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, 2010

 

Or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number:  001-26456

 

ARCH CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)

 

Bermuda

(State or other jurisdiction of incorporation or organization)

 

Not Applicable

(I.R.S. Employer Identification No.)

 

Wessex House, 45 Reid Street

Hamilton HM 12, Bermuda

(Address of principal executive offices)

 

(441) 278-9250

(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

 

The number of the registrant’s common shares (par value, $0.01 per share) outstanding as of May 4, 2010 was 52,307,829.

 

 

 



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, 2010 (unaudited) and December 31, 2009

 

3

 

 

 

Consolidated Statements of Income
For the three month periods ended March 31, 2010 and 2009 (unaudited)

 

4

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity
For the three month periods ended March 31, 2010 and 2009 (unaudited)

 

5

 

 

 

Consolidated Statements of Comprehensive Income
For the three month periods ended March 31, 2010 and 2009 (unaudited)

 

6

 

 

 

Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2010 and 2009 (unaudited)

 

7

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

8

 

 

 

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

 

34

 

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

 

65

 

 

 

Item 4 — Controls and Procedures

 

65

 

 

 

PART II. Other Information

 

 

 

 

 

Item 1 — Legal Proceedings

 

66

 

 

 

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

 

66

 

 

 

Item 5 — Other Information

 

67

 

 

 

Item 6 — Exhibits

 

67

 

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 sheet of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of March 31, 2010, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income for each of the three-month periods ended March 31, 2010 and March 31, 2009 and the consolidated statements of cash flows for the three month periods ended March 31, 2010 and March 31, 2009.  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.

 

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income, and of cash flows for the year then ended (not presented herein), and in our report dated February 26, 2010, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet information as of March 31, 2010, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

/s/ PricewaterhouseCoopers LLP

 

 

 

New York, NY

 

May 7, 2010

 

 

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,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities available for sale, at market value (amortized cost: 2010, $9,129,065; 2009, $9,227,432)

 

$

9,295,680

 

$

9,391,926

 

Short-term investments available for sale, at market value (amortized cost: 2010, $671,902; 2009, $570,469)

 

669,798

 

571,489

 

Investment of funds received under securities lending agreements, at market value (amortized cost: 2010, $182,338; 2009, $96,590)

 

177,954

 

91,160

 

TALF investments, at market value (amortized cost: 2010, $400,347; 2009, $247,192)

 

406,997

 

250,265

 

Other investments (cost: 2010, $251,917; 2009, $162,505)

 

263,608

 

172,172

 

Investment funds accounted for using the equity method

 

405,584

 

391,869

 

Total investments

 

11,219,621

 

10,868,881

 

 

 

 

 

 

 

Cash

 

338,708

 

334,571

 

Accrued investment income

 

74,214

 

70,673

 

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

 

102,946

 

102,855

 

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

 

184,221

 

212,820

 

Securities purchased under agreements to resell using funds received under securities lending agreements

 

 

115,839

 

Premiums receivable

 

699,385

 

595,030

 

Unpaid losses and loss adjustment expenses recoverable

 

1,643,573

 

1,659,500

 

Paid losses and loss adjustment expenses recoverable

 

67,734

 

60,770

 

Prepaid reinsurance premiums

 

250,841

 

277,985

 

Deferred acquisition costs, net

 

298,371

 

280,372

 

Receivable for securities sold

 

1,427,085

 

187,171

 

Other assets

 

628,407

 

609,323

 

Total Assets

 

$

16,935,106

 

$

15,375,790

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$

7,898,162

 

$

7,873,412

 

Unearned premiums

 

1,495,265

 

1,433,331

 

Reinsurance balances payable

 

114,254

 

156,500

 

Senior notes

 

300,000

 

300,000

 

Revolving credit agreement borrowings

 

100,000

 

100,000

 

TALF borrowings, at market value (par: 2010, $346,950; 2009, $218,740)

 

346,746

 

217,565

 

Securities lending payable

 

189,024

 

219,116

 

Payable for securities purchased

 

1,429,529

 

136,381

 

Other liabilities

 

683,369

 

616,136

 

Total Liabilities

 

12,556,349

 

11,052,441

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Non-cumulative preferred shares ($0.01 par, issued and outstanding: 13,000,000)

 

130

 

130

 

Common shares ($0.01 par, issued and outstanding: 2010, 52,709,934; 2009, 54,761,678)

 

527

 

548

 

Additional paid-in capital

 

420,796

 

578,336

 

Retained earnings

 

3,816,342

 

3,605,809

 

Accumulated other comprehensive income, net of deferred income tax

 

140,962

 

138,526

 

Total Shareholders’ Equity

 

4,378,757

 

4,323,349

 

Total Liabilities and Shareholders’ Equity

 

$

16,935,106

 

$

15,375,790

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

 

