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 March 31, 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 April 30, 2009

Common Shares, $0.01 par value

 

60,555,269

 

 

 



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
March 31, 2009 (unaudited) and December 31, 2008

 

3

 

 

 

Consolidated Statements of Income
For the three month periods ended March 31, 2009 and 2008 (unaudited)

 

4

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity
For the three month periods ended March 31, 2009 and 2008 (unaudited)

 

5

 

 

 

Consolidated Statements of Comprehensive Income
For the three month periods ended March 31, 2009 and 2008 (unaudited)

 

6

 

 

 

Consolidated Statements of Cash Flows
For the three month periods ended March 31, 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

 

33

 

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

 

57

 

 

 

Item 4 — Controls and Procedures

 

57

 

 

 

PART II. Other Information

 

 

 

 

 

Item 1 — Legal Proceedings

 

58

 

 

 

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

 

58

 

 

 

Item 5 — Other Information

 

58

 

 

 

Item 6 — Exhibits

 

59

 

See Notes to Consolidated Financial Statements

 

1



Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of

Arch Capital Group Ltd.:

 

We have reviewed the accompanying consolidated balance sheets of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of March 31, 2009, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income and cash flows for each of the three-month periods ended March 31, 2009 and March 31, 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 7 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 information 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.

 

/s/ PricewaterhouseCoopers LLP

New York, New York

May 11, 2009

 

2



Table of Contents

 

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

 

 

(Unaudited)

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities available for sale, at market value (amortized cost: 2009, $8,735,769; 2008, $8,314,615)

 

$

8,540,653

 

$

8,122,221

 

Short-term investments available for sale, at market value (amortized cost: 2009, $749,178; 2008, $478,088)

 

749,708

 

479,586

 

Investment of funds received under securities lending agreements, at market value (amortized cost: 2009, $571,102; 2008, $750,330)

 

550,821

 

730,194

 

Other investments (cost: 2009, $114,779; 2008, $125,858)

 

104,988

 

109,601

 

Investment funds accounted for using the equity method

 

293,452

 

301,027

 

Total investments

 

10,239,622

 

9,742,629

 

 

 

 

 

 

 

Cash

 

244,037

 

251,739

 

Accrued investment income

 

65,365

 

78,052

 

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

 

101,143

 

98,341

 

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

 

559,691

 

728,065

 

Premiums receivable

 

720,724

 

628,951

 

Unpaid losses and loss adjustment expenses recoverable

 

1,710,781

 

1,729,135

 

Paid losses and loss adjustment expenses recoverable

 

76,312

 

63,294

 

Prepaid reinsurance premiums

 

274,578

 

303,707

 

Deferred income tax assets, net

 

62,210

 

60,192

 

Deferred acquisition costs, net

 

313,973

 

295,192

 

Receivable for securities sold

 

1,191,896

 

105,073

 

Other assets

 

531,955

 

532,175

 

Total Assets

 

$

16,092,287

 

$

14,616,545

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$

7,709,317

 

$

7,666,957

 

Unearned premiums

 

1,617,431

 

1,526,682

 

Reinsurance balances payable

 

146,981

 

138,509

 

Senior notes

 

300,000

 

300,000

 

Revolving credit agreement borrowings

 

100,000

 

100,000

 

Securities lending payable

 

574,337

 

753,528

 

Payable for securities purchased

 

1,433,732

 

123,309

 

Other liabilities

 

580,093

 

574,595

 

Total Liabilities

 

12,461,891

 

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, 60,532,222; 2008, 60,511,974)

 

605

 

605

 

Additional paid-in capital

 

996,417

 

994,585

 

Retained earnings

 

2,894,577

 

2,693,239

 

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

 

(261,333

)

(255,594

)

Total Shareholders’ Equity

 

3,630,396

 

3,432,965

 

Total Liabilities and Shareholders’ Equity

 

$

16,092,287

 

$

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

Net premiums written

 

$

822,863

 

$

811,342

 

Increase in unearned premiums

 

(122,299

)

(103,108

)

Net premiums earned

 

700,564

 

708,234

 

Net investment income

 

95,882

 

122,193

 

Net realized gains (losses)

 

(5,164

)

48,686

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

(92,989

)

(12,711

)

Portion of loss recognized in other comprehensive income (loss), before taxes

 

56,855

 

 

Net impairment losses recognized in earnings

 

(36,134

)

(12,711

)

 

 

 

 

 

 

Fee income

 

925

 

