For the 2018 first quarter, the Company reports:
- Net income available to Arch common
shareholders of $137.3 million, or $0.99 per share, a 6.6%
annualized return on average common equity, and after-tax operating
income to Arch common shareholders, a non-GAAP measure, of $235.1
million, or $1.69 per share, a 11.3% annualized return on average
common equity;
- Book value per common share of $61.24
at March 31, 2018, a 0.5% increase in the 2018 first quarter and a
6.2% increase for the trailing twelve months;
- Pre-tax catastrophic losses, net of
reinsurance and reinstatement premiums(1), of $2.0 million;
- Favorable development in prior year
loss reserves, net of related adjustments(1), of $50.6
million;
- Combined ratio excluding catastrophic
activity and prior year development(1) of 83.2%.
Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income
available to Arch common shareholders for the 2018 first quarter
was $137.3 million, or $0.99 per share, compared to $241.9 million,
or $1.74 per share, for the 2017 first quarter. The Company’s net
income available to Arch common shareholders produced an annualized
return on average common equity of 6.6% for the 2018 first quarter,
compared to 12.6% for the 2017 first quarter. All earnings per
share amounts discussed in this release are on a diluted basis. The
Company’s book value per common share was $61.24 at March 31, 2018,
a 0.5% increase from $60.91 per share reported at December 31, 2017
and a 6.2% increase from $57.69 per share at March 31, 2017.
The Company also reported after-tax operating income to Arch
common shareholders, a non-GAAP measure, of $235.1 million, or
$1.69 per share, for the 2018 first quarter, compared to after-tax
operating income to Arch common shareholders of $198.0 million, or
$1.42 per share, for the 2017 first quarter. The Company’s
after-tax operating income available to Arch common shareholders
produced an annualized return on average common equity of 11.3% for
the 2018 first quarter, compared to 10.3% for the 2017 first
quarter. See ‘Comments on Regulation G’ for further details.
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). Pursuant to GAAP, the Company consolidates the results
of Watford Re in its financial statements, although it only owns
approximately 11% of Watford Re’s common equity. See ‘Comments on
Regulation G’ for further details.
(U.S. dollars in thousands)
Consolidated Consolidated Excluding ‘Other’ Segment
(1) Three Months Ended March 31, Three Months Ended
March 31, 2018 2017
% Change 2018 2017
% Change Gross premiums written $ 1,838,214 $ 1,657,990 10.9
$ 1,721,605 $ 1,606,686 7.2 Net premiums written 1,412,544
1,276,260 10.7 1,232,992 1,132,574 8.9 Net premiums earned
1,234,899 1,117,017 10.6 1,098,151 995,020 10.4 Underwriting income
236,997 212,072 11.8 237,557 214,367 10.8
Underwriting
Ratios
% PointChange
% PointChange
Loss ratio 51.6 % 49.5 % 2.1 49.1 % 46.9 % 2.2 Underwriting expense
ratio 29.7 % 31.9 % (2.2 ) 29.7 % 31.9 % (2.2 ) Combined ratio 81.3
% 81.4 % (0.1 ) 78.8 % 78.8 % — Combined ratio excluding
catastrophic activity and prior year development 83.2 % 86.1 % (2.9
) (1) Excluding the ‘other’ segment (i.e., results of
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 March 31, 2018
2017 Net income available to Arch common shareholders $
137,276 $ 241,909 Net realized (gains) losses 111,764 (29,134 ) Net
impairment losses recognized in earnings 162 1,807 Equity in net
(income) loss of investment funds accounted for using the equity
method (28,069 ) (48,088 ) Net foreign exchange (gains) losses
15,556 19,796 UGC transaction costs and other 830 15,584 Loss on
redemption of preferred shares 2,710 — Income tax expense (benefit)
(1) (5,086 ) (3,909 ) After-tax operating income available to Arch
common shareholders $ 235,143 $ 197,965
Diluted per common
share results:
