Arch Capital Group Ltd. (NASDAQ: ACGL) announces its 2021 first
quarter results. The results included:
- Net income available to Arch common shareholders of $427.8
million, or $1.05 per share, a 13.9% annualized return on average
common equity, compared to $133.7 million, or $0.32 per share, for
the 2020 first quarter;
- After-tax operating income available to Arch common
shareholders(1) of $239.8 million, or $0.59 per share, a 7.8%
annualized return on average common equity, compared to $189.8
million, or $0.46 per share, for the 2020 first quarter;
- Pre-tax current accident year catastrophic losses for the
Company’s insurance and reinsurance segments, net of reinsurance
and reinstatement premiums(1) of $188.3 million, including $0.6
million of COVID-19 related losses;
- Favorable development in prior year loss reserves, net of
related adjustments(1) of $41.7 million;
- Combined ratio excluding catastrophic activity and prior year
development(1) of 81.0%, compared to 84.2% for the 2020 first
quarter;
- The percentage of loans in default on U.S. primary mortgage
business was 3.86% at March 31, 2021, compared to 4.19% at December
31, 2020;
- Results for the 2021 first quarter reflect a one-time gain of
$74.5 million, or $0.18 per share, related to the purchase of a
29.5% stake in Coface. Such amount is reflected in income (loss)
from operating affiliates and included in after-tax operating
income available to Arch common shareholders;
- Total return on investments(1) of -0.18%;
- Book value per common share of $30.54 at March 31, 2021, a 0.8%
increase from December 31, 2020 and a 17.0% increase from March 31,
2020;
- 5.3 million shares repurchased at an aggregate cost of $179.3
million;
- Regulatory approvals are ongoing for the announced acquisition
of Watford Holdings Ltd. Shareholder approval has been obtained.
The Company expects the transaction to close in the second quarter
of 2021.
All earnings per share amounts discussed in this release are on
a diluted basis. The following table summarizes the Company’s
underwriting results, both (i) on a consolidated basis and (ii) on
a consolidated basis excluding the ‘other’ segment (i.e., results
of Watford):
(U.S. dollars in thousands)
Consolidated
Consolidated Excluding ‘Other’
Segment (1)
Three Months Ended March
31,
Three Months Ended March
31,
2021
2020
% Change
2021
2020
% Change
Gross premiums written
$
3,397,206
$
2,832,830
19.9
$
3,277,293
$
2,698,537
21.4
Net premiums written
2,508,457
2,137,246
17.4
2,329,146
1,950,546
19.4
Net premiums earned
1,948,422
1,744,444
11.7
1,800,691
1,604,405
12.2
Underwriting income
185,918
154,050
20.7
198,997
160,060
24.3
Underwriting Ratios
% Point Change
% Point Change
Loss ratio
61.7
%
63.9
%
(2.2
)
60.2
%
62.6
%
(2.4
)
Underwriting expense ratio
29.0
%
27.6
%
1.4
29.0
%
27.9
%
1.1
Combined ratio
90.7
%
91.5
%
(0.8
)
89.2
%
90.5
%
(1.3
)
Combined ratio excluding catastrophic
activity and prior year development (1)
81.0
%
84.2
%
(3.2
)
(1)
Presentation represents a “non-GAAP”
financial measure as defined in Regulation G. Such presentation
excludes the results of Watford Holdings Ltd. (“Watford”). Pursuant
to GAAP, the Company consolidates the results of Watford in its
financial statements, although it only owns approximately 10% of
Watford’s outstanding common equity as of March 31, 2021. See
‘Comments on Regulation G’ for further details.
