Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income
available to Arch common shareholders for the 2015 third quarter
was $74.5 million, or $0.60 per share, compared to $223.2 million,
or $1.64 per share, for the 2014 third quarter. The Company also
reported after-tax operating income available to Arch common
shareholders of $125.8 million, or $1.01 per share, for the 2015
third quarter, compared to $142.1 million, or $1.05 per share, for
the 2014 third quarter. The Company’s after-tax operating income
available to Arch common shareholders represented an annualized
return on average common equity of 8.6% for the 2015 third quarter,
compared to 9.7% for the 2014 third quarter. For the trailing
twelve months ended September 30, 2015, after-tax operating income
available to Arch common shareholders produced a 9.9% return on
average common equity while net income available to Arch common
shareholders produced an 11.6% return on average common equity. The
Company’s book value per common share was $47.68 at September 30,
2015, a 0.4% increase from $47.49 per share at June 30, 2015 and an
8.3% increase from $44.04 per share at September 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 10 to 13 of the Company’s Financial Supplement dated
September 30, 2015.
(U.S. dollars in thousands)
Three
Months Ended September 30, Nine Months Ended September
30, 2015 2014 % Change
2015 2014 % Change Gross
premiums written $ 1,158,451 $ 1,138,392 1.8 $ 3,625,382 $
3,690,462 (1.8 ) Net premiums written 846,965 859,724 (1.5 )
2,612,774 2,812,646 (7.1 ) Net premiums earned 837,523 868,881 (3.6
) 2,511,770 2,620,667 (4.2 ) Underwriting income 93,470 101,167
(7.6 ) 316,516 359,878 (12.0 )
Underwriting Ratios
% Point Change
% Point Change
Loss ratio 55.5 % 55.0 % 0.5 53.8 % 53.1 % 0.7 Acquisition expense
ratio 17.1 % 17.7 % (0.6 ) 17.1 % 17.8 % (0.7 ) Other operating
expense ratio 17.1 % 15.8 % 1.3 17.4 % 15.6 % 1.8
Combined ratio 89.7 % 88.5 % 1.2 88.3 % 86.5 % 1.8
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 Nine Months Ended
September 30, September 30, 2015
2014 2015 2014 After-tax operating
income available to Arch common shareholders $ 125,798 $ 142,055 $
421,600 $ 467,128 Net realized gains (losses), net of tax (58,048 )
27,476 (24,188 ) 96,016 Net impairment losses recognized in
earnings, net of tax (5,868 ) (8,593 ) (12,780 ) (26,313 ) Equity
in net income (loss) of investment funds accounted for using the
equity method, net of tax (2,373 ) 4,765 19,272 16,983 Net foreign
exchange gains (losses), net of tax 15,040 57,488
58,802 48,924 Net income available to Arch common
shareholders $ 74,549 $ 223,191 $ 462,706 $
602,738
Diluted per common
share results:
After-tax operating income available to Arch common shareholders $
1.01 $ 1.05 $ 3.34 $ 3.43 Net realized gains (losses), net of tax
(0.46 ) 0.20 (0.19 ) 0.70 Net impairment losses recognized in
earnings, net of tax (0.05 ) (0.06 ) (0.10 ) (0.19 ) Equity in net
income (loss) of investment funds accounted for using the equity
method, net of tax (0.02 ) 0.03 0.15 0.12 Net foreign exchange
gains (losses), net of tax 0.12 0.42 0.46 0.36
Net income available to Arch common shareholders $ 0.60
$ 1.64 $ 3.66 $ 4.42 Weighted
average common shares and common share equivalents outstanding -
diluted 125,011,773 135,876,605 126,354,759 136,354,172
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 3.42 years at September 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 (0.31)% for the 2015 third quarter,
compared to (0.51)% for the 2014 third quarter. Total return in the
2015 third quarter reflected the impact of the strengthening U.S.
Dollar against the British Pound Sterling, Canadian Dollar and
other major currencies on non-U.S. Dollar denominated investments.
Excluding the effects of foreign exchange, total return was 0.04%
for the 2015 third quarter, as investment-grade fixed income
returns were substantially offset by negative returns on equities,
high yield and alternative strategies.
Net investment income for the 2015 third quarter was $0.54 per
share, or $67.3 million, compared to $0.53 per share, or $72.2
million, for the 2014 third quarter, and $0.53 per share, or $67.2
million, for the 2015 second quarter. The annualized pre-tax
investment income yield was 2.04% for the 2015 third quarter,
compared to 2.05% for the 2014 third quarter and 2.05% for the 2015
second 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 $359.2 million for the 2015
third quarter, compared to $319.3 million for the 2014 third
quarter, primarily reflecting a higher level of premiums
collected.
