Arch Capital Group Ltd. (NASDAQ: ACGL) reports that net income
available to Arch common shareholders for the 2016 second quarter
was $205.6 million, or $1.65 per share, compared to $110.3 million,
or $0.88 per share, for the 2015 second quarter. The Company’s net
income available to Arch common shareholders represented an
annualized return on average common equity of 13.2% for the 2016
second quarter, compared to 7.5% for the 2015 second quarter. For
the trailing twelve months ended June 30, 2016, net income
available to Arch common shareholders produced a 7.9% return on
average common equity. The Company’s book value per common share
was $52.04 at June 30, 2016, a 4.4% increase from $49.87 per share
at March 31, 2016 and a 9.6% increase from $47.49 per share at June
30, 2015. All earnings per share amounts discussed in this release
are on a diluted basis.
The Company also reported after-tax operating income available
to Arch common shareholders of $140.6 million, or $1.13 per share,
for the 2016 second quarter, compared to $146.0 million, or $1.16
per share, for the 2015 second quarter. The Company’s after-tax
operating income available to Arch common shareholders represented
an annualized return on average common equity of 9.0% for the 2016
second quarter, compared to 9.9% for the 2015 second quarter. For
the trailing twelve months ended June 30, 2016, after-tax operating
income available to Arch common shareholders produced a 9.1% return
on average common equity. After-tax operating income or loss
available to Arch common shareholders and the related return on
average common equity are non-GAAP measures. See ‘Comments on
Regulation G’ for further details.
The Company’s 2016 second quarter results included losses for
current year catastrophic events of $36.3 million, net of
reinsurance and the effects of reinstatement premiums, with $20.6
million from the insurance segment and $15.7 million from the
reinsurance segment. Events in the 2016 second quarter included the
Texas hailstorms and floods, Fort McMurray wildfires, earthquake
events in Japan and Ecuador and other U.S. weather events.
The following table summarizes the Company’s consolidated
underwriting results:
(U.S. dollars in thousands)
Three Months Ended June
30, Six Months Ended June 30, 2016
2015 % Change 2016
2015 % Change Gross premiums
written $ 1,329,936 $ 1,199,209 10.9 $ 2,767,902 $ 2,541,231 8.9
Net premiums written 1,023,563 943,580 8.5 2,144,798 2,010,575 6.7
Net premiums earned 1,005,985 943,438 6.6 1,957,564 1,853,702 5.6
Underwriting income 111,746 105,114 6.3 222,689 221,585 0.5
Underwriting Ratios
% PointChange
% PointChange
Loss ratio 58.1 % 55.1 % 3.0 56.6 % 54.7 % 1.9 Acquisition expense
ratio 17.4 % 18.6 % (1.2 ) 17.7 % 18.3 % (0.6 ) Other operating
expense ratio 15.9 % 16.0 % (0.1 ) 15.9 % 16.2 % (0.3 ) Combined
ratio 91.4 % 89.7 % 1.7 90.2 % 89.2 % 1.0
Please note that these amounts include the impact of the ‘other’
segment (i.e., results of Watford Re). See ‘Comments on Regulation
G’ for a reconciliation of underwriting income or loss to income
before income taxes and net income available to Arch common
shareholders. The ‘other’ segment includes amounts related to
Watford Re. Pursuant to generally accepted accounting principles,
Watford Re is considered a variable interest entity and the Company
concluded that it is the primary beneficiary of Watford Re. As
such, the Company consolidates the results of Watford Re in its
consolidated financial statements, although it only owns
approximately 11% of Watford Re’s common equity.
Segment Information
The following section provides analysis on the Company’s 2016
second quarter performance by operating segment. For additional
details regarding the Company’s operating segments, please refer to
the Company’s Financial Supplement dated June 30, 2016. The
Company’s segment information includes the use of underwriting
income and 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. Such items are non-GAAP financial measures
(see ‘Comments on Regulation G’ for further details).
