Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income
available to Arch common shareholders for the 2015 second quarter
was $110.3 million, or $0.88 per share, compared to $202.5 million,
or $1.48 per share, for the 2014 second quarter. The Company also
reported after-tax operating income available to Arch common
shareholders of $146.0 million, or $1.16 per share, for the 2015
second quarter, compared to $160.7 million, or $1.17 per share, for
the 2014 second quarter. The Company’s after-tax operating income
available to Arch common shareholders represented an annualized
return on average common equity of 9.9% for the 2015 second
quarter, compared to 11.2% for the 2014 second quarter. For the
trailing twelve months ended June 30, 2015, after-tax operating
income available to Arch common shareholders produced a 10.0%
return on average common equity while net income available to Arch
common shareholders produced a 14.0% return on average common
equity. The Company’s book value per common share was $47.49 at
June 30, 2015, a 0.6% decrease from $47.80 per share at March 31,
2015 and an 8.6% increase from $43.73 per share at June 30,
2014.
After-tax operating income or loss available to Arch common
shareholders, a non-GAAP measure, 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 and net foreign exchange gains or losses, net of
income taxes. See ‘Comments on Regulation G’ for a further
discussion of after-tax operating income or loss available to Arch
common shareholders. All earnings per share amounts discussed in
this release are on a diluted basis.
The following table summarizes the Company’s underwriting
results, excluding amounts related to the ‘other’ segment (i.e.,
results of Watford Re). Although the Company owns approximately 11%
of Watford Re’s common equity, pursuant to generally accepted
accounting principles, it consolidates the results of Watford Re in
its financial statements. All discussions of line items in this
release exclude amounts related to the ‘other’ segment. For segment
results reflecting the contribution of the ‘other’ segment, see
pages 11 to 14 of the Company’s Financial Supplement dated June 30,
2015.
(U.S. dollars in thousands)
Three Months Ended June 30, Six Months
Ended June 30, 2015 2014
% Change 2015 2014
% Change Gross premiums written $ 1,155,253 $
1,256,934 (8.1 ) $ 2,466,931 $ 2,552,070 (3.3 ) Net premiums
written 823,392 920,126 (10.5 ) 1,765,809 1,952,922 (9.6 ) Net
premiums earned 836,249 894,172 (6.5 ) 1,674,247 1,751,786 (4.4 )
Underwriting income 108,343 125,133 (13.4 ) 223,046 258,711 (13.8 )
Underwriting Ratios % Point Change % Point
Change Loss ratio 52.8 % 53.4 % (0.6 ) 52.9 % 52.1 % 0.8
Acquisition expense ratio 17.4 % 17.2 % 0.2 17.2 % 17.9 % (0.7 )
Other operating expense ratio 17.7 % 15.6 % 2.1 17.6 % 15.5
% 2.1 Combined ratio 87.9 % 86.2 % 1.7 87.7 % 85.5 %
2.2
The following table summarizes, on an after-tax basis, the
Company’s consolidated financial data, including a reconciliation
of after-tax operating income available to Arch common shareholders
to net 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, 2015
2014 2015 2014 After-tax
operating income available to Arch common shareholders $ 145,956 $
160,669 $ 295,802 $ 325,073 Net realized gains (losses), net of tax
(28,074 ) 50,267 33,860 68,540 Net impairment losses recognized in
earnings, net of tax (1,113 ) (14,749 ) (6,912 ) (17,720 ) Equity
in net income of investment funds accounted for using the equity
method, net of tax 16,113 9,054 21,645 12,218 Net foreign exchange
gains (losses), net of tax (22,577 ) (2,710 ) 43,762 (8,564
) Net income available to Arch common shareholders $ 110,305
$ 202,531 $ 388,157 $ 379,547
Diluted per common
share results:
After-tax operating income available to Arch common shareholders $
1.16 $ 1.17 $ 2.33 $ 2.38 Net realized gains (losses), net of tax
(0.22 ) 0.37 0.27 0.50 Net impairment losses recognized in
earnings, net of tax (0.01 ) (0.11 ) (0.06 ) (0.13 ) Equity in net
income of investment funds accounted for using the equity method,
net of tax 0.13 0.07 0.17 0.09 Net foreign exchange gains (losses),
net of tax (0.18 ) (0.02 ) 0.34 (0.06 ) Net income available
to Arch common shareholders $ 0.88 $ 1.48 $ 3.05
$ 2.78 Weighted average common shares and
common share equivalents outstanding - diluted 125,885,420
