10-Q 1 a11-9421_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended March 31, 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, $0.01 per share) outstanding as of May 4, 2011 was 43,987,362.

 

 

 



Table of Contents

 

ARCH CAPITAL GROUP LTD.

 

INDEX

 

 

Page No.

PART I. Financial Information

 

 

 

Item 1 — Consolidated Financial Statements

 

 

 

Report of Independent Registered Public Accounting Firm

2

 

 

Consolidated Balance Sheets
March 31, 2011 (unaudited) and December 31, 2010

3

 

 

Consolidated Statements of Income
For the three month periods ended March 31, 2011 and 2010 (unaudited)

4

 

 

Consolidated Statements of Comprehensive Income
For the three month periods ended March 31, 2011 and 2010 (unaudited)

5

 

 

Consolidated Statements of Changes in Shareholders’ Equity
For the three month periods ended March 31, 2011 and 2010 (unaudited)

6

 

 

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

34

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

65

 

 

Item 4 — Controls and Procedures

65

 

 

PART II. Other Information

 

 

 

Item 1 — Legal Proceedings

66

 

 

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

66

 

 

Item 5 — Other Information

67

 

 

Item 6 — Exhibits

67

 

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Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of

Arch Capital Group Ltd.:

 

We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of March 31, 2011, and the related consolidated statements of income for the three-month periods ended March 31, 2011 and March 31, 2010, and the consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for the three-month periods ended March 31, 2011 and March 31, 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

May 9, 2011

 

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Table of Contents

 

ARCH CAPITAL GROUP LTD. and Subsidiaries

Consolidated BALANCE SHEETS

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

 

 

 

(Unaudited)

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities available for sale, at market value (amortized cost: $8,842,786 and $8,896,957)

 

$

9,033,408

 

$

9,082,828

 

Short-term investments available for sale, at market value (amortized cost: $1,124,397 and $913,488)

 

1,130,142

 

915,841

 

Investment of funds received under securities lending agreements, at market value (amortized cost: $9,547 and $69,682)

 

9,951

 

69,660

 

TALF investments, at market value (amortized cost: $386,068 and $389,200)

 

400,970

 

402,449

 

Equity securities available for sale, at market value (cost: $393,645 and $346,019)

 

419,893

 

363,255

 

Other investments (cost: $362,020 and $326,324)

 

386,127

 

349,272

 

Investment funds accounted for using the equity method

 

395,258

 

434,600

 

Total investments

 

11,775,749

 

11,617,905

 

 

 

 

 

 

 

Cash

 

406,877

 

362,740

 

Accrued investment income

 

69,057

 

74,837

 

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

 

105,495

 

105,698

 

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

 

198,418

 

75,575

 

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

 

185,176

 

 

Premiums receivable

 

633,144

 

503,434

 

Unpaid losses and loss adjustment expenses recoverable

 

1,720,677

 

1,703,201

 

Paid losses and loss adjustment expenses recoverable

 

51,453

 

60,784

 

Prepaid reinsurance premiums

 

259,624

 

263,448

 

Deferred acquisition costs, net

 

302,271

 

277,861

 

Receivable for securities sold

 

749,708

 

56,145

 

Other assets

 

734,317

 

669,164

 

Total Assets

 

$

17,191,966

 

$

15,770,792

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss adjustment expenses

 

$

8,319,324

 

$

8,098,454

 

Unearned premiums

 

1,504,162

 

1,370,075

 

Reinsurance balances payable

 

131,512

 

132,452

 

Senior notes

 

300,000

 

300,000

 

Revolving credit agreement borrowings

 

100,000

 

100,000

 

TALF borrowings, at market value (par: $322,514 and $326,219)

 

322,222

 

325,770

 

Securities lending payable

 

203,925

 

78,021

 

Payable for securities purchased

 

1,266,390

 

200,192

 

Other liabilities

 

718,896

 

652,825

 

Total Liabilities

 

12,866,431

 

11,257,789

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Non-cumulative preferred shares - Series A and B

 

325,000

 

325,000

 

Common shares ($0.01 par, shares issued: 53,454,505 and 53,357,872)

 

535

 

534

 

Additional paid-in capital

 

120,109

 

110,325

 

Retained earnings

 

4,441,848

 

4,422,553

 

Accumulated other comprehensive income, net of deferred income tax

 

225,405

 

204,503

 