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

Revenues

 

 

 

 

 

Net premiums written

 

$

767,754

 

$

822,863

 

Increase in unearned premiums

 

(97,837

)

(122,299

)

Net premiums earned

 

669,917

 

700,564

 

Net investment income

 

92,972

 

95,882

 

Net realized gains (losses)

 

47,782

 

(5,164

)

 

 

 

 

 

 

Other-than-temporary impairment losses

 

(2,336

)

(97,422

)

Less investment impairments recognized in other comprehensive income, before taxes

 

730

 

61,288

 

Net impairment losses recognized in earnings

 

(1,606

)

(36,134

)

 

 

 

 

 

 

Fee income

 

794

 

925

 

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

 

29,050

 

(9,581

)

Other income

 

5,978

 

3,951

 

Total revenues

 

844,887

 

750,443

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Losses and loss adjustment expenses

 

428,051

 

400,542

 

Acquisition expenses

 

117,624

 

126,458

 

Other operating expenses

 

106,806

 

87,116

 

Interest expense

 

7,260

 

5,712

 

Net foreign exchange gains

 

(38,601

)

(25,205

)

Total expenses

 

621,140

 

594,623

 

 

 

 

 

 

 

Income before income taxes

 

223,747

 

155,820

 

 

 

 

 

 

 

Income tax expense

 

6,753

 

9,490

 

 

 

 

 

 

 

Net Income

 

216,994

 

146,330

 

 

 

 

 

 

 

Preferred dividends

 

6,461

 

6,461

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

210,533

 

$

139,869

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

3.97

 

$

2.32

 

Diluted

 

$

3.79

 

$

2.24

 

 

 

 

 

 

Weighted average common shares and common share equivalents outstanding

 

 

 

 

 

Basic

 

53,039,026

 

60,313,550

 

Diluted

 

55,513,827

 

62,559,969

 

 

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,

 

 

 

2010

 

2009

 

Non-Cumulative Preferred Shares

 

 

 

 

 

Balance at beginning and end of period

 

$

130

 

$

130

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Balance at beginning of year

 

548

 

605

 

Common shares issued, net

 

4

 

 

Purchases of common shares under share repurchase program

 

(25

)

(0

)

Balance at end of period

 

527

 

605

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

Balance at beginning of year

 

578,336

 

994,585

 

Common shares issued

 

14

 

 

Exercise of stock options

 

16,700

 

528

 

Common shares retired

 

(181,350

)

(3,760

)

Amortization of share-based compensation

 

7,096

 

4,318

 

Other

 

 

746

 

Balance at end of period

 

420,796

 

996,417

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

Balance at beginning of year

 

3,605,809

 

2,693,239

 

Cumulative effect of change in accounting principle (1)

 

 

61,469

 

Balance at beginning of year, as adjusted

 

3,605,809

 

2,754,708

 

Dividends declared on preferred shares

 

(6,461

)

(6,461

)

Net income

 

216,994

 

146,330

 

Balance at end of period

 

3,816,342

 

2,894,577

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance at beginning of year

 

138,526

 

(255,594

)

Cumulative effect of change in accounting principle (1)

 

 

(61,469

)

Balance at beginning of year, as adjusted

 

138,526

 

(317,063

)

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

 

5,240

 

119,277

 

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

 

(730

)

(61,288

)

Foreign currency translation adjustments, net of deferred income tax

 

(2,074

)

(2,259

)

Balance at end of period

 

140,962

 

(261,333

)

 

 

 

 

 

 

Total Shareholders’ Equity

 

$

4,378,757

 

$

3,630,396

 

 


(1) Adoption of accounting guidance regarding the recognition and presentation of other-than-temporary impairments.

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

Comprehensive Income

 

 

 

 

 

Net income

 

$

216,994

 

$

146,330

 

Other comprehensive income, net of deferred income tax

 

 

 

 

 

Unrealized appreciation in value of investments:

 

 

 

 

 

Unrealized holding gains arising during period

 

42,847

 

62,757

 

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

 

(730

)

(61,288

)

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

 

(37,607

)

56,520

 

Foreign currency translation adjustments

 

(2,074

)

(2,259

)

Other comprehensive income

 

2,436

 

55,730

 

Comprehensive Income

 

$

219,430

 

$

202,060

 

 

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,

 

 

 

2010

 

2009

 

Operating Activities

 

 

 

 

 

Net income

 

$

216,994

 

$

146,330

 

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

 

 

 

 

 

Net realized (gains) losses

 

(49,483

)

5,620

 

Net impairment losses recognized in earnings

 

1,606

 

36,134

 

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

 

(15,012

)

10,428

 

Share-based compensation

 

7,096

 

4,318

 

Changes in:

 

 

 

 

 

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

 

91,247

 

83,763

 

