |
9,556,326 |
|
$ |
9,375,604 |
|
Short-term investments available for sale, at fair value (amortized cost: $1,085,961 and $909,121) |
|
1,087,910 |
|
904,219 |
| ||
Investment of funds received under securities lending, at fair value (amortized cost: $66,327 and $48,577) |
|
66,424 |
|
48,419 |
| ||
Equity securities available for sale, at fair value (cost: $258,983 and $299,058) |
|
260,864 |
|
299,584 |
| ||
Other investments available for sale, at fair value (cost: $368,826 and $235,381) |
|
381,576 |
|
238,111 |
| ||
Investments accounted for using the fair value option |
|
496,843 |
|
366,903 |
| ||
TALF investments, at fair value (amortized cost: $292,841 and $373,040) |
|
307,453 |
|
387,702 |
| ||
Investments accounted for using the equity method |
|
331,601 |
|
380,507 |
| ||
Total investments |
|
12,488,997 |
|
12,001,049 |
| ||
|
|
|
|
|
| ||
Cash |
|
355,392 |
|
351,699 |
| ||
Accrued investment income |
|
72,095 |
|
70,739 |
| ||
Investment in joint venture (cost: $100,000) |
|
109,240 |
|
107,576 |
| ||
Fixed maturities and short-term investments pledged under securities lending, at fair value |
|
74,032 |
|
56,393 |
| ||
Premiums receivable |
|
834,116 |
|
501,563 |
| ||
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses |
|
1,849,191 |
|
1,851,584 |
| ||
Contractholder receivables |
|
787,389 |
|
748,231 |
| ||
Prepaid reinsurance premiums |
|
313,264 |
|
265,696 |
| ||
Deferred acquisition costs, net |
|
272,736 |
|
227,884 |
| ||
Receivable for securities sold |
|
821,527 |
|
462,891 |
| ||
Other assets |
|
518,744 |
|
460,052 |
| ||
Total Assets |
|
$ |
18,496,723 |
|
$ |
17,105,357 |
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
Reserve for losses and loss adjustment expenses |
|
$ |
8,546,350 |
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$ |
8,456,210 |
|
Unearned premiums |
|
1,815,135 |
|
1,411,872 |
| ||
Reinsurance balances payable |
|
184,763 |
|
133,866 |
| ||
Contractholder payables |
|
787,389 |
|
748,231 |
| ||
Senior notes |
|
300,000 |
|
300,000 |
| ||
Revolving credit agreement borrowings |
|
100,000 |
|
100,000 |
| ||
TALF borrowings, at fair value (par: $237,095 and $310,868) |
|
235,818 |
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310,486 |
| ||
Securities lending payable |
|
76,383 |
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58,546 |
| ||
Payable for securities purchased |
|
927,962 |
|
480,230 |
| ||
Other liabilities |
|
502,607 |
|
513,842 |
| ||
Total Liabilities |
|
13,476,407 |
|
12,513,283 |
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|
|
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|
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Commitments and Contingencies |
|
|
|
|
| ||
|
|
|
|
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Shareholders Equity |
|
|
|
|
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Non-cumulative preferred shares |
|
325,000 |
|
325,000 |
| ||
Common shares ($0.0033 par, shares issued: 166,748,110 and 164,636,338) |
|
556 |
|
549 |
| ||
Additional paid-in capital |
|
187,013 |
|
161,419 |
| ||
Retained earnings |
|
5,167,069 |
|
4,796,655 |
| ||
Accumulated other comprehensive income, net of deferred income tax |
|
193,097 |
|
153,923 |
| ||
Common shares held in treasury, at cost (shares: 30,456,458 and 30,277,993) |
|
(852,419 |
) |
(845,472 |
) | ||
Total Shareholders Equity |
|
5,020,316 |
|
4,592,074 |
| ||
Total Liabilities and Shareholders Equity |
|
$ |
18,496,723 |
|
$ |
17,105,357 |
|
See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
|
|
(Unaudited) |
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(Unaudited) |
| ||||||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
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June 30, |
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June 30, |
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|
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2012 |
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2011 |
|
2012 |
|
2011 |
| ||||
Revenues |
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|
|
|
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|
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Net premiums written |
|
$ |
820,233 |
|
$ |
706,543 |
|
$ |
1,683,844 |
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$ |
1,470,821 |
|
Change in unearned premiums |
|
(93,577 |
) |
(63,664 |
) |
(276,876 |
) |
(194,247 |
) | ||||
Net premiums earned |
|
726,656 |
|
642,879 |
|
1,406,968 |
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1,276,574 |
| ||||
Net investment income |
|
73,608 |
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86,671 |
|
147,905 |
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174,978 |
| ||||
Net realized gains |
|
34,867 |
|
45,210 |
|
78,988 |
|
65,905 |
| ||||
|
|
|
|
|
|
|
|
|
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Other-than-temporary impairment losses |
|
(2,454 |
) |
(1,969 |
) |
(3,485 |
) |
(5,227 |
) | ||||
Less investment impairments recognized in other comprehensive income, before taxes |
|
503 |
|
285 |
|
511 |
|
863 |
| ||||
Net impairment losses recognized in earnings |
|
(1,951 |
) |
(1,684 |
) |
(2,974 |
) |
(4,364 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Fee income |
|
806 |
|
784 |
|
1,349 |
|
1,599 |
| ||||
