Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income available
to common shareholders for the 2013 fourth quarter was $156.0 million,
or $1.14 per share, compared to $13.7 million, or $0.10 per share, for
the 2012 fourth quarter, while after-tax operating income available to
common shareholders was $152.7 million, or $1.12 per share, for the 2013
fourth quarter, compared to an after-tax operating loss available to
common shareholders of $24.7 million, or $0.18 per share, for the 2012
fourth quarter. For 2013, net income available to common shareholders
was $687.8 million, or $5.07 per share, compared to $557.7 million, or
$4.03 per share, for 2012, while after-tax operating income available to
common shareholders was $595.7 million, or $4.39 per share for 2013,
compared to $350.6 million, or $2.54 per share, for 2012.
The Company's book value per common share was $39.82 at December 31,
2013, a 3.9% increase from $38.34 per share at September 30, 2013 and a
10.0% increase from $36.19 per share at December 31, 2012. The Company's
after-tax operating income available to common shareholders represented
an annualized return on average common equity of 11.7% for the 2013
fourth quarter, compared to (2.0)% for the 2012 fourth quarter, and
11.7% for 2013, compared to 7.7% for 2012. The Company's net income
available to common shareholders represented a return on average common
equity of 13.5% for 2013, compared to 12.2% for 2012.
After-tax operating income or loss available to common shareholders, a
non-GAAP measure, is defined as net income available to common
shareholders, excluding net realized gains or losses, net impairment
losses recognized in earnings, equity in net income or loss of
investment funds accounted for using the equity method, net foreign
exchange gains or losses and loss on repurchase of preferred shares, net
of income taxes. See 'Comments on Regulation G' for a further discussion
of after-tax operating income or loss available to common shareholders.
All earnings per share amounts discussed in this release are on a
diluted basis.
The following table summarizes the Company's underwriting results:
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31,
|
|
|
|
December 31,
|
(U.S. dollars in thousands)
|
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
|
|
|
$
|
955,199
|
|
|
|
|
$
|
813,928
|
|
|
|
|
$
|
4,196,623
|
|
|
|
|
$
|
3,869,161
|
|
Net premiums written
|
|
|
|
|
748,921
|
|
|
|
|
613,142
|
|
|
|
|
3,351,367
|
|
|
|
|
3,052,235
|
|
Net premiums earned
|
|
|
|
|
839,366
|
|
|
|
|
779,481
|
|
|
|
|
3,145,952
|
|
|
|
|
2,935,140
|
|
Underwriting income (loss)
|
|
|
|
|
128,318
|
|
|
|
|
(91,334
|
)
|
|
|
|
451,737
|
|
|
|
|
143,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio (1)
|
|
|
|
|
85.3
|
%
|
|
|
|
112.4
|
%
|
|
|
|
85.9
|
%
|
|
|
|
95.4
|
%
|
|
(1)
|
|
The combined ratio represents a measure of underwriting
profitability, excluding investment income, and is the sum of the
loss ratio and expense ratio. A combined ratio under 100% represents
an underwriting profit and a combined ratio over 100% represents an
underwriting loss.
|
|
For the 2013 fourth quarter, the combined ratio of the Company's
insurance and reinsurance subsidiaries consisted of a loss ratio of
51.7% and an underwriting expense ratio of 33.6%, compared to a loss
ratio of 79.9% and an underwriting expense ratio of 32.5% for the 2012
fourth quarter. For a discussion of underwriting activities and a review
of the Company's results by operating segment, see “Segment Information”
in the Supplemental Financial Information section of this release.
The following table summarizes, on an after-tax basis, the Company's
consolidated financial data, including a reconciliation of after-tax
operating income or loss available to common shareholders to net income
available to common shareholders and related diluted per share results:
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31,
|
|
|
|
December 31,
|
(U.S. dollars in thousands, except share data)
|
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax operating income (loss) available to common shareholders
|
|
|
|
|
$
|
152,741
|
|
|
|
|
$
|
(24,667
|
)
|
|
|
|
$
|
595,715
|
|
|
|
|
$
|
350,640
|
|
Net realized gains, net of tax
|
|
|
|
|
8,584
|
|
|
|
|
51,031
|
|
|
|
|
73,844
|
|
|
|
|
184,083
|
|
Net impairment losses recognized in earnings, net of tax
|
|
|
|
|
(88
|
)
|
|
|
|
(6,035
|
)
|
|
|
|
(3,786
|
)
|
|
|
|
(11,388
|
)
|
Equity in net income of investment funds accounted for using the
equity
method, net of tax
|
|
|
|
|
5,309
|
|
|
|
|
16,567
|
|
|
|
|
35,738
|
|
|
|
|
73,510
|
|
Net foreign exchange losses, net of tax
|
|
|
|
|
(10,541
|
)
|
|
|
|
(23,164
|
)
|
|
|
|
(13,718
|
)
|
|
|
|
(28,527
|
)
|
Loss on repurchase of preferred shares, net of tax
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(10,612
|
)
|
Net income available to common shareholders
|
|
|
|
|
$
|
156,005
|
|
|
|
|
$
|
13,732
|
|
|
|
|
$
|
687,793
|
|
|
|
|
$
|
557,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per common share results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax operating income (loss) available to common shareholders
|
|
|
|
|
$
|
1.12
|
|
|
|
|
$
|
(0.18
|
)
|
|
|
|
$
|
4.39
|
|
|
|
|
$
|
2.54
|
|
Net realized gains, net of tax
|
|
|
|
|
0.06
|
|
|
|
|
0.37
|
|
|
|
|
0.54
|
|
|
|
|
1.33
|
|
Net impairment losses recognized in earnings, net of tax
|
|
|
|
|
—
|
|
|
|
|
(0.04
|
)
|
|
|
|
(0.03
|
)
|
|
|
|
(0.08
|
)
|
Equity in net income of investment funds accounted for using the
equity
method, net of tax
|
|
|
|
|
0.04
|
|
|
|
|
0.12
|
|
|
|
|
0.27
|
|
|
|
|
0.53
|
|
Net foreign exchange losses, net of tax
|
|
|
|
|
(0.08
|
)
|
|
|
|
(0.17
|
)
|
|
|
|
(0.10
|
)
|
|
|
|
(0.21
|
)
|
Loss on repurchase of preferred shares, net of tax
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(0.08
|
)
|
Net income available to common shareholders
|
|
|
|
|
$
|
1.14
|
|
|
|
|
$
|
0.10
|
|
|
|
|
$
|
5.07
|
|
|
|
|
$
|
4.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common share equivalents
outstanding - diluted
|
|
|
|
|
136,467,998
|
|
|
|
|
138,270,853
|
|
|
|
|
135,777,183
|
|
|
|
|
138,258,847
|
|
|
At December 31, 2013, the Company's investment portfolio had an average
credit quality of “AA-/Aa2” with 83% held in fixed maturities and
short-term investments, compared to “AA-/Aa2” and 84% at December 31,
2012. The average effective duration of the Company's investment
portfolio was 2.62 years at December 31, 2013, compared to 3.06 years at
December 31, 2012. Including the effects of foreign exchange, the total
return on the Company's investment portfolio was 0.97% for the 2013
fourth quarter, compared to 0.80% for the 2012 fourth quarter. Excluding
the effects of foreign exchange, the total return was 0.85% for the 2013
fourth quarter, compared to 0.67% for the 2012 fourth quarter.
