Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2011

 

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 x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

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, $0.0033 per share) outstanding as of November 1, 2011 was 134,188,052.

 

 

 



Table of Contents

 

ARCH CAPITAL GROUP LTD.

 

INDEX

 

 

Page No.

PART I. Financial Information

 

 

 

Item 1 — Consolidated Financial Statements

 

 

 

Report of Independent Registered Public Accounting Firm

2

 

 

Consolidated Balance Sheets

 

September 30, 2011 (unaudited) and December 31, 2010

3

 

 

Consolidated Statements of Income

 

For the three and nine month periods ended September 30, 2011 and 2010 (unaudited)

4

 

 

Consolidated Statements of Comprehensive Income

 

For the nine month periods ended September 30, 2011 and 2010 (unaudited)

5

 

 

Consolidated Statements of Changes in Shareholders’ Equity

 

For the nine month periods ended September 30, 2011 and 2010 (unaudited)

6

 

 

Consolidated Statements of Cash Flows

 

For the nine month periods ended September 30, 2011 and 2010 (unaudited)

7

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

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

29

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

68

 

 

Item 4 — Controls and Procedures

68

 

 

PART II. Other Information

 

 

 

Item 1 — Legal Proceedings

69

 

 

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

69

 

 

Item 5 — Other Information

69

 

 

Item 6 — Exhibits

70

 

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 September 30, 2011, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2011 and September 30, 2010, and the consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 2011 and September 30, 2010. 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, 2010, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated February 28, 2011, 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, 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

November 8, 2011

 

2



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

 

 

(Unaudited)

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities available for sale, at fair value (amortized cost: $9,304,357 and $8,771,988)

 

$

9,529,834

 

$

8,957,859

 

Short-term investments available for sale, at fair value (amortized cost: $807,872 and $913,488)

 

799,662

 

915,841

 

Investment of funds received under securities lending, at fair value (amortized cost: $44,695 and $69,682)

 

44,553

 

69,660

 

Equity securities available for sale, at fair value (cost: $300,335 and $292,958)

 

273,213

 

310,194

 

Other investments available for sale, at fair value (cost: $226,089 and $252,590)

 

229,974

 

275,538

 

Investments accounted for using the fair value option

 

319,381

 

219,173

 

TALF investments, at fair value (amortized cost: $376,889 and $389,200)

 

392,455

 

402,449

 

Investments accounted for using the equity method

 

383,543

 

508,334

 

Total investments

 

11,972,615

 

11,659,048

 

 

 

 

 

 

 

Cash

 

369,895

 

362,740

 

Accrued investment income

 

71,264

 

74,837

 

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

 

107,642

 

105,698

 

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

 

72,399

 

75,575

 

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

 

20,032

 

 

Premiums receivable

 

606,963

 

503,434

 

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses

 

1,840,191

 

1,763,985

 

Prepaid reinsurance premiums

 

267,846

 

263,448

 

Deferred acquisition costs, net

 

306,810

 

277,861

 

Receivable for securities sold

 

1,067,188

 

56,145

 

Other assets

 

727,183

 

669,164

 

Total Assets

 

$

17,430,028

 

$

15,811,935

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$

8,523,522

 

$

8,098,454

 

Unearned premiums

 

1,578,419

 

1,370,075

 

Reinsurance balances payable

 

123,815

 

132,452

 

Senior notes

 

300,000

 

300,000

 

Revolving credit agreement borrowings

 

100,000

 

100,000

 

TALF borrowings, at fair value (par: $314,371 and $326,219)

 

314,137

 

325,770

 

Securities lending payable

 

74,696

 

78,021

 

Payable for securities purchased

 

1,161,591

 

200,192

 

Other liabilities

 

779,477

 

693,968

 

Total Liabilities

 

12,955,657

 

11,298,932

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Non-cumulative preferred shares - Series A and B

 

325,000

 

325,000

 

Common shares ($0.0033 par, shares issued: 163,267,317 and 160,073,616)

 

544

 

534

 

Additional paid-in capital

 

150,882

 

110,325

 

Retained earnings

 

4,696,256

 

4,422,553

 

Accumulated other comprehensive income, net of deferred income tax

 

146,576

 

204,503

 

Common shares held in treasury, at cost (shares: 30,261,852 and 20,441,391)

 

(844,887

)

(549,912

)

