For the 2017 fourth quarter, the Company reports:
- Net income available to Arch common
shareholders of $203.5 million, or $1.46 per share, a 9.9%
annualized return on average common equity, and after-tax operating
income to Arch common shareholders, a non-GAAP measure, of $187.4
million, or $1.34 per share, a 9.1% return on average common
equity;
- Book value per common share of $60.91
at December 31, 2017, a 2.2% increase in the 2017 fourth quarter
and a 10.4% increase for the year;
- Pre-tax catastrophic losses, net of
reinsurance and reinstatement premiums1, of $0.8 million,
reflecting $68.4 million from the California wildfires, $1.5
million from other events and $69.1 million of reductions on the
2017 third quarter hurricane events;
- Favorable development in prior year
loss reserves, net of related adjustments1, of $50.9 million;
- Combined ratio excluding catastrophic
activity and prior year development1 of 87.0%;
- Charge of $21.5 million related to the
revaluation of the Company’s net deferred tax asset1 as a result of
a lower U.S. corporate income tax rate beginning in 2018. Effective
tax rate on pre-tax operating income of 15.4%, excluding the
charge.
Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income
available to Arch common shareholders for the 2017 fourth quarter
was $203.5 million, or $1.46 per share, compared to $62.4 million,
or $0.50 per share, for the 2016 fourth quarter. For the year ended
December 31, 2017, the Company reported net income available to
Arch common shareholders of $566.5 million, or $4.07 per share,
compared to $664.7 million, or $5.33 per share, for the 2016
period. The Company’s net income available to Arch common
shareholders produced an annualized return on average common equity
of 9.9% for the 2017 fourth quarter, compared to 3.9% for the 2016
fourth quarter, and 7.2% for the year ended December 31, 2017,
compared to 10.9% for the year ended December 31, 2016. All
earnings per share amounts discussed in this release are on a
diluted basis.
The Company’s book value per common share was $60.91 at December
31, 2017, a 2.2% increase from $59.61 per share reported at
September 30, 2017 and a 10.4% increase from $55.19 per share at
December 31, 2016.
The Company also reported after-tax operating income to Arch
common shareholders, a non-GAAP measure, of $187.4 million, or
$1.34 per share, for the 2017 fourth quarter, compared to after-tax
operating income to Arch common shareholders of $141.5 million, or
$1.13 per share, for the 2016 fourth quarter. For the year ended
December 31, 2017, the Company reported after-tax operating income
available to Arch common shareholders of $447.2 million, or $3.21
per share, compared to $577.4 million, or $4.63 per share, for the
2016 period. The Company’s after-tax operating income available to
Arch common shareholders produced an annualized return on average
common equity of 9.1% for the 2017 fourth quarter, compared to 8.7%
for the 2016 fourth quarter, and 5.7% for the year ended December
31, 2017, compared to 9.4% for the year ended December 31, 2016.
See ‘Comments on Regulation G’ for further details.
1
Excluding the ‘other’ segment (i.e.,
results of Watford Re). See ‘Comments on Regulation G’ for further
discussion.
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). See
‘Comments on Regulation G’ for a reconciliation of underwriting
income (loss) to income (loss) before income taxes and net income
(loss) available to Arch common shareholders.
(U.S. dollars in thousands)
Consolidated
Consolidated Excluding ‘Other’ Segment (1) Three Months
Ended December 31, Three Months Ended December 31,
2017 2016 % Change 2017
2016 % Change Gross premiums
written $ 1,452,530 $ 1,155,467 25.7 $ 1,391,247 $ 1,121,338 24.1
Net premiums written 1,111,015 872,315 27.4 995,714 764,925 30.2
Net premiums earned 1,224,755 968,855 26.4 1,094,409 847,405 29.1
Underwriting income 182,111 114,096 59.6 206,012 117,362 75.5
% Point
% Point
Underwriting Ratios
Change
Change
Loss ratio 55.4 % 57.2 % (1.8 ) 51.4 % 55.4 % (4.0 ) Underwriting
expense ratio 30.9 % 33.0 % (2.1 ) 31.1 % 32.9 % (1.8 ) Combined
ratio 86.3 % 90.2 % (3.9 ) 82.5 % 88.3 % (5.8 ) Combined
ratio excluding catastrophic activity and prior year development
(2) 87.0 % 90.7 % (3.7 ) (1) Pursuant to generally accepted
accounting principles, the Company concluded that Watford Re is
considered a variable interest entity and that the Company 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. (2) See ‘Comments
on Regulation G’ for further discussion.