Equity in net income of investment funds accounted for using the equity method |
|
7,787 |
|
5,973 |
|
32,613 |
|
35,646 |
| ||||
Other income (loss) |
|
695 |
|
(4,265 |
) |
(7,373 |
) |
302 |
| ||||
Total revenues |
|
842,468 |
|
775,568 |
|
1,657,476 |
|
1,550,640 |
| ||||
|
|
|
|
|
|
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Expenses |
|
|
|
|
|
|
|
|
| ||||
Losses and loss adjustment expenses |
|
399,693 |
|
431,622 |
|
794,900 |
|
925,502 |
| ||||
Acquisition expenses |
|
128,289 |
|
110,639 |
|
247,251 |
|
219,393 |
| ||||
Other operating expenses |
|
117,701 |
|
112,842 |
|
224,173 |
|
215,724 |
| ||||
Interest expense |
|
7,439 |
|
7,758 |
|
14,960 |
|
15,479 |
| ||||
Net foreign exchange (gains) losses |
|
(31,689 |
) |
18,375 |
|
(11,001 |
) |
55,287 |
| ||||
Total expenses |
|
621,433 |
|
681,236 |
|
1,270,283 |
|
1,431,385 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
|
221,035 |
|
94,332 |
|
387,193 |
|
119,255 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense (benefit) |
|
767 |
|
(2,271 |
) |
2,669 |
|
(2,821 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
220,268 |
|
96,603 |
|
384,524 |
|
122,076 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Preferred dividends |
|
7,649 |
|
6,461 |
|
14,110 |
|
12,922 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income available to common shareholders |
|
$ |
212,619 |
|
$ |
90,142 |
|
$ |
370,414 |
|
$ |
109,154 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per common share |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
1.58 |
|
$ |
0.69 |
|
$ |
2.76 |
|
$ |
0.82 |
|
Diluted |
|
$ |
1.54 |
|
$ |
0.65 |
|
$ |
2.68 |
|
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares and common share equivalents outstanding |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
134,529,129 |
|
131,232,269 |
|
134,241,876 |
|
132,359,493 |
| ||||
Diluted |
|
138,211,736 |
|
137,975,599 |
|
138,017,490 |
|
139,234,931 |
|
See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
|
|
(Unaudited) |
| ||||
|
|
Six Months Ended |
| ||||
|
|
June 30, |
| ||||
|
|
2012 |
|
2011 |
| ||
Comprehensive Income |
|
|
|
|
| ||
Net income |
|
$ |
384,524 |
|
$ |
122,076 |
|
Other comprehensive income, net of deferred income tax |
|
|
|
|
| ||
Unrealized appreciation in value of investments: |
|
|
|
|
| ||
Unrealized holding gains arising during period |
|
112,923 |
|
125,232 |
| ||
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax |
|
(511 |
) |
(863 |
) | ||
Reclassification of net realized gains, net of income taxes, included in net income |
|
(71,303 |
) |
(67,858 |
) | ||
Foreign currency translation adjustments, net of deferred income tax |
|
(1,935 |
) |
2,570 |
| ||
Other comprehensive income |
|
39,174 |
|
59,081 |
| ||
Comprehensive Income |
|
$ |
423,698 |
|
$ |
181,157 |
|
See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(U.S. dollars in thousands)
|
|
(Unaudited) |
| ||||
|
|
Six Months Ended |
| ||||
|
|
June 30, |
| ||||
|
|
2012 |
|
2011 |
| ||
Non-Cumulative Preferred Shares |
|
|
|
|
| ||
Balance at beginning of period |
|
$ |
325,000 |
|
$ |
325,000 |
|
Shares issued - Series C |
|
325,000 |
|
|
| ||
Shares repurchased - Series A and B |
|
(325,000 |
) |
|
| ||
Balance at end of period |
|
325,000 |
|
325,000 |
| ||
|
|
|
|
|
| ||
Common Shares |
|
|
|
|
| ||
Balance at beginning of year |
|
549 |
|
534 |
| ||
Common shares issued, net |
|
7 |
|
7 |
| ||
Balance at end of period |
|
556 |
|
541 |
| ||
|
|
|
|
|
| ||
Additional Paid-in Capital |
|
|
|
|
| ||
Balance at beginning of year |
|
161,419 |
|
110,325 |
| ||
Common shares issued, net |
|
4,553 |
|
3,912 |
| ||
Issue costs on Series C preferred shares |
|
(9,397 |
) |
|
| ||
Exercise of stock options |
|
4,822 |
|
6,372 |
| ||
Amortization of share-based compensation |
|
23,930 |
|
19,505 |
| ||
Other |
|
1,686 |
|
1,887 |
| ||
Balance at end of period |
|
187,013 |
|
142,001 |
| ||
|
|
|
|
|
| ||
Retained Earnings |
|
|
|
|
| ||
Balance at beginning of year |
|
4,796,655 |
|
4,422,553 |
| ||
Cumulative effect of adjustment resulting from adoption of new accounting guidance (1) |
|
|
|
(36,217 |
) | ||
Balance at beginning of year, as adjusted |
|
4,796,655 |
|
4,386,336 |
| ||
Dividends declared on preferred shares |
|
(14,110 |
) |
(12,922 |
) | ||
Net income |
|
384,524 |
|
122,076 |
| ||
Balance at end of period |
|
5,167,069 |
|
4,495,490 |
| ||
|
|
|
|
|
| ||
Accumulated Other Comprehensive Income |
|
|
|
|
| ||
Balance at beginning of year |
|
153,923 |
|
204,503 |
| ||
Change in unrealized appreciation in value of investments, net of deferred income tax |
|
41,620 |
|
57,374 |
| ||
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax |
|
(511 |
) |
(863 |
) | ||
Foreign currency translation adjustments, net of deferred income tax |
|
(1,935 |
) |
2,570 |
| ||
Balance at end of period |
|
193,097 |
|
263,584 |
| ||
|
|
|
|
|
| ||
Common Shares Held in Treasury, at Cost |
|
|
|
|
| ||
Balance at beginning of year |
|
(845,472 |
) |
(549,912 |
) | ||
Shares repurchased for treasury |
|
(6,947 |
) |
(273,674 |
) | ||
Balance at end of period |
|
(852,419 |
) |
(823,586 |
) | ||
|
|
|
|
|
| ||
Total Shareholders Equity |
|
$ |
5,020,316 |
|
$ |
4,403,030 |
|
(1) Adoption of accounting guidance regarding costs incurred that can be capitalized by insurance entities.
