Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income
available to Arch common shareholders for the 2017 second quarter
was $173.8 million, or $1.25 per share, compared to $205.6 million,
or $1.65 per share, for the 2016 second quarter. The Company’s net
income available to Arch common shareholders represented an
annualized return on average common equity of 8.7% for the 2017
second quarter, compared to 13.3% for the 2016 second quarter. For
the trailing twelve months ended June 30, 2017, net income
available to Arch common shareholders produced a 10.0% return on
average common equity. The Company’s book value per common share
was $59.60 at June 30, 2017, a 3.3% increase from $57.69 per share
at March 31, 2017 and a 15.2% increase from $51.73 per share at
June 30, 2016. All earnings per share amounts discussed in this
release are on a diluted basis.
The Company also reported after-tax operating income available
to Arch common shareholders, a non-GAAP measure, of $168.9 million,
or $1.21 per share, for the 2017 second quarter, compared to $140.6
million, or $1.13 per share, for the 2016 second quarter. The
Company’s after-tax operating income available to Arch common
shareholders represented an annualized return on average common
equity of 8.5% for the 2017 second quarter, compared to 9.1% for
the 2016 second quarter. For the trailing twelve months ended June
30, 2017, after-tax operating income available to Arch common
shareholders produced a 9.1% return on average common equity. See
‘Comments on Regulation G’ for further details.
The following table summarizes the Company’s underwriting
results, both on a consolidated basis and a consolidated basis
excluding the ‘other’ segment (i.e., results of Watford Re):
(U.S. dollars in thousands)
Consolidated Consolidated Excluding ‘Other’ Segment
(1) Three Months Ended June 30, Three Months Ended
June 30, 2017 2016 % Change
2017 2016 % Change Gross
premiums written $ 1,609,659 $ 1,329,936 21.0 $ 1,533,142 $
1,292,199 18.6 Net premiums written 1,248,695 1,023,563 22.0
1,108,292 918,735 20.6 Net premiums earned 1,240,874 1,005,985 23.3
1,090,120 885,418 23.1 Underwriting income 195,419 116,626 67.6
198,062 118,350 67.4
Underwriting Ratios
% Point Change
% Point Change
Loss ratio 55.6 % 58.1 % (2.5 ) 53.1 % 56.6 % (3.5 ) Acquisition
expense ratio 15.3 % 17.2 % (1.9 ) 14.3 % 15.7 % (1.4 ) Other
operating expense ratio 13.7 % 15.6 % (1.9 ) 14.8 % 17.1 % (2.3 )
Combined ratio 84.6 % 90.9 % (6.3 ) 82.2 % 89.4 % (7.2 ) (1)
Pursuant to generally accepted accounting principles,
Watford Re is considered a variable interest entity and the Company
concluded that it is the primary beneficiary of Watford Re. As
such, the Company consolidates the results of Watford Re (i.e., the
‘other’ segment) in its consolidated financial statements, although
it only owns approximately 11% of Watford Re’s common equity.
See ‘Comments on Regulation G’ for a reconciliation of
underwriting income or loss to income before income taxes and net
income available to Arch common shareholders.
