Arch Capital Group Ltd. Reports 2007 First Quarter Results

Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income available to common shareholders for the 2007 first quarter was $198.6 million, or $2.59 per share, compared to $129.6 million, or $1.71 per share, for the 2006 first quarter. The Company also reported after-tax operating income available to common shareholders of $207.4 million, or $2.71 per share, for the 2007 first quarter, compared to $143.1 million, or $1.89 per share, for the 2006 first quarter. The Companys after-tax operating income available to common shareholders represented a 24.7% annualized return on average common equity for the 2007 first quarter, compared to 22.8% for the 2006 first quarter. After-tax operating income available to common shareholders, a non-GAAP measure, is defined as net income available to common shareholders, excluding net realized gains or losses and net foreign exchange gains or losses, net of income taxes. See page 6 for a further discussion of after-tax operating income available to common shareholders and Regulation G.

The Companys book value per common share, adjusted for the effects of share repurchases, increased by 7.0% to $46.89 at March 31, 2007 from $43.97 per share at December 31, 2006. Gross and net premiums written for the 2007 first quarter were $1.21 billion and $871.7 million, respectively, compared to $1.17 billion and $873.7 million, respectively, for the 2006 first quarter. The Companys combined ratio was 83.4% for the 2007 first quarter, compared to 88.3% for the 2006 first quarter. All per share amounts discussed in this release are on a diluted basis.

The following table summarizes the Companys underwriting results:

(Unaudited)
Three Months Ended
March 31,
(U.S. dollars in thousands) 20072006
Gross premiums written $1,210,614  $1,167,814 
Net premiums written 871,745  873,719 
Net premiums earned 745,493  761,601 
Underwriting income 124,598  90,228 
Combined ratio 83.4% 88.3%

The following table summarizes, on an after-tax basis, the Companys consolidated financial data, including a reconciliation of after-tax operating income available to common shareholders to net income available to common shareholders and related diluted per share results:

(Unaudited)
Three Months Ended
March 31,
(U.S. dollars in thousands, except per share data) 20072006
After-tax operating income available to common shareholders $ 207,372  $ 143,081 
Net realized gains (losses), net of tax 786  (2,912)
Net foreign exchange losses, net of tax (9,607) (10,546)
Net income available to common shareholders $ 198,551  $ 129,623 
Diluted per common share results:
After-tax operating income available to common shareholders $ 2.71  $ 1.89 
Net realized gains (losses), net of tax 0.01  (0.04)
Net foreign exchange losses, net of tax (0.13) (0.14)
Net income available to common shareholders $ 2.59  $ 1.71 

Weighted average common shares and common share equivalents outstanding diluted

76,640,686  75,855,309 

The combined ratio represents a measure of underwriting profitability, excluding investment income, and is the sum of the loss ratio and expense ratio. A combined ratio under 100% represents an underwriting profit and a combined ratio over 100% represents an underwriting loss. The combined ratio of the Companys insurance and reinsurance subsidiaries consisted of a loss ratio of 56.3% and an underwriting expense ratio of 27.1% for the 2007 first quarter, compared to a loss ratio of 61.5% and an underwriting expense ratio of 26.8% for the 2006 first quarter. The loss ratio of 56.3% for the 2007 first quarter was comprised of 36.8 points of paid losses, (0.4) points related to reserves for reported losses and 19.9 points related to incurred but not reported reserves.

In establishing the reserves for losses and loss adjustment expenses, the Company has made various assumptions relating to the pricing of its reinsurance contracts and insurance policies and also has considered available historical industry experience and current industry conditions. The Companys reserving method to date has been, to a large extent, the expected loss method, which is commonly applied when limited loss experience exists. Any estimates and assumptions made as part of the reserving process could prove to be inaccurate due to several factors, including the fact that limited historical information has been reported to the Company through March 31, 2007.

For a discussion of underwriting activities and a review of the Companys results by operating segment, see Segment Information in the Supplemental Financial Information section of this release.

Consolidated cash flow provided by operating activities for the 2007 first quarter was $403.1 million, compared to $423.2 million for the 2006 first quarter. The lower level of operating cash flows in the 2007 first quarter was primarily due to a higher level of paid losses as the Companys insurance and reinsurance loss reserves have continued to mature.

Net investment income for the 2007 first quarter rose to $112.7 million from $80.3 million for the 2006 first quarter. The increase in net investment income in the 2007 first quarter primarily resulted from a higher level of average invested assets in the 2007 first quarter and an increase in the pre-tax investment income yield to 4.91% for the 2007 first quarter, compared to 4.29% for the 2006 first quarter. The Companys investment portfolio, which mainly consists of high quality fixed income securities, had an average Standard & Poors quality rating of AAA at March 31, 2007 and December 31, 2006. The average effective duration of the Companys investment portfolio was 3.3 years at March 31, 2007, compared to 3.2 years at December 31, 2006.