Total Shareholders’ Equity

 

4,474,371

 

4,513,003

 

Total Liabilities and Shareholders’ Equity

 

$

17,430,028

 

$

15,811,935

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenues

 

 

 

 

 

 

 

 

 

Net premiums written

 

$

691,381

 

$

636,117

 

$

2,162,202

 

$

2,028,129

 

Change in unearned premiums

 

(9,332

)

(8,708

)

(203,579

)

(107,792

)

Net premiums earned

 

682,049

 

627,409

 

1,958,623

 

1,920,337

 

Net investment income

 

82,753

 

90,768

 

257,731

 

274,277

 

Net realized gains

 

30,199

 

68,828

 

96,104

 

178,724

 

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment losses

 

(5,180

)

(2,679

)

(10,406

)

(9,732

)

Less investment impairments recognized in other comprehensive income, before taxes

 

2,441

 

604

 

3,303

 

1,641

 

Net impairment losses recognized in earnings

 

(2,739

)

(2,075

)

(7,103

)

(8,091

)

 

 

 

 

 

 

 

 

 

 

Fee income

 

848

 

874

 

2,447

 

2,551

 

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

 

(30,549

)

9,708

 

5,097

 

38,410

 

Other income

 

2,432

 

1,840

 

2,734

 

12,346

 

Total revenues

 

764,993

 

797,352

 

2,315,633

 

2,418,554

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

423,984

 

359,193

 

1,349,486

 

1,150,389

 

Acquisition expenses

 

120,205

 

111,279

 

339,598

 

336,378

 

Other operating expenses

 

105,998

 

103,121

 

318,981

 

311,460

 

Interest expense

 

8,125

 

7,371

 

23,604

 

22,547

 

Net foreign exchange losses (gains)

 

(60,040

)

65,157

 

(4,753

)

(22,069

)

Total expenses

 

598,272

 

646,121

 

2,026,916

 

1,798,705

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

166,721

 

151,231

 

288,717

 

619,849

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(2,267

)

3,200

 

(4,369

)

11,373

 

 

 

 

 

 

 

 

 

 

 

Net income

 

168,988

 

148,031

 

293,086

 

608,476

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

6,461

 

6,461

 

19,383

 

19,383

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

162,527

 

$

141,570

 

$

273,703

 

$

589,093

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

1.24

 

$

0.96

 

$

2.07

 

$

3.85

 

Diluted

 

$

1.19

 

$

0.92

 

$

1.98

 

$

3.68

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and common share equivalents outstanding

 

 

 

 

 

 

 

 

 

Basic

 

131,560,851

 

146,993,373

 

132,090,354

 

152,979,948

 

Diluted

 

137,140,929

 

153,546,027

 

138,542,558

 

159,951,594

 

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Comprehensive Income

 

 

 

 

 

Net income

 

$

293,086

 

$

608,476

 

Other comprehensive income, net of deferred income tax

 

 

 

 

 

Unrealized appreciation in value of investments:

 

 

 

 

 

Unrealized holding gains arising during period

 

53,371

 

378,543

 

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

 

(3,303

)

(1,641

)

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

 

(98,565

)

(126,517

)

Foreign currency translation adjustments

 

(9,430

)

(541

)

Other comprehensive income (loss)

 

(57,927

)

249,844

 

Comprehensive Income

 

$

235,159

 

$

858,320

 

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Non-Cumulative Preferred Shares

 

 

 

 

 

Balance at beginning and end of period

 

$

325,000

 

$

325,000

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Balance at beginning of year

 

534

 

548

 

Common shares issued, net

 

10

 

13

 

Purchases of common shares under share repurchase program

 

 

(30

)

Balance at end of period

 

544

 

531

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

Balance at beginning of year

 

110,325

 

253,466

 

Common shares issued

 

3,910

 

3,572

 

Exercise of stock options

 

9,379

 

35,150

 

Common shares retired

 

 

(217,562

)

Amortization of share-based compensation

 

25,286

 

25,450

 

Other

 

1,982

 

564

 

Balance at end of period

 

150,882

 

100,640

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

Balance at beginning of year

 

4,422,553

 

3,605,809

 

Dividends declared on preferred shares

 

(19,383

)

(19,383

)

Net income

 

293,086

 

608,476

 

Balance at end of period

 

4,696,256

 

4,194,902

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

204,503

 

