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ARCH CAPITAL GROUP LTD. Annual Report (Amendment), Year Ended Dec 31, 2005

Filing Date
Filed June 23, 2006
Period End
December 31, 2005
Securities
ACGLACGLNACGLO
In the record · 2016–202610-K1110-Q328-K172

ACGL filed 11 annual reports (10-K), 32 quarterly reports (10-Q) and 172 current reports (8-K) between 2016 and 2026.

  1. Leadership change8-K · Nov ’17Nov ’17
  2. Material agreement8-K · Dec ’19Dec ’19
  3. Material agreement8-K · Apr ’22Apr ’22
  4. FY2024 annual report10-K · Feb ’25Feb ’25

01—Abstract

Summary

Summary of the 10-K/A filed June 23, 2006. Cited figures are marked; the original filing is the authoritative source.

Arch Capital Group Ltd. (ACGL) filed this Form 10-K/A on June 23, 2006 for fiscal year 2005.

The amendment is narrow: it corrects the date of the PricewaterhouseCoopers audit report and the reference in Exhibit 23 to March 13, 2006; otherwise the original 10-K (filed March 13, 2006) is unchanged. The underlying disclosures show a Bermuda-domiciled specialty insurer and reinsurer with about $2.8 billiona of capital, $3.14 billion of net premiums written, and 2005 net income of $256.5 million, down from $316.9 million in 2004, with return on average equity of 10.9% versus 16.0%. The decline was driven mainly by 2005's heavy catastrophe losses from Hurricanes Katrina, Rita, Wilma and Dennis, along with a $52.5 million net realized loss on investments that included $25.7 million of other-than-temporary impairments.

Diluted book value per share rose 9.0% to $33.82b. Underwriting results were mixed. The reinsurance segment's combined ratio deteriorated to 97.5% (from 92.4%) and insurance to 93.8% (from 91.6%), with underwriting income falling to $133.3 million.

Partly offsetting this, net investment income rose 62% to $232.9 millionc on higher yields and a larger portfolio, and the company recorded $119 million of favorable prior-year reserve development. Gross reserves reached $5.45 billion, up from $3.49 billion, reflecting rapid growth since the October 2001 underwriting launch.

Capital actions included a $200 milliond 8.00% series A preferred issuance in February 2006 and the conversion of 37.3 million preference shares into common stock. Key risks for investors include the company's relative newness (limited reserve history), dependence on a few brokers (Marsh 19.2%, Aon 13.3% of gross premiums), a 45% quota share ceded to Flatiron Re for 2006-2007, expected sharply higher reinsurance costs in 2006, the influence of Warburg Pincus and Hellman & Friedman (about 43.9% of voting shares), and the possibility of Bermuda taxation after March 28, 2016.

02—Key points

Key Highlights

  1. 2005 net income fell 19% to $256.5 million (diluted EPS $3.43 vs. $4.37), mainly due to catastrophe losses from the second-half 2005 hurricanes.
  2. Diluted book value per share grew 9.0% to $33.82; ROE was 10.9% versus 16.0% in 2004.
  3. Gross premiums written reached $4.01 billion and net premiums written $3.14 billion, up about 5% year over year.
  4. Reinsurance combined ratio rose to 97.5% and insurance to 93.8%, with 2005 hurricane losses of roughly $192 million net (reinsurance) and $140 million net (insurance).
  5. Net investment income rose 62% to $232.9 million, with the portfolio yield up to 3.7% and average credit quality AA+.
  6. Favorable prior-year reserve development of $119 million supported results, though the net reserve base grew to $4.06 billion.
  7. Capital position strengthened by a $200 million preferred issuance in February 2006 and the conversion of preference shares into common equity; Flatiron Re quota share (45%) starts in 2006 to shift part of property/marine risk.

03—Questions

Frequently Asked Questions

  1. Why is this filing a 10-K/A, and does it change the financial results?

    The amendment only corrects dates in Exhibit 23 and the auditor's report, which should both read March 13, 2006. No financial figures or other content were changed from the original 10-K filed March 13, 2006.

  2. What drove the decline in 2005 profitability?

    Higher catastrophe activity, mainly Hurricanes Katrina, Rita, Wilma and Dennis. Net realized investment losses of $53.5 million, including $25.7 million of other-than-temporary impairments, also weighed on results, while investment income and reserve releases partly offset these.

  3. How exposed is ACGL to a few large brokers and reinsurers?

    Marsh & McLennan generated 19.2% and Aon 13.3% of 2005 gross premiums written. About 92.6% of reinsurance recoverables were from carriers rated A- or better, and no single reinsurer exceeded 5.6% of shareholders' equity.

  4. What does the Flatiron Re arrangement mean for investors?

    Flatiron Re Ltd. assumes a 45% quota share of certain Arch Re Bermuda property and marine business for the 2006 and 2007 underwriting years. This reduces ACGL's net exposure and adds profit-commission volatility, and its funded-trust requirements (up to $900 million by July 2006) create counterparty dependence.

  5. What are the main governance and dilution risks?

    Warburg Pincus and Hellman & Friedman together hold about 43.9% of voting shares and can nominate a board majority while their stakes stay above set thresholds. Their shareholders agreement also bars common dividends or buybacks until $250 million of common shares is repurchased from them, and the bye-laws include anti-takeover provisions and a 9.9% voting cap on U.S. persons.

04—Continue

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