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 Year Ended December 31,
December 31, 2017 2016 2017
2016 Net income available to Arch common shareholders
$ 203,535 $ 62,396 $ 566,502 $ 664,668 Net realized (gains) losses
(36,906 ) 98,477 (148,836 ) (77,081 ) Net impairment losses
recognized in earnings 1,723 13,593 7,138 30,442 Equity in net
(income) loss of investment funds accounted for using the equity
method (30,402 ) (16,421 ) (142,286 ) (48,475 ) Net foreign
exchange (gains) losses 27,994 (35,547 ) 113,613 (31,987 ) UGC
transaction costs and other 901 34,587 22,150 41,729 Loss on
redemption of preferred shares — — 6,735 — Income tax expense
(benefit) (1) 20,559 (15,557 ) 22,139 (1,852 )
After-tax operating income available to Arch common shareholders $
187,404 $ 141,528 $ 447,155 $ 577,444
Diluted per common
share results:
Net income available to Arch common shareholders $ 1.46 $ 0.50 $
4.07 $ 5.33 Net realized (gains) losses (0.27 ) 0.78 (1.07 ) (0.62
) Net impairment losses recognized in earnings 0.01 0.11 0.05 0.24
Equity in net (income) loss of investment funds accounted for using
the equity method (0.22 ) (0.13 ) (1.02 ) (0.38 ) Net foreign
exchange (gains) losses 0.20 (0.28 ) 0.81 (0.26 ) UGC transaction
costs and other 0.01 0.27 0.16 0.33 Loss on redemption of preferred
shares 0.00 — 0.05 — Income tax expense (benefit) (1) 0.15
(0.12 ) 0.16 (0.01 ) After-tax operating income available to
Arch common shareholders $ 1.34 $ 1.13 $ 3.21
$ 4.63 Weighted average common shares and common
share equivalents outstanding-diluted 139,578,630 125,427,259
139,261,675 124,717,493 Beginning common shareholders’
equity $ 8,138,589 $ 6,538,983 $ 7,481,163 $ 5,841,542 Ending
common shareholders’ equity 8,324,047 7,481,163
8,324,047 7,481,163 Average common shareholders’
equity $ 8,231,318 $ 6,471,392 $ 7,902,605 $
6,113,718 Annualized return on average common equity
9.9 % 3.9 % 7.2 % 10.9 % Annualized operating return on average
common equity 9.1 % 8.7 % 5.7 % 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, 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. For
the 2017 fourth quarter and year ended December 31, 2017, such
amounts include the $21.5 million expense as a result of revaluing
the Company’s net deferred tax asset due to the reduction in the
U.S. corporate income tax rate from 35% to 21% effective January 1,
2018.
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
fourth quarter performance by operating segment. For additional
details regarding the Company’s operating segments, please refer to
the Company’s Financial Supplement dated December 31, 2017. 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 December 31, (U.S. dollars
in thousands)
2017 2016 % Change
Gross premiums written $ 767,456 $ 707,519 8.5 Net premiums
written 512,867 465,861 10.1 Net premiums earned 554,633 514,087
7.9 Underwriting income $ 9,047 $ 3,468 160.9
Underwriting Ratios % Point Change Loss ratio 66.7 %
67.7 % (1.0 ) Underwriting expense ratio 31.6 % 31.6 % —
Combined ratio 98.3 % 99.3 % (1.0 ) Catastrophic activity
and prior year development: Current accident year catastrophic
events, net of reinsurance and reinstatement premiums (1.3 )% 4.6 %
(5.9 ) Net (favorable) adverse development in prior year loss
reserves, net of related adjustments (0.1 )% (1.5 )% 1.4
Combined ratio excluding catastrophic activity and prior year
development (1) 99.7 % 96.2 % 3.5 (1) See ‘Comments
on Regulation G’ for further discussion.
Gross premiums written by the insurance segment in the 2017
fourth quarter were 8.5% higher than in the 2016 fourth quarter
while net premiums written were 10.1% higher than in the 2016
fourth quarter. The higher level of net premiums written reflected
increases in national accounts, which included $10 million of
adjustment premiums from a single large account, and in programs,
due to the continued effects of two newer programs. In addition,
net premiums written increased in travel, due to new business, and
in professional lines, reflecting increases in small and medium
sized accounts. Net premiums earned by the insurance segment in the
2017 fourth quarter were 7.9% higher than in the 2016 fourth
quarter, and reflect changes in net premiums written over the
previous five quarters.