On a pre-tax basis, net foreign exchange gains for the 2015
third quarter were $16.1 million, compared to net foreign exchange
gains for the 2014 third quarter of $57.6 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 for the 2015 third quarter was $12.0 million,
compared to $4.2 million for the 2014 third quarter. The lower
level of interest expense for the 2014 third quarter primarily
reflected an $8.2 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 2014
third quarter resulted from a reassessment of this estimated
ultimate liability due to a determination that paid losses were
expected to be lower than previously anticipated. The Company
reduced the same liability by $8.4 million in the 2015 second
quarter.
The Company’s effective tax rate on income before income taxes
(based on the Company’s estimated annual effective tax rate) was
13.2% for the 2015 third quarter and 5.5% for the nine months ended
September 30, 2015, compared to 2.8% for the 2014 third quarter and
2.8% for the nine months ended September 30, 2014. The Company’s
effective tax rate on pre-tax operating income available to Arch
shareholders was 5.7% for the 2015 third quarter and 4.5% for the
nine months ended September 30, 2015, compared to 2.5% for the 2014
third quarter and 2.6% for the nine months ended September 30,
2014. 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. The adjustment to
the estimated annual effective tax rate in the 2015 third quarter
reduced the Company’s after-tax results by $1.8 million, or $.01
per share.
During the 2015 third quarter, the Company repurchased a small
amount of shares under its share repurchase program. Since the
inception of the share repurchase program through September 30,
2015, ACGL has repurchased 124.1 million common shares for an
aggregate purchase price of $3.61 billion. At September 30, 2015,
$521.8 million of repurchases were available under the share
repurchase program.
At September 30, 2015, total capital available to Arch of $7.05
billion consisted of $791.3 million of senior notes, representing
11.2% 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 $5.84 billion, representing 82.8% of the
total. 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.
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on October 29, 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 October 29,
2015 at 3:00 p.m. Eastern Time until November 5, 2015 at midnight
Eastern Time. To access the replay, domestic callers should dial
888-286-8010 (passcode 23491563), and international callers should
dial 617-801-6888 (passcode 23491563).
Please refer to the Company’s Financial Supplement dated
September 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 $7.05 billion in capital at September 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)
September
30, 2015 December 31, 2014 Calculation
of book value per common share: Total shareholders’ equity
available to Arch $ 6,162,815 $ 6,130,053 Less preferred
shareholders’ equity 325,000 325,000 Common shareholders’
equity available to Arch 5,837,815 5,805,053 Common shares
outstanding, net of treasury shares (1) 122,438,554
127,367,934 Book value per common share $ 47.68 $ 45.58
(1) Excludes the effects of 7,681,882 and 7,804,033
stock options and 415,084 and 447,073 restricted stock units
outstanding at September 30, 2015 and December 31, 2014,
respectively.
Investment
Information
(U.S. dollars in thousands, except share data)
Three
Months Ended Nine Months Ended September 30,
September 30, 2015 2014 2015
2014 Components of net investment income (1):
Fixed maturities $ 58,888 $ 64,461 $ 182,447 $ 191,409 Term loan
investments (2) 4,810 5,717 13,651 16,619 Equity securities
(dividends) 3,807 2,779 9,228 8,971 Short-term investments 75 152
453 660 Other (3) 10,253 7,896 33,462 21,681
Gross investment income 77,833 81,005 239,241 239,340
Investment expenses (10,582 ) (8,766 ) (34,531 ) (27,650 ) Net
investment income $ 67,251 $ 72,239 $ 204,710
$ 211,690 Per share $ 0.54 $ 0.53 $ 1.62 $ 1.55
Investment income yield, at amortized cost (1) (4): Pre-tax
2.04 % 2.05 % 2.06 % 2.07 % After-tax 1.86 % 1.90 % 1.89 % 1.93 %
Total return (1) (5): Including effects of foreign exchange
(0.31 )% (0.51 )% 0.76 % 2.32 % Excluding effects of foreign
