Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income
available to Arch common shareholders for the 2014 third quarter
was $223.2 million, or $1.64 per share, compared to $109.3 million,
or $0.80 per share, for the 2013 third quarter. The Company also
reported after-tax operating income available to Arch common
shareholders of $142.1 million, or $1.05 per share, for the 2014
third quarter, compared to after-tax operating income available to
Arch common shareholders of $149.2 million, or $1.10 per share, for
the 2013 third quarter. The Company’s after-tax operating income
available to Arch common shareholders represented an annualized
return on average common equity of 9.7% for the 2014 third quarter,
compared to 11.9% for the 2013 third quarter. The Company’s net
income available to Arch common shareholders represented an
annualized return on average common equity of 15.3% for the 2014
third quarter, compared to 8.7% for the 2013 third quarter. The
Company’s book value per common share was $44.04 at September 30,
2014, a 0.7% increase from $43.73 per share at June 30, 2014 and a
14.9% increase from $38.34 per share at September 30, 2013.
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). The Company owns approximately 11% of
Watford’s common equity and consolidates the results of Watford 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
September 30, 2014.
Three Months Ended September
30, Nine Months Ended September 30, (U.S. dollars in
thousands)
2014 2013 %
Change 2014 2013 %
Change Gross premiums written $ 1,138,392 $ 1,036,987
9.8 $ 3,690,462 $ 3,241,424 13.9 Net premiums written 859,724
839,135 2.5 2,812,646 2,602,446 8.1 Net premiums earned 868,881
795,000 9.3 2,620,667 2,306,586 13.6 Underwriting income 101,167
110,992 (8.9 ) 359,878 323,419 11.3
Underwriting
Ratios % Point Change % Point Change Loss ratio
55.0 % 53.7 % 1.3 53.1 % 54.0 % (0.9 ) Acquisition expense ratio
17.7 % 18.5 % (0.8 ) 17.8 % 17.6 % 0.2 Other operating expense
ratio 15.8 % 13.9 % 1.9 15.6 % 14.5 % 1.1 Combined
ratio 88.5 % 86.1 % 2.4 86.5 % 86.1 % 0.4
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:
Three Months Ended
Nine Months Ended September 30, September 30,
(U.S. dollars in thousands, except share data)
2014
2013 2014 2013
After-tax operating income available to Arch common
shareholders $ 142,055 $ 149,205 $ 467,128 $ 442,974 Net realized
gains (losses), net of tax 27,476 (3,442 ) 96,016 65,260 Net
impairment losses recognized in earnings, net of tax (8,593 ) (728
) (26,313 ) (3,698 ) Equity in net income of investment funds
accounted for using the equity method, net of tax 4,765 5,665
16,983 30,429 Net foreign exchange gains (losses), net of tax
57,488 (41,359 ) 48,924 (3,177 ) Net income available
to Arch common shareholders $ 223,191 $ 109,341 $
602,738 $ 531,788
Diluted per common
share results:
After-tax operating income available to Arch common shareholders $
1.05 $ 1.10 $ 3.43 $ 3.27 Net realized gains (losses), net of tax
0.20 (0.03 ) 0.70 0.48 Net impairment losses recognized in
earnings, net of tax (0.06 ) (0.01 ) (0.19 ) (0.03 ) Equity in net
income of investment funds accounted for using the equity method,
net of tax 0.03 0.04 0.12 0.22 Net foreign exchange gains (losses),
net of tax 0.42 (0.30 ) 0.36 (0.02 ) Net income
available to Arch common shareholders $ 1.64 $ 0.80 $
4.42 $ 3.92 Weighted average common shares and
common share equivalents outstanding - diluted 135,876,605
136,034,413 136,354,172 135,680,829
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 3.28 years at September 30,
2014, compared to 3.14 years at June 30, 2014. Including the
effects of foreign exchange, total return on the Company’s
investment portfolio was (0.51)% for the 2014 third quarter,
compared to 1.43% for the 2013 third quarter. The negative total
return in the 2014 third quarter reflects the impact of the U.S.