1,068

 

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

 

(9,581

)

(22,313

)

Other income

 

3,951

 

4,036

 

Total revenues

 

750,443

 

849,193

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Losses and loss adjustment expenses

 

400,542

 

404,417

 

Acquisition expenses

 

126,458

 

114,639

 

Other operating expenses

 

87,116

 

97,187

 

Interest expense

 

5,712

 

5,524

 

Net foreign exchange (gains) losses

 

(25,205

)

23,587

 

Total expenses

 

594,623

 

645,354

 

 

 

 

 

 

 

Income before income taxes

 

155,820

 

203,839

 

 

 

 

 

 

 

Income tax expense

 

9,490

 

7,956

 

 

 

 

 

 

 

Net income

 

146,330

 

195,883

 

 

 

 

 

 

 

Preferred dividends

 

6,461

 

6,461

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

139,869

 

$

189,422

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

2.32

 

$

2.90

 

Diluted

 

$

2.24

 

$

2.78

 

 

 

 

 

 

 

Weighted average common shares and common share equivalents outstanding

 

 

 

 

 

Basic

 

60,313,550

 

65,295,516

 

Diluted

 

62,559,969

 

68,019,413

 

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

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

 

0

 

0

 

Purchases of common shares under share repurchase program

 

(0

)

(27

)

Balance at end of period

 

605

 

646

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

Balance at beginning of year

 

994,585

 

1,451,667

 

Common shares issued

 

0

 

0

 

Exercise of stock options

 

528

 

3,749

 

Common shares retired

 

(3,760

)

(190,278

)

Amortization of share-based compensation

 

4,318

 

4,600

 

Other

 

746

 

83

 

Balance at end of period

 

996,417

 

1,269,821

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

Balance at beginning of year

 

2,693,239

 

2,428,117

 

Cumulative effect of change in accounting principle, adoption of FSP FAS 115-2/124-2 (1)

 

61,469

 

 

Balance at beginning of year, as adjusted

 

2,754,708

 

2,428,117

 

Dividends declared on preferred shares

 

(6,461

)

(6,461

)

Net income

 

146,330

 

195,883

 

Balance at end of period

 

2,894,577

 

2,617,539

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance at beginning of year

 

(255,594

)

155,224

 

Cumulative effect of change in accounting principle, adoption of FSP FAS 115-2/124-2 (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

 

114,844

 

(37,577

)

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

 

(56,855

)

 

Foreign currency translation adjustments, net of deferred income tax

 

(2,259

)

(1,239

)

Balance at end of period

 

(261,333

)

116,408

 

 

 

 

 

 

 

Total Shareholders’ Equity

 

$

3,630,396

 

$

4,004,544

 

 


(1)          FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2/124-2”)

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Comprehensive Income

 

 

 

 

 

Net income

 

$

146,330

 

$

195,883

 

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

 

 

 

 

 

Unrealized appreciation (decline) in value of investments:

 

 

 

 

 

Unrealized holding gains (losses) arising during period

 

58,324

 

12,707

 

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

 

(56,855

)

 

Reclassification of net realized (gains) losses, net of income taxes, included in net income

 

56,520

 

(50,284

)

Foreign currency translation adjustments

 

(2,259

)

(1,239

)

Other comprehensive income (loss)

 

55,730

 

(38,816

)

Comprehensive Income

 

$

202,060

 

$

157,067

 

 

See Notes to Consolidated Financial Statements

 

6



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2009

 

2008

 

Operating Activities

 

 

 

 

 

Net income

 

$

146,330

 

$

195,883

 

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

 

 

 

 

 

Net realized (gains) losses

 

5,620

 

(46,502

)

Net impairment losses recognized in earnings

 

36,134

 

12,711

 

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

 

10,428

 

18,277

 

Share-based compensation

 

4,318

 

4,600

 

Changes in:

 

 

 

 

 

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

 

83,763

 

182,498

 

Unearned premiums, net of prepaid reinsurance premiums

 

120,867

 

105,497

 

Premiums receivable

 

(94,777

)

(148,197

)

Deferred acquisition costs, net

 

(18,933

)

(21,319

)

Reinsurance balances payable

 

11,278

 

19,677

 

Other liabilities

 

2,802

 

40,490

 

Other items, net

 

(13,027

)

(29,070

)

Net Cash Provided By Operating Activities

 

294,803

 

334,545

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of fixed maturity investments

 

(3,632,350

)

(3,772,652

)

