Arch Capital Group Ltd. (NASDAQ: ACGL) announces its 2018 second
quarter results. The results included:
- Net income available to Arch common
shareholders of $233.2 million, or $0.56 per share, an 11.1%
annualized return on average common equity, compared to $173.8
million, or $0.42 per share, and 8.7% for the 2017 second
quarter;
- After-tax operating income available to
Arch common shareholders, a non-GAAP measure, of $242.6 million, or
$0.59 per share, an 11.6% annualized return on average common
equity, compared to $168.9 million, or $0.40 per share, and 8.5%
for the 2017 second quarter;
- Pre-tax current accident year
catastrophic losses, net of reinsurance and reinstatement
premiums(1), of $14.9 million;
- Favorable development in prior year
loss reserves, net of related adjustments(1), of $60.3
million;
- Combined ratio excluding catastrophic
activity and prior year development(1) of 84.0%;
- Book value per common share of $20.68
at June 30, 2018, a 1.3% increase in the 2018 second quarter and a
4.1% increase for the trailing twelve months;
- Share repurchases of $170.3
million.
All earnings per share amounts discussed in this release are on
a diluted basis. All share and per share amounts in this release
reflect the three-for-one share split of Arch Capital’s common
shares which occurred in the 2018 second quarter.
The following table summarizes the Company’s underwriting
results, both (i) on a consolidated basis and (ii) on a
consolidated basis excluding the ‘other’ segment (i.e., results of
Watford Re, as defined below):
(U.S. dollars in thousands)
Consolidated
Consolidated Excluding ‘Other’ Segment (1) Three Months
Ended June 30, Three Months Ended June 30, 2018
2017 % Change 2018
2017 % Change Gross premiums written $
1,696,544 $ 1,609,659 5.4 $ 1,591,202 $ 1,533,142 3.8 Net premiums
written 1,298,896 1,248,695 4.0 1,158,310 1,108,292 4.5 Net
premiums earned 1,336,763 1,240,874 7.7 1,177,245 1,090,120 8.0
Underwriting income 235,465 195,419 20.5 235,783 198,062 19.0
Underwriting Ratios
% Point Change
% Point Change
Loss ratio 54.3 % 55.6 % (1.3 ) 51.7 % 53.1 % (1.4 ) Underwriting
expense ratio 28.4 % 29.0 % (0.6 ) 28.5 % 29.1 % (0.6 ) Combined
ratio 82.7 % 84.6 % (1.9 ) 80.2 % 82.2 % (2.0 ) Combined ratio
excluding catastrophic activity and prior year development 84.0 %
86.3 % (2.3 )
(1) Excluding the ‘other’ segment. See ‘Comments on Regulation
G’ for further details.
Pursuant to GAAP, the Company consolidates the results of
Watford Holdings Ltd. in its financial statements, although it only
owns approximately 11% of Watford Holdings Ltd.’s common equity.
Watford Holdings Ltd. is the parent of Watford Re Ltd., a
multi-line Bermuda reinsurance company (together with Watford
Holdings Ltd., “Watford Re”). See ‘Comments on Regulation G’ for
further details.
