Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income
available to Arch common shareholders for the 2015 fourth quarter
was $53.1 million, or $0.42 per share, compared to $209.7 million,
or $1.60 per share, for the 2014 fourth quarter. The Company also
reported after-tax operating income available to Arch common
shareholders of $143.6 million, or $1.15 per share, for the 2015
fourth quarter, compared to $150.2 million, or $1.15 per share, for
the 2014 fourth quarter. The Company’s after-tax operating income
available to Arch common shareholders represented an annualized
return on average common equity of 9.8% for the 2015 fourth
quarter, compared to 10.4% for the 2014 fourth quarter. For the
year ended December 31, 2015, after-tax operating income available
to Arch common shareholders produced a 9.7% return on average
common equity while net income available to Arch common
shareholders produced an 8.8% return on average common equity. The
Company’s book value per common share was $47.95 at
December 31, 2015, a 0.6% increase from $47.68 per share at
September 30, 2015 and a 5.2% increase from $45.58 per share at
December 31, 2014.
After-tax operating income or loss available to Arch common
shareholders, a non-GAAP measure, is defined as net income
available to Arch 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 and net foreign exchange gains or losses, net of
income taxes. See ‘Comments on Regulation G’ for a further
discussion of after-tax operating income or loss available to Arch
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, excluding amounts related to the ‘other’ segment (i.e.,
results of Watford Re). Although the Company owns approximately 11%
of Watford Re’s common equity, pursuant to generally accepted
accounting principles, it consolidates the results of Watford Re in
its financial statements. All discussions of line items in this
release exclude amounts related to the ‘other’ segment. For segment
results reflecting the contribution of the ‘other’ segment, see
pages 10 to 13 of the Company’s Financial Supplement dated
December 31, 2015.
(U.S. dollars in thousands)
Three
Months Ended December 31, Year Ended December 31,
2015 2014 % Change 2015
2014 % Change Gross premiums written $
1,031,341 $ 1,069,932 (3.6 ) $ 4,656,723 $ 4,760,394 (2.2 ) Net
premiums written 738,798 804,836 (8.2 ) 3,351,572 3,617,482 (7.4 )
Net premiums earned 824,283 869,604 (5.2 ) 3,336,053 3,490,271 (4.4
) Underwriting income 116,700 114,300 2.1 433,216 474,178 (8.6 )
Underwriting Ratios
% Point Change
% Point Change
Loss ratio 51.2 % 52.8 % (1.6 ) 53.2 % 53.0 % 0.2 Acquisition
expense ratio 16.7 % 18.4 % (1.7 ) 17.0 % 18.0 % (1.0 ) Other
operating expense ratio 18.9 % 16.3 % 2.6 17.8 % 15.8 % 2.0
Combined ratio 86.8 % 87.5 % (0.7 ) 88.0 % 86.8 % 1.2
The following table summarizes, on an after-tax basis, the
Company’s consolidated financial data, including a reconciliation
of after-tax operating income available to Arch common shareholders
to net income available to Arch common shareholders and related
diluted per share results:
(U.S. dollars in thousands, except share data)
Three Months Ended Year Ended December 31,
December 31, 2015 2014 2015
2014 After-tax operating income available to Arch
common shareholders $ 143,599 $ 150,184 $ 565,199 $ 617,312 Net
realized gains (losses), net of tax (93,419 ) 26,847 (117,607 )
122,863 Net impairment losses recognized in earnings, net of tax
(7,336 ) (3,837 ) (20,116 ) (30,150 )
Equity in net income (loss) of investment
funds accounted for using the equity method, net of tax
5,247 2,252 24,519 19,235 Net foreign exchange gains (losses), net
of tax 5,003 34,233 63,805 83,157 Net
income available to Arch common shareholders $ 53,094 $
209,679 $ 515,800 $ 812,417
Diluted per common
share results:
After-tax operating income available to Arch common shareholders $
1.15 $ 1.15 $ 4.48 $ 4.58 Net realized gains (losses), net of tax
(0.75 ) 0.21 (0.93 ) 0.91 Net impairment losses recognized in