138,526

 

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

 

(45,194

)

252,026

 

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

 

(3,303

)

(1,641

)

Foreign currency translation adjustments, net of deferred income tax

 

(9,430

)

(541

)

Balance at end of period

 

146,576

 

388,370

 

 

 

 

 

 

 

Common Shares Held in Treasury, at Cost

 

 

 

 

 

Balance at beginning of year

 

(549,912

)

 

Shares repurchased for treasury

 

(294,975

)

(291,533

)

Balance at end of period

 

(844,887

)

(291,533

)

 

 

 

 

 

 

Total Shareholders’ Equity

 

$

4,474,371

 

$

4,717,910

 

 

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)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Operating Activities

 

 

 

 

 

Net income

 

$

293,086

 

$

608,476

 

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

 

 

 

 

 

Net realized gains

 

(100,982

)

(184,423

)

Net impairment losses recognized in earnings

 

7,103

 

8,091

 

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

 

50,324

 

(29,925

)

Share-based compensation

 

25,286

 

25,450

 

Changes in:

 

 

 

 

 

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

 

334,620

 

212,024

 

Unearned premiums, net of prepaid reinsurance premiums

 

204,042

 

105,905

 

Premiums receivable

 

(114,044

)

(73,654

)

Deferred acquisition costs, net

 

(29,146

)

(17,570

)

Reinsurance balances payable

 

(3,381

)

(22,255

)

Other liabilities

 

12,678

 

8,143

 

Other items, net

 

76,885

 

17,299

 

Net Cash Provided By Operating Activities

 

756,471

 

657,561

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of:

 

 

 

 

 

Fixed maturity investments

 

(10,116,781

)

(14,501,938

)

Equity securities

 

(343,062

)

(139,165

)

Other investments

 

(373,814

)

(376,405

)

Proceeds from the sales of:

 

 

 

 

 

Fixed maturity investments

 

8,855,624

 

13,984,442

 

Equity securities

 

311,117

 

55,919

 

Other investments

 

396,514

 

245,889

 

Proceeds from redemptions and maturities of fixed maturity investments

 

738,081

 

683,826

 

Net (purchases) sales of short-term investments

 

112,465

 

(212,093

)

Change in investment of securities lending collateral

 

3,325

 

9,705

 

Purchases of furniture, equipment and other assets

 

(15,526

)

(10,111

)

Net Cash Used By Investing Activities

 

(432,057

)

(259,931

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Purchases of common shares under share repurchase program

 

(287,558

)

(503,724

)

Proceeds from common shares issued, net

 

3,087

 

22,956

 

Proceeds from borrowings

 

 

264,526

 

Repayments of borrowings

 

(11,839

)

(125,985

)

Change in securities lending collateral

 

(3,325

)

(9,705

)

Other

 

3,999

 

8,950

 

Preferred dividends paid

 

(19,383

)

(19,383

)

Net Cash Used For Financing Activities

 

(315,019

)

(362,365

)

 

 

 

 

 

 

Effects of exchange rate changes on foreign currency cash

 

(2,240

)

(3,839

)

 

 

 

 

 

 

Increase in cash

 

7,155

 

31,426

 

Cash beginning of year

 

362,740

 

334,571

 

Cash end of period

 

$

369,895

 

$

365,997

 

 

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, 2010, including the Company’s audited consolidated financial statements and related notes.

 

The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the 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 October 2010, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new or renewal insurance contracts. The amended guidance specifies that certain costs incurred in the successful acquisition of new and renewal insurance contracts should be capitalized. Those costs include incremental direct costs of contract acquisition that result directly from and are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. All other acquisition-related costs, such as costs incurred for soliciting business, administration, and unsuccessful acquisition or renewal efforts should be charged to expense as incurred. Administrative costs, including rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and should also be charged to expense as incurred. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 with earlier adoption permitted. Retrospective application to all prior periods presented upon the date of adoption is also permitted but is not required. The Company plans to adopt this ASU on January 1, 2012 using a retrospective application and, based on a preliminary analysis, does not expect the adoption of the ASU to have a material impact on its consolidated financial statements. In applying the retrospective application, deferred policy acquisition costs and related deferred taxes will be reduced as of the beginning of the earliest period presented in the financial statements with a corresponding reduction to shareholders’ equity.

