Arch Capital Group Ltd. (NASDAQ:ACGL) announces its 2018 third
quarter results. The results included:
- Net income available to Arch common
shareholders of $217.0 million, or $0.53 per share, a 10.2%
annualized return on average common equity, compared to a net loss
of $52.8 million, or $0.13 per share, for the 2017 third
quarter;
- After-tax operating income available to
Arch common shareholders, a non-GAAP measure, of $242.3 million, or
$0.59 per share, an 11.4% annualized return on average common
equity, compared to a net loss of $107.1 million, or $0.26 per
share, for the 2017 third quarter;
- Pre-tax current accident year
catastrophic losses, net of reinsurance and reinstatement
premiums(1), of $58.2 million, primarily related to Hurricane
Florence and Typhoon Jebi;
- Favorable development in prior year
loss reserves, net of related adjustments(1), of $77.6
million;
- Combined ratio excluding catastrophic
activity and prior year development(1) of 81.8%;
- Book value per common share of $21.15
at September 30, 2018, a 2.3% increase in the 2018 third quarter
and a 6.4% increase for the trailing twelve months;
- Share repurchases of $11.0
million.
All earnings per share amounts discussed in this release are on
a diluted basis. 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 September 30,
Three Months Ended September 30, 2018
2017 % Change 2018
2017 % Change Gross
premiums written $ 1,731,328 $ 1,648,246 5.0 $ 1,622,532 $
1,557,179 4.2 Net premiums written 1,333,553 1,325,403 0.6
1,181,876 1,171,676 0.9 Net premiums earned 1,290,878 1,261,886 2.3
1,155,255 1,133,256 1.9 Underwriting income (loss) 234,581 (142,172
) n/m 234,790 (107,617 ) n/m
Underwriting Ratios % Point
Change % Point Change Loss ratio 54.2 % 82.9 %
(28.7 ) 52.1 % 81.4 % (29.3 ) Underwriting expense ratio 28.1 %
28.9 % (0.8 ) 28.0 % 28.6 % (0.6 ) Combined ratio 82.3 % 111.8 %
(29.5 ) 80.1 % 110.0 % (29.9 ) Combined ratio excluding
catastrophic activity and prior year development 81.8 % 84.4 % (2.6
) (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.
In addition, the Company estimates that its 2018 fourth quarter
results will be negatively impacted by Hurricane Michael, which
occurred in October 2018, in the range of $40 million to $60
million, net of reinsurance and reinstatement premiums. This
pre-tax preliminary loss estimate is based on industry insured
losses ranging from $7 billion to $10 billion. The Company’s
preliminary estimate for Hurricane Michael is based on currently
available information derived from modeling techniques, industry
assessments of exposure, preliminary claims information obtained
from the Company’s clients and brokers to date and a review of
in-force contracts. The Company’s actual losses from this event may
vary materially from the estimates due to the inherent
uncertainties in making such determinations resulting from several
factors, including the preliminary nature of available information,
the potential inaccuracies and inadequacies in the data provided by
clients and brokers, the modeling techniques and the application of
such techniques, the contingent nature of business interruption
exposures, the effects of any resultant demand surge on claims
activity and attendant coverage issues. In addition, actual losses
may increase if the Company’s reinsurers fail to meet their
obligations to the Company or the reinsurance protections purchased
by the Company are exhausted or are otherwise unavailable.