Net income available to Arch common shareholders $ 0.99 $ 1.74 Net
realized (gains) losses 0.80 (0.21 ) Net impairment losses
recognized in earnings 0.00 0.01 Equity in net (income) loss of
investment funds accounted for using the equity method (0.20 )
(0.34 ) Net foreign exchange (gains) losses 0.11 0.14 UGC
transaction costs and other 0.01 0.11 Loss on redemption of
preferred shares 0.02 — Income tax expense (benefit) (1) (0.04 )
(0.03 ) After-tax operating income available to Arch common
shareholders $ 1.69 $ 1.42 Weighted average
common shares and common share equivalents outstanding-diluted
139,297,934 139,047,672 Beginning common shareholders’
equity $ 8,324,047 $ 7,481,163 Ending common shareholders’ equity
8,370,372 7,833,289 Average common shareholders’
equity $ 8,347,210 $ 7,657,226 Annualized
return on average common equity 6.6 % 12.6 % Annualized operating
return on average common equity 11.3 % 10.3 % (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
first quarter performance by operating segment. For additional
details regarding the Company’s operating segments, please refer to
the Company’s Financial Supplement dated March 31, 2018. The
Company’s segment information includes the use of underwriting
income (loss) and a combined ratio excluding catastrophic activity
and prior year development for the insurance segment and
reinsurance segment and a combined ratio excluding prior year
development for the mortgage segment. Such items are non-GAAP
financial measures (see ‘Comments on Regulation G’ for further
details).
Insurance Segment
Three Months Ended March 31, (U.S. dollars in
thousands)
2018 2017 %
Change Gross premiums written $ 823,378 $ 782,281 5.3
Net premiums written 576,198 548,186 5.1 Net premiums earned
538,737 505,646 6.5 Underwriting income $ 7,864 $ 10,011
(21.4)
Underwriting Ratios % Point Change Loss
ratio 65.7 % 65.8 % (0.1) Underwriting expense ratio 32.9 % 32.2 %
0.7 Combined ratio 98.6 % 98.0 % 0.6 Catastrophic activity
and prior year development: Current accident year catastrophic
events, net of reinsurance and reinstatement premiums 0.2 % 0.5 %
(0.3) Net (favorable) adverse development in prior year loss
reserves, net of related adjustments (0.3 )% (0.3 )% — Combined
ratio excluding catastrophic activity and prior year development
(1) 98.7 % 97.8 % 0.9 (1) See ‘Comments on Regulation
G’ for further discussion.
Gross premiums written by the insurance segment in the 2018
first quarter were 5.3% higher than in the 2017 first quarter while
net premiums written were 5.1% higher than in the 2017 first
quarter. Changes in foreign currency rates resulted in an increase
in net premiums written in the 2018 first quarter of $10.3 million,
or 1.9%, compared to the 2017 first quarter. The increase in net
premiums written reflected growth in travel, through both new
business and growth in existing accounts, in property, primarily
due to improved rates and new business, and in professional lines,
reflecting increases in small and medium sized accounts. Net
premiums earned by the insurance segment in the 2018 first quarter
were 6.5% higher than in the 2017 first quarter, and reflect
changes in net premiums written over the previous five
quarters.
The 2018 first quarter loss ratio reflected 0.2 points for
current year catastrophic activity, compared to 0.5 points in the
2017 first quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 0.4 points in the 2018 first quarter, consistent with the
0.4 points in the 2017 first quarter. The balance of the change in
the 2018 first quarter loss ratio resulted, in part, from a lower
level of large loss activity than in the 2017 first quarter and
changes in mix of business.
The underwriting expense ratio was 32.9% in the 2018 first
quarter, compared to 32.2% in the 2017 first quarter, reflecting
changes in the mix and type of business.