The following table summarizes the Company’s consolidated
financial data, including a reconciliation of net income or loss
available to Arch common shareholders to after-tax operating income
or loss available to Arch common shareholders and related diluted
per share results:
(U.S. dollars in thousands, except share
data)
Three Months Ended
March 31,
2021
2020
Net income available to Arch common
shareholders
$
427,753
$
133,714
Net realized (gains) losses
(105,551
)
109,364
Equity in net (income) loss of investment
funds accounted for using the equity method
(71,686
)
4,209
Net foreign exchange (gains) losses
(21,332
)
(64,491
)
Transaction costs and other
1,274
2,595
Income tax expense (benefit) (1)
9,311
4,365
After-tax operating income available to
Arch common shareholders
$
239,769
$
189,756
Diluted per common
share results:
Net income available to Arch common
shareholders
$
1.05
$
0.32
Net realized (gains) losses
(0.25
)
0.27
Equity in net (income) loss of investment
funds accounted for using the equity method
(0.18
)
0.01
Net foreign exchange (gains) losses
(0.05
)
(0.16
)
Transaction costs and other
0.00
0.01
Income tax expense (benefit) (1)
0.02
0.01
After-tax operating income available to
Arch common shareholders
$
0.59
$
0.46
Weighted average common shares and common
share equivalents outstanding — diluted
409,223,253
414,033,570
Beginning common shareholders’ equity
$
12,325,886
$
10,717,371
Ending common shareholders’ equity
12,316,472
10,587,244
Average common shareholders’ equity
$
12,321,179
$
10,652,308
Annualized return on average common
equity
13.9
%
5.0
%
Annualized operating return on average
common equity
7.8
%
7.1
%
(1)
Income tax expense (benefit) on net
realized gains or losses, equity in net income (loss) of investment
funds accounted for using the equity method, net foreign exchange
gains or losses and 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 ownership of Watford’s outstanding common equity. See
‘Comments on Regulation G’ for a discussion of non-GAAP financial
measures.
Segment Information
The following section provides analysis on the Company’s 2021
first quarter performance by operating segment. For additional
details regarding the Company’s operating segments, please refer to
the Company’s Financial Supplement dated March 31, 2021. The
Company’s segment information includes the use of underwriting
income (loss) and a combined ratio excluding catastrophic activity
and prior year development. Such items are non-GAAP financial
measures (see ‘Comments on Regulation G’ for further details).
Insurance Segment
Three Months Ended March
31,
(U.S. dollars in thousands)
2021
2020
% Change
Gross premiums written
$
1,415,886
$
1,207,645
17.2
Net premiums written
994,839
828,748
20.0
Net premiums earned
819,474
715,919
14.5
Underwriting income (loss)
$
18,392
$
(28,175
)
165.3
Underwriting Ratios
% Point Change
Loss ratio
65.4
%
70.8
%
(5.4
)
Underwriting expense ratio
32.3
%
33.1
%
(0.8
)
Combined ratio
97.7
%
103.9
%
(6.2
)
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
5.1
%
6.9
%
(1.8
)
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(0.7
)
%
(0.1
)
%
(0.6
)
Combined ratio excluding catastrophic
activity and prior year development (1)
93.3
%
97.1
%
(3.8
)
(1)
See ‘Comments on Regulation G’ for further
discussion.
Gross premiums written by the insurance segment in the 2021
first quarter were 17.2% higher than in the 2020 first quarter
while net premiums written were 20.0% higher than in the 2020 first
quarter. The higher level of net premiums written reflected
increases across most lines of business, due in part to rate
increases, new business opportunities and growth in existing
accounts, partially offset by a decrease in travel business,
reflecting the ongoing impact of the COVID-19 global pandemic. Net
premiums earned in the 2021 first quarter were 14.5% higher than in
the 2020 first quarter, and reflect changes in net premiums written
over the previous five quarters.
The 2021 first quarter loss ratio reflected 5.1 points of
current year catastrophic activity, primarily from winter storms
Uri and Viola, compared to 6.9 points in the 2020 first quarter.