exchange 0.04 % 0.21 % 1.73 % 2.89 % Cash flow from
operations (1) $ 359,246 $ 319,304 $ 606,607 $ 770,867 (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)
September 30, 2015
December 31, 2014 Amount
% of Total
Amount
% of Total
Investable assets (1) (2): Fixed maturities available
for sale, at fair value $ 10,560,635 71.7 $ 10,750,770 73.6 Fixed
maturities, at fair value (3) 341,131 2.3 377,053 2.6 Fixed
maturities pledged under securities lending agreements, at fair
value 285,632 1.9 50,802 0.3 Total
fixed maturities 11,187,398 75.9 11,178,625 76.6 Short-term
investments available for sale, at fair value 708,428 4.8 797,226
5.5 Cash 521,137 3.5 474,247 3.2 Equity securities available for
sale, at fair value 606,259 4.1 658,182 4.5 Equity securities, at
fair value (3) 78 — — — Other investments available for sale, at
fair value 281,014 1.9 296,224 2.0 Other investments, at fair value
(3) 891,484 6.1 878,774 6.0 Investments accounted for using the
equity method (4) 589,277 4.0 349,014 2.4 Securities transactions
entered into but not settled at the balance sheet date (51,343 )
(0.3 ) (32,802 ) (0.2 ) Total investable assets managed by the
Company $ 14,733,732 100.0 $ 14,599,490 100.0
Investment portfolio statistics (1): Average
effective duration (in years) 3.42 3.34
Average credit quality (Standard &
Poor’s/Moody’s Investors Service)
AA/Aa2 AA/Aa2
Embedded book yield (before investment
expenses)
2.10 % 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
Nine Months Ended September 30, September 30,
2015 2014 2015 2014
Components of losses and loss adjustment expenses incurred
Paid losses and loss adjustment expenses $ 467,855 $ 467,102 $
1,365,542 $ 1,328,386 Change in unpaid losses and loss adjustment
expenses (2,654 ) 10,988 (14,356 ) 61,912 Total
losses and loss adjustment expenses $ 465,201 $ 478,090
$ 1,351,186 $ 1,390,298
Estimated
net (favorable) adverse development in prior year loss reserves,
net of related adjustments Net impact on underwriting results:
Insurance $ (7,572 ) $ (8,096 ) $ (29,694 ) $ (34,650 ) Reinsurance
(48,075 ) (60,525 ) (164,156 ) (198,327 ) Mortgage (3,965 ) (751 )
(7,885 ) (1,863 ) Total $ (59,612 ) $ (69,372 ) $ (201,735 ) $
(234,840 ) Impact on losses and loss adjustment expenses: Insurance
$ (9,867 ) $ (11,395 ) $ (37,216 ) $ (46,355 ) Reinsurance (49,941
) (61,015 ) (165,750 ) (200,529 ) Mortgage (3,975 ) (723 ) (7,715 )
(1,769 ) Total $ (63,783 ) $ (73,133 ) $ (210,681 ) (248,653 )
Impact on acquisition expenses: Insurance $ 2,295 $ 3,299 $ 7,522 $
11,705 Reinsurance 1,866 490 1,594 2,202 Mortgage 10 (28 )
(170 ) (94 ) Total $ 4,171 $ 3,761 $ 8,946 $
13,813 Impact on combined ratio: Insurance (1.4 )% (1.6 )%
(1.9 )% (2.3 )% Reinsurance (18.5 )% (20.4 )% (20.2 )% (20.4 )%
Mortgage (7.3 )% (1.4 )% (5.0 )% (1.3 )% Total (7.1 )% (8.0 )% (8.0
)% (9.0 )% Impact on loss ratio: Insurance (1.9 )% (2.2 )% (2.4 )%
(3.1 )% Reinsurance (19.2 )% (20.6 )% (20.4 )% (20.6 )% Mortgage
(7.3 )% (1.4 )% (4.9 )% (1.2 )% Total (7.6 )% (8.4 )% (8.4 )% (9.5
)% Impact on acquisition expense ratio: Insurance 0.5 % 0.6 % 0.5 %
0.8 % Reinsurance 0.7 % 0.2 % 0.2 % 0.2 % Mortgage — % — % (0.1 )%
(0.1 )% Total 0.5 % 0.4 % 0.4 % 0.5 %
Estimated net
losses incurred from current accident year catastrophic events
(2) Insurance $ 8,545 $ 1,958 $ 17,745 $ 8,311 Reinsurance
10,302 12,226 21,574 27,908 Total $
18,847 $ 14,184 $ 39,319 $ 36,219
Impact on combined ratio: Insurance 1.6 % 0.4 % 1.2 % 0.6 %
Reinsurance 4.0 % 4.1 % 2.7 % 2.9 % Total 2.3 % 1.6 % 1.6 % 1.4 %
(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
third quarter performance by operating segment. For additional
details regarding the Company’s operating segments, please refer to
the Company’s Financial Supplement dated September 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 September 30, (U.S. dollars in
thousands)
2015 2014 % Change
Gross premiums written $ 752,438 $ 726,683 3.5 Net premiums
written 542,995 538,994 0.7 Net premiums earned 522,544 519,387 0.6
Underwriting income 21,508 16,654 29.1
Underwriting
Ratios
% Point Change
Loss ratio 65.0 % 65.1 % (0.1 ) Acquisition expense ratio 14.8 %
15.7 % (0.9 ) Other operating expense ratio 16.2 % 16.0 % 0.2
Combined ratio 96.0 % 96.8 % (0.8 ) Catastrophic