Reinsurance Segment
Three Months Ended March 31, (U.S. dollars in
thousands)
2018 2017 %
Change Gross premiums written $ 577,483 $ 475,782 21.4
Net premiums written 381,753 309,690 23.3 Net premiums earned
279,172 244,851 14.0 Other underwriting income (loss) 1,232 (306 )
(502.6) Underwriting income $ 54,839 $ 55,411 (1.0)
Underwriting Ratios % Point Change Loss ratio 50.7 %
43.1 % 7.6 Underwriting expense ratio 30.0 % 34.1 % (4.1) Combined
ratio 80.7 % 77.2 % 3.5 Catastrophic activity and prior year
development: Current accident year catastrophic events, net of
reinsurance and reinstatement premiums 0.3 % 4.0 % (3.7) Net
(favorable) adverse development in prior year loss reserves, net of
related adjustments (13.0 )% (24.4 )% 11.4 Combined ratio excluding
catastrophic activity and prior year development (1) 93.4 % 97.6 %
(4.2) (1) See ‘Comments on Regulation G’ for further
discussion.
Gross premiums written by the reinsurance segment in the 2018
first quarter were 21.4% higher than in the 2017 first quarter,
while net premiums written were 23.3% higher than in the 2017 first
quarter. Changes in foreign currency rates resulted in an increase
in net premiums written in the 2018 first quarter of $22.4 million,
or 7.2%, compared to the 2017 first quarter. The increase in net
premiums written reflected growth in international motor contracts.
Net premiums earned by the reinsurance segment in the 2018 first
quarter were 14.0% higher than in the 2017 first quarter, and
reflect changes in net premiums written over the previous five
quarters.
The 2018 first quarter loss ratio included 0.4 points of current
year catastrophic activity, compared to 4.0 points of catastrophic
activity in the 2017 first quarter. Estimated net favorable
development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 13.1 points in the 2018
first quarter, compared to 23.4 points in the 2017 first quarter.
The estimated net favorable development in the 2018 first 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 first quarter loss ratio resulted, in
part, from a higher level of large loss activity than in the 2017
first quarter.
The underwriting expense ratio was 30.0% in the 2018 first
quarter, compared to 34.1% in the 2017 first quarter, reflecting
changes in the mix and type of business and a higher level of net
premiums earned. The underwriting expense ratio benefited from a
reduction in federal excise taxes incurred of $2.5 million, or 0.9
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 March 31, (U.S. dollars in
thousands)
2018 2017 %
Change Gross premiums written $ 321,178 $ 348,623 (7.9)
Net premiums written 275,041 274,698 0.1 Net premiums earned
280,242 244,523 14.6 Other underwriting income 3,416 4,123 (17.1)
Underwriting income $ 174,854 $ 148,945 17.4
Underwriting Ratios % Point Change Loss ratio 15.5 %
11.9 % 3.6 Underwriting expense ratio 23.3 % 28.9 % (5.6) Combined
ratio 38.8 % 40.8 % (2.0) Prior year development: Net
(favorable) adverse development in prior year loss reserves, net of
related adjustments (4.6 )% (9.6 )% 5.0 Combined ratio excluding
prior year development (1) 43.4 % 50.4 % (7.0) (1)
See ‘Comments on Regulation G’ for further discussion.
The mortgage segment includes the Company’s U.S. mortgage
insurance operations (“Arch MI U.S.”), international mortgage
insurance and reinsurance operations as well as government
sponsored enterprise (“GSE”) credit-risk sharing transactions.
Gross premiums written by the mortgage segment in the 2018 first
quarter were 7.9% lower than in the 2017 first quarter, while net
premiums written were 0.1% higher than in the 2017 first quarter.
The reduction in gross premiums written primarily reflected a lower
level of Australian mortgage reinsurance business and a lower level
of U.S. single premium business. Net premiums written for the 2018
first 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 first quarter also
reflected higher retrocessions of Australian mortgage reinsurance
business. The increase in net premiums earned for the 2018 first
quarter primarily reflected the growth in insurance in force over
the last twelve months. Insurance in force increased to $349.9
billion at March 31, 2018, compared to $325.2 billion at March 31,
2017.