Insurance Segment
Three Months Ended June 30, (U.S. dollars in
thousands)
2016 2015 % Change
Gross premiums written $ 762,043 $ 744,810 2.3 Net
premiums written 515,168 509,067 1.2 Net premiums earned 527,650
509,825 3.5 Underwriting income 3,329 23,643 (85.9 )
Underwriting Ratios
% PointChange
Loss ratio 67.2 % 62.9 % 4.3 Acquisition expense ratio 14.7
% 15.0 % (0.3 ) Other operating expense ratio 17.5 % 17.5 % —
Combined ratio 99.4 % 95.4 % 4.0 Catastrophic
activity and prior year development: Current accident year
catastrophic events, net of reinsurance and reinstatement premiums
3.9 % 1.2 % 2.7 Net (favorable) adverse development in prior year
loss reserves, net of related adjustments (0.8 )% (3.4 )% 2.6
Combined ratio excluding catastrophic activity and prior
year development (1) 96.3 % 97.6 % (1.3 ) (1) See ‘Comments
on Regulation G’ for further discussion.
Gross premiums written by the insurance segment in the 2016
second quarter were 2.3% higher than in the 2015 second quarter
while net premiums written were 1.2% higher than in the 2015 second
quarter. The increase in net premiums written reflected growth in
travel, construction and national accounts, partially offset by a
reduction in programs and property lines. The growth in travel
reflected both new business and continued expansion in existing
accounts. The increase in construction and national accounts
primarily reflected new business and audit premiums. The reduction
in program business primarily reflected the continued impact of the
non-renewal of a large program in the latter part of 2015 while the
lower level of net premiums written in property lines reflected
continued weak market conditions. Net premiums earned by the
insurance segment in the 2016 second quarter were 3.5% higher than
in the 2015 second quarter, and reflect changes in net premiums
written over the previous five quarters.
The 2016 second quarter loss ratio reflected 3.9 points of
current year catastrophic activity, compared to 1.2 points in the
2015 second quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 0.9 points in the 2016 second quarter, compared to 3.6
points in the 2015 second quarter. The estimated net favorable
development in the 2016 second quarter primarily resulted from
better than expected claims emergence in property lines from more
recent accident years and in longer-tailed lines from earlier
accident years, partially offset by a large energy casualty claim
from the 2015 accident year. The balance of the change in the 2016
second quarter loss ratio resulted, in part, from changes in the
mix of business.
The underwriting expense ratio was 32.2% in the 2016 second
quarter, compared to 32.5% in the 2015 second quarter. The
comparison of the underwriting expense ratios and the underlying
acquisition expense and other operating expense ratios reflected
changes in the mix of business and the level of reinsurance ceded
on a quota share basis.
Reinsurance Segment
Three Months Ended June 30, (U.S. dollars in
thousands)
2016 2015 % Change
Gross premiums written $ 412,053 $ 342,101 20.4 Net
premiums written 292,102 252,655 15.6 Net premiums earned 291,256
273,965 6.3 Other underwriting income 20,118 2,658 656.9
Underwriting income 72,372 68,073 6.3
Underwriting
Ratios
% PointChange
Loss ratio 50.2 % 40.6 % 9.6 Acquisition expense ratio 19.2
% 21.3 % (2.1 ) Other operating expense ratio 12.7 % 14.2 % (1.5 )
Combined ratio 82.1 % 76.1 % 6.0 Catastrophic
activity and prior year development: Current accident year
catastrophic events, net of reinsurance and reinstatement premiums
5.4 % 3.6 % 1.8 Net (favorable) adverse development in prior year
loss reserves, net of related adjustments (21.7 )% (21.5 )% (0.2 )
Combined ratio excluding catastrophic activity and prior year
development (1) 98.4 % 94.0 % 4.4 (1) See ‘Comments
on Regulation G’ for further discussion.
Gross premiums written by the reinsurance segment in the 2016
second quarter were 20.4% higher than in the 2015 second quarter,
while net premiums written were 15.6% higher than in the 2015
second quarter. The growth reflected the impact of a loss portfolio
transfer which resulted in $52.1 million of gross premiums written
and $40.2 million of net premiums written. Such premium was
substantially earned in the period and resulted in a corresponding
increase to losses and loss adjustment expenses. Excluding such
transaction, net premiums written were flat, reflecting competitive
market conditions and a higher level of ceded premiums.