 

In May 2011, the FASB issued an ASU that provides clarification or changes to existing fair value measurement and disclosure requirements, including, for example, additional disclosure for fair value measurements categorized within Level 3 of the fair value hierarchy. This ASU is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. Early application is not

 

8



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

permitted. The Company is evaluating the impact the new guidance will have on its consolidated financial statements.

 

In June 2011, the FASB issued an ASU that is intended to increase the prominence of other comprehensive income in the financial statements by allowing only two options for reporting comprehensive income: (1) A single statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income or (2) in a two-statement approach that presents the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. This ASU is effective for interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted. The Company does not believe that the adoption of this ASU will impact the presentation of its consolidated financial statements.

 

3.       Share Transactions

 

Three-for-One Share Split

 

In May 2011, shareholders approved a proposal to amend the memorandum of association by sub-dividing the authorized common shares of ACGL to effect a three-for-one split of ACGL’s common shares. The share split changed the Company’s authorized common shares to 600 million common shares (200 million previously) with a par value of $0.0033 per share ($0.01 previously). Information pertaining to the composition of the Company’s shareholders’ equity accounts, shares and earnings per share has been retroactively adjusted in the accompanying financial statements and notes to the consolidated financial statements to reflect the share split.

 

Share Repurchases

 

The board of directors of ACGL has authorized the investment 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 December 2012. Since the inception of the share repurchase program, ACGL has repurchased approximately 104.8 million common shares for an aggregate purchase price of $2.56 billion. During the 2011 third quarter, ACGL repurchased 0.7 million common shares for an aggregate purchase price of $20.8 million, compared to 2.0 million common shares for an aggregate purchase price of $53.4 million during the 2010 third quarter. For the nine months ended September 30, 2011, ACGL repurchased 9.6 million common shares for an aggregate purchase price of $287.6 million, compared to 20.6 million common shares for an aggregate purchase price of $503.7 million for the 2010 period.

 

At September 30, 2011, $942.0 million of share repurchases were available under the program. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.

 

9



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

4.      Commitments and Contingencies

 

Letter of Credit and Revolving Credit Facilities

 

As of September 30, 2011, the Company had a $300 million unsecured revolving loan and letter of credit facility and a $500 million secured letter of credit facility (the “Credit Agreement”). The Company was in compliance with all covenants contained in the Credit Agreement at September 30, 2011. The Credit Agreement expires on August 18, 2014. In addition, the Company had access to secured letter of credit facilities of approximately $180 million as of September 30, 2011, which were primarily used to support the Company’s syndicate at Lloyd’s of London, and to other secured 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 Company was in compliance with all covenants contained in the LOC Facilities at September 30, 2011. At September 30, 2011, the Company had $621.5 million in outstanding letters of credit under the LOC Facilities, which were secured by investments with a fair value of $644.2 million, and had $100.0 million of borrowings outstanding under the Credit Agreement.

 

Dividends for Preferred Shares

 

On September 8, 2011, the Company’s board of directors declared dividends with respect to the $200.0 million principal amount of 8.0% series A non-cumulative preferred shares outstanding and $125.0 million principal amount of 7.875% series B non-cumulative preferred shares outstanding (together, “Preferred Shares”). All such dividends will be payable out of lawfully available funds for the payment of dividends under Bermuda law on November 15, 2011 to holders of record of the Preferred Shares as of November 1, 2011, unless determined otherwise by the board of directors or the executive committee of the board of directors on or prior to the applicable effective date. At September 30, 2011, the Company had declared an aggregate of $3.3 million of dividends to be paid to the holders of the Preferred Shares.

 

Investment Commitments

 

The Company’s investment commitments, which are primarily related to investment funds accounted for using the equity method and other investments, were approximately $229.6 million at September 30, 2011.

 

5.      Segment Information

 

The Company classifies its businesses into two underwriting segments — insurance and reinsurance — and corporate and other (non-underwriting). 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.