The 2017 fourth quarter loss ratio reflected a benefit of 1.3
points for current year catastrophic activity, which reflected a
reduction of 1.8 points from reserve releases on Hurricanes Harvey,
Irma and Maria, while the California wildfires contributed 0.5
points of expense. The 2016 fourth quarter loss ratio included 4.6
points of catastrophic activity. Estimated net favorable
development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 0.3 points in the 2017
fourth quarter, compared to 1.6 points in the 2016 fourth quarter.
The balance of the change in the 2017 fourth quarter loss ratio
resulted, in part, from a higher level of large attritional losses
in the 2017 fourth quarter and changes in the mix of business.
The underwriting expense ratio was 31.6% in the 2017 fourth
quarter, consistent with the 2016 fourth quarter.
Reinsurance Segment
Three Months Ended December 31, (U.S. dollars
in thousands)
2017 2016 % Change
Gross premiums written $ 289,348 $ 276,593 4.6 Net premiums
written 210,166 206,120 2.0 Net premiums earned 259,495 251,841 3.0
Other underwriting income 10,193 13,744 (25.8 ) Underwriting
income $ 24,617 $ 67,829 (63.7 )
% Point
Underwriting Ratios
Change
Loss ratio 54.8 % 44.5 % 10.3 Underwriting expense ratio 39.7 %
34.0 % 5.7 Combined ratio 94.5 % 78.5 % 16.0
Catastrophic activity and prior year development: Current accident
year catastrophic events, net of reinsurance and reinstatement
premiums 3.0 % 4.1 % (1.1 ) Net (favorable) adverse development in
prior year loss reserves, net of related adjustments (11.7 )% (16.7
)% 5.0 Combined ratio excluding catastrophic activity and
prior year development (1) 103.2 % 91.1 % 12.1 (1)
See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the reinsurance segment in the 2017
fourth quarter were 4.6% higher than in the 2016 fourth quarter,
while net premiums written were 2.0% higher than in the 2016 fourth
quarter. The increase in net premiums written in the 2017 fourth
quarter reflected growth in other specialty business, primarily in
international motor quota share contracts. Such amounts were
partially offset by reductions in property excluding property
catastrophe business, primarily related to a targeted reduction in
onshore energy writings. Net premiums earned by the reinsurance
segment in the 2017 fourth quarter were 3.0% higher than in the
2016 fourth quarter, and reflect changes in net premiums written
over the previous five quarters.
The 2017 fourth quarter loss ratio included 2.3 points of
current year catastrophic activity, including 25.3 points related
to the California wildfires, with a reduction of 22.8 points on
Hurricanes Harvey, Irma and Maria, due to lower initial loss
emergence. The 2016 fourth quarter loss ratio included 4.5 points
of catastrophic activity. Estimated net favorable development in
prior year loss reserves, before related adjustments, reduced the
loss ratio by 12.4 points in the 2017 fourth quarter, compared to
16.7 points in the 2016 fourth quarter. The estimated net favorable
development in the 2017 fourth 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 2017
fourth quarter loss ratio resulted, in part, from a higher level of
onshore energy losses and changes in the mix of business while the
2016 fourth quarter benefited from a higher level of retrocessional
recoveries.
The underwriting expense ratio was 39.7% in the 2017 fourth
quarter, compared to 34.0% in the 2016 fourth quarter. As
previously disclosed, the Company entered into intercompany loss
portfolio transfers effective on December 31, 2017 that transferred
$1.36 billion of net retained reserves for losses and allocated
loss adjustment expenses between its subsidiaries. The acquisition
expense ratio for the 2017 fourth quarter included 5.3 points of
federal excise taxes in connection with such activity. The
comparison of the underwriting expense ratios also reflected
changes in the mix and type of business.
Mortgage Segment
Three Months Ended December 31, (U.S. dollars
in thousands)
2017 2016 % Change
Gross premiums written $ 335,338 $ 138,285 142.5 Net
premiums written 272,681 92,944 193.4 Net premiums earned 280,281
81,477 244.0 Other underwriting income 3,738 4,354 (14.1 )
Underwriting income $ 172,348 $ 46,065 274.1
% Point
Underwriting Ratios
Change
Loss ratio 17.8 % 10.9 % 6.9 Underwriting expense ratio 22.1 % 37.9
% (15.8 ) Combined ratio 39.9 % 48.8 % (8.9 ) Prior year
development: Net (favorable) adverse development in prior year loss
reserves, net of related adjustments (7.2 )% (6.0 )% (1.2 )
Combined ratio excluding prior year development (1) 47.1 % 54.8 %
(7.7 ) (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”) from American International Group,
Inc. (“AIG”). As such, the 2017 fourth quarter results in the table
above reflects the combination of Arch and UGC while the 2016
fourth quarter does not.