Proceeds from sales of fixed maturity investments

 

3,377,680

 

3,523,338

 

Proceeds from redemptions and maturities of fixed maturity investments

 

168,758

 

136,932

 

Purchases of other investments

 

(22,670

)

(146,815

)

Proceeds from sales of other investments

 

24,027

 

65,226

 

Net (purchases) sales of short-term investments

 

(204,924

)

74,201

 

Change in investment of securities lending collateral

 

179,191

 

274,855

 

Purchases of furniture, equipment and other assets

 

(7,647

)

(3,045

)

Net Cash Provided By (Used For) Investing Activities

 

(117,935

)

152,040

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Purchases of common shares under share repurchase program

 

(1,552

)

(189,843

)

Proceeds from common shares issued, net

 

(1,688

)

2,540

 

Change in securities lending collateral

 

(179,191

)

(274,855

)

Excess tax benefits from share-based compensation

 

742

 

660

 

Preferred dividends paid

 

(6,461

)

(6,461

)

Net Cash Used For Financing Activities

 

(188,150

)

(467,959

)

 

 

 

 

 

 

Effects of exchange rate changes on foreign currency cash

 

3,580

 

139

 

Increase (decrease) in cash

 

(7,702

)

18,765

 

Cash beginning of year

 

251,739

 

239,915

 

Cash end of period

 

$

244,037

 

$

258,680

 

 

 

 

 

 

 

Income taxes paid, net

 

$

2,231

 

$

2,510

 

Interest paid

 

$

184

 

 

 

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 FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” effective for its interim period ending March 31, 2009. See note 7, “Investment Information—Other-Than-Temporary Impairments” for further details.

 

2.      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. In March 2009, ACGL repurchased $1.6 million of common shares through the share repurchase program. Since the inception of the share repurchase program through March 31, 2009, ACGL has repurchased 15.3 million common shares for an aggregate purchase price of $1.05 billion. As a result of the share repurchase transactions to date, weighted average shares outstanding were reduced by 15.3 million for the 2009 first quarter, compared to 9.4 million shares for the 2008 first quarter.

 

At March 31, 2009, $448.3 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.

 

8



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Non-Cumulative Preferred Shares

 

During 2006, ACGL completed two public offerings of non-cumulative preferred shares (“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”) 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 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. At March 31, 2009, the Company had declared an aggregate of $3.3 million of dividends to be paid to holders of the Preferred Shares.

 

3.      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 2009 and 2008 first quarters, interest expense on the Senior Notes was $5.5 million. The market value of the Senior Notes at March 31, 2009 and December 31, 2008 was $193.4 million and $246.1 million, respectively.

 

Letter of Credit and Revolving Credit Facilities

 

As of March 31, 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

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

shareholders’ equity levels. The Company was in compliance with all covenants contained in the Credit Agreement at March 31, 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, 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 March 31, 2009. At such date, the Company had $585.7 million in outstanding letters of credit under the LOC Facilities, which were secured by investments totaling $700.0 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 to Arch Reinsurance Ltd. (“Arch Re Bermuda”) and used to fund the investment in Gulf Re (see Note 6).

 

4.      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 SFAS No. 131, “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 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 and employers’ liability business and lender products).

 

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 treaties. 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).

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Corporate and other (non-underwriting) includes net investment income, other fee income, net of related expenses, 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 and income taxes. In addition, corporate and other results include dividends on the Company’s non-cumulative preferred shares.

 

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

 

 

 

March 31, 2009

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

638,409

 

$

390,129

 

$

1,024,971

 

Net premiums written (1)

 

441,586

 

381,277

 

822,863

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

401,097

 

$

299,467

 

$

700,564

 

Fee income

 

870

 

55

 

925

 

Losses and loss adjustment expenses

 

(270,015

)

(130,527

)

(400,542

)

Acquisition expenses, net

 

(57,623

)

(68,835

)

(126,458

)

Other operating expenses

 

(62,908

)

(18,192

)

(81,100

)

Underwriting income

 

$

11,421

 

$

81,968

 

93,389

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

95,882

 

Net realized losses

 

 

 

 

 

(5,164

)

Net impairment losses recognized in earnings

 

 

 

 

 

(36,134

)

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

 

 

 

 

 

(9,581

)

Other income

 

 

 

 

 

3,951

 

Other expenses

 

 

 

 

 

(6,016

)

Interest expense

 

 

 

 

 

(5,712

)

Net foreign exchange gains

 