 

10



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following table summarizes the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders, for the 2011 third quarter and 2010 third quarter:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

Insurance

 

Reinsurance

 

Total

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

634,280

 

$

227,837

 

$

860,289

 

$

624,490

 

$

208,770

 

$

831,788

 

Net premiums written

 

472,986

 

218,395

 

691,381

 

431,361

 

204,756

 

636,117

 

Net premiums earned

 

$

437,970

 

$

244,079

 

$

682,049

 

$

411,881

 

$

215,528

 

$

627,409

 

Fee income

 

661

 

187

 

848

 

864

 

10

 

874

 

Losses and loss adjustment expenses

 

(290,608

)

(133,376

)

(423,984

)

(265,411

)

(93,782

)

(359,193

)

Acquisition expenses, net

 

(76,763

)

(43,442

)

(120,205

)

(67,309

)

(43,970

)

(111,279

)

Other operating expenses

 

(77,078

)

(22,740

)

(99,818

)

(77,078

)

(20,247

)

(97,325

)

Underwriting income (loss)

 

$

(5,818

)

$

44,708

 

38,890

 

$

2,947

 

$

57,539

 

60,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

82,753

 

 

 

 

 

90,768

 

Net realized gains

 

 

 

 

 

30,199

 

 

 

 

 

68,828

 

Net impairment losses recognized in earnings

 

 

 

 

 

(2,739

)

 

 

 

 

(2,075

)

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

 

 

 

 

 

(30,549

)

 

 

 

 

9,708

 

Other income

 

 

 

 

 

2,432

 

 

 

 

 

1,840

 

Other expenses

 

 

 

 

 

(6,180

)

 

 

 

 

(5,796

)

Interest expense

 

 

 

 

 

(8,125

)

 

 

 

 

(7,371

)

Net foreign exchange gains (losses)

 

 

 

 

 

60,040

 

 

 

 

 

(65,157

)

Income before income taxes

 

 

 

 

 

166,721

 

 

 

 

 

151,231

 

Income tax benefit (expense)

 

 

 

 

 

2,267

 

 

 

 

 

(3,200

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

168,988

 

 

 

 

 

148,031

 

Preferred dividends

 

 

 

 

 

(6,461

)

 

 

 

 

(6,461

)

Net income available to common shareholders

 

 

 

 

 

$

162,527

 

 

 

 

 

$

141,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio

 

66.4

%

54.6

%

62.2

%

64.4

%

43.5

%

57.3

%

Acquisition expense ratio (2)

 

17.4

%

17.8

%

17.5

%

16.1

%

20.4

%

17.6

%

Other operating expense ratio

 

17.6

%

9.3

%

14.6

%

18.7

%

9.4

%

15.5

%

Combined ratio

 

101.4

%

81.7

%

94.3

%

99.2

%

73.3

%

90.4

%

 


(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.

(2)

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

 

11



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following table summarizes the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to common shareholders, for the nine months ended September 30, 2011 and 2010:

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

Insurance

 

Reinsurance

 

Total

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

1,903,868

 

$

836,616

 

$

2,736,794

 

$

1,874,419

 

$

735,942

 

$

2,602,575

 

Net premiums written

 

1,360,540

 

801,662

 

2,162,202

 

1,307,122

 

721,007

 

2,028,129

 

Net premiums earned

 

$

1,256,380

 

$

702,243

 

$

1,958,623

 

$

1,246,831

 

$

673,506

 

$

1,920,337

 

Fee income

 

2,141

 

306

 

2,447

 

2,491

 

60

 

2,551

 

Losses and loss adjustment expenses

 

(889,973

)

(459,513

)

(1,349,486

)

(852,716

)

(297,673

)

(1,150,389

)

Acquisition expenses, net

 

(204,721

)

(134,877

)

(339,598

)

(200,099

)

(136,279

)

(336,378

)

Other operating expenses

 

(228,580

)

(65,798

)

(294,378

)

(229,525

)

(59,948

)

(289,473

)

Underwriting income (loss)

 

$

(64,753

)

$

42,361

 

(22,392

)

$

(33,018

)

$

179,666

 

146,648

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

257,731

 

 

 

 

 

274,277

 

Net realized gains

 

 

 

 

 

96,104

 

 

 

 

 

178,724

 

Net impairment losses recognized in earnings

 

 

 

 

 

(7,103

)

 

 

 

 

(8,091

)

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

 

 

 

 

 

5,097

 

 

 

 

 

38,410

 

Other income

 

 

 

 

 

2,734

 

 

 

 

 

12,346

 

Other expenses

 

 

 

 

 

(24,603

)

 

 

 

 

(21,987

)

Interest expense

 

 

 

 

 

(23,604

)

 

 

 

 

(22,547

)

Net foreign exchange gains

 

 

 

 

 

4,753

 