136,889,944 127,156,713 136,716,889
The Company’s investment portfolio continues to be comprised
primarily of high quality fixed income securities with an average
credit quality of “AA/Aa2.” The average effective duration of the
Company’s investment portfolio was 3.05 years at June 30, 2015,
compared to 3.34 years at December 31, 2014. Including the
effects of foreign exchange, total return on the Company’s
investment portfolio was (0.04)% for the 2015 second quarter,
compared to 1.80% for the 2014 second quarter. Total return in the
2015 second quarter reflected the impact of the U.S. Dollar
weakening against the British Pound Sterling, Euro and other major
currencies on non-U.S. Dollar denominated investments and benefited
from strong returns on alternatives and non-investment grade fixed
income securities. Excluding the effects of foreign exchange, total
return was (0.38)% for the 2015 second quarter, compared to 1.63%
for the 2014 second quarter.
Net investment income for the 2015 second quarter was $0.53 per
share, or $67.2 million, compared to $0.53 per share, or $72.5
million, for the 2014 second quarter, and $0.55 per share, or $70.3
million, for the 2015 first quarter. The lower level of net
investment income per share compared to the 2015 first quarter was
primarily related to a lower level of income on certain fund
investments. The annualized pre-tax investment income yield was
2.05% for the 2015 second quarter, compared to 2.05% for the 2014
second quarter and 2.09% for the 2015 first quarter. Such yields
reflect the effects of low prevailing interest rates available in
the market and the Company’s investment strategy, which puts an
emphasis on total return. Cash flow provided by operating
activities was $231.8 million for the 2015 second quarter, compared
to $254.2 million for the 2014 second quarter, primarily reflecting
a lower level of net premiums collected than in the 2014 second
quarter.
On a pre-tax basis, net foreign exchange losses for the 2015
second quarter were $22.6 million, compared to net foreign exchange
losses for the 2014 second quarter of $2.8 million. For both
periods, such amounts were primarily unrealized and resulted from
the effects of revaluing the Company’s net insurance liabilities
required to be settled in foreign currencies at each balance sheet
date. Changes in the value of available-for-sale investments held
in foreign currencies due to foreign currency rate movements are
reflected as a direct increase or decrease to shareholders’ equity
and are not included in the consolidated statements of income. The
Company has not matched a portion of its projected liabilities in
foreign currencies with investments in the same currencies and may
not match such amounts in future periods, which could increase the
Company’s exposure to foreign currency fluctuations and increase
the volatility of the Company’s shareholders’ equity.
Interest expense of $4.0 million for the 2015 second quarter
included $12.4 million related to the Company’s senior notes and
other borrowings, partially offset by an $8.4 million reduction in
interest expense on a deposit accounting liability (i.e., a
contract that, in accordance with GAAP, does not pass risk
transfer). The reduction in the 2015 second quarter resulted from a
reassessment of this estimated ultimate liability due to a
determination that paid losses are expected to be lower than
previously anticipated.
The Company’s effective tax rate on income before income taxes
(based on the Company’s estimated annual effective tax rate) was
5.5% for the 2015 second quarter, compared to 3.4% for the 2014
second quarter. The Company’s effective tax rate on pre-tax
operating income available to Arch shareholders was 3.9% for the
2015 second quarter, compared to 3.6% for the 2014 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.
During the 2015 second quarter, the Company repurchased 3.2
million common shares for an aggregate purchase price of $199.0
million under its share repurchase program. Since the inception of
the share repurchase program through June 30, 2015, ACGL has
repurchased 124.0 million common shares for an aggregate purchase
price of $3.60 billion. At June 30, 2015, $525.3 million of
repurchases were available under the share repurchase program.