 

 

 

 

25,205

 

Income before income taxes

 

 

 

 

 

155,820

 

Income tax expense

 

 

 

 

 

(9,490

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

146,330

 

Preferred dividends

 

 

 

 

 

(6,461

)

Net income available to common shareholders

 

 

 

 

 

$

139,869

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

67.3

%

43.6

%

57.2

%

Acquisition expense ratio (2)

 

14.1

%

23.0

%

17.9

%

Other operating expense ratio

 

15.7

%

6.1

%

11.6

%

Combined ratio

 

97.1

%

72.7

%

86.7

%

 


(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 $3.5 million, respectively, of gross and net premiums written and $0.5 million and $4.7 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

 

 

 

March 31, 2008

 

(U.S. dollars in thousands)

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

626,348

 

$

433,827

 

$

1,053,152

 

Net premiums written (1)

 

402,764

 

408,578

 

811,342

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

$

419,100

 

$

289,134

 

$

708,234

 

Fee income

 

882

 

186

 

1,068

 

Losses and loss adjustment expenses

 

(287,303

)

(117,114

)

(404,417

)

Acquisition expenses, net

 

(51,889

)

(62,750

)

(114,639

)

Other operating expenses

 

(73,637

)

(18,238

)

(91,875

)

Underwriting income

 

$

7,153

 

$

91,218

 

98,371

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

122,193

 

Net realized gains

 

 

 

 

 

48,686

 

Net impairment losses recognized in earnings

 

 

 

 

 

(12,711

)

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

 

 

 

 

 

(22,313

)

Other income

 

 

 

 

 

4,036

 

Other expenses

 

 

 

 

 

(5,312

)

Interest expense

 

 

 

 

 

(5,524

)

Net foreign exchange losses

 

 

 

 

 

(23,587

)

Income before income taxes

 

 

 

 

 

203,839

 

Income tax expense

 

 

 

 

 

(7,956

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

195,883

 

Preferred dividends

 

 

 

 

 

(6,461

)

Net income available to common shareholders

 

 

 

 

 

$

189,422

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

68.6

%

40.5

%

57.1

%

Acquisition expense ratio (2)

 

12.2

%

21.7

%

16.1

%

Other operating expense ratio

 

17.6

%

6.3

%

13.0

%

Combined ratio

 

98.4

%

68.5

%

86.2

%

 


(1)

 

Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The insurance segment and reinsurance segment results include nil and $7.0 million, respectively, of gross and net premiums written and $0.1 million and $8.7 million, respectively, of net premiums earned assumed through intersegment transactions.

(2)

 

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

 

12



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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

 

 

 

March 31,

 

 

 

2009

 

2008

 

INSURANCE SEGMENT
(U.S. dollars in thousands)

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

106,029

 

24.0

 

$

97,237

 

24.1

 

Programs

 

74,807

 

16.9

 

54,583

 

13.6

 

Professional liability

 

52,008

 

11.8

 

54,081

 

13.4

 

Executive assurance

 

50,079

 

11.3

 

42,169

 

10.5

 

Construction

 

36,571

 

8.3

 

39,480

 

9.8

 

Casualty

 

26,539

 

6.0

 

28,543

 

7.1

 

National accounts casualty

 

24,227

 

5.5

 

13,055

 

3.2

 

Travel and accident

 

17,534

 

4.0

 

16,653

 

4.1

 

Surety

 

11,358

 

2.6

 

10,867

 

2.7

 

Healthcare

 

11,219

 

2.5

 

10,997

 

2.7

 

Other (2)

 

31,215

 

7.1

 

35,099

 

8.8

 

Total

 

$

441,586

 

100.0

 

$

402,764

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

73,840

 

18.4

 

$

84,458

 

20.2

 

Programs

 

66,669

 

16.6

 

56,987

 

13.6

 

Professional liability

 

58,234

 

14.5

 

68,810

 

16.4

 

Executive assurance

 

47,816

 

11.9

 

44,408

 

10.6

 

Construction

 

40,420

 

10.1

 

42,717

 

10.2

 

Casualty

 

32,698

 

8.2

 

42,306

 

10.1

 

National accounts casualty

 

14,439

 

3.6

 

7,923

 

1.9

 

Travel and accident

 

13,156

 

3.3

 

15,485

 

3.7

 

Surety

 

13,391

 

3.3

 

13,499

 

3.2

 

Healthcare

 

10,928

 

2.7

 

13,445

 

3.2

 