The following table summarizes the Company’s consolidated
financial data, including a reconciliation of net income available
to Arch common shareholders to after-tax operating income 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, 2017 2016
2017 2016 Net income available to Arch common
shareholders $ 173,818 $ 205,570 $ 415,727 $ 354,884 Net realized
(gains) losses (18,452 ) (43,935 ) (47,586 ) (76,399 ) Net
impairment losses recognized in earnings 1,730 5,343 3,537 12,982
Equity in net (income) loss of investment funds accounted for using
the equity method (32,706 ) (8,737 ) (80,794 ) (15,392 ) Net
foreign exchange (gains) losses 38,012 (22,703 ) 57,808 (494 ) UGC
transaction costs and other 2,675 — 18,259 — Income tax (benefit)
expense (1) 3,842 5,036 (67 ) 10,735 After-tax
operating income available to Arch common shareholders $ 168,919
$ 140,574 $ 366,884 $ 286,316
Diluted per common
share results:
Net income available to Arch common shareholders $ 1.25 $ 1.65 $
2.99 $ 2.85 Net realized (gains) losses (0.13 ) (0.35 ) (0.34 )
(0.62 ) Net impairment losses recognized in earnings 0.01 0.04 0.02
0.10 Equity in net (income) loss of investment funds accounted for
using the equity method (0.24 ) (0.07 ) (0.58 ) (0.12 ) Net foreign
exchange (gains) losses 0.27 (0.18 ) 0.42 0.00 UGC transaction
costs and other 0.02 0.00 0.13 0.00 Income tax (benefit) expense
(1) 0.03 0.04 0.00 0.09 After-tax
operating income available to Arch common shareholders $ 1.21
$ 1.13 $ 2.64 $ 2.30 Weighted
average common shares and common share equivalents outstanding —
diluted 139,244,646 124,365,596 139,140,632 124,425,126
Beginning common shareholders’ equity $ 7,833,289 $ 6,050,248 $
7,481,163 $ 5,841,542 Ending common shareholders’ equity 8,126,332
6,340,583 8,126,332 6,340,583 Average
common shareholders’ equity $ 7,979,811 $ 6,195,416 $
7,803,748 $ 6,091,063 Annualized return on
average common equity 8.7 % 13.3 % 10.7 % 11.7 % Annualized
operating return on average common equity 8.5 % 9.1 % 9.4 % 9.4 %
(1) Income tax expense on net realized gains or
losses, net impairment losses recognized in earnings, equity in net
income (loss) of investment funds accounted for using the equity
method, net foreign exchange gains or losses and UGC transaction
costs and other 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 2017
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, 2017. The
Company’s segment information includes the use of underwriting
income 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 June 30, (U.S.
dollars in thousands)
2017 2016 %
Change Gross premiums written $ 743,902 $ 762,043 (2.4 )
Net premiums written 496,456 515,168 (3.6 ) Net premiums earned
517,574 527,650 (1.9 ) Underwriting income (loss) $ (4,504 )
$ 4,265 (205.6 )
Underwriting Ratios
% Point Change
Loss ratio 67.8 % 67.2 % 0.6 Underwriting expense ratio 33.0 % 32.0
% 1.0 Combined ratio 100.8 % 99.2 % 1.6
Catastrophic activity and prior year development: Current accident
year catastrophic events, net of reinsurance and reinstatement
premiums 1.6 % 3.9 % (2.3 ) Net (favorable) adverse development in
prior year loss reserves, net of related adjustments (0.2 )% (0.8
)% 0.6 Combined ratio excluding catastrophic activity and
prior year development (1) 99.4 % 96.1 % 3.3 (1)
See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the insurance segment in the 2017
second quarter were 2.4% lower than in the 2016 second quarter
while net premiums written were 3.6% lower than in the 2016 second
quarter. The decrease in net premiums written largely reflected our
response to weaker market conditions, with reductions in
construction, excess and surplus casualty and property lines,
partially offset by growth in programs. The lower level of
construction premiums reflected non-renewals as well as lower audit
and project premium, while excess and surplus casualty reflected a
targeted reduction in certain exposures, increased use of
reinsurance and other factors. The reduction in property lines
reflected continued weak market conditions while growth in program
business primarily reflected the continued impact of two newer
programs. Net premiums earned by the insurance segment in the 2017
second quarter were 1.9% lower than in the 2016 second quarter, and
reflect changes in net premiums written over the previous five
quarters.
The 2017 second quarter loss ratio reflected 1.6 points of
current year catastrophic activity, compared to 3.9 points in the
2016 second quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 0.4 points in the 2017 second quarter, compared to 0.9
points in the 2016 second quarter. The balance of the change in the
2017 second quarter loss ratio resulted, in part, from a softening
market environment and changes in the mix of business.
The underwriting expense ratio was 33.0% in the 2017 second
quarter, compared to 32.0% in the 2016 second quarter. The
comparison of the underwriting expense ratios reflected changes in
the mix of business and the level of reinsurance ceded on a quota
share basis.
