Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income
available to Arch common shareholders for the 2014 fourth quarter
was $209.7 million, or $1.60 per share, compared to $156.0 million,
or $1.14 per share, for the 2013 fourth quarter, while after-tax
operating income available to Arch common shareholders was $150.2
million, or $1.15 per share, for the 2014 fourth quarter, compared
to $152.7 million, or $1.12 per share, for the 2013 fourth quarter.
For the year ended December 31, 2014, net income available to Arch
common shareholders was $812.4 million, or $6.02 per share,
compared to $687.8 million, or $5.07 per share, for 2013, while
after-tax operating income available to Arch common shareholders
for 2014 was $617.3 million, or $4.58 per share, compared to $595.7
million, or $4.39 per share, for 2013. All earnings per share
amounts discussed in this release are on a diluted basis.
The Company’s book value per common share was $45.58 at December
31, 2014, a 3.5% increase from $44.04 per share at September 30,
2014 and a 14.5% increase from $39.82 per share at December 31,
2013. The Company’s after-tax operating income available to Arch
common shareholders represented an annualized return on average
common equity of 10.4% for the 2014 fourth quarter, compared to
11.7% for the 2013 fourth quarter, and 11.1% for the year ended
December 31, 2014, compared to 11.7% for 2013. The Company’s net
income available to Arch common shareholders represented an
annualized return on average common equity of 14.5% for the 2014
fourth quarter, compared to 12.0% for the 2013 fourth quarter, and
14.6% for the year ended December 31, 2014, compared to 13.5% for
2013.
The following table summarizes the Company’s underwriting
results, excluding amounts related to the ‘other’ segment (i.e.,
results of Watford). Although the Company owns approximately 11% of
Watford’s common equity, it consolidates the results of Watford in
its financial statements, pursuant to generally accepted accounting
principles. 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 December 31,
2014.
Three Months
Ended December 31, Year Ended December 31, (U.S. dollars
in thousands)
2014 2013
% Change 2014
2013 % Change Gross
premiums written $ 1,069,932 $ 955,199 12.0 $
4,760,394 $ 4,196,623 13.4 Net premiums written 804,836
748,921 7.5 3,617,482 3,351,367 7.9 Net premiums earned 869,604
839,366 3.6 3,490,271 3,145,952 10.9 Underwriting income 114,300
128,318 (10.9 ) 474,178 451,737 5.0
Underwriting
Ratios
% PointChange
% PointChange
Loss ratio 52.8 % 51.7 % 1.1 53.0 % 53.4 % (0.4 ) Acquisition
expense ratio 18.4 % 18.8 % (0.4 ) 18.0 % 17.9 % 0.1 Other
operating expense ratio 16.3 % 14.9 % 1.4 15.8 % 14.6 % 1.2
Combined ratio 87.5 % 85.4 % 2.1 86.8 % 85.9 % 0.9
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, a non-GAAP measure, to net income available to Arch
common shareholders and related diluted per share results. See
‘Comments on Regulation G’ for a further discussion of after-tax
operating income or loss available to Arch common shareholders.
Three Months
Ended Year Ended December 31, December 31,
(U.S. dollars in thousands, except share data)
2014
2013 2014
2013 After-tax operating income available to
Arch common shareholders $ 150,184 $ 152,741 $
617,312 $ 595,715 Net realized gains, net of tax 26,847
8,584 122,863 73,844 Net impairment losses recognized in earnings,
net of tax (3,837 ) (88 ) (30,150 ) (3,786 ) Equity in net income
of investment funds accounted for using the equity method, net of
tax 2,252 5,309 19,235 35,738 Net foreign exchange gains (losses),
net of tax 34,233 (10,541 ) 83,157 (13,718 ) Net
income available to Arch common shareholders $ 209,679
$ 156,005 $ 812,417 $
687,793
Diluted per common
share results:
After-tax operating income available to Arch common shareholders $
1.15 $ 1.12 $ 4.58 $ 4.39 Net realized gains, net of tax 0.21 0.06
0.91 0.54 Net impairment losses recognized in earnings, net of tax
(0.03 ) — (0.22 ) (0.03 ) Equity in net income of investment funds
accounted for using the equity method, net of tax 0.01 0.04 0.14
0.27 Net foreign exchange gains (losses), net of tax 0.26
(0.08 ) 0.61 (0.10 ) Net income available to Arch common
shareholders $ 1.60 $ 1.14 $
6.02 $ 5.07 Weighted average common
shares and common share equivalents outstanding - diluted
130,855,218 136,467,998 134,922,322 135,777,183
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 3.34 years at December 31, 2014,
compared to 3.28 years at September 30, 2014. Including the effects
of foreign exchange, total return on the Company’s investment
portfolio was 0.85% for the 2014 fourth quarter, compared to 0.97%
for the 2013 fourth quarter. Total return in the 2014 fourth
quarter was primarily driven by investment grade fixed income
returns and strong returns on equities during the period, partially
offset by strengthening of the U.S. Dollar 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 1.34% for the 2014 fourth quarter,
compared to 0.85% for the 2013 fourth quarter.