earnings, net of tax (0.06 ) (0.03 ) (0.16 ) (0.22 )
Equity in net income (loss) of investment
funds accounted for using the equity method, net of tax
0.04 0.01 0.19 0.14 Net foreign exchange gains (losses), net of tax
0.04 0.26 0.51 0.61 Net income
available to Arch common shareholders $ 0.42 $ 1.60 $
4.09 $ 6.02
Weighted average common shares and common
share equivalents outstanding - diluted
125,311,942 130,855,218 126,038,743 134,922,322
The Company’s investment portfolio continues to be comprised
primarily of high quality fixed income securities with an average
credit quality of “AA/Aa2.” The average effective duration of the
Company’s investment portfolio was 3.43 years at December 31,
2015, compared to 3.34 years at December 31, 2014. Including
the effects of foreign exchange, total return on the Company’s
investment portfolio was (0.33)% for the 2015 fourth quarter,
compared to 0.85% for the 2014 fourth quarter. Excluding the
effects of foreign exchange, total return was (0.10)% for the 2015
fourth quarter, compared to 1.34% for the 2014 fourth quarter.
Total return for the 2015 fourth quarter primarily reflected
negative returns on fixed income, both investment-grade and non
investment-grade, partially offset by positive returns on
equities.
Net investment income for the 2015 fourth quarter was $0.53 per
share, or $67.0 million, compared to $0.56 per share, or $72.6
million, for the 2014 fourth quarter, and $0.54 per share, or $67.3
million, for the 2015 third quarter. The annualized pre-tax
investment income yield was 2.02% for the 2015 fourth quarter,
compared to 2.16% for the 2014 fourth quarter and 2.04% for the
2015 third quarter. Such yields reflect the effects of low
prevailing interest rates available in the market and the Company’s
investment strategy, which puts an emphasis on total return. Cash
flow provided by operating activities was $98.5 million for the
2015 fourth quarter, compared to $226.9 million for the 2014 fourth
quarter, primarily reflecting a lower level of gross premiums
collected and an increase in net outflows to Watford Re and other
reinsurers.
On a pre-tax basis, net foreign exchange gains for the 2015
fourth quarter were $2.3 million, compared to net foreign exchange
gains for the 2014 fourth quarter of $34.5 million. For both
periods, such amounts were primarily unrealized and resulted 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. The
Company has not matched a portion 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.
The Company’s effective tax rate on income before income taxes
was 15.4% for the 2015 fourth quarter and 7.0% for the year ended
December 31, 2015, compared to 2.5% for the 2014 fourth quarter and
2.7% for 2014. The Company’s effective tax rate on pre-tax
operating income available to Arch shareholders was 6.9% for the
2015 fourth quarter and 5.1% for the year ended December 31, 2015,
compared to 1.7% for the 2014 fourth quarter and 2.4% for 2014. The
Company’s effective tax rate fluctuates based upon the relative mix
of income or loss reported by jurisdiction and the varying tax
rates in each jurisdiction. The increase to the effective tax rate
in the 2015 fourth quarter reduced the Company’s after-tax results
by $2.9 million, or $0.02 per share.
At December 31, 2015, total capital available to Arch of
$7.10 billion consisted of $791.3 million of senior notes,
representing 11.2% of the total, $100.0 million of revolving credit
agreement borrowings, representing 1.4% of the total, $325.0
million of preferred shares, representing 4.6% of the total, and
common shareholders’ equity of $5.88 billion, representing 82.9% of
the total. At September 30, 2015, total capital available to Arch
of $7.05 billion consisted of $791.3 million of senior notes,
representing 11.2% of the total, $100.0 million of revolving credit
agreement borrowings, representing 1.4% of the total, $325.0
million of preferred shares, representing 4.6% of the total, and
common shareholders’ equity of $5.84 billion, representing 82.8% of
the total.