For the 2007 and 2006 first quarters, the effective tax rates on income before income taxes were 4.0% and 7.9%, respectively, and the effective tax rates on pre-tax operating income available to common shareholders were 4.6% and 7.4%, respectively. The reduction in the effective tax rate on pre-tax operating income available to common shareholders in the 2007 first quarter, compared to the 2006 first quarter, primarily resulted from a change in the relative mix of income reported by jurisdiction. The Companys effective tax rates may fluctuate from period to period based on the relative mix of income reported by jurisdiction primarily due to the varying tax rates in each jurisdiction. The Companys quarterly tax provision is adjusted to reflect changes in its expected annual effective tax rates, if any. The Company currently expects that its annual effective tax rate on pre-tax operating income available to common shareholders for 2007 will be in the range of 4.0% to 6.0%.

Net foreign exchange losses for the 2007 first quarter of $9.7 million consisted of net unrealized losses of $17.2 million and net realized gains of $7.5 million, compared to net foreign exchange losses for the 2006 first quarter of $10.3 million, which consisted of net unrealized losses of $7.9 million and net realized losses of $2.4 million. Net unrealized foreign exchange gains or losses result from the effects of revaluing the Companys net insurance liabilities required to be settled in foreign currencies at each balance sheet date. The Company holds investments in foreign currencies which are intended to mitigate its exposure to foreign currency fluctuations in its net insurance liabilities. However, changes in the value of such investments due to foreign currency rate movements are reflected as a direct increase or decrease to shareholders equity and are not included in the statement of income.

Diluted weighted average common shares and common share equivalents outstanding, used in the calculation of after-tax operating income and net income per common share, were 76.6 million in the 2007 first quarter, compared to 75.9 million in the 2006 first quarter. The higher level of weighted average shares outstanding in the 2007 first quarter was primarily due to increases in the dilutive effects of stock options and nonvested restricted stock calculated using the treasury stock method and the exercise of stock options. Under the treasury stock method, the dilutive impact of options and nonvested stock on diluted weighted average shares outstanding increases as the market price of the Companys common shares increases. Share repurchases during the 2007 first quarter had a minimal impact on the weighted average shares outstanding in the period due to the timing of such transactions.

On February 28, 2007, ACGLs Board of Directors authorized the investment of up to $1 billion in ACGLs common shares through a share repurchase program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through February 2009. Through April 25, 2007, ACGL repurchased approximately 906,000 common shares under the share repurchase program for an aggregate purchase price of $59.9 million. As a result of share repurchase transactions in the 2007 first quarter, book value per common share at March 31, 2007 was reduced by $0.17 per share. 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.

At March 31, 2007, the Companys capital of $4.08 billion consisted of $300.0 million of senior notes, representing 7.3% of the total, $325.0 million of preferred shares, representing 8.0% of the total, and common shareholders equity of $3.46 billion, representing the balance. The increase in the Companys capital during the 2007 first quarter of $192.7 million was primarily attributable to operating income for the 2007 first quarter and an after-tax increase in the fair value of the Companys investment portfolio, partially offset by share repurchases during the period. The increase in the fair value of the investment portfolio was primarily due to a decrease in the level of interest rates in the 2007 first quarter.

The Company will hold a conference call for investors and analysts at 11:00 a.m. Eastern Time on Friday, April 27, 2007. A live webcast of this call will be available via the Media-Earnings Webcasts section of the Company's website at http://www.archcapgroup.bm and will be archived on the website from 1:00 p.m. Eastern Time on April 27 through midnight Eastern Time on May 27, 2007. A telephone replay of the conference call also will be available beginning on April 27 at 1:00 p.m. Eastern Time until May 4 at midnight Eastern Time. To access the replay, domestic callers should dial 888-286-8010 (passcode 53460223), and international callers should dial 617-801-6888 (passcode 53460223).

Arch Capital Group Ltd., a Bermuda-based company with over $4.0 billion in capital at March 31, 2007, provides insurance and reinsurance on a worldwide basis through its wholly owned subsidiaries.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This release or any other written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Companys current views with respect to future events and financial performance. All statements other than statements of historical fact included in this release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as may,will, expect,intend, estimate,anticipate, believe or continue or their negative or variations or similar terminology.