See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
|
|
(Unaudited) |
| ||||
|
|
Six Months Ended |
| ||||
|
|
June 30, |
| ||||
|
|
2012 |
|
2011 |
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
|
$ |
384,524 |
|
$ |
122,076 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Net realized gains |
|
(80,753 |
) |
(71,367 |
) | ||
Net impairment losses recognized in earnings |
|
2,974 |
|
4,364 |
| ||
Equity in net income of investment funds accounted for using the equity method and other income |
|
(18,141 |
) |
18,590 |
| ||
Share-based compensation |
|
23,930 |
|
19,505 |
| ||
Changes in: |
|
|
|
|
| ||
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable |
|
107,670 |
|
286,223 |
| ||
Unearned premiums, net of prepaid reinsurance premiums |
|
276,877 |
|
194,123 |
| ||
Premiums receivable |
|
(273,735 |
) |
(196,244 |
) | ||
Deferred acquisition costs, net |
|
(45,390 |
) |
(27,520 |
) | ||
Reinsurance balances payable |
|
37,129 |
|
15,987 |
| ||
Other liabilities |
|
(2,526 |
) |
6,753 |
| ||
Other items, net |
|
(15,291 |
) |
74,057 |
| ||
Net Cash Provided By Operating Activities |
|
397,268 |
|
446,547 |
| ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Purchases of: |
|
|
|
|
| ||
Fixed maturity investments |
|
(7,546,498 |
) |
(7,386,907 |
) | ||
Equity securities |
|
(110,303 |
) |
(248,947 |
) | ||
Other investments |
|
(386,243 |
) |
(207,365 |
) | ||
Proceeds from the sales of: |
|
|
|
|
| ||
Fixed maturity investments |
|
6,887,186 |
|
6,555,997 |
| ||
Equity securities |
|
198,485 |
|
199,650 |
| ||
Other investments |
|
216,964 |
|
204,747 |
| ||
Proceeds from redemptions and maturities of fixed maturity investments |
|
598,792 |
|
537,410 |
| ||
Net (purchases) sales of short-term investments |
|
(174,607 |
) |
235,676 |
| ||
Change in investment of securities lending collateral |
|
(17,837 |
) |
(77,051 |
) | ||
Purchase of business, net of cash acquired |
|
28,948 |
|
|
| ||
Purchases of furniture, equipment and other assets |
|
(10,208 |
) |
(12,348 |
) | ||
Net Cash Used For Investing Activities |
|
(315,321 |
) |
(199,138 |
) | ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Proceeds from issuance of Series C preferred shares, net |
|
315,789 |
|
|
| ||
Repurchase of Series A and B preferred shares |
|
(325,000 |
) |
|
| ||
Purchases of common shares under share repurchase program |
|
|
|
(266,725 |
) | ||
Proceeds from common shares issued, net |
|
348 |
|
1,478 |
| ||
Repayments of borrowings |
|
(73,773 |
) |
(7,614 |
) | ||
Change in securities lending collateral |
|
17,837 |
|
77,051 |
| ||
Other |
|
3,464 |
|
3,181 |
| ||
Preferred dividends paid |
|
(17,412 |
) |
(12,922 |
) | ||
Net Cash Used For Financing Activities |
|
(78,747 |
) |
(205,551 |
) | ||
|
|
|
|
|
| ||
Effects of exchange rate changes on foreign currency cash |
|
493 |
|
6,403 |
| ||
|
|
|
|
|
| ||
Increase in cash |
|
3,693 |
|
48,261 |
| ||
Cash beginning of year |
|
351,699 |
|
362,740 |
| ||
Cash end of period |
|
$ |
355,392 |
|
$ |
411,001 |
|
See Notes to Consolidated Financial Statements
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
Arch Capital Group Ltd. (ACGL) is a Bermuda public limited liability company which provides insurance and reinsurance on a worldwide basis through its wholly owned subsidiaries.
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of ACGL and its wholly owned subsidiaries (together with ACGL, the Company). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2011, including the Companys audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Companys net income, shareholders equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
2. Share Transactions
Share Repurchases
The board of directors of ACGL has authorized the investment in ACGLs 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 December 2012. Since the inception of the share repurchase program, ACGL has repurchased approximately 104.8 million common shares for an aggregate purchase price of $2.56 billion. During the 2012 periods, ACGL did not repurchase any common shares, compared to 0.9 million common shares for an aggregate purchase price of $29.6 million during the 2011 second quarter and 8.9 million common shares for an aggregate purchase price of $266.7 during the six months ended June 30, 2011. At June 30, 2012, $942.0 million of share repurchases were available under the program. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.