Unearned premiums, net of prepaid reinsurance premiums

 

96,645

 

120,867

 

Premiums receivable

 

(116,571

)

(94,777

)

Deferred acquisition costs, net

 

(19,655

)

(18,933

)

Reinsurance balances payable

 

(36,669

)

11,278

 

Other liabilities

 

41,448

 

2,802

 

Other items, net

 

(33,023

)

(13,027

)

Net Cash Provided By Operating Activities

 

184,623

 

294,803

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of:

 

 

 

 

 

Fixed maturity investments

 

(4,597,713

)

(3,037,132

)

Other investments

 

(185,102

)

(22,670

)

Proceeds from the sales of:

 

 

 

 

 

Fixed maturity investments

 

4,443,108

 

2,782,462

 

Other investments

 

101,235

 

24,027

 

Proceeds from redemptions and maturities of fixed maturity investments

 

212,625

 

168,758

 

Net purchases of short-term investments

 

(102,921

)

(204,924

)

Change in investment of securities lending collateral

 

30,092

 

179,191

 

Purchases of furniture, equipment and other assets

 

(1,803

)

(7,647

)

Net Cash Used By Investing Activities

 

(100,479

)

(117,935

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Purchases of common shares under share repurchase program

 

(181,272

)

(1,552

)

Proceeds from common shares issued, net

 

10,591

 

(1,688

)

Proceeds from borrowings

 

214,526

 

 

Repayments of borrowings

 

(86,317

)

 

Change in securities lending collateral

 

(30,092

)

(179,191

)

Other

 

5,061

 

742

 

Preferred dividends paid

 

(6,461

)

(6,461

)

Net Cash Used For Financing Activities

 

(73,964

)

(188,150

)

 

 

 

 

 

 

Effects of exchange rate changes on foreign currency cash

 

(6,043

)

3,580

 

 

 

 

 

 

 

Increase (decrease) in cash

 

4,137

 

(7,702

)

Cash beginning of year

 

334,571

 

251,739

 

Cash end of period

 

$

338,708

 

$

244,037

 

 

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, 2009, including the Company’s audited consolidated financial statements and related notes and the section entitled “Risk Factors.”

 

The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

 

2.      Recent Accounting Pronouncements

 

In March 2010, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemption—one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. This ASU is effective at the beginning of the first fiscal quarter beginning after June 15, 2010. The Company does not expect the adoption of this ASU to have a material effect on the Company’s consolidated financial position or results of operations.

 

In February 2010, the FASB issued an ASU, which defers the effective date of certain amendments to recent consolidation requirements concerning variable interest entities (“VIEs”) relating to a reporting entity’s interest in certain types of entities (primarily investment funds) and clarifies other aspects of the amendments. As a result of the deferral, a reporting entity will not be required to apply the consolidation requirements to its interest in an entity that meets the criteria to qualify for the deferral. This ASU also clarifies how a related party’s interests in an entity should be considered when evaluating the criteria for determining whether a decision maker or service provider fee represents a variable interest. In addition, the ASU also clarifies that a quantitative calculation should not be the sole basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. The Company adopted the amended guidance on January 1, 2010, and its adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

 

8



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

In January 2010, the FASB issued an ASU to improve disclosure requirements related to fair value measurements. The ASU requires more robust disclosures about (i) different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs to fair value measurements for both Levels 2 and 3, (iii) the activity within Level 3 fair value measurements (i.e., in the reconciliation for fair value measurements using significant unobservable inputs activity should be presented on a gross basis), and (iv) the transfers between Levels 1, 2 and 3, (i.e., include the reasons for significant transfers in and out of Levels 1 and 2 ).The ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements, which will become effective for fiscal years beginning after December 15, 2010. Accordingly, the Company adopted the appropriate disclosure provisions of the ASU on January 1, 2010.

 

In June 2009, the FASB issued amendments to the guidance regarding the consolidation of VIEs, which affect all entities currently within the scope of the December 2003 revised version of the guidance, as well as qualifying special-purpose entities that are currently excluded from the scope of the guidance. The amendments require an analysis to determine whether a variable interest gives a company a controlling financial interest in a VIE. In addition, they require an ongoing reassessment of all VIEs and eliminate the quantitative approach previously required for determining whether a company is the primary beneficiary. The Company adopted the amended guidance on January 1, 2010, and its adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In June 2009, the FASB issued an amendment to the guidance regarding accounting for transfers of financial assets. This amendment removes the concept of a qualifying special-purpose entity from the guidance regarding the accounting for transfers and servicing of financial assets and extinguishment of liabilities, and removes the exception from applying to the consolidation of VIEs. This amendment also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting and enhances disclosures about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This amendment is effective prospectively to transfers of financial assets occurring in fiscal years beginning after November 15, 2009. The Company adopted this amendment on January 1, 2010 and its adoption did not have a material impact on the Company’s consolidated financial position or results of operations.