Forward-looking statements involve the Companys current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this release and in the Companys periodic reports filed with the Securities and Exchange Commission (the SEC), and include:

  • the Companys ability to successfully implement its business strategy during soft as well as hard markets;
  • acceptance of the Companys business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and its insureds and reinsureds;
  • the Companys ability to maintain or improve its ratings, which may be affected by its ability to raise additional equity or debt financings, by ratings agencies existing or new policies and practices, as well as other factors described herein;
  • general economic and market conditions (including inflation, interest rates and foreign currency exchange rates) and conditions specific to the reinsurance and insurance markets in which the Company operates;
  • competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;
  • the Companys ability to successfully integrate, establish and maintain operating procedures (including the implementation of improved computerized systems and programs to replace and support manual systems) to effectively support its underwriting initiatives and to develop accurate actuarial data, especially in light of the rapid growth of its business;
  • the loss of key personnel;
  • the integration of businesses the Company has acquired or may acquire into its existing operations;
  • accuracy of those estimates and judgments utilized in the preparation of the Companys financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like the Company, are even more difficult to make than those made in a mature company since limited historical information has been reported to the Company through March 31, 2007;
  • greater than expected loss ratios on business written by the Company and adverse development on claim and/or claim expense liabilities related to business written by its insurance and reinsurance subsidiaries;
  • severity and/or frequency of losses;
  • claims for natural or man-made catastrophic events in the Companys insurance or reinsurance business could cause large losses and substantial volatility in its results of operations;
  • acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;
  • losses relating to aviation business and business produced by a certain managing underwriting agency for which the Company may be liable to the purchaser of its prior reinsurance business or to others in connection with the May 5, 2000 asset sale described in the Companys periodic reports filed with the SEC;
  • availability to the Company of reinsurance to manage its gross and net exposures and the cost of such reinsurance;
  • the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to the Company;
  • the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company;
  • material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;
  • changes in accounting principles or policies or in the Companys application of such accounting principles or policies; and
  • statutory or regulatory developments, including as to tax policy and matters and insurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or changes in regulations or tax laws applicable to the Company, its subsidiaries, brokers or customers.

In addition, other general factors could affect the Companys results, including developments in the worlds financial and capital markets and its access to such markets.

All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Comment on Regulation G

Throughout this release, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Companys financial information in evaluating the performance of the Company. This presentation includes the use of after-tax operating income available to common shareholders, which is defined as net income available to common shareholders, excluding net realized gains or losses and net foreign exchange gains or losses, net of income taxes. The presentation of after-tax operating income available to common shareholders is a non-GAAP financial measure as defined in Regulation G. The reconciliation of such measure to net income available to common shareholders (the most directly comparable GAAP financial measure) in accordance with Regulation G is included on page 2 of this release.

The Company believes that net realized gains or losses and net foreign exchange gains or losses in any particular period are not indicative of the performance of, or trends in, the Companys business performance. Although net realized gains or losses and net foreign exchange gains or losses are an integral part of the Companys operations, the decision to realize investment gains or losses and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Companys financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic, and, under applicable GAAP accounting, losses on the Companys investments can be realized as the result of other-than-temporary declines in value without actual realization. Due to these reasons, the Company excludes net realized gains or losses and net foreign exchange gains or losses from the calculation of after-tax operating income available to common shareholders.

The Company believes that showing net income available to common shareholders exclusive of the items referred to above reflects the underlying fundamentals of the Companys business since the Company evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income available to common shareholders, the Company believes that this presentation enables investors and other users of the Companys financial information to analyze the Companys performance in a manner similar to how the Companys management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Companys financial information to compare the Companys performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies which follow the Company and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL INFORMATION

Selected Information on Losses and Loss Adjustment Expenses

(Unaudited)
Three Months Ended
March 31,
(U.S. dollars in thousands) 20072006
Components of losses and loss adjustment expenses
Paid losses and loss adjustment expenses $ 274,368  $ 221,054 
Increase in unpaid losses and loss adjustment expenses 145,693  247,124 
Total losses and loss adjustment expenses $ 420,061  $ 468,178 
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments
Insurance $ 2,926  $ 7,922 
Reinsurance (46,227) (1,510)
Total ($43,301) $ 6,412 
Impact on combined ratio:
Insurance 0.7% 2.1%
Reinsurance (13.9%) (0.4%)
Total (5.8%) 0.8%
Estimated net losses incurred from current period catastrophic events (1)
Insurance
Reinsurance $ 15,758  $ 16,276 
Total $ 15,758  $ 16,276 
Impact on loss ratio:
Insurance
Reinsurance 4.8% 4.3%
Total 2.1% 2.1%

(1) Equals estimated losses from catastrophic events occurring in the current accident year, net of reinsurance and reinstatement premiums. Amounts shown for the insurance segment are for named catastrophic events only. Amounts shown for the reinsurance segment include (i) named events with over $5 million of losses incurred for its Bermuda operations and (ii) all losses incurred for its U.S. operations.