Other (2)

 

29,506

 

7.4

 

29,062

 

6.9

 

Total

 

$

401,097

 

100.0

 

$

419,100

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

317,044

 

71.8

 

$

279,255

 

69.3

 

Europe

 

92,396

 

20.9

 

86,300

 

21.4

 

Other

 

32,146

 

7.3

 

37,209

 

9.3

 

Total

 

$

441,586

 

100.0

 

$

402,764

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by underwriting location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

320,829

 

72.7

 

$

287,208

 

71.3

 

Europe

 

105,313

 

23.8

 

102,012

 

25.3

 

Other

 

15,444

 

3.5

 

13,544

 

3.4

 

Total

 

$

441,586

 

100.0

 

$

402,764

 

100.0

 

 


(1)

 

Insurance segment results include premiums written and earned assumed through intersegment transactions of $0.1 million and $0.5 million, respectively, for the 2009 first quarter and premiums written and earned assumed of nil and $0.1 million, respectively, for the 2008 first quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $3.5 million and $4.7 million, respectively, for the 2009 first quarter and $7.0 million and $8.7 million, respectively, for the 2008 first quarter.

(2)

 

Includes excess workers’ compensation and employers’ liability business and lender products.

 

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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

 

 

 

March 31,

 

REINSURANCE SEGMENT

 

2009

 

2008

 

(U.S. dollars in thousands)

 

Amount

 

% of Total

 

Amount

 

% of Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Property excluding property catastrophe (2)

 

$

119,088

 

31.2

 

$

95,922

 

23.5

 

Casualty (3)

 

99,432

 

26.1

 

105,987

 

25.9

 

Property catastrophe

 

91,903

 

24.1

 

106,224

 

26.0

 

Other specialty

 

40,712

 

10.7

 

75,680

 

18.5

 

Marine and aviation

 

28,523

 

7.5

 

22,164

 

5.4

 

Other

 

1,619

 

0.4

 

2,601

 

0.7

 

Total

 

$

381,277

 

100.0

 

$

408,578

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Property excluding property catastrophe (2)

 

$

96,231

 

32.1

 

$

63,341

 

21.9

 

Casualty (3)

 

85,946

 

28.7

 

107,648

 

37.2

 

Property catastrophe

 

58,601

 

19.6

 

50,281

 

17.4

 

Other specialty

 

33,450

 

11.2

 

38,484

 

13.3

 

Marine and aviation

 

24,830

 

8.3

 

27,431

 

9.5

 

Other

 

409

 

0.1

 

1,949

 

0.7

 

Total

 

$

299,467

 

100.0

 

$

289,134

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

181,222

 

47.5

 

$

215,419

 

52.7

 

Excess of loss

 

200,055

 

52.5

 

193,159

 

47.3

 

Total

 

$

381,277

 

100.0

 

$

408,578

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

194,518

 

65.0

 

$

192,076

 

66.4

 

Excess of loss

 

104,949

 

35.0

 

97,058

 

33.6

 

Total

 

$

299,467

 

100.0

 

$

289,134

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

229,968

 

60.3

 

$

217,179

 

53.2

 

Europe

 

101,501

 

26.6

 

143,920

 

35.2

 

Bermuda

 

37,567

 

9.9

 

34,060

 

8.3

 

Other

 

12,241

 

3.2

 

13,419

 

3.3

 

Total

 

$

381,277

 

100.0

 

$

408,578

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by underwriting location (1)

 

 

 

 

 

 

 

 

 

Bermuda

 

$

195,600

 

51.3

 

$

220,669

 

54.0

 

United States

 

146,193

 

38.3

 

154,480

 

37.8

 

Other

 

39,484

 

10.4

 

33,429

 

8.2

 

Total

 

$

381,277

 

100.0

 

$

408,578

 

100.0

 

 


(1)

 

Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $3.5 million and $4.7 million, respectively, for the 2009 first quarter and $7.0 million and $8.7 million, respectively, for the 2008 first quarter. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of $0.1 million and $0.5 million, respectively, for the 2009 first quarter and premiums written and earned ceded of nil and $0.1 million, respectively, for the 2008 first quarter.

(2)

 

Includes facultative business.

(3)

 

Includes professional liability, executive assurance and healthcare business.