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 Nine Months Ended
September 30, September 30, 2018
2017 2018 2017 Net income (loss)
available to Arch common shareholders $ 217,006 $ (52,760 ) $
587,525 $ 362,967 Net realized (gains) losses 47,528 (64,344 )
220,718 (111,930 ) Net impairment losses recognized in earnings 492
1,878 1,124 5,415 Equity in net (income) loss of investment funds
accounted for using the equity method (15,982 ) (31,090 ) (52,523 )
(111,884 ) Net foreign exchange (gains) losses (7,539 ) 27,811
(39,021 ) 85,619 Transaction costs and other 1,091 2,990 8,829
21,249 Loss on redemption of preferred shares — 6,735 2,710 6,735
Income tax expense (benefit) (1) (316 ) 1,647 (9,343 ) 1,580
After-tax operating income (loss) available to Arch common
shareholders $ 242,280 $ (107,133 ) $ 720,019 $
259,751
Diluted per common
share results:
Net income (loss) available to Arch common shareholders $ 0.53 $
(0.13 ) $ 1.42 $ 0.87 Net realized (gains) losses 0.12 (0.15 ) 0.53
(0.26 ) 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 (0.04 ) (0.08 ) (0.13 ) (0.27 ) Net foreign
exchange (gains) losses (0.02 ) 0.07 (0.09 ) 0.20 Transaction costs
and other 0.00 0.01 0.02 0.05 Loss on redemption of preferred
shares — 0.02 0.01 0.02 Income tax expense (benefit) (1) 0.00
0.00 (0.02 ) 0.00 After-tax operating income
(loss) available to Arch common shareholders $ 0.59 $ (0.26
) $ 1.74 $ 0.62 Weighted average common shares
and common share equivalents outstanding — diluted (2) 411,721,214
404,656,353 413,993,192 417,666,972 Beginning common
shareholders’ equity $ 8,383,755 $ 8,126,332 $ 8,324,047 $
7,481,163 Ending common shareholders’ equity 8,575,148
8,138,589 8,575,148 8,138,589 Average common
shareholders’ equity $ 8,479,452 $ 8,132,461 $
8,449,598 $ 7,809,876 Annualized return on
average common equity 10.2 % (2.6 )% 9.3 % 6.2 % Annualized
operating return on average common equity 11.4 % (5.3 )% 11.4 % 4.4
% (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, 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. (2) Due to the net loss recorded in the 2017 third
quarter, diluted weighted average common shares and common share
equivalents outstanding for such period do not include the effect
of dilutive securities since the inclusion of such securities is
anti-dilutive to per share results. Due to the net gain reported
for all other periods presented, weighted average common shares and
common share equivalents outstanding for such periods reflect the
effect of dilutive securities.
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
third quarter performance by operating segment. For additional
details regarding the Company’s operating segments, please refer to
the Company’s Financial Supplement dated September 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 September 30,
(U.S. dollars in thousands)
2018 2017
% Change Gross premiums written
$ 836,820 $ 787,447 6.3 Net premiums written 576,852 564,931 2.1
Net premiums earned 561,058 535,165 4.8 Underwriting income
(loss) $ (26,713 ) $ (207,143 ) n/m
Underwriting
Ratios % Point Change Loss ratio 73.0 % 106.3 %
(33.3 ) Underwriting expense ratio 31.8 % 32.4 % (0.6 ) Combined
ratio 104.8 % 138.7 % (33.9 ) Catastrophic activity and
prior year development: Current accident year catastrophic events,
net of reinsurance and reinstatement premiums 5.8 % 40.1 % (34.3 )
Net (favorable) adverse development in prior year loss reserves,
net of related adjustments (1.2 )% (0.3 )% (0.9 ) Combined ratio
excluding catastrophic activity and prior year development (1)
100.2 % 98.9 % 1.3 (1) See ‘Comments on Regulation G’
for further discussion.
Gross premiums written by the insurance segment in the 2018
third quarter were 6.3% higher than in the 2017 third quarter while
net premiums written were 2.1% higher than in the 2017 third
quarter. The increase in net premiums written reflected growth in
travel insurance, due to both new business and growth in existing
accounts, and in property, primarily due to new business and rate
increases. Net premiums earned by the insurance segment in the 2018
third quarter were 4.8% higher than in the 2017 third quarter, and
reflect changes in net premiums written over the previous five
quarters.
