ACGL Arch Capital Group Ltd

Arch Capital Group Ltd. (NASDAQ: ACGL) announces its 2019 first quarter results. The results included:

• Net income available to Arch common shareholders of $438.1 million, or $1.07 per share, a 19.5% annualized return on average common equity, compared to $137.3 million, or $0.33 per share, for the 2018 first quarter;
• After-tax operating income available to Arch common shareholders, a non-GAAP measure, of $275.9 million, or $0.67 per share, a 12.3% annualized return on average common equity, compared to $235.1 million, or $0.56 per share, for the 2018 first quarter;
• Book value per common share of $23.12 at March 31, 2019, a 7.4% increase in the 2019 first quarter and a 13.3% increase for the trailing twelve months;
• Pre-tax current accident year catastrophic losses, net of reinsurance and reinstatement premiums(1) of $7.9 million;
• Favorable development in prior year loss reserves, net of related adjustments(1) of $36.7 million;
• Combined ratio excluding catastrophic activity and prior year development(1) of 81.4%.

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 March 31, Three Months Ended March 31, 2019   2018   % Change 2019   2018   % Change Gross premiums written $ 2,077,879 $ 1,838,214 13.0 $ 1,980,453 $ 1,721,605 15.0 Net premiums written 1,525,259 1,412,544 8.0 1,379,872 1,232,992 11.9 Net premiums earned 1,368,866 1,234,899 10.8 1,222,772 1,098,151 11.3 Underwriting income 260,148 236,997 9.8 265,526 237,557 11.8 Underwriting Ratios % Point Change % Point Change Loss ratio 52.5 % 51.6 % 0.9 49.7 % 49.1 % 0.6 Underwriting expense ratio 29.2 % 29.7 % (0.5 ) 29.3 % 29.7 % (0.4 ) Combined ratio 81.7 % 81.3 % 0.4   79.0 % 78.8 % 0.2   Combined ratio excluding catastrophic activity and prior year development 81.4 % 83.2 % (1.8 ) (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 March 31, 2019   2018 Net income available to Arch common shareholders $ 438,125 $ 137,276 Net realized (gains) losses (115,644 ) 111,764 Net impairment losses recognized in earnings 1,309 162 Equity in net (income) loss of investment funds accounted for using the equity method (46,867 ) (28,069 ) Net foreign exchange (gains) losses (4,994 ) 15,556 Transaction costs and other 1,190 830 Loss on redemption of preferred shares — 2,710 Income tax expense (benefit) (1) 2,778   (5,086 ) After-tax operating income available to Arch common shareholders $ 275,897   $ 235,143    

Diluted per common share results:

Net income available to Arch common shareholders $ 1.07 $ 0.33 Net realized (gains) losses (0.29 ) 0.26 Net impairment losses recognized in earnings 0.00 0.00 Equity in net (income) loss of investment funds accounted for using the equity method (0.11 ) (0.07 ) Net foreign exchange (gains) losses (0.01 ) 0.04 Transaction costs and other 0.00 0.00 Loss on redemption of preferred shares — 0.01 Income tax expense (benefit) (1) 0.01   (0.01 ) After-tax operating income available to Arch common shareholders $ 0.67   $ 0.56     Weighted average common shares and common share equivalents outstanding — diluted 408,971,029 417,893,802   Beginning common shareholders’ equity $ 8,659,827 $ 8,324,047 Ending common shareholders’ equity 9,334,596   8,370,372   Average common shareholders’ equity $ 8,997,212   $ 8,347,210     Annualized return on average common equity 19.5 % 6.6 % Annualized operating return on average common equity 12.3 % 11.3 % (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, 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 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, 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 March 31, (U.S. dollars in thousands) 2019   2018   % Change   Gross premiums written $ 941,954 $ 823,378 14.4 Net premiums written 621,332 576,198 7.8 Net premiums earned 553,505 538,737 2.7   Underwriting income $ 562 $ 7,864 (92.9 )   Underwriting Ratios % Point Change Loss ratio 64.4 % 65.7 % (1.3 ) Underwriting expense ratio 35.5 % 32.9 % 2.6   Combined ratio 99.9 % 98.6 % 1.3     Catastrophic activity and prior year development: Current accident year catastrophic events, net of reinsurance and reinstatement premiums 0.0 % 0.2 % (0.2 ) Net (favorable) adverse development in prior year loss reserves, net of related adjustments (0.3 )% (0.3 )% 0.0   Combined ratio excluding catastrophic activity and prior year development (1) 100.2 % 98.7 % 1.5   (1)   See ‘Comments on Regulation G’ for further discussion.  