Other underwriting income for the 2016 second quarter included
$19.1 million related to a contract which was commuted during the
period. This contract had been reflected as a deposit accounting
liability (i.e., a contract that, in accordance with GAAP, does not
pass risk transfer) prior to the commutation.
The 2016 second quarter loss ratio reflected 7.7 points related
to the loss portfolio transfer noted above. In addition, the 2016
second quarter loss ratio included 6.1 points of current year
catastrophic activity, compared to 3.7 points of catastrophic
activity in the 2015 second quarter, and a higher level of
attritional large loss activity than in the 2015 second quarter.
Estimated net favorable development in prior year loss reserves,
before related adjustments, reduced the loss ratio by 24.0 points
in the 2016 second quarter, compared to 21.1 points in the 2015
second quarter. The estimated net favorable development in the 2016
second quarter primarily resulted from better than expected claims
emergence in short-tail business from most underwriting years and
in longer-tail business across earlier underwriting years.
The underwriting expense ratio was 31.9% in the 2016 second
quarter, compared to 35.5% in the 2015 second quarter. The loss
portfolio transfer noted above improved the 2016 second quarter
expense ratio by 5.0 points. The 2016 second quarter ratio
reflected changes in the mix and type of business.
Mortgage Segment
Three Months Ended June 30, (U.S. dollars in
thousands)
2016 2015 % Change
Gross premiums written $ 118,434 $ 68,572 72.7 Net
premiums written 111,465 61,670 80.7 Net premiums earned 66,512
52,459 26.8 Other underwriting income 4,137 3,686 12.2
Underwriting income 37,769 16,627 127.2
Underwriting
Ratios
% PointChange
Loss ratio 0.6 % 18.4 % (17.8 ) Acquisition expense ratio
12.8 % 19.4 % (6.6 ) Other operating expense ratio 36.1 % 37.5 %
(1.4 ) Combined ratio 49.5 % 75.3 % (25.8 ) Net (favorable)
adverse development in prior year loss reserves, net of related
adjustments (16.6 )% (2.1 )% (14.5 ) Combined ratio excluding prior
year development (1) 66.1 % 77.4 % (11.3 ) (1) See ‘Comments
on Regulation G’ for further discussion.
The mortgage segment includes the Company’s U.S. and
international mortgage insurance and reinsurance operations as well
as government sponsored enterprise (“GSE”) credit-risk sharing
transactions. Arch Mortgage Insurance Company (“Arch MI U.S.”) is
approved as an eligible mortgage insurer by Fannie Mae and Freddie
Mac.
Gross premiums written by the mortgage segment in the 2016
second quarter were 72.7% higher than in the 2015 second quarter,
while net premiums written were 80.7% higher than in the 2015
second quarter. Approximately two thirds of the increase was in
Australian mortgage reinsurance business with the remainder split
between U.S. primary business, primarily from banks and other
non-credit union originators, and in GSE credit risk-sharing
transactions receiving insurance accounting treatment. Net premiums
earned for the 2016 second quarter were 26.8% higher than in the
2015 second quarter, reflecting the growth in insurance in
force.
Other underwriting income, which is primarily related to GSE
risk-sharing transactions receiving derivative accounting
treatment, was $4.1 million for the 2016 second quarter, compared
to $3.7 million for the 2015 second quarter.
The loss ratio for the 2016 second quarter reflected estimated
net favorable development in prior year loss reserves, before
related adjustments, of 16.6 points, compared to 2.1 points in the
2015 second quarter, driven primarily by continued lower than
expected claim rates. 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 June 30, 2016, the mortgage segment’s risk-in-force consisted
of $8.40 billion from Arch MI U.S. and an additional $4.56 billion
through the mortgage segment’s reinsurance and risk-sharing
operations. Arch MI U.S. generated $6.42 billion of new insurance
written (“NIW”) during the 2016 second quarter, of which 76% was
from banks and other non-credit union mortgage originators. For
additional information on the mortgage segment, please refer to the
Company’s Financial Supplement.