Common shares held in treasury, at cost (shares: 9,504,292 and 6,813,797)

 

(787,362

)

(549,912

)

Total Shareholders’ Equity

 

4,325,535

 

4,513,003

 

Total Liabilities and Shareholders’ Equity

 

$

17,191,966

 

$

15,770,792

 

 

See Notes to Consolidated Financial Statements

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

 

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Revenues

 

 

 

 

 

Net premiums written

 

$

764,278

 

$

767,754

 

Change in unearned premiums

 

(130,583

)

(97,837

)

Net premiums earned

 

633,695

 

669,917

 

Net investment income

 

88,307

 

92,972

 

Net realized gains

 

20,695

 

47,782

 

 

 

 

 

 

 

Other-than-temporary impairment losses

 

(3,258

)

(2,336

)

Less investment impairments recognized in other comprehensive income, before taxes

 

578

 

730

 

Net impairment losses recognized in earnings

 

(2,680

)

(1,606

)

 

 

 

 

 

 

Fee income

 

815

 

794

 

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

 

29,673

 

29,050

 

Other income

 

4,567

 

5,978

 

Total revenues

 

775,072

 

844,887

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Losses and loss adjustment expenses

 

493,880

 

428,051

 

Acquisition expenses

 

108,754

 

117,624

 

Other operating expenses

 

102,420

 

106,806

 

Interest expense

 

7,721

 

7,260

 

Net foreign exchange losses (gains)

 

36,912

 

(38,601

)

Total expenses

 

749,687

 

621,140

 

 

 

 

 

 

 

Income before income taxes

 

25,385

 

223,747

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(371

)

6,753

 

 

 

 

 

 

 

Net income

 

25,756

 

216,994

 

 

 

 

 

 

 

Preferred dividends

 

6,461

 

6,461

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

19,295

 

$

210,533

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.43

 

$

3.97

 

Diluted

 

$

0.41

 

$

3.79

 

 

 

 

 

 

 

Weighted average common shares and common share equivalents outstanding

 

 

 

 

 

Basic

 

44,499,747

 

53,039,026

 

Diluted

 

46,820,172

 

55,513,827

 

 

See Notes to Consolidated Financial Statements

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Comprehensive Income

 

 

 

 

 

Net income

 

$

25,756

 

$

216,994

 

Other comprehensive income, net of deferred income tax

 

 

 

 

 

Unrealized appreciation in value of investments:

 

 

 

 

 

Unrealized holding gains arising during period

 

40,370

 

42,847

 

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

 

(578

)

(730

)

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

 

(20,176

)

(37,607

)

Foreign currency translation adjustments

 

1,286

 

(2,074

)

Other comprehensive income

 

20,902

 

2,436

 

Comprehensive Income

 

$

46,658

 

$

219,430

 

 

See Notes to Consolidated Financial Statements

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

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

 

1

 

4

 

Purchases of common shares under share repurchase program

 

 

(25

)

Balance at end of period

 

535

 

527

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

 

 

 

Balance at beginning of year

 

110,325

 

253,466

 

Common shares issued

 

8

 

14

 

Exercise of stock options

 

4,127

 

16,700

 

Common shares retired

 

 

(181,350

)

Amortization of share-based compensation

 

5,628

 

7,096

 

Other

 

21

 

 

Balance at end of period

 

120,109

 

95,926

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

Balance at beginning of year

 

4,422,553

 

3,605,809

 

Dividends declared on preferred shares

 

(6,461

)

(6,461

)

Net income

 

25,756

 

216,994

 

Balance at end of period

 

4,441,848

 

3,816,342

 

 

 

 

 

 

 

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

 

20,194

 

5,240

 

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

 

(578

)

(730

)

Foreign currency translation adjustments, net of deferred income tax

 

1,286

 

(2,074

)

Balance at end of period

 

225,405

 

140,962

 

 

 

 

 

 

 

Common Shares Held in Treasury, at Cost

 

 

 

 

 

Balance at beginning of year

 

(549,912

)

 

Shares repurchased for treasury

 

(237,450

)

 

Balance at end of period

 

(787,362

)

 

 

 

 

 

 

 

Total Shareholders’ Equity

 

$

4,325,535

 

$

4,378,757

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

 

 

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Operating Activities

 

 

 

 

 

Net income

 

$

25,756

 

$

216,994

 

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

 

 

 

 

 

Net realized gains

 

(22,481

)

