Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income
available to common shareholders for the 2013 fourth quarter was
$156.0 million, or $1.14 per share, compared to $13.7 million, or
$0.10 per share, for the 2012 fourth quarter, while after-tax
operating income available to common shareholders was $152.7
million, or $1.12 per share, for the 2013 fourth quarter, compared
to an after-tax operating loss available to common shareholders of
$24.7 million, or $0.18 per share, for the 2012 fourth quarter. For
2013, net income available to common shareholders was $687.8
million, or $5.07 per share, compared to $557.7 million, or $4.03
per share, for 2012, while after-tax operating income available to
common shareholders was $595.7 million, or $4.39 per share for
2013, compared to $350.6 million, or $2.54 per share, for 2012.
The Company's book value per common share was $39.82 at December
31, 2013, a 3.9% increase from $38.34 per share at September 30,
2013 and a 10.0% increase from $36.19 per share at December 31,
2012. The Company's after-tax operating income available to common
shareholders represented an annualized return on average common
equity of 11.7% for the 2013 fourth quarter, compared to (2.0)% for
the 2012 fourth quarter, and 11.7% for 2013, compared to 7.7% for
2012. The Company's net income available to common shareholders
represented a return on average common equity of 13.5% for 2013,
compared to 12.2% for 2012.
After-tax operating income or loss available to common
shareholders, a non-GAAP measure, is defined as net income
available to common shareholders, excluding net realized gains or
losses, net impairment losses recognized in earnings, equity in net
income or loss of investment funds accounted for using the equity
method, net foreign exchange gains or losses and loss on repurchase
of preferred shares, net of income taxes. See 'Comments on
Regulation G' for a further discussion of after-tax operating
income or loss available to 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:
Three Months Ended
Year Ended December 31, December
31, (U.S. dollars in thousands)
2013
2012 2013 2012
Gross premiums written $ 955,199 $ 813,928 $ 4,196,623 $
3,869,161 Net premiums written 748,921 613,142 3,351,367 3,052,235
Net premiums earned 839,366 779,481 3,145,952 2,935,140
Underwriting income (loss) 128,318 (91,334 ) 451,737 143,034
Combined ratio (1) 85.3 % 112.4 % 85.9 % 95.4 % (1)
The combined ratio represents a measure of underwriting
profitability, excluding investment income, and is the sum of the
loss ratio and expense ratio. A combined ratio under 100%
represents an underwriting profit and a combined ratio over 100%
represents an underwriting loss.
For the 2013 fourth quarter, the combined ratio of the Company's
insurance and reinsurance subsidiaries consisted of a loss ratio of
51.7% and an underwriting expense ratio of 33.6%, compared to a
loss ratio of 79.9% and an underwriting expense ratio of 32.5% for
the 2012 fourth quarter. For a discussion of underwriting
activities and a review of the Company's results by operating
segment, see “Segment Information” in the Supplemental Financial
Information section of this release.