Net investment income for the 2013 fourth quarter was $67.1 million, or
$0.49 per share, compared to $66.1 million, or $0.49 per share, for the
2013 third quarter, and $73.8 million, or $0.53 per share, for the 2012
fourth quarter. The annualized pre-tax investment income yield was 2.08%
for the 2013 fourth quarter, compared to 2.08% for the 2013 third
quarter and 2.46% for the 2012 fourth quarter. Such yields reflect the
effects of prevailing interest rates and the Company's investment
strategy, which puts a priority on total return. Consolidated cash flow
provided by operating activities was $223.8 million for the 2013 fourth
quarter, compared to $189.7 million for the 2012 fourth quarter, with
the increase primarily due to an incoming unearned premium transfer in
the reinsurance segment during the 2013 fourth quarter.
The Company's effective tax rate on income before income taxes was an
expense of 8.7% for the 2013 fourth quarter and 4.4% for 2013, while the
Company's effective tax rate on pre-tax operating income was an expense
of 8.3% for the 2013 fourth quarter and 4.8% for 2013. For 2012, the
Company's effective tax rates on income before income taxes and pre-tax
operating income were a benefit of 0.7% and 3.8%, respectively, while
the 2012 fourth quarter ratios were not meaningful. The Company's
effective tax rates may fluctuate from period to period based on the
relative mix of income or loss reported by jurisdiction and the varying
tax rates in each jurisdiction. The Company's quarterly tax provision is
adjusted to reflect changes in its effective tax rate, if any. Effective
January 1, 2013, the legal structure of the insurance segment's Canadian
operations changed whereby they ceased being a branch and incorporated
under applicable Canadian law. As a result of operating losses in 2013,
due in part to catastrophic activity, the Company recorded a valuation
allowance against its Canadian operation's deferred tax asset in the
2013 fourth quarter. This resulted in an increase in the effective tax
rate on pre-tax operating income of 6.1 points for the 2013 fourth
quarter and 1.6 points for 2013. In addition, the Company's
Bermuda-based reinsurer incurs federal excise taxes for premiums assumed
on U.S. risks. The Company incurred $9.5 million of federal excise taxes
for the year ended December 31, 2013, compared to $8.6 million for the
2012 period. Such amounts are reflected as acquisition expenses in the
Company's consolidated statements of income.
On a pre-tax basis, net foreign exchange losses for the 2013 fourth
quarter were $9.8 million (net unrealized losses of $7.4 million and net
realized losses of $2.5 million), compared to net foreign exchange
losses for the 2012 fourth quarter of $23.0 million (net unrealized
losses of $22.4 million and net realized losses of $0.6 million). Net
unrealized foreign exchange gains or losses result from the effects of
revaluing the Company's net insurance liabilities required to be settled
in foreign currencies at each balance sheet date. Changes in the value
of available-for-sale investments held in foreign currencies due to
foreign currency rate movements are reflected as a direct increase or
decrease to shareholders' equity and are not included in the
consolidated statements of income. At times, the Company has chosen not
to match portions of its projected liabilities in foreign currencies
with investments in the same currencies and may not match such amounts
in future periods, which could increase the Company's exposure to
foreign currency fluctuations and increase the volatility of the
Company's shareholders' equity.
On December 13, 2013, Arch Capital Group (U.S.) Inc. (“Arch-U.S.”), a
wholly-owned subsidiary of the Company, completed the public offering of
$500 million aggregate principal amount of its 5.144% senior notes
issued at par and due November 1, 2043, fully and unconditionally
guaranteed by the Company. The senior notes and the guarantee are
unsecured and unsubordinated obligations of Arch-U.S. and the Company,
respectively, and rank equally and ratably with the other unsecured and
unsubordinated indebtedness of Arch-U.S. and the Company. A portion of
the proceeds from the offering were used to fund the acquisition of the
mortgage operations as discussed below. In addition, the proceeds are
available for other corporate purposes.
As previously disclosed, on January 30, 2014, the Company’s U.S.-based
subsidiaries (“Arch U.S. MI”) completed the acquisition of CMG Mortgage
Insurance Company (“CMG MI”) and the mortgage insurance operating
platform of PMI Mortgage Insurance Co. (“PMI”). As part of the
transaction, CMG MI has obtained approval as an eligible mortgage
insurer from Fannie Mae and Freddie Mac, subject to maintaining certain
ongoing requirements. CMG MI will be renamed “Arch Mortgage Insurance
Company” following receipt of all applicable state approvals.
At December 31, 2013, the Company's capital of $6.55 billion consisted
of $800.0 million of senior notes, representing 12.2% of the total,
$100.0 million of revolving credit agreement borrowings due in August
2014, representing 1.5% of the total, $325.0 million of preferred
shares, representing 5.0% of the total, and common shareholders' equity
of $5.32 billion, representing the balance of 81.3%. At December 31,
2012, the Company's capital of $5.57 billion consisted of $300.0 million
of senior notes, representing 5.4% of the total, $100.0 million of
revolving credit agreement borrowings, representing 1.8% of the total,
$325.0 million of preferred shares, representing 5.8% of the total, and
common shareholders' equity of $4.84 billion, representing the balance
of 87.0%.
The Company will hold a conference call for investors and analysts at
11:00 a.m. Eastern Time on Wednesday, February 12, 2014. A live webcast
of this call will be available via the Investor Relations - Events &
Presentations section of the Company's website at http://www.archcapgroup.bm.
A telephone replay of the conference call also will be available
beginning on February 12, 2014 at 3:00 p.m. Eastern Time until February
19, 2014 at midnight Eastern Time. To access the replay, domestic
callers should dial 888-286-8010 (passcode 75518402), and international
callers should dial 617-801-6888 (passcode 75518402).
Please refer to the Company's Financial Supplement dated December 31,
2013, which is posted on the Company's website at http://www.archcapgroup.bm/FinancialInformation.aspx.
The Financial Supplement provides additional detail regarding the
financial performance of the Company. From time to time, the Company
posts additional financial information and presentations to its website,
including information with respect to its subsidiaries. Investors and
other recipients of this information are encouraged to check the
Company's website regularly, including the Investor Relations - Events &
Presentations section of the Company's website at http://www.archcapgroup.bm/Presentations.aspx
for additional information regarding the Company.