Net investment income for the 2014 fourth quarter was $72.6
million, or $0.56 per share, compared to $72.2 million, or $0.53
per share, for the 2014 third quarter, and $67.1 million, or $0.49
per share, for the 2013 fourth quarter. The annualized pre-tax
investment income yield was 2.16% for the 2014 fourth quarter,
compared to 2.05% for the 2014 third quarter and 2.08% for the 2013
fourth 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 $226.9 million for the
2014 fourth quarter, compared to $223.8 million for the 2013 fourth
quarter.
In 2008, the Company provided $100.0 million of funding to Gulf
Reinsurance Limited (“Gulf Re”), a specialty reinsurer based in the
Dubai International Financial Centre which was founded jointly by
Arch and Gulf Investment Corporation (“GIC”). 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).’ The Company
recorded a loss of $5.0 million in the 2014 fourth quarter and
$14.1 million for the year ended December 31, 2014 related to its
investment in Gulf Re, primarily resulting from a small number of
large losses. The Company entered into a number of strategic
initiatives in the 2014 fourth quarter, including an agreement to
acquire complete ownership of Gulf Re, which is currently pending
approval by the Dubai Financial Services Authority. To further
support Gulf Re’s business in advance of the January 1 renewal
season, the Company entered into a 90% whole account quota share
retrocession arrangement of Gulf Re’s net liabilities and a
portfolio transfer of all of Gulf Re’s existing business (both
unearned premium and loss reserves), effective as of October 1,
2014.
On a pre-tax basis, net foreign exchange gains for the 2014
fourth quarter were $34.5 million, compared to net foreign exchange
losses for the 2013 fourth quarter of $9.8 million. For both
periods, such amounts were primarily unrealized and resulted from
the effects of revaluing the Company’s net insurance liabilities
required to be settled in foreign currencies at each balance sheet
date. Changes in the value of available-for-sale investments held
in foreign currencies due to foreign currency rate movements are
reflected as a direct increase or decrease to shareholders’ equity
and are not included in the consolidated statements of income.
The Company’s effective tax rate on income before income taxes
was 2.5% for the 2014 fourth quarter and 2.7% for the year ended
December 31, 2014, compared to 8.7% for the 2013 fourth quarter and
4.4% for 2013. The Company’s effective tax rate on pre-tax
operating income available to Arch common shareholders was 1.7% for
the 2014 fourth quarter and 2.4% for the year ended December 31,
2014, compared to 8.3% for the 2013 fourth quarter and 4.8% for
2013. The 2013 effective tax rates reflected the recognition of a
valuation allowance on a deferred tax asset in the 2013 fourth
quarter. 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.
During the 2014 fourth quarter, the Company repurchased 3.6
million common shares for an aggregate purchase price of $202.2
million under its share repurchase program. Since the inception of
the share repurchase program through December 31, 2014, ACGL has
repurchased 118.1 million common shares for an aggregate purchase
price of $3.24 billion. At December 31, 2014, $887.1 million of
repurchases were available under the share repurchase program.
At December 31, 2014, total capital available to Arch of $7.03
billion consisted of $800.0 million of senior notes, representing
11.4% 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 4.6% of the total, and
common shareholders’ equity of $5.81 billion, representing 82.6% 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 February 11, 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 February
11, 2015 at 3:00 p.m. Eastern Time until February 18, 2015 at
midnight Eastern Time. To access the replay, domestic callers
should dial 888-286-8010 (passcode 22410429), and international
callers should dial 617-801-6888 (passcode 22410429).
Please refer to the Company’s Financial Supplement dated
December 31, 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 $7.03 billion in capital at December 31, 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)
December
31, 2014 December 31, 2013 Calculation
of book value per common share: Total shareholders’ equity
available to Arch $ 6,130,053 $ 5,647,496 Less
preferred shareholders’ equity 325,000 325,000 Common
shareholders’ equity available to Arch 5,805,053 5,322,496 Common
shares outstanding, net of treasury shares (1) 127,367,934
133,674,884 Book value per common share $ 45.58
$ 39.82 (1) Excludes the effects
of 7,804,033 and 8,338,480 stock options and 447,073 and 443,710
restricted stock units outstanding at December 31, 2014 and
December 31, 2013, respectively.