The following table summarizes, on an after-tax basis, the
Company's consolidated financial data, including a reconciliation
of after-tax operating income or loss available to common
shareholders to net income available to common shareholders and
related diluted per share results:
Three Months Ended
Year Ended December 31, December
31, (U.S. dollars in thousands, except share data)
2013
2012 2013
2012 After-tax operating income (loss) available to
common shareholders $ 152,741 $ (24,667 ) $ 595,715 $ 350,640 Net
realized gains, net of tax 8,584 51,031 73,844 184,083 Net
impairment losses recognized in earnings, net of tax (88 ) (6,035 )
(3,786 ) (11,388 )
Equity in net income of investment funds
accounted for using the equity
method, net of tax
5,309 16,567 35,738 73,510 Net foreign exchange losses, net of tax
(10,541 ) (23,164 ) (13,718 ) (28,527 ) Loss on repurchase of
preferred shares, net of tax — — — (10,612 )
Net income available to common shareholders $ 156,005 $
13,732 $ 687,793 $ 557,706
Diluted per common
share results:
After-tax operating income (loss) available to common shareholders
$ 1.12 $ (0.18 ) $ 4.39 $ 2.54 Net realized gains, net of tax 0.06
0.37 0.54 1.33 Net impairment losses recognized in earnings, net of
tax — (0.04 ) (0.03 ) (0.08 )
Equity in net income of investment funds
accounted for using the equity
method, net of tax
0.04 0.12 0.27 0.53 Net foreign exchange losses, net of tax (0.08 )
(0.17 ) (0.10 ) (0.21 ) Loss on repurchase of preferred shares, net
of tax — — — (0.08 ) Net income available to
common shareholders $ 1.14 $ 0.10 $ 5.07 $
4.03
Weighted average common shares and common
share equivalents
outstanding - diluted
136,467,998 138,270,853 135,777,183 138,258,847
At December 31, 2013, the Company's investment portfolio had an
average credit quality of “AA-/Aa2” with 83% held in fixed
maturities and short-term investments, compared to “AA-/Aa2” and
84% at December 31, 2012. The average effective duration of the
Company's investment portfolio was 2.62 years at December 31, 2013,
compared to 3.06 years at December 31, 2012. Including the effects
of foreign exchange, the total return on the Company's investment
portfolio was 0.97% for the 2013 fourth quarter, compared to 0.80%
for the 2012 fourth quarter. Excluding the effects of foreign
exchange, the total return was 0.85% for the 2013 fourth quarter,
compared to 0.67% for the 2012 fourth quarter.
Net investment income for the 2013 fourth quarter was $67.1
million, or $0.49 per share, compared to $66.1 million, or $0.49
per share, for the 2013 third quarter, and $73.8 million, or $0.53
per share, for the 2012 fourth quarter. The annualized pre-tax
investment income yield was 2.08% for the 2013 fourth quarter,
compared to 2.08% for the 2013 third quarter and 2.46% for the 2012
fourth quarter. Such yields reflect the effects of prevailing
interest rates and the Company's investment strategy, which puts a
priority on total return. Consolidated cash flow provided by
operating activities was $223.8 million for the 2013 fourth
quarter, compared to $189.7 million for the 2012 fourth quarter,
with the increase primarily due to an incoming unearned premium
transfer in the reinsurance segment during the 2013 fourth
quarter.
The Company's effective tax rate on income before income taxes
was an expense of 8.7% for the 2013 fourth quarter and 4.4% for
2013, while the Company's effective tax rate on pre-tax operating
income was an expense of 8.3% for the 2013 fourth quarter and 4.8%
for 2013. For 2012, the Company's effective tax rates on income
before income taxes and pre-tax operating income were a benefit of
0.7% and 3.8%, respectively, while the 2012 fourth quarter ratios
were not meaningful. The Company's effective tax rates may
fluctuate from period to period based on 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 effective tax rate, if any. Effective
January 1, 2013, the legal structure of the insurance segment's
Canadian operations changed whereby they ceased being a branch and
incorporated under applicable Canadian law. As a result of
operating losses in 2013, due in part to catastrophic activity, the
Company recorded a valuation allowance against its Canadian
operation's deferred tax asset in the 2013 fourth quarter. This
resulted in an increase in the effective tax rate on pre-tax
operating income of 6.1 points for the 2013 fourth quarter and 1.6
points for 2013. In addition, the Company's Bermuda-based reinsurer
incurs federal excise taxes for premiums assumed on U.S. risks. The
Company incurred $9.5 million of federal excise taxes for the year
ended December 31, 2013, compared to $8.6 million for the 2012
period. Such amounts are reflected as acquisition expenses in the
Company's consolidated statements of income.
On a pre-tax basis, net foreign exchange losses for the 2013
fourth quarter were $9.8 million (net unrealized losses of $7.4
million and net realized losses of $2.5 million), compared to net
foreign exchange losses for the 2012 fourth quarter of $23.0
million (net unrealized losses of $22.4 million and net realized
losses of $0.6 million). Net unrealized foreign exchange gains or
losses result 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. At times, the Company has chosen
not to match portions 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.
On December 13, 2013, Arch Capital Group (U.S.) Inc.