At June 30, 2015, total capital available to Arch of $7.03
billion consisted of $791.2 million of senior notes, representing
11.3% of the total, $100.0 million of revolving credit agreement
borrowings, representing 1.4% of the total, $325.0 million of
preferred shares, representing 4.6% of the total, and common
shareholders’ equity of $5.81 billion, representing 82.7% of the
total. At March 31, 2015, total capital available to Arch of $7.18
billion consisted of $791.2 million of senior notes, representing
11.0% of the total, $100.0 million of revolving credit agreement
borrowings, representing 1.4% of the total, $325.0 million of
preferred shares, representing 4.5% of the total, and common
shareholders’ equity of $5.96 billion, representing 83.1% of the
total.
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on July 30, 2015. 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 30,
2015 at 3:00 p.m. Eastern Time until August 6, 2015 at midnight
Eastern Time. To access the replay, domestic callers should dial
888-286-8010 (passcode 92454111), and international callers should
dial 617-801-6888 (passcode 92454111).
Please refer to the Company’s Financial Supplement dated June
30, 2015, 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 $7.03 billion in capital at June 30, 2015, provides
insurance and reinsurance on a worldwide basis through its wholly
owned subsidiaries.
Supplemental Information
Book Value Per
Common Share
(U.S. dollars in thousands, except share data)
June 30,
2015
December 31,
2014
Calculation of book value per common share: Total
shareholders’ equity available to Arch $ 6,137,515 $ 6,130,053 Less
preferred shareholders’ equity 325,000 325,000 Common
shareholders’ equity available to Arch 5,812,515 5,805,053 Common
shares outstanding, net of treasury shares (1) 122,403,909
127,367,934 Book value per common share $ 47.49 $ 45.58
(1) Excludes the effects of 7,913,680 and 7,804,033
stock options and 438,155 and 447,073 restricted stock units
outstanding at June 30, 2015 and December 31, 2014, respectively.
Investment
Information
(U.S. dollars in thousands, except share data)
Three Months Ended Six
Months Ended June 30, June 30, 2015
2014 2015
2014 Components of net investment income (1): Fixed
maturities $ 61,191 $ 64,499 $ 123,559 $ 126,948 Term loan
investments (2) 4,566 5,233 8,841 10,902 Equity securities
(dividends) 2,742 3,271 5,421 6,192 Short-term investments 183 103
378 508 Other (3) 10,472 9,067 23,209 13,785
Gross investment income 79,154 82,173 161,408 158,335
Investment expenses (11,983 ) (9,715 ) (23,949 ) (18,884 ) Net
investment income $ 67,171 $ 72,458 $ 137,459
$ 139,451 Per share $ 0.53 $ 0.53 $ 1.08 $ 1.02
Investment income yield, at amortized cost (1) (4): Pre-tax
2.05 % 2.05 % 2.07 % 2.07 % After-tax 1.90 % 1.91 % 1.92 % 1.93 %
Total return (1) (5): Including effects of foreign exchange
(0.04 )% 1.80 % 1.07 % 2.84 % Excluding effects of foreign exchange
(0.38 )% 1.63 % 1.68 % 2.67 % Cash flow from operations (1)
$ 231,762 $ 254,168 $ 247,361 $ 451,563 (1) Excludes
amounts related to the ‘other’ segment. (2) Included in
“investments accounted for using the fair value option” on the
Company’s balance sheet. (3) Includes income on other investments,
funds held balances, cash balances and other. (4) Presented on an
annualized basis and excluding the impact of investments for which
returns are not included within investment income, such as
investments accounted for using the equity method and certain
equities. (5) Includes net investment income, equity in net income
or loss of investment funds accounted for using the equity method,
net realized gains and losses and the change in unrealized gains or
losses generated by the Company’s investment portfolio. Total
return is calculated on a pre-tax basis and before investment
expenses.