Reinsurance Segment
Three Months Ended June 30, (U.S.
dollars in thousands)
2017 2016 %
Change Gross premiums written $ 453,186 $ 412,053 10.0
Net premiums written 337,924 292,102 15.7 Net premiums earned
314,702 291,256 8.0 Other underwriting income (loss) (279 ) 20,118
(101.4 ) Underwriting income $ 18,955 $ 72,613 (73.9 )
Underwriting Ratios
% Point Change
Loss ratio 66.0 % 50.2 % 15.8 Underwriting expense ratio 28.0 %
31.8 % (3.8 ) Combined ratio 94.0 % 82.0 % 12.0
Catastrophic activity and prior year development: Current accident
year catastrophic events, net of reinsurance and reinstatement
premiums 5.2 % 5.4 % (0.2 ) Net (favorable) adverse development in
prior year loss reserves, net of related adjustments (12.3 )% (21.7
)% 9.4 Combined ratio excluding catastrophic activity and
prior year development (1) 101.1 % 98.3 % 2.8 (1)
See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the reinsurance segment in the 2017
second quarter were 10.0% higher than in the 2016 second quarter,
while net premiums written were 15.7% higher than in the 2016
second quarter. Gross and net premiums written in both periods
reflected an increase in other specialty business related to
certain retroactive reinsurance contracts. For the 2017 second
quarter, net premiums written included $53.6 million related to
such contracts, compared to $40.2 million in the 2016 second
quarter. Such premiums, which were with the same cedent but covered
different underwriting years, were substantially earned in each
period and resulted in a corresponding increase to losses and loss
adjustment expenses. In addition to the retroactive reinsurance
contracts noted above, the increase in net premiums written in the
2017 second quarter reflected growth in other specialty, primarily
new international motor quota share business, partially offset by a
reduction in property catastrophe business. Net premiums earned by
the reinsurance segment in the 2017 second quarter were 8.0% higher
than in the 2016 second quarter, and reflect changes in net
premiums written over the previous five quarters.
Other underwriting income (loss) for the 2017 second quarter was
de minimis, while the 2016 second quarter reflected $19.1 million
related to a contract which was commuted during the period. This
contract had been reflected as a deposit accounting liability
(i.e., a contract that, in accordance with GAAP, does not pass risk
transfer) prior to the commutation.
The 2017 second quarter loss ratio included 5.4 points of
current year catastrophic activity, compared to 6.1 points of
catastrophic activity in the 2016 second quarter. Estimated net
favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 12.6 points in the 2017
second quarter, compared to 24.0 points in the 2016 second quarter.
The estimated net favorable development in the 2017 second quarter
primarily resulted from better than expected claims emergence in
short-tail business from more recent underwriting years and in
longer-tail business across earlier underwriting years. The 2017
second quarter loss ratio contained $34.8 million, or 11.1 points,
of property facultative loss activity, compared to $7.8 million, or
2.7 points, in the 2016 second quarter.
The underwriting expense ratio was 28.0% in the 2017 second
quarter, compared to 31.8% in the 2016 second quarter. The
retroactive reinsurance contracts noted above improved the reported
2017 second quarter underwriting expense ratio by 5.6 points,
compared to 5.0 points in the 2016 second quarter. The comparison
of the underwriting expense ratios primarily reflected changes in
the mix and type of business and a higher level of net premiums
earned in the 2017 second quarter.
Mortgage Segment
Three Months Ended June 30, (U.S.
dollars in thousands)
2017 2016 %
Change Gross premiums written $ 336,226 $ 118,434 183.9
Net premiums written 273,912 111,465 145.7 Net premiums earned
257,844 66,512 287.7 Other underwriting income 4,277 4,137 3.4
Underwriting income $ 183,611 $ 41,472 342.7
Underwriting Ratios
% Point Change
Loss ratio 8.0 % 0.6 % 7.4 Underwriting expense ratio 22.5 % 43.4 %
(20.9 ) Combined ratio 30.5 % 44.0 % (13.5 ) Net (favorable)
adverse development in prior year loss reserves, net of related
adjustments (11.5 )% (16.6 )% 5.1 Combined ratio excluding
prior year development (1) 42.0 % 60.6 % (18.6 ) (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. On
December 31, 2016, the Company completed the acquisition of United
Guaranty Corporation (“UGC”). As such, the 2017 second quarter
results reflect the combination of Arch and UGC while the 2016
second quarter does not reflect UGC activity. The acquisition of
UGC expanded the scale of Arch MI U.S. by combining UGC’s position
as the market leader in the U.S. private mortgage insurance
industry with Arch’s financial strength and history of
innovation.