(“Arch-U.S.”), a wholly-owned subsidiary of the Company, completed
the public offering of $500 million aggregate principal amount of
its 5.144% senior notes issued at par and due November 1, 2043,
fully and unconditionally guaranteed by the Company. The
senior notes and the guarantee are unsecured and unsubordinated
obligations of Arch-U.S. and the Company, respectively, and rank
equally and ratably with the other unsecured and unsubordinated
indebtedness of Arch-U.S. and the Company. A portion of the
proceeds from the offering were used to fund the acquisition of the
mortgage operations as discussed below. In addition, the proceeds
are available for other corporate purposes.
As previously disclosed, on January 30, 2014, the Company’s
U.S.-based subsidiaries (“Arch U.S. MI”) completed the acquisition
of CMG Mortgage Insurance Company (“CMG MI”) and the mortgage
insurance operating platform of PMI Mortgage Insurance Co. (“PMI”).
As part of the transaction, CMG MI has obtained approval as an
eligible mortgage insurer from Fannie Mae and Freddie Mac, subject
to maintaining certain ongoing requirements. CMG MI will be renamed
“Arch Mortgage Insurance Company” following receipt of all
applicable state approvals.
At December 31, 2013, the Company's capital of $6.55 billion
consisted of $800.0 million of senior notes, representing 12.2% of
the total, $100.0 million of revolving credit agreement borrowings
due in August 2014, representing 1.5% of the total, $325.0 million
of preferred shares, representing 5.0% of the total, and common
shareholders' equity of $5.32 billion, representing the balance of
81.3%. At December 31, 2012, the Company's capital of $5.57 billion
consisted of $300.0 million of senior notes, representing 5.4% of
the total, $100.0 million of revolving credit agreement borrowings,
representing 1.8% of the total, $325.0 million of preferred shares,
representing 5.8% of the total, and common shareholders' equity of
$4.84 billion, representing the balance of 87.0%.
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on Wednesday, February 12,
2014. A live webcast of this call will be available via the
Investor Relations - Events & Presentations section of the
Company's website at http://www.archcapgroup.bm. A telephone replay of
the conference call also will be available beginning on February
12, 2014 at 3:00 p.m. Eastern Time until February 19, 2014 at
midnight Eastern Time. To access the replay, domestic callers
should dial 888-286-8010 (passcode 75518402), and international
callers should dial 617-801-6888 (passcode 75518402).
Please refer to the Company's Financial Supplement dated
December 31, 2013, which is posted on the Company's website at
http://www.archcapgroup.bm/FinancialInformation.aspx.
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, including
the Investor Relations - Events & Presentations section of the
Company's website at http://www.archcapgroup.bm/Presentations.aspx for
additional information regarding the Company.
Arch Capital Group Ltd., a Bermuda-based company with
approximately $6.55 billion in capital at December 31, 2013,
provides insurance and reinsurance on a worldwide basis through its
wholly owned subsidiaries.
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 December 31, 2013;
- 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.
Comment 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 common shareholders, which is
defined as net income available to common shareholders, excluding
net realized gains or losses, net impairment losses recognized in
earnings, equity in net income or loss of investment funds
accounted for using the equity method, net foreign exchange gains
or losses and loss on repurchase of preferred shares, net of income
taxes. The presentation of after-tax operating income or loss
available to common shareholders is a “non-GAAP financial measure”
as defined in Regulation G. The reconciliation of such measure to
net income available to 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, net
foreign exchange gains or losses and loss on repurchase of
preferred shares in any particular period are not indicative of the
performance of, or trends in, the Company's business performance.
Although net realized gains or losses, net impairment losses
recognized in earnings, equity in net income or loss of investment
funds accounted for using the equity method and net foreign
exchange gains or losses are an integral part of the Company's
operations, the decision to realize investment gains or losses, the
recognition of the change in the carrying value of investments
accounted for using the fair value option in net realized gains or
losses, the recognition of net impairment losses, the recognition
of equity in net income or loss of investment funds accounted for
using the equity method and the recognition of foreign exchange
gains or losses are independent of the insurance underwriting
process and result, in large part, from general economic and
financial market conditions. Furthermore, certain users of the
Company's financial information believe that, for many companies,
the timing of the realization of investment gains or losses is
largely opportunistic. In addition, net impairment losses
recognized in earnings on the Company's investments represent
other-than-temporary declines in expected recovery values on
securities without actual realization. The use of the equity method
on certain of the Company's investments 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. The loss on
repurchase of preferred shares related to the redemption of the
Series A and B preferred shares in April 2012 and had no impact on
total shareholders' equity or cash flows. Due to these reasons, the
Company excludes net realized gains or losses, net impairment
losses recognized in earnings, equity in net income or loss of
investment funds accounted for using the equity method, net foreign
exchange gains or losses and loss on repurchase of preferred shares
from the calculation of after-tax operating income or loss
available to common shareholders.