Corporate (Non-Underwriting) Segment
The corporate (non-underwriting) segment results include net
investment income, other income (loss), corporate expenses,
interest expense, net realized gains or losses, net impairment
losses included in earnings, equity in net income or loss of
investment funds accounted for using the equity method, net foreign
exchange gains or losses, income taxes and items related to the
Company’s non-cumulative preferred shares. Such amounts exclude the
results of the ‘other’ segment.
Net investment income for the 2016 second quarter was $0.57 per
share, or $70.4 million, compared to $0.53 per share, or $67.2
million, for the 2015 second quarter, and $0.57 per share, or $70.4
million, for the 2016 first quarter. The 2016 second quarter net
investment income reflected approximately $2.3 million related to
inflation adjustments on U.S. Treasury Inflation-Protected
Securities along with adjustments on structured securities,
partially offset by lower returns from alternative investments. The
annualized pre-tax investment income yield was 2.08% for the 2016
second quarter, compared to 2.05% for the 2015 second quarter and
2.13% for the 2016 first 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.
Corporate expenses were $17.2 million for the 2016 second
quarter, compared to $17.4 million for the 2015 second quarter.
Such amounts primarily represent certain holding company costs
necessary to support the Company’s worldwide insurance, reinsurance
and mortgage operations and costs associated with operating as a
publicly traded company.
Interest expense for the 2016 second quarter was $12.4 million,
compared to $4.0 million for the 2015 second quarter. Such amounts
reflected $12.4 million related to the Company’s senior notes and
other borrowings, while the 2015 second quarter was partially
offset by an $8.4 million reduction in interest expense on the
deposit accounting liability contract discussed above.
On a pre-tax basis, net foreign exchange gains for the 2016
second quarter were $22.5 million, compared to net foreign exchange
losses for the 2015 second quarter of $22.6 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.
Although the Company generally attempts to match the currency of
its projected liabilities with investments in the same currencies,
from time to time the Company may elect to over or underweight one
or more currencies, 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
(based on the Company’s estimated annual effective tax rate) was
6.4% for the 2016 second quarter and 7.8% for the six months ended
June 30, 2016, compared to 5.6% for the 2015 second quarter and
4.7% for the six months ended June 30, 2015. The Company’s
effective tax rate on pre-tax operating income available to Arch
shareholders was 5.9% for the 2016 second quarter and 6.2% for the
six months ended June 30, 2016, compared to 3.9% for the 2015
second quarter and 3.9% for the six months ended June 30, 2015. The
Company’s effective tax rate fluctuates from year to year based
upon 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
estimated annual effective tax rate, if any. The adjustment to the
estimated annual effective tax rate in the 2016 second quarter did
not have a material impact on the Company’s after-tax results.
Capitalization and Shareholders’ Equity
At June 30, 2016, total capital available to Arch of $7.60
billion consisted of $791.4 million of senior notes, representing
10.4% of the total, $100.0 million of revolving credit agreement
borrowings, representing 1.3% of the total, $325.0 million of
preferred shares, representing 4.3% of the total, and common
shareholders’ equity of $6.38 billion, representing 84.0% of the
total. 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.
Conference Call
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on July 28, 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 July 28,
2016 at 2:00 p.m. Eastern Time until August 4, 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 38285511 for all callers).
Please refer to the Company’s Financial Supplement dated June
30, 2016, 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 $7.60 billion in capital at June 30, 2016, provides
insurance and reinsurance on a worldwide basis through its wholly
owned subsidiaries.
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 and that investors and such other persons benefit from
having a consistent basis for comparison between quarters and for
comparison with other companies within the industry. These measures
may not, however, be comparable to similarly titled measures used
by companies outside of the insurance industry. Investors are
cautioned not to place undue reliance on these non-GAAP financial
measures in assessing the Company’s overall financial
performance.