Estimated net favorable development of prior year loss reserves,
before related adjustments, reduced the loss ratio by 0.5 points in
the 2021 first quarter, compared to 0.2 points in the 2020 first
quarter. The 2021 first quarter loss ratio also reflected the
effect of rate increases, changes in mix of business and a lower
level of attritional losses compared to the 2020 first quarter.
The underwriting expense ratio was 32.3% in the 2021 first
quarter, compared to 33.1% in the 2020 first quarter, with the
decrease primarily due to growth in net premiums earned.
Reinsurance Segment
Three Months Ended March
31,
(U.S. dollars in thousands)
2021
2020
% Change
Gross premiums written
$
1,471,060
$
1,122,519
31.0
Net premiums written
999,112
797,180
25.3
Net premiums earned
644,900
543,460
18.7
Other underwriting income (loss)
(1,198
)
2,120
(156.5
)
Underwriting income (loss)
$
(19,707
)
$
(9,392
)
(109.8
)
Underwriting Ratios
% Point Change
Loss ratio
75.2
%
79.1
%
(3.9
)
Underwriting expense ratio
27.7
%
22.9
%
4.8
Combined ratio
102.9
%
102.0
%
0.9
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
22.7
%
12.7
%
10.0
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(3.8
)
%
(2.0
)
%
(1.8
)
Combined ratio excluding catastrophic
activity and prior year development (1)
84.0
%
91.3
%
(7.3
)
(1)
See ‘Comments on Regulation G’ for further
discussion.
For comparability, premiums written for the reinsurance segment
in the 2020 first quarter were affected by the presence of an $88
million loss portfolio transfer contract, written and fully earned
in the period in the other specialty line of business. Absent this
transaction, gross and net premiums written would have been higher
than in the 2020 first quarter by 42.2% and 40.8%, respectively.
The growth in net premiums written reflected increases in most
lines of business, mainly due to rate increases and new business.
Excluding the loss portfolio transfer contract, net premiums earned
by the reinsurance segment in the 2021 first quarter were 41.5%
higher than in the 2020 first quarter, and reflect changes in net
premiums written over the previous five quarters.
The 2021 first quarter loss ratio reflected 24.7 points of
current year catastrophic activity, including winter storms Uri and
Viola as well as other minor global events. The corresponding
impact on the 2020 first quarter results was 12.7 points. Estimated
net favorable development of prior year loss reserves, before
related adjustments, reduced the loss ratio by 4.2 points in the
2021 first quarter, compared to 2.1 points in the 2020 first
quarter. The 2021 first quarter loss ratio also reflected the
effect of rate increases, changes in the mix of business and a
lower level of attritional losses compared to the 2020 first
quarter. Absent the loss portfolio transfer contract noted above,
the 2020 first quarter loss ratio would have been 3.9 points lower
than reported.
The underwriting expense ratio was 27.7% in the 2021 first
quarter, compared to 22.9% in the 2020 first quarter. The 2020
first quarter ratio reflected a 4.4 point benefit related to the
loss portfolio transfer contract noted above and changes in mix of
business.
Mortgage Segment
Three Months Ended March
31,
(U.S. dollars in thousands)
2021
2020
% Change
Gross premiums written
$
391,246
$
368,945
6.0
Net premiums written
335,195
324,618
3.3
Net premiums earned
336,317
345,026
(2.5
)
Other underwriting income
6,897
4,599
50.0
Underwriting income
$
200,312
$
197,627
1.4
Underwriting Ratios
% Point Change
Loss ratio
18.9
%
19.6
%
(0.7
)
Underwriting expense ratio
23.5
%
24.5
%
(1.0
)
Combined ratio
42.4
%
44.1
%
(1.7
)
Prior year development:
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(3.4
)
%
(1.8
)
%
(1.6
)
Combined ratio excluding prior year
development (1)
45.8
%
45.9
%
(0.1
)
(1)
See ‘Comments on Regulation G’ for further
discussion.