The Company believes that showing net income available to 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 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.
ARCH CAPITAL GROUP LTD. AND
SUBSIDIARIES
SUPPLEMENTAL FINANCIAL
INFORMATION
Book Value Per Common Share
(U.S. dollars in thousands,
except share data)
December 31, 2013
December 31, 2012 Calculation of book value
per common share: Total shareholders' equity $ 5,647,496 $
5,168,878 Less preferred shareholders' equity 325,000
325,000 Common shareholders' equity 5,322,496 4,843,878 Common
shares outstanding, net of treasury shares (1) 133,674,884
133,842,613 Book value per common share $ 39.82 $ 36.19
(1) Excludes the effects of 8,338,480 and 8,221,444
stock options and 443,710 and 480,406 restricted stock units
outstanding at December 31, 2013 and December 31, 2012,
respectively.
Investment Information
Three Months Ended Year Ended
December 31, December 31, (U.S. dollars in thousands,
except share data)
2013 2012 2013 2012
Components of net investment income: Fixed maturities
$ 63,376 $ 69,198 $ 249,833 $ 281,140 Term loan investments (1)
5,069 4,551 20,608 15,283 Equity securities 2,091 1,865 8,919 7,963
Short-term investments 86 363 1,259 1,980 Other 4,924 4,228
19,710 14,196 Gross investment income 75,546
80,205 300,329 320,562 Investment expenses (8,451 ) (6,436 )
(33,110 ) (25,667 ) Net investment income $ 67,095 $ 73,769
$ 267,219 $ 294,895 Per share $ 0.49 $
0.53 $ 1.97 $ 2.13
Investment income yield, at amortized
cost (2): Pre-tax 2.08 % 2.46 % 2.12 % 2.51 % After-tax 1.96 %
2.32 % 1.98 % 2.38 %
Total return (3): Including
effects of foreign exchange 0.97 % 0.80 % 1.28 % 5.88 % Excluding
effects of foreign exchange 0.85 % 0.67 % 1.13 % 5.59 % Cash
flow from operations $ 223,820 $ 189,652 $ 850,868 $ 921,603
(1) Included in “investments accounted for using the fair
value option” on the Company's balance sheet. (2) Investment income
yield is presented on an annualized basis and excludes 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. (3) 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)
December 31, 2013
December 31, 2012 Investable assets
(1): Fixed maturities available for sale, at fair value $
9,571,776 $ 9,839,988 Fixed maturities, at fair value (2) 448,254
363,541 Fixed maturities pledged under securities lending
agreements, at fair value 105,081 42,600 Total fixed
maturities 10,125,111 10,246,129 Short-term investments available
for sale, at fair value 1,478,367 722,121 Short-term investments
pledged under securities lending agreements, at fair value — 8,248
Cash 434,057 371,041 Equity securities available for sale, at fair
value 496,824 312,749 Equity securities, at fair value (2) — 25,954
Other investments available for sale, at fair value 498,310 549,280
Other investments, at fair value (2) 773,280 527,971 Investments
accounted for using the equity method (3) 244,339 307,105
Securities sold but not yet purchased (4) — (6,924 ) Securities
transactions entered into but not settled at the balance sheet date
(763 ) (18,540 ) Total investable assets $ 14,049,525 $
13,045,134
Investment portfolio statistics
(1): Average effective duration (in years) 2.62 3.06 Average
credit quality (Standard & Poor's/Moody's Investors Service)
AA-/Aa2 AA-/Aa2 Embedded book yield (before investment expenses)
2.38 % 2.60 % (1) 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. (2) 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. (3) 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. (4) Represents the Company's obligation to
deliver securities that it did not own at the time of sale. Such
amounts are included in “other liabilities” on the Company's
balance sheet.