The following table summarizes the Company’s consolidated
financial data, including a reconciliation of net income or loss
available to Arch common shareholders to after-tax operating income
or loss available to Arch common shareholders and related diluted
per share results:
(U.S. dollars in thousands, except share data)
Three Months Ended Six Months Ended June 30,
June 30, 2018 2017 2018
2017 Net income available to Arch common shareholders $
233,243 $ 173,818 $ 370,519 $ 415,727 Net realized (gains) losses
61,426 (18,452 ) 173,190 (47,586 ) Net impairment losses recognized
in earnings 470 1,730 632 3,537 Equity in net (income) loss of
investment funds accounted for using the equity method (8,472 )
(32,706 ) (36,541 ) (80,794 ) Net foreign exchange (gains) losses
(47,038 ) 38,012 (31,482 ) 57,808 UGC transaction costs and other
6,908 2,675 7,738 18,259 Loss on redemption of preferred shares — —
2,710 — Income tax expense (benefit) (1) (3,941 ) 3,842
(9,027 ) (67 ) After-tax operating income available to Arch common
shareholders $ 242,596 $ 168,919 $ 477,739 $
366,884
Diluted per common
share results:
Net income available to Arch common shareholders $ 0.56 $ 0.42 $
0.89 $ 1.00 Net realized (gains) losses 0.15 (0.05 ) 0.42 (0.12 )
Net impairment losses recognized in earnings 0.00 0.00 0.00 0.01
Equity in net (income) loss of investment funds accounted for using
the equity method (0.02 ) (0.08 ) (0.09 ) (0.19 ) Net foreign
exchange (gains) losses (0.11 ) 0.09 (0.08 ) 0.14 UGC transaction
costs and other 0.02 0.01 0.02 0.04 Loss on redemption of preferred
shares
—
—
0.01
—
Income tax expense (benefit) (1) (0.01 ) 0.01 (0.02 ) 0.00
After-tax operating income available to Arch common
shareholders $ 0.59 $ 0.40 $ 1.15 $ 0.88
Weighted average common shares and common share
equivalents outstanding —diluted 413,111,205 417,733,938
415,460,756 417,421,896 Beginning common shareholders’
equity $ 8,370,372 $ 7,833,289 $ 8,324,047 $ 7,481,163 Ending
common shareholders’ equity 8,383,755 8,126,332
8,383,755 8,126,332 Average common shareholders’
equity $ 8,377,064 $ 7,979,811 $ 8,353,901 $
7,803,748 Annualized return on average common equity
11.1 % 8.7 % 8.9 % 10.7 % Annualized operating return on average
common equity 11.6 % 8.5 % 11.4 % 9.4 % (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, net foreign exchange
gains or losses, UGC transaction costs and other and loss on
redemption of preferred shares reflects the relative mix reported
by jurisdiction and the varying tax rates in each jurisdiction.
Each line item in the table above reflects the impact of the
Company’s approximate 11% ownership of Watford Re’s common equity.
See ‘Comments on Regulation G’ for a discussion of non-GAAP
financial measures.
Segment Information
The following section provides analysis on the Company’s 2018
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, 2018. The
Company’s segment information includes the use of underwriting
income (loss) and a combined ratio excluding catastrophic activity
(if applicable for the segment) and prior year development. 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)
2018 2017 % Change
Gross premiums written $ 769,372 $ 743,902 3.4 Net premiums
written 524,107 496,456 5.6 Net premiums earned 546,449 517,574 5.6
Underwriting income (loss) $ 5,634 $ (4,504 ) n/m
Underwriting Ratios
% Point Change
Loss ratio 65.4 % 67.8 % (2.4 ) Underwriting expense ratio 33.6 %
33.0 % 0.6 Combined ratio 99.0 % 100.8 % (1.8 )
Catastrophic activity and prior year development: Current accident
year catastrophic events, net of reinsurance and reinstatement
premiums 1.4 % 1.6 % (0.2 ) Net (favorable) adverse development in
prior year loss reserves, net of related adjustments (0.9 )% (0.2
)% (0.7 ) Combined ratio excluding catastrophic activity and prior
year development (1) 98.5 % 99.4 % (0.9 )
(1) See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the insurance segment in the 2018
second quarter were 3.4% higher than in the 2017 second quarter
while net premiums written were 5.6% higher than in the 2017 second
quarter. Changes in foreign currency exchange rates resulted in an
increase in net premiums written in the 2018 second quarter of $2.0
million, or 0.4%, compared to the 2017 second quarter. The increase
in net premiums written reflected growth in property, primarily due
to new business and rate increases, in travel, due to both new
business and growth in existing accounts, and in programs,
reflecting rate increases and growth in recently added programs.
Net premiums earned by the insurance segment in the 2018 second
quarter were 5.6% higher than in the 2017 second quarter, and
reflect changes in net premiums written over the previous five
quarters.
The 2018 second quarter loss ratio reflected 1.4 points for
current year catastrophic activity, compared to 1.6 points in the
2017 second quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 1.1 points in the 2018 second quarter, compared to 0.4
points in the 2017 second quarter. The balance of the change in the
2018 second quarter loss ratio resulted, in part, from a lower
level of large attritional losses and changes in mix of
business.
The underwriting expense ratio was 33.6% in the 2018 second
quarter, compared to 33.0% in the 2017 second quarter, reflecting
changes in the mix and type of business.