Gross premiums written by the mortgage segment in the 2021 first
quarter were 6.0% higher than in the 2020 first quarter, while net
premiums written were 3.3% higher. The growth in net premiums
written primarily reflected growth in Australian single premium
mortgage insurance, partially offset by a lower level of U.S.
primary mortgage insurance in force on monthly premium policies.
Net premiums earned in the 2021 first quarter were 2.5% lower than
in the 2020 first quarter, reflecting the decrease in U.S. primary
mortgage insurance in force, partially offset by an increase in
earnings from Australian single premium policy terminations.
U.S. primary mortgage insurance business generated $27.0 billion
of new insurance written (“NIW”) in the 2021 first quarter,
compared to $16.8 billion in the 2020 first quarter, with the
growth primarily the result of the significant increase in mortgage
originations in the market. Monthly premium policies contributed
92.5% of NIW in the 2021 first quarter, compared to 93.5% in the
2020 first quarter.
The 2021 first quarter loss ratio reflected continued elevated
delinquency rates, primarily due to financial stress related to the
COVID-19 pandemic. The percentage of loans in default on U.S.
primary mortgage insurance business was 3.86% at March 31, 2021,
compared to 4.19% at December 31, 2020, which reflects continued
improvement in new delinquencies received. Estimated net favorable
development in prior year loss reserves, before related
adjustments, reduced the 2021 first quarter loss ratio by 3.2
points, compared to 1.8 points in the 2020 first quarter.
The underwriting expense ratio was 23.5% in the 2021 first
quarter, compared to 24.5% in the 2020 first quarter, with the
decrease reflecting lower acquisition expenses on U.S. primary
mortgage insurance and to a lesser extent international
business.
Corporate and Non-Underwriting
Corporate and non-underwriting results include net investment
income, other income (loss), corporate expenses, transaction costs
and other, amortization of intangible assets, interest expense,
items related to the Company’s non-cumulative preferred shares, net
realized gains or losses (which includes changes in the allowance
for credit losses on financial assets and 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, income or loss from operating affiliates and
income taxes. Such amounts exclude the results of the ‘other’
segment.
Pre-tax net investment income for the 2021 first quarter was
$0.19 per share, or $78.7 million, compared to $0.27 per share, or
$113.0 million, for the 2020 first quarter. The annualized pre-tax
investment income yield was 1.31% for the 2021 first quarter,
compared to 2.20% for the 2020 first quarter, with the decrease
primarily due to lower yields available in the financial markets.
Total return, a non-GAAP measure, was -0.18% for the 2021 first
quarter, compared to -0.86% for the 2020 first quarter. See
‘Comments on Regulation G’ for a discussion of non-GAAP financial
measures.
Interest expense for the 2021 first quarter was $34.2 million,
compared to $25.2 million for the 2020 first quarter. The higher
level of interest expense mainly resulted from the issuance of $1.0
billion of 3.635% senior notes in June 2020.
On a pre-tax basis, net foreign exchange gains for the 2021
first quarter were $21.5 million, compared to net foreign exchange
gains for the 2020 first quarter of $63.3 million. For both
periods, such amounts were primarily unrealized and resulted from
the effects of revaluing the Company’s net insurance liabilities
required to be settled in foreign currencies at each balance sheet
date. Changes in the value of available-for-sale investments held
in foreign currencies due to foreign currency rate movements are
reflected as a direct increase or decrease to shareholders’ equity
and are not included in the consolidated statements of income.
Although the Company generally attempts to match the currency of
its projected liabilities with investments in the same currencies,
the Company may elect to over or underweight one or more currencies
from time to time, which could increase the Company’s exposure to
foreign currency fluctuations and increase the volatility of the
Company’s shareholders’ equity.