Annualized Operating Return on Average Common Equity

(Unaudited)
Three Months Ended
March 31,
(U.S. dollars in thousands) 20072006
After-tax operating income available to common shareholders $ 207,372  $ 143,081 
Annualized operating income available to common shareholders 829,488  572,324 
Beginning common shareholders equity 3,265,619  2,480,527 
Ending common shareholders equity 3,458,348  2,549,554 
Average common shareholders equity 3,361,984  2,515,041 
Annualized operating return on average common equity 24.7% 22.8%

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL INFORMATION

Investment Information

(Unaudited)
Three Months Ended
March 31,
(U.S. dollars in thousands except share data)

 2007

 2006

Net investment income:
Total $ 112,689  $ 80,326 
Per diluted share $ 1.47  $ 1.06 
Pre-tax yield (at amortized cost) 4.91% 4.29%
After-tax yield (at amortized cost) 4.75% 4.13%
(Unaudited)
March 31,

December 31,

20072006
Investable assets:
Total cash and investments (1) $ 9,528,634  $ 9,319,148 
Securities transactions entered into but not settled at the balance sheet date (52,257) (227,941)
Investable assets $ 9,476,377  $ 9,091,207 
Cash flow from operations $ 403,131  $ 423,178 
Fixed income portfolio (1):
Average effective duration (in years) 3.3  3.2 
Average credit quality (Standard & Poors) AAA AAA
Imbedded book yield (2) 4.98% 4.97%
(1) Includes fixed maturities pledged under securities lending agreements and excludes short-term investment of funds received under securities lending agreements.

(2) Before investment expenses.

Book Value Per Common Share and Share Repurchases

(Unaudited)
March 31,December 31,
(U.S. dollars in thousands, except share data) 20072006
Calculation of book value per common share:
Total shareholders equity $ 3,783,348  $ 3,590,619 
Less preferred shareholders equity (325,000) (325,000)
Common shareholders equity 3,458,348  3,265,619 
Common shares outstanding (1) 73,746,726  74,270,466 
Book value per common share $ 46.89  $ 43.97 
Effect of share repurchases during period:
Aggregate purchase price of shares repurchased $ 44,475 
Shares repurchased 682,767 
Average price per share repurchased $ 65.14 
Estimated dilutive impact on ending book value per common share (2) ($0.17)

(1) Excludes the effects of 5,486,649 and 5,669,994 stock options and 89,238 and 91,514 restricted stock units outstanding at March 31, 2007 and December 31, 2006, respectively.

(2) As the average price per share repurchased during the period exceeded the book value per common share at March 31, 2007, the repurchase of shares during the period reduced book value per common share.

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
(Unaudited)
Three Months Ended
March 31,
20072006
Revenues
Net premiums written $ 871,745  $ 873,719 
Increase in unearned premiums (126,252) (112,118)
Net premiums earned 745,493  761,601 
Net investment income 112,689  80,326 
Net realized losses (981) (3,383)
Fee income 1,969  1,805 
Other income 604 
Total revenues 859,774  840,349 
Expenses
Losses and loss adjustment expenses 420,061  468,178 
Acquisition expenses 120,128  129,672 
Other operating expenses 90,813  82,977 
Interest expense 5,523  5,555 
Net foreign exchange losses 9,742  10,253 
Total expenses 646,267  696,635 
Income before income taxes 213,507  143,714 
Income tax expense 8,495  11,424 
Net income 205,012  132,290 
Preferred dividends 6,461  2,667 
Net income available to common shareholders $ 198,551  $ 129,623 
Net income per common share
Basic $ 2.69  $ 1.78 
Diluted $ 2.59  $ 1.71 

Weighted average common shares and common share equivalents outstanding

Basic 73,931,996  72,899,249 
Diluted 76,640,686  75,855,309 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
(Unaudited)
March 31,December 31,
20072006
Assets
Investments and cash:
Fixed maturities available for sale, at fair value (amortized cost: 2007, $6,933,803; 2006, $6,858,970) $ 6,963,359  $ 6,876,548 
Short-term investments available for sale, at fair value (amortized cost: 2007, $794,726; 2006, $956,926) 796,682  957,698 
Short-term investment of funds received under securities lending agreements, at fair value 1,160,098  891,376 

Other investments (cost: 2007, $394,604; 2006, $282,923)