Preferred Share Offering
On April 2, 2012, the Company completed the underwritten public offering of $325 million of its 6.75% Series C non-cumulative preferred shares. Except in specified circumstances relating to certain tax or corporate events, the Series C non-cumulative preferred shares are not redeemable prior to April 2, 2017. The net proceeds from the offering of approximately $316 million and other available funds were used to redeem all of the Companys $200 million of 8.0% Series A preferred shares and $125 million of 7.875% Series B preferred shares on May 2, 2012. The preferred shares were redeemed at a redemption price equal to $25.00 per share, plus all declared and unpaid dividends to (but excluding) the redemption date.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Share-Based Compensation
During the 2012 second quarter, the Company made a stock grant of 782,248 stock appreciation rights and stock options and 728,864 restricted shares and units to certain employees and directors. The weighted average grant-date fair value of the stock appreciation rights and options and restricted shares and units granted during the 2012 second quarter were approximately $9.91 and $38.59 per share, respectively. During the 2011 second quarter, the Company made a stock grant of 697,632 stock appreciation rights and stock options and 727,641 restricted shares and units to certain employees and directors. The weighted average grant-date fair value of the stock appreciation rights and options and restricted shares and units granted during the 2011 second quarter were approximately $9.75 and $33.91 per share, respectively. The stock appreciation rights and stock options were valued at the grant date using the Black-Scholes option pricing model. Such values are being amortized over the respective substantive vesting period. For awards granted to retirement-eligible employees where no service is required for the employee to retain the award, the grant date fair value is immediately recognized as compensation expense at the grant date because the employee is able to retain the award without continuing to provide service. For employees near retirement eligibility, attribution of compensation cost is over the period from the grant date to the retirement eligibility date.
3. Recent Accounting Pronouncements
Effective January 1, 2012, the Company adopted an Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB) concerning the accounting for costs associated with acquiring or renewing insurance contracts. This guidance was adopted retrospectively and has been applied to all prior period financial information contained in these consolidated financial statements. The impact of the adoption of the new guidance on the consolidated financial statements was as follows:
|
|
As Previously |
|
Effect of |
|
As Currently |
| |||
|
|
Reported |
|
Change |
|
Reported |
| |||
|
|
|
|
|
|
|
| |||
December 31, 2010 |
|
|
|
|
|
|
| |||
Deferred acquisition costs, net |
|
$ |
277,861 |
|
$ |
(50,583 |
) |
$ |
227,278 |
|
Other assets (1) |
|
475,911 |
|
14,366 |
|
490,277 |
| |||
Retained earnings |
|
4,422,553 |
|
(36,217 |
) |
4,386,336 |
| |||
|
|
|
|
|
|
|
| |||
Three Months Ended June 30, 2011 |
|
|
|
|
|
|
| |||
Other operating expenses |
|
$ |
110,563 |
|
$ |
2,279 |
|
$ |
112,842 |
|
Income tax benefit |
|
(1,731 |
) |
(540 |
) |
(2,271 |
) | |||
Net income |
|
98,342 |
|
(1,739 |
) |
96,603 |
| |||
|
|
|
|
|
|
|
| |||
Net income per common share - basic |
|
$ |
0.70 |
|
$ |
(0.01 |
) |
$ |
0.69 |
|
Net income per common share - diluted |
|
$ |
0.67 |
|
$ |
(0.02 |
) |
$ |
0.65 |
|
|
|
|
|
|
|
|
| |||
Six Months Ended June 30, 2011 |
|
|
|
|
|
|
| |||
Other operating expenses |
|
$ |
212,983 |
|
$ |
2,741 |
|
$ |
215,724 |
|
Income tax benefit |
|
(2,102 |
) |
(719 |
) |
(2,821 |
) | |||
Net income |
|
124,098 |
|
(2,022 |
) |
122,076 |
| |||
|
|
|
|
|
|
|
| |||
Net income per common share - basic |
|
$ |
0.84 |
|
$ |
(0.02 |
) |
$ |
0.82 |
|
Net income per common share - diluted |
|
$ |
0.80 |
|
$ |
(0.02 |
) |
$ |
0.78 |
|
(1) Effect of change equals tax benefit included in other assets on the Companys balance sheet.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Effective January 1, 2012, the Company prospectively adopted an ASU that provides clarification or changes to existing fair value measurement and disclosure requirements, including, for example, additional disclosure for fair value measurements categorized within Level 3 of the fair value hierarchy. See Note 8, Fair Value, for the Companys disclosures on fair value.
Effective January 1, 2012, the Company adopted an ASU that is intended to increase the prominence of other comprehensive income in the financial statements by allowing only two options for reporting comprehensive income: (1) A single statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income or (2) in a two-statement approach that presents the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The adoption of this ASU did not impact the presentation of the Companys consolidated financial statements.
In December 2011, the FASB issued an ASU that expands the required disclosures about financial instruments and derivative instruments that are either offset for balance sheet presentation purposes or subject to an enforceable master netting arrangement or similar arrangement, regardless of whether they are offset for balance sheet presentation purposes. This ASU is effective for periods beginning on or after January 1, 2013. This new guidance is disclosure-related only and does not amend existing guidance on offsetting on the balance sheet. As such, the Company does not believe that the adoption of this ASU will impact the presentation of its consolidated financial statements.
4. Commitments and Contingencies
Letter of Credit and Revolving Credit Facilities
As of June 30, 2012, the Company had a $300 million unsecured revolving loan and letter of credit facility and a $500 million secured letter of credit facility (the Credit Agreement). The Credit Agreement expires on August 18, 2014. In addition, the Company had access to secured letter of credit facilities of approximately $81 million as of June 30, 2012, which are available on a limited basis and for limited purposes (together with the secured portion of the Credit Agreement and these letter of credit facilities, the LOC Facilities). At June 30, 2012, the Company had $445.4 million in outstanding letters of credit under the LOC Facilities, which were secured by investments with a fair value of $514.4 million, and had $100.0 million of borrowings outstanding under the Credit Agreement. The Company was in compliance with all covenants contained in the LOC Facilities at June 30, 2012.