Dollar strengthening against the Euro, British Pound Sterling and
other major currencies on non-U.S. Dollar denominated investments.
Excluding the effects of foreign exchange, total return was 0.21%
for the 2014 third quarter, compared to 0.84% for the 2013 third
quarter.
Net investment income for the 2014 third quarter was $72.2
million, or 0.53 per share, compared to $72.5 million, or 0.53 per
share, for the 2014 second quarter, and $66.1 million, or 0.49 per
share, for the 2013 third quarter. Investment income for the 2014
third quarter included a $3.1 million interest income distribution
received on a fund investment, compared to $4.1 million in the 2014
second quarter. The annualized pre-tax investment income yield was
2.05% for the 2014 third quarter, compared to 2.05% for the 2014
second quarter and 2.08% for the 2013 third 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. Consolidated cash flow provided by
operating activities was $319.3 million for the 2014 third quarter,
compared to $238.7 million for the 2013 third quarter, primarily
reflecting an increase in premiums collected.
The Company recorded after-tax net impairment losses on
investments of $8.6 million in the 2014 third quarter. Such amount
primarily related to a reduction in the carrying value of a fund
investment as the Company decided to redeem its holding in early
October 2014.
In 2008, the Company provided $100.0 million of funding to Gulf
Reinsurance Limited (“Gulf Re”), a reinsurer which focuses on
business emanating from the six GCC states (Bahrain, Oman, Kuwait,
Qatar, Saudi Arabia and the UAE), pursuant to a joint venture
agreement with Gulf Investment Corporation GSC. The Company
accounts for its investment in Gulf Re, shown as ‘investment in
joint venture,’ using the equity method and records its equity in
the operating results of Gulf Re in ‘other income (loss)’ on a
three month lag (based on the availability of their financial
statements). The Company recorded a loss of $7.8 million in the
2014 third quarter based upon Gulf Re’s 2014 second quarter
results.
On a pre-tax basis, net foreign exchange gains for the 2014
third quarter were $56.0 million, compared to net foreign exchange
losses for the 2013 third quarter of $40.6 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 of $4.2 million for the 2014 third quarter
included $12.4 million related to the Company’s senior notes and
other borrowings, partially offset by an $8.2 million reduction in
interest expense on a deposit accounting liability (i.e., a
contract that does not pass risk transfer) in accordance with GAAP.
The reduction in the 2014 third quarter resulted from a
reassessment of the estimated ultimate liability due to a
determination that paid losses are expected to be lower than
initially anticipated. Because the contract does not pass risk
transfer under GAAP, it is accounted for similar to a borrowing
with accretion and changes in expectations surrounding the
estimated ultimate liability impacting interest expense. The
reduction of the estimated ultimate liability at September 30, 2014
will also reduce the rate of accretion recorded in interest expense
for future periods.
The Company’s effective tax rate on income before income taxes
was 2.8% for the 2014 third quarter and 2.8% for the nine months
ended September 30, 2014, compared to 6.1% for the 2013 third
quarter and 3.1% for the nine months ended September 30, 2013. The
Company’s effective tax rate on pre-tax operating income available
to Arch shareholders was 2.5% for the 2014 third quarter and 2.6%
for the nine months ended September 30, 2014, compared to 5.6% for
the 2013 third quarter and 3.6% for the nine months ended September
30, 2013. The Company’s quarterly tax provision is adjusted to
reflect changes in its estimated annual effective tax rate, if
any.
During the 2014 third quarter, the Company repurchased 4.6
million common shares for an aggregate purchase price of $251.9
million under its share repurchase program. From October 1 through
October 29, 2014, the Company repurchased 1.6 million common shares
for an aggregate purchase price of $89.2 million. Since the
inception of the share repurchase program through October 29, 2014,
ACGL has repurchased 116.2 million common shares for an aggregate
purchase price of $3.13 billion. At October 29, 2014, $371.0
million of repurchases were available under the share repurchase
program.