Arch MI U.S. generated $11.4 billion of new insurance written
(“NIW”) in the 2018 first quarter, compared to $12.7 billion in the
2017 first quarter, with a decrease in the origination market and a
decline in single premium and other business with higher risk
attributes. Monthly premium policies contributed 91.4% of NIW in
the 2018 first quarter, compared to 81.9% in the 2017 first
quarter.
The loss ratio for the 2018 first quarter reflected estimated
net favorable development in prior year loss reserves, before
related adjustments, of 4.6 points, compared to 9.6 points in the
2017 first quarter. The estimated net favorable development in the
2018 first 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 1.98% at March 31, 2018, from
2.23% at December 31, 2017, reflecting a seasonal reduction in
delinquent loans and those attributable to the 2017 third quarter
hurricanes.
The mortgage segment’s underwriting expense ratio was 23.3% in
the 2018 first quarter, compared to 28.9% in the 2017 first
quarter. The lower underwriting expense ratio in the 2018 first
quarter reflected a higher level of net premiums earned and expense
savings from integration efforts following the acquisition of
UGC.
At March 31, 2018, the mortgage segment’s risk-in-force (before
reinsurance) of $70.7 billion consisted of $65.2 billion from Arch
MI U.S. with the remainder from reinsurance and risk-sharing
operations. For additional information on the mortgage segment,
please refer to the Company’s Financial Supplement dated March 31,
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.
Net investment income for the 2018 first quarter was $0.72 per
share, or $100.2 million, compared to $0.69 per share, or $95.8
million, for the 2017 first quarter. The 2018 first quarter net
investment income reflected a higher level of investable assets
than in the 2017 first quarter. The annualized pre-tax investment
income yield was 2.13% for the 2018 first quarter, consistent with
the 2.13% for the 2017 first quarter.
Corporate expenses were $14.5 million for the 2018 first
quarter, compared to $12.2 million for the 2017 first quarter, with
the increase primarily due to higher compensation costs. UGC
transaction costs and other were $0.8 million for the 2018 first
quarter, primarily related to severance and severance related
costs. Amortization of intangible assets for the 2018 first quarter
was $26.7 million, compared to $31.3 million for the 2017 first
quarter, with amounts in both periods primarily related to
intangible assets related to the UGC acquisition.
Interest expense for the 2018 first quarter was $25.9 million,
compared to $25.8 million for the 2017 first quarter. Preferred
dividends for the 2018 first quarter were $10.4 million, compared
to $11.2 million for the 2017 first quarter. On January 2, 2018,
the Company redeemed the remaining $92.6 million of 6.75% Series C
preferred shares. As such, in accordance with GAAP, the Company
recorded a loss of $2.7 million to remove original issuance costs
related to the redeemed shares from additional paid-in capital. For
additional information on the Company’s capital structure, please
refer to the Financial Supplement dated March 31, 2018.
On a pre-tax basis, net foreign exchange losses for the 2018
first quarter were $15.0 million, compared to net foreign exchange
losses for the 2017 first quarter of $19.8 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 12.7% for
the 2018 first quarter, compared to 10.1% for the 2017 first
quarter, while the effective tax rate on pre-tax operating income
available to Arch shareholders was 9.9% for the 2018 first quarter,
compared to 13.4% for the 2017 first quarter. The effective tax
rates for the 2018 first quarter included a discrete income tax
benefit of $1.4 million related to share-based compensation. This
benefit had the effect of reducing the 2018 first quarter effective
tax rate on operating income available to Arch shareholders by
0.5%. 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 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 first quarter as compared to the 2017 first
quarter.