Investment Commitments
The Companys investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately $537.0 million at June 30, 2012.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Numerator: |
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
220,268 |
|
$ |
96,603 |
|
$ |
384,524 |
|
$ |
122,076 |
|
Preferred dividends |
|
(7,649 |
) |
(6,461 |
) |
(14,110 |
) |
(12,922 |
) | ||||
Net income available to common shareholders |
|
$ |
212,619 |
|
$ |
90,142 |
|
$ |
370,414 |
|
$ |
109,154 |
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator: |
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding basic |
|
134,529,129 |
|
131,232,269 |
|
134,241,876 |
|
132,359,493 |
| ||||
Effect of dilutive common share equivalents: |
|
|
|
|
|
|
|
|
| ||||
Nonvested restricted shares |
|
800,455 |
|
931,305 |
|
909,524 |
|
1,040,514 |
| ||||
Stock options (1) |
|
2,882,152 |
|
5,812,025 |
|
2,866,090 |
|
5,834,924 |
| ||||
Weighted average common shares and common share equivalents outstanding diluted |
|
138,211,736 |
|
137,975,599 |
|
138,017,490 |
|
139,234,931 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
1.58 |
|
$ |
0.69 |
|
$ |
2.76 |
|
$ |
0.82 |
|
Diluted |
|
$ |
1.54 |
|
$ |
0.65 |
|
$ |
2.68 |
|
$ |
0.78 |
|
(1) Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2012 second quarter and 2011 second quarter, the number of stock options excluded were 912,056 and 430,758, respectively. For the six months ended June 30, 2012 and 2011, the number of stock options excluded were 688,634 and 223,063, respectively.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. Segment Information
The following table summarizes the Companys underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders:
|
|
Three Months Ended |
|
Three Months Ended |
| ||||||||||||||
|
|
June 30, 2012 |
|
June 30, 2011 |
| ||||||||||||||
|
|
Insurance |
|
Reinsurance |
|
Total |
|
Insurance |
|
Reinsurance |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gross premiums written (1) |
|
$ |
676,090 |
|
$ |
376,981 |
|
$ |
1,051,813 |
|
$ |
635,005 |
|
$ |
277,766 |
|
$ |
911,939 |
|
Net premiums written |
|
464,584 |
|
355,649 |
|
820,233 |
|
438,263 |
|
268,280 |
|
706,543 |
| ||||||
Net premiums earned |
|
$ |
446,594 |
|
$ |
280,062 |
|
$ |
726,656 |
|
$ |
410,819 |
|
$ |
232,060 |
|
$ |
642,879 |
|
Fee income |
|
628 |
|
178 |
|
806 |
|
702 |
|
82 |
|
784 |
| ||||||
Losses and loss adjustment expenses |
|
(290,416 |
) |
(109,277 |
) |
(399,693 |
) |
(301,642 |
) |
(129,980 |
) |
(431,622 |
) | ||||||
Acquisition expenses, net |
|
(76,058 |
) |
(52,231 |
) |
(128,289 |
) |
(66,543 |
) |
(44,096 |
) |
(110,639 |
) | ||||||
Other operating expenses |
|
(76,617 |
) |
(29,140 |
) |
(105,757 |
) |
(77,774 |
) |
(23,671 |
) |
(101,445 |
) | ||||||
Underwriting income (loss) |
|
$ |
4,131 |
|
$ |
89,592 |
|
93,723 |
|
$ |
(34,438 |
) |
$ |
34,395 |
|
(43 |
) | ||
Net investment income |
|
|
|
|
|
73,608 |
|
|
|
|
|
86,671 |
| ||||||
Net realized gains |
|
|
|
|
|
34,867 |
|
|
|
|
|
45,210 |
| ||||||
Net impairment losses recognized in earnings |
|
|
|
|
|
(1,951 |
) |
|
|
|
|
(1,684 |
) | ||||||
Equity in net income of investment funds accounted for using the equity method |
|
|
|
|
|
7,787 |
|
|
|
|
|
5,973 |
| ||||||
Other income (loss) |
|
|
|
|
|
695 |
|
|
|
|
|
(4,265 |
) | ||||||
Other expenses |
|
|
|
|
|
(11,944 |
) |
|
|
|
|
(11,397 |
) | ||||||
Interest expense |
|
|
|
|
|
(7,439 |
) |
|
|
|
|
(7,758 |
) | ||||||
Net foreign exchange gains (losses) |
|
|
|
|
|
31,689 |
|
|
|
|
|
(18,375 |
) | ||||||
Income before income taxes |
|
|
|
|
|
221,035 |
|
|
|
|
|
94,332 |
| ||||||
Income tax (expense) benefit |
|
|
|
|
|
(767 |
) |
|
|
|
|
2,271 |
| ||||||
Net income |
|
|
|
|
|
220,268 |
|
|
|
|
|
96,603 |
| ||||||
Preferred dividends |
|
|
|
|
|
(7,649 |
) |
|
|
|
|
(6,461 |
) | ||||||
Net income available to common shareholders |
|
|
|
|
|
$ |
212,619 |
|
|
|
|
|
$ |
90,142 |
| ||||
Underwriting Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loss ratio |
|
65.0 |
% |
39.0 |
% |
55.0 |
% |
73.4 |
% |
56.0 |
% |
67.1 |
% | ||||||
Acquisition expense ratio (2) |
|
16.9 |
% |
18.6 |
% |
17.6 |
% |
16.0 |
% |
19.0 |
% |
17.1 |
% | ||||||
Other operating expense ratio |
|
17.2 |
% |
10.4 |
% |
14.6 |
% |
18.9 |
% |
10.2 |
% |
15.8 |
% | ||||||
Combined ratio |
|
99.1 |
% |
68.0 |
% |
87.2 |
% |
108.3 |
% |
85.2 |
% |
100.0 |
% |
(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.