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on February 10, 2016. A live
webcast of this call will be available via the Investors section of
the Company’s website at http://www.archcapgroup.com. A telephone replay of
the conference call also will be available beginning on February
10, 2016 at 2:00 p.m. Eastern Time until February 17, 2016 at
midnight Eastern Time. To access the replay, domestic callers
should dial 855-859-2056, and international callers should dial
404-537-3406 (passcode 21574259 for all callers).
Please refer to the Company’s Financial Supplement dated
December 31, 2015, which is available via the Investors
section of the Company’s website at http://www.archcapgroup.com. 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 for additional information
regarding the Company.
Arch Capital Group Ltd., a Bermuda-based company with
approximately $7.10 billion in capital at December 31, 2015,
provides insurance and reinsurance on a worldwide basis through its
wholly owned subsidiaries.
Supplemental Information
Book Value Per
Common Share
(U.S. dollars in thousands, except share data)
December
31, 2015 December 31, 2014 Calculation
of book value per common share: Total shareholders’ equity
available to Arch $ 6,204,881 $ 6,130,053 Less preferred
shareholders’ equity 325,000 325,000 Common shareholders’
equity available to Arch 5,879,881 5,805,053 Common shares
outstanding, net of treasury shares (1) 122,627,783
127,367,934 Book value per common share $ 47.95 $ 45.58
(1) Excludes the effects of 7,482,462 and 7,804,033
stock options and 413,364 and 447,073 restricted stock units
outstanding at December 31, 2015 and December 31, 2014,
respectively.
Investment
Information
(U.S. dollars in thousands, except share data)
Three
Months Ended Year Ended December 31, December
31, 2015 2014 2015
2014 Components of net investment income (1): Fixed
maturities $ 58,942 $ 65,978 $ 241,389 $ 257,387 Term loan
investments (2) 5,639 4,902 19,290 21,521 Equity securities
(dividends) 5,111 4,034 14,339 13,005 Short-term investments 121
244 574 904 Other (3) 8,259 7,122 41,721
28,803 Gross investment income 78,072 82,280 317,313 321,620
Investment expenses (11,102 ) (9,634 ) (45,633 ) (37,284 ) Net
investment income $ 66,970 $ 72,646 $ 271,680
$ 284,336 Per share $ 0.53 $ 0.56 $ 2.16 $ 2.11
Investment income yield, at amortized cost (1) (4): Pre-tax
2.02 % 2.16 % 2.06 % 2.08 % After-tax 1.82 % 2.03 % 1.88 % 1.94 %
Total return (1) (5): Including effects of foreign exchange
(0.33 )% 0.85 % 0.41 % 3.21 % Excluding effects of foreign exchange
(0.10 )% 1.34 % 1.62 % 4.26 % Cash flow from operations (1)
$ 98,521 $ 226,948 $ 705,128 $ 997,815 (1) Excludes
amounts related to the ‘other’ segment. (2) Included in
“investments accounted for using the fair value option” on the
Company’s balance sheet. (3) Includes income on other investments,
funds held balances, cash balances and other. (4) Presented on an
annualized basis and excluding 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. (5) 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, 2015
December 31, 2014 Amount
% of Total
Amount
% of Total
Investable assets (1) (2): Fixed maturities available
for sale, at fair value $ 10,459,353 71.4 $ 10,750,770 73.6 Fixed
maturities, at fair value (3) 367,780 2.5 377,053 2.6 Fixed
maturities pledged under securities lending agreements, at fair
value 373,304 2.5 50,802 0.3 Total
fixed maturities 11,200,437 76.5 11,178,625 76.6 Short-term
investments available for sale, at fair value 587,904 4.0 797,226
5.5 Cash 444,776 3.0 474,247 3.2 Equity securities available for
sale, at fair value 618,405 4.2 658,182 4.5 Equity securities, at
fair value (3) 798 — — — Equity securities pledged under securities
lending agreements, at fair value 10,777 0.1 — — Other investments
available for sale, at fair value 300,476 2.1 296,224 2.0 Other
investments, at fair value (3) 908,809 6.2 878,774 6.0 Investments
accounted for using the equity method (4) 592,973 4.0 349,014 2.4
Securities transactions entered into but not settled at the balance
sheet date (20,524 ) (0.1 ) (32,802 ) (0.2 ) Total investable
assets managed by the Company $ 14,644,831 100.0 $
14,599,490 100.0
Investment portfolio
statistics (1): Average effective duration (in years) 3.43 3.34
Average credit quality (Standard & Poor’s/Moody’s Investors
Service) AA/Aa2 AA/Aa2 Embedded book yield (before investment
expenses) 2.16 % 2.18 % (1) Excludes amounts related
to the ‘other’ segment. (2) This table excludes the collateral
received and reinvested and includes the securities pledged under
securities lending agreements, at fair value. (3) 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. (4) 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.