 

14



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

5.      Reinsurance

 

In the normal course of business, the Company’s insurance subsidiaries cede a substantial portion of their premium through pro rata and excess of loss reinsurance agreements on a treaty or facultative basis. The Company’s reinsurance subsidiaries participate in “common account” retrocessional arrangements for certain pro rata treaties. Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties, including the reinsurers, such as the Company’s reinsurance subsidiaries, and the ceding company. In addition, the Company’s reinsurance subsidiaries may purchase retrocessional coverage as part of their risk management program. Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance or reinsurance subsidiaries would be liable for such defaulted amounts.

 

The effects of reinsurance on the Company’s written and earned premiums and losses and loss adjustment expenses with unaffiliated reinsurers were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(U.S. dollars in thousands)

 

2009

 

2008

 

 

 

 

 

 

 

Premiums Written

 

 

 

 

 

Direct

 

$

620,446

 

$

619,486

 

Assumed

 

404,525

 

433,666

 

Ceded

 

(202,108

)

(241,810

)

Net

 

$

822,863

 

$

811,342

 

 

 

 

 

 

 

Premiums Earned

 

 

 

 

 

Direct

 

$

587,760

 

$

630,814

 

Assumed

 

332,567

 

365,364

 

Ceded

 

(219,763

)

(287,944

)

Net

 

$

700,564

 

$

708,234

 

 

 

 

 

 

 

Losses and Loss Adjustment Expenses

 

 

 

 

 

Direct

 

$

351,493

 

$

420,971

 

Assumed

 

147,145

 

141,249

 

Ceded

 

(98,096

)

(157,803

)

Net

 

$

400,542

 

$

404,417

 

 

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with substantial, financially sound carriers. At March 31, 2009, approximately 88.9% of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.79 billion were due from carriers which had an A.M. Best rating of “A-” or better and the largest reinsurance recoverables from any one carrier was less than 6.9% of the Company’s total shareholders’ equity. At December 31, 2008, approximately 88.5% of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.79 billion were due from carriers which had an A.M. Best rating of “A-” or better and the largest reinsurance recoverables from any one carrier was less than 7.3% of the Company’s total shareholders’ equity.

 

On December 29, 2005, Arch Re Bermuda entered into a quota share reinsurance treaty with Flatiron Re Ltd. (“Flatiron”), a Bermuda reinsurance company, pursuant to which Flatiron assumed a 45% quota share (the “Treaty”) of certain lines of property and marine business underwritten by Arch Re Bermuda for unaffiliated third parties for the 2006 and 2007 underwriting years (January 1, 2006 to December 31, 2007). Effective June 28, 2006, the parties amended the Treaty to increase the percentage ceded to Flatiron from 45% to 70% of all covered business bound by Arch Re Bermuda from (and including) June 28, 2006 until (and including) August 

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

15, 2006 provided such business did not incept beyond September 30, 2006. The ceding percentage for all business bound outside of this period continued to be 45%. On December 31, 2007, the Treaty expired by its terms. At March 31, 2009, $7.3 million of premiums ceded to Flatiron were unearned.

 

Flatiron is required to contribute funds into a trust for the benefit of Arch Re Bermuda (the “Trust”). Effective June 28, 2006, the parties amended the Treaty to provide that, through the earning of all written premium, the amount required to be on deposit in the Trust, together with certain other amounts, will be an amount equal to a calculated amount estimated to cover ceded losses arising from in excess of two 1-in-250 year events for the applicable forward twelve-month period (the “Requisite Funded Amount”). If the actual amounts on deposit in the Trust, together with certain other amounts (the “Funded Amount”), do not at least equal the Requisite Funded Amount, Arch Re Bermuda will, among other things, recapture unearned premium reserves and reassume losses that would have been ceded in respect of such unearned premiums. No assurances can be given that actual losses will not exceed the Requisite Funded Amount or that Flatiron will make, or will have the ability to make, the required contributions into the Trust.

 

Arch Re Bermuda pays to Flatiron a reinsurance premium in the amount of the ceded percentage of the original gross written premium on the business reinsured less a ceding commission, which includes a reimbursement of direct acquisition expenses as well as a commission to Arch Re Bermuda for generating the business. The Treaty also provides for a profit commission to Arch Re Bermuda based on the underwriting results for the 2006 and 2007 underwriting years on a cumulative basis. For the 2009 first quarter, $3.5 million of premiums written, $14.5 million of premiums earned and $3.7 million of losses and loss adjustment expenses were ceded to Flatiron by Arch Re Bermuda, compared to $18.4 million of premiums written, $58.9 million of premiums earned and $11.8 million of losses and loss adjustment expenses for the 2008 first quarter. Reinsurance recoverables from Flatiron, which is not rated by A.M. Best, were $153.5 million at March 31, 2009, compared to $148.7 million at December 31, 2008. As noted above, Flatiron is required to contribute funds into a trust for the benefit of Arch Re Bermuda. The recoverable from Flatiron was fully collateralized through such trust at March 31, 2009 and December 31, 2008.