(2) The acquisition expense ratio is adjusted to include policy-related fee income.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the Companys underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders, for the six months ended June 30, 2012 and 2011:
|
|
Six Months Ended |
|
Six Months Ended |
| ||||||||||||||
|
|
June 30, 2012 |
|
June 30, 2011 |
| ||||||||||||||
|
|
Insurance |
|
Reinsurance |
|
Total |
|
Insurance |
|
Reinsurance |
|
Total |
| ||||||
Gross premiums written (1) |
|
$ |
1,364,203 |
|
$ |
756,957 |
|
$ |
2,118,469 |
|
$ |
1,269,588 |
|
$ |
608,779 |
|
$ |
1,876,505 |
|
Net premiums written |
|
955,264 |
|
728,580 |
|
1,683,844 |
|
887,554 |
|
583,267 |
|
1,470,821 |
| ||||||
Net premiums earned |
|
$ |
888,334 |
|
$ |
518,634 |
|
$ |
1,406,968 |
|
$ |
818,410 |
|
$ |
458,164 |
|
$ |
1,276,574 |
|
Fee income |
|
1,158 |
|
191 |
|
1,349 |
|
1,480 |
|
119 |
|
1,599 |
| ||||||
Losses and loss adjustment expenses |
|
(593,580 |
) |
(201,320 |
) |
(794,900 |
) |
(599,365 |
) |
(326,137 |
) |
(925,502 |
) | ||||||
Acquisition expenses, net |
|
(149,928 |
) |
(97,323 |
) |
(247,251 |
) |
(127,958 |
) |
(91,435 |
) |
(219,393 |
) | ||||||
Other operating expenses |
|
(149,987 |
) |
(55,263 |
) |
(205,250 |
) |
(152,403 |
) |
(44,898 |
) |
(197,301 |
) | ||||||
Underwriting income (loss) |
|
$ |
(4,003 |
) |
$ |
164,919 |
|
160,916 |
|
$ |
(59,836 |
) |
$ |
(4,187 |
) |
(64,023 |
) | ||
Net investment income |
|
|
|
|
|
147,905 |
|
|
|
|
|
174,978 |
| ||||||
Net realized gains |
|
|
|
|
|
78,988 |
|
|
|
|
|
65,905 |
| ||||||
Net impairment losses recognized in earnings |
|
|
|
|
|
(2,974 |
) |
|
|
|
|
(4,364 |
) | ||||||
Equity in net income of investment funds accounted for using the equity method |
|
|
|
|
|
32,613 |
|
|
|
|
|
35,646 |
| ||||||
Other income (loss) |
|
|
|
|
|
(7,373 |
) |
|
|
|
|
302 |
| ||||||
Other expenses |
|
|
|
|
|
(18,923 |
) |
|
|
|
|
(18,423 |
) | ||||||
Interest expense |
|
|
|
|
|
(14,960 |
) |
|
|
|
|
(15,479 |
) | ||||||
Net foreign exchange gains (losses) |
|
|
|
|
|
11,001 |
|
|
|
|
|
(55,287 |
) | ||||||
Income before income taxes |
|
|
|
|
|
387,193 |
|
|
|
|
|
119,255 |
| ||||||
Income tax (expense) benefit |
|
|
|
|
|
(2,669 |
) |
|
|
|
|
2,821 |
| ||||||
Net income |
|
|
|
|
|
384,524 |
|
|
|
|
|
122,076 |
| ||||||
Preferred dividends |
|
|
|
|
|
(14,110 |
) |
|
|
|
|
(12,922 |
) | ||||||
Net income available to common shareholders |
|
|
|
|
|
$ |
370,414 |
|
|
|
|
|
$ |
109,154 |
| ||||
Underwriting Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loss ratio |
|
66.8 |
% |
38.8 |
% |
56.5 |
% |
73.2 |
% |
71.2 |
% |
72.5 |
% | ||||||
Acquisition expense ratio (2) |
|
16.7 |
% |
18.8 |
% |
17.5 |
% |
15.5 |
% |
20.0 |
% |
17.1 |
% | ||||||
Other operating expense ratio |
|
16.9 |
% |
10.7 |
% |
14.6 |
% |
18.6 |
% |
9.8 |
% |
15.5 |
% | ||||||
Combined ratio |
|
100.4 |
% |
68.3 |
% |
88.6 |
% |
107.3 |
% |
101.0 |
% |
105.1 |
% |
(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.