Gross premiums written by the insurance segment in the 2019 first quarter were 14.4% higher than in the 2018 first quarter while net premiums written were 7.8% higher than in the 2018 first quarter. The increase in net premiums written primarily reflects the acquisition of a U.K. commercial lines book of business on January 1, 2019, along with the growth in most lines of business. The percentage increase in gross premiums written is higher than the increase in net premiums written due to a single large national account, for which the premium written in the quarter was substantially ceded. Net premiums earned by the insurance segment in the 2019 first quarter were 2.7% higher than in the 2018 first quarter, and reflect changes in net premiums written over the previous five quarters.

The 2019 first quarter loss ratio reflected minimal current year catastrophic activity, compared to 0.2 points in the 2018 first quarter. Estimated net favorable development of prior year loss reserves, before related adjustments, reduced the loss ratio by 0.8 points in the 2019 first quarter, compared to 0.4 points in the 2018 first quarter. The balance of the change in the 2019 first quarter loss ratio primarily resulted from changes in mix of business.

The underwriting expense ratio was 35.5% in the 2019 first quarter, compared to 32.9% in the 2018 first quarter. The increase in the underwriting expense ratio reflected a previously announced change in the timing of our incentive compensation practices, with a large portion of the expense associated with the share based compensation grants reflected in the 2019 first quarter. In prior periods, share based compensation grants occurred in the second quarter. On the U.K. acquisition noted above, only a small portion of net premiums written were earned in the 2019 first quarter while the Company incurred a full quarter of expenses. This resulted in a higher expense ratio in the period, which is expected to moderate as the business matures. The Company did not acquire any loss reserves or unearned premiums as part of the transaction.

Reinsurance Segment

    Three Months Ended March 31, (U.S. dollars in thousands) 2019   2018   % Change   Gross premiums written $ 682,855 $ 577,483 18.2 Net premiums written 451,288 381,753 18.2 Net premiums earned 346,365 279,172 24.1 Other underwriting income (loss) 4,377 1,232 255.3   Underwriting income $ 20,902 $ 54,839 (61.9 )   Underwriting Ratios % Point Change Loss ratio 69.2 % 50.7 % 18.5 Underwriting expense ratio 26.0 % 30.0 % (4.0 ) Combined ratio 95.2 % 80.7 % 14.5     Catastrophic activity and prior year development: Current accident year catastrophic events, net of reinsurance and reinstatement premiums 2.3 % 0.3 % 2.0 Net (favorable) adverse development in prior year loss reserves, net of related adjustments 0.5 % (13.0 )% 13.5   Combined ratio excluding catastrophic activity and prior year development (1) 92.4 % 93.4 % (1.0 ) (1)   See ‘Comments on Regulation G’ for further discussion.  

Gross and net premiums written by the reinsurance segment in the 2019 first quarter were 18.2% higher than in the 2018 first quarter. The increase in net premiums written in the 2019 first quarter primarily reflected growth from selected new business opportunities in casualty and property excluding property catastrophe. Net premiums earned by the reinsurance segment in the 2019 first quarter were 24.1% higher than in the 2018 first quarter, and reflect changes in net premiums written over the previous five quarters.