Arch Capital Group Ltd., a Bermuda-based company with approximately
$6.55 billion in capital at December 31, 2013, provides insurance and
reinsurance on a worldwide basis through its wholly owned subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides
a “safe harbor” for forward-looking statements. This release or any
other written or oral statements made by or on behalf of the Company may
include forward-looking statements, which reflect the Company's current
views with respect to future events and financial performance. All
statements other than statements of historical fact included in or
incorporated by reference in this release are forward-looking
statements. Forward-looking statements, for purposes of the PSLRA or
otherwise, can generally be identified by the use of forward-looking
terminology such as “may,” “will,” “expect,” “intend,” “estimate,”
“anticipate,” “believe” or “continue” and similar statements of a future
or forward-looking nature or their negative or variations or similar
terminology.
Forward-looking statements involve the Company's current assessment of
risks and uncertainties. Actual events and results may differ materially
from those expressed or implied in these statements. Important factors
that could cause actual events or results to differ materially from
those indicated in such statements are discussed below and elsewhere in
this release and in the Company's periodic reports filed with the
Securities and Exchange Commission (the “SEC”), and include:
-
the Company's ability to successfully implement its business strategy
during “soft” as well as “hard” markets;
-
acceptance of the Company's business strategy, security and financial
condition by rating agencies and regulators, as well as by brokers and
its insureds and reinsureds;
-
the Company's ability to maintain or improve its ratings, which may be
affected by its ability to raise additional equity or debt financings,
by ratings agencies' existing or new policies and practices, as well
as other factors described herein;
-
general economic and market conditions (including inflation, interest
rates, foreign currency exchange rates, prevailing credit terms and
the depth and duration of a recession) and conditions specific to the
reinsurance and insurance markets (including the length and magnitude
of the current “soft” market) in which the Company operates;
-
competition, including increased competition, on the basis of pricing,
capacity, coverage terms or other factors;
-
developments in the world's financial and capital markets and the
Company's access to such markets;
-
the Company's ability to successfully enhance, integrate and maintain
operating procedures (including information technology) to effectively
support its current and new business;
-
the loss of key personnel;
-
the integration of businesses the Company has acquired or may acquire
into its existing operations;
-
accuracy of those estimates and judgments utilized in the preparation
of the Company's financial statements, including those related to
revenue recognition, insurance and other reserves, reinsurance
recoverables, investment valuations, intangible assets, bad debts,
income taxes, contingencies and litigation, and any determination to
use the deposit method of accounting, which for a relatively new
insurance and reinsurance company, like the Company, are even more
difficult to make than those made in a mature company since relatively
limited historical information has been reported to the Company
through December 31, 2013;
-
greater than expected loss ratios on business written by the Company
and adverse development on claim and/or claim expense liabilities
related to business written by its insurance and reinsurance
subsidiaries;
-
severity and/or frequency of losses;
-
claims for natural or man-made catastrophic events in the Company's
insurance or reinsurance business could cause large losses and
substantial volatility in its results of operations;
-
acts of terrorism, political unrest and other hostilities or other
unforecasted and unpredictable events;
-
availability to the Company of reinsurance to manage its gross and net
exposures and the cost of such reinsurance;
-
the failure of reinsurers, managing general agents, third party
administrators or others to meet their obligations to the Company;
-
the timing of loss payments being faster or the receipt of reinsurance
recoverables being slower than anticipated by the Company;
-
the Company's investment performance, including legislative or
regulatory developments that may adversely affect the fair value of
the Company's investments;
-
the impact of the continued weakness of the U.S., European countries
and other key economies, projected budget deficits for the U.S.,
European countries and other governments and the consequences
associated with possible additional downgrades of securities of the
U.S., European countries and other governments by credit rating
agencies, and the resulting effect on the value of securities in the
Company's investment portfolio as well as the uncertainty in the
market generally;
-
losses relating to aviation business and business produced by a
certain managing underwriting agency for which the Company may be
liable to the purchaser of its prior reinsurance business or to others
in connection with the May 5, 2000 asset sale described in the
Company's periodic reports filed with the SEC;
-
changes in accounting principles or policies or in the Company's
application of such accounting principles or policies;
-
changes in the political environment of certain countries in which the
Company operates, underwrites business or invests;
-
statutory or regulatory developments, including as to tax policy
matters and insurance and other regulatory matters such as the
adoption of proposed legislation that would affect
Bermuda-headquartered companies and/or Bermuda-based insurers or
reinsurers and/or changes in regulations or tax laws applicable to the
Company, its subsidiaries, brokers or customers; and
-
the other matters set forth under Item 1A “Risk Factors”, Item 7
“Management's Discussion and Analysis of Financial Condition and
Results of Operations” and other sections of the Company's Annual
Report on Form 10-K, as well as the other factors set forth in the
Company's other documents on file with the SEC, and management's
response to any of the aforementioned factors.
All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified
in their entirety by these cautionary statements. The foregoing review
of important factors should not be construed as exhaustive and should be
read in conjunction with other cautionary statements that are included
herein or elsewhere. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
Comment on Regulation G
Throughout this release, the Company presents its operations in the way
it believes will be the most meaningful and useful to investors,
analysts, rating agencies and others who use the Company's financial
information in evaluating the performance of the Company. This
presentation includes the use of after-tax operating income or loss
available to common shareholders, which is defined as net income
available to common shareholders, excluding net realized gains or
losses, net impairment losses recognized in earnings, equity in net
income or loss of investment funds accounted for using the equity
method, net foreign exchange gains or losses and loss on repurchase of
preferred shares, net of income taxes. The presentation of after-tax
operating income or loss available to common shareholders is a “non-GAAP
financial measure” as defined in Regulation G. The reconciliation of
such measure to net income available to common shareholders (the most
directly comparable GAAP financial measure) in accordance with
Regulation G is included on page 2 of this release.
The Company believes that net realized gains or losses, net impairment
losses recognized in earnings, equity in net income or loss of
investment funds accounted for using the equity method, net foreign
exchange gains or losses and loss on repurchase of preferred shares in
any particular period are not indicative of the performance of, or
trends in, the Company's business performance. Although net realized
gains or losses, net impairment losses recognized in earnings, equity in
net income or loss of investment funds accounted for using the equity
method and net foreign exchange gains or losses are an integral part of
the Company's operations, the decision to realize investment gains or
losses, the recognition of the change in the carrying value of
investments accounted for using the fair value option in net realized
gains or losses, the recognition of net impairment losses, the
recognition of equity in net income or loss of investment funds
accounted for using the equity method and the recognition of foreign
exchange gains or losses are independent of the insurance underwriting
process and result, in large part, from general economic and financial
market conditions. Furthermore, certain users of the Company's financial
information believe that, for many companies, the timing of the
realization of investment gains or losses is largely opportunistic. In
addition, net impairment losses recognized in earnings on the Company's
investments represent other-than-temporary declines in expected recovery
values on securities without actual realization. The use of the equity
method on certain of the Company's investments is driven by the
ownership structure of such funds (either limited partnerships or
limited liability companies). In applying the equity method, these
investments are initially recorded at cost and are subsequently adjusted
based on the Company's proportionate share of the net income or loss of
the funds (which include changes in the fair value of the underlying
securities in the funds). This method of accounting is different from
the way the Company accounts for its other fixed maturity securities and
the timing of the recognition of equity in net income or loss of
investment funds accounted for using the equity method may differ from
gains or losses in the future upon sale or maturity of such investments.