As disclosed previously, the Company adopted new accounting
guidance for equity instruments on January 1, 2018. This accounting
guidance had no net impact on total shareholders’ equity but
resulted in a $149.8 million cumulative effect adjustment in
retained earnings and an offsetting decrease in unrealized gains on
equity instruments in accumulated other comprehensive income. In
addition, beginning in the 2018 first quarter, changes in fair
value for equity instruments are required to be recognized through
net income rather than through other comprehensive income. For the
2018 first quarter, net realized losses of $111.9 million included
$18.6 million of unrealized losses on equity instruments pursuant
to the new accounting guidance.
Conference Call
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on May 2, 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 May 2, 2018
at 2:00 p.m. Eastern Time until May 9, 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 7699499 for all callers).
Please refer to the Company’s Financial Supplement dated March
31, 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 $11.26 billion in capital at March 31, 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 transaction 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 and prior year
development for the insurance segment and reinsurance segment and a
combined ratio excluding prior year development for the mortgage
segment. These ratios are non-GAAP financial measures as defined in
Regulation G. The reconciliation of such measures to the combined
ratio (the most directly comparable GAAP financial measure) in
accordance with Regulation G are shown on the individual segment
pages. The Company’s management utilizes the adjusted combined
ratio excluding current accident year catastrophic events and
favorable or adverse development in prior year loss reserves in its
analysis of the underwriting performance of each of its
underwriting segments.
The following tables summarize the Company’s results by segment
for the 2018 first quarter and 2017 first 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
March 31, 2018 Insurance
Reinsurance Mortgage
Sub-total Other
Total Gross premiums written (1) $ 823,378 $ 577,483 $
321,178 $ 1,721,605 $ 213,870 $ 1,838,214 Premiums ceded (247,180 )
(195,730 ) (46,137 ) (488,613 ) (34,318 ) (425,670 ) Net premiums
written 576,198 381,753 275,041 1,232,992 179,552 1,412,544 Change
in unearned premiums (37,461 ) (102,581 ) 5,201 (134,841 )
(42,804 ) (177,645 ) Net premiums earned 538,737 279,172 280,242
1,098,151 136,748 1,234,899 Other underwriting income — 1,232 3,416
4,648 701 5,349 Losses and loss adjustment expenses (353,730 )
(141,675 ) (43,466 ) (538,871 ) (97,989 ) (636,860 ) Acquisition
expenses (85,169 ) (48,319 ) (26,567 ) (160,055 ) (31,321 )
(191,376 ) Other operating expenses (91,974 ) (35,571 ) (38,771 )
(166,316 ) (8,699 ) (175,015 ) Underwriting income (loss) $ 7,864
$ 54,839 $ 174,854 237,557 (560 ) 236,997
Net investment income 100,243 26,481 126,724 Net realized
gains (losses) (111,859 ) 861 (110,998 ) Net impairment losses
recognized in earnings (162 ) — (162 ) Equity in net income (loss)
of investment funds accounted for using the equity method 28,069 —
28,069 Other income 74 — 74 Corporate expenses (14,482 ) — (14,482
) UGC transaction costs and other (830 ) — (830 ) Amortization of
intangible assets (26,736 ) — (26,736 ) Interest expense (25,907 )
(4,729 ) (30,636 ) Net foreign exchange gains (losses) (15,039 )
(4,682 ) (19,721 )
Income before income taxes 170,928 17,371
188,299 Income tax expense (21,912 ) (3 ) (21,915 )