(2) The acquisition expense ratio is adjusted to include policy-related fee income.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. Investment Information
Available For Sale Investments
The following table summarizes the fair value and cost or amortized cost of the Companys investments classified as available for sale:
|
|
Estimated |
|
Gross |
|
Gross |
|
Cost or |
|
OTTI |
| |||||
|
|
Fair |
|
Unrealized |
|
Unrealized |
|
Amortized |
|
Unrealized |
| |||||
|
|
Value |
|
Gains |
|
Losses |
|
Cost |
|
Losses (2) |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
At June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed maturities and fixed maturities pledged under securities lending agreements (1): |
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate bonds |
|
$ |
2,519,832 |
|
$ |
92,282 |
|
$ |
(11,533 |
) |
$ |
2,439,083 |
|
$ |
(716 |
) |
Mortgage backed securities |
|
1,670,108 |
|
23,743 |
|
(18,286 |
) |
1,664,651 |
|
(14,772 |
) | |||||
Municipal bonds |
|
1,542,262 |
|
67,946 |
|
(1,541 |
) |
1,475,857 |
|
(65 |
) | |||||
Commercial mortgage backed securities |
|
961,326 |
|
31,685 |
|
(2,412 |
) |
932,053 |
|
(3,259 |
) | |||||
U.S. government and government agencies |
|
1,380,074 |
|
29,797 |
|
(1,872 |
) |
1,352,149 |
|
(207 |
) | |||||
Non-U.S. government securities |
|
986,585 |
|
32,558 |
|
(17,976 |
) |
972,003 |
|
(157 |
) | |||||
Asset backed securities |
|
570,171 |
|
17,294 |
|
(8,579 |
) |
561,456 |
|
(3,876 |
) | |||||
Total |
|
9,630,358 |
|
295,305 |
|
(62,199 |
) |
9,397,252 |
|
(23,052 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Equity securities |
|
260,864 |
|
24,129 |
|
(22,248 |
) |
258,983 |
|
|
| |||||
Other investments |
|
381,576 |
|
15,512 |
|
(2,762 |
) |
368,826 |
|
|
| |||||
Short-term investments |
|
1,087,910 |
|
3,279 |
|
(1,330 |
) |
1,085,961 |
|
|
| |||||
Total |
|
$ |
11,360,708 |
|
$ |
338,225 |
|
$ |
(88,539 |
) |
$ |
11,111,022 |
|
$ |
(23,052 |
) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
At December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed maturities and fixed maturities pledged under securities lending agreements (1): |
|
|
|
|
|
|
|
|
|
|
| |||||
Corporate bonds |
|
$ |
2,596,118 |
|
$ |
79,407 |
|
$ |
(29,922 |
) |
$ |
2,546,633 |
|
$ |
(1,138 |
) |
Mortgage backed securities |
|
1,592,762 |
|
27,633 |
|
(23,226 |
) |
1,588,355 |
|
(20,466 |
) | |||||
Municipal bonds |
|
1,430,565 |
|
77,977 |
|
(886 |
) |
1,353,474 |
|
(105 |
) | |||||
Commercial mortgage backed securities |
|
1,046,326 |
|
28,780 |
|
(2,904 |
) |
1,020,450 |
|
(3,259 |
) | |||||
U.S. government and government agencies |
|
1,451,993 |
|
34,811 |
|
(3 |
) |
1,417,185 |
|
(207 |
) | |||||
Non-U.S. government securities |
|
737,477 |
|
33,486 |
|
(17,684 |
) |
721,675 |
|
|
| |||||
Asset backed securities |
|
576,757 |
|
14,649 |
|
(10,078 |
) |
572,186 |
|
(3,876 |
) | |||||
Total |
|
9,431,998 |
|
296,743 |
|
(84,703 |
) |
9,219,958 |
|
(29,051 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Equity securities |
|
299,584 |
|
22,870 |
|
(22,344 |
) |
299,058 |
|
|
| |||||
Other investments |
|
238,111 |
|
8,340 |
|
(5,610 |
) |
235,381 |
|
|
| |||||
Short-term investments |
|
904,219 |
|
390 |
|
(5,292 |
) |
909,121 |
|
|
| |||||
Total |
|
$ |
10,873,912 |
|
$ |
328,343 |
|
$ |
(117,949 |
) |
$ |
10,663,518 |
|
$ |
(29,051 |
) |
(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See Securities Lending Agreements.
(2) Represents the total other-than-temporary impairments (OTTI) recognized in accumulated other comprehensive income (AOCI). It does not include the change in fair value subsequent to the impairment measurement date. At June 30, 2012, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $9.2 million, compared to a net unrealized loss of $18.0 million at December 31, 2011.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
| ||||||||||||
|
|
Estimated |
|
Gross |
|
Estimated |
|
Gross |
|
Estimated |
|
Gross |
| ||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
|
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
At June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturities and fixed maturities pledged under securities lending agreements (1): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate bonds |
|
$ |
289,690 |
|
$ |
(8,308 |
) |
$ |
36,087 |
|
$ |
(3,225 |
) |
$ |
325,777 |
|
$ |
(11,533 |
) |
Mortgage backed securities |
|
664,985 |
|
(7,631 |
) |
72,287 |
|
(10,655 |
) |
737,272 |
|
(18,286 |
) | ||||||
Municipal bonds |
|
187,671 |
|
(943 |
) |
16,583 |
|
(598 |
) |
204,254 |
|
(1,541 |
) | ||||||
Commercial mortgage backed securities |
|
74,376 |
|
(728 |
) |
20,739 |
|
(1,684 |
) |
95,115 |
|
(2,412 |
) | ||||||
U.S. government and government agencies |
|
373,405 |
|
(1,872 |
) |
|
|
|
|
373,405 |
|
(1,872 |
) | ||||||
Non-U.S. government securities |
|
338,862 |
|
(16,492 |
) |
10,046 |
|
(1,484 |
) |
348,908 |
|
(17,976 |
) | ||||||
Asset backed securities |
|
102,740 |
|
(5,676 |
) |
24,569 |
|
(2,903 |
) |
127,309 |
|
(8,579 |
) | ||||||
Total |
|
2,031,729 |
|
(41,650 |
) |
180,311 |
|
(20,549 |
) |
2,212,040 |
|
(62,199 |
) | ||||||
Equity securities |
|
81,062 |
|
(12,458 |
) |
28,874 |
|
(9,790 |
) |
109,936 |
|
(22,248 |
) | ||||||
Other investments |
|
27,754 |
|
(1,014 |
) |
23,252 |
|
(1,748 |
) |
51,006 |
|
(2,762 |
) | ||||||
Short-term investments |
|
124,398 |
|
(1,330 |
) |
|
|
|
|
124,398 |
|
(1,330 |
) | ||||||
Total |
|
$ |
2,264,943 |
|
$ |
(56,452 |
) |
$ |
232,437 |
|
$ |
(32,087 |
) |
$ |
2,497,380 |
|
$ |
(88,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