At September 30, 2014, total capital available to Arch of $6.98
billion consisted of $800.0 million of senior notes, representing
11.5% of the total, $100.0 million of revolving credit agreement
borrowings due in June 2019, representing 1.4% of the total, $325.0
million of preferred shares, representing 4.7% of the total, and
common shareholders’ equity of $5.76 billion, representing 82.4% of
the total. At December 31, 2013, total capital available to Arch 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, 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 81.3% of
the total.
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on October 30, 2014. 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 30,
2014 at 3:00 p.m. Eastern Time until November 6, 2014 at midnight
Eastern Time. To access the replay, domestic callers should dial
888-286-8010 (passcode 23126585), and international callers should
dial 617-801-6888 (passcode 23126585).
Please refer to the Company’s Financial Supplement dated
September 30, 2014, 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 $6.98 billion in capital at September 30, 2014,
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, 2014 December
31, 2013 Calculation of book value per common
share: Total shareholders’ equity available to Arch $ 6,081,046
$ 5,647,496 Less preferred shareholders’ equity 325,000
325,000 Common shareholders’ equity available to Arch 5,756,046
5,322,496 Common shares outstanding, net of treasury shares (1)
130,700,619 133,674,884 Book value per common share $ 44.04
$ 39.82 (1) Excludes the effects of 7,980,587
and 8,338,480 stock options and 460,860 and 443,710 restricted
stock units outstanding at September 30, 2014 and December 31,
2013, respectively.
Investment Information
(U.S. dollars in thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30, 2014
2013 2014 2013
Components of net investment income (1): Fixed maturities $
64,461 $ 62,447 $ 191,409 $ 186,457 Term loan investments (2) 5,717
5,296 16,619 15,539 Equity securities (dividends) 2,779 2,241 8,971
6,828 Short-term investments 152 417 660 1,173 Other (3) 7,896
3,753 21,681 14,786 Gross investment
income 81,005 74,154 239,340 224,783 Investment expenses (8,766 )
(8,071 ) (27,650 ) (24,659 ) Net investment income $ 72,239
$ 66,083 $ 211,690 $ 200,124 Per share $ 0.53
$ 0.49 $ 1.55 $ 1.47
Investment income yield, at
amortized cost (1) (4): Pre-tax 2.05 % 2.08 % 2.07 % 2.16 %
After-tax 1.90 % 1.92 % 1.93 % 2.02 %
Total return (1) (5):
Including effects of foreign exchange (0.51 )% 1.43 % 2.32 % 0.31 %
Excluding effects of foreign exchange 0.21 % 0.84 % 2.89 % 0.27 %
Cash flow from operations (1) $ 319,304 $ 238,694 $ 770,867
$ 627,048 (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, 2014 December 31, 2013
Amount % of Total Amount % of
Total Investable assets (1) (2): Fixed maturities
available for sale, at fair value $ 10,733,382 73.6 $ 9,571,776
68.1 Fixed maturities, at fair value (3) 359,409 2.5 448,254 3.2
Fixed maturities pledged under securities lending agreements, at
fair value 107,547 0.7 105,081 0.8 Total fixed
maturities 11,200,338 76.8 10,125,111 72.1 Short-term investments
available for sale, at fair value 748,659 5.1 1,478,367 10.5 Cash
486,351 3.3 434,057 3.1 Equity securities available for sale, at
fair value 582,075 4.0 496,824 3.5 Other investments available for
sale, at fair value 431,833 3.0 498,310 3.6 Other investments, at
fair value (3) 838,054 5.8 773,280 5.5 Investments accounted for
using the equity method (4) 307,252 2.1 244,339 1.7 Securities
transactions entered into but not settled at the balance sheet date
(9,835 ) (0.1 ) (763 ) — Total investable assets managed by the
Company $ 14,584,727 100.0 $ 14,049,525 100.0
Investment portfolio statistics (1): Average
effective duration (in years) 3.28 2.62 Average credit quality
(Standard & Poor’s/Moody’s Investors Service) AA/Aa2 AA-/Aa2
Embedded book yield (before investment expenses) 2.21 % 2.38 % (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, 2014 2013