Selected Information on Losses and
Loss Adjustment Expenses Three
Months Ended Year Ended December
31, December 31, (U.S. dollars in thousands)
2013
2012 2013
2012 Components of losses and loss adjustment
expenses incurred Paid losses and loss adjustment expenses $
439,411 $ 406,621 $ 1,708,817 $ 1,465,376 Change in unpaid losses
and loss adjustment expenses (5,088 ) 215,885 (29,393 )
395,901 Total losses and loss adjustment expenses $ 434,323
$ 622,506 $ 1,679,424 $ 1,861,277
Estimated net (favorable) adverse
development in prior year
loss reserves, net of related
adjustments
Net impact on underwriting results: Insurance $ (2,884 ) $ (4,050 )
$ (35,702 ) $ (30,474 ) Reinsurance (63,638 ) (50,555 ) (218,472 )
(187,895 ) Total $ (66,522 ) $ (54,605 ) $ (254,174 ) $ (218,369 )
Impact on losses and loss adjustment expenses: Insurance $ (6,649 )
$ (3,288 ) $ (45,148 ) $ (31,247 ) Reinsurance (64,590 ) (50,638 )
(218,894 ) (190,281 ) Total $ (71,239 ) $ (53,926 ) $ (264,042 )
(221,528 ) Impact on acquisition expenses: Insurance $ 3,765 $ (762
) $ 9,446 $ 773 Reinsurance 952 83 422 2,386
Total $ 4,717 $ (679 ) $ 9,868 $ 3,159
Impact on combined ratio: Insurance (0.6 )% (0.9 )% (1.9 )% (1.7 )%
Reinsurance (18.4 )% (15.6 )% (17.2 )% (16.6 )% Total (7.9 )% (7.0
)% (8.1 )% (7.4 )% Impact on loss ratio: Insurance (1.3 )% (0.7 )%
(2.4 )% (1.7 )% Reinsurance (18.7 )% (15.6 )% (17.2 )% (16.8 )%
Total (8.5 )% (6.9 )% (8.4 )% (7.5 )% Impact on acquisition expense
ratio: Insurance 0.7 % (0.2 )% 0.5 % — % Reinsurance 0.3 % — % — %
0.2 % Total 0.6 % (0.1 )% 0.3 % 0.1 %
Estimated net losses incurred from
current accident year
catastrophic events (1)
Insurance $ 2,203 $ 86,665 $ 21,563 $ 105,787 Reinsurance 14,583
114,628 62,188 153,410 Total $ 16,786
$ 201,293 $ 83,751 $ 259,197 Impact on
combined ratio: Insurance 0.4 % 19.0 % 1.1 % 5.9 % Reinsurance 4.2
% 35.4 % 4.9 % 13.5 % Total 2.0 % 25.8 % 2.7 % 8.8 % (1)
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.
Segment Information
The following section provides analysis on the Company's 2013
fourth quarter performance by operating segment. For additional
details regarding the Company's operating segments, please refer to
the Company's Financial Supplement dated December 31, 2013 on the
Company's website at http://www.archcapgroup.bm/FinancialInformation.aspx.