 

 

 

 

22,069

 

Income before income taxes

 

 

 

 

 

288,717

 

 

 

 

 

619,849

 

Income tax benefit (expense)

 

 

 

 

 

4,369

 

 

 

 

 

(11,373

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

293,086

 

 

 

 

 

608,476

 

Preferred dividends

 

 

 

 

 

(19,383

)

 

 

 

 

(19,383

)

Net income available to common shareholders

 

 

 

 

 

$

273,703

 

 

 

 

 

$

589,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio

 

70.8

%

65.4

%

68.9

%

68.4

%

44.2

%

59.9

%

Acquisition expense ratio (2)

 

16.1

%

19.2

%

17.2

%

15.8

%

20.2

%

17.4

%

Other operating expense ratio

 

18.2

%

9.4

%

15.0

%

18.4

%

8.9

%

15.1

%

Combined ratio

 

105.1

%

94.0

%

101.1

%

102.6

%

73.3

%

92.4

%

 


(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.

(2)

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

 

12



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

6.      Investment Information

 

Available For Sale Securities

 

The following table summarizes the fair value and cost or amortized cost of the Company’s securities classified as available for sale:

 

 

 

Estimated

 

Gross

 

Gross

 

Cost or

 

OTTI

 

 

 

Fair

 

Unrealized

 

Unrealized

 

Amortized

 

Unrealized

 

 

 

Value

 

Gains

 

Losses

 

Cost

 

Losses (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities and fixed maturities pledged under securities lending agreements (1):

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

2,766,651

 

$

93,418

 

$

(42,230

)

$

2,715,463

 

$

(17,607

)

Mortgage backed securities

 

1,545,321

 

32,503

 

(21,110

)

1,533,928

 

(20,676

)

Municipal bonds

 

1,422,943

 

66,880

 

(2,322

)

1,358,385

 

(105

)

Commercial mortgage backed securities

 

1,118,905

 

26,981

 

(4,230

)

1,096,154

 

(3,259

)

U.S. government and government agencies

 

1,263,665

 

39,866

 

(536

)

1,224,335

 

(207

)

Non-U.S. government securities

 

837,043

 

42,570

 

(15,610

)

810,083

 

 

Asset backed securities

 

647,705

 

19,529

 

(8,572

)

636,748

 

(3,876

)

Total

 

9,602,233

 

321,747

 

(94,610

)

9,375,096

 

(45,730

)

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

273,213

 

9,049

 

(36,171

)

300,335

 

 

Other investments

 

229,974

 

10,530

 

(6,645

)

226,089

 

 

Short-term investments

 

799,662

 

58

 

(8,268

)

807,872

 

 

Total

 

$

10,905,082

 

$

341,384

 

$

(145,694

)

$

10,709,392

 

$

(45,730

)

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities and fixed maturities pledged under securities lending agreements (1):

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

2,714,375

 

$

97,400

 

$

(18,343

)

$

2,635,318

 

$

(18,047

)

Mortgage backed securities

 

1,806,813

 

18,801

 

(26,893

)

1,814,905

 

(21,147

)

Municipal bonds

 

1,182,100

 

40,410

 

(6,958

)

1,148,648

 

(125

)

Commercial mortgage backed securities

 

1,167,299

 

31,743

 

(6,028

)

1,141,584

 

(3,481

)

U.S. government and government agencies

 

872,149

 

20,150

 

(5,696

)

857,695

 

(207

)

Non-U.S. government securities

 

732,666

 

39,539

 

(11,894

)

705,021

 

(72

)

Asset backed securities

 

558,032

 

20,672

 

(3,990

)

541,350

 

(3,954

)

Total

 

9,033,434

 

268,715

 

(79,802

)

8,844,521

 

(47,033

)

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

310,194

 

20,660

 

(3,424

)

292,958

 

 

Other investments

 

275,538

 

24,280

 

(1,332

)

252,590

 

 

Short-term investments

 

915,841

 

2,845

 

(492

)

913,488

 

 

Total

 

$

10,535,007

 

$

316,500

 

$

(85,050

)

$

10,303,557

 

$

(47,033

)

 


(1)          In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

(2)          Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At September 30, 2011, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $13.8 million, compared to a net unrealized loss of $7.1 million at December 31, 2010.