Selected
Information on Losses and Loss Adjustment Expenses
(1)
(U.S. dollars in thousands)
Three Months Ended
Year Ended December 31, December 31,
2015 2014 2015 2014
Components of losses and loss adjustment expenses incurred
Paid losses and loss adjustment expenses $ 445,914 $ 428,874 $
1,811,456 $ 1,757,260 Change in unpaid losses and loss adjustment
expenses (23,856 ) 29,905 (38,212 ) 91,817 Total
losses and loss adjustment expenses $ 422,058 $ 458,779
$ 1,773,244 $ 1,849,077
Estimated net (favorable) adverse
development in prior year loss reserves, net of related
adjustments
Net impact on underwriting results: Insurance $ (10,561 ) $ (9,437
) $ (40,255 ) $ (44,087 ) Reinsurance (55,411 ) (63,192 ) (219,567
) (261,519 ) Mortgage (4,579 ) 858 (12,464 ) (1,005 ) Total
$ (70,551 ) $ (71,771 ) $ (272,286 ) $ (306,611 ) Impact on losses
and loss adjustment expenses: Insurance $ (10,030 ) $ (12,322 ) $
(47,246 ) $ (58,677 ) Reinsurance (59,091 ) (66,785 ) (224,841 )
(267,314 ) Mortgage (4,579 ) 858 (12,294 ) (911 ) Total $
(73,700 ) $ (78,249 ) $ (284,381 ) $ (326,902 ) Impact on
acquisition expenses: Insurance $ (531 ) $ 2,885 $ 6,991 $ 14,590
Reinsurance 3,680 3,593 5,274 5,795 Mortgage — — (170
) (94 ) Total $ 3,149 $ 6,478 $ 12,095 $
20,291 Impact on combined ratio: Insurance (2.1 )% (1.8 )%
(2.0 )% (2.2 )% Reinsurance (21.1 )% (20.7 )% (20.4 )% (20.4 )%
Mortgage (8.1 )% 1.7 % (5.8 )% (0.5 )% Total (8.6 )% (8.3 )% (8.2
)% (8.8 )% Impact on loss ratio: Insurance (2.0 )% (2.4 )% (2.3 )%
(2.9 )% Reinsurance (22.5 )% (21.8 )% (20.9 )% (20.9 )% Mortgage
(8.1 )% 1.7 % (5.7 )% (0.5 )% Total (8.9 )% (9.0 )% (8.5 )% (9.4 )%
Impact on acquisition expense ratio: Insurance (0.1 )% 0.6 % 0.3 %
0.7 % Reinsurance 1.4 % 1.1 % 0.5 % 0.5 % Mortgage — % — % (0.1 )%
— % Total 0.3 % 0.7 % 0.3 % 0.6 %
Estimated net losses incurred from
current accident year catastrophic events (2)
Insurance $ 1,888 $ 5,671 $ 19,633 $ 13,982 Reinsurance 13,972
14,237 35,546 42,145 Total $ 15,860
$ 19,908 $ 55,179 $ 56,127 Impact on
combined ratio: Insurance 0.4 % 1.1 % 1.0 % 0.7 % Reinsurance 5.3 %
4.7 % 3.3 % 3.3 % Total 1.9 % 2.3 % 1.7 % 1.6 % (1)
Excludes amounts related to the ‘other’ segment. (2) 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. Amounts not applicable for the mortgage
segment.