The Company’s effective tax rate on income before income taxes
(based on the Company’s estimated annual effective tax rate) was
8.1% for the 2021 first quarter, compared to 16.2% for the 2020
first quarter. The Company’s effective tax rate on pre-tax
operating income available to Arch common shareholders was 10.6%
for the 2021 first quarter, consistent with 10.5% for the 2020
first quarter. The Company’s effective tax rate may fluctuate from
period to period based upon the relative mix of income or loss
reported by jurisdiction, the level of catastrophic loss activity
incurred, and the varying tax rates in each jurisdiction.
During the 2021 first quarter, the Company changed its
presentation of ‘income (loss) from operating affiliates’ on its
consolidated statements of income for all periods presented to
reclass such item from ‘other income (loss)’. The Company also
changed its presentation of ‘investment in operating affiliates’ on
its consolidated balance sheet for all periods presented to reclass
such item from ‘other assets’. Income from operating affiliates for
the 2021 first quarter was $75.5 million, or $0.18 per share,
compared to $8.5 million, or $0.02 per share, for the 2020 first
quarter. Results for the 2021 first quarter reflected a one-time
gain of $74.5 million realized from the Company’s recent
acquisition of 29.5% stake in Coface, a global trade credit
insurer. As a result of equity method accounting rules,
approximately $36 million of additional gain was deferred and will
be recognized generally over the next five years.
Conference Call
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on April 28, 2021. 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 April 28,
2021 at 2:00 p.m. Eastern Time until May 5, 2021 at midnight
Eastern Time. To access the replay, domestic callers should dial
855-859-2056, and international callers should dial 404-537-3406
(passcode 8299092 for all callers).
Please refer to the Company’s Financial Supplement dated March
31, 2021, 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 publicly listed Bermuda exempted
company with approximately $15.8 billion in capital at March 31,
2021, 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 (which includes changes in
the allowance for credit losses on financial assets and 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 transaction costs and other,
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 page 2 of this release.
The Company believes that net realized gains or losses, equity
in net income or loss of investment funds accounted for using the
equity method, net foreign exchange gains or losses and 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, 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 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,
changes in the allowance for credit losses and net impairment
losses recognized in earnings on the Company’s investments
represent other-than-temporary declines in expected recovery values
on securities without actual realization. The use of the equity
method on certain of the Company’s investments in certain funds
that invest in fixed maturity securities is driven by the ownership
structure of such funds (either limited partnerships or limited
liability companies). In applying the equity method, these
investments are initially recorded at cost and are subsequently
adjusted based on the Company’s proportionate share of the net
income or loss of the funds (which include changes in the fair
value of the underlying securities in the funds). This method of
accounting is different from the way the Company accounts for its
other fixed maturity securities and the timing of the recognition
of equity in net income or loss of investment funds accounted for
using the equity method may differ from gains or losses in the
future upon sale or maturity of such investments. Transaction costs
and other include advisory, financing, legal, severance, incentive
compensation and other costs related to acquisitions and Watford’s
non-recurring listing expenses. The Company believes that
transaction costs and other, due to their non-recurring nature, are
not indicative of the performance of, or trends in, the Company’s
business performance. Due to these reasons, the Company excludes
net realized gains or losses, equity in net income or loss of
investment funds accounted for using the equity method, net foreign
exchange gains or losses and 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.
Watford has its own management and board of directors that is
responsible for its own results and profitability. For the ‘other’
segment, performance is measured based on net income or loss. The
Company does not guarantee or provide credit support for Watford,
and the Company’s financial exposure to Watford is limited to its
investment in Watford’s senior notes, common and preferred shares
and counterparty credit risk (mitigated by collateral) arising from
reinsurance transactions.
Along with consolidated underwriting income, the Company
provides a subtotal of underwriting income or loss before the
contribution from the ‘other’ segment and believes that this
presentation enables investors and other users of the Company’s
financial information to analyze the Company’s underwriting
performance in a manner similar to how the Company’s management
analyzes performance.