The loss on repurchase of preferred shares related to the redemption of
the Series A and B preferred shares in April 2012 and had no impact on
total shareholders' equity or cash flows. Due to these reasons, the
Company excludes net realized gains or losses, net impairment losses
recognized in earnings, equity in net income or loss of investment funds
accounted for using the equity method, net foreign exchange gains or
losses and loss on repurchase of preferred shares from the calculation
of after-tax operating income or loss available to common shareholders.
The Company believes that showing net income available to common
shareholders exclusive of the items referred to above reflects the
underlying fundamentals of the Company's business since the Company
evaluates the performance of and manages its business to produce an
underwriting profit. In addition to presenting net income available to
common shareholders, the Company believes that this presentation enables
investors and other users of the Company's financial information to
analyze the Company's performance in a manner similar to how the
Company's management analyzes performance. The Company also believes
that this measure follows industry practice and, therefore, allows the
users of the Company's financial information to compare the Company's
performance with its industry peer group. The Company believes that the
equity analysts and certain rating agencies which follow the Company and
the insurance industry as a whole generally exclude these items from
their analyses for the same reasons.
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
|
|
Book Value Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands, except share data)
|
|
|
|
|
December 31, 2013
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Calculation of book value per common share:
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
|
|
$
|
5,647,496
|
|
|
|
|
$
|
5,168,878
|
Less preferred shareholders' equity
|
|
|
|
|
325,000
|
|
|
|
|
325,000
|
Common shareholders' equity
|
|
|
|
|
5,322,496
|
|
|
|
|
4,843,878
|
Common shares outstanding, net of treasury shares (1)
|
|
|
|
|
133,674,884
|
|
|
|
|
133,842,613
|
Book value per common share
|
|
|
|
|
$
|
39.82
|
|
|
|
|
$
|
36.19
|
|
(1)
|
|
Excludes the effects of 8,338,480 and 8,221,444 stock options and
443,710 and 480,406 restricted stock units outstanding at December
31, 2013 and December 31, 2012, respectively.
|
|
|
Investment Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31,
|
|
|
|
December 31,
|
(U.S. dollars in thousands, except share data)
|
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
$
|
63,376
|
|
|
|
|
$
|
69,198
|
|
|
|
|
$
|
249,833
|
|
|
|
|
$
|
281,140
|
|
Term loan investments (1)
|
|
|
|
|
5,069
|
|
|
|
|
4,551
|
|
|
|
|
20,608
|
|
|
|
|
15,283
|
|
Equity securities
|
|
|
|
|
2,091
|
|
|
|
|
1,865
|
|
|
|
|
8,919
|
|
|
|
|
7,963
|
|
Short-term investments
|
|
|
|
|
86
|
|
|
|
|
363
|
|
|
|
|
1,259
|
|
|
|
|
1,980
|
|
Other
|
|
|
|
|
4,924
|
|
|
|
|
4,228
|
|
|
|
|
19,710
|
|
|
|
|
14,196
|
|
Gross investment income
|
|
|
|
|
75,546
|
|
|
|
|
80,205
|
|
|
|
|
300,329
|
|
|
|
|
320,562
|
|
Investment expenses
|
|
|
|
|
(8,451
|
)
|
|
|
|
(6,436
|
)
|
|
|
|
(33,110
|
)
|
|
|
|
(25,667
|
)
|
Net investment income
|
|
|
|
|
$
|
67,095
|
|
|
|
|
$
|
73,769
|
|
|
|
|
$
|
267,219
|
|
|
|
|
$
|
294,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share
|
|
|
|
|
$
|
0.49
|
|
|
|
|
$
|
0.53
|
|
|
|
|
$
|
1.97
|
|
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income yield, at amortized cost (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
|
|
|
2.08
|
%
|
|
|
|
2.46
|
%
|
|
|
|
2.12
|
%
|
|
|
|
2.51
|
%
|
After-tax
|
|
|
|
|
1.96
|
%
|
|
|
|
2.32
|
%
|
|
|
|
1.98
|
%
|
|
|
|
2.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including effects of foreign exchange
|
|
|
|
|
0.97
|
%
|
|
|
|
0.80
|
%
|
|
|
|
1.28
|
%
|
|
|
|
5.88
|
%
|
Excluding effects of foreign exchange
|
|
|
|
|
0.85
|
%
|
|
|
|
0.67
|
%
|
|
|
|
1.13
|
%
|
|
|
|
5.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operations
|
|
|
|
|
$
|
223,820
|
|
|
|
|
$
|
189,652
|
|
|
|
|
$
|
850,868
|
|
|
|
|
$
|
921,603
|
|
|
(1)
|
|
Included in “investments accounted for using the fair value option”
on the Company's balance sheet.
|
(2)
|
|
Investment income yield is presented on an annualized basis and
excludes the impact of investments for which returns are not
included within investment income, such as investments accounted for
using the equity method and certain equities.
|
(3)
|
|
Includes net investment income, equity in net income or loss of
investment funds accounted for using the equity method, net realized
gains and losses and the change in unrealized gains or losses
generated by the Company's investment portfolio. Total return is
calculated on a pre-tax basis and before investment expenses.