 

9



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

3.       Share Transactions

 

Share Repurchases

 

The board of directors of ACGL has authorized the investment of up to $2.5 billion in ACGL’s common shares through a share repurchase program, consisting of a $1.0 billion authorization in February 2007, a $500 million authorization in May 2008, and a $1.0 billion authorization in November 2009. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through December 2011. Since the inception of the share repurchase program, ACGL has repurchased approximately 24.5 million common shares for an aggregate purchase price of $1.69 billion. During the 2010 first quarter, ACGL repurchased 2.5 million common shares for an aggregate purchase price of $181.3 million, compared to a de minimis number of shares and aggregate purchase price of $1.6 million during the 2009 period.

 

At March 31, 2010, approximately $810.1 million of share repurchases were available under the program. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. In connection with the share repurchase program, the Warburg Pincus funds waived their rights relating to share repurchases under its shareholders agreement with ACGL for all repurchases of common shares by ACGL under the share repurchase program in open market transactions and certain privately negotiated transactions.

 

Non-Cumulative Preferred Shares

 

ACGL’s outstanding non-cumulative preferred shares consist of $200.0 million principal amount of 8.0% series A non-cumulative preferred shares (“Series A Preferred Shares”) and $125.0 million principal amount of 7.875% series B non-cumulative preferred shares (“Series B Preferred Shares” and together with the Series A Preferred Shares, the “Preferred Shares”). ACGL has the right to redeem all or a portion of each series of Preferred Shares at a redemption price of $25.00 per share on or after (1) February 1, 2011 for the Series A Preferred Shares and (2) May 15, 2011 for the Series B Preferred Shares. 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. During the 2010 and 2009 first quarters, the Company paid $6.5 million to holders of the Preferred Shares. At March 31, 2010, the Company had declared an aggregate of $3.3 million of dividends to be paid to holders of the Preferred Shares.

 

10



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

4.      Debt and Financing Arrangements

 

Senior Notes

 

On May 4, 2004, ACGL completed a public offering of $300 million principal amount of 7.35% senior notes (“Senior Notes”) due May 1, 2034 and received net proceeds of $296.4 million. ACGL used $200 million of the net proceeds to repay all amounts outstanding under a revolving credit agreement. The Senior Notes are ACGL’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the Senior Notes are due on May 1st and November 1st of each year. ACGL may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. For the 2010 and 2009 first quarters, interest expense on the Senior Notes was $5.5 million. The market value of the Senior Notes at March 31, 2010 and December 31, 2009 was $300.8 million and $298.6 million, respectively.

 

Letter of Credit and Revolving Credit Facilities

 

As of March 31, 2010, the Company had a $300 million unsecured revolving loan and letter of credit facility and a $1.0 billion secured letter of credit facility (the “Credit Agreement”). Under the terms of the agreement, Arch Reinsurance Company (“Arch Re U.S.”) is limited to issuing $100 million of unsecured letters of credit as part of the $300 million unsecured revolving loan. Borrowings of revolving loans may be made by ACGL and Arch Re U.S. at a variable rate based on LIBOR or an alternative base rate at the option of the Company. Secured letters of credit are available for issuance on behalf of the Company’s insurance and reinsurance subsidiaries. The Credit Agreement and related documents are structured such that each party that requests a letter of credit or borrowing does so only for itself and for only its own obligations. Issuance of letters of credit and borrowings under the Credit Agreement are subject to the Company’s compliance with certain covenants and conditions, including absence of a material adverse change. These covenants require, among other things, that the Company maintain a debt to total capital ratio of not greater than 0.35 to 1 and shareholders’ equity in excess of $1.95 billion plus 25% of future aggregate net income for each quarterly period (not including any future net losses) beginning after June 30, 2006 and 25% of future aggregate proceeds from the issuance of common or preferred equity and that the Company’s principal insurance and reinsurance subsidiaries maintain at least a “B++” rating from A.M. Best. In addition, certain of the Company’s subsidiaries which are party to the Credit Agreement are required to maintain minimum shareholders’ equity levels. The Company was in compliance with all covenants contained in the Credit Agreement at March 31, 2010. The Credit Agreement expires on August 30, 2011.

 

Including the secured letter of credit portion of the Credit Agreement, the Company has access to letter of credit facilities for up to a total of $1.45 billion. Arch Reinsurance Ltd. (“Arch Re Bermuda”) also has access to other letter of credit facilities, some of which are available on a limited basis and for limited purposes (together with the secured portion of the Credit Agreement and these letter of credit facilities, the “LOC Facilities”). The principal purpose of the LOC Facilities is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which the Company has entered into reinsurance arrangements to ensure that such counterparties are permitted to take credit for reinsurance obtained from the 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, 2010. At such date, the

 

11



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Company had $777.8 million in outstanding letters of credit under the LOC Facilities, which were secured by investments with a market value of $909.8 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.