In addition, the Company’s segment information includes the use
of a combined ratio excluding catastrophic activity and prior year
development, for the insurance and reinsurance segments, 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
ratios excluding current accident year catastrophic events and
favorable or adverse development in prior year loss reserves in its
analysis of the underwriting performance of each of its
underwriting segments.
Total return on investments includes investment income, equity
in net income or loss of investment funds accounted for using the
equity method, net realized gains and losses (excluding changes in
the allowance for credit losses on non-investment related financial
assets) and the change in unrealized gains and losses generated by
Arch’s investment portfolio. Total return is calculated on a
pre-tax basis and before investment expenses, excludes amounts
reflected in the ‘other’ segment, and reflects the effect of
financial market conditions along with foreign currency
fluctuations. Management uses total return on investments as a key
measure of the return generated to Arch common shareholders, and
compares the return generated by the Company’s investment portfolio
against benchmark returns during the periods presented.
The following tables summarize the Company’s results by segment
for the 2021 first quarter and 2020 first quarter and a
reconciliation of underwriting income or loss to income or loss
before income taxes and net income or loss available to Arch common
shareholders:
(U.S. Dollars in thousands)
Three Months Ended
March 31, 2021
Insurance
Reinsurance
Mortgage
Sub-total
Other
Total
Gross premiums written (1)
$
1,415,886
$
1,471,060
$
391,246
$
3,277,293
$
216,523
$
3,397,206
Premiums ceded
(421,047
)
(471,948
)
(56,051
)
(948,147
)
(37,212
)
(888,749
)
Net premiums written
994,839
999,112
335,195
2,329,146
179,311
2,508,457
Change in unearned premiums
(175,365
)
(354,212
)
1,122
(528,455
)
(31,580
)
(560,035
)
Net premiums earned
819,474
644,900
336,317
1,800,691
147,731
1,948,422
Other underwriting income (loss)
—
(1,198
)
6,897
5,699
411
6,110
Losses and loss adjustment expenses
(535,747
)
(484,870
)
(63,689
)
(1,084,306
)
(118,794
)
(1,203,100
)
Acquisition expenses
(128,222
)
(118,025
)
(30,082
)
(276,329
)
(28,152
)
(304,481
)
Other operating expenses
(137,113
)
(60,514
)
(49,131
)
(246,758
)
(14,275
)
(261,033
)
Underwriting income (loss)
$
18,392
$
(19,707
)
$
200,312
198,997
(13,079
)
185,918
Net investment income
78,729
20,127
98,856
Net realized gains (losses)
101,336
41,125
142,461
Equity in net income (loss) of investment
funds accounted for using the equity method
71,686
—
71,686
Other income (loss)
(1,741
)
—
(1,741
)
Corporate expenses
(23,468
)
—
(23,468
)
Transaction costs and other
(1,201
)
(715
)
(1,916
)
Amortization of intangible assets
(14,402
)
—
(14,402
)
Interest expense
(34,197
)
(4,149
)
(38,346
)
Net foreign exchange gains (losses)
21,505
(1,442
)
20,063
Income (loss) before income taxes and
income (loss) from operating affiliates
397,244
41,867
439,111
Income tax expense
(38,852
)
(8
)
(38,860
)
Income (loss) from operating
affiliates
75,457
—
75,457
Net income (loss)
433,849
41,859
475,708
Dividends attributable to redeemable
noncontrolling interests
117
(972
)
(855
)
Amounts attributable to nonredeemable
noncontrolling interests
—
(36,697
)
(36,697
)
Net income (loss) available to
Arch
433,966
4,190
438,156
Preferred dividends
(10,403
)
—
(10,403
)
Net income (loss) available to Arch
common shareholders
$
423,563
$
4,190
$
427,753
Underwriting Ratios
Loss ratio
65.4
%
75.2
%
18.9
%
60.2
%
80.4
%
61.7
%
Acquisition expense ratio
15.6
%
18.3
%
8.9
%
15.3
%
19.1
%
15.6
%
Other operating expense ratio
16.7
%
9.4
%
14.6
%
13.7
%
9.7
%
13.4
%
Combined ratio
97.7
%
102.9
%
42.4
%
89.2
%
109.2
%
90.7
%
Net premiums written to gross premiums
written
70.3
%
67.9
%
85.7
%
71.1
%
82.8
%
73.8
%
(1)
Certain amounts included in the gross
premiums written of each segment are related to intersegment
transactions and are included in the gross premiums written of each
segment. Accordingly, the sum of gross premiums written for each
segment does not agree to the total gross premiums written as shown
in the table above due to the elimination of intersegment
transactions in the total.
