10-QPeriod: Q2 FY2011

ARCH CAPITAL GROUP LTD. Quarterly Report for Q2 Ended Jun 30, 2011

Filed August 5, 2011For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported its financial results for the quarter ending June 30, 2011. The company demonstrated resilience in a competitive market, with total revenues remaining stable compared to the prior year's quarter. However, net income available to common shareholders saw a significant decrease, primarily due to an increase in losses and loss adjustment expenses, particularly from catastrophic events. Investment income also experienced a slight decline. The company actively managed its capital through share repurchases, although this activity, combined with the impact of catastrophe losses, led to a decrease in total shareholders' equity compared to the end of the previous year. Despite the challenges, ACGL's underwriting segments, particularly reinsurance, showed strong premium growth. The company continues to focus on specialty lines and catastrophe-exposed business, which experienced improved pricing. Management remains focused on achieving its long-term operating return on equity target and maintaining financial discipline. Investors should note the impact of significant catastrophe events on quarterly results and the ongoing sensitivity to market and economic conditions.

Financial Highlights

28 data points
Beta

Revenue

$775.57M

Net Income

$96.60M

12.5% Net Margin

EPS (Diluted)

$0.22

Total Assets

$17.21B

Cash & Equivalents

$411.00M

Free Cash Flow

$221.97M

Financial Statements
Beta
Revenue$775.57M
Interest Expense$7.76M
Net Income$96.60M
EPS (Basic)$0.23
EPS (Diluted)$0.22
Shares Outstanding (Basic)393.70M
Shares Outstanding (Diluted)413.93M

Key Highlights

  • 1Total revenues for the three months ended June 30, 2011, were $775.6 million, relatively flat compared to $776.3 million in the prior year's quarter.
  • 2Net income available to common shareholders decreased to $91.9 million ($0.67 per diluted share) from $237.0 million ($1.48 per diluted share) in the same period last year, largely driven by increased losses and loss adjustment expenses.
  • 3Losses and loss adjustment expenses increased significantly to $431.6 million from $363.1 million in the prior year's quarter, with a substantial portion attributed to catastrophic events.
  • 4Net premiums written increased to $706.5 million from $624.3 million in the prior year's quarter, reflecting growth in both insurance and reinsurance segments.
  • 5The company repurchased $29.6 million of its common shares in the second quarter of 2011, compared to $269.1 million in the same quarter of 2010.
  • 6Book value per common share increased to $31.00 as of June 30, 2011, from $29.99 as of December 31, 2010.
  • 7The reinsurance segment experienced a notable increase in gross premiums written (36.4%) and a decrease in underwriting income due to higher catastrophe losses, while the insurance segment saw a smaller increase in premiums written and an increase in underwriting loss.

Frequently Asked Questions

The primary driver for the decrease in net income available to common shareholders was a substantial increase in losses and loss adjustment expenses, particularly due to significant catastrophic events during the quarter, which more than offset growth in net premiums written and investment income.

The company's investment portfolio generated $86.7 million in net investment income for the quarter, a slight decrease from $90.5 million in the prior year's quarter. Net realized gains were $45.2 million, down from $62.1 million in the prior year's quarter. The total return on the portfolio was 1.65%, which underperformed its benchmark by 28 basis points, primarily due to shorter duration and widening credit spreads.

Arch Capital Group Ltd. has an ongoing share repurchase program authorized by its board of directors. In the second quarter of 2011, the company repurchased $29.6 million worth of shares. While this activity reduces outstanding shares, the overall impact on book value per share depends on the purchase price relative to book value. Share repurchases are conducted based on market conditions and corporate considerations.

The company actively monitors its natural catastrophe risk globally. It aims to limit its 1-in-250 year return period net probable maximum pre-tax loss from a severe catastrophic event in any geographic zone to approximately 25% of total shareholders' equity. The company uses sophisticated modeling systems and regularly assesses its exposures, although actual losses can vary materially from these modeled estimates.