 

6.      Investment in Joint Venture

 

In May 2008, the Company provided $100.0 million of funding to Gulf Reinsurance Limited (“Gulf Re”), a newly formed reinsurer based in the Dubai International Financial Centre, pursuant to the joint venture agreement with Gulf Investment Corporation GSC (“GIC”). Under the agreement, Arch Re Bermuda and GIC each own 50% of Gulf Re, which commenced underwriting activities in June 2008. Gulf Re will initially target the six member states of the Gulf Cooperation Council, which include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The joint venture will write a broad range of property and casualty reinsurance, including aviation, energy, commercial transportation, marine, engineered risks and property, on both a treaty and facultative basis. The initial capital of the joint venture consisted of $200.0 million with an additional $200.0 million commitment to be funded equally by the Company and GIC depending on the joint venture’s business needs. The Company accounts for its investment in Gulf Re, shown as “Investment in joint venture,” using the equity method and records its equity in the operating results of Gulf Re in “Other income” on a quarter lag basis.

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

7.      Investment Information

 

The following table summarizes the Company’s invested assets:

 

 

 

March 31,

 

December 31,

 

(U.S. dollars in thousands)

 

2009

 

2008

 

 

 

 

 

 

 

Fixed maturities available for sale, at market value

 

$

8,540,653

 

$

8,122,221

 

Fixed maturities pledged under securities lending agreements, at market value (1)

 

503,449

 

626,501

 

Total fixed maturities

 

9,044,102

 

8,748,722

 

Short-term investments available for sale, at market value

 

749,708

 

479,586

 

Short-term investments pledged under securities lending agreements, at market value (1)

 

56,242

 

101,564

 

Other investments

 

104,988

 

109,601

 

Investment funds accounted for using the equity method

 

293,452

 

301,027

 

Total investments (1)

 

10,248,492

 

9,740,500

 

Securities transactions entered into but not settled at the balance sheet date

 

(241,836

)

(18,236

)

Total investments, net of securities transactions

 

$

10,006,656

 

$

9,722,264

 

 


(1)

 

In securities lending transactions, the Company receives collateral in excess of the market value of the fixed maturities and short-term investments pledged under securities lending agreements. For purposes of this table, the Company has excluded the collateral received at March 31, 2009 and December 31, 2008 of $550.8 million and $730.2 million, respectively, which is reflected as “investment of funds received under securities lending agreements, at market value” and included the $559.7 million and $728.1 million, respectively, of “fixed maturities and short-term investments pledged under securities lending agreements, at market value.”

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Fixed Maturities and Fixed Maturities Pledged Under Securities Lending Agreements

 

The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements:

 

 

 

 

 

Included in Accumulated Other
Comprehensive Income (“AOCI”)

 

 

 

 

 

 

 

 

 

Gross Unrealized Losses

 

 

 

(U.S. dollars in thousands)

 

Estimated
Market
Value

 

Gross
Unrealized
Gains

 

Non-OTTI
Unrealized
Losses

 

OTTI
Unrealized
Losses (1)

 

Amortized
Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

2,181,763

 

$

32,016

 

$

(99,877

)

$

(23,672

)

$

2,273,296

 

Mortgage backed securities

 

1,692,863

 

31,111

 

(70,249

)

(67,981

)

1,799,982

 

U.S. government and government agencies

 

1,547,416

 

51,239

 

(6,940

)

(614

)

1,503,731

 

Commercial mortgage backed securities

 

1,209,605

 

20,153

 

(42,587

)

(5,689

)

1,237,728

 

Asset backed securities

 

922,560

 

8,388

 

(29,955

)

(15,833

)

959,960

 

Municipal bonds

 

861,954

 

32,621

 

(1,959

)

(198

)

831,490

 

Non-U.S. government securities

 

627,941

 

22,550

 

(23,477

)

(647

)

629,515

 

Total

 

$

9,044,102

 

$

198,078

 

$

(275,044

)

$

(114,634

)

$

9,235,702

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

2,019,373

 

$

51,131

 

$

(98,979

)

 