INSURANCE SEGMENT
Three Months Ended December
31, (U.S. dollars in thousands)
2013
2012 % Change
Gross premiums written $ 636,949 $ 571,157 11.5 Net premiums
written 440,707 386,714 14.0 Net premiums earned 493,264 455,668
8.3 Underwriting income (loss) 18,653 (84,421 ) n/m
Underwriting Ratios % Point Change Loss ratio 62.4 %
84.1 % (21.7 ) Acquisition expense ratio 16.9 % 16.4 % 0.5 Other
operating expense ratio 16.9 % 18.0 % (1.1 ) Combined ratio 96.2 %
118.5 % (22.3 ) Catastrophic activity and prior year
development: Current accident year catastrophic events, net of
reinsurance and reinstatement premiums 0.4 % 19.0 % (18.6 ) Net
(favorable) adverse development in prior year loss reserves, net of
related adjustments (0.6 )% (0.9 )% 0.3 Combined ratio
excluding such items 96.4 % 100.4 % (4.0 )
Gross premiums written by the insurance segment in the 2013
fourth quarter were 11.5% higher than in the 2012 fourth quarter,
while net premiums written were 14.0% higher. The differential in
net versus gross premiums written reflects increases in lines such
as programs and contract binding (which was launched in early
2013), both of which typically have lower limits than other lines
and, as a result, are retained at a higher level. The growth in net
premiums written primarily resulted from increases in programs,
contract binding, national accounts casualty and construction
lines, partially offset by a reduction in professional liability
and executive assurance lines and lenders products business. The
increase in program business resulted from a combination of new
business, underlying exposure growth within existing programs and
rate increases while the growth in national accounts casualty and
construction lines primarily resulted from new business and strong
renewal retention. The decrease in professional liability and
executive assurance lines resulted from a continued strategic
reduction in exposure to international business while lenders
products reflected a higher level of third party cessions. Net
premiums earned by the insurance segment in the 2013 fourth quarter
were 8.3% higher than in the 2012 fourth quarter, and reflect
changes in net premiums written over the previous five
quarters.
The 2013 fourth quarter loss ratio reflected 0.4 points of
current year catastrophic event activity, compared to 19.0 points
in the 2012 fourth quarter (primarily related to Superstorm Sandy).
Estimated net favorable development in prior year loss reserves,
before related adjustments, reduced the loss ratio by 1.3 points in
the 2013 fourth quarter, compared to 0.7 points in the 2012 fourth
quarter. The estimated net favorable development in the 2013 fourth
quarter primarily resulted from better than expected claims
emergence in short-tail business from more recent accident years.
The 2013 fourth quarter loss ratio continued to reflect estimated
margin expansion along with a lower level of non-catastrophic large
loss activity.
The underwriting expense ratio was 33.8% in the 2013 fourth
quarter, compared to 34.4% in the 2012 fourth quarter. The
acquisition expense ratio was 16.9% in the 2013 fourth quarter,
compared to 16.4% in the 2012 fourth quarter. The comparison of the
2013 fourth quarter and 2012 fourth quarter acquisition expense
ratios is influenced by, among other things, the mix and type of
business written and earned and the level of ceding commissions. In
addition, the acquisition expense ratio was impacted by changes in
development of prior year ceded loss reserves which increased the
2013 fourth quarter acquisition expense ratio by 0.7 points,
compared to a 0.2 point reduction in the 2012 fourth quarter. The
operating expense ratio was 16.9% in the 2013 fourth quarter,
compared to 18.0% in the 2012 fourth quarter. The 2013 fourth
quarter operating expense ratio benefited from the 8.3% increase in
net premiums earned compared to aggregate expenses that rose only
1.3% compared to the 2012 fourth quarter reflecting costs related
to the new contract binding operation.
REINSURANCE SEGMENT
Three Months Ended December
31, (U.S. dollars in thousands)
2013
2012 % Change
Gross premiums written $ 320,253 $ 245,292 30.6 Net
premiums written 308,214 226,428 36.1 Net premiums earned 346,102
323,813 6.9 Underwriting income (loss) 109,665 (6,913 ) n/m
Underwriting Ratios % Point Change Loss ratio
36.5 % 73.9 % (37.4 ) Acquisition expense ratio 21.2 % 18.0 % 3.2
Other operating expense ratio 12.1 % 11.8 % 0.3 Combined
ratio 69.8 % 103.7 % (33.9 ) Catastrophic activity and prior
year development: Current accident year catastrophic events, net of
reinsurance and reinstatement premiums 4.2 % 35.4 % (31.2 ) Net
(favorable) adverse development in prior year loss reserves, net of
related adjustments (18.4 )% (15.6 )% (2.8 ) Combined ratio
excluding such items 84.0 % 83.9 % 0.1
Gross premiums written by the reinsurance segment in the 2013
fourth quarter were 30.6% higher than in the 2012 fourth quarter,
while net premiums written were 36.1% higher than in the 2012
fourth quarter. Roughly 60% of the change in both growth rates
resulted from the unearned premium transfer described below, while
the differential in net versus gross premiums written reflects
changes in mix of business. The growth in net premiums written
primarily resulted from increases in casualty and other specialty
lines, partially offset by reductions in property catastrophe and
marine business. Growth in casualty business primarily resulted
from one large professional liability quota share contract which
contributed $59.4 million of premiums written in the quarter,
including a $44.4 million unearned premium transfer. The increase
in other specialty lines reflected the ongoing impact of the
multi-line quota share reinsurance agreement entered into during
the 2013 third quarter, as well as from international trade credit
and surety business and accident and health business, partially
offset by a continued reduction in U.K. motor. The decrease in
property catastrophe business reflected selected line reductions
and rate decreases, while the 2012 fourth quarter included $10.1
million of assumed reinstatement premiums as a result of 2012
fourth quarter catastrophic activity (primarily related to Sandy).