 

TALF Program

 

The Company participates in the Federal Reserve Bank of New York‘s (“FRBNY”) Term Asset-Backed Securities Loan Facility (“TALF”). TALF provides secured financing for asset-backed securities backed by certain types of consumer and small business loans and for legacy commercial mortgage-backed securities. TALF financing is non-recourse to the Company, except in certain limited instances, and is collateralized by the purchased securities and provides financing for the purchase price of the securities, less a ‘haircut’ that varies based on the type of collateral. The Company can deliver the collateralized securities to a special purpose vehicle created by the FRBNY in full defeasance of the borrowings.

 

The Company elected to carry the securities and related borrowings at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and financial liabilities. As of March 31, 2010, the Company had $407.0 million of securities under TALF which are reflected as “TALF investments, at market value” and $346.7 million of secured financing from the FRBNY which is reflected as “TALF borrowings, at market value.” As of December 31, 2009, the Company had $250.3 million of securities under TALF which are reflected as “TALF investments, at market value” and $217.6 million of secured financing from the FRBNY which is reflected as “TALF borrowings, at market value.” The original maturity dates for the TALF borrowings vary between 2 to 5 years with floating or fixed coupons depending on the related TALF investments.

 

Interest Paid

 

During the 2010 first quarter, the Company made interest payments of $1.8 million related to its debt and financing arrangements, compared to $0.2 million for the 2009 first quarter.

 

12



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

5.      Segment Information

 

The Company classifies its businesses into two underwriting segments — insurance and reinsurance — and corporate and other (non-underwriting). The 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 Chairman, President and Chief Executive Officer of ACGL and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. The Company determined its reportable operating segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information.

 

Management measures segment performance based on underwriting income or loss. The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment. In addition, other revenue and expense items are not evaluated by segment. The accounting policies of the segments are the same as those used for the preparation of the 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. Specialty product lines include: casualty; construction; executive assurance; healthcare; national accounts casualty; professional liability; programs; property, energy, marine and aviation; surety; travel and accident; and other (consisting of excess workers’ compensation, employers’ liability and collateral protection business).

 

The reinsurance segment consists of the Company’s reinsurance underwriting subsidiaries. The reinsurance segment generally seeks to write significant lines on specialty property and casualty reinsurance contracts. Classes of business include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of non-traditional and casualty clash business).

 

Corporate and other (non-underwriting) includes net investment income, other income (loss), other expenses incurred by the Company, interest expense, net realized gains or losses, net impairment losses recognized in earnings, equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses, income taxes and dividends on the Company’s non-cumulative preferred shares.

 

13



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following tables set forth an analysis of the Company’s underwriting income by segment, together with a reconciliation of underwriting income to net income available to common shareholders, summary information regarding net premiums written and earned by major line of business and net premiums written by location:

 

 

 

Three Months Ended

 

 

 

March 31, 2010

 

 

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

633,576

 

$

323,477

 

$

953,687

 

Net premiums written (1)

 

452,924

 

314,830

 

767,754

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

429,477

 

240,440

 

669,917

 

Fee income

 

753

 

41

 

794

 

Losses and loss adjustment expenses

 

(312,011

)

(116,040

)

(428,051

)

Acquisition expenses, net

 

(67,431

)

(50,193

)

(117,624

)

Other operating expenses

 

(80,720

)

(20,398

)

(101,118

)

Underwriting income (loss)

 

$

(29,932

)

$

53,850

 

23,918

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

92,972

 

Net realized gains

 

 

 

 

 

47,782

 

Net impairment losses recognized in earnings

 

 

 

 

 

(1,606

)

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

 

 

 

 

 

29,050

 

Other income

 

 

 

 

 

5,978

 

Other expenses

 

 

 

 

 

(5,688

)

Interest expense

 

 

 

 

 

(7,260

)

Net foreign exchange gains

 

 

 

 

 

38,601

 

Income before income taxes

 

 

 

 

 

223,747

 

Income tax expense

 

 

 

 

 

(6,753

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

216,994

 

Preferred dividends

 

 

 

 

 

(6,461

)

Net income available to common shareholders

 

 

 

 

 

$

210,533

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

72.6

%

48.3

%

63.9

%

Acquisition expense ratio (2)

 

15.5

%

20.9

%

17.4

%

Other operating expense ratio

 

18.8

%

8.5

%

15.1

%

Combined ratio

 

106.9

%

77.7

%

96.4

%

 


(1)   Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. The insurance segment and reinsurance segment results include nil and $3.4 million, respectively, of gross and net premiums written and $0.3 million and $3.5 million, respectively, of net premiums earned assumed through intersegment transactions.