Reinsurance Segment
Three Months Ended June 30, (U.S. dollars in
thousands)
2018 2017 % Change
Gross premiums written $ 490,327 $ 453,186 8.2 Net premiums
written 354,080 337,924 4.8 Net premiums earned 340,318 314,702 8.1
Other underwriting income (loss) (129 ) (279 ) (53.8 )
Underwriting income $ 24,413 $ 18,955 28.8
Underwriting
Ratios
% Point Change
Loss ratio 67.6 % 66.0 % 1.6 Underwriting expense ratio 25.2 % 28.0
% (2.8 ) Combined ratio 92.8 % 94.0 % (1.2 ) Catastrophic
activity and prior year development: Current accident year
catastrophic events, net of reinsurance and reinstatement premiums
2.2 % 5.2 % (3.0 ) Net (favorable) adverse development in prior
year loss reserves, net of related adjustments (9.4 )% (12.3 )% 2.9
Combined ratio excluding catastrophic activity and prior
year development (1) 100.0 % 101.1 % (1.1 )
(1) See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the reinsurance segment in the 2018
second quarter were 8.2% higher than in the 2017 second quarter,
while net premiums written were 4.8% higher than in the 2017 second
quarter. The lower level of growth in net premiums written
primarily reflects an increase in retrocessions on other specialty
lines. Changes in foreign currency exchange rates resulted in an
increase in net premiums written in the 2018 second quarter of $6.9
million, or 2.0%, compared to the 2017 second quarter. The increase
in net premiums written reflected growth in property excluding
property catastrophe business, primarily due to new accounts and
rate increases. Net premiums earned reflect changes in net premiums
written over the previous five quarters.
The 2018 second quarter loss ratio contained 9.9 points, or
$33.7 million, of property facultative loss activity, compared to
11.1 points, or $34.8 million, in the 2017 second quarter. The 2018
second quarter loss ratio included 2.2 points of current year
catastrophic activity, compared to 5.4 points of catastrophic
activity in the 2017 second quarter. Estimated net favorable
development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 9.7 points in the 2018
second quarter, compared to 12.6 points in the 2017 second quarter.
The estimated net favorable development in the 2018 second 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 2018 second quarter loss ratio resulted, in
part, from changes in mix of business.
The underwriting expense ratio was 25.2% in the 2018 second
quarter, compared to 28.0% in the 2017 second quarter, reflecting a
higher level of net premiums earned and changes in the mix and type
of business. In addition, the underwriting expense ratio benefited
from a reduction in federal excise taxes incurred of $2.6 million,
or 0.8 points, as the reinsurance agreements between the Company’s
U.S.-based insurance and reinsurance subsidiaries and Arch
Reinsurance Ltd. were not renewed as of January 1, 2018.
Mortgage Segment
Three Months Ended June 30, (U.S. dollars in
thousands)
2018 2017 % Change
Gross premiums written $ 330,990 $ 336,226 (1.6 ) Net
premiums written 280,123 273,912 2.3 Net premiums earned 290,478
257,844 12.7 Other underwriting income 3,315 4,277 (22.5 )
Underwriting income $ 205,736 $ 183,611 12.0
Underwriting
Ratios
% Point Change
Loss ratio 7.4 % 8.0 % (0.6 ) Underwriting expense ratio 22.8 %
22.5 % 0.3 Combined ratio 30.2 % 30.5 % (0.3 ) Prior
year development: Net (favorable) adverse development in prior year
loss reserves, net of related adjustments (8.0 )% (11.5 )% 3.5
Combined ratio excluding prior year development (1) 38.2 %
42.0 % (3.8 )
(1) See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the mortgage segment in the 2018
second quarter were 1.6% lower than in the 2017 second quarter,
while net premiums written were 2.3% higher than in the 2017 second
quarter. The reduction in gross premiums written primarily
reflected lower level of U.S. single premium business and a
decrease in Australian mortgage reinsurance business, partially
offset by growth in U.S. monthly premium business and government
sponsored enterprise (“GSE”) credit-risk sharing transactions. Net
premiums written for the 2018 second quarter reflected a declining
cession to AIG on the 50% quota share reinsurance agreement
covering 2014 to 2016 policy years of UGC business on a run-off
basis, while the 2017 second quarter also reflected higher
retrocessions of Australian mortgage reinsurance business. The
increase in net premiums earned for the 2018 second quarter
primarily reflected the growth in insurance in force over the last
twelve months. Insurance in force increased to $359.9 billion at
June 30, 2018, compared to $332.9 billion at June 30, 2017.