 

13



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Estimated

 

Gross

 

Estimated

 

Gross

 

Estimated

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities and fixed maturities pledged under securities lending agreements (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

946,958

 

$

(38,638

)

$

39,640

 

$

(3,592

)

$

986,598

 

$

(42,230

)

Mortgage backed securities

 

377,312

 

(11,221

)

41,759

 

(9,889

)

419,071

 

(21,110

)

Municipal bonds

 

243,629

 

(2,197

)

3,174

 

(125

)

246,803

 

(2,322

)

Commercial mortgage backed securities

 

193,318

 

(3,453

)

8,408

 

(777

)

201,726

 

(4,230

)

U.S. government and government agencies

 

149,684

 

(536

)

 

 

149,684

 

(536

)

Non-U.S. government securities

 

351,494

 

(14,840

)

11,890

 

(770

)

363,384

 

(15,610

)

Asset backed securities

 

200,706

 

(5,922

)

10,716

 

(2,650

)

211,422

 

(8,572

)

Total

 

2,463,101

 

(76,807

)

115,587

 

(17,803

)

2,578,688

 

(94,610

)

Equity securities

 

193,356

 

(36,171

)

 

 

193,356

 

(36,171

)

Other investments

 

103,167

 

(6,229

)

2,906

 

(416

)

106,073

 

(6,645

)

Short-term investments

 

150,061

 

(8,268

)

 

 

150,061

 

(8,268

)

Total

 

$

2,909,685

 

$

(127,475

)

$

118,493

 

$

(18,219

)

$

3,028,178

 

$

(145,694

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities and fixed maturities pledged under securities lending agreements (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

530,956

 

$

(16,580

)

$

20,351

 

$

(1,763

)

$

551,307

 

$

(18,343

)

Mortgage backed securities

 

913,138

 

(20,331

)

57,895

 

(6,562

)

971,033

 

(26,893

)

Municipal bonds

 

294,978

 

(6,440

)

8,465

 

(518

)

303,443

 

(6,958

)

Commercial mortgage backed securities

 

311,703

 

(5,273

)

22,030

 

(755

)

333,733

 

(6,028

)

U.S. government and government agencies

 

190,497

 

(5,696

)

 

 

190,497

 

(5,696

)

Non-U.S. government securities

 

271,446

 

(7,418

)

45,884

 

(4,476

)

317,330

 

(11,894

)

Asset backed securities

 

75,655

 

(827

)

8,126

 

(3,163

)

83,781

 

(3,990

)

Total

 

2,588,373

 

(62,565

)

162,751

 

(17,237

)

2,751,124

 

(79,802

)

Equity securities

 

68,629

 

(3,424

)

 

 

68,629

 

(3,424

)

Other investments

 

46,750

 

(916

)

2,850

 

(416

)

49,600

 

(1,332

)

Short-term investments

 

42,030

 

(492

)

 

 

42,030

 

(492

)

Total

 

$

2,745,782

 

$

(67,397

)

$

165,601

 

$

(17,653

)

$

2,911,383

 

$

(85,050

)

 


(1)          In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

 

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Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

At September 30, 2011, on a lot level basis, approximately 1,830 security lots out of a total of approximately 4,800 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $5.3 million. At December 31, 2010, on a lot level basis, approximately 1,130 security lots out of a total of approximately 4,360 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $2.6 million.

 

The contractual maturities of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements are shown in the following table. 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.

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Estimated

 

Amortized

 

Estimated

 

Amortized

 

Maturity

 

Fair Value

 

Cost

 

Fair Value

 

Cost

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

424,945

 

$

413,387

 

$

414,390

 

$

398,795

 

Due after one year through five years

 

2,950,545

 

2,869,718

 

2,924,879

 

2,833,955

 

Due after five years through 10 years

 

2,446,160

 

2,376,760

 

1,719,446

 

1,671,306

 

Due after 10 years

 

468,652

 

448,401

 

442,575

 

442,626

 

 

 

 6,290,302

 

6,108,266

 

5,501,290

 

5,346,682

 

Mortgage backed securities

 

1,545,321

 

1,533,928

 

1,806,813

 

1,814,905

 

Commercial mortgage backed securities

 

1,118,905

 

1,096,154

 

1,167,299

 

1,141,584

 

Asset backed securities

 

647,705

 

636,748

 

558,032

 

541,350

 

Total

 

$

9,602,233

 

$

9,375,096

 