The 2018 third quarter loss ratio reflected 5.8 points for
current year catastrophic activity, primarily related to Hurricane
Florence, compared to 40.1 points in the 2017 third quarter,
primarily related to Hurricanes Harvey, Irma and Maria. Estimated
net favorable development in prior year loss reserves, before
related adjustments, reduced the loss ratio by 1.1 points in the
2018 third quarter, compared to 0.6 points in the 2017 third
quarter. The balance of the change in the 2018 third quarter loss
ratio resulted, in part, from a higher level of large attritional
losses.
The underwriting expense ratio was 31.8% in the 2018 third
quarter, compared to 32.4% in the 2017 third quarter, reflecting
changes in the mix and type of business.
Reinsurance Segment
Three Months Ended September 30,
(U.S. dollars in thousands)
2018 2017
% Change Gross premiums written
$ 435,396 $ 422,083 3.2 Net premiums written 311,691 316,694 (1.6 )
Net premiums earned 293,273 323,573 (9.4 ) Other underwriting
income (loss) 1,387 1,728 (19.7 ) Underwriting income (loss)
$ 30,944 $ (86,862 ) n/m
Underwriting Ratios %
Point Change Loss ratio 62.5 % 98.5 % (36.0 )
Underwriting expense ratio 27.4 % 28.9 % (1.5 ) Combined ratio 89.9
% 127.4 % (37.5 ) Catastrophic activity and prior year
development: Current accident year catastrophic events, net of
reinsurance and reinstatement premiums 8.7 % 41.2 % (32.5 ) Net
(favorable) adverse development in prior year loss reserves, net of
related adjustments (11.3 )% (10.7 )% (0.6 ) Combined ratio
excluding catastrophic activity and prior year development (1) 92.5
% 96.9 % (4.4 ) (1) See ‘Comments on Regulation G’ for
further discussion.
Gross premiums written by the reinsurance segment in the 2018
third quarter were 3.2% higher than in the 2017 third quarter,
while net premiums written were 1.6% lower than in the 2017 third
quarter. The lower change in net premiums written primarily
reflects an increase in retrocessions on other specialty and
casualty lines. Net premiums written for the 2018 third quarter
reflected declines in property catastrophe and casualty lines,
partially offset by growth in property excluding property
catastrophe business, primarily due to new accounts. The reduction
in property catastrophe net premiums written primarily related to a
lower level of reinstatement premiums, as the 2017 third quarter
included $15.8 million related to Hurricanes Harvey, Irma and
Maria. The decline in casualty net premiums written was mostly due
to the one-time impact of a retroactive reinsurance contract of
$45.4 million recorded in the 2017 third quarter, which was
substantially earned in that period with a corresponding increase
in losses and loss adjustment expenses. A portion of the
premium reduction in this line was offset by new business
opportunities in the 2018 third quarter. Net premiums earned
reflect the retroactive reinsurance contract and reinstatement
premium impacts discussed above, as well as changes in net premiums
written over the previous five quarters.
The 2018 third quarter loss ratio included 9.5 points of current
year catastrophic activity, primarily related to Hurricane Florence
and Typhoon Jebi, compared to 46.3 points of catastrophic activity
in the 2017 third quarter, primarily related to Hurricanes Harvey,
Irma and Maria. Estimated net favorable development in prior year
loss reserves, before related adjustments, reduced the loss ratio
by 11.7 points in the 2018 third quarter, compared to 11.3 points
in the 2017 third quarter. The estimated net favorable development
in the 2018 third 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 underwriting expense ratio was 27.4% in the 2018 third
quarter, compared to 28.9% in the 2017 third quarter, reflecting
the non-renewal of certain reinsurance agreements between the
Company’s U.S.-based insurance and reinsurance subsidiaries and
Arch Reinsurance Ltd. as of January 1, 2018, which reduced federal
excise taxes incurred by $2.3 million, or 0.8 points, and changes
in the mix and type of business.