activity and prior year development: Current accident year
catastrophic events, net of reinsurance and reinstatement premiums
1.6 % 0.4 % 1.2 Net (favorable) adverse development in prior year
loss reserves, net of related adjustments (1.4 )% (1.6 )% 0.2
Combined ratio excluding catastrophic activity and prior
year development 95.8 % 98.0 % (2.2 )
Gross premiums written by the insurance segment in the 2015
third quarter were 3.5% higher than in the 2014 third quarter while
net premiums written were 0.7% higher than in the 2014 third
quarter. Changes in foreign currency rates resulted in a decrease
in net premiums written in the 2015 third quarter of approximately
$11 million, or 2.1%, compared to the 2014 third quarter. The
higher level of net premiums written reflected growth in
construction, alternative markets and travel, accident and health
business, partially offset by a reduction in program business. The
growth in construction business primarily reflected an increase in
new projects and audit premiums, while the increase in alternative
markets primarily resulted from changes in renewal dates on
business acquired as part of the renewal rights agreement entered
into in the 2014 second quarter. The higher level of travel,
accident and health business reflected growth in U.S. travel along
with international medical small and medium accounts, while the
reduction in program business reflected underwriting decisions. Net
premiums earned by the insurance segment in the 2015 third quarter
were 0.6% higher than in the 2014 third quarter, and reflect
changes in net premiums written over the previous five
quarters.
The 2015 third quarter loss ratio reflected 1.6 points of
current year catastrophic activity, compared to 0.4 points in the
2014 third quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 1.9 points in the 2015 third quarter, compared to 2.2
points in the 2014 third quarter. The estimated net favorable
development in the 2015 third quarter primarily resulted from
better than expected claims emergence in medium-tail and
longer-tailed lines from older accident years. The balance of the
change in the 2015 third quarter loss ratio primarily resulted from
a lower level of attritional large loss activity relative to the
2014 third quarter and changes in the mix of business.
The underwriting expense ratio was 31.0% in the 2015 third
quarter, compared to 31.7% in the 2014 third quarter. The
acquisition expense ratio was 14.8% in the 2015 third quarter,
compared to 15.7% in the 2014 third quarter. The lower 2015 third
quarter ratio primarily resulted from changes in the mix of
business. The operating expense ratio was 16.2% in the 2015 third
quarter, compared to 16.0% in the 2014 third quarter.
Reinsurance
Segment
Three Months Ended September 30, (U.S. dollars in
thousands)
2015 2014 % Change
Gross premiums written $ 329,327 $ 345,747 (4.7 ) Net
premiums written 237,145 262,245 (9.6 ) Net premiums earned 260,431
296,548 (12.2 ) Other underwriting income 2,783 215 1,194.4
Underwriting income 54,887 76,437 (28.2 )
Underwriting
Ratios
% Point Change
Loss ratio 44.5 % 41.7 % 2.8 Acquisition expense ratio 21.3 % 20.3
% 1.0 Other operating expense ratio 14.3 % 12.3 % 2.0
Combined ratio 80.1 % 74.3 % 5.8 Catastrophic
activity and prior year development: Current accident year
catastrophic events, net of reinsurance and reinstatement premiums
4.0 % 4.1 % (0.1 ) Net (favorable) adverse development in prior
year loss reserves, net of related adjustments (18.5 )% (20.4 )%
1.9 Combined ratio excluding catastrophic activity and prior
year development 94.6 % 90.6 % 4.0
Gross premiums written by the reinsurance segment in the 2015
third quarter were 4.7% lower than in the 2014 third quarter, while
net premiums written were 9.6% lower than in the 2014 third
quarter. Changes in foreign currency rates resulted in a decrease
in net premiums written in the 2015 third quarter of approximately
$9 million, or 3.4%, compared to the 2014 third quarter. The
difference in gross versus net premiums written primarily reflects
an increase in cessions to Watford Re in the 2015 third quarter
compared to the 2014 third quarter. The lower level of net premiums
written reflected decreases in other specialty and property lines.