Investment
Information (continued)
(U.S. dollars in thousands)
June 30, 2015 December 31, 2014
Amount % of Total Amount
% of Total Investable assets (1) (2):
Fixed maturities available for sale, at fair value $ 9,927,603 68.4
$ 10,750,770 73.6 Fixed maturities, at fair value (3) 387,941 2.7
377,053 2.6 Fixed maturities pledged under securities lending
agreements, at fair value 373,969 2.6 50,802
0.3 Total fixed maturities 10,689,513 73.7 11,178,625 76.6
Short-term investments available for sale, at fair value 875,727
6.0 797,226 5.5 Cash 470,011 3.2 474,247 3.2 Equity securities
available for sale, at fair value 701,623 4.8 658,182 4.5 Equity
securities, at fair value (3) 248 — — — Other investments available
for sale, at fair value 377,677 2.6 296,224 2.0 Other investments,
at fair value (3) 899,763 6.2 878,774 6.0 Investments accounted for
using the equity method (4) 472,926 3.3 349,014 2.4 Securities
transactions entered into but not settled at the balance sheet date
26,066 0.2 (32,802 ) (0.2 ) Total investable assets
managed by the Company $ 14,513,554 100.0 $
14,599,490 100.0
Investment portfolio
statistics (1): Average effective duration (in years) 3.05 3.34
Average credit quality (Standard & Poor’s/Moody’s Investors
Service) AA/Aa2 AA/Aa2 Embedded book yield (before investment
expenses) 2.07 % 2.18 % (1) Excludes amounts
related to the ‘other’ segment. (2) This table excludes the
collateral received and reinvested and includes the fixed
maturities and short-term investments pledged under securities
lending agreements, at fair value. (3) Represents investments which
are carried at fair value under the fair value option and reflected
as “investments accounted for using the fair value option” on the
Company’s balance sheet. Changes in the carrying value of such
investments are recorded in net realized gains or losses. (4)
Changes in the carrying value of investment funds accounted for
using the equity method are recorded as “equity in net income
(loss) of investment funds accounted for using the equity method”
rather than as an unrealized gain or loss component of accumulated
other comprehensive income.
Selected
Information on Losses and Loss Adjustment Expenses
(1)
(U.S. dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30, 2015
2014 2015 2014 Components of
losses and loss adjustment expenses incurred Paid losses and
loss adjustment expenses $ 465,053 $ 435,370 $ 897,687 $ 861,284
Change in unpaid losses and loss adjustment expenses (23,305 )
41,954 (11,702 ) 50,924 Total losses and loss
adjustment expenses $ 441,748 $ 477,324 $ 885,985
$ 912,208
Estimated net (favorable) adverse
development in prior
year loss reserves, net of related
adjustments
Net impact on underwriting results: Insurance $ (17,167 ) $ (16,137
) $ (22,122 ) $ (26,554 ) Reinsurance (58,802 ) (67,700 ) (116,081
) (137,802 ) Mortgage (1,108 ) 58 (3,920 ) (1,112 ) Total $
(77,077 ) $ (83,779 ) $ (142,123 ) $ (165,468 ) Impact on losses
and loss adjustment expenses: Insurance $ (18,595 ) $ (19,388 ) $
(27,349 ) $ (34,960 ) Reinsurance (57,798 ) (69,115 ) (115,809 )
(139,514 ) Mortgage (1,125 ) 88 (3,740 ) (1,046 ) Total $
(77,518 ) $ (88,415 ) $ (146,898 ) (175,520 ) Impact on acquisition
expenses: Insurance $ 1,428 $ 3,251 $ 5,227 $ 8,406 Reinsurance
(1,004 ) 1,415 (272 ) 1,712 Mortgage 17 (30 ) (180 ) (66 )
Total $ 441 $ 4,636 $ 4,775 $ 10,052
Impact on combined ratio: Insurance (3.4 )% (3.2 )% (2.2 )% (2.7 )%
Reinsurance (21.5 )% (20.2 )% (21.0 )% (20.4 )% Mortgage (2.1 )%
0.1 % (3.8 )% (1.2 )% Total (9.2 )% (9.4 )% (8.5 )% (9.4 )% Impact
on loss ratio: Insurance (3.6 )% (3.8 )% (2.7 )% (3.5 )%
Reinsurance (21.1 )% (20.6 )% (20.9 )% (20.6 )% Mortgage (2.1 )%
0.2 % (3.6 )% (1.2 )% Total (9.3 )% (9.9 )% (8.8 )% (10.0 )% Impact
on acquisition expense ratio: Insurance 0.2 % 0.6 % 0.5 % 0.8 %
Reinsurance (0.4 )% 0.4 % (0.1 )% 0.2 % Mortgage — % (0.1 )% (0.2