$

9,033,434

 

$

8,844,521

 

 

Securities Lending Agreements

 

The Company operates a securities lending program under which certain of its fixed income portfolio securities are loaned to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. At September 30, 2011, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $72.4 million and $70.7 million, respectively, compared to $75.6 million and $72.5 million at December 31, 2010, respectively. At September 30, 2011, the portfolio of collateral backing the Company’s securities lending program included approximately $8.5 million fair value of sub-prime securities with an average credit quality of “CCC” from Standard & Poor’s and “Caa3” from Moody’s, compared to $13.2 million with an average credit quality of “B-” from Standard & Poor’s and “Caa2” from Moody’s at December 31, 2010.

 

15



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Fair Value Option

 

The Company elected to carry certain fixed maturity securities, equity securities and other investments at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and liabilities. Changes in fair value of investments accounted for using the fair value option are included in “Net realized gains (losses).” The primary reasons for electing the fair value option were to reflect economic events in earnings on a timely basis and address simplification and cost-benefit considerations.

 

The Company also elected to carry the securities and related borrowings under the Federal Reserve Bank of New York’s (“FRBNY”) Term Asset-Backed Securities Loan Facility (“TALF”) at fair value under the fair value option. The primary reason for electing the fair value option on the TALF investments and TALF borrowings was to mitigate volatility in equity from using different measurement attributes (i.e., TALF investments carried at fair value whereas the related TALF borrowings would be recorded on an accrual basis absent electing the fair value option). Changes in fair value for both the securities and borrowings are included in “Net realized gains (losses)” while interest income on the TALF investments is reflected in net investment income and interest expense on the TALF borrowings is reflected in interest expense.

 

The following table summarizes the Company’s assets and liabilities which are accounted for using the fair value option:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Fixed maturities

 

$

122,866

 

$

124,969

 

Equity securities

 

100,719

 

94,204

 

Other investments (par: $100,250 and $0)

 

95,796

 

 

Investments accounted for using the fair value option

 

319,381

 

219,173

 

Securities sold but not yet purchased (1)

 

(46,526

)

(41,143

)

TALF investments

 

392,455

 

402,449

 

TALF borrowings

 

(314,137

)

(325,770

)

Net assets accounted for using the fair value option

 

$

351,173

 

$

254,709

 

 


(1)              Represents the Company’s obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.

 

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Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Net Investment Income

 

The components of net investment income were derived from the following sources:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

$

82,686

 

$

94,209

 

$

252,250

 

$

286,051

 

Equity securities

 

1,796

 

120

 

5,187

 

410

 

Short-term investments

 

430

 

473

 

1,613

 

958

 

Other (1)

 

4,264

 

1,174

 

17,625

 

2,296

 

Gross investment income

 

89,176

 

95,976

 

276,675

 

289,715

 

Investment expenses

 

(6,423

)

(5,208

)

(18,944

)

(15,438

)

Net investment income

 

$

82,753

 

$

90,768

 

$

257,731

 

$

274,277

 

 


(1)               Includes interest on term loan investments (included in “investments accounted for using the fair value option”), dividends on investment funds and other items.

 

Net Realized Gains (Losses)

 

Net realized gains (losses) were as follows, excluding the other-than-temporary impairment provisions discussed above:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

Gross gains on investment sales

 

$

61,008

 

$

87,358

 

$

204,303

 

$

207,368

 

Gross losses on investment sales

 

(21,503

)

(29,819

)

(85,170

)

(71,282

)

Change in fair value of assets and liabilities accounted for using the fair value option:

 

 

 

 

 

 

 

 

 

Fixed maturities

 

(4,366

)

6,240

 

(12,759

)

(2,457

)

Equity securities

 

(28,993

)

5,660

 

(32,043

)

369

 

Other investments

 

(3,755

)

 

(3,432

)

 

TALF investments

 

(2,130

)

6,534

 

2,317

 

14,431

 

TALF borrowings

 

79

 

(1,231

)

(206

)

(691

)

Derivative instruments (1)

 

36,179

 

(7,030

)

28,035

 

28,522

 

Other

 

(6,320

)

1,116

 

(4,941

)

2,464

 

Net realized gains

 

$

30,199

 

$

68,828

 

$

96,104

 

$

178,724

 

 


(1)               See Note 8 for information on the Company’s derivative instruments.

 

17