(49,483

)

Net impairment losses recognized in earnings

 

2,680

 

1,606

 

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

 

(355

)

(15,012

)

Share-based compensation

 

5,628

 

7,096

 

Changes in:

 

 

 

 

 

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

 

155,477

 

91,247

 

Unearned premiums, net of prepaid reinsurance premiums

 

130,136

 

96,645

 

Premiums receivable

 

(118,688

)

(116,571

)

Deferred acquisition costs, net

 

(22,518

)

(19,655

)

Reinsurance balances payable

 

(7,122

)

(36,669

)

Other liabilities

 

33,366

 

41,448

 

Other items, net

 

42,701

 

(33,023

)

Net Cash Provided By Operating Activities

 

224,580

 

184,623

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of:

 

 

 

 

 

Fixed maturity investments

 

(3,250,938

)

(4,597,713

)

Equity securities

 

(89,790

)

(52,283

)

Other investments

 

(92,777

)

(132,819

)

Proceeds from the sales of:

 

 

 

 

 

Fixed maturity investments

 

3,376,248

 

4,443,108

 

Equity securities

 

52,316

 

11,725

 

Other investments

 

84,920

 

89,510

 

Proceeds from redemptions and maturities of fixed maturity investments

 

253,898

 

212,625

 

Net purchases of short-term investments

 

(267,904

)

(102,921

)

Change in investment of securities lending collateral

 

(125,904

)

30,092

 

Purchases of furniture, equipment and other assets

 

(8,082

)

(1,803

)

Net Cash Used By Investing Activities

 

(68,013

)

(100,479

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Purchases of common shares under share repurchase program

 

(237,173

)

(181,272

)

Proceeds from common shares issued, net

 

2,875

 

10,591

 

Proceeds from borrowings

 

 

214,526

 

Repayments of borrowings

 

(3,695

)

(86,317

)

Change in securities lending collateral

 

125,904

 

(30,092

)

Other

 

714

 

5,061

 

Preferred dividends paid

 

(6,461

)

(6,461

)

Net Cash Used For Financing Activities

 

(117,836

)

(73,964

)

 

 

 

 

 

 

Effects of exchange rate changes on foreign currency cash

 

5,406

 

(6,043

)

 

 

 

 

 

 

Increase in cash

 

44,137

 

4,137

 

Cash beginning of year

 

362,740

 

334,571

 

Cash end of period

 

$

406,877

 

$

338,708

 

 

See Notes to Consolidated Financial Statements

 

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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. Earlier adoption is permitted. Retrospective application to all prior periods presented upon the date of adoption is also permitted but is not required. The Company is evaluating the impact this new guidance will have on its consolidated statement of financial position and results of operations.

 

3.      Share Transactions

 

Share Repurchases

 

The board of directors of ACGL has authorized the investment in ACGL’s common shares through a share repurchase program. Authorizations have consisted of a $1.0 billion authorization in February 2007, a $500 million authorization in May 2008, a $1.0 billion authorization in November 2009 and a $1.0 billion

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

authorization in February 2011. 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 34.4 million common shares for an aggregate purchase price of $2.51 billion. During the 2011 first quarter, ACGL repurchased 2.7 million common shares for an aggregate purchase price of $237.2 million, compared to 2.5 million common shares for an aggregate purchase price of $181.3 million during the 2010 first quarter.

 

At March 31, 2011, approximately $992.4 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.

 

Treasury Shares

 

In May 2010, ACGL’s shareholders approved amendments to the bye-laws to permit ACGL to hold its own acquired shares as treasury shares in lieu of cancellation, as determined by ACGL’s board of directors. From May 5, 2010 to March 31, 2011, all repurchases of ACGL’s common shares in connection with the share repurchase plan noted above and other share-based transactions were held in the treasury under the cost method, and the cost of the common shares acquired is included in ‘Common shares held in treasury, at cost.’  Prior to May 5, 2010, such acquisitions were reflected as a reduction in additional paid-in capital. At March 31, 2011, the Company held 9.5 million shares for an aggregate cost of $787.4 million in treasury.

