10-QPeriod: Q3 FY2013

ARCH CAPITAL GROUP LTD. Quarterly Report for Q3 Ended Sep 30, 2013

Filed November 8, 2013For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported solid performance in the third quarter of 2013, with improvements in underwriting results across both its insurance and reinsurance segments. The company is strategically navigating a moderately improving market environment, characterized by moderating rate increases but still indicating a need for further rate adjustments in certain longer-tail casualty lines. ACGL's disciplined underwriting strategy, focusing on specialty lines and emphasizing smaller accounts and short-tail business, continues to yield positive results. Financially, the company demonstrated growth in book value per common share, driven by strong underwriting. While net investment income experienced a slight decline compared to the previous year due to lower reinvestment yields and higher investment expenses, the overall investment portfolio performance was stable. ACGL maintained a strong capital base and managed its exposures, particularly to natural catastrophe risks, by adhering to its probable maximum loss thresholds. The company also made progress on strategic initiatives, including the expansion of its U.S. insurance underwriting platform and the ongoing acquisition of CMG Mortgage Insurance Company.

Financial Highlights

28 data points
Beta

Revenue

$861.15M

Net Income

$114.83M

13.3% Net Margin

EPS (Diluted)

$0.27

Total Assets

$18.93B

Cash & Equivalents

$436.14M

Free Cash Flow

$238.69M

Financial Statements
Beta
Revenue$861.15M
Interest Expense$5.94M
Net Income$114.83M
EPS (Basic)$0.28
EPS (Diluted)$0.27
Shares Outstanding (Basic)394.49M
Shares Outstanding (Diluted)408.10M

Key Highlights

  • 1Book value per common share increased by 4.2% in Q3 2013 to $38.34, driven by strong underwriting results.
  • 2The insurance segment's combined ratio improved by 3.0 percentage points to 96.8% in Q3 2013, indicating better underwriting profitability.
  • 3The reinsurance segment reported a significant increase in underwriting income of 31.8% in Q3 2013, with a combined ratio of 69.6%.
  • 4Gross premiums written increased by 3.7% in the insurance segment and 26.9% in the reinsurance segment for Q3 2013 compared to the prior year, reflecting growth across various lines of business.
  • 5Net investment income decreased in Q3 2013 due to lower reinvestment yields and higher investment expenses, impacting overall investment returns.
  • 6The company managed its natural catastrophe risk, with modeled peak zone exposures for windstorms in the Northeastern U.S. and Gulf of Mexico, and maintained its probable maximum loss threshold.
  • 7ACGL continues to repurchase its common shares, with $712.1 million available under its share repurchase program as of September 30, 2013.

Frequently Asked Questions

Arch Capital Group Ltd. focuses on writing specialty lines of insurance and reinsurance on a worldwide basis. Its strategy emphasizes disciplined underwriting, maintaining a strong capital base, and expanding its insurance underwriting platform, particularly in the U.S. excess and surplus lines market.

Both the insurance and reinsurance segments showed improved underwriting performance. The insurance segment's combined ratio decreased from 99.8% to 96.8%, driven by a lower loss ratio. The reinsurance segment also saw its combined ratio improve from 75.3% to 69.6%, with a significant increase in underwriting income.

The growth in book value per common share is primarily driven by strong underwriting results. The company aims for an average operating return on average equity of 15% or greater over the insurance cycle.

ACGL's investment strategy emphasizes capital preservation, market liquidity, and diversification. The company monitors its investment portfolio for various risks, including interest rate risk, credit spread widening, and foreign currency exchange rate fluctuations. While net investment income was lower in Q3 2013 compared to Q3 2012, the overall investment portfolio remained substantial and managed within established guidelines.