(U.S. Dollars in thousands)
Three Months Ended
March 31, 2020
Insurance
Reinsurance
Mortgage
Sub-total
Other
Total
Gross premiums written (1)
$
1,207,645
$
1,122,519
$
368,945
$
2,698,537
$
234,902
$
2,832,830
Premiums ceded
(378,897
)
(325,339
)
(44,327
)
(747,991
)
(48,202
)
(695,584
)
Net premiums written
828,748
797,180
324,618
1,950,546
186,700
2,137,246
Change in unearned premiums
(112,829
)
(253,720
)
20,408
(346,141
)
(46,661
)
(392,802
)
Net premiums earned
715,919
543,460
345,026
1,604,405
140,039
1,744,444
Other underwriting income (loss)
—
2,120
4,599
6,719
133
6,852
Losses and loss adjustment expenses
(507,108
)
(430,069
)
(67,566
)
(1,004,743
)
(110,676
)
(1,115,419
)
Acquisition expenses
(107,337
)
(79,606
)
(38,536
)
(225,479
)
(21,804
)
(247,283
)
Other operating expenses
(129,649
)
(45,297
)
(45,896
)
(220,842
)
(13,702
)
(234,544
)
Underwriting income (loss)
$
(28,175
)
$
(9,392
)
$
197,627
160,060
(6,010
)
154,050
Net investment income
113,028
32,125
145,153
Net realized gains (losses)
(72,109
)
(294,851
)
(366,960
)
Equity in net income (loss) of investment
funds accounted for using the equity method
(4,209
)
—
(4,209
)
Other income (loss)
32
—
32
Corporate expenses
(18,201
)
—
(18,201
)
Transaction costs and other
(2,595
)
—
(2,595
)
Amortization of intangible assets
(16,631
)
—
(16,631
)
Interest expense
(25,245
)
(7,310
)
(32,555
)
Net foreign exchange gains (losses)
63,307
9,364
72,671
Income (loss) before income taxes and
income (loss) from operating affiliates
197,437
(266,682
)
(69,245
)
Income tax expense
(27,945
)
—
(27,945
)
Income (loss) from operating
affiliates
8,516
—
8,516
Net income (loss)
178,008
(266,682
)
(88,674
)
Dividends attributable to redeemable
noncontrolling interests
(57
)
(1,096
)
(1,153
)
Amounts attributable to nonredeemable
noncontrolling interests
—
233,944
233,944
Net income (loss) available to
Arch
177,951
(33,834
)
144,117
Preferred dividends
(10,403
)
—
(10,403
)
Net income (loss) available to Arch
common shareholders
$
167,548
$
(33,834
)
$
133,714
Underwriting Ratios
Loss ratio
70.8
%
79.1
%
19.6
%
62.6
%
79.0
%
63.9
%
Acquisition expense ratio
15.0
%
14.6
%
11.2
%
14.1
%
15.6
%
14.2
%
Other operating expense ratio
18.1
%
8.3
%
13.3
%
13.8
%
9.8
%
13.4
%
Combined ratio
103.9
%
102.0
%
44.1
%
90.5
%
104.4
%
91.5
%
Net premiums written to gross premiums
written
68.6
%
71.0
%
88.0
%
72.3
%
79.5
%
75.4
%
(1)
Certain amounts included in the gross
premiums written of each segment are related to intersegment
transactions and are included in the gross premiums written of each
segment. Accordingly, the sum of gross premiums written for each
segment does not agree to the total gross premiums written as shown
in the table above due to the elimination of intersegment
transactions in the total.
