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Arch Capital Group Ltd. Reports Operating Results (10-K)

February 29, 2012 | About:
10qk

10qk

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Arch Capital Group Ltd. (ACGL) filed Annual Report for the period ended 2011-12-31.

Arch Cap Gp Ltd has a market cap of $4.99 billion; its shares were traded at around $37.11 with a P/E ratio of 16.9 and P/S ratio of 1.6. Arch Cap Gp Ltd had an annual average earning growth of 11.5% over the past 10 years.

Highlight of Business Operations:

Our U.K. subsidiaries are companies incorporated in the U.K. and are therefore resident in the U.K. for corporation tax purposes and will be subject to U.K. corporate tax on their respective worldwide profits. The current rate of U.K. corporation tax is 26% on profits, but with progressive decreases to take effect on April 1, 2012 through 2014 from 25% to 23%.

We write business on a worldwide basis, and our results of operations may be affected by fluctuations in the value of currencies other than the U.S. Dollar. The primary foreign currencies in which we operate are the Euro, the British Pound Sterling and the Canadian Dollar. Changes in foreign currency exchange rates can reduce our revenues, increase our liabilities and costs and cause fluctuations in the valuation of our investment portfolio. We may therefore suffer losses solely as a result of exchange rate fluctuations. In order to mitigate our exposure to foreign currency fluctuations in our net insurance liabilities, we have invested and expect to continue to invest in securities denominated in currencies other than the U.S. Dollar. In addition, we may replicate investment positions in foreign currencies using derivative financial instruments. Net foreign exchange gains, recorded in the statement of income, were $17.4 million and $28.1 million, respectively, for 2011 and 2010, compared to net foreign exchange losses of $39.2 million for 2009. Changes in the value of investments due to foreign currency rate movements are reflected as a direct increase or decrease to shareholders' equity and are not included in the statement of income. We have chosen not to hedge certain currency risks on capital contributed to our subsidiaries, including to Arch Insurance Europe in May 2004, which is held in British Pounds Sterling, and may continue to choose not to hedge our currency risks. There can be no assurances that arrangements to match projected liabilities in foreign currencies with investments in the same currencies or derivative financial instruments will mitigate the negative impact of exchange rate fluctuations, and we may suffer losses solely as a result of exchange rate fluctuations.

On a quarterly basis, we perform reviews of our available for sale investments to determine whether declines in fair value below the cost basis are considered other-than-temporary in accordance with applicable accounting guidance regarding the recognition and presentation of other-than-temporary impairments. The process of determining whether a security is other-than-temporarily impaired requires judgment and involves analyzing many factors. These factors include (i) an analysis of the liquidity, business prospects and overall financial condition of the issuer, (ii) the time period in which there was a significant decline in value, (iii) the significance of the decline, and (iv) the analysis of specific credit events. We evaluate the unrealized losses of our equity securities by issuer and determine if we can forecast a reasonable period of time by which the fair value of the securities would increase and we would recover our cost. If we are unable to forecast a reasonable period of time in which to recover the cost of our equity securities, we record a net impairment loss in earnings equivalent to the entire unrealized loss. For 2011, we recorded $9.1 million of credit related impairments in earnings, compared to $11.3 million in 2010 and $66.1 million in 2009. The other-than-temporary impairments ("OTTI") recorded in 2011, 2010 and 2009 primarily resulted from reductions in estimated recovery values on certain mortgage-backed and asset-backed securities following the review of such securities. See note 7, "Investment InformationOther-Than-Temporary Impairments," of the notes accompanying our consolidated financial statements for additional information.

During 2011, we recorded $9.1 million of net impairment losses recognized in earnings, compared to $11.3 million in 2010. See note 7, "Investment InformationOther-Than-Temporary Impairments," of the notes accompanying our consolidated financial statements for additional information.

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