|
|
|
Investment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
December 31, 2013
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Investable assets (1):
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale, at fair value
|
|
|
|
|
$
|
9,571,776
|
|
|
|
|
$
|
9,839,988
|
|
Fixed maturities, at fair value (2)
|
|
|
|
|
448,254
|
|
|
|
|
363,541
|
|
Fixed maturities pledged under securities lending agreements, at
fair value
|
|
|
|
|
105,081
|
|
|
|
|
42,600
|
|
Total fixed maturities
|
|
|
|
|
10,125,111
|
|
|
|
|
10,246,129
|
|
Short-term investments available for sale, at fair value
|
|
|
|
|
1,478,367
|
|
|
|
|
722,121
|
|
Short-term investments pledged under securities lending agreements,
at fair value
|
|
|
|
|
—
|
|
|
|
|
8,248
|
|
Cash
|
|
|
|
|
434,057
|
|
|
|
|
371,041
|
|
Equity securities available for sale, at fair value
|
|
|
|
|
496,824
|
|
|
|
|
312,749
|
|
Equity securities, at fair value (2)
|
|
|
|
|
—
|
|
|
|
|
25,954
|
|
Other investments available for sale, at fair value
|
|
|
|
|
498,310
|
|
|
|
|
549,280
|
|
Other investments, at fair value (2)
|
|
|
|
|
773,280
|
|
|
|
|
527,971
|
|
Investments accounted for using the equity method (3)
|
|
|
|
|
244,339
|
|
|
|
|
307,105
|
|
Securities sold but not yet purchased (4)
|
|
|
|
|
—
|
|
|
|
|
(6,924
|
)
|
Securities transactions entered into but not settled at the balance
sheet date
|
|
|
|
|
(763
|
)
|
|
|
|
(18,540
|
)
|
Total investable assets
|
|
|
|
|
$
|
14,049,525
|
|
|
|
|
$
|
13,045,134
|
|
|
|
|
|
|
|
|
|
|
|
Investment portfolio statistics (1):
|
|
|
|
|
|
|
|
|
|
Average effective duration (in years)
|
|
|
|
|
2.62
|
|
|
|
|
3.06
|
|
Average credit quality (Standard & Poor's/Moody's Investors Service)
|
|
|
|
|
AA-/Aa2
|
|
|
|
AA-/Aa2
|
Embedded book yield (before investment expenses)
|
|
|
|
|
2.38
|
%
|
|
|
|
2.60
|
%
|
|
(1)
|
|
This table excludes the collateral received and reinvested and
includes the fixed maturities and short-term investments pledged
under securities lending agreements, at fair value.
|
(2)
|
|
Represents investments which are carried at fair value under the
fair value option and reflected as “investments accounted for using
the fair value option” on the Company's balance sheet. Changes in
the carrying value of such investments are recorded in net realized
gains or losses.
|
(3)
|
|
Changes in the carrying value of investment funds accounted for
using the equity method are recorded as “equity in net income (loss)
of investment funds accounted for using the equity method” rather
than as an unrealized gain or loss component of accumulated other
comprehensive income.
|
(4)
|
|
Represents the Company's obligation to deliver securities that it
did not own at the time of sale. Such amounts are included in “other
liabilities” on the Company's balance sheet.
|
|
|
Selected Information on Losses and Loss Adjustment Expenses
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31,
|
|
|
|
December 31,
|
(U.S. dollars in thousands)
|
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of losses and loss adjustment expenses incurred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses and loss adjustment expenses
|
|
|
|
|
$
|
439,411
|
|
|
|
|
$
|
406,621
|
|
|
|
|
$
|
1,708,817
|
|
|
|
|
$
|
1,465,376
|
|
Change in unpaid losses and loss adjustment expenses
|
|
|
|
|
(5,088
|
)
|
|
|
|
215,885
|
|
|
|
|
(29,393
|
)
|
|
|
|
395,901
|
|
Total losses and loss adjustment expenses
|
|
|
|
|
$
|
434,323
|
|
|
|
|
$
|
622,506
|
|
|
|
|
$
|
1,679,424
|
|
|
|
|
$
|
1,861,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net (favorable) adverse development in prior year
loss reserves, net of related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact on underwriting results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
(2,884
|
)
|
|
|
|
$
|
(4,050
|
)
|
|
|
|
$
|
(35,702
|
)
|
|
|
|
$
|
(30,474
|
)
|
Reinsurance
|
|
|
|
|
(63,638
|
)
|
|
|
|
(50,555
|
)
|
|
|
|
(218,472
|
)
|
|
|
|
(187,895
|
)
|
Total
|
|
|
|
|
$
|
(66,522
|
)
|
|
|
|
$
|
(54,605
|
)
|
|
|
|
$
|
(254,174
|
)
|
|
|
|
$
|
(218,369
|
)
|
Impact on losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
(6,649
|
)
|
|
|
|
$
|
(3,288
|
)
|
|
|
|
$
|
(45,148
|
)
|
|
|
|
$
|
(31,247
|
)
|
Reinsurance
|
|
|
|
|
(64,590
|
)
|
|
|
|
(50,638
|
)
|
|
|
|
(218,894
|
)
|
|
|
|
(190,281
|
)
|
Total
|
|
|
|
|
$
|
(71,239
|
)
|
|
|
|
$
|
(53,926
|
)
|
|
|
|
$
|
(264,042
|
)
|
|
|
|
(221,528
|
)
|
Impact on acquisition expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
3,765
|
|
|
|
|
$
|
(762
|
)
|
|
|
|
$
|
9,446
|
|
|
|
|
$
|
773
|
|
Reinsurance
|
|
|
|
|
952
|
|
|
|
|
83
|
|
|
|
|
422
|
|
|
|
|
2,386
|
|
Total
|
|
|
|
|
$
|
4,717
|
|
|
|
|
$
|
(679
|
)
|
|
|
|
$
|
9,868
|
|
|
|
|
$
|
3,159
|
|
Impact on combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
(0.6
|
)%
|
|
|
|
(0.9
|
)%
|
|
|
|
(1.9
|
)%
|
|
|
|
(1.7
|
)%
|
Reinsurance
|
|
|
|
|
(18.4
|
)%
|
|
|
|
(15.6
|
)%
|
|
|
|
(17.2
|
)%
|
|
|
|
(16.6
|
)%
|
Total
|
|
|
|
|
(7.9
|
)%
|
|
|
|
(7.0
|
)%
|
|
|
|
(8.1
|
)%
|
|
|
|
(7.4
|
)%
|
Impact on loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
(1.3
|
)%
|
|
|
|
(0.7
|
)%
|
|
|
|
(2.4
|
)%
|
|
|
|
(1.7
|
)%
|
Reinsurance
|
|
|
|
|
(18.7
|
)%
|
|
|
|
(15.6
|
)%
|
|
|
|
(17.2
|
)%
|
|
|
|
(16.8
|
)%
|
Total
|
|
|
|
|
(8.5
|
)%
|
|
|
|
(6.9
|
)%
|
|
|
|
(8.4
|
)%
|
|
|
|
(7.5
|
)%
|
Impact on acquisition expense ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
0.7
|
%
|
|
|
|
(0.2
|
)%
|
|
|
|
0.5
|
%
|
|
|
|
—
|
%
|
Reinsurance
|
|
|
|
|
0.3
|
%
|
|
|
|
—
|
%
|
|
|
|
—
|
%
|
|
|
|
0.2
|
%
|
Total
|
|
|
|
|
0.6
|
%
|
|
|
|
(0.1
|
)%
|
|
|
|
0.3
|
%
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net losses incurred from current accident year
catastrophic events (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
2,203
|
|
|
|
|
$
|
86,665
|
|
|
|
|
$
|
21,563
|
|
|
|
|
$
|
105,787
|
|
Reinsurance
|
|
|
|
|
14,583
|
|
|
|
|
114,628
|
|
|
|
|
62,188
|
|
|
|
|
153,410
|
|
Total
|
|
|
|
|
$
|
16,786
|
|
|
|
|
$
|
201,293
|
|
|
|
|
$
|
83,751
|
|
|
|
|
$
|
259,197
|
|
Impact on combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
0.4
|
%
|
|
|
|
19.0
|
%
|
|
|
|
1.1
|
%
|
|
|
|
5.9
|
%
|
Reinsurance
|
|
|
|
|
4.2
|
%
|
|
|
|
35.4
|
%
|
|
|
|
4.9
|
%
|
|
|
|
13.5
|
%
|
Total
|
|
|
|
|
2.0
|
%
|
|
|
|
25.8
|
%
|
|
|
|
2.7
|
%
|
|
|
|
8.8
|
%
|
|
(1)
|
|
Equals estimated losses from catastrophic events occurring in the
current accident year, net of reinsurance and reinstatement
premiums. Amounts shown for the insurance segment are for named
catastrophic events only. Amounts shown for the reinsurance segment
include (i) named events with over $5 million of losses incurred by
its Bermuda and Europe operations and (ii) all catastrophe losses
incurred by its U.S. operations.
