Arch Capital Group Ltd. (NASDAQ: ACGL) announces its 2019 second
quarter results. The results included:
- Net income available to Arch common shareholders of $458.6
million, or $1.12 per share, a 19.0% annualized return on average
common equity, compared to $233.2 million, or $0.56 per share, for
the 2018 second quarter;
- After-tax operating income available to Arch common
shareholders, a non-GAAP measure, of $317.4 million, or $0.77 per
share, a 13.1% annualized return on average common equity, compared
to $242.6 million, or $0.59 per share, for the 2018 second
quarter;
- Book value per common share of $24.64 at June 30, 2019, a 6.6%
increase in the 2019 second quarter and an 19.2% increase for the
trailing twelve months;
- Pre-tax current accident year catastrophic losses, net of
reinsurance and reinstatement premiums(1) of $7.2 million;
- Favorable development in prior year loss reserves, net of
related adjustments(1) of $35.5 million;
- Combined ratio excluding catastrophic activity and prior year
development(1) of 80.0%.
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 June
30,
Three Months Ended June
30,
2019
2018
% Change
2019
2018
% Change
Gross premiums written
$
1,937,809
$
1,696,544
14.2
$
1,829,829
$
1,591,202
15.0
Net premiums written
1,444,898
1,298,896
11.2
1,325,528
1,158,310
14.4
Net premiums earned
1,463,727
1,336,763
9.5
1,312,409
1,177,245
11.5
Underwriting income
293,134
235,465
24.5
297,727
235,783
26.3
Underwriting Ratios
% Point Change
% Point Change
Loss ratio
52.4
%
54.3
%
(1.9
)
50.0
%
51.7
%
(1.7
)
Underwriting expense ratio
28.0
%
28.4
%
(0.4
)
27.8
%
28.5
%
(0.7
)
Combined ratio
80.4
%
82.7
%
(2.3
)
77.8
%
80.2
%
(2.4
)
Combined ratio excluding catastrophic
activity and prior year development
80.0
%
84.0
%
(4.0
)
(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 outstanding
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,
2019
2018
2019
2018
Net income available to Arch common
shareholders
$
458,551
$
233,243
$
896,676
$
370,519
Net realized (gains) losses
(124,637
)
61,426
(240,281
)
173,190
Net impairment losses recognized in
earnings
49
470
1,358
632
Equity in net (income) loss of investment
funds accounted for using the equity method
(32,536
)
(8,472
)
(79,403
)
(36,541
)
Net foreign exchange (gains) losses
6,054
(47,038
)
1,060
(31,482
)
Transaction costs and other
2,178
6,908
3,368
7,738
Loss on redemption of preferred shares
—
—
—
2,710
Income tax expense (benefit) (1)
7,774
(3,941
)
10,552
(9,027
)
After-tax operating income available to
Arch common shareholders
$
317,433
$
242,596
$
593,330
$
477,739
Diluted per common
share results:
Net income available to Arch common
shareholders
$
1.12
$
0.56
$
2.19
$
0.89
Net realized (gains) losses
(0.31
)
0.15
(0.59
)
0.42
Net impairment losses recognized in
earnings
0.00
0.00
0.00
0.00
Equity in net (income) loss of investment
funds accounted for using the equity method
(0.08
)
(0.02
)
(0.19
)
(0.09
)
Net foreign exchange (gains) losses
0.01
(0.11
)
0.00
(0.08
)
Transaction costs and other
0.01
0.02
0.01
0.02
Loss on redemption of preferred shares
—
—
—
0.01
Income tax expense (benefit) (1)
0.02
(0.01
)
0.03
(0.02
)
After-tax operating income available to
Arch common shareholders
$
0.77
$
0.59
$
1.45
$
1.15
Weighted average common shares and common
share equivalents outstanding — diluted
410,899,483
413,111,205
409,755,250
415,460,756
Beginning common shareholders’ equity
$
9,334,596
$
8,370,372
$
8,659,827
$
8,324,047
Ending common shareholders’ equity
9,977,352
8,383,755
9,977,352
8,383,755
Average common shareholders’ equity
$
9,655,974
$
8,377,064
$
9,318,590
$
8,353,901
Annualized return on average common
equity
19.0
%
11.1
%
19.2
%
8.9
%
Annualized operating return on average
common equity
13.1
%
11.6
%
12.7
%
11.4
%
(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.