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 Company’s ability to consummate acquisitions and integrate
any businesses it has acquired or may acquire into its existing
operations;
- the Company’s ability to maintain or improve its ratings, which
may be affected by its ability to raise additional equity or debt
financings, by ratings agencies’ existing or new policies and
practices, as well as other factors described herein;
- general economic and market conditions (including inflation,
interest rates, unemployment, housing prices, foreign currency
exchange rates, prevailing credit terms and the depth and duration
of a recession, including those resulting from COVID-19) and
conditions specific to the reinsurance and insurance markets 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;
- 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;
- the adequacy of the Company’s loss reserves;
- severity and/or frequency of losses;
- greater frequency or severity of unpredictable natural and
man-made catastrophic events;
- claims resulting from natural or man-made catastrophic events
or severe economic events in the Company’s insurance, reinsurance
and mortgage businesses could cause large losses and substantial
volatility in the Company’s results of operations;
- the effect of climate change on the Company’s business;
- the effect of contagious diseases (including COVID-19) on the
Company’s business;
- acts of terrorism, political unrest and other hostilities or
other unforecasted and unpredictable events;
- availability to the Company of reinsurance to manage its gross
and net exposures and the cost of such reinsurance;
- the failure of reinsurers, managing general agents, third party
administrators or others to meet their obligations to the
Company;
- the timing of loss payments being faster or the receipt of
reinsurance recoverables being slower than anticipated by the
Company;
- the Company’s investment performance, including legislative or
regulatory developments that may adversely affect the fair value of
the Company’s investments;
- changes in general economic conditions, including new or
continued sovereign debt concerns or downgrades of U.S. securities
by credit rating agencies, which could affect the Company’s
business, financial condition and results of operations;
- changes in the method for determining the London Inter-bank
Offered Rate (“LIBOR”) and the potential replacement of LIBOR;
- the volatility of the Company’s shareholders’ equity from
foreign currency fluctuations, which could increase due to us not
matching portions of the Company’s projected liabilities in foreign
currencies with investments in the same currencies;
- changes in accounting principles or policies or in the
Company’s application of such accounting principles or
policies;
- changes in the political environment of certain countries in
which the Company operates, underwrites business or invests;
- a disruption caused by cyber-attacks or other technology
breaches or failures on the Company or the Company’s business
partners and service providers, which could negatively impact the
Company’s business and/or expose the Company to litigation;
- statutory or regulatory developments, including as to tax
policy matters and insurance and other regulatory matters such as
the adoption of proposed legislation that would affect
Bermuda-headquartered companies and/or Bermuda-based insurers or
reinsurers and/or changes in regulations or tax laws applicable to
the Company, its subsidiaries, brokers or customers, including the
Tax Cuts and Jobs Act of 2017; and
- the other matters set forth under Item 1A “Risk Factors”, Item
7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and other sections of the Company’s Annual
Report on Form 10-K, as well as the other factors set forth in the
Company’s other documents on file with the SEC, and management’s
response to any of the aforementioned factors.
All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary
statements. The foregoing review of important factors should not be
construed as exhaustive and should be read in conjunction with
other cautionary statements that are included herein or elsewhere.
The Company undertakes no obligation to publicly update or revise
any forward-looking statement, whether as a result of new
information, future events or otherwise.
Source - Arch Capital Group Ltd. arch-corporate
View source
version on businesswire.com: https://www.businesswire.com/news/home/20210427006154/en/
Arch Capital Group Ltd. François Morin: (441) 278-9250
Investor Relations Donald Watson: (914) 872-3616;
dwatson@archgroup.com
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