|
|
Segment Information
The following section provides analysis on the Company's 2013 fourth
quarter performance by operating segment. For additional details
regarding the Company's operating segments, please refer to the
Company's Financial Supplement dated December 31, 2013 on the Company's
website at http://www.archcapgroup.bm/FinancialInformation.aspx.
|
INSURANCE SEGMENT
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(U.S. dollars in thousands)
|
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
|
|
|
$
|
636,949
|
|
|
|
|
$
|
571,157
|
|
|
|
|
11.5
|
|
Net premiums written
|
|
|
|
|
440,707
|
|
|
|
|
386,714
|
|
|
|
|
14.0
|
|
Net premiums earned
|
|
|
|
|
493,264
|
|
|
|
|
455,668
|
|
|
|
|
8.3
|
|
Underwriting income (loss)
|
|
|
|
|
18,653
|
|
|
|
|
(84,421
|
)
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
% Point Change
|
Loss ratio
|
|
|
|
|
62.4
|
%
|
|
|
|
84.1
|
%
|
|
|
|
(21.7
|
)
|
Acquisition expense ratio
|
|
|
|
|
16.9
|
%
|
|
|
|
16.4
|
%
|
|
|
|
0.5
|
|
Other operating expense ratio
|
|
|
|
|
16.9
|
%
|
|
|
|
18.0
|
%
|
|
|
|
(1.1
|
)
|
Combined ratio
|
|
|
|
|
96.2
|
%
|
|
|
|
118.5
|
%
|
|
|
|
(22.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophic activity and prior year development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year catastrophic events, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance and reinstatement premiums
|
|
|
|
|
0.4
|
%
|
|
|
|
19.0
|
%
|
|
|
|
(18.6
|
)
|
Net (favorable) adverse development in prior year loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, net of related adjustments
|
|
|
|
|
(0.6
|
)%
|
|
|
|
(0.9
|
)%
|
|
|
|
0.3
|
|
Combined ratio excluding such items
|
|
|
|
|
96.4
|
%
|
|
|
|
100.4
|
%
|
|
|
|
(4.0
|
)
|
|
Gross premiums written by the insurance segment in the 2013 fourth
quarter were 11.5% higher than in the 2012 fourth quarter, while net
premiums written were 14.0% higher. The differential in net versus gross
premiums written reflects increases in lines such as programs and
contract binding (which was launched in early 2013), both of which
typically have lower limits than other lines and, as a result, are
retained at a higher level. The growth in net premiums written primarily
resulted from increases in programs, contract binding, national accounts
casualty and construction lines, partially offset by a reduction in
professional liability and executive assurance lines and lenders
products business. The increase in program business resulted from a
combination of new business, underlying exposure growth within existing
programs and rate increases while the growth in national accounts
casualty and construction lines primarily resulted from new business and
strong renewal retention. The decrease in professional liability and
executive assurance lines resulted from a continued strategic reduction
in exposure to international business while lenders products reflected a
higher level of third party cessions. Net premiums earned by the
insurance segment in the 2013 fourth quarter were 8.3% higher than in
the 2012 fourth quarter, and reflect changes in net premiums written
over the previous five quarters.
The 2013 fourth quarter loss ratio reflected 0.4 points of current year
catastrophic event activity, compared to 19.0 points in the 2012 fourth
quarter (primarily related to Superstorm Sandy). Estimated net favorable
development in prior year loss reserves, before related adjustments,
reduced the loss ratio by 1.3 points in the 2013 fourth quarter,
compared to 0.7 points in the 2012 fourth quarter. The estimated net
favorable development in the 2013 fourth quarter primarily resulted from
better than expected claims emergence in short-tail business from more
recent accident years. The 2013 fourth quarter loss ratio continued to
reflect estimated margin expansion along with a lower level of
non-catastrophic large loss activity.
The underwriting expense ratio was 33.8% in the 2013 fourth quarter,
compared to 34.4% in the 2012 fourth quarter. The acquisition expense
ratio was 16.9% in the 2013 fourth quarter, compared to 16.4% in the
2012 fourth quarter. The comparison of the 2013 fourth quarter and 2012
fourth quarter acquisition expense ratios is influenced by, among other
things, the mix and type of business written and earned and the level of
ceding commissions. In addition, the acquisition expense ratio was
impacted by changes in development of prior year ceded loss reserves
which increased the 2013 fourth quarter acquisition expense ratio by 0.7
points, compared to a 0.2 point reduction in the 2012 fourth quarter.