422,387  307,082 
Cash 225,249  317,017 
Total investments and cash 9,567,775  9,349,721 
Accrued investment income 68,012  68,440 
Fixed maturities and short-term investments pledged under securities lending agreements, at fair value 1,120,957  860,803 
Premiums receivable 954,168  749,961 
Funds held by reinsureds 60,783  82,385 
Unpaid losses and loss adjustment expenses recoverable 1,537,176  1,552,157 
Paid losses and loss adjustment expenses recoverable 120,883  122,149 
Prepaid reinsurance premiums 501,287  470,138 
Deferred income tax assets, net 64,271  63,606 
Deferred acquisition costs, net 314,686  290,999 
Receivable for securities sold 164,124  190,168 
Other assets 487,749  511,940 
Total Assets $ 14,961,871  $ 14,312,467 
Liabilities
Reserve for losses and loss adjustment expenses $ 6,595,820  $ 6,463,041 
Unearned premiums 1,950,264  1,791,922 
Reinsurance balances payable 393,658  301,679 
Senior notes 300,000  300,000 
Deposit accounting liabilities 43,284  45,107 
Securities lending collateral 1,160,098  891,376 
Payable for securities purchased 216,381  418,109 
Other liabilities 519,018  510,614 
Total Liabilities 11,178,523  10,721,848 
Commitments and Contingencies
Shareholders Equity
Non-cumulative preferred shares ($0.01 par value, 50,000,000 shares authorized)
- Series A (issued: 2007 and 2006, 8,000,000) 80  80 
- Series B (issued: 2007 and 2006, 5,000,000) 50  50 
Common shares ($0.01 par value, 200,000,000 shares authorized, issued: 2007, 73,746,726;
2006, 74,270,466)
737  743 
Additional paid-in capital 1,910,125  1,944,304 
Retained earnings 1,794,569  1,596,018 
Accumulated other comprehensive income (loss), net of deferred income tax 77,787  49,424 
Total Shareholders Equity 3,783,348  3,590,619 
Total Liabilities and Shareholders Equity $ 14,961,871  $ 14,312,467 
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(U.S. dollars in thousands)
(Unaudited)
Three Months Ended
March 31,

 2007

 2006

Non-Cumulative Preferred Shares
Balance at beginning of period $ 130  $
Preferred shares issued 80 
Balance at end of period 130  80 
Common Shares
Balance at beginning of year 743  733 
Common shares issued, net
Purchases of common shares under share repurchase program (7)
Balance at end of period 737  738 
Additional Paid-in Capital
Balance at beginning of year 1,944,304  1,595,440 
Cumulative effect of change in accounting for unearned stock grant compensation (9,646)
Series A non-cumulative preferred shares issued 193,378 
Common shares issued 109  160 
Exercise of stock options 6,997  12,152 
Common shares retired (46,291) (647)
Amortization of share-based compensation 4,306  3,299 
Other 700  274 
Balance at end of period 1,910,125  1,794,410 
Deferred Compensation Under Share Award Plan
Balance at beginning of year (9,646)
Cumulative effect of change in accounting for unearned stock grant compensation 9,646 
Balance at end of period
Retained Earnings
Balance at beginning of year 1,593,907  901,348 
Adjustment to adopt SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140 2,111 
Balance at beginning of year, as adjusted 1,596,018  901,348 
Dividends declared on preferred shares (6,461) (2,667)
Net income 205,012  132,290 
Balance at end of period 1,794,569  1,030,971 
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year 51,535  (7,348)
Adjustment to adopt SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140 (2,111)
Balance at beginning of year, as adjusted 49,424  (7,348)
Change in unrealized appreciation (decline) in value of investments, net of deferred income tax 20,587  (67,032)
Foreign currency translation adjustments, net of deferred income tax 7,776  (2,265)
Balance at end of period 77,787  (76,645)
Total Shareholders Equity $ 3,783,348  $ 2,749,554 
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
20072006
Comprehensive Income
Net income $ 205,012  $ 132,290 
Other comprehensive income (loss), net of deferred income tax
Unrealized decline in value of investments:
Unrealized holding gains (losses) arising during period 22,014  (67,987)
Reclassification of net realized (gains) losses, net of income taxes, included in net income (1,427) 955 
Foreign currency translation adjustments 7,776  (2,265)
Other comprehensive loss 28,363  (69,297)
Comprehensive Income $ 233,375  $ 62,993 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
20072006
Operating Activities
Net income $ 205,012  $ 132,290 
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized losses 1,097  783 
Other income (604)
Share-based compensation 4,306  3,299 
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable 147,462  256,469 
Unearned premiums, net of prepaid reinsurance premiums 127,107  113,179 
Premiums receivable (203,707) (200,073)
Deferred acquisition costs, net (23,700) (10,134)
Funds held by reinsureds 21,602  35,771 
Reinsurance balances payable 91,498  76,441 
Deferred income tax assets, net (2,972) (7,352)
Other liabilities 1,296  46,147 
Other items, net 34,734  (23,642)
Net Cash Provided By Operating Activities 403,131  423,178 
Investing Activities
Purchases of fixed maturity investments (5,047,868) (4,330,266)
Proceeds from sales of fixed maturity investments 4,326,607  4,121,591 
Proceeds from redemptions and maturities of fixed maturity investments 183,984  83,394 
Purchases of other investments (151,978) (32,596)
Proceeds from sales of other investments 54,754  5,359 
Net sales (purchases) of short-term investments 188,663  (444,527)
Change in securities lending collateral (268,722) 10,429 
Purchases of furniture, equipment and other (4,138) (4,602)
Net Cash Used For Investing Activities (718,698) (591,218)
Financing Activities
Purchases of common shares under share repurchase program (44,475)
Proceeds from common shares issued, net 3,145  8,690 
Proceeds from preferred shares issued, net of issuance costs 193,527 
Change in securities lending collateral 268,722  (10,429)
Excess tax benefits from share-based compensation 2,355  2,450 
Preferred dividends paid (6,461)
Net Cash Provided By Financing Activities 223,286  194,238 
Effects of exchange rate changes on foreign currency cash 513  (769)
Increase (decrease) in cash (91,768) 25,429 
Cash beginning of year 317,017  222,477 
Cash end of period $ 225,249  $ 247,906 
Income taxes paid, net $ 596  $ 9,591 
Interest paid $ 42 
            
                ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
                           SEGMENT INFORMATION

The Company classifies its businesses into two underwriting segments insurance and reinsurance and a corporate and other segment (non-underwriting). The Companys 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 Companys chief operating decision makers, the President and Chief Executive Officer of ACGL and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. The Company determined its reportable operating segments using the management approach described in SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information.

Management measures segment performance based on underwriting income or loss. The Company does not manage its assets by segment and, accordingly, investment income is not allocated to each underwriting segment. In addition, other revenue and expense items are not evaluated by segment. The accounting policies of the segments are the same as those used for the preparation of the Companys consolidated financial statements. Inter-segment insurance business is allocated to the segment accountable for the underwriting results.

The insurance segment consists of the Companys insurance underwriting subsidiaries which primarily write on both an admitted and non-admitted basis. The insurance segment consists of eight specialty product lines, including: casualty; construction, surety and national accounts; executive assurance; healthcare; professional liability; programs; property, marine and aviation; and other (consisting of collateral protection business and excess workers compensation and employers liability business produced by Wexford).

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

The corporate and other segment (non-underwriting) includes net investment income, other fee income, net of related expenses, other income (loss), other expenses incurred by the Company, interest expense, net realized gains or losses, net foreign exchange gains or losses and income taxes. In addition, results for the corporate and other segment included dividends on the Companys non-cumulative preferred shares.

The following tables set forth underwriting income or loss by segment, together with a reconciliation of underwriting income to net income available to common shareholders:

(Unaudited)
Three Months Ended
March 31, 2007
(U.S. dollars in thousands) InsuranceReinsuranceTotal
Gross premiums written (1) $ 661,210  $ 558,654  $ 1,210,614 
Net premiums written 428,344  443,401  871,745 
Net premiums earned $ 413,847  $ 331,646  $ 745,493 
Fee income 1,425  544  1,969 
Losses and loss adjustment expenses (259,322) (160,739) (420,061)
Acquisition expenses, net (46,695) (73,433) (120,128)
Other operating expenses (68,894) (13,781) (82,675)
Underwriting income $ 40,361  $ 84,237  124,598 
Net investment income 112,689 
Net realized losses (981)
Other income 604 
Other expenses (8,138)
Interest expense (5,523)
Net foreign exchange losses (9,742)
Income before income taxes 213,507 
Income tax expense (8,495)
Net income 205,012 
Preferred dividends (6,461)
Net income available to common shareholders $ 198,551 
Underwriting Ratios
Loss ratio 62.7% 48.5% 56.3%
Acquisition expense ratio (2) 11.1% 22.1% 16.0%
Other operating expense ratio 16.6% 4.2% 11.1%
Combined ratio 90.4% 74.8% 83.4%

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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 certain fee income.

(Unaudited)
Three Months Ended
March 31, 2006
(U.S. dollars in thousands) InsuranceReinsuranceTotal
Gross premiums written (1) $ 615,484  $ 564,668  $ 1,167,814 
Net premiums written 397,254  476,465  873,719 
Net premiums earned $ 380,254  $ 381,347  $ 761,601 
Fee income 1,404  401  1,805 
Losses and loss adjustment expenses (248,002) (220,176) (468,178)
Acquisition expenses, net (37,885) (91,787) (129,672)
Other operating expenses (62,076) (13,252) (75,328)
Underwriting income $ 33,695  $ 56,533  90,228 
Net investment income 80,326 
Net realized losses (3,383)
Other income
Other expenses (7,649)
Interest expense (5,555)
Net foreign exchange losses (10,253)
Income before income taxes 143,714 
Income tax expense (11,424)
Net income 132,290 
Preferred dividends (2,667)
Net income available to common shareholders $ 129,623 
Underwriting Ratios
Loss ratio 65.2% 57.7% 61.5%
Acquisition expense ratio (2) 9.7% 24.1% 16.9%
Other operating expense ratio 16.3% 3.5% 9.9%
Combined ratio 91.2% 85.3% 88.3%

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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 certain fee income.