Each line item in the table above reflects the impact of the
Company’s approximate 11% ownership of Watford Re’s outstanding
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 2019
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, 2019. 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)
2019
2018
% Change
Gross premiums written
$
919,925
$
769,372
19.6
Net premiums written
627,830
524,107
19.8
Net premiums earned
592,442
546,449
8.4
Underwriting income
$
2,653
$
5,634
(52.9
)
Underwriting Ratios
% Point Change
Loss ratio
65.7
%
65.4
%
0.3
Underwriting expense ratio
33.9
%
33.6
%
0.3
Combined ratio
99.6
%
99.0
%
0.6
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
0.4
%
1.4
%
(1.0
)
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(0.2
)%
(0.9
)%
0.7
Combined ratio excluding catastrophic
activity and prior year development (1)
99.4
%
98.5
%
0.9
(1)
See ‘Comments on Regulation G’ for further
discussion.
Gross premiums written by the insurance segment in the 2019
second quarter were 19.6% higher than in the 2018 second quarter
while net premiums written were 19.8% higher than in the 2018
second quarter. Approximately one third of the growth in net
premiums written resulted from the Company’s recent acquisition of
a U.K. commercial lines book of business. The remainder was due to
growth in existing accounts and rate increases across most lines of
business. Net premiums earned by the insurance segment in the 2019
second quarter were 8.4% higher than in the 2018 second quarter,
and reflect changes in net premiums written over the previous five
quarters.
The 2019 second quarter loss ratio reflected 0.4 points of
current year catastrophic activity, compared to 1.4 points in the
2018 second quarter. Estimated net favorable development of prior
year loss reserves, before related adjustments, reduced the loss
ratio by 0.4 points in the 2019 second quarter, compared to 1.1
points in the 2018 second quarter. The 2019 second quarter loss
ratio also reflected a higher level of attritional losses than in
the 2018 second quarter.
The underwriting expense ratio was 33.9% in the 2019 second
quarter, compared to 33.6% in the 2018 second quarter. Operating
expenses increased in the 2019 second quarter due to the recent
acquisitions by the Company, as well as growth in headcount,
primarily in the areas of underwriting and technology. The impact
of this increased level of expenses on the expense ratio was
partially tempered by the growth in net premiums earned.
Reinsurance Segment
Three Months Ended June
30,
(U.S. dollars in thousands)
2019
2018
% Change
Gross premiums written
$
545,547
$
490,327
11.3
Net premiums written
376,090
354,080
6.2
Net premiums earned
367,184
340,318
7.9
Other underwriting income (loss)
1,224
(129
)
n/m
Underwriting income
$
36,705
$
24,413
50.4
Underwriting Ratios
% Point Change
Loss ratio
65.6
%
67.6
%
(2.0
)
Underwriting expense ratio
24.7
%
25.2
%
(0.5
)
Combined ratio
90.3
%
92.8
%
(2.5
)
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
1.2
%
2.2
%
(1.0
)
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(3.1
)%
(9.4
)%
6.3
Combined ratio excluding catastrophic
activity and prior year development (1)
92.2
%
100.0
%
(7.8
)
(1)
See ‘Comments on Regulation G’ for further
discussion.
Gross premiums written by the reinsurance segment in the 2019
second quarter were 11.3% higher than in the 2018 second quarter,
while net premiums written were 6.2% higher than in 2018 second
quarter. The increase in gross premiums written is primarily a
result of growth in property business, with a significant amount
being retroceded. The increase in net premiums written in the 2019
second quarter primarily reflected growth from select new business
opportunities across most lines of business. This was partially
offset by a decline in other specialty business, primarily
reflecting a reduction in U.K motor business with one cedent in the
period. Net premiums earned by the reinsurance segment in the 2019
second quarter were 7.9% higher than in the 2018 second quarter,
and reflect changes in net premiums written over the previous five
quarters.
The 2019 second quarter loss ratio included 1.3 points of
current year catastrophic activity, compared to 2.2 points of
catastrophic activity in the 2018 second quarter. Estimated net
favorable development of prior year loss reserves, before related
adjustments, reduced the loss ratio by 3.5 points in the 2019
second quarter, compared to 9.7 points in the 2018 second quarter.
In addition, the 2019 second quarter reflected a lower level of
large attritional loss activity than in the 2018 second
quarter.
The underwriting expense ratio was 24.7% in the 2019 second
quarter, compared to 25.2% in the 2018 second quarter, primarily as
a result of growth in net premiums earned and changes in mix of
business.