The operating expense ratio was 16.9% in the 2013 fourth quarter,
compared to 18.0% in the 2012 fourth quarter. The 2013 fourth quarter
operating expense ratio benefited from the 8.3% increase in net premiums
earned compared to aggregate expenses that rose only 1.3% compared to
the 2012 fourth quarter reflecting costs related to the new contract
binding operation.
|
REINSURANCE SEGMENT
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
(U.S. dollars in thousands)
|
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
|
|
|
$
|
320,253
|
|
|
|
|
$
|
245,292
|
|
|
|
|
30.6
|
|
Net premiums written
|
|
|
|
|
308,214
|
|
|
|
|
226,428
|
|
|
|
|
36.1
|
|
Net premiums earned
|
|
|
|
|
346,102
|
|
|
|
|
323,813
|
|
|
|
|
6.9
|
|
Underwriting income (loss)
|
|
|
|
|
109,665
|
|
|
|
|
(6,913
|
)
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
% Point Change
|
|
Loss ratio
|
|
|
|
|
36.5
|
%
|
|
|
|
73.9
|
%
|
|
|
|
(37.4
|
)
|
Acquisition expense ratio
|
|
|
|
|
21.2
|
%
|
|
|
|
18.0
|
%
|
|
|
|
3.2
|
|
Other operating expense ratio
|
|
|
|
|
12.1
|
%
|
|
|
|
11.8
|
%
|
|
|
|
0.3
|
|
Combined ratio
|
|
|
|
|
69.8
|
%
|
|
|
|
103.7
|
%
|
|
|
|
(33.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophic activity and prior year development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year catastrophic events, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance and reinstatement premiums
|
|
|
|
|
4.2
|
%
|
|
|
|
35.4
|
%
|
|
|
|
(31.2
|
)
|
Net (favorable) adverse development in prior year loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, net of related adjustments
|
|
|
|
|
(18.4
|
)%
|
|
|
|
(15.6
|
)%
|
|
|
|
(2.8
|
)
|
Combined ratio excluding such items
|
|
|
|
|
84.0
|
%
|
|
|
|
83.9
|
%
|
|
|
|
0.1
|
|
|
Gross premiums written by the reinsurance segment in the 2013 fourth
quarter were 30.6% higher than in the 2012 fourth quarter, while net
premiums written were 36.1% higher than in the 2012 fourth quarter.
Roughly 60% of the change in both growth rates resulted from the
unearned premium transfer described below, while the differential in net
versus gross premiums written reflects changes in mix of business. The
growth in net premiums written primarily resulted from increases in
casualty and other specialty lines, partially offset by reductions in
property catastrophe and marine business. Growth in casualty business
primarily resulted from one large professional liability quota share
contract which contributed $59.4 million of premiums written in the
quarter, including a $44.4 million unearned premium transfer. The
increase in other specialty lines reflected the ongoing impact of the
multi-line quota share reinsurance agreement entered into during the
2013 third quarter, as well as from international trade credit and
surety business and accident and health business, partially offset by a
continued reduction in U.K. motor. The decrease in property catastrophe
business reflected selected line reductions and rate decreases, while
the 2012 fourth quarter included $10.1 million of assumed reinstatement
premiums as a result of 2012 fourth quarter catastrophic activity
(primarily related to Sandy). The reduction in marine business resulted
from a mix of share decreases and reductions in premium estimates. Net
premiums earned in the 2013 fourth quarter were 6.9% higher than in the
2012 fourth quarter, and primarily reflect changes in net premiums
written over the previous five quarters, including the mix and type of
business written.
The 2013 fourth quarter loss ratio reflected 4.5 points of current year
catastrophic activity, compared to 38.5 points of catastrophic activity
in the 2012 fourth quarter (primarily related to Sandy). Estimated net
favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 18.7 points in the 2013 fourth
quarter, compared to 15.6 points in the 2012 fourth quarter. The
estimated net favorable development in the 2013 fourth quarter primarily
resulted from better than expected claims emergence in longer-tail
business, primarily from older underwriting years, and in short-tail
business, primarily from more recent underwriting years. The 2013 fourth
quarter loss ratio also reflected changes in the mix of business.
The underwriting expense ratio was 33.3% in the 2013 fourth quarter,
compared to 29.8% in the 2012 fourth quarter. The acquisition expense
ratio for the 2013 fourth quarter was 21.2%, compared to 18.0% for the
2012 fourth quarter. The comparison of the 2013 fourth quarter and 2012
fourth quarter acquisition expense ratios is influenced by, among other
things, the mix and type of business written and earned and the level of
ceding commissions. In addition, the acquisition expense ratio was
impacted by changes in development of prior year loss reserves which
increased the 2013 fourth quarter acquisition expense ratio by 0.3
points. The operating expense ratio was 12.1% in the 2013 fourth
quarter, compared to 11.8% in the 2012 fourth quarter. The 2013 fourth
quarter operating expense ratio reflected an increase in aggregate
expenses due, in part, to selected expansion of the reinsurance
segment's operating platform, partially offset by the benefit of a
higher level of net premiums earned.
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2012
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
|
|
$
|
748,921
|
|
|
|
|
$
|
613,142
|
|
|
|
|
$
|
3,351,367
|
|
|
|
|
$
|
3,052,235
|
|
Change in unearned premiums
|
|
|
|
|
90,445
|
|
|
|
|
166,339
|
|
|
|
|
(205,415
|
)
|
|
|
|
(117,095
|
)
|
Net premiums earned
|
|
|
|
|
839,366
|
|
|
|
|
779,481
|
|
|
|
|
3,145,952
|
|
|
|
|
2,935,140
|
|
Net investment income
|
|
|
|
|
67,095
|
|
|
|
|
73,769
|
|
|
|
|
267,219
|
|
|
|
|
294,895
|
|
Net realized gains
|
|
|
|
|
9,048
|
|
|
|
|
54,849
|
|
|
|
|
74,018
|
|
|
|
|
194,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment losses
|
|
|
|
|
(88
|
)
|
|
|
|
(6,046
|
)
|
|
|
|
(3,961
|
)
|
|
|
|
(12,175
|
)
|
Less investment impairments recognized in other comprehensive