 

Non-Cumulative Preferred Shares

 

During 2006, ACGL completed two public offerings of non-cumulative preferred shares (“Preferred Shares”). On February 1, 2006, $200.0 million principal amount of 8.0% series A non-cumulative preferred shares (“Series A Preferred Shares”) were issued with net proceeds of $193.5 million and, on May 24, 2006, $125.0 million principal amount of 7.875% series B non-cumulative preferred shares (“Series B Preferred Shares”) were issued with net proceeds of $120.9 million. ACGL has the right to redeem all or a portion of the Series A Preferred Shares at a redemption price of $25.00 per share currently and the right to redeem all or a portion of the Series B Preferred Shares on or after May 15, 2011. During the 2011 first quarter and 2010 first quarter, the Company paid $6.5 million to holders of the Preferred Shares. At March 31, 2011, the Company had declared an aggregate of $3.3 million of dividends to be paid to holders of the Preferred Shares. Certain executive officers and directors of the Company own less than 1% of the aggregate outstanding Preferred Shares.

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

4.      Debt and Financing Arrangements

 

Senior Notes

 

On May 4, 2004, ACGL completed a public offering of $300 million principal amount of 7.35% senior notes (“Senior Notes”) due May 1, 2034 and received net proceeds of $296.4 million. ACGL used $200 million of the net proceeds to repay all amounts outstanding under a revolving credit agreement. The Senior Notes are ACGL’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the Senior Notes are due on May 1st and November 1st of each year. ACGL may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. For the 2011 first quarter and 2010 first quarter, interest expense on the Senior Notes was $5.5 million. The market value of the Senior Notes at March 31, 2011 and December 31, 2010 was $311.6 million and $310.9 million, respectively.

 

Letter of Credit and Revolving Credit Facilities

 

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

 

In addition, the Company had access to secured letter of credit facilities of approximately $180 million as of March 31, 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 principal purpose of the LOC Facilities is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which the Company has entered into reinsurance arrangements to ensure that such counterparties are permitted to take credit for reinsurance obtained from the Company’s reinsurance subsidiaries in United States jurisdictions where such subsidiaries are not licensed or otherwise admitted as an insurer, as required under insurance regulations in the United States, and to comply with requirements of Lloyd’s of London in connection with qualifying quota share and other arrangements. The amount of letters of credit issued is driven by, among other things, the timing and payment of catastrophe losses, loss development of existing reserves, the payment pattern of such reserves, the further expansion of the Company’s business and the loss experience of such business. When issued, certain letters of credit are secured by a portion of the Company’s investment portfolio. In addition, the LOC Facilities also require the maintenance of certain covenants, which the Company was in compliance with at March 31, 2011. At such date, the Company had $692.2 million in outstanding letters of credit under the LOC Facilities, which

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

were secured by investments with a market value of $780.1 million. At March 31, 2011, the Company had $100.0 million of borrowings outstanding under the Credit Agreement at a Company-selected variable interest rate that is based on 1 month, 3 month or 6 month reset option terms and their corresponding term LIBOR rates plus 27.5 basis points.

 

TALF Program

 

The Company participates in the Federal Reserve Bank of New York’s (“FRBNY”) Term Asset-Backed Securities Loan Facility (“TALF”). TALF provides secured financing for asset-backed securities backed by certain types of consumer and small business loans and for legacy commercial mortgage-backed securities. TALF financing is non-recourse to the Company, except in certain limited instances, and is collateralized by the purchased securities and provides financing for the purchase price of the securities, less a ‘haircut’ that varies based on the type of collateral. The Company can deliver the collateralized securities to a special purpose vehicle created by the FRBNY in full defeasance of the borrowings. TALF began operation in March 2009 and was closed for new loan extensions against newly issued commercial mortgage-backed securities on June 30, 2010, and for new loan extensions against all other types of collateral on March 31, 2010.

 

The Company elected to carry the securities and related borrowings at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and financial liabilities. As of March 31, 2011, the Company had $401.0 million of securities under TALF which are reflected as “TALF investments, at market value” and $322.2 million of secured financing from the FRBNY which is reflected as “TALF borrowings, at market value.” As of December 31, 2010, the Company had $402.4 million of TALF investments and $325.8 million of TALF borrowings. The maturity dates for the TALF borrowings vary between 1.3 to 4.0 years from March 31, 2011 with floating or fixed coupons depending on the related TALF investments.

 

Interest Paid

 

During the 2011 first quarter, the Company made interest payments of $2.2 million related to its debt and financing arrangements, compared to $1.8 million for the 2010 first quarter.