Arch MI U.S. generated $19.9 billion of new insurance written
(“NIW”) in the 2018 second quarter, compared to $17.3 billion in
the 2017 second quarter, as a higher level of purchase market
activity more than offset a reduction in single premium business.
Monthly premium policies contributed 94.3% of NIW in the 2018
second quarter, compared to 85.7% in the 2017 second quarter.
The loss ratio for the 2018 second quarter reflected $9.0
million, or 3.1 points, of favorable current year development on
2018 first quarter delinquencies which cured in the period, and
estimated net favorable development in prior year loss reserves,
before related adjustments, of 8.0 points, compared to 11.5 points
in the 2017 second quarter. The estimated net favorable development
in the 2018 second quarter was primarily driven by lower than
expected claim rates on first lien business and subrogation
activity on second lien business. The ending percentage of loans in
default on first lien business decreased to 1.70% at June 30, 2018,
from 1.98% at March 31, 2018.
The mortgage segment’s underwriting expense ratio was 22.8% in
the 2018 second quarter, compared to 22.5% in the 2017 second
quarter. The underwriting expense ratio in the 2018 second quarter
reflected an increase in incentive compensation costs, partially
offset by a higher level of net premiums earned.
At June 30, 2018, the mortgage segment’s risk-in-force (before
reinsurance) of $72.8 billion consisted of $67.3 billion from Arch
MI U.S. with the remainder from reinsurance and credit-risk sharing
operations. For additional information on the mortgage segment,
please refer to the Company’s Financial Supplement dated June 30,
2018.
Corporate and Non-Underwriting
Corporate and non-underwriting results include net investment
income, other income (loss), corporate expenses, UGC transaction
costs and other, amortization of intangible assets, interest
expense, items related to the Company’s non-cumulative preferred
shares, 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 and income taxes. Such amounts exclude the results
of the ‘other’ segment.
Pre-tax net investment income for the 2018 second quarter was
$0.26 per share, or $107.8 million, compared to $0.22 per share, or
$92.5 million, for the 2017 second quarter. The 2018 second quarter
net investment income reflected the reinvestment of fixed income
securities at higher available yields, a shift from municipal bonds
to corporates and a higher level of average investable assets than
in the 2017 second quarter. The annualized pre-tax investment
income yield was 2.32% for the 2018 second quarter, compared to
2.04% for the 2017 second quarter.
Corporate expenses were $15.6 million for the 2018 second
quarter, compared to $22.2 million for the 2017 second quarter,
with the decrease primarily due to lower incentive compensation
costs. UGC transaction costs and other were $6.9 million for the
2018 second quarter, compared to $2.7 million for the 2017 second
quarter. The 2018 second quarter amount was primarily attributable
to the write off of intangible assets related to insurance licenses
for a subsidiary of UGC which is being merged with another
subsidiary. Amortization of intangible assets for the 2018 second
quarter was $26.5 million, compared to $30.8 million for the 2017
second quarter, with amounts in both periods primarily related to
intangible assets related to the UGC acquisition.
Interest expense for the 2018 second quarter was $26.1 million,
compared to $25.9 million for the 2017 second quarter while
preferred dividends for the 2018 second quarter were $10.4 million,
compared to $11.3 million for the 2017 second quarter.
On a pre-tax basis, net foreign exchange gains for the 2018
second quarter were $46.2 million, compared to net foreign exchange
losses for the 2017 second quarter of $37.8 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,
the Company may elect to over or underweight one or more currencies
from time to time, 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 annual effective tax rate) was 8.8% for the
2018 second quarter, compared to 15.6% for the 2017 second quarter,
while the effective tax rate on pre-tax operating income available
to Arch common shareholders was 9.8% for the 2018 second quarter,
compared to 14.4% for the 2017 second quarter. The effective tax
rates for the 2018 second quarter included a discrete income tax
benefit of $1.6 million related to share-based compensation which
had the effect of reducing the 2018 second quarter effective tax
rate on operating income available to Arch common shareholders by
0.6%. The change in the U.S. federal corporate tax rate from 35% to
21% commencing on January 1, 2018 contributed to a lower effective
tax rate on operating income for the 2018 second quarter as
compared to the 2017 second quarter. The Company’s effective tax
rate fluctuates from period to period based upon the relative mix
of income or loss reported by jurisdiction, the level of
catastrophic loss activity incurred, and the varying tax rates in
each jurisdiction. The Company currently expects that its annual
effective tax rate on pre-tax operating income available to Arch
common shareholders for the year ended December 31, 2018 will be in
the range of 9% to 12%.