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 business
reflected share decreases and timing of renewals. Net premiums
earned in the 2015 third quarter were 12.2% lower than in the 2014
third quarter, and primarily reflect changes in net premiums
written over the previous five quarters, including the mix and type
of business written.
The 2015 third quarter loss ratio reflected 4.2 points of
current year catastrophic activity, compared to 4.6 points of
catastrophic activity in the 2014 third quarter. Estimated net
favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 19.2 points in the 2015
third quarter, compared to 20.6 points in the 2014 third quarter.
The estimated net favorable development in the 2015 third 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 2015 third quarter loss ratio primarily
resulted from a higher level of attritional large loss activity and
changes in mix of business.
The underwriting expense ratio was 35.6% in the 2015 third
quarter, compared to 32.6% in the 2014 third quarter. The
acquisition expense ratio for the 2015 third quarter was 21.3%,
compared to 20.3% for the 2014 third 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, and
an increase in the level of ceding commissions incurred. The
operating expense ratio for the 2015 third quarter was 14.3%,
compared to 12.3% in the 2014 third quarter, primarily reflecting
the lower level of net premiums earned.
Mortgage
Segment
Three Months Ended September 30, (U.S. dollars in
thousands)
2015 2014 % Change
Gross premiums written $ 74,657 $ 66,389 12.5 Net premiums
written 66,825 58,485 14.3 Net premiums earned 54,548 52,946 3.0
Other underwriting income 3,565 988 260.8 Underwriting income
17,075 8,076 111.4
Underwriting Ratios
% Point Change
Loss ratio 17.5 % 30.2 % (12.7 ) Acquisition expense ratio 19.1 %
22.6 % (3.5 ) Other operating expense ratio 38.6 % 33.8 % 4.8
Combined ratio 75.2 % 86.6 % (11.4 ) Net (favorable)
adverse development in prior year loss reserves, net of related
adjustments (7.3 )% (1.4 )% (5.9 ) Combined ratio excluding prior
year development 82.5 % 88.0 % (5.5 )
The mortgage segment includes the results of Arch Mortgage
Insurance Company (“Arch MI U.S.”) and Arch Mortgage Insurance
Limited, leading providers of mortgage insurance products and
services to the U.S. and European markets, respectively. Arch MI
U.S. is approved as an eligible mortgage insurer by Fannie Mae and
Freddie Mac (each a government sponsored enterprise, or “GSE”). The
mortgage segment also includes GSE credit risk-sharing transactions
and mortgage reinsurance for the U.S. and Australian markets.
Gross premiums written by the mortgage segment in the 2015 third
quarter were 12.5% higher than in the 2014 third quarter, while net
premiums written were 14.3% higher than in the 2014 third quarter.
Net premiums written in the 2015 third quarter included $31.2
million of business underwritten by Arch MI U.S., compared to $32.2
million in the 2014 third quarter. The 2015 third quarter amount
reflected $23.7 million from credit union clients and $7.5 million
from banks and other mortgage originators, compared to $24.6
million from credit union clients and $7.6 million from banks and
other mortgage originators in the 2014 third quarter. Premiums
written on reinsurance treaties were higher by $9.4 million
compared to the 2014 third quarter, primarily reflecting growth in
single premium Australian business. Net premiums earned for the
2015 third quarter were 3.0% higher than in the 2014 third
quarter.
Other underwriting income, which is primarily related to GSE
risk-sharing transactions, was $3.6 million for the 2015 third
quarter, compared to $1.0 million for the 2014 third quarter, and
comparable with the $3.7 million recorded in the 2015 second
quarter.
The loss ratio for the 2015 third quarter continues to reflect
relatively low levels of reported delinquencies. 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 September 30, 2015, the mortgage segment’s risk-in-force
consisted of $6.47 billion from Arch MI U.S. and an additional
$3.80 billion through the mortgage segment’s reinsurance and
risk-sharing operations. Arch MI U.S. generated $3.18 billion of
new insurance written (“NIW”) during the 2015 third quarter, of
which approximately 57% was from banks and other mortgage
originators. 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 September 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/20151028006677/en/
Arch Capital Group Ltd.Mark D. Lyons, 441-278-9250Fax:
441-278-9255Executive Vice President and Chief Financial
Officer
Arch Capital (NASDAQ:ACGL)
Historical Stock Chart
From Mar 2024 to Apr 2024
Arch Capital (NASDAQ:ACGL)
Historical Stock Chart
From Apr 2023 to Apr 2024