Mortgage Segment
Three Months Ended June
30,
(U.S. dollars in thousands)
2019
2018
% Change
Gross premiums written
$
364,465
$
330,990
10.1
Net premiums written
321,608
280,123
14.8
Net premiums earned
352,783
290,478
21.4
Other underwriting income
4,056
3,315
22.4
Underwriting income
$
258,369
$
205,736
25.6
Underwriting Ratios
% Point Change
Loss ratio
7.4
%
7.4
%
—
Underwriting expense ratio
20.6
%
22.8
%
(2.2
)
Combined ratio
28.0
%
30.2
%
(2.2
)
Prior year development:
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(6.5
)%
(8.0
)%
1.5
Combined ratio excluding prior year
development (1)
34.5
%
38.2
%
(3.7
)
(1)
See ‘Comments on Regulation G’ for further
discussion.
Gross premiums written by the mortgage segment in the 2019
second quarter were 10.1% higher than in the 2018 second quarter,
while net premiums written were 14.8% higher. The growth in net
premiums written primarily reflected an increase in monthly premium
business due to growth in insurance in force, partially offset by
higher ceded premiums related to Bellemeade transactions. In
addition, net premiums written for the 2019 second quarter included
$17.1 million due to the novation of a quota share reinsurance
arrangement on international business. Insurance in force increased
to $403.9 billion at June 30, 2019, compared to $390.4 at March 31,
2019. The increase in net premiums earned for the 2019 second
quarter reflected the growth in insurance in force over the last
twelve months and the novation noted above.
Arch MI U.S. generated $17.2 billion of new insurance written
(“NIW”) in the 2019 second quarter, compared to $19.9 billion in
the 2018 second quarter. Monthly premium policies contributed 92.9%
of NIW in the 2019 second quarter, compared to 94.3% in the 2018
second quarter.
The loss ratio for the 2019 second quarter reflected estimated
net favorable development in prior year loss reserves, before
related adjustments, of 6.5 points in the 2019 second quarter,
compared to 8.0 points in the 2018 second quarter. The estimated
net favorable development in the 2019 second quarter was primarily
driven by lower expected claim rates on first lien business and, to
a lesser extent, subrogation activity on second lien business. In
addition, the novation mentioned above reduced the 2019 second
quarter loss ratio by 0.3 points. The percentage of loans in
default on Arch MI U.S first lien business was 1.45% at June 30,
2019, a decrease from 1.54% at March 31, 2019.
The mortgage segment’s underwriting expense ratio was 20.6% in
the 2019 second quarter, compared to 22.8% in the 2018 second
quarter. The lower ratio in the 2019 second quarter primarily
resulted from the higher level of net premiums earned.
At June 30, 2019, the mortgage segment’s risk-in-force (before
reinsurance) of $78.2 billion consisted of $71.8 billion from Arch
MI U.S. with the remainder from reinsurance, credit-risk sharing
and international insurance operations.
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 2019 second quarter was
$0.30 per share, or $123.0 million, compared to $0.26 per share, or
$107.8 million, for the 2018 second quarter. The growth in 2019
second quarter net investment income reflected growth in invested
assets, the reinvestment of fixed income securities at higher
available yields and the shift from municipal bonds to corporates.
The annualized pre-tax investment income yield was 2.62% for the
2019 second quarter, compared to 2.32% for the 2018 second quarter.
Total return, a non-GAAP measure, was 2.37% for the 2019 second
quarter, primarily reflecting the decline in interest rates during
the period and attendant appreciation in the Company’s fixed income
portfolio. See ‘Comments on Regulation G’ for a discussion of
non-GAAP financial measures.
Interest expense for the 2019 second quarter was $23.4 million,
compared to $26.1 million for the 2018 second quarter, reflecting
the paydown of revolving credit agreement borrowings in the second
half of 2018.
On a pre-tax basis, net foreign exchange losses for the 2019
second quarter were $6.2 million, compared to net foreign exchange
gains for the 2018 second quarter of $46.2 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 estimated annual effective tax rate) was
8.7% for the 2019 second quarter, compared to 8.8% for the 2018
second quarter. The Company’s effective tax rate on pre-tax
operating income available to Arch common shareholders was 10.1%
for the 2019 second quarter, compared to 9.8% for the 2018 second
quarter. The effective tax rates for the 2019 second quarter
included a discrete income tax benefit of $2.5 million related to
share-based compensation. This benefit had the effect of reducing
the effective tax rate on operating income available to Arch common
shareholders by 0.7%. The Company’s effective tax rate may
fluctuate 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.
Conference Call
The Company will hold a conference call for investors and
analysts at 9:00 a.m. Eastern Time on July 30, 2019. 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 30,
2019 at 2:00 p.m. Eastern Time until August 6, 2019 at midnight
Eastern Time. To access the replay, domestic callers should dial
855-859-2056, and international callers should dial 404-537-3406
(passcode 2085083 for all callers).