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

 

14



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31, 2009

 

 

 

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 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.

 

15



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

INSURANCE SEGMENT

 

Amount

 

% of Total

 

Amount

 

% of Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

100,665

 

22.2

 

$

106,029

 

24.0

 

Programs

 

70,498

 

15.6

 

74,807

 

16.9

 

Executive assurance

 

61,355

 

13.5

 

50,079

 

11.3

 

Professional liability

 

58,726

 

13.0

 

52,008

 

11.8

 

Construction

 

36,322

 

8.0

 

36,571

 

8.3

 

National accounts casualty

 

30,809

 

6.8

 

24,227

 

5.5

 

Casualty

 

25,463

 

5.6

 

26,539

 

6.0

 

Travel and accident

 

21,806

 

4.8

 

17,534

 

4.0

 

Surety

 

8,091

 

1.8

 

11,358

 

2.6

 

Healthcare

 

8,524

 

1.9

 

11,219

 

2.5

 

Other (2)

 

30,665

 

6.8

 

31,215

 

7.1

 

Total

 

$

452,924

 

100.0

 

$

441,586

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

95,037

 

22.1

 

$

73,840

 

18.4

 

Programs

 

66,159

 

15.4

 

66,669

 

16.6

 

Executive assurance

 

56,322

 

13.1

 

47,816

 

11.9

 

Professional liability

 

62,245

 

14.5

 

58,234

 

14.5

 

Construction

 

34,485

 

8.0

 

40,420

 

10.1

 

National accounts casualty

 

21,773

 

5.1

 

14,439

 

3.6

 

Casualty

 

28,069

 

6.5

 

32,698

 

8.2

 

Travel and accident

 

16,078

 

3.7

 

13,156

 

3.3

 

Surety

 

10,258

 

2.4

 

13,391

 

3.3

 

Healthcare

 

9,943

 

2.3

 

10,928

 

2.7

 

Other (2)

 

29,108

 

6.9

 

29,506

 

7.4

 

Total

 

$

429,477

 

100.0

 

$

401,097

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

303,168

 

66.9

 

$

317,044

 

71.8

 

Europe

 

102,489

 

22.6

 

92,396

 

20.9

 

Other

 

47,267

 

10.5

 

32,146

 

7.3

 

Total

 

$

452,924

 

100.0

 

$

441,586

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by underwriting location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

302,437

 

66.8

 

$

320,829

 

72.7

 

Europe

 

133,739

 

29.5

 

105,313

 

23.8

 

Other

 

16,748

 

3.7

 

15,444

 

3.5

 

Total

 

$

452,924

 

100.0

 

$

441,586

 

100.0

 

 


(1)   Insurance segment results include premiums written and earned assumed through intersegment transactions of nil and $0.3 million, respectively, for the 2010 first quarter and premiums written and earned of $0.1 million and $0.5 million, respectively, for the 2009 first quarter. Insurance segment results exclude premiums written and earned ceded through intersegment transactions of $3.4 million and $3.5 million, respectively, for the 2010 first quarter and premiums written and earned of $3.5 million and $4.7 million, respectively, for the 2009 first quarter.

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

 

16



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

REINSURANCE SEGMENT

 

Amount

 

% of Total

 

Amount

 

% of Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Property catastrophe

 

$

88,802

 

28.2

 

$

91,903

 

24.1

 

Property excluding property catastrophe (2)

 

74,927

 

23.8

 

119,088

 

31.2

 

Casualty (3)

 

72,582

 

23.1

 

99,432

 

26.1

 

Other specialty

 

54,762

 

17.4

 

40,712

 

10.7

 

Marine and aviation

 

21,238

 

6.7

 

28,523

 

7.5

 

Other

 

2,519

 

0.8

 

1,619

 

0.4

 

Total

 

$

314,830

 

100.0

 

$

381,277

 

100.0

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Property catastrophe

 

$

53,873

 

22.4

 

$

58,601

 

19.6

 

Property excluding property catastrophe (2)

 

79,239

 

33.0

 

96,231

 

32.1

 

Casualty (3)

 

70,436

 

29.3

 

85,946

 

28.7

 

Other specialty

 

17,769

 

7.4

 

33,450

 

11.2

 

Marine and aviation

 

18,072

 

7.5

 

24,830

 

8.3

 

Other

 

1,051

 

0.4

 

409

 

0.1

 

Total

 

$

240,440

 

100.0

 

$

299,467

 

100.0

 

 

 

 

 

 

 

 

 

 

Net premiums written (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

118,037

 

37.5

 

$

181,222

 

47.5

 

Excess of loss

 

196,793

 

62.5

 

200,055

 

52.5

 

Total

 

$

314,830

 

100.0

 

$

381,277

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned (1)

 

 

 

 

 

 