Investment
Information
(U.S. dollars in thousands, except share data)
Three
Months Ended Year Ended December 31, December
31, 2014 2013 2014
2013 Components of net investment income (1):
Fixed maturities $ 65,978 $ 63,376 $ 257,387 $
249,833 Term loan investments (2) 4,902 5,069 21,521 20,608
Equity securities (dividends) 4,034 2,091 13,005 8,919 Short-term
investments 244 86 904 1,259 Other (3) 7,122 4,924
28,803 19,710 Gross investment income 82,280 75,546
321,620 300,329 Investment expenses (9,634 ) (8,451 ) (37,284 )
(33,110 ) Net investment income $ 72,646 $
67,095
$ 284,336 $ 267,219 Per share $
0.56 $ 0.49 $ 2.11 $ 1.97
Investment income yield, at
amortized cost (1) (4): Pre-tax 2.16 % 2.08 % 2.08 % 2.12 %
After-tax 2.03 % 1.96 % 1.94 % 1.98 %
Total return (1) (5):
Including effects of foreign exchange 0.85 % 0.97 % 3.21 % 1.28 %
Excluding effects of foreign exchange 1.34 % 0.85 % 4.26 % 1.13 %
Cash flow from operations (1) $ 226,948 $ 223,820 $ 997,815
$ 850,868 (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)
December 31, 2014
December 31, 2013 Amount % of
Total Amount % of Total
Investable assets (1) (2): Fixed maturities available for
sale, at fair value $ 10,750,770 73.6 $ 9,571,776
68.1 Fixed maturities, at fair value (3) 377,053 2.6 448,254 3.2
Fixed maturities pledged under securities lending agreements, at
fair value 50,802 0.3 105,081 0.8 Total fixed
maturities 11,178,625 76.5 10,125,111 72.1 Short-term investments
available for sale, at fair value 797,226 5.5 1,478,367 10.5 Cash
474,247 3.2 434,057 3.1 Equity securities available for sale, at
fair value 658,182 4.5 496,824 3.5 Other investments available for
sale, at fair value 296,224 2.0 498,310 3.6 Other investments, at
fair value (3) 889,253 6.1 773,280 5.5 Investments accounted for
using the equity method (4) 349,014 2.4 244,339 1.7 Securities
transactions entered into but not settled at the balance sheet date
(32,802 ) (0.2 ) (763 ) — Total investable assets managed by the
Company $ 14,609,969 100.0 $ 14,049,525
100.0
Investment portfolio statistics (1):
Average effective duration (in years) 3.34 2.62 Average credit
quality (Standard & Poor’s/Moody’s Investors Service) AA/Aa2
AA-/Aa2 Embedded book yield (before investment expenses) 2.18 %
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
Year Ended December 31, December 31,
2014 2013 2014
2013 Components of losses and loss adjustment expenses
incurred Paid losses and loss adjustment expenses $
428,874 $ 439,411 $ 1,757,260 $ 1,708,817
Change in unpaid losses and loss adjustment expenses 29,905
(5,088 ) 91,817 (29,393 ) Total losses and loss adjustment
expenses $ 458,779 $ 434,323 $
1,849,077 $ 1,679,424
Estimated net (favorable) adverse
development in prior year
loss reserves, net of related
adjustments
Net impact on underwriting results: Insurance $ (9,437 ) $ (2,884 )
$ (44,087 ) $ (35,702 ) Reinsurance (63,192 ) (63,200 ) (261,519 )
(218,034 ) Mortgage 858 (438 ) (1,005 ) (438 ) Total $
(71,771 ) $ (66,522 ) $ (306,611 ) $
(254,174 ) Impact on losses and loss adjustment expenses: Insurance
$ (12,322 ) $ (6,649 ) $ (58,677 ) $ (45,148 ) Reinsurance (66,785
) (63,607 ) (267,314 ) (217,911 ) Mortgage 858 (983 ) (911 )
(983 ) Total $ (78,249 ) $ (71,239 ) $
(326,902 ) (264,042 ) Impact on acquisition expenses: Insurance $
2,885 $ 3,765 $ 14,590 $ 9,446 Reinsurance 3,593 407 5,795 (123 )
Mortgage — 545 (94 ) 545 Total $ 6,478
$ 4,717 $ 20,291 $ 9,868
Impact on combined ratio: Insurance (1.8 )% (0.6 )% (2.2 )%
(1.9 )% Reinsurance (20.7 )% (19.0 )% (20.4 )% (17.9 )% Mortgage
1.7 % (3.1 )% (0.5 )% (0.9 )% Total (8.3 )% (7.9 )% (8.8 )% (8.1 )%
Impact on loss ratio: Insurance (2.4 )% (1.3 )% (2.9 )% (2.4 )%
Reinsurance (21.8 )% (19.2 )% (20.9 )% (17.9 )% Mortgage 1.7 % (6.9
)% (0.5 )% (1.9 )% Total (9.0 )% (8.5 )% (9.4 )% (8.4 )% Impact on
acquisition expense ratio: Insurance 0.6 % 0.7 % 0.7 % 0.5 %
Reinsurance 1.1 % 0.2 % 0.5 % — % Mortgage — % 3.8 % — % 1.0 %