Gross premiums written by the mortgage segment in the 2017
second quarter were significantly higher than in the 2016 second
quarter, primarily reflecting the growth in insurance in force due
to the acquisition of UGC. The lower growth rate on net premiums
written in the 2017 second quarter reflected cessions to AIG under
the 50% quota share reinsurance agreement, which covers 2014 to
2016 policy years of UGC business on a run-off basis, while the
higher increase in net premiums earned for the 2017 second quarter
reflected growth in insurance in force over the last twelve
months.
Arch MI U.S. generated $17.3 billion of new insurance written
(“NIW”) during the 2017 second quarter, compared to $12.7 billion
during the 2017 first quarter. Monthly premium policies contributed
85.7% of 2017 second quarter NIW, compared to 81.9% in the 2017
first quarter. The sequential growth in NIW reflected seasonality
driven by increased home purchase loans, offset by a lower level of
refinance loans.
The loss ratio for the 2017 second quarter reflected estimated
net favorable development in prior year loss reserves, before
related adjustments, of 11.5 points, compared to 9.6 points in the
2017 first quarter. The estimated net favorable development in the
2017 periods was primarily driven by continued lower than expected
claim rates and subrogation activity, with the ending percentage of
loans in default on first lien business declining to 2.02% at June
30, 2017 from 2.25% at March 31, 2017.
The mortgage segment’s underwriting expense ratio was 22.5% in
the 2017 second quarter, compared to 28.9% in the 2017 first
quarter. The lower underwriting expense ratio in the 2017 second
quarter reflected the benefits of integration activities which
reduced aggregate expenses for the period, while the 2017 first
quarter reflected a higher level of expenses on international
mortgage business.
At June 30, 2017, the mortgage segment’s risk-in-force (before
reinsurance) of $67.3 billion consisted of $62.4 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 June 30,
2017.
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, dividends on 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 2017 second quarter was $0.66 per
share, or $92.5 million, compared to $0.57 per share, or $70.4
million, for the 2016 second quarter. The 2017 second quarter net
investment income reflected income on the acquired UGC portfolio,
partially offset by higher investment expenses. The annualized
pre-tax investment income yield was 2.04% for the 2017 second
quarter, compared to 2.08% for the 2016 second quarter.
Corporate expenses were $22.2 million for the 2017 second
quarter, compared to $17.2 million for the 2016 second quarter,
with the increase primarily due to higher incentive compensation
costs. UGC transaction costs and other were $2.7 million for the
2017 second quarter, compared to $15.6 million in the 2017 first
quarter. UGC transaction costs and other include advisory,
financing, legal, severance, incentive compensation and other
transaction costs related to the UGC acquisition. Amounts for the
2017 second quarter primarily reflected severance and severance
related costs.
Amortization of intangible assets for the 2017 second quarter
was $30.8 million, compared to $4.9 million for the 2016 second
quarter. The higher level of expense for the 2017 second quarter
reflects the amortization of intangible assets included in the UGC
acquisition, including intangible assets related to acquired
insurance contracts and distribution relationships.
Interest expense for the 2017 second quarter was $25.9 million,
compared to $12.4 million for the 2016 second quarter, with the
increase primarily reflecting the impact of the issuance of the
Company’s 2026 and 2046 senior notes in December 2016 and the
higher level of borrowings under the Company’s revolving credit
agreement. Preferred dividends for the 2017 second quarter were
$11.3 million, compared to $5.5 million for the 2016 second
quarter, with the increase reflecting the impact of the issuance of
series E preferred shares in September 2016. The proceeds from the
debt and preferred offerings were used to close the UGC acquisition
on December 31, 2016. For additional information on the Company’s
capital structure, please refer to the Financial Supplement dated
June 30, 2017.
On a pre-tax basis, net foreign exchange losses for the 2017
second quarter were $37.8 million, compared to net foreign exchange
gains for the 2016 second quarter of $22.5 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
15.6% for the 2017 second quarter, compared to 6.3% for the 2016
second quarter. The Company’s effective tax rate on pre-tax
operating income available to Arch shareholders was 14.4% for the
2017 second quarter, compared to 5.9% for the 2016 second quarter.
The Company’s effective tax rate fluctuates from year to year based
upon the relative mix of income or loss reported by jurisdiction
and the varying tax rates in each jurisdiction. The Company’s
quarterly tax provision is adjusted to reflect changes in its
estimated annual effective tax rate, if any.