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

5.      Segment Information

 

The Company classifies its businesses into two underwriting segments — insurance and reinsurance — and corporate and other (non-underwriting). The Company’s insurance and reinsurance operating segments each have segment managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the Chairman, President and Chief Executive Officer of ACGL and the Chief Financial Officer of ACGL. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. The Company determined its reportable operating segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information.

 

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

 

The insurance segment consists of the Company’s insurance underwriting subsidiaries which primarily write on both an admitted and non-admitted basis. Specialty product lines include: casualty; construction; executive assurance; healthcare; lenders products; national accounts casualty; professional liability; programs; property, energy, marine and aviation; surety; travel and accident; and other (consisting of excess workers’ compensation, employers’ liability, alternative markets and accident and health business).

 

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

 

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

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

 

 

Three Months Ended

 

 

 

March 31, 2011

 

 

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

634,583

 

$

331,013

 

$

964,566

 

Net premiums written

 

449,291

 

314,987

 

764,278

 

 

 

 

 

 

 

 

 

Net premiums earned

 

407,591

 

226,104

 

633,695

 

Fee income

 

778

 

37

 

815

 

Losses and loss adjustment expenses

 

(297,723

)

(196,157

)

(493,880

)

Acquisition expenses, net

 

(61,415

)

(47,339

)

(108,754

)

Other operating expenses

 

(74,737

)

(20,657

)

(95,394

)

Underwriting loss

 

$

(25,506

)

$

(38,012

)

(63,518

)

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

88,307

 

Net realized gains

 

 

 

 

 

20,695

 

Net impairment losses recognized in earnings

 

 

 

 

 

(2,680

)

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

 

 

 

 

 

29,673

 

Other income

 

 

 

 

 

4,567

 

Other expenses

 

 

 

 

 

(7,026

)

Interest expense

 

 

 

 

 

(7,721

)

Net foreign exchange losses

 

 

 

 

 

(36,912

)

Income before income taxes

 

 

 

 

 

25,385

 

Income tax benefit

 

 

 

 

 

371

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

25,756

 

Preferred dividends

 

 

 

 

 

(6,461

)

Net income available to common shareholders

 

 

 

 

 

$

19,295

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

73.0

%

86.8

%

77.9

%

Acquisition expense ratio (2)

 

14.9

%

20.9

%

17.0

%

Other operating expense ratio

 

18.3

%

9.1

%

15.1

%

Combined ratio

 

106.2

%

116.8

%

110.0

%

 


(1)          Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.

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

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31, 2010

 

 

 

Insurance

 

Reinsurance

 

Total

 

 

 

 

 

 

 

 

 

Gross premiums written (1)

 

$

633,576

 

$

323,477

 

$

953,687

 

Net premiums written

 

452,924

 

314,830

 

767,754

 

 

 

 

 

 

 

 

 

Net premiums earned

 

429,477

 

240,440

 

669,917

 

Fee income

 

753

 

41

 

794

 

Losses and loss adjustment expenses

 

(312,011

)

(116,040

)

(428,051

)

Acquisition expenses, net

 

(67,431

)

(50,193

)

(117,624

)

Other operating expenses

 

(80,720

)

(20,398

)

(101,118

)

Underwriting income (loss)

 

$

(29,932

)

$

53,850

 

23,918

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

92,972

 

Net realized gains

 

 

 

 

 

47,782

 

Net impairment losses recognized in earnings

 

 

 

 

 

(1,606

)

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

 

 

 

 

 

29,050

 

Other income

 

 

 

 

 

5,978

 

Other expenses

 

 

 

 

 

(5,688

)

Interest expense

 

 

 

 

 

(7,260

)

Net foreign exchange gains

 

 

 

 

 

38,601

 

Income before income taxes

 

 

 

 

 

223,747

 

Income tax expense

 

 

 

 

 

(6,753

)

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

216,994

 

Preferred dividends

 

 

 

 

 

(6,461

)

Net income available to common shareholders

 

 

 

 

 

$

210,533

 

 

 

 

 

 

 

 

 

Underwriting Ratios

 

 

 

 

 

 

 

Loss ratio

 

72.6

%

48.3

%

63.9

%

Acquisition expense ratio (2)

 

15.5

%

20.9

%

17.4

%

Other operating expense ratio

 

18.8

%

8.5

%

15.1

%

Combined ratio

 

106.9

%

77.7

%

96.4

%

 


(1)          Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.

