10-QPeriod: Q3 FY2009

ARCH CAPITAL GROUP LTD. Quarterly Report for Q3 Ended Sep 30, 2009

Filed November 9, 2009For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported a strong third quarter and nine-month period ended September 30, 2009, demonstrating significant recovery and growth compared to the prior year. The company's net income available to common shareholders surged to $274.4 million for the quarter and $566.4 million year-to-date, representing substantial year-over-year increases. This improvement was driven by a robust performance in both the insurance and reinsurance segments, particularly a turnaround in underwriting income. The reinsurance segment saw a notable increase in underwriting income and a significant reduction in its combined ratio, while the insurance segment also moved from a loss to a profit. Investment income, while down from the prior year due to lower yields, remained a significant contributor, supplemented by strong net realized gains and a substantial increase in equity in net income from investment funds. The company also repurchased a considerable amount of its common stock, indicating confidence in its financial position and a commitment to returning value to shareholders. The balance sheet reflects growth in total investments and shareholders' equity, signaling a healthy financial position.

Financial Highlights

19 data points
Beta

Revenue

$976.23M

Net Income

$280.87M

28.8% Net Margin

EPS (Diluted)

$0.49

Cash & Equivalents

$385.15M

Free Cash Flow

$290.12M

Financial Statements
Beta
Revenue$976.23M
Interest Expense$6.00M
Net Income$280.87M
EPS (Basic)$0.51
EPS (Diluted)$0.49
Shares Outstanding (Basic)541.41M
Shares Outstanding (Diluted)562.80M

Key Highlights

  • 1Net income available to common shareholders reached $274.4 million for Q3 2009, a substantial increase from $26.4 million in Q3 2008.
  • 2Year-to-date net income available to common shareholders was $566.4 million, up from $408.1 million in the prior year.
  • 3The reinsurance segment reported underwriting income of $66.4 million for Q3 2009, a significant improvement from an $8.4 million loss in Q3 2008.
  • 4The insurance segment achieved underwriting income of $7.4 million for Q3 2009, reversing a $30.1 million loss in Q3 2008.
  • 5Total investments grew to $11.55 billion as of September 30, 2009, from $9.97 billion at December 31, 2008.
  • 6Shareholders' equity increased to $4.46 billion from $3.43 billion over the same period.
  • 7The company repurchased approximately 1.54 million shares for $98.2 million in the third quarter and 1.6 million shares for $99.7 million year-to-date, continuing its share repurchase program.

Frequently Asked Questions

Arch Capital Group Ltd. showed significant improvement in the third quarter of 2009 compared to the third quarter of 2008. Net income available to common shareholders increased substantially from $26.4 million to $274.4 million. This was driven by improved underwriting results in both the insurance and reinsurance segments, with both segments moving from losses or significantly lower profits to positive underwriting income. Net investment income decreased due to lower yields, but net realized gains and equity in net income from investment funds increased.

The company noted that while market conditions had stabilized and shown some improvements in rates in the first half of 2009, the pace of rate improvement moderated in the third quarter. They anticipate that current economic conditions could continue to impact claim frequency and severity, potentially affecting underwriting returns. Volatility in financial markets is also expected to continue affecting investment returns and equity. The company sees U.S. catastrophe-related property business as an attractive area for pricing.

Arch Capital Group's shareholders' equity stood at $4.46 billion as of September 30, 2009, an increase from $3.43 billion at the end of 2008, primarily due to net income and favorable investment performance. The company has an active share repurchase program, having bought back approximately 1.6 million shares for $99.7 million in the first nine months of 2009, and authorized an additional $1.0 billion for repurchases. They also have access to credit facilities and are focused on maintaining capital adequacy to support their financial strength ratings and underwriting capacity.

The company's total investments grew to $11.55 billion from $9.97 billion. Net investment income decreased due to lower yields and a reduction in portfolio duration, but was complemented by strong net realized gains. The company also reported a significant increase in equity in net income from investment funds accounted for using the equity method. The portfolio consists mainly of fixed maturities, with a significant portion rated 'AA+' by Standard & Poor's. The company is actively managing its investments with a focus on capital preservation, liquidity, and diversification.