2014 2013 Components
of losses and loss adjustment expenses incurred Paid losses and
loss adjustment expenses $ 467,102 $ 418,187 $ 1,328,386 $
1,269,406 Change in unpaid losses and loss adjustment expenses
10,988 8,858 61,912 (24,305 ) Total losses and
loss adjustment expenses $ 478,090 $ 427,045 $
1,390,298 $ 1,245,101
Estimated net
(favorable) adverse development in prior year loss reserves, net of
related adjustments Net impact on underwriting results:
Insurance $ (8,096 ) $ (13,515 ) $ (34,650 ) $ (32,818 )
Reinsurance (60,525 ) (51,393 ) (198,327 ) (154,834 ) Mortgage (751
) — (1,863 ) — Total $ (69,372 ) $ (64,908 ) $
(234,840 ) $ (187,652 ) Impact on losses and loss adjustment
expenses: Insurance $ (11,395 ) $ (17,508 ) $ (46,355 ) $ (38,499 )
Reinsurance (61,015 ) (51,394 ) (200,529 ) (154,304 ) Mortgage (723
) — (1,769 ) — Total $ (73,133 ) $ (68,902 ) $
(248,653 ) (192,803 ) Impact on acquisition expenses: Insurance $
3,299 $ 3,993 $ 11,705 $ 5,681 Reinsurance 490 1 2,202 (530 )
Mortgage (28 ) — (94 ) — Total $ 3,761 $ 3,994
$ 13,813 $ 5,151 Impact on combined ratio:
Insurance (1.6 )% (2.8 )% (2.3 )% (2.4 )% Reinsurance (20.4 )%
(17.0 )% (20.4 )% (17.5 )% Mortgage (1.4 )% — % (1.3 )% — % Total
(8.0 )% (8.2 )% (9.0 )% (8.1 )% Impact on loss ratio: Insurance
(2.2 )% (3.7 )% (3.1 )% (2.8 )% Reinsurance (20.6 )% (17.0 )% (20.6
)% (17.4 )% Mortgage (1.4 )% — % (1.2 )% — % Total (8.4 )% (8.7 )%
(9.5 )% (8.4 )% Impact on acquisition expense ratio: Insurance 0.6
% 0.9 % 0.8 % 0.4 % Reinsurance 0.2 % — % 0.2 % (0.1 )% Mortgage —
% — % (0.1 )% — % Total 0.4 % 0.5 % 0.5 % 0.3 %
Estimated
net losses incurred from current accident year catastrophic events
(2) Insurance $ 1,958 $ 12,679 $ 8,311 $ 19,360 Reinsurance
12,226 6,816 27,908 47,605 Total $
14,184 $ 19,495 $ 36,219 $ 66,965
Impact on combined ratio: Insurance 0.4 % 2.6 % 0.6 % 1.4 %
Reinsurance 4.1 % 2.2 % 2.9 % 5.4 % Total 1.6 % 2.5 % 1.4 % 2.9 %
(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 2014
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, 2014.
Insurance Segment
Three Months Ended September 30,
(U.S. dollars in thousands)
2014 2013
% Change Gross premiums written $
726,683 $ 682,839 6.4 Net premiums written 538,994 501,971 7.4 Net
premiums earned 519,387 479,129 8.4 Underwriting income 16,654
15,220 9.4
Underwriting Ratios % Point Change
Loss ratio 65.1 % 63.8 % 1.3 Acquisition expense ratio 15.7 % 17.3
% (1.6 ) Other operating expense ratio 16.0 % 15.8 % 0.2
Combined ratio 96.8 % 96.9 % (0.1 ) Catastrophic activity
and prior year development: Current accident year catastrophic
events, net of reinsurance and reinstatement premiums 0.4 % 2.6 %
(2.2 ) Net (favorable) adverse development in prior year loss
reserves, net of related adjustments (1.6 )% (2.8 )% 1.2
Combined ratio excluding such items 98.0 % 97.1 % 0.9
Gross premiums written by the insurance segment in the 2014
third quarter were 6.4% higher than in the 2013 third quarter,
while net premiums written were 7.4% higher than in the 2013 third
quarter. The growth in net premiums written primarily resulted from
increases in: programs; travel, accident and health; alternative
markets; construction and national accounts; and excess and surplus
casualty. Such amounts were partially offset by reductions in
property, energy, marine and aviation business and professional
lines. The increase in programs reflects underlying exposure growth
and rate increases in existing programs and new business while the
growth in travel, accident and health primarily resulted from
expansion in existing and new distribution channels. The higher
level of alternative markets reflected new accounts resulting from
a renewal rights agreement entered into in the 2014 second quarter,
growth in construction and national accounts primarily reflected
new national accounts business written while growth in excess and
surplus casualty primarily resulted from contract binding business.
