10-QPeriod: Q1 FY2011

ARCH CAPITAL GROUP LTD. Quarterly Report for Q1 Ended Mar 31, 2011

Filed May 9, 2011For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported its first quarter 2011 financial results. The company experienced a significant decrease in net income compared to the prior year, primarily due to a substantial increase in losses from catastrophic events, including the Japanese earthquake and tsunami, and events in New Zealand and Australia. While net premiums written remained relatively stable, net premiums earned declined across both the insurance and reinsurance segments. Despite the challenging quarter marked by significant catastrophe losses, the company's book value per common share saw a modest increase. Management's focus remains on disciplined underwriting and achieving long-term operating return on equity targets. The company also continued its share repurchase program, which had an accretive impact on book value per share.

Financial Highlights

27 data points
Beta

Revenue

$775.07M

Net Income

$25.47M

3.3% Net Margin

EPS (Diluted)

$0.05

Total Assets

$17.19B

Cash & Equivalents

$406.88M

Free Cash Flow

$224.58M

Financial Statements
Beta
Revenue$775.07M
Interest Expense$7.72M
Net Income$25.47M
EPS (Basic)$0.05
EPS (Diluted)$0.05
Shares Outstanding (Basic)400.50M
Shares Outstanding (Diluted)421.38M

Key Highlights

  • 1Net income for the quarter significantly decreased year-over-year, largely driven by $178.7 million in net losses from catastrophic events.
  • 2Net premiums written remained stable at $764.3 million, down slightly from $767.8 million in Q1 2010, while net premiums earned decreased to $633.7 million from $669.9 million.
  • 3The insurance segment reported an underwriting loss of $25.5 million with a combined ratio of 106.2%, impacted by higher current year losses and prior period reserve development.
  • 4The reinsurance segment also experienced an underwriting loss of $38.0 million and a combined ratio of 116.8%, significantly affected by a substantial increase in current year catastrophe losses.
  • 5Book value per common share increased to $91.02 from $89.98 at the end of 2010, reflecting the impact of share repurchases and investment returns, partially offset by catastrophe losses.
  • 6The company repurchased approximately 2.7 million common shares for $237.2 million in the first quarter of 2011, consistent with its ongoing share repurchase program.
  • 7Net investment income decreased to $88.3 million from $92.9 million in the prior year's quarter, influenced by lower reinvestment yields and an increased allocation to equities.

Frequently Asked Questions

The primary driver of the significant decrease in net income was a substantial increase in losses from catastrophic events. These included losses from the Japanese earthquake and tsunami, the New Zealand earthquake, and Australian floods/Cyclone Yasi, resulting in $178.7 million in net losses after reinsurance, compared to $58.1 million in the prior year's quarter.

Both the insurance and reinsurance segments reported underwriting losses. The insurance segment had an underwriting loss of $25.5 million with a combined ratio of 106.2%. The reinsurance segment experienced a larger underwriting loss of $38.0 million with a combined ratio of 116.8%. Both segments were negatively impacted by higher current year catastrophe losses and, in the case of reinsurance, a significant increase in the current year loss ratio.

The company noted a competitive market environment with slight price declines in longer-tail product lines. For reinsurance, market conditions were relatively unchanged except for international catastrophe-exposed business, which saw increased submission activity due to industry losses. Arch Capital aims for an average operating return on average equity of 15% or greater over the insurance cycle, emphasizing underwriting discipline and seeking opportunities in catastrophe-exposed business, which may increase operating result volatility.

The company continued its share repurchase program, repurchasing approximately 2.7 million common shares for $237.2 million in the first quarter of 2011. As of March 31, 2011, approximately $992.4 million remained available under the authorized repurchase program, which is expected to continue through December 2012. These repurchases had an accretive impact on book value per common share.