Gross premiums written by the mortgage segment in the 2017
fourth quarter were significantly higher than in the 2016 fourth
quarter, primarily reflecting growth in insurance in force due to
the acquisition of UGC. Premiums ceded for the 2017 fourth quarter
were primarily related to the 50% quota share reinsurance agreement
to AIG, covering 2014 to 2016 policy years of UGC business on a
run-off basis, while the 2016 fourth quarter reflected the
retrocession of $40.1 million of Australian mortgage reinsurance
business. The increase in net premiums earned for the 2017 fourth
quarter reflected the acquisition of UGC as well as growth in
insurance in force over the last twelve months.
Arch MI U.S. generated $14.4 billion of new insurance written
(“NIW”) during the 2017 fourth quarter, compared to $17.7 billion
during the 2017 third quarter, with the sequential decline
primarily due to typical seasonality in purchase market activity.
Monthly premium policies contributed 88.7% of 2017 fourth quarter
NIW, compared to 87.0% in the 2017 third quarter.
The loss ratio for the 2017 fourth quarter reflected estimated
net favorable development in prior year loss reserves, before
related adjustments, of 7.2 points, compared to 7.8 points in the
2017 third quarter. The estimated net favorable development in the
2017 periods was primarily driven by lower than expected claim
rates and subrogation activity. The loss ratio for the 2017 fourth
quarter included approximately $10.4 million, or 3.7 points,
primarily stemming from a higher level of delinquencies emanating
from new notices from areas impacted by the 2017 third quarter
hurricanes and a catch-up of 2017 reported losses from one
lender. The ending percentage of loans in default on first lien
business increased to 2.23% at December 31, 2017, from 1.98% at
September 30, 2017, primarily due to the hurricane-related activity
noted above.
The mortgage segment’s underwriting expense ratio was 22.1% in
the 2017 fourth quarter, compared to 20.6% in the 2017 third
quarter. The higher underwriting expense ratio in the 2017 fourth
quarter primarily reflected an increase in amortization of deferred
acquisition costs as a result of the UGC acquisition.
At December 31, 2017, the mortgage segment’s risk-in-force
(before reinsurance) of $70.3 billion consisted of $64.9 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
December 31, 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, 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 2017 fourth quarter was $0.71 per
share, or $99.6 million, compared to $0.56 per share, or $70.1
million, for the 2016 fourth quarter. The 2017 fourth quarter net
investment income reflected income on the acquired UGC portfolio
and a higher level of income on fund investments. The annualized
pre-tax investment income yield was 2.08% for the 2017 fourth
quarter, compared to 1.92% for the 2016 fourth quarter.
Corporate expenses were $13.1 million for the 2017 fourth
quarter, compared to $11.5 million for the 2016 fourth quarter,
with the increase primarily due to higher compensation costs. UGC
transaction costs and other were $0.9 million for the 2017 fourth
quarter, compared to $3.0 million in the 2017 third quarter, with
amounts for both quarters primarily related to severance and
severance related costs. Amortization of intangible assets for the
2017 fourth quarter was $31.8 million, compared to $4.9 million for
the 2016 fourth quarter, with the increase primarily related to the
UGC acquisition.
Interest expense for the 2017 fourth quarter was $25.7 million,
compared to $15.5 million for the 2016 fourth 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. During the 2017 fourth quarter, the Company repaid $25.0
million of revolving borrowings.
Preferred dividends for the 2017 fourth quarter were $11.1
million, compared to $11.6 million for the 2016 fourth quarter. In
December 2017, the Company issued $100 million of 5.45% Series F
preferred shares and received net proceeds of $97.6 million. On
January 2, 2018, the Company redeemed the remaining $92.6 million
of 6.75% Series C preferred shares. As such, both issuances are
outstanding at December 31, 2017 and, in accordance with GAAP, the
Company will record a loss of $2.7 million to remove original
issuance costs related to the redeemed shares from additional
paid-in capital in the 2018 first quarter. Such adjustment will
have no impact on total shareholders’ equity or cash flows.