income, before taxes
|
|
|
|
|
—
|
|
|
|
|
11
|
|
|
|
|
175
|
|
|
|
|
787
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
(88
|
)
|
|
|
|
(6,035
|
)
|
|
|
|
(3,786
|
)
|
|
|
|
(11,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other underwriting income
|
|
|
|
|
5,673
|
|
|
|
|
5,664
|
|
|
|
|
7,639
|
|
|
|
|
8,090
|
|
Equity in net income of investment funds accounted for using the
equity method
|
|
|
|
|
5,272
|
|
|
|
|
16,567
|
|
|
|
|
35,701
|
|
|
|
|
73,510
|
|
Other income (loss)
|
|
|
|
|
(3,288
|
)
|
|
|
|
(4,189
|
)
|
|
|
|
(586
|
)
|
|
|
|
(12,094
|
)
|
Total revenues
|
|
|
|
|
923,078
|
|
|
|
|
920,106
|
|
|
|
|
3,526,157
|
|
|
|
|
3,482,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
|
|
434,323
|
|
|
|
|
622,506
|
|
|
|
|
1,679,424
|
|
|
|
|
1,861,277
|
|
Acquisition expenses
|
|
|
|
|
157,521
|
|
|
|
|
133,568
|
|
|
|
|
564,103
|
|
|
|
|
508,884
|
|
Other operating expenses
|
|
|
|
|
135,069
|
|
|
|
|
127,751
|
|
|
|
|
500,730
|
|
|
|
|
465,353
|
|
Interest expense
|
|
|
|
|
9,373
|
|
|
|
|
6,187
|
|
|
|
|
27,060
|
|
|
|
|
28,525
|
|
Net foreign exchange losses
|
|
|
|
|
9,848
|
|
|
|
|
22,997
|
|
|
|
|
12,335
|
|
|
|
|
28,955
|
|
Total expenses
|
|
|
|
|
746,134
|
|
|
|
|
913,009
|
|
|
|
|
2,783,652
|
|
|
|
|
2,892,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
176,944
|
|
|
|
|
7,097
|
|
|
|
|
742,505
|
|
|
|
|
589,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
15,454
|
|
|
|
|
(12,120
|
)
|
|
|
|
32,774
|
|
|
|
|
(4,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
161,490
|
|
|
|
|
19,217
|
|
|
|
|
709,731
|
|
|
|
|
593,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
|
|
5,485
|
|
|
|
|
5,485
|
|
|
|
|
21,938
|
|
|
|
|
25,079
|
|
Loss on repurchase of preferred shares
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
10,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
|
|
|
$
|
156,005
|
|
|
|
|
$
|
13,732
|
|
|
|
|
$
|
687,793
|
|
|
|
|
$
|
557,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
1.19
|
|
|
|
|
$
|
0.10
|
|
|
|
|
$
|
5.24
|
|
|
|
|
$
|
4.15
|
|
Diluted
|
|
|
|
|
$
|
1.14
|
|
|
|
|
$
|
0.10
|
|
|
|
|
$
|
5.07
|
|
|
|
|
$
|
4.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common share
equivalents outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
131,631,606
|
|
|
|
|
134,229,078
|
|
|
|
|
131,355,392
|
|
|
|
|
134,446,158
|
|
Diluted
|
|
|
|
|
136,467,998
|
|
|
|
|
138,270,853
|
|
|
|
|
135,777,183
|
|
|
|
|
138,258,847
|
|
|
|
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
December 31, 2012
|
Assets
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale, at fair value (amortized cost:
$9,564,634 and $9,567,290)
|
|
|
|
|
$
|
9,571,776
|
|
|
|
|
$
|
9,839,988
|
|
Short-term investments available for sale, at fair value (amortized
cost: $1,477,584 and $719,848)
|
|
|
|
|
1,478,367
|
|
|
|
|
722,121
|
|
Investment of funds received under securities lending, at fair value
(amortized cost: $97,943 and $42,302)
|
|
|
|
|
100,584
|
|
|
|
|
42,531
|
|
Equity securities available for sale, at fair value (cost: $433,275
and $298,414)
|
|
|
|
|
496,824
|
|
|
|
|
312,749
|
|
Other investments available for sale, at fair value (cost: $488,687
and $519,955)
|
|
|
|
|
498,310
|
|
|
|
|
549,280
|
|
Investments accounted for using the fair value option
|
|
|
|
|
1,221,534
|
|
|
|
|
917,466
|
|
Investments accounted for using the equity method
|
|
|
|
|
244,339
|
|
|
|
|
307,105
|
|
Total investments
|
|
|
|
|
13,611,734
|
|
|
|
|
12,691,240
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
434,057
|
|
|
|
|
371,041
|
|
Accrued investment income
|
|
|
|
|
66,848
|
|
|
|
|
71,748
|
|
Investment in joint venture (cost: $100,000)
|
|
|
|
|
104,856
|
|
|
|
|
107,284
|
|
Fixed maturities and short-term investments pledged under securities
lending, at fair value
|
|
|
|
|
105,081
|
|
|
|
|
50,848
|
|
Premiums receivable
|
|
|
|
|
753,924
|
|
|
|
|
688,873
|
|
Reinsurance recoverable on unpaid and paid losses and loss
adjustment expenses
|
|
|
|
|
1,804,330
|
|
|
|
|
1,870,037
|
|
Contractholder receivables
|
|
|
|
|
1,064,246
|
|
|
|
|
865,728
|
|
Prepaid reinsurance premiums
|
|
|
|
|
328,343
|
|
|
|
|
298,484
|
|
Deferred acquisition costs, net
|
|
|
|
|
342,314
|
|
|
|
|
262,822
|
|
Receivable for securities sold
|
|
|
|
|
50,555
|
|
|
|
|
19,248
|
|
Other assets
|
|
|
|
|
899,806
|
|
|
|
|
519,409
|
|
Total Assets
|
|
|
|
|
$
|
19,566,094
|
|
|
|
|
$
|
17,816,762
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses
|
|
|
|
|
$
|
8,824,696
|
|
|
|
|
$
|
8,933,292
|
|
Unearned premiums
|
|
|
|
|
1,896,365
|
|
|
|
|
1,647,978
|
|
Reinsurance balances payable
|
|
|
|
|
196,167
|
|
|
|
|
188,546
|
|
Contractholder payables
|
|
|
|
|
1,064,246
|
|
|
|
|
865,728
|
|
Deposit accounting liabilities
|
|
|
|
|
421,297
|
|
|
|
|
27,594
|
|
Senior notes
|
|
|
|
|
800,000
|
|
|
|
|
300,000
|
|
Revolving credit agreement borrowings
|
|
|
|
|
100,000
|
|
|
|
|
100,000
|
|
Securities lending payable
|
|
|
|
|
107,999
|
|
|
|
|
52,356
|
|
Payable for securities purchased
|
|
|
|
|
51,318
|
|
|
|
|
37,788
|
|
Other liabilities
|
|
|
|
|
456,510
|
|
|
|
|
494,602
|
|
Total Liabilities
|
|
|
|
|
13,918,598
|
|
|
|
|
12,647,884
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
Non-cumulative preferred shares
|
|
|
|
|
325,000
|
|
|
|
|
325,000
|
|
Common shares ($0.0033 par, shares issued: 169,560,591 and
168,255,572)
|
|
|
|
|
565
|
|
|
|
|
561
|
|
Additional paid-in capital
|
|
|
|
|
299,517
|
|
|
|
|
227,778
|
|
Retained earnings
|
|
|
|
|
6,042,154
|
|
|
|
|
5,354,361
|
|
Accumulated other comprehensive income, net of deferred income tax
|
|
|
|
|
74,964
|
|
|
|
|
287,017
|
|
Common shares held in treasury, at cost (shares: 35,885,707 and
34,412,959)
|
|
|
|
|
(1,094,704
|
)
|
|
|
|
(1,025,839
|
)
|
Total Shareholders' Equity
|
|
|
|
|
5,647,496
|
|
|
|
|
5,168,878
|
|
Total Liabilities and Shareholders' Equity
|
|
|
|
|
$
|
19,566,094
|
|
|
|
|
$
|
17,816,762
|
|
|
Copyright Business Wire 2014