Capital Activity
During the 2018 second quarter, the Company repaid $250.0
million of revolving credit agreement borrowings which reduced the
overall debt and preferred ratio to capital available to Arch to
23.9% at June 30, 2018. In addition, the Company repurchased 6.4
million shares under its share repurchase program with an aggregate
purchase price of $170.3 million, which reduced book value per
share by $0.09 for the 2018 second quarter. At June 30, 2018,
$272.9 million of share repurchases were remaining and available
under the program, which may be effected from time to time in open
market or privately negotiated transactions through December 31,
2019. For additional information on the Company’s capital
structure, please refer to the Financial Supplement dated June 30,
2018.
Conference Call
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on August 1, 2018. 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 August 1,
2018 at 2:00 p.m. Eastern Time until August 8, 2018 at midnight
Eastern Time. To access the replay, domestic callers should dial
855-859-2056, and international callers should dial 404-537-3406
(passcode 5782529 for all callers).
Please refer to the Company’s Financial Supplement dated June
30, 2018, 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 $11.02 billion in capital at June 30, 2018, provides
insurance, reinsurance and mortgage insurance 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, UGC transaction costs and other and loss on
redemption of preferred shares, net of 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, net
foreign exchange gains or losses, UGC transaction costs and other
and loss on redemption of preferred shares 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. UGC
transaction costs and other include advisory, financing, legal,
severance, incentive compensation and other costs related to the
UGC acquisition. The Company believes that UGC transaction costs
and other, due to their non-recurring nature, are not indicative of
the performance of, or trends in, the Company’s business
performance. The loss on redemption of preferred shares related to
the redemption of the Company's Series C preferred shares in
January 2018 and had no impact on shareholders' equity or cash
flows. 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, net foreign exchange gains or losses, UGC
transaction costs and other and loss on redemption of preferred
shares 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 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
the following pages.
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 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 (if applicable
for the segment) and prior year development. 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 2018 second quarter and 2017 second quarter and a
reconciliation of underwriting income or loss to income or loss
before income taxes and net income or loss available to Arch common
shareholders:
(U.S. Dollars in thousands)
Three Months Ended
June 30, 2018 Insurance Reinsurance
Mortgage Sub-total Other
Total Gross premiums written (1) $ 769,372 $ 490,327
$ 330,990 $ 1,591,202 $ 175,175 $ 1,696,544 Premiums ceded (245,265
) (136,247 ) (50,867 ) (432,892 ) (34,589 ) (397,648 ) Net premiums
written 524,107 354,080 280,123 1,158,310 140,586 1,298,896 Change
in unearned premiums 22,342 (13,762 ) 10,355 18,935
18,932 37,867 Net premiums earned 546,449
340,318 290,478 1,177,245 159,518 1,336,763 Other underwriting
income — (129 ) 3,315 3,186 688 3,874 Losses and loss adjustment
expenses (357,465 ) (229,956 ) (21,591 ) (609,012 ) (117,141 )
(726,153 ) Acquisition expenses (90,670 ) (50,142 ) (27,737 )
(168,549 ) (34,289 ) (202,838 ) Other operating expenses (92,680 )
(35,678 ) (38,729 ) (167,087 ) (9,094 ) (176,181 ) Underwriting
income (loss) $ 5,634 $ 24,413 $ 205,736
235,783 (318 ) 235,465 Net investment income 107,761 27,907
135,668 Net realized gains (losses) (59,545 ) (17,066 ) (76,611 )
Net impairment losses recognized in earnings (470 ) — (470 ) Equity
in net income (loss) of investment funds accounted for using the
equity method 8,472 — 8,472 Other income 3,113 — 3,113 Corporate
expenses (15,604 ) — (15,604 ) UGC transaction costs and other