For additional information on the Company’s capital structure,
please refer to the Financial Supplement dated December 31,
2017.
On a pre-tax basis, net foreign exchange losses for the 2017
fourth quarter were $27.9 million, compared to net foreign exchange
gains for the 2016 fourth quarter of $35.2 million. For both
periods, such amounts were primarily unrealized and resulted from
the effects of revaluing the Company’s net insurance liabilities
required to be settled in foreign currencies at each balance sheet
date. Changes in the value of available-for-sale investments held
in foreign currencies due to foreign currency rate movements are
reflected as a direct increase or decrease to shareholders’ equity
and are not included in the consolidated statements of income.
Although the Company generally attempts to match the currency of
its projected liabilities with investments in the same currencies,
the Company may elect to over or underweight one or more currencies
from time to time, which could increase the Company’s exposure to
foreign currency fluctuations and increase the volatility of the
Company’s shareholders’ equity.
The Company’s effective tax rate on income before income taxes
(based on the Company’s annual effective tax rate) was an expense
of 20.9% for the 2017 fourth quarter and an expense of 17.1% for
the year ended December 31, 2017, compared to a benefit of 19.9%
for the 2016 fourth quarter and an expense of 4.3% for the 2016
period. The 2017 amounts reflected an expense of $21.5 million due
to the revaluation of the Company’s net deferred tax asset
resulting from the change in the U.S. corporate income tax rate
from 35% to 21% effective January 1, 2018. The Company’s effective
tax rate on pre-tax operating income available to Arch shareholders
was 15.4% for the 2017 fourth quarter and 17.6% for the year ended
December 31, 2017, compared to 2.1% for the 2016 fourth quarter and
5.2% for the 2016 period. The Company’s effective tax rate
fluctuates from year to year 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 February 13, 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 February
13, 2018 at 2:00 p.m. Eastern Time until February 20, 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 4685749 for all callers).
Please refer to the Company’s Financial Supplement dated
December 31, 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 $11.30 billion in capital at December 31, 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 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. 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. The loss on
redemption of preferred shares related to the redemption of the
Company's Series C preferred shares in September 2017 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. In
addition, for the 2017 fourth quarter and year ended December 31,
2017, income tax expense included $21.5 million charge due to the
revaluation of the Company’s net deferred tax asset resulting from
the reduction in the U.S. corporate income tax rate from 35% to 21%
effective January 1, 2018. Due to the non-recurring nature of this
item, the Company excluded it from after-tax operating income
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 fourth quarter and 2016 fourth 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
December 31, 2017 Insurance Reinsurance
Mortgage Sub-total Other
Total Gross premiums written (1) $ 767,456 $ 289,348
$ 335,338 $ 1,391,247 $ 127,173 $ 1,452,530 Premiums ceded (254,589
) (79,182 ) (62,657 ) (395,533 ) (11,872 ) (341,515 ) Net premiums
written 512,867 210,166 272,681 995,714 115,301 1,111,015 Change in
unearned premiums 41,766 49,329 7,600 98,695
15,045 113,740 Net premiums earned 554,633
259,495 280,281 1,094,409 130,346 1,224,755 Other underwriting
income — 10,193 3,738 13,931 803 14,734 Losses and loss adjustment
expenses (370,069 ) (142,254 ) (49,762 ) (562,085 ) (116,790 )
(678,875 ) Acquisition expenses (87,261 ) (66,612 ) (24,363 )
(178,236 ) (30,643 ) (208,879 ) Other operating expenses (88,256 )
(36,205 ) (37,546 ) (162,007 ) (7,617 ) (169,624 ) Underwriting