Mortgage Segment
Three Months Ended September 30, (U.S.
dollars in thousands)
2018 2017
% Change Gross premiums written $ 350,559 $
347,951 0.7 Net premiums written 293,333 290,051 1.1 Net premiums
earned 300,924 274,518 9.6 Other underwriting income 3,733 3,599
3.7 Underwriting income $ 230,559 $ 186,388 23.7
Underwriting Ratios % Point Change Loss ratio 3.2 %
12.8 % (9.6 ) Underwriting expense ratio 21.4 % 20.6 % 0.8
Combined ratio 24.6 % 33.4 % (8.8 ) Prior year development:
Net (favorable) adverse development in prior year loss reserves,
net of related adjustments (12.5 )% (7.8 )% (4.7 ) Combined ratio
excluding prior year development (1) 37.1 % 41.2 % (4.1 ) (1)
See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the mortgage segment in the 2018 third
quarter were 0.7% higher than in the 2017 third quarter, while net
premiums written were 1.1% higher than in the 2017 third quarter.
The growth in gross premiums written primarily reflected an
increase in U.S. monthly premium business and government sponsored
enterprise (“GSE”) credit-risk sharing transactions, partially
offset by a lower level of U.S. single premium business and a
decrease in Australian mortgage reinsurance business. Net premiums
written for the 2018 third quarter reflected a higher level of
ceded premiums related to the new Bellemeade transaction in the
2018 third quarter, while the 2017 third quarter reflected higher
retrocessions of Australian mortgage reinsurance business. The
increase in net premiums earned for the 2018 third quarter
primarily reflected the growth in insurance in force in the U.S.
over the last twelve months. Insurance in force increased to $372.8
billion at September 30, 2018, compared to $346.2 billion at
September 30, 2017.
Arch MI U.S. generated $21.4 billion of new insurance written
(“NIW”) in the 2018 third quarter, compared to $17.7 billion in the
2017 third quarter, as a higher level of purchase market activity
more than offset a reduction in single premium business. Monthly
premium policies contributed 92.6% of NIW in the 2018 third
quarter, compared to 87.0% in the 2017 third quarter.
The loss ratio for the 2018 third quarter reflected 2.8 points
of favorable current year development on delinquencies from the
first half of 2018 which cured in the period, and estimated net
favorable development in prior year loss reserves, before related
adjustments, of 12.8 points, compared to 7.8 points in the 2017
third quarter. The estimated net favorable development in the 2018
third quarter was primarily driven by lower than expected claim
rates on first lien business and subrogation activity on second
lien business. The percentage of loans in default on first lien
business decreased to 1.60% at September 30, 2018, from 1.70% at
June 30, 2018.
The mortgage segment’s underwriting expense ratio was 21.4% in
the 2018 third quarter, compared to 20.6% in the 2017 third
quarter, reflecting a higher level of acquisition expenses due to
higher NIW and a lower level of other operating expenses.
At September 30, 2018, the mortgage segment’s risk-in-force
(before reinsurance) of $75.5 billion consisted of $69.8 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 September 30, 2018.
Corporate and Non-Underwriting
Corporate and non-underwriting results include net investment
income, other income (loss), corporate expenses, 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 third quarter was
$0.28 per share, or $114.3 million, compared to $0.23 per share, or
$94.1 million, for the 2017 third quarter. The 2018 third quarter
net investment income reflected the reinvestment of fixed income
securities at higher available yields and a shift from municipal
bonds to corporates. The annualized pre-tax investment income yield
was 2.45% for the 2018 third quarter, compared to 2.00% for the
2017 third quarter.
Amortization of intangible assets for the 2018 third quarter was
$26.3 million, compared to $31.8 million for the 2017 third
quarter. Amounts in both periods primarily related to amortization
of finite-lived intangible assets related to the UGC acquisition,
as disclosed in the Company’s Form 10-K.