)% — % Total 0.1 % 0.5 % 0.3 % 0.6 %
Estimated net losses incurred from
current accident year
catastrophic events (2)
Insurance $ 6,019 $ 3,739 $ 9,200 $ 6,353 Reinsurance 9,842
12,748 11,272 15,682 Total $ 15,861 $
16,487 $ 20,472 $ 22,035 Impact on combined
ratio: Insurance 1.2 % 0.7 % 0.9 % 0.6 % Reinsurance 3.6 % 3.8 %
2.0 % 2.3 % Total 1.9 % 1.8 % 1.2 % 1.3 % (1)
Excludes amounts related to the ‘other’ segment. (2) Equals
estimated losses from catastrophic events occurring in the current
accident year, net of reinsurance and reinstatement premiums.
Amounts shown for the insurance segment are for named catastrophic
events only. Amounts shown for the reinsurance segment include (i)
named events with over $5 million of losses incurred by its Bermuda
and Europe operations and (ii) all catastrophe losses incurred by
its U.S. operations. Amounts not applicable for the mortgage
segment.
Segment Information
The following section provides analysis on the Company’s 2015
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, 2015. 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. See ‘Comments on Regulation G’ for further details.
Insurance
Segment
Three Months Ended June 30,
(U.S. dollars in thousands)
2015 2014
% Change Gross premiums written $
744,810 $ 852,231 (12.6 ) Net premiums written 509,067 578,882
(12.1 ) Net premiums earned 509,825 507,712 0.4 Underwriting income
23,643 34,422 (31.3 )
Underwriting Ratios % Point
Change Loss ratio 62.9 % 61.4 % 1.5 Acquisition expense ratio
15.0 % 15.1 % (0.1 ) Other operating expense ratio 17.5 % 16.9 %
0.6 Combined ratio 95.4 % 93.4 % 2.0
Catastrophic activity and prior year development: Current accident
year catastrophic events, net of reinsurance and reinstatement
premiums 1.2 % 0.7 % 0.5 Net (favorable) adverse development in
prior year loss reserves, net of related adjustments (3.4 )% (3.2
)% (0.2 ) Combined ratio excluding catastrophic activity and prior
year development 97.6 % 95.9 % 1.7
Gross premiums written by the insurance segment in the 2015
second quarter were 12.6% lower than in the 2014 second quarter
while net premiums written were 12.1% lower than in the 2014 second
quarter. Changes in foreign currency rates resulted in a decrease
in net premiums written in the 2015 second quarter of approximately
$8 million, or 1.4%, compared to the 2014 second quarter. The lower
level of net premiums written reflected reductions in property,
energy and marine business, programs, professional lines and
alternative markets business. The decrease in property, energy and
marine business reflected rate decreases and strategic reductions
in certain lines, while the reduction in program business reflected
underwriting decisions to terminate two programs. The decline in
professional lines was primarily related to the timing of premiums
on renewal accounts while the decrease in alternative markets
primarily reflected changes in renewal dates on business acquired
as part of the renewal rights agreement entered into in the 2014
second quarter. Net premiums earned by the insurance segment in the
2015 second quarter were 0.4% higher than in the 2014 second
quarter, and reflect changes in net premiums written over the
previous five quarters.
The 2015 second quarter loss ratio reflected 1.2 points of
current year catastrophic activity, compared to 0.7 points in the
2014 second quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 3.6 points in the 2015 second quarter, compared to 3.8
points in the 2014 second quarter. The estimated net favorable
development in the 2015 second quarter primarily resulted from
better than expected claims emergence in short-tail business from
more recent accident years. The balance of the increase in the 2015
second quarter loss ratio primarily resulted from a higher level of
non-catastrophic large loss activity.