income (loss) $ 9,047 $ 24,617 $ 172,348
206,012 (23,901 ) 182,111 Net investment income 99,613
25,802 125,415 Net realized gains (losses) 38,136 (11,158 ) 26,978
Net impairment losses recognized in earnings (1,723 ) — (1,723 )
Equity in net income (loss) of investment funds accounted for using
the equity method 30,402 — 30,402 Other income (loss) 547 — 547
Corporate expenses (13,085 ) — (13,085 ) UGC transaction costs and
other (901 ) — (901 ) Amortization of intangible assets (31,836 ) —
(31,836 ) Interest expense (25,660 ) (4,836 ) (30,496 ) Net foreign
exchange gains (losses) (27,894 ) (913 ) (28,807 )
Income (loss)
before income taxes 273,611 (15,006 ) 258,605 Income tax
expense (56,813 ) — (56,813 )
Net income (loss)
216,798 (15,006 ) 201,792 Dividends attributable to redeemable
noncontrolling interests — (4,588 ) (4,588 ) Amounts attributable
to nonredeemable noncontrolling interests — 17,436
17,436
Net income (loss) available to Arch 216,798
(2,158 ) 214,640 Preferred dividends (11,105 ) — (11,105 )
Net income (loss) available to Arch common shareholders $
205,693 $ (2,158 ) $ 203,535
Underwriting
Ratios Loss ratio 66.7 % 54.8 % 17.8 % 51.4 % 89.6 % 55.4 %
Acquisition expense ratio 15.7 % 25.7 % 8.7 % 16.3 % 23.5 % 17.1 %
Other operating expense ratio 15.9 % 14.0 % 13.4 % 14.8 % 5.8 %
13.8 % Combined ratio 98.3 % 94.5 % 39.9 % 82.5 % 118.9 % 86.3 %
Net premiums written to gross premiums written 66.8 % 72.6 %
81.3 % 71.6 % 90.7 % 76.5 % (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 December 31,
2016 Insurance Reinsurance
Mortgage Sub-total Other
Total Gross premiums written (1) $ 707,519 $ 276,593 $
138,285 $ 1,121,338 $ 113,467 $ 1,155,467 Premiums ceded (241,658 )
(70,473 ) (45,341 ) (356,413 ) (6,077 ) (283,152 ) Net premiums
written 465,861 206,120 92,944 764,925 107,390 872,315 Change in
unearned premiums 48,226 45,721 (11,467 ) 82,480
14,060 96,540 Net premiums earned 514,087
251,841 81,477 847,405 121,450 968,855 Other underwriting income —
13,744 4,354 18,098 824 18,922 Losses and loss adjustment expenses
(348,226 ) (112,149 ) (8,841 ) (469,216 ) (84,659 ) (553,875 )
Acquisition expenses (75,244 ) (51,552 ) (4,843 ) (131,639 )
(34,204 ) (165,843 ) Other operating expenses (87,149 ) (34,055 )
(26,082 ) (147,286 ) (6,677 ) (153,963 ) Underwriting income (loss)
$ 3,468 $ 67,829 $ 46,065 117,362 (3,266 )
114,096 Net investment income 70,105 20,946 91,051 Net
realized gains (losses) (99,149 ) 6,088 (93,061 ) Net impairment
losses recognized in earnings (13,593 ) — (13,593 ) Equity in net
income (loss) of investment funds accounted for using the equity
method 16,421 — 16,421 Other income (loss) (368 ) — (368 )
Corporate expenses (11,470 ) — (11,470 ) UGC transaction costs and
other (34,587 ) — (34,587 ) Amortization of intangible assets
(4,850 ) — (4,850 ) Interest expense (15,481 ) (3,058 ) (18,539 )
Net foreign exchange gains (losses) 35,221 2,955
38,176
Income before income taxes 59,611 23,665
83,276 Income tax (expense) benefit 12,298 — 12,298
Net income 71,909 23,665 95,574 Dividends
attributable to redeemable noncontrolling interests — (4,588 )
(4,588 ) Amounts attributable to nonredeemable noncontrolling
interests — (16,973 ) (16,973 )
Net income available to
Arch 71,909 2,104 74,013 Preferred dividends (11,617 ) —
(11,617 )
Net income available to Arch common shareholders $
60,292 $ 2,104 $ 62,396
Underwriting
Ratios Loss ratio 67.7 % 44.5 % 10.9 % 55.4 % 69.7 % 57.2 %
Acquisition expense ratio 14.6 % 20.5 % 5.9 % 15.5 % 28.2 % 17.1 %
Other operating expense ratio 17.0 % 13.5 % 32.0 % 17.4 % 5.5 %
15.9 % Combined ratio 99.3 % 78.5 % 48.8 % 88.3 % 103.4 % 90.2 %
Net premiums written to gross premiums written 65.8 % 74.5 %
67.2 % 68.2 % 94.6 % 75.5 % (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 December 31, 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 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: http://www.businesswire.com/news/home/20180212006276/en/
Arch Capital Group Ltd.Mark D. Lyons,
441-278-9250orInvestor RelationsDonald Watson,
914-872-3616dwatson@archcapservices.com
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