The decrease in property, energy, marine and aviation reflected
reductions in property and marine business in response to current
market conditions while the lower level of professional lines
business was primarily due to a continued strategic reduction in
exposure to international business. Net premiums earned by the
insurance segment in the 2014 third quarter were 8.4% higher than
in the 2013 third quarter, and reflect changes in net premiums
written over the previous five quarters.
The 2014 third quarter loss ratio reflected 0.4 points of
current year catastrophic activity, compared to 2.6 points in the
2013 third quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 2.2 points in the 2014 third quarter, compared to 3.7
points in the 2013 third quarter. The estimated net favorable
development in the 2014 third quarter primarily resulted from
better than expected claims emergence in short-tail business from
more recent accident years. The 2014 third quarter loss ratio also
reflected a higher level of non-catastrophic large loss activity,
primarily in aviation war business.
The underwriting expense ratio was 31.7% in the 2014 third
quarter, compared to 33.1% in the 2013 third quarter. The
acquisition expense ratio was 15.7% in the 2014 third quarter,
compared to 17.3% in the 2013 third quarter. The comparison of the
2014 third quarter and 2013 third 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.
The 2014 third quarter ratio was impacted by changes in development
of prior year loss reserves which increased the 2014 third quarter
commission expense ratio by 0.6 points, compared to 0.9 points in
the 2013 third quarter. The operating expense ratio was 16.0% in
the 2014 third quarter, compared to 15.8% in the 2013 third
quarter, as a higher level of aggregate expenses was substantially
offset by growth in net premiums earned.
Reinsurance Segment
Three Months Ended September 30,
(U.S. dollars in thousands)
2014 2013
% Change Gross premiums written $
345,747 $ 330,458 4.6 Net premiums written 262,245 312,531 (16.1 )
Net premiums earned 296,548 303,098 (2.2 ) Underwriting income
76,437 90,801 (15.8 )
Underwriting Ratios % Point
Change Loss ratio 41.7 % 39.3 % 2.4 Acquisition expense ratio
20.3 % 20.1 % 0.2 Other operating expense ratio 12.3 % 10.6 % 1.7
Combined ratio 74.3 % 70.0 % 4.3 Catastrophic
activity and prior year development: Current accident year
catastrophic events, net of reinsurance and reinstatement premiums
4.1 % 2.2 % 1.9 Net (favorable) adverse development in prior year
loss reserves, net of related adjustments (20.4 )% (17.0 )% (3.4 )
Combined ratio excluding such items 90.6 % 84.8 % 5.8
Gross premiums written by the reinsurance segment in the 2014
third quarter were 4.6% higher than in the 2013 third quarter,
while net premiums written were 16.1% lower than in the 2013 third
quarter. The differential in gross versus net premiums written
primarily reflects retrocessions of premiums to Watford Re
(included in the ‘other’ segment) in the 2014 third quarter. The
lower level of net premiums written reflected decreases in other
specialty, property catastrophe and marine and aviation lines,
partially offset by growth in casualty business. Other specialty
premiums in the 2013 third quarter included $55.2 million from a
multi-line quota share reinsurance agreement which was not expected
to, and did not, recur in 2014, partially offset by increases in
accident and health and motor business. The reduction in property
catastrophe and marine and aviation business reflected non-renewals
and share decreases in response to current market conditions and a
higher usage of retrocessional coverage. The increase in casualty
premiums reflected new international excess motor business as well
as quota shares of U.S. professional liability business which were
written after June 30, 2013, partially offset by cessions to
Watford Re. Net premiums earned in the 2014 third quarter were 2.2%
lower than in the 2013 third quarter, and primarily reflect changes
in net premiums written over the previous five quarters, including
the mix and type of business written.