(6,908 ) — (6,908 ) Amortization of intangible assets (26,472 ) —
(26,472 ) Interest expense (26,058 ) (4,286 ) (30,344 ) Net foreign
exchange gains (losses) 46,211 7,495 53,706
Income before income taxes 266,283 13,732 280,015 Income tax
expense (23,644 ) (24 ) (23,668 )
Net income 242,639 13,708
256,347 Dividends attributable to redeemable noncontrolling
interests — (4,585 ) (4,585 ) Amounts attributable to nonredeemable
noncontrolling interests — (8,116 ) (8,116 )
Net income
available to Arch 242,639 1,007 243,646 Preferred dividends
(10,403 ) — (10,403 )
Net income available to Arch common
shareholders $ 232,236 $ 1,007 $ 233,243
Underwriting Ratios Loss ratio 65.4 % 67.6 % 7.4 %
51.7 % 73.4 % 54.3 % Acquisition expense ratio 16.6 % 14.7 % 9.5 %
14.3 % 21.5 % 15.2 % Other operating expense ratio 17.0 % 10.5 %
13.3 % 14.2 % 5.7 % 13.2 % Combined ratio 99.0 % 92.8 % 30.2 % 80.2
% 100.6 % 82.7 % Net premiums written to gross premiums
written 68.1 % 72.2 % 84.6 % 72.8 % 80.3 % 76.6 % (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, 2017 Insurance Reinsurance
Mortgage Sub-total Other
Total Gross premiums written (1) $ 743,902 $ 453,186
$ 336,226 $ 1,533,142 $ 152,813 $ 1,609,659 Premiums ceded (247,446
) (115,262 ) (62,314 ) (424,850 ) (12,410 ) (360,964 ) Net premiums
written 496,456 337,924 273,912 1,108,292 140,403 1,248,695 Change
in unearned premiums 21,118 (23,222 ) (16,068 ) (18,172 )
10,351 (7,821 ) Net premiums earned 517,574 314,702 257,844
1,090,120 150,754 1,240,874 Other underwriting income (loss) — (279
) 4,277 3,998 824 4,822 Losses and loss adjustment expenses
(350,939 ) (207,606 ) (20,694 ) (579,239 ) (110,621 ) (689,860 )
Acquisition expenses (78,872 ) (51,151 ) (25,666 ) (155,689 )
(34,747 ) (190,436 ) Other operating expenses (92,267 ) (36,711 )
(32,150 ) (161,128 ) (8,853 ) (169,981 ) Underwriting income (loss)
$ (4,504 ) $ 18,955 $ 183,611 198,062 (2,643 )
195,419 Net investment income 92,520 18,604 111,124 Net
realized gains (losses) 18,046 3,689 21,735 Net impairment losses
recognized in earnings (1,730 ) — (1,730 ) Equity in net income
(loss) of investment funds accounted for using the equity method
32,706 — 32,706 Other income (loss) (1,994 ) — (1,994 ) Corporate
expenses (22,201 ) — (22,201 ) UGC transaction costs and other
(2,675 ) — (2,675 ) Amortization of intangible assets (30,824 ) —
(30,824 ) Interest expense (25,912 ) (2,837 ) (28,749 ) Net foreign
exchange gains (losses) (37,821 ) (1,722 ) (39,543 )
Income
before income taxes 218,177 15,091 233,268 Income tax (expense)
benefit (34,169 ) — (34,169 )
Net income 184,008
15,091 199,099 Dividends attributable to redeemable noncontrolling
interests — (4,586 ) (4,586 ) Amounts attributable to nonredeemable
noncontrolling interests — (9,346 ) (9,346 )
Net income
available to Arch 184,008 1,159 185,167 Preferred dividends
(11,349 ) — (11,349 )
Net income available to Arch common
shareholders $ 172,659 $ 1,159 $ 173,818
Underwriting Ratios Loss ratio 67.8 % 66.0 % 8.0 %
53.1 % 73.4 % 55.6 % Acquisition expense ratio 15.2 % 16.3 % 10.0 %
14.3 % 23.0 % 15.3 % Other operating expense ratio 17.8 % 11.7 %
12.5 % 14.8 % 5.9 % 13.7 % Combined ratio 100.8 % 94.0 % 30.5 %
82.2 % 102.3 % 84.6 % Net premiums written to gross premiums
written 66.7 % 74.6 % 81.5 % 72.3 % 91.9 % 77.6 % (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 integration of any businesses the
Company has acquired or may acquire into its existing
operations;
- 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;
- 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, 2018;
- 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 resulting from natural or
man-made catastrophic events in the Company’s insurance,
reinsurance and mortgage businesses could cause large losses and
substantial volatility in our 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, including the Tax Cuts and Jobs Act of 2017; 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: https://www.businesswire.com/news/home/20180731005935/en/
Arch Capital Group Ltd.François Morin,
441-278-9250orInvestor RelationsDonald Watson,
914-872-3616dwatson@archcapservices.com
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