Segment Information
The following section provides analysis on the Company’s 2015
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, 2015.
The Company’s segment information includes the use of a combined
ratio excluding catastrophic activity and prior year development
for the insurance segment and reinsurance segment and a combined
ratio excluding prior year development for the mortgage segment.
These ratios are “non-GAAP financial measures” as defined in
Regulation G. See ‘Comments on Regulation G’ for further
details.
Insurance
Segment
Three Months Ended December 31, (U.S. dollars in
thousands)
2015 2014 % Change
Gross premiums written $ 680,617 $ 699,109 (2.6 ) Net
premiums written 451,606 483,176 (6.5 ) Net premiums earned 504,525
512,770 (1.6 ) Underwriting income 28,022 22,856 22.6
Underwriting Ratios
% Point Change
Loss ratio 62.2 % 63.3 % (1.1 ) Acquisition expense ratio 14.0 %
15.8 % (1.8 ) Other operating expense ratio 18.4 % 16.6 % 1.8
Combined ratio 94.6 % 95.7 % (1.1 ) Catastrophic
activity and prior year development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
0.4 % 1.1 % (0.7 )
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(2.1 )% (1.8 )% (0.3 ) Combined ratio excluding catastrophic
activity and prior year development 96.3 % 96.4 % (0.1 )
Gross premiums written by the insurance segment in the 2015
fourth quarter were 2.6% lower than in the 2014 fourth quarter
while net premiums written were 6.5% lower than in the 2014 fourth
quarter. Changes in foreign currency rates resulted in a decrease
in net premiums written in the 2015 fourth quarter of approximately
$7 million, or 1.6%, compared to the 2014 fourth quarter. The lower
level of net premiums written on a constant dollar basis reflected
reductions in program business, professional lines, property,
energy, marine and aviation business and excess and surplus
casualty, partially offset by growth in travel, accident and health
business and construction and national accounts. The reduction in
program business primarily reflected the non-renewal of a large
program. The lower level of professional lines, property, energy,
marine and aviation reflected the timing of premiums and market
conditions while the decline in excess and surplus casualty
reflected market conditions. Growth in travel, accident and health
primarily reflected new personal accident business while the
increase in construction and national accounts included new
business and higher audit and endorsement premium on national
accounts. Net premiums earned by the insurance segment in the 2015
fourth quarter were 1.6% lower than in the 2014 fourth quarter, and
reflect changes in net premiums written over the previous five
quarters.
The 2015 fourth quarter loss ratio reflected 0.4 points of
current year catastrophic activity, compared to 1.1 points in the
2014 fourth quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 2.0 points in the 2015 fourth quarter, compared to 2.4
points in the 2014 fourth quarter. The estimated net favorable
development in the 2015 fourth quarter primarily resulted from
better than expected claims emergence in medium-tail and
longer-tailed lines from older accident years. The balance of the
change in the 2015 fourth quarter loss ratio resulted, in part,
from changes in the mix of business.
The underwriting expense ratio was 32.4% in the 2015 fourth
quarter, compared to 32.4% in the 2014 fourth quarter. The
comparison of the underwriting expense ratios and the underlying
acquisition expense and other operating expense ratios reflects an
increase in the level of reinsurance ceded on a quota share basis
in the 2015 fourth quarter and changes in the mix of business.