 

 

 

Pro rata

 

$

130,871

 

54.4

 

$

194,518

 

65.0

 

Excess of loss

 

109,569

 

45.6

 

104,949

 

35.0

 

Total

 

$

240,440

 

100.0

 

$

299,467

 

100.0

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location (1)

 

 

 

 

 

 

 

 

 

United States

 

$

171,001

 

54.3

 

$

229,968

 

60.3

 

Europe

 

107,142

 

34.0

 

101,501

 

26.6

 

Bermuda

 

22,675

 

7.2

 

37,567

 

9.9

 

Other

 

14,012

 

4.5

 

12,241

 

3.2

 

Total

 

$

314,830

 

100.0

 

$

381,277

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by underwriting location (1)

 

 

 

 

 

 

 

 

 

Bermuda

 

$

164,934

 

52.4

 

$

195,600

 

51.3

 

United States

 

103,726

 

32.9

 

146,193

 

38.3

 

Other

 

46,170

 

14.7

 

39,484

 

10.4

 

Total

 

$

314,830

 

100.0

 

$

381,277

 

100.0

 

 


(1)   Reinsurance segment results include premiums written and earned assumed through intersegment transactions of $3.4 million and $3.5 million, respectively, for the 2010 first quarter and premiums written and earned of $3.5 million and $4.7 million, respectively, for the 2009 first quarter. Reinsurance segment results exclude premiums written and earned ceded through intersegment transactions of nil and $0.3 million, respectively, for the 2010 first quarter and premiums written and earned of $0.1 million and $0.5 million, respectively, for the 2009 first quarter.

(2)   Includes facultative business.

(3)   Includes professional liability, executive assurance and healthcare business.

 

17



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

6.      Reinsurance

 

In the normal course of business, the Company’s insurance subsidiaries cede a 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,

 

 

 

2010

 

2009

 

 

 

 

 

 

Premiums Written

 

 

 

 

 

Direct

 

$

617,935

 

$

620,446

 

Assumed

 

335,752

 

404,525

 

Ceded

 

(185,933

)

(202,108

)

Net

 

$

767,754

 

$

822,863

 

 

 

 

 

 

Premiums Earned

 

 

 

 

 

Direct

 

$

600,645

 

$

587,760

 

Assumed

 

262,535

 

332,567

 

Ceded

 

(193,263

)

(219,763

)

Net

 

$

669,917

 

$

700,564

 

 

 

 

 

 

Losses and Loss Adjustment Expenses

 

 

 

 

 

Direct

 

$

398,951

 

$

351,493

 

Assumed

 

107,167

 

147,145

 

Ceded

 

(78,067

)

(98,096

)

Net

 

$

428,051

 

$

400,542

 

 

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with substantial, financially sound carriers. At March 31, 2010, approximately 90.2% of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.71 billion were due from carriers which had an A.M. Best rating of “A-” or better and the largest reinsurance recoverables from any one carrier was less than 5.5% of the Company’s total shareholders’ equity. At December 31, 2009, approximately 90.0% of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.72 billion were due from carriers which had an A.M. Best rating of “A-” or better and the largest reinsurance recoverables from any one carrier was less than 5.8% of the Company’s total shareholders’ equity.

 

18



Table of Contents

 

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,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Fixed maturities available for sale, at market value

 

$

9,295,680

 

$

9,391,926

 

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

 

181,871

 

208,826

 

Total fixed maturities

 

9,477,551

 

9,600,752

 

Short-term investments available for sale, at market value

 

669,798

 

571,489

 

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

 

2,350

 

3,994

 

TALF investments, at market value

 

406,997

 

250,265

 

Other investments

 

263,608

 

172,172

 

Investment funds accounted for using the equity method

 

405,584

 

391,869

 

Total investments (1)

 

11,225,888

 

10,990,541

 

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

 

(2,444

)

50,790

 

Total investments, net of securities transactions

 

$

11,223,444

 

$

11,041,331

 

 


(1)          In securities lending transactions, the Company receives collateral in excess of the market value of the fixed maturities and short-term investments pledged under securities lending agreements. For purposes of this table, the Company has excluded the collateral received and reinvested of $178.0 million and $207.0 million at March 31, 2010 and December 31, 2009, respectively, and included the $184.2 million and $212.8 million, respectively, of “fixed maturities and short-term investments pledged under securities lending agreements, at market value.”