The 2014 third quarter loss ratio reflected 4.6 points of
current year catastrophic activity, compared to 2.0 points of
catastrophic activity in the 2013 third quarter. Estimated net
favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 20.6 points in the 2014
third quarter, compared to 17.0 points in the 2013 third quarter.
The estimated net favorable development in the 2014 third quarter
primarily resulted from better than expected claims emergence in
short-tail business from more recent underwriting years and in
longer-tail business, primarily from older underwriting years. The
balance of the increase in the 2014 third quarter loss ratio
primarily resulted from changes in the mix of net premiums earned,
including a lower contribution from property catastrophe business
than in the 2013 third quarter.
The underwriting expense ratio was 32.6% in the 2014 third
quarter, compared to 30.7% in the 2013 third quarter. The
acquisition expense ratio for the 2014 third quarter was 20.3%,
compared to 20.1% for the 2013 third quarter. The 2014 third
quarter acquisition expense ratio was impacted by changes in
development of prior year loss reserves which increased the ratio
by 0.2 points. 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 the level of ceding commissions.
The operating expense ratio for the 2014 third quarter was 12.3%,
compared to 10.6% in the 2013 third quarter, reflecting a higher
level of aggregate expenses due, in part, to selected expansion of
the reinsurance segment's operating platform.
Mortgage Segment
Three Months Ended September 30,
(U.S. dollars in thousands)
2014 2013
% Change Gross premiums written $
66,389 $ 24,633 169.5 Net premiums written 58,485 24,633 137.4 Net
premiums earned 52,946 12,773 314.5 Underwriting income 8,076 4,971
62.5
Underwriting Ratios % Point Change Loss
ratio 30.2 % 15.8 % 14.4 Acquisition expense ratio 22.6 % 27.0 %
(4.4 ) Other operating expense ratio 33.8 % 18.3 % 15.5
Combined ratio 86.6 % 61.1 % 25.5 Net (favorable)
adverse development in prior year loss reserves, net of related
adjustments (1.4 )% — % (1.4 ) Combined ratio excluding prior year
development 88.0 % 61.1 % 26.9
The mortgage segment includes the results of Arch MI U.S., a
leading provider of mortgage insurance products and services to the
U.S. marketplace, which was acquired in January 2014, along with
the Company’s other global mortgage insurance, reinsurance and
risk-sharing products.
Net premiums written in the 2014 third quarter included $32.2
million of business underwritten by Arch MI U.S., including $24.6
million from credit union clients and $7.6 million from other
lenders. Amounts written from other lenders primarily resulted from
lender paid mortgage insurance (LPMI) single premium transactions
in the 2014 third quarter. In addition, net premiums written
included $8.8 million from the 100% quota share indemnity
reinsurance agreement with PMI for performing certificates of
insurance that were issued by PMI from 2009 to 2011, while premiums
on reinsurance treaties covering U.S. and international mortgages
were substantially unchanged.
Net premiums earned for the 2014 third quarter were
substantially higher than in the 2013 third quarter, reflecting the
contribution of Arch MI U.S. business along with an increase from
the mortgage segment’s quota share reinsurance business. The loss
ratio for the 2014 third quarter continues to reflect relatively
low levels of reported delinquencies and a higher contribution from
Arch MI U.S. while the underwriting expense ratio is expected to
stay at an elevated level until Arch MI U.S. reaches scale.
At September 30, 2014, the mortgage segment’s risk-in-force
consisted of $5.5 billion from Arch MI U.S. and an additional $4.6
billion through the mortgage segment’s reinsurance and risk-sharing
operations. Arch MI U.S. generated $1.98 billion of new insurance
written (“NIW”) during the 2014 third quarter, of which
approximately 55% was to credit union 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 September 30, 2014;
- 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 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.
Arch Capital Group Ltd.Mark D. Lyons,
441-278-9250Executive Vice President and Chief Financial
Officer
Arch Capital (NASDAQ:ACGL)
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