Total 0.7 % 0.6 % 0.6 % 0.3 %
Estimated net losses incurred from
current accident year
catastrophic events (2)
Insurance $ 5,671 $ 2,203 $ 13,982 $ 21,563 Reinsurance 14,237
14,583 42,145 62,188 Total $
19,908 $ 16,786 $ 56,127 $
83,751 Impact on combined ratio: Insurance 1.1 % 0.4
% 0.7 % 1.1 % Reinsurance 4.7 % 4.4 % 3.3 % 5.1 % Total 2.3 % 2.0 %
1.6 % 2.7 % (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
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, 2014.
Insurance
Segment
Three Months Ended December 31, (U.S. dollars in
thousands)
2014 2013 %
Change Gross premiums written $ 699,109 $
636,949 9.8 Net premiums written 483,176 440,707 9.6 Net premiums
earned 512,770 493,264 4.0 Underwriting income 22,856 18,653 22.5
Underwriting Ratios % Point Change Loss ratio
63.3 % 62.4 % 0.9 Acquisition expense ratio 15.8 % 17.0 % (1.2 )
Other operating expense ratio 16.6 % 16.9 % (0.3 ) Combined ratio
95.7 % 96.3 % (0.6 ) Catastrophic activity and prior year
development: Current accident year catastrophic events, net of
reinsurance and reinstatement premiums 1.1 % 0.4 % 0.7 Net
(favorable) adverse development in prior year loss reserves, net of
related adjustments (1.8 )% (0.6 )% (1.2 ) Combined ratio excluding
such items 96.4 % 96.5 % (0.1 )
Gross premiums written by the insurance segment in the 2014
fourth quarter were 9.8% higher than in the 2013 fourth quarter and
net premiums written were 9.6% higher than in the 2013 fourth
quarter. The growth in net premiums written primarily resulted from
increases in professional lines, excess and surplus casualty and
alternative markets, partially offset by a decrease in construction
and national accounts. The growth in professional lines primarily
reflected increases in small and medium sized international
accounts. The increase in excess and surplus casualty business
primarily resulted from contract binding business and reflected
additional product lines and a high retention ratio while growth in
alternative markets reflected new accounts resulting from a renewal
rights agreement entered into in the 2014 second quarter, growth in
existing accounts and new business. Net premiums written for
construction and national accounts was impacted by a 2014
regulatory change in the accounting for New York workers’
compensation surcharges.
Net premiums earned by the insurance segment in the 2014 fourth
quarter were 4.0% higher than in the 2013 fourth quarter, and
reflect changes in net premiums written over the previous five
quarters.
The 2014 fourth quarter loss ratio reflected 1.1 points of
current year catastrophic activity, compared to 0.4 points in the
2013 fourth quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 2.4 points in the 2014 fourth quarter, compared to 1.3
points in the 2013 fourth quarter. The estimated net favorable
development in the 2014 fourth quarter primarily resulted from
better than expected claims emergence in short-tail business from
more recent accident years.
The underwriting expense ratio was 32.4% in the 2014 fourth
quarter, compared to 33.9% in the 2013 fourth quarter. The
acquisition expense ratio was 15.8% in the 2014 fourth quarter,
compared to 17.0% in the 2013 fourth quarter. The higher ratio in
the 2013 fourth quarter primarily resulted from the accounting for
New York workers’ compensation surcharges noted above. The
comparison of the 2014 fourth quarter and 2013 fourth quarter
acquisition expense ratios is also influenced by, among other
things, the mix and type of business written and earned and the
level of ceding commissions. In addition, the 2014 fourth quarter
ratio was impacted by changes in development of prior year loss
reserves which increased the 2014 fourth quarter commission expense
ratio by 0.6 points, compared to 0.7 points recorded in the 2013
fourth quarter. The operating expense ratio was 16.6% in the 2014
fourth quarter, compared to 16.9% in the 2013 fourth quarter,
primarily reflecting growth in net premiums earned.