Interest expense for the 2018 third quarter was $24.7 million,
compared to $26.3 million for the 2017 third quarter, reflecting
the lower revolving credit agreement borrowings outstanding
partially offset by higher borrowing costs. Preferred dividends for
the 2018 third quarter were $10.4 million, compared to $12.4
million for the 2017 third quarter.
On a pre-tax basis, net foreign exchange gains for the 2018
third quarter were $7.1 million, compared to net foreign exchange
losses for the 2017 third quarter of $27.8 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 12.8% for
the 2018 third quarter, while the effective tax rate on pre-tax
operating income available to Arch common shareholders was 11.8%
for the 2018 third quarter. The effective tax rates for the 2018
third quarter included a discrete income tax expense of $5.6
million which had the effect of increasing the 2018 third quarter
effective tax rate on operating income available to Arch common
shareholders by 1.9%. The discrete tax item in the 2018 third
quarter primarily relates to the Company’s change in judgment
regarding the realizability of certain deferred tax assets,
partially offset by tax benefits associated with share-based
compensation. 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%.
Conference Call
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on October 31, 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 October 31,
2018 at 2:00 p.m. Eastern Time until November 7, 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 4079781 for all callers).
Please refer to the Company’s Financial Supplement dated
September 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 $11.21 billion in capital at September 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, 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, 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. transaction costs
and other include advisory, financing, legal, severance, incentive
compensation and other costs related to acquisitions. The Company
believes that 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, 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 third quarter and 2017 third 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 September 30, 2018 Insurance
Reinsurance Mortgage
Sub-total Other
Total Gross premiums written (1) $ 836,820 $ 435,396 $
350,559 $ 1,622,532 $ 185,033 $ 1,731,328 Premiums ceded (259,968 )
(123,705 ) (57,226 ) (440,656 ) (33,356 ) (397,775 ) Net premiums
written 576,852 311,691 293,333 1,181,876 151,677 1,333,553 Change
in unearned premiums (15,794 ) (18,418 ) 7,591 (26,621 )
(16,054 ) (42,675 ) Net premiums earned 561,058 293,273 300,924
1,155,255 135,623 1,290,878 Other underwriting income — 1,387 3,733
5,120 703 5,823 Losses and loss adjustment expenses (409,435 )
(183,413 ) (9,615 ) (602,463 ) (96,957 ) (699,420 ) Acquisition
expenses (88,255 ) (50,367 ) (33,361 ) (171,983 ) (29,619 )
(201,602 ) Other operating expenses (90,081 ) (29,936 ) (31,122 )
(151,139 ) (9,959 ) (161,098 ) Underwriting income (loss) $ (26,713
) $ 30,944 $ 230,559 234,790 (209 ) 234,581
Net investment income 114,328 29,696 144,024 Net realized gains
(losses) (47,010 ) (4,695 ) (51,705 ) Net impairment losses
recognized in earnings (492 ) — (492 ) Equity in net income (loss)
of investment funds accounted for using the equity method 15,982 —
15,982 Other income (726 ) — (726 ) Corporate expenses (13,244 ) —
(13,244 ) Transaction costs and other (1,091 ) — (1,091 )
Amortization of intangible assets (26,315 ) — (26,315 ) Interest
expense (24,666 ) (5,064 ) (29,730 ) Net foreign exchange gains
(losses) 7,130 3,708 10,838