 

19



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Fixed Maturities and Fixed Maturities Pledged Under Securities Lending Agreements

 

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

 

 

 

Estimated

 

Gross

 

Gross

 

 

 

OTTI

 

 

 

Market

 

Unrealized

 

Unrealized

 

Amortized

 

Unrealized

 

 

 

Value

 

Gains

 

Losses

 

Cost

 

Losses (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

2,929,992

 

$

94,809

 

$

(14,477

)

$

2,849,660

 

$

(19,073

)

Mortgage backed securities

 

1,850,700

 

20,840

 

(36,172

)

1,866,032

 

(44,164

)

U.S. government and government agencies

 

1,435,477

 

10,288

 

(5,828

)

1,431,017

 

(492

)

Commercial mortgage backed securities

 

1,073,487

 

37,040

 

(8,890

)

1,045,337

 

(3,750

)

Municipal bonds

 

873,272

 

37,032

 

(2,168

)

838,408

 

(130

)

Non-U.S. government securities

 

719,697

 

29,759

 

(11,664

)

701,602

 

(351

)

Asset backed securities

 

594,926

 

21,809

 

(5,519

)

578,636

 

(4,662

)

Total

 

$

9,477,551

 

$

251,577

 

$

(84,718

)

$

9,310,692

 

$

(72,622

)

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

3,134,088

 

$

99,446

 

$

(12,983

)

$

3,047,625

 

$

(19,667

)

Mortgage backed securities

 

1,449,382

 

13,158

 

(45,536

)

1,481,760

 

(43,930

)

U.S. government and government agencies

 

1,553,672

 

8,716

 

(12,999

)

1,557,955

 

(499

)

Commercial mortgage backed securities

 

1,185,799

 

35,161

 

(11,724

)

1,162,362

 

(3,750

)

Municipal bonds

 

957,752

 

44,043

 

(2,284

)

915,993

 

(145

)

Non-U.S. government securities

 

752,215

 

41,858

 

(7,712

)

718,069

 

(351

)

Asset backed securities

 

567,844

 

21,713

 

(8,220

)

554,351

 

(6,111

)

Total

 

$

9,600,752

 

$

264,095

 

$

(101,458

)

$

9,438,115

 

$

(74,453

)

 


(1)          Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in market value subsequent to the impairment measurement date. At March 31, 2010, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $24.8 million, compared to $37.9 million at December 31, 2009.

 

20



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Estimated

 

Gross

 

Estimated

 

Gross

 

Estimated

 

Gross

 

 

 

Market

 

Unrealized

 

Market

 

Unrealized

 

Market

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

609,246

 

$

(12,137

)

$

38,333

 

$

(2,340

)

$

647,579

 

$

(14,477

)

Mortgage backed securities

 

587,249

 

(26,187

)

64,912

 

(9,985

)

652,161

 

(36,172

)

U.S. government and government agencies

 

786,526

 

(5,815

)

141

 

(13

)

786,667

 

(5,828

)

Commercial mortgage backed securities

 

60,979

 

(490

)

72,292

 

(8,400

)

133,271

 

(8,890

)

Municipal bonds

 

186,073

 

(2,168

)

 

 

186,073

 

(2,168

)

Non-U.S. government securities

 

264,398

 

(11,664

)

 

 

264,398

 

(11,664

)

Asset backed securities

 

50,580

 

(2,020

)

23,010

 

(3,499

)

73,590

 

(5,519

)

 

 

2,545,051

 

(60,481

)

198,688

 

(24,237

)

2,743,739

 

(84,718

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

3,086

 

(402

)

31,310

 

(3,325

)

34,396

 

(3,727

)

Short-term investments

 

54,202

 

(3,227

)

 

 

54,202

 

(3,227

)

Total

 

$

2,602,339

 

$

(64,110

)

$

229,998

 

$

(27,562

)

$

2,832,337

 

$

(91,672

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

547,376

 

$

(7,742

)

$

45,399

 

$

(5,241

)

$

592,775

 

$

(12,983

)

Mortgage backed securities

 

636,817

 

(33,388

)

62,382

 

(12,148

)

699,199

 

(45,536

)

U.S. government and government agencies

 

1,112,534

 

(12,510

)

5,309

 

(489

)

1,117,843

 

(12,999

)

Commercial mortgage backed securities

 

154,087

 

(4,808

)

67,744

 

(6,916

)

221,831

 

(11,724

)

Municipal bonds

 

151,412

 

(2,284

)

 

 

151,412

 

(2,284

)

Non-U.S. government securities

 

218,394

 

(7,712

)

 

 

218,394

 

(7,712

)

Asset backed securities

 

101,679

 

(5,838

)

22,915

 

(2,382

)

124,594

 

(8,220

)

 

 

2,922,299

 

(74,282

)

203,749

 

(27,176

)

3,126,048

 

(101,458

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

9,071

 

(304

)

29,439

 

(5,195

)

38,510

 

(5,499

)

Short-term investments

 

64,616

 

(1,858

)

 

 

64,616

 

(1,858

)

Total

 

$

2,995,986

 

$

(76,444

)

$

233,188

 

$

(32,371

)

$

3,229,174

 

$

(108,815

)

 

21



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The contractual maturities