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, net foreign exchange
gains or losses and income taxes, and the use of annualized
operating return on average common equity. The presentation of
after-tax operating income available to Arch common shareholders
and annualized operating return on average common equity are
non-GAAP financial measures as defined in Regulation G. The
reconciliation of such measures to net income available to Arch
common shareholders and annualized return on average common equity
(the most directly comparable GAAP financial measures) in
accordance with Regulation G is included on the following page 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.
The following table summarizes the Company’s consolidated
financial data, including a reconciliation of net income available
to Arch common shareholders to after-tax operating income available
to Arch common shareholders and related diluted per share results.
Each line item reflects the impact of the Company’s approximate 11%
ownership of Watford Re’s common equity:
(U.S. dollars in thousands, except share data)
Three
Months Ended Six Months Ended June 30,
June 30, 2016 2015 2016
2015 Net income available to Arch common shareholders $
205,570 $ 110,305 $ 354,884 $ 388,157 Net realized (gains) losses
(43,935 ) 27,837 (76,399 ) (39,638 ) Net impairment losses
recognized in earnings 5,343 1,113 12,982 6,912 Equity in net
(income) loss of investment funds accounted for using the equity
method (8,737 ) (16,168 ) (15,392 ) (22,057 ) Net foreign exchange
(gains) losses (22,703 ) 22,241 (494 ) (44,574 ) Income tax expense
(1) 5,036 628 10,735 7,002 After-tax
operating income available to Arch common shareholders $ 140,574
$ 145,956 $ 286,316 $ 295,802
Diluted per common
share results:
Net income available to Arch common shareholders $ 1.65 $ 0.88 $
2.85 $ 3.05 Net realized (gains) losses (0.35 ) 0.22 (0.62 ) (0.31
) Net impairment losses recognized in earnings 0.04 0.01 0.10 0.05
Equity in net (income) loss of investment funds accounted for using
the equity method (0.07 ) (0.13 ) (0.12 ) (0.17 ) Net foreign
exchange (gains) losses (0.18 ) 0.18 — (0.35 ) Income tax expense
0.04 — 0.09 0.06 After-tax operating
income available to Arch common shareholders $ 1.13 $ 1.16
$ 2.30 $ 2.33 Weighted average common
shares and common share equivalents outstanding — diluted
124,365,596 125,885,420 124,425,126 127,156,713 Beginning
common shareholders’ equity $ 6,088,587 $ 5,963,702 $ 5,879,881 $
5,805,053 Ending common shareholders’ equity 6,378,922
5,812,515 6,378,922 5,812,515 Average common
shareholders’ equity $ 6,233,755 $ 5,888,109 $
6,129,402 $ 5,808,784 Annualized return on
average common equity 13.2 % 7.5 % 11.6 % 13.4 % Annualized
operating return on average common equity 9.0 % 9.9 % 9.3 % 10.2 %
(1) Income tax expense on net realized gains or losses, net
impairment losses recognized in earnings, equity in net income
(loss) of investment funds accounted for using the equity method
and net foreign exchange gains or losses reflects the relative mix
reported by jurisdiction and the varying tax rates in each
jurisdiction.
The Company’s segment information includes the presentation of
consolidated underwriting income or loss and a subtotal of
underwriting income or loss before the contribution from the
‘other’ segment. Such measures represent the pre-tax profitability
of its underwriting operations and include net premiums earned plus
other underwriting income, less losses and loss adjustment
expenses, acquisition expenses and other operating expenses. Other
operating expenses include those operating expenses that are
incremental and/or directly attributable to the Company’s
individual underwriting operations. Underwriting income or loss
does not incorporate items included in the Company’s corporate
(non-underwriting) segment. While these measures are presented in
the Segment Information footnote to the Company’s Consolidated
Financial Statements, they are considered non-GAAP financial
measures when presented elsewhere on a consolidated basis. The
reconciliations of underwriting income or loss to income before
income taxes (the most directly comparable GAAP financial measure)
on a consolidated basis and a subtotal before the contribution from
the ‘other’ segment, in accordance with Regulation G, is shown on
pages 8 and 9.