Net
income 149,016 17,368 166,384 Dividends attributable to
redeemable noncontrolling interests — (4,585 ) (4,585 ) Amounts
attributable to nonredeemable noncontrolling interests —
(11,376 ) (11,376 )
Net income available to Arch 149,016
1,407 150,423 Preferred dividends (10,437 ) — (10,437 ) Loss on
redemption of preferred shares (2,710 ) — (2,710 )
Net
income available to Arch common shareholders $ 135,869 $
1,407 $ 137,276
Underwriting Ratios
Loss ratio 65.7 % 50.7 % 15.5 % 49.1 % 71.7 % 51.6 % Acquisition
expense ratio 15.8 % 17.3 % 9.5 % 14.6 % 22.9 % 15.5 % Other
operating expense ratio 17.1 % 12.7 % 13.8 % 15.1 % 6.4 % 14.2 %
Combined ratio 98.6 % 80.7 % 38.8 % 78.8 % 101.0 % 81.3 %
Net premiums written to gross premiums written 70.0 % 66.1 % 85.6 %
71.6 % 84.0 % 76.8 % (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 March 31,
2017 Insurance Reinsurance
Mortgage Sub-total
Other Total Gross premiums written (1)
$ 782,281 $ 475,782 $ 348,623 $ 1,606,686 $ 154,120 $ 1,657,990
Premiums ceded (234,095 ) (166,092 ) (73,925 ) (474,112 ) (10,434 )
(381,730 ) Net premiums written 548,186 309,690 274,698 1,132,574
143,686 1,276,260 Change in unearned premiums (42,540 ) (64,839 )
(30,175 ) (137,554 ) (21,689 ) (159,243 ) Net premiums earned
505,646 244,851 244,523 995,020 121,997 1,117,017 Other
underwriting income (loss) — (306 ) 4,123 3,817 816 4,633 Losses
and loss adjustment expenses (332,641 ) (105,454 ) (29,065 )
(467,160 ) (85,410 ) (552,570 ) Acquisition expenses (74,868 )
(46,147 ) (28,766 ) (149,781 ) (32,508 ) (182,289 ) Other operating
expenses (88,126 ) (37,533 ) (41,870 ) (167,529 ) (7,190 ) (174,719
) Underwriting income (loss) $ 10,011 $ 55,411 $
148,945 214,367 (2,295 ) 212,072 Net investment
income 95,812 22,062 117,874 Net realized gains (losses) 28,512
5,641 34,153 Net impairment losses recognized in earnings (1,807 )
— (1,807 ) Equity in net income (loss) of investment funds
accounted for using the equity method 48,088 — 48,088 Other income
(loss) (782 ) — (782 ) Corporate expenses (12,208 ) — (12,208 ) UGC
transaction costs and other (15,584 ) — (15,584 ) Amortization of
intangible assets (31,294 ) — (31,294 ) Interest expense (25,756 )
(2,920 ) (28,676 ) Net foreign exchange gains (losses) (19,845 )
441 (19,404 )
Income before income taxes 279,503
22,929 302,432 Income tax (expense) benefit (28,397 ) —
(28,397 )
Net income 251,106 22,929 274,035 Dividends
attributable to redeemable noncontrolling interests — (4,584 )
(4,584 ) Amounts attributable to nonredeemable noncontrolling
interests — (16,324 ) (16,324 )
Net income available to
Arch 251,106 2,021 253,127 Preferred dividends (11,218 ) —
(11,218 )
Net income available to Arch common
shareholders $ 239,888 $ 2,021 $ 241,909
Underwriting Ratios Loss ratio 65.8 % 43.1 % 11.9 %
46.9 % 70.0 % 49.5 % Acquisition expense ratio 14.8 % 18.8 % 11.8 %
15.1 % 26.6 % 16.3 % Other operating expense ratio 17.4 % 15.3 %
17.1 % 16.8 % 5.9 % 15.6 % Combined ratio 98.0 % 77.2 % 40.8 % 78.8
% 102.5 % 81.4 % Net premiums written to gross premiums
written 70.1 % 65.1 % 78.8 % 70.5 % 93.2 % 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.
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 United Guaranty
Corporation and any other 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 March 31, 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 recently enacted 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/20180501006786/en/
Arch Capital Group Ltd.Mark D. Lyons,
441-278-9250orInvestor RelationsDonald Watson,
914-872-3616dwatson@archcapservices.com
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