At December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturities and fixed maturities pledged under securities lending agreements (1): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate bonds |
|
$ |
781,635 |
|
$ |
(24,977 |
) |
$ |
47,687 |
|
$ |
(4,945 |
) |
$ |
829,322 |
|
$ |
(29,922 |
) |
Mortgage backed securities |
|
255,101 |
|
(11,988 |
) |
44,606 |
|
(11,238 |
) |
299,707 |
|
(23,226 |
) | ||||||
Municipal bonds |
|
39,156 |
|
(537 |
) |
14,988 |
|
(349 |
) |
54,144 |
|
(886 |
) | ||||||
Commercial mortgage backed securities |
|
87,796 |
|
(1,676 |
) |
14,582 |
|
(1,228 |
) |
102,378 |
|
(2,904 |
) | ||||||
U.S. government and government agencies |
|
7,059 |
|
(3 |
) |
|
|
|
|
7,059 |
|
(3 |
) | ||||||
Non-U.S. government securities |
|
310,182 |
|
(16,139 |
) |
20,482 |
|
(1,545 |
) |
330,664 |
|
(17,684 |
) | ||||||
Asset backed securities |
|
260,647 |
|
(8,197 |
) |
7,317 |
|
(1,881 |
) |
267,964 |
|
(10,078 |
) | ||||||
Total |
|
1,741,576 |
|
(63,517 |
) |
149,662 |
|
(21,186 |
) |
1,891,238 |
|
(84,703 |
) | ||||||
Equity securities |
|
130,045 |
|
(22,039 |
) |
1,923 |
|
(305 |
) |
131,968 |
|
(22,344 |
) | ||||||
Other investments |
|
98,605 |
|
(3,053 |
) |
22,443 |
|
(2,557 |
) |
121,048 |
|
(5,610 |
) | ||||||
Short-term investments |
|
189,100 |
|
(5,292 |
) |
|
|
|
|
189,100 |
|
(5,292 |
) | ||||||
Total |
|
$ |
2,159,326 |
|
$ |
(93,901 |
) |
$ |
174,028 |
|
$ |
(24,048 |
) |
$ |
2,333,354 |
|
$ |
(117,949 |
) |
(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See Securities Lending Agreements.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At June 30, 2012, on a lot level basis, approximately 790 security lots out of a total of approximately 4,470 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Companys fixed maturity portfolio was $3.5 million. At December 31, 2011, on a lot level basis, approximately 1,150 security lots out of a total of approximately 4,520 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Companys fixed maturity portfolio was $3.0 million.
The contractual maturities of the Companys fixed maturities and fixed maturities pledged under securities lending agreements are shown in the following table. Expected maturities, which are managements best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
June 30, 2012 |
|
December 31, 2011 |
| ||||||||
|
|
Estimated |
|
Amortized |
|
Estimated |
|
Amortized |
| ||||
Maturity |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Due in one year or less |
|
$ |
491,380 |
|
$ |
483,860 |
|
$ |
486,986 |
|
$ |
476,734 |
|
Due after one year through five years |
|
3,434,433 |
|
3,356,501 |
|
2,850,578 |
|
2,793,982 |
| ||||
Due after five years through 10 years |
|
2,218,284 |
|
2,125,636 |
|
2,532,834 |
|
2,441,800 |
| ||||
Due after 10 years |
|
284,656 |
|
273,095 |
|
345,755 |
|
326,451 |
| ||||
|
|
6,428,753 |
|
6,239,092 |
|
6,216,153 |
|
6,038,967 |
| ||||
Mortgage backed securities |
|
1,670,108 |
|
1,664,651 |
|
1,592,762 |
|
1,588,355 |
| ||||
Commercial mortgage backed securities |
|
961,326 |
|
932,053 |
|
1,046,326 |
|
1,020,450 |
| ||||
Asset backed securities |
|
570,171 |
|
561,456 |
|
576,757 |
|
572,186 |
| ||||
Total |
|
$ |
9,630,358 |
|
$ |
9,397,252 |
|
$ |
9,431,998 |
|
$ |
9,219,958 |
|
Securities Lending Agreements
The Company operates a securities lending program under which certain of its fixed income portfolio securities are loaned to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. At June 30, 2012, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $74.0 million and $72.0 million, respectively, compared to $56.4 million and $54.5 million at December 31, 2011, respectively. At June 30, 2012, the portfolio of collateral backing the Companys securities lending program included approximately $6.0 million fair value of sub-prime securities, compared to $7.3 million at December 31, 2011.
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Fair Value Option
The Company elected to carry certain fixed maturity securities, equity securities and other investments (primarily term loans) at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and liabilities. Changes in fair value of investments accounted for using the fair value option are included in net realized gains or losses while interest income, dividends received and distributions from fund investments which are not a return of capital are reflected in net investment income. The primary reasons for electing the fair value option were to reflect economic events in earnings on a timely basis and to address practicality and cost-benefit considerations.
The Company also elected to carry the securities and related borrowings under the Federal Reserve Bank of New Yorks (FRBNY) Term Asset-Backed Securities Loan Facility (TALF) at fair value under the fair value option. The primary reason for electing the fair value option on the TALF investments and TALF borrowings was to mitigate volatility in equity from using different measurement attributes (i.e., TALF investments carried at fair value whereas the related TALF borrowings would be recorded on an accrual basis absent electing the fair value option). Changes in fair value for both the securities and borrowings are included in net realized gains or losses while interest income on the TALF investments is reflected in net investment income and interest expense on the TALF borrowings is reflected in interest expense.
The following table summarizes the Companys assets and liabilities which are accounted for using the fair value option:
|
|
June 30, |
|
December 31, |
| ||
|
|
2012 |
|
|