The following table sets forth the insurance segments net premiums written and earned by major line of business, together with net premiums written by client location:

(Unaudited)
Three Months Ended
March 31,
20072006
INSURANCE SEGMENT
(U.S. dollars in thousands)
Amount% of TotalAmount% of Total
Net premiums written
Property, marine and aviation $ 84,863  19.8  $ 68,646  17.3 
Construction, surety and national accounts 79,230  18.5  80,629  20.3 
Professional liability 70,403  16.4  62,454  15.7 
Programs 58,323  13.6  60,534  15.2 
Executive assurance 44,091  10.3  45,591  11.5 
Casualty 43,091  10.1  50,750  12.8 
Healthcare 21,530  5.0  18,115  4.6 
Other 26,813  (1) 6.3  10,535  2.6 
Total $ 428,344  100.0  $ 397,254  100.0 
Net premiums earned
Property, marine and aviation $ 81,804  19.8  $ 62,968  16.6 
Construction, surety and national accounts 67,104  16.2  66,703  17.5 
Professional liability 77,130  18.6  54,045  14.2 
Programs 56,209  13.6  57,389  15.1 
Executive assurance 45,378  11.0  50,076  13.2 
Casualty 51,542  12.4  62,808  16.5 
Healthcare 19,844  4.8  16,677  4.4 
Other 14,836  (1) 3.6  9,588  2.5 
Total $ 413,847  100.0  $ 380,254  100.0 
Net premiums written by client location
United States $ 320,005  74.7  $ 324,465  81.7 
Europe 74,935  17.5  47,580  12.0 
Other 33,404  7.8  25,209  6.3 
Total $ 428,344  100.0  $ 397,254  100.0 

(1) Includes excess workers compensation and employers liability business.

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

(Unaudited)
Three Months Ended
March 31,
20072006
REINSURANCE SEGMENT
(U.S. dollars in thousands)
Amount% of TotalAmount% of Total
Net premiums written
Casualty (1) $ 144,476  32.6  $ 162,988  34.2 
Property excluding property catastrophe 94,944  21.4  106,782  22.4 
Property catastrophe 80,659  18.2  70,336  14.7 
Other specialty 73,996  16.7  93,264  19.6 
Marine and aviation 43,715  9.8  41,352  8.7 
Other 5,611  1.3  1,743  0.4 
Total $ 443,401  100.0  $ 476,465  100.0 
Net premiums earned
Casualty (1) $ 140,444  42.4  $ 171,197  44.9 
Property excluding property catastrophe 73,039  22.0  79,620  20.9 
Property catastrophe 34,691  10.5  49,106  12.8 
Other specialty 52,042  15.7  57,919  15.2 
Marine and aviation 26,622  8.0  23,650  6.2 
Other 4,808  1.4  (145) (0.0)
Total $ 331,646  100.0  $ 381,347  100.0 
Net premiums written
Pro rata $ 263,815  59.5  $ 272,534  57.2 
Excess of loss 179,586  40.5  203,931  42.8 
Total $ 443,401  100.0  $ 476,465  100.0 
Net premiums earned
Pro rata $ 242,439  73.1  $ 295,288  77.4 
Excess of loss 89,207  26.9  86,059  22.6 
Total $ 331,646  100.0  $ 381,347  100.0 
Net premiums written by client location
United States $ 253,991  57.3  $ 277,315  58.2 
Europe 124,338  28.0  127,263  26.7 
Bermuda 50,841  11.5  43,839  9.2 
Other 14,231  3.2  28,048  5.9 
Total $ 443,401  100.0  $ 476,465  100.0 

(1) Includes professional liability and executive assurance business.

Discussion of 2007 First Quarter Performance

Insurance Segment

(Unaudited)
Three Months Ended
March 31,
(U.S. dollars in thousands) 20072006
Gross premiums written $661,210  $615,484 
Net premiums written 428,344  397,254 
Net premiums earned 413,847  380,254 
Underwriting income 40,361  33,695 
Loss ratio 62.7% 65.2%
Acquisition expense ratio 11.1% 9.7%
Other operating expense ratio 16.6% 16.3%
Combined ratio 90.4% 91.2%

Gross premiums written by the insurance segment in the 2007 first quarter were 7.4% higher than in the 2006 first quarter, while net premiums written increased 7.8%. Roughly half of the growth in net premiums written was generated by the insurance segments European operations primarily as a result of increases in the professional liability and executive assurance lines. The balance of the growth was generated by the insurance segments U.S. operations through increases in property as well as from $9.4 million of excess workers compensation and employers liability business produced by Wexford, a managing general agent. As previously announced, the insurance segments U.S. operations entered into an agreement effective January 1, 2007 to write business produced by Wexford and also entered into an asset purchase agreement to acquire the operations of Wexford, including the renewal rights of the subject business, as of January 1, 2008. Net premiums earned by the insurance segment in the 2007 first quarter were 8.8% higher than in the 2006 first quarter, and reflect changes in net premiums written over the previous five quarters, including the mix and type of business written.

The insurance segments loss ratio of 62.7% in the 2007 first quarter reflected a 0.2 point reduction in the loss ratio related to estimated net favorable development in prior year loss reserves, compared to a loss ratio of 65.2% in the 2006 first quarter which included 2.1 points related to estimated net adverse development.