Reinsurance
Segment
Three Months Ended December 31, (U.S. dollars in
thousands)
2015 2014 % Change
Gross premiums written $ 262,482 $ 314,604 (16.6 ) Net
premiums written 200,065 268,973 (25.6 ) Net premiums earned
263,022 305,805 (14.0 ) Other underwriting income 3,736 2,333 60.1
Underwriting income 71,022 89,902 (21.0 )
Underwriting
Ratios
% Point Change
Loss ratio 38.3 % 38.8 % (0.5 ) Acquisition expense ratio 20.2 %
20.2 % — Other operating expense ratio 15.8 % 12.3 % 3.5
Combined ratio 74.3 % 71.3 % 3.0 Catastrophic
activity and prior year development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
5.3 % 4.7 % 0.6
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(21.1 )% (20.7 )% (0.4 ) Combined ratio excluding catastrophic
activity and prior year development 90.1 % 87.3 % 2.8
Gross premiums written by the reinsurance segment in the 2015
fourth quarter were 16.6% lower than in the 2014 fourth quarter,
while net premiums written were 25.6% lower than in the 2014 fourth
quarter. The 2014 fourth quarter included an incoming $50.2 million
non-recurring unearned premium portfolio transfer in property
business from Gulf Reinsurance Limited (which was subsequently
acquired in 2015). In addition, changes in foreign currency rates
resulted in a decrease in net premiums written in the 2015 fourth
quarter of approximately $7 million, or 3.5%, compared to the 2014
fourth quarter. The 2015 fourth quarter also reflected increased
cessions to Watford Re compared to the 2014 fourth quarter. Net
premiums earned in the 2015 fourth quarter were 14.0% lower than in
the 2014 fourth quarter, and primarily reflect changes in net
premiums written over the previous five quarters, including the mix
and type of business written.
The 2015 fourth quarter loss ratio reflected 5.8 points of
current year catastrophic activity, compared to 4.7 points of
catastrophic activity in the 2014 fourth quarter. Estimated net
favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 22.5 points in the 2015
fourth quarter, compared to 21.8 points in the 2014 fourth quarter.
The estimated net favorable development in the 2015 fourth quarter
primarily resulted from better than expected claims emergence in
short-tail business from more recent underwriting years and in
longer-tail business across earlier underwriting years. The balance
of the change in the 2015 fourth quarter loss ratio resulted, in
part, from changes in mix of business.
The underwriting expense ratio was 36.0% in the 2015 fourth
quarter, compared to 32.5% in the 2014 fourth quarter. The
acquisition expense ratio for the 2015 fourth quarter was 20.2%,
compared to 20.2% for the 2014 fourth quarter. The 2015 fourth
quarter ratio reflected a higher level of ceding commissions
incurred and changes in the mix and type of business, offset by a
0.7 point benefit related to a federal excise tax adjustment which
resulted from a change in the application of U.S. tax rules. The
operating expense ratio for the 2015 fourth quarter was 15.8%,
compared to 12.3% in the 2014 fourth quarter, primarily reflecting
the lower level of net premiums earned.
Mortgage
Segment
Three Months Ended December 31, (U.S. dollars in
thousands)
2015 2014 % Change
Gross premiums written $ 91,787 $ 57,584 59.4 Net premiums
written 87,127 52,687 65.4 Net premiums earned 56,736 51,029 11.2
Other underwriting income 3,461 1,870 85.1 Underwriting income
17,656 1,542 1,045.0
Underwriting Ratios
% Point Change
Loss ratio 12.8 % 30.8 % (18.0 ) Acquisition expense ratio 24.7 %
32.9 % (8.2 ) Other operating expense ratio 37.5 % 36.9 % 0.6
Combined ratio 75.0 % 100.6 % (25.6 )
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(8.1 )% 1.7 % (9.8 ) Combined ratio excluding prior year
development 83.1 % 98.9 % (15.8 )
The mortgage segment includes the results of Arch Mortgage
Insurance Company (“Arch MI U.S.”) and Arch Mortgage Insurance
Designated Activity Company, leading providers of mortgage
insurance products and services to the U.S. and European markets,
respectively. Arch MI U.S. is approved as an eligible mortgage
insurer by Fannie Mae and Freddie Mac (each a government sponsored
enterprise, or “GSE”). The mortgage segment also includes GSE
credit risk-sharing transactions and mortgage reinsurance for the
U.S. and Australian markets.