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

 

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

INSURANCE SEGMENT

 

Amount

 

% of Total

 

Amount

 

% of Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

76,418

 

17.0

 

$

100,665

 

22.2

 

Programs

 

74,396

 

16.6

 

70,498

 

15.6

 

Professional liability

 

69,543

 

15.5

 

58,726

 

13.0

 

Executive assurance

 

45,910

 

10.2

 

61,355

 

13.5

 

National accounts casualty

 

40,191

 

8.9

 

30,809

 

6.8

 

Construction

 

31,509

 

7.0

 

36,322

 

8.0

 

Casualty

 

30,134

 

6.7

 

25,463

 

5.6

 

Travel and accident

 

21,501

 

4.8

 

21,806

 

4.8

 

Lenders products

 

21,074

 

4.7

 

16,319

 

3.6

 

Surety

 

9,734

 

2.2

 

8,091

 

1.8

 

Healthcare

 

9,117

 

2.0

 

8,524

 

1.9

 

Other (1)

 

19,764

 

4.4

 

14,346

 

3.2

 

Total

 

$

449,291

 

100.0

 

$

452,924

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

 

 

 

 

 

 

 

 

Property, energy, marine and aviation

 

$

73,599

 

18.1

 

$

95,037

 

22.1

 

Programs

 

67,018

 

16.4

 

66,159

 

15.4

 

Professional liability

 

73,127

 

17.9

 

62,245

 

14.5

 

Executive assurance

 

48,843

 

12.0

 

56,322

 

13.1

 

National accounts casualty

 

21,162

 

5.2

 

21,773

 

5.1

 

Construction

 

28,391

 

7.0

 

34,485

 

8.0

 

Casualty

 

28,427

 

7.0

 

28,069

 

6.5

 

Travel and accident

 

15,599

 

3.8

 

16,078

 

3.7

 

Lenders products

 

18,236

 

4.5

 

16,807

 

3.9

 

Surety

 

9,779

 

2.4

 

10,258

 

2.4

 

Healthcare

 

8,652

 

2.1

 

9,943

 

2.3

 

Other (1)

 

14,758

 

3.6

 

12,301

 

3.0

 

Total

 

$

407,591

 

100.0

 

$

429,477

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location

 

 

 

 

 

 

 

 

 

United States

 

$

305,216

 

67.9

 

$

303,168

 

66.9

 

Europe

 

100,091

 

22.3

 

102,489

 

22.6

 

Other

 

43,984

 

9.8

 

47,267

 

10.5

 

Total

 

$

449,291

 

100.0

 

$

452,924

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by underwriting location

 

 

 

 

 

 

 

 

 

United States

 

$

295,043

 

65.7

 

$

302,437

 

66.8

 

Europe

 

135,536

 

30.2

 

133,739

 

29.5

 

Other

 

18,712

 

4.1

 

16,748

 

3.7

 

Total

 

$

449,291

 

100.0

 

$

452,924

 

100.0

 

 


(1)          Includes excess workers’ compensation, employers’ liability, alternative markets and accident and health business.

 

15



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

REINSURANCE SEGMENT

 

Amount

 

% of Total

 

Amount

 

% of Total

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

 

 

 

 

 

 

 

 

 

Casualty (1)

 

$

81,802

 

26.0

 

$

72,582

 

23.1

 

Property excluding property catastrophe (2)

 

71,150

 

22.6

 

74,927

 

23.8

 

Other specialty

 

67,204

 

21.3

 

54,762

 

17.4

 

Property catastrophe

 

66,961

 

21.3

 

88,802

 

28.2

 

Marine and aviation

 

24,164

 

7.7

 

21,238

 

6.7

 

Other

 

3,706

 

1.1

 

2,519

 

0.8

 

Total

 

$

314,987

 

100.0

 

$

314,830

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

 

 

 

 

 

 

 

 

Casualty (1)

 

$

49,705

 

22.0

 

$

70,436

 

29.3

 

Property excluding property catastrophe (2)

 

63,006

 

27.9

 

79,239

 

33.0

 

Other specialty

 

37,758

 

16.7

 

17,769

 

7.4

 

Property catastrophe

 

51,642

 

22.8

 

53,873

 

22.4

 

Marine and aviation

 

21,626

 

9.6

 

18,072

 

7.5

 

Other

 

2,367

 

1.0

 

1,051

 

0.4

 

Total

 

$

226,104

 

100.0

 

$

240,440

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

 

 

 

 

 

 

 

 

 

