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Arch Capital Group Ltd. Reports 2012 Third Quarter Results

The 2012 third quarter loss ratio reflected 3.1 points of current year catastrophic event activity, primarily due to Hurricane Isaac, compared to 1.6 points in the 2011 third quarter. Estimated net favorable development in prior year loss reserves, before related adjustments, reduced the loss ratio by 2.3 points in the 2012 third quarter, compared to 1.2 points in the 2011 third quarter. The estimated net favorable development in the 2012 third quarter primarily resulted from better than expected claims emergence in short-tail and medium-tail lines.

The underwriting expense ratio was 32.5% in the 2012 third quarter, compared to 35.2% in the 2011 third quarter. The acquisition expense ratio was 16.0% in the 2012 third quarter, compared to 17.4% in the 2011 third quarter. The 2012 third quarter acquisition expense ratio included a reduction of 0.6 points of commission expense related to development in prior year loss reserves, compared to an increase of 1.1 points in the 2011 third quarter. The operating expense ratio was 16.5% in the 2012 third quarter, compared to 17.8% in the 2011 third quarter, with the lower ratio in the 2012 third quarter reflecting the benefits of expense management resulting in lower absolute operating expense dollars and the higher level of net premiums earned.

Reinsurance Segment
Three Months Ended September 30,
(U.S. dollars in thousands) 2012   2011   % Change  
Gross premiums written $ 279,751 $ 227,837 22.8
Net premiums written 271,893 218,395 24.5
Net premiums earned 292,350 244,079 19.8
Underwriting income 72,663 45,108 61.1
% Point
Underwriting Ratios Change
Loss ratio 46.8 % 54.6 % (7.8 )
Acquisition expense ratio 18.6 % 17.8 % 0.8
Other operating expense ratio   9.9 %   9.2 % 0.7  
Combined ratio   75.3 %   81.6 % (6.3 )
Catastrophic activity and prior year development:
Current accident year catastrophic events 4.6 % 21.6 % (17.0 )
Net (favorable) adverse development in prior year loss
reserves, net of related adjustments   (13.6 %)   (23.7 %) 10.1  
Combined ratio excluding such items   84.3 %   83.7 % 0.6  

Gross premiums written by the reinsurance segment in the 2012 third quarter were 22.8% higher than in the 2011 third quarter, while net premiums written were 24.5% higher than in the 2011 third quarter, primarily due to increases in mortgage and U.K. motor business. The reinsurance segment’s mortgage business primarily resulted from a reinsurance treaty written in the 2012 second quarter covering newly originated residential mortgages, while growth in U.K. motor was primarily due to new business written emanating from one significant client. Growth in property and casualty writings was offset by a lower level of property catastrophe business, as the 2011 third quarter included $5.7 million of adjustment premiums on a treaty which did not recur in the 2012 third quarter.

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