Capitalization and Shareholders’ Equity
At June 30, 2017, total capital available to Arch of $11.13
billion consisted of $1.73 billion of senior notes, representing
15.6% of the total, $500.0 million of revolving credit agreement
borrowings, representing 4.5% of the total, $772.6 million of
preferred shares, representing 6.9% of the total, and common
shareholders’ equity of $8.13 billion, representing 73.0% of the
total. At December 31, 2016, total capital available to Arch of
$10.49 billion consisted of $1.73 billion of senior notes,
representing 16.5% of the total, $500.0 million of revolving credit
agreement borrowings, representing 4.8% of the total, $772.6
million of preferred shares, representing 7.4% of the total, and
common shareholders’ equity of $7.48 billion, representing 71.3% of
the total.
Conference Call
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on July 27, 2017. 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 27,
2017 at 2:00 p.m. Eastern Time until August 3, 2017 at midnight
Eastern Time. To access the replay, domestic callers should dial
855-859-2056, and international callers should dial 404-537-3406
(passcode 48620454 for all callers).
Please refer to the Company’s Financial Supplement dated June
30, 2017, 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 $11.13 billion in capital at June 30, 2017, 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 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 and UGC transaction costs and
other 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. During the 2016 fourth quarter, UGC transaction
costs and other included non-recurring expenses related to a change
in the Company’s approach on the deferral of certain internal
underwriting costs which are no longer being deferred. 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. 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 and UGC transaction costs and
other 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 2017 second quarter and 2016 second quarter and a
reconciliation of underwriting income or loss to income before
income taxes and net income available to Arch common
shareholders:
(U.S. Dollars in thousands)
Three Months
Ended June 30, 2017 Insurance
Reinsurance Mortgage Sub-total
Other Total Gross premiums written (1)
$ 743,902 $ 453,186 $ 336,226 $ 1,533,142 $ 152,813 $ 1,609,659
Premiums ceded (247,446 ) (115,262 ) (62,314 ) (424,850 ) (12,410 )
(360,964 ) Net premiums written 496,456 337,924 273,912 1,108,292
140,403 1,248,695 Change in unearned premiums 21,118 (23,222
) (16,068 ) (18,172 ) 10,351 (7,821 ) Net premiums earned
517,574 314,702 257,844 1,090,120 150,754 1,240,874 Other
underwriting income — (279 ) 4,277 3,998 824 4,822 Losses and loss
adjustment expenses (350,939 ) (207,606 ) (20,694 ) (579,239 )
(110,621 ) (689,860 ) Acquisition expenses (78,872 ) (51,151 )
(25,666 ) (155,689 ) (34,747 ) (190,436 ) Other operating expenses
(92,267 ) (36,711 ) (32,150 ) (161,128 ) (8,853 ) (169,981 )
Underwriting income (loss) $ (4,504 ) $ 18,955 $ 183,611
198,062 (2,643 ) 195,419 Net investment income 92,520
18,604 111,124 Net realized gains (losses) 18,046 3,689 21,735 Net
impairment losses recognized in earnings (1,730 ) — (1,730 ) Equity
in net income (loss) of investment funds accounted for using the
equity method 32,706 — 32,706 Other income (loss) (1,994 ) — (1,994
) Corporate expenses (22,201 ) — (22,201 ) UGC transaction costs
and other (2,675 ) — (2,675 ) Amortization of intangible assets
(30,824 ) — (30,824 ) Interest expense (25,912 ) (2,837 ) (28,749 )
Net foreign exchange gains (losses) (37,821 ) (1,722 ) (39,543 )
Income before income taxes 218,177 15,091 233,268 Income tax
expense (34,169 ) — (34,169 )
Net income 184,008
15,091 199,099 Dividends attributable to redeemable noncontrolling
interests — (4,586 ) (4,586 ) Amounts attributable to nonredeemable
noncontrolling interests — (9,346 ) (9,346 )
Net income
available to Arch 184,008 1,159 185,167 Preferred dividends
(11,349 ) — (11,349 )
Net income available to Arch common
shareholders $ 172,659 $ 1,159 $ 173,818
Underwriting Ratios Loss ratio 67.8 % 66.0 % 8.0 %
53.1 % 73.4 % 55.6 % Acquisition expense ratio 15.2 % 16.3 % 10.0 %
14.3 % 23.0 % 15.3 % Other operating expense ratio 17.8 % 11.7 %
12.5 % 14.8 % 5.9 % 13.7 % Combined ratio 100.8 % 94.0 % 30.5 %
82.2 % 102.3 % 84.6 % Net premiums written to gross premiums
written 66.7 % 74.6 % 81.5 % 72.3 % 91.9 % 77.6 % (1)
Certain amounts included in the gross premiums written of each
segment are related to intersegment transactions and are included
in the gross premiums written of each segment. Accordingly, the sum
of gross premiums written for each segment does not agree to the
total gross premiums written as shown in the table above due to the
elimination of intersegment transactions in the total.