The reduction in marine business resulted from a mix of share
decreases and reductions in premium estimates. Net premiums earned
in the 2013 fourth quarter were 6.9% higher than in the 2012 fourth
quarter, and primarily reflect changes in net premiums written over
the previous five quarters, including the mix and type of business
written.
The 2013 fourth quarter loss ratio reflected 4.5 points of
current year catastrophic activity, compared to 38.5 points of
catastrophic activity in the 2012 fourth quarter (primarily related
to Sandy). Estimated net favorable development in prior year loss
reserves, before related adjustments, reduced the loss ratio by
18.7 points in the 2013 fourth quarter, compared to 15.6 points in
the 2012 fourth quarter. The estimated net favorable development in
the 2013 fourth quarter primarily resulted from better than
expected claims emergence in longer-tail business, primarily from
older underwriting years, and in short-tail business, primarily
from more recent underwriting years. The 2013 fourth quarter loss
ratio also reflected changes in the mix of business.
The underwriting expense ratio was 33.3% in the 2013 fourth
quarter, compared to 29.8% in the 2012 fourth quarter. The
acquisition expense ratio for the 2013 fourth quarter was 21.2%,
compared to 18.0% for the 2012 fourth quarter. The comparison of
the 2013 fourth quarter and 2012 fourth quarter acquisition expense
ratios is influenced by, among other things, the mix and type of
business written and earned and the level of ceding commissions. In
addition, the acquisition expense ratio was impacted by changes in
development of prior year loss reserves which increased the 2013
fourth quarter acquisition expense ratio by 0.3 points. The
operating expense ratio was 12.1% in the 2013 fourth quarter,
compared to 11.8% in the 2012 fourth quarter. The 2013 fourth
quarter operating expense ratio reflected an increase in aggregate
expenses due, in part, to selected expansion of the reinsurance
segment's operating platform, partially offset by the benefit of a
higher level of net premiums earned.
