947484--3/13/2006--ARCH_CAPITAL_GROUP

related topics

{loss, insurance, financial}

{stock, price, share}

{tax, income, asset}

{financial, litigation, operation}

{regulation, change, law}

{operation, international, foreign}

{capital, credit, financial}

{personnel, key, retain}

{acquisition, growth, future}

{interest, director, officer}

{competitive, industry, competition}

{debt, indebtedness, cash}

{operation, natural, condition}

{control, financial, internal}

{provision, law, control}

{condition, economic, financial}

We operate in a highly competitive environment, and we may not be able to compete successfully in our industry. The insurance and reinsurance industry is highly cyclical, and we expect to continue to experience periods characterized by excess underwriting capacity and unfavorable premium rates. We could face unanticipated losses from war, terrorism and political unrest, and these or other unanticipated losses could have a material adverse effect on our financial condition and results of operations. Claims for catastrophic events could cause large losses and substantial volatility in our results of operations, and, as a result, the value of our securities, including our common shares and series A non-cumulative preferred shares, may fluctuate widely. Underwriting claims and reserving for losses are based on probabilities and related modeling, which are subject to inherent uncertainties. The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or results of operations. The risk associated with reinsurance underwriting could adversely affect us, and while reinsurance and retrocessional coverage will be used to limit our exposure to risks, the availability of such arrangements may be limited, and counterparty credit and other risks associated with our reinsurance arrangements may result in losses which could adversely affect our financial condition and results of operations. Our reliance on brokers subjects us to their credit risk. We cannot predict the effect that the investigation currently being conducted by the New York Attorney General and others will have on the industry or our business, and the effects of emerging claims and coverage issues and certain proposed legislation are uncertain. Our success will depend on our ability to establish and maintain effective operating procedures and internal controls. A downgrade in our ratings or our inability to obtain a rating for our operating insurance and reinsurance subsidiaries may adversely affect our relationships with clients and brokers and negatively impact sales of our products. The loss of our key employees or our inability to retain them could negatively impact our business. The preparation of our financial statements requires us to make many estimates and judgments, which are even more difficult than those made in a mature company since limited historical information has been reported to us through December 31, 2005. The Warburg Pincus funds and the Hellman Friedman funds together own approximately 43.9% of our voting shares, and these shareholders have the right to have directors on our board; their interests may materially differ from the interests of the holders of our other securities. The price of our common shares may be volatile. Our business is dependent upon insurance and reinsurance brokers, and the loss of important broker relationships could materially adversely affect our ability to market our products and services. We could be materially adversely affected to the extent that managing general agents, general agents and other producers in our program business exceed their underwriting authorities or otherwise breach obligations owed to us. Our investment performance may affect our financial results and ability to conduct business. We may be adversely affected by interest rate changes. We may require additional capital in the future, which may not be available or only available on unfavorable terms. We sold our prior reinsurance operations in May 2000 and may have liability to the purchaser and continuing liability from those reinsurance operations if the purchaser should fail to make payments on the reinsurance liabilities it assumed. We sold our non-standard automobile insurance operations and merchant banking operations in 2004 and may have liability to the purchasers. Any future acquisitions may expose us to operational risks. Some of the provisions of our bye-laws and our shareholders agreement may have the effect of hindering, delaying or preventing third party takeovers or changes in management initiated by shareholders. These provisions may also prevent our shareholders from receiving premium prices for their shares in an unsolicited takeover. Our operating insurance and reinsurance subsidiaries are subject to regulation in various jurisdictions, and material changes in the regulation of their operations could adversely affect our results of operations. ACGL is a holding company and is dependent on dividends and other payments from its operating subsidiaries, which are subject to dividend restrictions, to make payments, including the payment of debt service obligations and operating expenses we may incur and any payments of dividends, redemption amounts or liquidation amounts with respect to the series A non-cumulative preferred shares and common shares. If our Bermuda reinsurance subsidiary is unable to provide collateral to ceding companies, its ability to conduct business could be significantly and negatively affected. We may become subject to taxes in Bermuda after March 28, 2016, which may have a material adverse effect on our results of operations. Foreign currency exchange rate fluctuation may adversely affect our financial results. Employees of our Bermuda operations are required to obtain work permits before engaging in a gainful occupation in Bermuda. Required work permits may not be granted or may not remain in effect. The enforcement of civil liabilities against us may be difficult. General market conditions and unpredictable factors could adversely affect market prices for the series A non-cumulative preferred shares (issued on February 1, 2006). Dividends on the series A non-cumulative preferred shares (issued on February 1, 2006) are non-cumulative. The voting rights of holders of the series A non-cumulative preferred shares (issued on February 1, 2006) are limited. There is no limitation on our issuance of securities that rank equally with or senior to the series A non-cumulative preferred shares (issued on February 1, 2006). We and our non-U.S. subsidiaries may become subject to U.S. federal income taxation. U.S. persons who hold our common shares or series A non-cumulative preferred shares may be subject to U.S. income taxation at ordinary income rates on our undistributed earnings and profits. Reduced tax rate for qualified dividend income received by individuals and other non-corporate holders may not be available in the future. Our non-U.S. companies may be subject to U.K. tax that may have a material adverse effect on our results of operations.

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947484--3/13/2006--ARCH_CAPITAL_GROUP_LTD.