$

2,067,221

 

Mortgage backed securities

 

1,581,736

 

23,306

 

(125,759

)

 

1,684,189

 

U.S. government and government agencies

 

1,463,897

 

77,762

 

(14,159

)

 

1,400,294

 

Commercial mortgage backed securities

 

1,219,737

 

16,128

 

(68,212

)

 

1,271,821

 

Asset backed securities

 

970,041

 

1,121

 

(70,762

)

 

1,039,682

 

Municipal bonds

 

965,966

 

26,815

 

(1,730

)

 

940,881

 

Non-U.S. government securities

 

527,972

 

33,690

 

(31,884

)

 

526,166

 

Total

 

$

8,748,722

 

$

229,953

 

$

(411,485

)

 

$

8,930,254

 

 


(1) Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”) at March 31, 2009.

 

The contractual maturities of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements are shown below. Expected maturities, which are management’s 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.

 

 

 

March 31, 2009

 

December 31, 2008

 

(U.S. dollars in thousands)
Maturity

 

Estimated
Market Value

 

Amortized
Cost

 

Estimated
Market Value

 

Amortized
Cost

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

177,866

 

$

180,842

 

$

173,168

 

$

169,187

 

Due after one year through five years

 

2,835,183

 

2,857,223

 

2,451,062

 

2,452,344

 

Due after five years through 10 years

 

1,784,817

 

1,756,034

 

1,726,742

 

1,686,575

 

Due after 10 years

 

421,208

 

443,933

 

626,236

 

626,456

 

 

 

5,219,074

 

5,238,032

 

4,977,208

 

4,934,562

 

Mortgage backed securities

 

1,692,863

 

1,799,982

 

1,581,736

 

1,684,189

 

Commercial mortgage backed securities

 

1,209,605

 

1,237,728

 

1,219,737

 

1,271,821

 

Asset backed securities

 

922,560

 

959,960

 

970,041

 

1,039,682

 

Total

 

$

9,044,102

 

$

9,235,702

 

$

8,748,722

 

$

8,930,254

 

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following table provides an analysis of the length of time each of those fixed maturities, fixed maturities pledged under securities lending agreements, equity securities and short-term investments with an unrealized loss has been in a continual unrealized loss position:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

(U.S. dollars in thousands)

 

Estimated
Market
Value

 

Gross
Unrealized
Losses (1)

 

Estimated
Market
Value

 

Gross
Unrealized
Losses (1)

 

Estimated
Market
Value

 

Gross
Unrealized
Losses (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

874,438

 

$

(97,914

)

$

92,736

 

$

(25,635

)

$

967,174

 

$

(123,549

)

Mortgage backed securities

 

459,638

 

(51,091

)

127,043

 

(87,139

)

586,681

 

(138,230

)

U.S. government and government agencies

 

187,544

 

(7,554

)

 

 

187,544

 

(7,554

)

Commercial mortgage backed securities

 

499,768

 

(31,161

)

80,292

 

(17,115

)

580,060

 

(48,276

)

Asset backed securities

 

385,775

 

(35,666

)

48,813

 

(10,122

)

434,588

 

(45,788

)

Municipal bonds

 

67,822

 

(1,818

)

7,562

 

(339

)

75,384

 

(2,157

)

Non-U.S. government securities

 

43,630

 

(23,908

)

5,741

 

(216

)

49,371

 

(24,124

)

Total

 

2,518,615

 

(249,112

)

362,187

 

(140,566

)

2,880,802

 

(389,678

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

28,715

 

(17,687

)

 

 

28,715

 

(17,687

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

88,597

 

(1,124

)

 

 

88,597

 

(1,124

)

Total

 

$

2,635,927

 

$

(267,923

)

$

362,187

 

$

(140,566

)

$

2,998,114

 

$

(408,489

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

870,093

 

$

(89,446

)

$

30,608

 

$

(9,533

)

$

900,701

 

$

(98,979

)

Mortgage backed securities

 

417,373

 

(105,154

)

23,295

 

(20,605

)

440,668

 

(125,759

)

U.S. government and government agencies

 

356,719

 

(14,159

)

 

 

356,719

 

(14,159

)

Commercial mortgage backed securities

 

714,497

 

(68,210

)

52

 

(2

)

714,549

 

(68,212

)

Asset backed securities

 

888,908

 

(63,845

)

26,185

 

(6,917

)

915,093

 

(70,762

)

Municipal bonds

 

93,072

 

(1,730

)