10-QPeriod: Q3 FY2008

ARCH CAPITAL GROUP LTD. Quarterly Report for Q3 Ended Sep 30, 2008

Filed November 10, 2008For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported its third quarter and year-to-date results for the period ending September 30, 2008. The company experienced a significant decline in net income available to common shareholders, largely driven by substantial underwriting losses attributed to Hurricanes Gustav and Ike, and net realized losses on its investment portfolio. Despite these challenges, ACGL's underwriting segments, insurance and reinsurance, continue to operate, though both reported underwriting losses for the quarter. The company's balance sheet shows total assets of $16.1 billion and total liabilities of $12.6 billion. Shareholders' equity stands at $3.5 billion. The company continued its share repurchase program, reducing the weighted average number of shares outstanding, which positively impacted earnings per share despite lower net income. Management highlighted ongoing market volatility and its potential impact on future results and capital access, while also noting a focus on catastrophe-related property business.

Key Highlights

  • 1Net income available to common shareholders decreased significantly to $26.4 million for Q3 2008 from $199.7 million in Q3 2007.
  • 2Hurricanes Gustav and Ike resulted in estimated after-tax net losses of $133.0 million ($2.12 per share) for the nine months ended September 30, 2008.
  • 3The company reported net realized losses of $105.5 million for Q3 2008, largely due to other-than-temporary impairment charges on its investment portfolio, including $22.8 million related to Lehman Brothers Holdings Inc. securities.
  • 4The insurance segment incurred an underwriting loss of $30.1 million and a combined ratio of 106.8% in Q3 2008.
  • 5The reinsurance segment incurred an underwriting loss of $8.4 million and a combined ratio of 102.9% in Q3 2008.
  • 6Diluted weighted average common shares outstanding decreased to 62.8 million in Q3 2008 from 72.4 million in Q3 2007, primarily due to share repurchases.
  • 7Total investable assets remained stable at approximately $10.14 billion as of September 30, 2008, though fair value was impacted by market conditions.

Frequently Asked Questions

The primary drivers for the decrease in net income available to common shareholders were substantial underwriting losses stemming from Hurricanes Gustav and Ike, coupled with significant net realized losses on the company's investment portfolio, particularly due to other-than-temporary impairments.

The company's investment portfolio experienced net realized losses of $105.5 million in the third quarter of 2008. This was significantly impacted by other-than-temporary impairment charges totaling $82.5 million, including $22.8 million related to securities issued by Lehman Brothers Holdings Inc. The report also notes continued deterioration in credit markets after the quarter's end.

Management notes that recent financial market disruptions and catastrophic events are beginning to positively affect market conditions, potentially leading to rate strengthening in specialty lines. However, they also acknowledge that economic conditions could negatively impact claims frequency and severity, and market volatility can affect investment returns. The company continues to view catastrophe-related property business as attractive and expects it to remain a significant proportion of its portfolio, though this could increase earnings volatility.

The company's ongoing share repurchase program has reduced the weighted average number of common shares outstanding. This helped to mitigate the impact of lower net income on earnings per share, resulting in a diluted EPS of $0.42 for Q3 2008, down from $2.76 in Q3 2007, but less of a proportional decrease than the net income decline. The program also reduced book value per common share by $3.20.