Pro rata

 

$

105,492

 

33.5

 

$

118,037

 

37.5

 

Excess of loss

 

209,495

 

66.5

 

196,793

 

62.5

 

Total

 

$

314,987

 

100.0

 

$

314,830

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

 

 

 

 

 

 

 

 

Pro rata

 

$

106,653

 

47.2

 

$

130,871

 

54.4

 

Excess of loss

 

119,451

 

52.8

 

109,569

 

45.6

 

Total

 

$

226,104

 

100.0

 

$

240,440

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by client location

 

 

 

 

 

 

 

 

 

United States

 

$

167,215

 

53.1

 

$

171,001

 

54.3

 

Europe

 

125,700

 

39.9

 

107,142

 

34.0

 

Bermuda

 

4,379

 

1.4

 

22,675

 

7.2

 

Other

 

17,693

 

5.6

 

14,012

 

4.5

 

Total

 

$

314,987

 

100.0

 

$

314,830

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Net premiums written by underwriting location

 

 

 

 

 

 

 

 

 

Bermuda

 

$

146,596

 

46.5

 

$

164,934

 

52.4

 

United States

 

113,756

 

36.1

 

103,726

 

32.9

 

Other

 

54,635

 

17.4

 

46,170

 

14.7

 

Total

 

$

314,987

 

100.0

 

$

314,830

 

100.0

 

 


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

(2)          Includes facultative business.

 

16



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

6.      Reinsurance

 

In the normal course of business, the Company’s insurance subsidiaries cede a portion of their premium on a pro rata or excess of loss basis through treaty or facultative reinsurance agreements. The Company’s reinsurance subsidiaries also obtain reinsurance whereby another reinsurer contractually agrees to indemnify it for all or a portion of the reinsurance risks it underwrites. Such arrangements, where one reinsurer provides reinsurance to another reinsurer, are usually referred to as “retrocessional reinsurance” arrangements. In addition, the Company’s reinsurance subsidiaries participate in “common account” retrocessional arrangements for certain pro rata treaties. Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties, including the reinsurers, such as the Company’s reinsurance subsidiaries, and the ceding company. Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance or reinsurance subsidiaries would be liable for such defaulted amounts.

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Premiums Written

 

 

 

 

 

Direct

 

$

627,174

 

$

617,935

 

Assumed

 

337,392

 

335,752

 

Ceded

 

(200,288

)

(185,933

)

Net

 

$

764,278

 

$

767,754

 

 

 

 

 

 

 

Premiums Earned

 

 

 

 

 

Direct

 

$

573,006

 

$

600,645

 

Assumed

 

245,135

 

262,535

 

Ceded

 

(184,446

)

(193,263

)

Net

 

$

633,695

 

$

669,917

 

 

 

 

 

 

 

Losses and Loss Adjustment Expenses

 

 

 

 

 

Direct

 

$

393,584

 

$

398,951

 

Assumed

 

243,743

 

107,167

 

Ceded

 

(143,447

)

(78,067

)

Net

 

$

493,880

 

$

428,051

 

 

The Company monitors the financial condition of its reinsurers and attempts to place coverages only with substantial, financially sound carriers. At March 31, 2011, approximately 90.7% of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.77 billion were due from carriers which had an A.M. Best rating of “A-” or better and the largest reinsurance recoverables from any one carrier was less than 5.9% of the Company’s total shareholders’ equity. At December 31, 2010, approximately 91.1% of the Company’s reinsurance recoverables on paid and unpaid losses (not including prepaid reinsurance premiums) of $1.76 billion were due from carriers which had an A.M. Best rating of “A-” or better and the largest reinsurance recoverables from any one carrier was less than 5.5% of the Company’s total shareholders’ equity.

 

17



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

7.      Investment Information

 

The following table summarizes the Company’s invested assets:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Fixed maturities available for sale, at market value

 

$

9,033,408

 

$

9,082,828

 

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

 

161,888

 

75,575

 

Total fixed maturities

 

9,195,296

 

9,158,403

 

Short-term investments available for sale, at market value

 

1,130,142

 

915,841

 

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

 

36,530

 

 

TALF investments, at market value

 

400,970

 

402,449

 

Equity securities available for sale, at market value

 

419,893

 

363,255

 

Other investments

 

386,127

 

349,272

 

Investment funds accounted for using the equity method

 

395,258

 

434,600

 

Total investments (1)

 

11,964,216

 

11,623,820

 

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

 

(516,682

)

(144,047

)

Total investments, net of securities transactions

 

$

11,447,534

 

$

11,479,773

 

 


(1)          In securities lending transactions, the Company receives collateral in excess of the market value of the fixed maturities and short-term investments pledged under securities lending agreements. For purposes of this table, the Company has excluded the collateral received and reinvested of $195.1 million and $69.7 million at March 31, 2011 and December 31, 2010, respectively, and included the $198.4 million and $75.6 million, respectively, of “fixed maturities and short-term investments pledged under securities lending agreements, at market value.”