(U.S. Dollars in thousands)
Three Months
Ended June 30, 2016 Insurance
Reinsurance Mortgage Sub-total
Other Total Gross premiums written (1)
$ 762,043 $ 412,053 $ 118,434 $ 1,292,199 $ 109,285 $ 1,329,936
Premiums ceded (246,875 ) (119,951 ) (6,969 ) (373,464 ) (4,457 )
(306,373 ) Net premiums written 515,168 292,102 111,465 918,735
104,828 1,023,563 Change in unearned premiums 12,482 (846 )
(44,953 ) (33,317 ) 15,739 (17,578 ) Net premiums earned
527,650 291,256 66,512 885,418 120,567 1,005,985 Other underwriting
income — 20,118 4,137 24,255 969 25,224 Losses and loss adjustment
expenses (354,633 ) (146,091 ) (366 ) (501,090 ) (83,502 ) (584,592
) Acquisition expenses (77,312 ) (55,756 ) (5,964 ) (139,032 )
(33,645 ) (172,677 ) Other operating expenses (91,440 ) (36,914 )
(22,847 ) (151,201 ) (6,113 ) (157,314 ) Underwriting income (loss)
$ 4,265 $ 72,613 $ 41,472 118,350 (1,724 )
116,626 Net investment income 70,397 17,941 88,338 Net
realized gains (losses) 40,927 27,291 68,218 Net impairment losses
recognized in earnings (5,343 ) — (5,343 ) Equity in net income
(loss) of investment funds accounted for using the equity method
8,737 — 8,737 Other income (loss) (7 ) — (7 ) Corporate expenses
(17,200 ) — (17,200 ) Amortization of intangible assets (4,880 ) —
(4,880 ) Interest expense (12,432 ) (3,231 ) (15,663 ) Net foreign
exchange gains (losses) 22,461 2,201 24,662
Income before income taxes 221,010 42,478 263,488 Income tax
expense (14,131 ) — (14,131 )
Net income 206,879
42,478 249,357 Dividends attributable to redeemable noncontrolling
interests — (4,586 ) (4,586 ) Amounts attributable to nonredeemable
noncontrolling interests — (33,716 ) (33,716 )
Net income
available to Arch 206,879 4,176 211,055 Preferred dividends
(5,485 ) — (5,485 )
Net income available to Arch common
shareholders $ 201,394 $ 4,176 $ 205,570
Underwriting Ratios Loss ratio 67.2 % 50.2 % 0.6 %
56.6 % 69.3 % 58.1 % Acquisition expense ratio 14.7 % 19.1 % 9.0 %
15.7 % 27.9 % 17.2 % Other operating expense ratio 17.3 % 12.7 %
34.4 % 17.1 % 5.1 % 15.6 % Combined ratio 99.2 % 82.0 % 44.0 % 89.4
% 102.3 % 90.9 % Net premiums written to gross premiums
written 67.6 % 70.9 % 94.1 % 71.1 % 95.9 % 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 June 30, 2017;
- 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 for natural or man-made
catastrophic events in the Company’s insurance or reinsurance
business could cause large losses and substantial volatility in its
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; 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: http://www.businesswire.com/news/home/20170726006323/en/
Arch Capital Group Ltd.Mark D. Lyons, 441-278-9250Fax:
441-278-9255Executive Vice President andChief Financial Officer
Arch Capital (NASDAQ:ACGL)
Historical Stock Chart
From Apr 2024 to May 2024
Arch Capital (NASDAQ:ACGL)
Historical Stock Chart
From May 2023 to May 2024