Management measures segment performance for its three
underwriting segments based on underwriting income or loss. The
Company does not manage its assets by underwriting segment, with
the exception of goodwill and intangible assets, and, accordingly,
investment income and other non-underwriting related items are not
allocated to each underwriting segment. As noted earlier, the
‘other’ segment includes the results of Watford Re. Watford Re has
its own management and board of directors that is responsible for
the overall profitability of the ‘other’ segment. For the ‘other’
segment, performance is measured based on net income or loss. The
Company does not guarantee or provide credit support for Watford
Re, and the Company’s financial exposure to Watford Re is limited
to its investment in Watford Re’s common and preferred shares and
counterparty credit risk (mitigated by collateral) arising from
reinsurance transactions. Along with consolidated underwriting
income, the Company provides a subtotal of underwriting income or
loss before the contribution from the ‘other’ segment and believes
that this presentation enables investors and other users of the
Company’s financial information to analyze the Company’s
underwriting performance in a manner similar to how the Company’s
management analyzes performance.
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 underwriting performance of each of its
underwriting segments.
The following tables summarize the Company’s results by segment
for the 2016 second quarter and 2015 second quarter and a
reconciliation of underwriting income or loss to income before
income taxes and net income available to Arch common
shareholders:
(U.S. Dollars in thousands)
Three Months Ended
June 30, 2016 Insurance Reinsurance
Mortgage Sub-total Other
Total Gross premiums written (1) $ 762,043 $ 412,053
$ 118,434 $ 1,292,199 $ 109,285 $ 1,329,936 Premiums ceded (246,875
) (119,951 ) (6,969 ) (373,464 ) (4,457 ) (306,373 ) Net premiums
written 515,168 292,102 111,465 918,735 104,828 1,023,563 Change in
unearned premiums 12,482 (846 ) (44,953 ) (33,317 ) 15,739
(17,578 ) Net premiums earned 527,650 291,256 66,512 885,418
120,567 1,005,985 Other underwriting income — 20,118 4,137 24,255
969 25,224 Losses and loss adjustment expenses (354,633 ) (146,091
) (366 ) (501,090 ) (83,502 ) (584,592 ) Acquisition expenses, net
(77,317 ) (55,796 ) (8,523 ) (141,636 ) (33,645 ) (175,281 ) Other
operating expenses (92,371 ) (37,115 ) (23,991 ) (153,477 ) (6,113
) (159,590 ) Underwriting income (loss) $ 3,329 $ 72,372
$ 37,769 113,470 (1,724 ) 111,746 Net
investment income 70,397 17,941 88,338 Net realized gains (losses)
40,927 27,291 68,218 Net impairment losses recognized in earnings
(5,343 ) — (5,343 )
Equity in net income (loss) of investment
fundsaccounted for using the equity method
8,737 — 8,737 Other income (loss) (7 ) — (7 ) Corporate expenses
(17,200 ) — (17,200 ) Interest expense (12,432 ) (3,231 ) (15,663 )
Net foreign exchange gains (losses) 22,461 2,201
24,662
Income before income taxes 221,010 42,478
263,488 Income tax expense (14,131 ) — (14,131 )
Net
income 206,879 42,478 249,357
Dividends attributable to redeemable
noncontrollinginterests
— (4,586 ) (4,586 )
Amounts attributable to nonredeemable
noncontrollinginterests
— (33,716 ) (33,716 )
Net income available to Arch
206,879 4,176 211,055 Preferred dividends (5,485 ) — (5,485
)
Net income available to Arch common shareholders $ 201,394
$ 4,176 $ 205,570
Underwriting
Ratios Loss ratio 67.2 % 50.2 % 0.6 % 56.6 % 69.3 % 58.1 %
Acquisition expense ratio 14.7 % 19.2 % 12.8 % 16.0 % 27.9 % 17.4 %
Other operating expense ratio 17.5 % 12.7 % 36.1 % 17.3 % 5.1 %
15.9 % Combined ratio 99.4 % 82.1 % 49.5 % 89.9 % 102.3 % 91.4 %
Net premiums written to gross premiums written 67.6 % 70.9 %
94.1 % 71.1 % 95.9 % 77.0 % (1) Certain amounts included in