Income before
income taxes 258,686 23,436 282,122 Income tax expense (33,356
) — (33,356 )
Net income 225,330 23,436 248,766
Dividends attributable to redeemable noncontrolling interests —
(4,599 ) (4,599 ) Amounts attributable to nonredeemable
noncontrolling interests — (16,759 ) (16,759 )
Net income
available to Arch 225,330 2,078 227,408 Preferred dividends
(10,402 ) — (10,402 )
Net income available to Arch common
shareholders $ 214,928 $ 2,078 $ 217,006
Underwriting Ratios Loss ratio 73.0 % 62.5 % 3.2 %
52.1 % 71.5 % 54.2 % Acquisition expense ratio 15.7 % 17.2 % 11.1 %
14.9 % 21.8 % 15.6 % Other operating expense ratio 16.1 % 10.2 %
10.3 % 13.1 % 7.3 % 12.5 % Combined ratio 104.8 % 89.9 % 24.6 %
80.1 % 100.6 % 82.3 % Net premiums written to gross premiums
written 68.9 % 71.6 % 83.7 % 72.8 % 82.0 % 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 September 30, 2017 Insurance
Reinsurance Mortgage
Sub-total Other
Total Gross premiums written (1) $ 787,447 $ 422,083 $
347,951 $ 1,557,179 $ 166,198 $ 1,648,246 Premiums ceded (222,516 )
(105,389 ) (57,900 ) (385,503 ) (12,471 ) (322,843 ) Net premiums
written 564,931 316,694 290,051 1,171,676 153,727 1,325,403 Change
in unearned premiums (29,766 ) 6,879 (15,533 ) (38,420 )
(25,097 ) (63,517 ) Net premiums earned 535,165 323,573 274,518
1,133,256 128,630 1,261,886 Other underwriting income (loss) —
1,728 3,599 5,327 737 6,064 Losses and loss adjustment expenses
(568,795 ) (318,609 ) (35,156 ) (922,560 ) (123,581 ) (1,046,141 )
Acquisition expenses (82,638 ) (57,340 ) (21,803 ) (161,781 )
(32,073 ) (193,854 ) Other operating expenses (90,875 ) (36,214 )
(34,770 ) (161,859 ) (8,268 ) (170,127 ) Underwriting income (loss)
$ (207,143 ) $ (86,862 ) $ 186,388 (107,617 ) (34,555 )
(142,172 ) Net investment income 94,127 22,332 116,459 Net
realized gains (losses) 64,104 2,171 66,275 Net impairment losses
recognized in earnings (1,878 ) — (1,878 ) Equity in net income
(loss) of investment funds accounted for using the equity method
31,090 — 31,090 Other income (loss) (342 ) — (342 ) Corporate
expenses (14,108 ) — (14,108 ) Transaction costs and other (2,990 )
— (2,990 ) Amortization of intangible assets (31,824 ) — (31,824 )
Interest expense (26,264 ) (3,246 ) (29,510 ) Net foreign exchange
gains (losses) (27,785 ) (243 ) (28,028 )
Income (loss) before
income taxes (23,487 ) (13,541 ) (37,028 ) Income tax (expense)
benefit (8,168 ) (21 ) (8,189 )
Net income (loss) (31,655 )
(13,562 ) (45,217 ) Dividends attributable to redeemable
noncontrolling interests — (4,586 ) (4,586 ) Amounts attributable
to nonredeemable noncontrolling interests — 16,147
16,147
Net income (loss) available to Arch (31,655 )
(2,001 ) (33,656 ) Preferred dividends (12,369 ) — (12,369 ) Loss
on redemption of preferred shares (6,735 ) — (6,735 )
Net
income (loss) available to Arch common shareholders $ (50,759 )
$ (2,001 ) $ (52,760 )
Underwriting Ratios Loss ratio
106.3 % 98.5 % 12.8 % 81.4 % 96.1 % 82.9 % Acquisition expense
ratio 15.4 % 17.7 % 7.9 % 14.3 % 24.9 % 15.4 % Other operating
expense ratio 17.0 % 11.2 % 12.7 % 14.3 % 6.4 % 13.5 % Combined
ratio 138.7 % 127.4 % 33.4 % 110.0 % 127.4 % 111.8 % Net
premiums written to gross premiums written 71.7 % 75.0 % 83.4 %
75.2 % 92.5 % 80.4 % (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 September 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;
- 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/20181030006053/en/
Arch Capital Group Ltd.François Morin,
441-278-9250orInvestor RelationsDonald Watson,
914-872-3616dwatson@archcapservices.com
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