 

18



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Fixed Maturities and Equity Securities

 

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

 

 

 

Estimated

 

Gross

 

Gross

 

Cost or

 

OTTI

 

 

 

Market

 

Unrealized

 

Unrealized

 

Amortized

 

Unrealized

 

 

 

Value

 

Gains

 

Losses

 

Cost

 

Losses (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities and fixed maturities pledged under securities lending agreements:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

2,885,398

 

$

98,498

 

$

(13,879

)

$

2,800,779

 

$

(17,776

)

Mortgage backed securities

 

1,789,776

 

14,533

 

(22,430

)

1,797,673

 

(18,931

)

Municipal bonds

 

1,170,113

 

39,020

 

(4,552

)

1,135,645

 

(125

)

Commercial mortgage backed securities

 

1,164,745

 

25,817

 

(5,796

)

1,144,724

 

(3,453

)

U.S. government and government agencies

 

788,000

 

13,974

 

(2,441

)

776,467

 

(207

)

Non-U.S. government securities

 

779,416

 

43,697

 

(12,237

)

747,956

 

(72

)

Asset backed securities

 

617,848

 

23,681

 

(4,199

)

598,366

 

(3,927

)

Total

 

$

9,195,296

 

$

259,220

 

$

(65,534

)

$

9,001,610

 

$

(44,491

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

419,893

 

$

33,442

 

$

(7,194

)

$

393,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities and fixed maturities pledged under securities lending agreements:

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

2,839,344

 

$

97,400

 

$

(18,343

)

$

2,760,287

 

$

(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

 

$

9,158,403

 

$

268,715

 

$

(79,802

)

$

8,969,490

 

$

(47,033

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

363,255

 

$

20,660

 

$

(3,424

)

$

346,019

 

 

 

 


(1)          Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in market value subsequent to the impairment measurement date. At March 31, 2011, the net unrealized gain related to securities for which a non-credit OTTI was recognized in AOCI was $1.8 million, compared to a net unrealized loss of $7.1 million at December 31, 2010.

 

19



Table of Contents

 

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Estimated

 

Gross

 

Estimated

 

Gross

 

Estimated

 

Gross

 

 

 

Market

 

Unrealized

 

Market

 

Unrealized

 

Market

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities and fixed maturities pledged under securities lending agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

729,974

 

$

(12,180

)

$

42,603

 

$

(1,699

)

$

772,577

 

$

(13,879

)

Mortgage backed securities

 

870,558

 

(18,123

)

38,531

 

(4,307

)

909,089

 

(22,430

)

Municipal bonds

 

289,375

 

(3,939

)

8,363

 

(613

)

297,738

 

(4,552

)

Commercial mortgage backed securities

 

380,147

 

(5,238

)

11,223

 

(558

)

391,370

 

(5,796

)

U.S. government and government agencies

 

264,821

 

(2,441

)

 

 

264,821

 

(2,441

)

Non-U.S. government securities

 

349,955

 

(9,082

)

47,359

 

(3,155

)

397,314

 

(12,237

)

Asset backed securities

 

111,381

 

(1,321

)

8,468

 

(2,878

)

119,849

 

(4,199

)

 

 

2,996,211

 

(52,324

)

156,547

 

(13,210

)

3,152,758

 

(65,534

)

Equity securities

 

103,279

 

(7,136

)

585

 

(58

)

103,864

 

(7,194

)

Other investments

 

52,704

 

(1,551

)

3,015

 

(281

)

55,719

 

(1,832

)

Short-term investments

 

19,757

 

(390

)

 

 

19,757

 

(390

)

Total

 

$

3,171,951

 

$

(61,401

)

$

160,147

 

$

(13,549

)

$

3,332,098

 

$

(74,950

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities and fixed maturities pledged under securities lending agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

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