the gross premiums written of each segment are related to
intersegment transactions and are included in the gross premiums
written of each segment. Accordingly, the sum of gross premiums
written for each segment does not agree to the total gross premiums
written as shown in the table above due to the elimination of
intersegment transactions in the total. (U.S. Dollars in thousands)
Three Months Ended June 30, 2015
Insurance Reinsurance Mortgage
Sub-total Other Total
Gross premiums written (1) $ 744,810 $ 342,101 $ 68,572 $ 1,155,253
$ 127,954 $ 1,199,209 Premiums ceded (235,743 ) (89,446 ) (6,902 )
(331,861 ) (7,766 ) (255,629 ) Net premiums written 509,067 252,655
61,670 823,392 120,188 943,580 Change in unearned premiums 758
21,310 (9,211 ) 12,857 (12,999 ) (142 ) Net
premiums earned 509,825 273,965 52,459 836,249 107,189 943,438
Other underwriting income 521 2,658 3,686 6,865 852 7,717 Losses
and loss adjustment expenses (320,926 ) (111,183 ) (9,639 )
(441,748 ) (77,678 ) (519,426 ) Acquisition expenses, net (76,723 )
(58,360 ) (10,200 ) (145,283 ) (30,142 ) (175,425 ) Other operating
expenses (89,054 ) (39,007 ) (19,679 ) (147,740 ) (3,450 ) (151,190
) Underwriting income (loss) $ 23,643 $ 68,073 $
16,627 108,343 (3,229 ) 105,114 Net investment income
67,171 19,792 86,963 Net realized gains (losses) (26,860 ) (8,865 )
(35,725 ) Net impairment losses recognized in earnings (1,113 ) —
(1,113 )
Equity in net income (loss) of investment
fundsaccounted for using the equity method
16,167 — 16,167 Other income (loss) 2,205 — 2,205 Corporate
expenses (17,418 ) — (17,418 ) Interest expense (4,011 ) — (4,011 )
Net foreign exchange gains (losses) (22,571 ) 2,988 (19,583
)
Income before income taxes 121,913 10,686 132,599 Income
tax expense (6,780 ) — (6,780 )
Net income 115,133
10,686 125,819
Dividends attributable to redeemable
noncontrollinginterests
— (4,743 ) (4,743 )
Amounts attributable to nonredeemable
noncontrollinginterests
— (5,286 ) (5,286 )
Net income available to Arch
115,133 657 115,790 Preferred dividends (5,485 ) — (5,485 )
Net income available to Arch common shareholders $ 109,648
$ 657 $ 110,305
Underwriting
Ratios Loss ratio 62.9 % 40.6 % 18.4 % 52.8 % 72.5 % 55.1 %
Acquisition expense ratio 15.0 % 21.3 % 19.4 % 17.4 % 28.1 % 18.6 %
Other operating expense ratio 17.5 % 14.2 % 37.5 % 17.7 % 3.2 %
16.0 % Combined ratio 95.4 % 76.1 % 75.3 % 87.9 % 103.8 % 89.7 %
Net premiums written to gross premiums written 68.3 % 73.9 %
89.9 % 71.3 % 93.9 % 78.7 % (1) Certain amounts included in
the gross premiums written of each segment are related to
intersegment transactions and are included in the gross premiums
written of each segment. Accordingly, the sum of gross premiums
written for each segment does not agree to the total gross premiums
written as shown in the table above due to the elimination of
intersegment transactions in the total.
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 (including
alternative sources of capital), 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 June 30, 2016;
- 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;
- changes in general economic conditions,
including new or continued sovereign debt concerns in Eurozone
countries or downgrades of U.S. securities by credit rating
agencies, which could affect the Company’s business, financial
condition and results of operations;
- the volatility of the Company’s
shareholders’ equity from foreign currency fluctuations, which
could increase due to us not matching portions of the Company’s
projected liabilities in foreign currencies with investments in the
same currencies;
- 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.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160727006524/en/
Arch Capital Group Ltd.Mark D. LyonsExecutive Vice President and
Chief Financial Officer441-278-9250441-278-9255 fax
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