Gross premiums written by the mortgage segment in the 2015
fourth quarter were 59.4% higher than in the 2014 fourth quarter,
while net premiums written were 65.4% higher than in the 2014
fourth quarter, reflecting $31.8 million of new single premium
Australian mortgage reinsurance business written in the 2015 fourth
quarter. In addition, net premiums written by the mortgage segment
in the 2015 fourth quarter reflected growth in U.S. primary
business of $6.1 million, primarily from banks and other mortgage
originators, and an increase in GSE credit risk-sharing
transactions. Net premiums earned for the 2015 fourth quarter were
11.2% higher than in the 2014 fourth quarter, reflecting the growth
in insurance in force.
Other underwriting income, which is primarily related to certain
GSE risk-sharing transactions, was $3.5 million for the 2015 fourth
quarter, compared to $1.9 million for the 2014 fourth quarter, and
comparable with the $3.6 million recorded in the 2015 third
quarter.
The loss ratio for the 2015 fourth quarter reflected estimated
net favorable development in prior year loss reserves, before
related adjustments, of 8.1 points, compared to net adverse
development of 1.7 points in the 2014 fourth quarter, driven
primarily by lower than expected claim rates during 2015. As noted
previously, the mortgage segment’s underwriting expense ratio is
expected to stay at an elevated level until Arch MI U.S. reaches
scale.
At December 31, 2015, the mortgage segment’s risk-in-force
consisted of $6.83 billion from Arch MI U.S. and an additional
$4.67 billion through the mortgage segment’s reinsurance and
risk-sharing operations. Arch MI U.S. generated $2.58 billion of
new insurance written (“NIW”) during the 2015 fourth quarter, of
which approximately 60% was from banks and other mortgage
originators. For additional information on the mortgage segment,
please refer to the Company’s Financial Supplement.
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, 2015;
- 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.
Comments 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 Arch common shareholders,
which is defined as net income available to Arch 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 and
net foreign exchange gains or losses, net of income taxes. The
presentation of after-tax operating income or loss available to
Arch common shareholders is a “non-GAAP financial measure” as
defined in Regulation G. The reconciliation of such measure to net
income available to Arch 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 and
net foreign exchange gains or losses 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 in certain funds that
invest in fixed maturity securities 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. 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 and
net foreign exchange gains or losses from the calculation of
after-tax operating income or loss available to Arch common
shareholders.
The Company believes that showing net income available to Arch
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 Arch 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.
In addition, the Company’s segment information includes the use
of a combined ratio excluding catastrophic activity and prior year
development for the insurance segment and reinsurance segment and a
combined ratio excluding prior year development for the mortgage
segment. These ratios are “non-GAAP financial measures” as defined
in Regulation G. The reconciliation of such measures to the
combined ratio (the most directly comparable GAAP financial
measure) in accordance with Regulation G are shown on the
individual segment pages. The Company’s management utilizes the
adjusted combined ratio excluding current accident year
catastrophic events and favorable or adverse development in prior
year loss reserves in its analysis of the core underwriting
performance of each of its underwriting segments.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160209006721/en/
Arch Capital Group Ltd.Mark D. Lyons,
441-278-9250Executive Vice President andChief Financial Officer
Arch Capital (NASDAQ:ACGL)
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