The 2019 first quarter loss ratio included 2.3 points of current year catastrophic activity, compared to 0.4 points of catastrophic activity in the 2018 first quarter. Estimated net adverse development of prior year loss reserves, before related adjustments, increased the loss ratio by 0.5 points in the 2019 first quarter, compared to 13.1 points of favorable development in the 2018 first quarter. The estimated net adverse development in the 2019 first quarter included an increase in reserves on Typhoon Jebi of $16.0 million, or 4.6 points, based on receipt of updated information from cedents and additional updated industry data.

The underwriting expense ratio was 26.0% in the 2019 first quarter, compared to 30.0% in the 2018 first quarter, primarily as a result of growth in net premiums earned and changes in mix of business.

Mortgage Segment

    Three Months Ended March 31, (U.S. dollars in thousands) 2019   2018   % Change   Gross premiums written $ 356,050 $ 321,178 10.9 Net premiums written 307,252 275,041 11.7 Net premiums earned 322,902 280,242 15.2 Other underwriting income 3,856 3,416 12.9   Underwriting income $ 244,062 $ 174,854 39.6   Underwriting Ratios % Point Change Loss ratio 3.5 % 15.5 % (12.0 ) Underwriting expense ratio 22.1 % 23.3 % (1.2 ) Combined ratio 25.6 % 38.8 % (13.2 )   Prior year development: Net (favorable) adverse development in prior year loss reserves, net of related adjustments (11.3 )% (4.6 )% (6.7 ) Combined ratio excluding prior year development (1) 36.9 % 43.4 % (6.5 ) (1)   See ‘Comments on Regulation G’ for further discussion.  

Gross premiums written by the mortgage segment in the 2019 first quarter were 10.9% higher than in the 2018 first quarter, while net premiums written were 11.7% higher. The growth in net premiums written primarily reflected an increase in monthly premiums business due to growth in U.S. insurance in force, partially offset by a lower level of U.S. single premium business, a decrease in Australian mortgage reinsurance business and higher ceded premiums related to Bellemeade transactions. The increase in net premiums earned for the 2019 first quarter primarily reflected the growth in insurance in force over the last twelve months, with $390.4 billion of insurance in force at March 31, 2019, compared to $349.9 billion at March 31, 2018.

Arch MI U.S. generated $11.2 billion of new insurance written (“NIW”) in the 2019 first quarter, consistent with the $11.4 billion in the 2018 first quarter. Monthly premium policies contributed 91.6% of NIW in the 2019 first quarter, compared to 91.4% in the 2018 first quarter.

The loss ratio for the 2019 first quarter reflected estimated net favorable development in prior year loss reserves, before related adjustments, of 11.3 points in the 2019 first quarter, compared to 4.6 points in the 2018 first quarter. The estimated net favorable development in the 2019 first quarter was primarily driven by lower expected claim rates on first lien business and subrogation activity on second lien business. The percentage of loans in default on first lien business was 1.54% at March 31, 2019, a decrease from 1.60% at December 31, 2018 and from 1.98% at March 31, 2018.

The mortgage segment’s underwriting expense ratio was 22.1% in the 2019 first quarter, compared to 23.3% in the 2018 first quarter. The lower ratio in the 2019 first quarter primarily resulted from the higher level of net premiums earned.

At March 31, 2019, the mortgage segment’s risk-in-force (before reinsurance) of $77.1 billion consisted of $71.1 billion from Arch MI U.S. with the remainder from reinsurance and credit-risk sharing 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 first quarter was $0.30 per share, or $121.2 million, compared to $0.24 per share, or $100.2 million, for the 2018 first quarter. The growth in 2019 first quarter net investment income reflected 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 2.67% for the 2019 first quarter, compared to 2.13% for the 2018 first quarter. Total return, a non-GAAP measure, was 2.70% for the 2019 first 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 first quarter was $23.5 million, compared to $25.9 million for the 2018 first quarter, reflecting the paydown of revolving credit agreement borrowings in the second half of 2018.