ARCH CAPITAL GROUP LTD. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
INCOME
(U.S. dollars in thousands, except
share data)
Three Months Ended
Year Ended December 31, December
31, 2013 2012 2013
2012 Revenues Net premiums
written $ 748,921 $ 613,142 $ 3,351,367 $ 3,052,235 Change in
unearned premiums 90,445 166,339 (205,415 ) (117,095
) Net premiums earned 839,366 779,481 3,145,952 2,935,140 Net
investment income 67,095 73,769 267,219 294,895 Net realized gains
9,048 54,849 74,018 194,228 Other-than-temporary impairment
losses (88 ) (6,046 ) (3,961 ) (12,175 )
Less investment impairments recognized in
other comprehensive
income, before taxes
— 11 175 787 Net impairment losses
recognized in earnings (88 ) (6,035 ) (3,786 ) (11,388 )
Other underwriting income 5,673 5,664 7,639 8,090
Equity in net income of investment funds
accounted for using the
equity method
5,272 16,567 35,701 73,510 Other income (loss) (3,288 ) (4,189 )
(586 ) (12,094 ) Total revenues 923,078 920,106
3,526,157 3,482,381
Expenses Losses and
loss adjustment expenses 434,323 622,506 1,679,424 1,861,277
Acquisition expenses 157,521 133,568 564,103 508,884 Other
operating expenses 135,069 127,751 500,730 465,353 Interest expense
9,373 6,187 27,060 28,525 Net foreign exchange losses 9,848
22,997 12,335 28,955 Total expenses 746,134
913,009 2,783,652 2,892,994
Income before income taxes 176,944 7,097 742,505 589,387
Income tax expense (benefit) 15,454 (12,120 ) 32,774
(4,010 ) Net income 161,490 19,217 709,731 593,397
Preferred dividends 5,485 5,485 21,938 25,079 Loss on repurchase of
preferred shares — — — 10,612
Net income available to common shareholders $ 156,005 $
13,732 $ 687,793 $ 557,706
Net
income per common share Basic $ 1.19 $ 0.10 $ 5.24 $ 4.15
Diluted $ 1.14 $ 0.10 $ 5.07 $ 4.03
Weighted average common shares and
common share
equivalents outstanding
Basic 131,631,606 134,229,078 131,355,392 134,446,158 Diluted
136,467,998 138,270,853 135,777,183 138,258,847
ARCH CAPITAL GROUP LTD. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except
share data)
December 31, 2013
December 31, 2012 Assets
Investments: Fixed maturities available for sale, at fair value
(amortized cost: $9,564,634 and $9,567,290) $ 9,571,776 $ 9,839,988
Short-term investments available for sale, at fair value (amortized
cost: $1,477,584 and $719,848) 1,478,367 722,121 Investment of
funds received under securities lending, at fair value (amortized
cost: $97,943 and $42,302) 100,584 42,531 Equity securities
available for sale, at fair value (cost: $433,275 and $298,414)
496,824 312,749 Other investments available for sale, at fair value
(cost: $488,687 and $519,955) 498,310 549,280 Investments accounted
for using the fair value option 1,221,534 917,466 Investments
accounted for using the equity method 244,339 307,105
Total investments 13,611,734 12,691,240 Cash 434,057 371,041
Accrued investment income 66,848 71,748 Investment in joint venture
(cost: $100,000) 104,856 107,284 Fixed maturities and short-term
investments pledged under securities lending, at fair value 105,081
50,848 Premiums receivable 753,924 688,873 Reinsurance recoverable
on unpaid and paid losses and loss adjustment expenses 1,804,330
1,870,037 Contractholder receivables 1,064,246 865,728 Prepaid
reinsurance premiums 328,343 298,484 Deferred acquisition costs,
net 342,314 262,822 Receivable for securities sold 50,555 19,248
Other assets 899,806 519,409 Total Assets $
19,566,094 $ 17,816,762
Liabilities
Reserve for losses and loss adjustment expenses $ 8,824,696 $
8,933,292 Unearned premiums 1,896,365 1,647,978 Reinsurance
balances payable 196,167 188,546 Contractholder payables 1,064,246
865,728 Deposit accounting liabilities 421,297 27,594 Senior notes
800,000 300,000 Revolving credit agreement borrowings 100,000
100,000 Securities lending payable 107,999 52,356 Payable for
securities purchased 51,318 37,788 Other liabilities 456,510
494,602 Total Liabilities 13,918,598 12,647,884
Commitments and Contingencies
Shareholders' Equity Non-cumulative preferred shares 325,000
325,000 Common shares ($0.0033 par, shares issued: 169,560,591 and
168,255,572) 565 561 Additional paid-in capital 299,517 227,778
Retained earnings 6,042,154 5,354,361 Accumulated other
comprehensive income, net of deferred income tax 74,964 287,017
Common shares held in treasury, at cost (shares: 35,885,707 and
34,412,959) (1,094,704 ) (1,025,839 ) Total Shareholders' Equity
5,647,496 5,168,878 Total Liabilities and
Shareholders' Equity $ 19,566,094 $ 17,816,762
Arch Capital Group Ltd.Mark D. Lyons,
441-278-9250Executive Vice President and Chief Financial
Officer
Arch Capital (NASDAQ:ACGL)
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