The insurance segments underwriting expense ratio was 27.7% in the 2007 first quarter, compared to 26.0% in the 2006 first quarter. The acquisition expense ratio was 11.1% for the 2007 first quarter, compared to 9.7% for the 2006 first quarter. The acquisition expense ratio is influenced by, among other things, (1) the amount of ceding commissions received from unaffiliated reinsurers and (2) the amount of business written on a surplus lines (non-admitted) basis. The increase in the 2007 first quarter acquisition expense ratio primarily resulted from the reversal of contingent commission income on ceded surety business that resulted from loss development which added 0.9 points. In addition, part of the increase was due to changes in the mix of business. The insurance segments other operating expense ratio was 16.6% for the 2007 first quarter, compared to 16.3% for the 2006 first quarter.

Reinsurance Segment

(Unaudited)
Three Months Ended
March 31,
(U.S. dollars in thousands) 20072006
Gross premiums written $ 558,654  $ 564,668 
Net premiums written 443,401  476,465 
Net premiums earned 331,646  381,347 
Underwriting income 84,237  56,533 
Loss ratio 48.5% 57.7%
Acquisition expense ratio 22.1% 24.1%
Other operating expense ratio 4.2% 3.5%
Combined ratio 74.8% 85.3%

Gross premiums written by the reinsurance segment in the 2007 first quarter were 1.1% lower than in the 2006 first quarter. Growth in property and marine lines was offset by a reduction in casualty and other specialty business. The growth in property and marine lines was in response to current market opportunities as prices for catastrophe-exposed property and marine lines remained strong. The decrease in casualty business was in response to market conditions.

Ceded premiums written by the reinsurance segment were 20.6% of gross premiums written for the 2007 first quarter, compared to 15.6% for the 2006 first quarter. Arch Re Bermuda ceded $108.9 million, or 19.5% of gross premiums written, of certain lines of property and marine premiums written to Flatiron Re Ltd. in the 2007 first quarter, compared to $82.4 million, or 14.6%, in the 2006 first quarter. The increase in business ceded to Flatiron Re Ltd. was due to the fact that certain premiums written in the 2006 first quarter were from 2005 and prior underwriting years and were not subject to the quota share treaty with Flatiron Re Ltd., which covers business written from January 1, 2006. On an earned basis, Arch Re Bermuda ceded $66.0 million to Flatiron Re Ltd. in the 2007 first quarter, compared to $18.3 million in the 2006 first quarter.

Net premiums written by the reinsurance segment in the 2007 first quarter were 6.9% lower than in the 2006 first quarter. Net premiums earned by the reinsurance segment in the 2007 first quarter were 13.0% lower than in the 2006 first quarter. The larger decrease in net premiums earned in the 2007 first quarter primarily resulted from the transactions with Flatiron Re Ltd. noted above and also reflects changes in net premiums written over the previous five quarters, including the mix and type of business written.

The reinsurance segments loss ratio of 48.5% in the 2007 first quarter reflected a 14.1 point reduction in the loss ratio related to estimated net favorable development in prior year loss reserves, compared to a loss ratio of 57.7% in the 2006 first quarter which included 0.6 points related to estimated net adverse development before related adjustments. The 2007 first quarter loss ratio reflected approximately 4.8 points of catastrophic activity, consisting of $11.4 million of losses incurred related to European Storm Kyrill, net of reinstatement premiums, and $4.3 million related to U.S. storm activity, while the 2006 first quarter loss ratio reflected approximately 4.3 points of catastrophic activity, consisting of $8.2 million of loss incurred related to U.S. storm activity and $8.1 million related to Cyclone Larry. The 2007 first quarter loss ratio also reflected changes in the reinsurance segments mix of business.

The underwriting expense ratio for the reinsurance segment was 26.3% in the 2007 first quarter, compared to 27.6% in the 2006 first quarter. The acquisition expense ratio for the 2007 first quarter was 22.1%, compared to 24.1% for the 2006 first quarter. The acquisition expense ratio included commission income (in excess of the reimbursement of direct acquisition expenses) on the quota-share reinsurance treaty with Flatiron Re Ltd. which reduced the 2007 first quarter acquisition expense ratio by 2.8 points, compared to 0.8 points in the 2006 first quarter. In addition, the acquisition expense ratio for the 2007 first quarter included 0.2 points related to prior year loss development, compared to a decrease of 1.0 point in the 2006 first quarter. The reinsurance segments other operating expense ratio was 4.2% for the 2007 first quarter, compared to 3.5% for the 2006 first quarter. The higher ratio in the 2007 first quarter primarily resulted from a lower level of net premiums earned than in the 2006 first quarter.

Data & News supplied by www.cloudquote.io
Stock quotes supplied by Barchart
Quotes delayed at least 20 minutes.
By accessing this page, you agree to the following
Privacy Policy and Terms and Conditions.