The underwriting expense ratio was 32.5% in the 2015 second
quarter, compared to 32.0% in the 2014 second quarter. The
acquisition expense ratio was 15.0% in the 2015 second quarter,
compared to 15.1% in the 2014 second quarter. The operating expense
ratio was 17.5% in the 2015 second quarter, compared to 16.9% in
the 2014 second quarter, and consistent with the 2015 first quarter
ratio.
Reinsurance
Segment
Three Months Ended June 30,
(U.S. dollars in thousands)
2015 2014
% Change Gross premiums written $
342,101 $ 349,841 (2.2 ) Net premiums written 252,655 290,847 (13.1
) Net premiums earned 273,965 335,627 (18.4 ) Other underwriting
income 2,658 303 777.2 Underwriting income 68,073 81,904 (16.9 )
Underwriting Ratios % Point Change Loss ratio
40.6 % 44.8 % (4.2 ) Acquisition expense ratio 21.3 % 19.7 % 1.6
Other operating expense ratio 14.2 % 11.2 % 3.0 Combined
ratio 76.1 % 75.7 % 0.4 Catastrophic activity and
prior year development: Current accident year catastrophic events,
net of reinsurance and reinstatement premiums 3.6 % 3.8 % (0.2 )
Net (favorable) adverse development in prior year loss reserves,
net of related adjustments (21.5 )% (20.2 )% (1.3 ) Combined ratio
excluding catastrophic activity and prior year development 94.0 %
92.1 % 1.9
Gross premiums written by the reinsurance segment in the 2015
second quarter were 2.2% lower than in the 2014 second quarter,
while net premiums written were 13.1% lower than in the 2014 second
quarter. The difference in gross versus net premiums written
primarily reflects an increase in cessions to Watford Re in the
2015 second quarter compared to the 2014 second quarter, primarily
in casualty lines. Changes in foreign currency rates resulted in a
decrease in net premiums written in the 2015 second quarter of
approximately $14 million, or 4.8%, compared to the 2014 second
quarter. The lower level of net premiums written reflected
decreases in other specialty and property catastrophe business. The
decrease in other specialty reflected non-renewals and share
decreases in response to current market conditions, primarily in
proportional motor contracts. The lower level of property
catastrophe business reflected non-renewals and share decreases,
also in response to current market conditions. Net premiums earned
in the 2015 second quarter were 18.4% lower than in the 2014 second
quarter, and primarily reflect changes in net premiums written over
the previous five quarters, including the mix and type of business
written.
The 2015 second quarter loss ratio reflected 3.7 points of
current year catastrophic activity, compared to 4.1 points of
catastrophic activity in the 2014 second quarter. Estimated net
favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 21.1 points in the 2015
second quarter, compared to 20.6 points in the 2014 second quarter.
The estimated net favorable development in the 2015 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 balance
of the decrease in the 2015 second quarter loss ratio primarily
resulted from a lower level of non-catastrophic large loss
activity, partially offset by the effects of a lower level of
property catastrophe business than in the 2014 second quarter.
The underwriting expense ratio was 35.5% in the 2015 second
quarter, compared to 30.9% in the 2014 second quarter. The
acquisition expense ratio for the 2015 second quarter was 21.3%,
compared to 19.7% for the 2014 second quarter. The comparison of
the acquisition expense ratios in each period is influenced by,
among other things, the mix and type of business written and
earned, including a lower contribution from property catastrophe
business than in the 2014 second quarter, and an increase in the
level of ceding commissions. The operating expense ratio for the
2015 second quarter was 14.2%, compared to 11.2% in the 2014 second
quarter, primarily reflecting the lower level of net premiums
earned.