Please refer to the Company’s Financial Supplement dated June
30, 2019, 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 $12.49 billion in capital at June 30, 2019, 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 and Watford
Re’s non-recurring listing expenses. 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 senior
notes, 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.
Total return on investments includes investment income, equity
in net income or loss of investment funds accounted for using the
equity method, net realized gains and losses and the change in
unrealized gains and losses generated by Arch’s investment
portfolio. Total return is calculated on a pre-tax basis and before
investment expenses, excludes amounts reflected in the ‘other’
segment, and reflects the effect of financial market conditions
along with foreign currency fluctuations. Management uses total
return on investments as a key measure of the return generated to
Arch common shareholders on the capital held in its business, and
compares the return generated by the Company’s investment portfolio
against benchmark returns which it measures portfolio returns
against during the periods presented.
The following tables summarize the Company’s results by segment
for the 2019 second quarter and 2018 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, 2019
Insurance
Reinsurance
Mortgage
Sub-total
Other
Total
Gross premiums written (1)
$
919,925
$
545,547
$
364,465
$
1,829,829
$
161,978
$
1,937,809
Premiums ceded
(292,095
)
(169,457
)
(42,857
)
(504,301
)
(42,608
)
(492,911
)
Net premiums written
627,830
376,090
321,608
1,325,528
119,370
1,444,898
Change in unearned premiums
(35,388
)
(8,906
)
31,175
(13,119
)
31,948
18,829
Net premiums earned
592,442
367,184
352,783
1,312,409
151,318
1,463,727
Other underwriting income
—
1,224
4,056
5,280
673
5,953
Losses and loss adjustment expenses
(389,172
)
(240,958
)
(25,997
)
(656,127
)
(111,416
)
(767,543
)
Acquisition expenses
(91,094
)
(56,785
)
(32,654
)
(180,533
)
(29,556
)
(210,089
)
Other operating expenses
(109,523
)
(33,960
)
(39,819
)
(183,302
)
(15,612
)
(198,914
)
Underwriting income (loss)
$
2,653
$
36,705
$
258,369
297,727
(4,593
)
293,134
Net investment income
123,038
32,000
155,038
Net realized gains (losses)
125,112
(4,306
)
120,806
Net impairment losses recognized in
earnings
(49
)
—
(49
)
Equity in net income (loss) of investment
funds accounted for using the equity method
32,536
—
32,536
Other income
1,129
—
1,129
Corporate expenses
(16,073
)
—
(16,073
)
Transaction costs and other
(2,178
)
—
(2,178
)
Amortization of intangible assets
(19,794
)
—
(19,794
)
Interest expense
(23,375
)
(5,905
)
(29,280
)
Net foreign exchange gains (losses)
(6,190
)
1,238
(4,952
)
Income before income taxes
511,883
18,434
530,317
Income tax expense
(44,452
)
(20
)
(44,472
)
Net income
467,431
18,414
485,845
Dividends attributable to redeemable
noncontrolling interests
—
(4,590
)
(4,590
)
Amounts attributable to nonredeemable
noncontrolling interests
—
(12,301
)
(12,301
)
Net income available to Arch
467,431
1,523
468,954
Preferred dividends
(10,403
)
—
(10,403
)
Net income available to Arch common
shareholders
$
457,028
$
1,523
$
458,551
Underwriting Ratios
Loss ratio
65.7
%
65.6
%
7.4
%
50.0
%
73.6
%
52.4
%
Acquisition expense ratio
15.4
%
15.5
%
9.3
%
13.8
%
19.5
%
14.4
%
Other operating expense ratio
18.5
%
9.2
%
11.3
%
14.0
%
10.3
%
13.6
%
Combined ratio
99.6
%
90.3
%
28.0
%
77.8
%
103.4
%
80.4
%
Net premiums written to gross premiums
written
68.2
%
68.9
%
88.2
%
72.4
%
73.7
%
74.6
%
(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, 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
)
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) benefit
(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.
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, unemployment, housing prices, 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, 2019;
- 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
or severe economic events in the Company’s insurance, reinsurance
and mortgage businesses could cause large losses and substantial
volatility in the Company’s results of operations;
- the effect of climate change on the Company’s business;
- 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;
- a disruption caused by cyber-attacks or other technology
breaches or failures on the Company or the Company’s business
partners and service providers, which could negatively impact the
Company’s business and/or expose the Company to litigation;
- 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/20190729005725/en/
Arch Capital Group Ltd. François Morin: (441)
278-9250
Investor Relations Donald Watson: (914) 872-3616;
dwatson@archcapservices.com
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