On a pre-tax basis, net foreign exchange gains for the 2019 first quarter were $5.2 million, compared to net foreign exchange losses for the 2018 first quarter of $15.0 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 9.3% for the 2019 first quarter, compared to 12.7% for the 2018 first quarter. The Company’s effective tax rate on pre-tax operating income available to Arch common shareholders was 13.1% for the 2019 first quarter, compared to 9.9% for the 2018 first quarter. The effective tax rates for the 2019 first quarter included a discrete income tax benefit of $1.8 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 0.5%. 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 11:00 a.m. Eastern Time on May 1, 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 May 1, 2019 at 2:00 p.m. Eastern Time until May 8, 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 7196298 for all callers).

Please refer to the Company’s Financial Supplement dated March 31, 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 $11.85 billion in capital at March 31, 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 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 first quarter and 2018 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, 2019 Insurance   Reinsurance   Mortgage   Sub-total   Other   Total Gross premiums written (1) $ 941,954 $ 682,855 $ 356,050 $ 1,980,453 $ 186,689 $ 2,077,879 Premiums ceded (320,622 ) (231,567 ) (48,798 ) (600,581 ) (41,302 ) (552,620 ) Net premiums written 621,332 451,288 307,252 1,379,872 145,387 1,525,259 Change in unearned premiums (67,827 ) (104,923 ) 15,650   (157,100 ) 707   (156,393 ) Net premiums earned 553,505 346,365 322,902 1,222,772 146,094 1,368,866 Other underwriting income — 4,377 3,856 8,233 592 8,825 Losses and loss adjustment expenses (356,723 ) (239,810 ) (11,149 ) (607,682 ) (110,850 ) (718,532 ) Acquisition expenses (82,824 ) (54,326 ) (31,672 ) (168,822 ) (29,026 ) (197,848 ) Other operating expenses (113,396 ) (35,704 ) (39,875 ) (188,975 ) (12,188 ) (201,163 ) Underwriting income (loss) $ 562   $ 20,902   $ 244,062   265,526 (5,378 ) 260,148   Net investment income 121,249 35,700 156,949 Net realized gains (losses) 112,433 29,132 141,565 Net impairment losses recognized in earnings (1,309 ) — (1,309 ) Equity in net income (loss) of investment funds accounted for using the equity method 46,867 — 46,867 Other income 1,083 — 1,083 Corporate expenses (16,772 ) — (16,772 ) Transaction costs and other (1,190 ) — (1,190 ) Amortization of intangible assets (20,417 ) — (20,417 ) Interest expense (23,482 ) (5,583 ) (29,065 ) Net foreign exchange gains (losses) 5,175   (1,650 ) 3,525   Income before income taxes 489,163 52,221 541,384 Income tax expense (45,886 ) —   (45,886 ) Net income 443,277 52,221 495,498 Dividends attributable to redeemable noncontrolling interests — (4,588 ) (4,588 ) Amounts attributable to nonredeemable noncontrolling interests —   (42,382 ) (42,382 ) Net income available to Arch 443,277 5,251 448,528 Preferred dividends (10,403 ) —   (10,403 ) Net income available to Arch common shareholders $ 432,874   $ 5,251   $ 438,125     Underwriting Ratios Loss ratio 64.4 % 69.2 % 3.5 % 49.7 % 75.9 % 52.5 % Acquisition expense ratio 15.0 % 15.7 % 9.8 % 13.8 % 19.9 % 14.5 % Other operating expense ratio 20.5 % 10.3 % 12.3 % 15.5 % 8.3 % 14.7 % Combined ratio 99.9 % 95.2 % 25.6 % 79.0 % 104.1 % 81.7 %   Net premiums written to gross premiums written 66.0 % 66.1 % 86.3 % 69.7 % 77.9 % 73.4 % (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.       (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 ) 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) benefit (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.  

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 March 31, 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.

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Arch Capital Group Ltd.François Morin: (441) 278-9250

Investor RelationsDonald Watson: (914) 872-3616; dwatson@archcapservices.com