Mortgage
Segment
Three Months Ended June 30,
(U.S. dollars in thousands)
2015 2014
% Change Gross premiums written $
68,572 $ 55,476 23.6 Net premiums written 61,670 50,397 22.4 Net
premiums earned 52,459 50,833 3.2 Other underwriting income 3,686
1,216 203.1 Underwriting income 16,627 8,807 88.8
Underwriting Ratios % Point Change Loss ratio 18.4 %
30.4 % (12.0 ) Acquisition expense ratio 19.4 % 22.6 % (3.2 ) Other
operating expense ratio 37.5 % 32.0 % 5.5 Combined ratio
75.3 % 85.0 % (9.7 ) Net (favorable) adverse development in
prior year loss reserves, net of related adjustments (2.1 )% 0.1 %
(2.2 ) Combined ratio excluding prior year development 77.4 % 84.9
% (7.5 )
The mortgage segment includes the results of Arch Mortgage
Insurance Company (“Arch MI U.S.”), a leading provider of mortgage
insurance products and services to the U.S. marketplace, along with
the Company’s other global mortgage insurance, reinsurance and
risk-sharing products.
Gross premiums written by the mortgage segment in the 2015
second quarter were 23.6% higher than in the 2014 second quarter,
while net premiums written were 22.4% higher than in the 2014
second quarter. Net premiums written in the 2015 second quarter
included $30.6 million of business underwritten by Arch MI U.S.,
compared to $24.6 million in the 2014 second quarter. The 2015
second quarter amount reflected $23.8 million from credit union
clients and $6.8 million from banks and other mortgage originators
while substantially all of the 2014 second quarter amount related
to credit union clients. Premiums written on reinsurance treaties
covering U.S. and international mortgages were higher by $5.3
million compared to the 2014 second quarter.
Net premiums earned for the 2015 second quarter were 3.2% higher
than in the 2014 second quarter, reflecting the contribution of
Arch MI U.S. business and higher earnings from the mortgage
segment’s quota share reinsurance business. Other underwriting
income, which is primarily related to risk-sharing products issued
to GSEs and mortgage lenders, was $3.7 million for the 2015 second
quarter, compared to $1.2 million for the 2014 second quarter, and
in line with the $7.7 million in the 2015 first quarter when taking
into consideration approximately $3.5 million of non-recurring
income in the period.
The loss ratio for the 2015 second quarter continues to reflect
relatively low levels of reported delinquencies and reflects new
business generated by the mortgage segment. As noted previously,
the mortgage segment’s underwriting expense ratio is expected to
stay at an elevated level until Arch MI U.S. reaches scale. At June
30, 2015, the mortgage segment’s risk-in-force consisted of $6.05
billion from Arch MI U.S. and an additional $4.61 billion through
the mortgage segment’s reinsurance and risk-sharing operations.
Arch MI U.S. generated $2.71 billion of new insurance written
(“NIW”) during the 2015 second quarter, of which approximately 50%
was from bank channel clients. For additional information on the
mortgage segment, please refer to the Company’s Financial
Supplement.
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 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, 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;
- the integration of businesses the
Company has acquired or may acquire into its existing
operations;
- 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, 2015;
- 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;
- the impact of the continued weakness of
the U.S., European countries and other key economies, projected
budget deficits for the U.S., European countries and other
governments and the consequences associated with possible
additional downgrades of securities of the U.S., European countries
and other governments by credit rating agencies, and the resulting
effect on the value of securities in the Company’s investment
portfolio as well as the uncertainty in the market generally;
- 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.
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. 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 and
net foreign exchange gains or losses, net of income taxes. The
presentation of after-tax operating income or loss available to
Arch common shareholders is a “non-GAAP financial measure” as
defined in Regulation G. The reconciliation of such measure to net
income available to Arch common shareholders (the most directly
comparable GAAP financial measure) in accordance with Regulation G
is included on page 2 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 and
net foreign exchange gains or losses 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. 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 and
net foreign exchange gains or losses 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.
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 core underwriting
performance of each of its underwriting segments.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20150729006692/en/
Arch Capital Group Ltd.Mark D. Lyons,
441-278-9250Executive Vice President and Chief Financial
Officer
Arch Capital (NASDAQ:ACGL)
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