Reinsurance
Segment
Three Months Ended December 31, (U.S. dollars in
thousands)
2014 2013 %
Change Gross premiums written $ 314,604 $
299,818 4.9 Net premiums written 268,973 287,779 (6.5 ) Net
premiums earned 305,805 331,929 (7.9 ) Underwriting income 89,902
103,599 (13.2 )
Underwriting Ratios % Point
Change Loss ratio 38.8 % 38.6 % 0.2 Acquisition expense ratio
20.2 % 20.1 % 0.1 Other operating expense ratio 12.3 % 11.6 % 0.7
Combined ratio 71.3 % 70.3 % 1.0 Catastrophic
activity and prior year development: Current accident year
catastrophic events, net of reinsurance and reinstatement premiums
4.7 % 4.4 % 0.3 Net (favorable) adverse development in prior year
loss reserves, net of related adjustments (20.7 )% (19.0 )% (1.7 )
Combined ratio excluding such items 87.3 % 84.9 % 2.4
Gross premiums written by the reinsurance segment in the 2014
fourth quarter were 4.9% higher than in the 2013 fourth quarter,
while net premiums written were 6.5% lower than in the 2013 fourth
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 fourth quarter. The
lower level of net premiums written reflected decreases in casualty
and other specialty lines, partially offset by growth in property
excluding property catastrophe business discussed below. The
decrease in casualty business primarily resulted from a 2013 fourth
quarter portfolio in from a large U.S. professional liability quota
share contract of $44.4 million, along with cessions to Watford Re
in the 2014 fourth quarter. The decrease in other specialty
business reflected a lower level of premiums related to a
multi-line quota share reinsurance agreement entered into in the
2013 third quarter which was not expected to, and did not, recur in
2014. In addition, other specialty premiums reflected a reduction
in motor business. As discussed earlier in this release, the
Company entered into a 90% whole account quota share retrocession
arrangement of Gulf Re’s net liabilities and a portfolio transfer
of all of Gulf Re’s existing business (both unearned premium and
loss reserves), effective as of October 1, 2014. The growth in
property excluding property catastrophe business in the 2014 fourth
quarter primarily resulted from the unearned premium portfolio
transfer from Gulf Re of $50.2 million.
Net premiums earned in the 2014 fourth quarter were 7.9% lower
than in the 2013 fourth quarter, and primarily reflect changes in
net premiums written over the previous five quarters, including the
mix and type of business written.
The 2014 fourth quarter loss ratio reflected 4.7 points of
current year catastrophic activity, compared to 4.7 points of
catastrophic activity in the 2013 fourth quarter. Estimated net
favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 21.8 points in the 2014
fourth quarter, compared to 19.2 points in the 2013 fourth quarter.
The estimated net favorable development in the 2014 fourth 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 fourth 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 fourth quarter.
The underwriting expense ratio was 32.5% in the 2014 fourth
quarter, compared to 31.7% in the 2013 fourth quarter. The
acquisition expense ratio for the 2014 fourth quarter was 20.2%,
compared to 20.1% for the 2013 fourth quarter. The 2014 fourth
quarter acquisition expense ratio was impacted by changes in
development of prior year loss reserves which increased the ratio
by 1.1 points, compared to 0.2 points for the 2013 fourth 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 the level of ceding commissions. The
operating expense ratio for the 2014 fourth quarter was 12.3%,
compared to 11.6% in the 2013 fourth quarter, primarily reflecting
the lower level of net premiums earned.
Mortgage
Segment
Three Months Ended December 31, (U.S. dollars in
thousands)
2014 2013 %
Change Gross premiums written $ 57,584 $
20,435 181.8 Net premiums written 52,687 20,435 157.8 Net premiums
earned 51,029 14,173 260.0 Underwriting income 1,542 6,066 (74.6 )
Underwriting Ratios % Point Change Loss ratio
30.8 % (10.8 )% 41.6 Acquisition expense ratio 32.9 % 46.2 % (13.3
) Other operating expense ratio 36.9 % 23.6 % 13.3 Combined
ratio 100.6 % 59.0 % 41.6 Net (favorable) adverse
development in prior year loss
reserves, net of related adjustments
1.7 % (3.1 )% 4.8 Combined ratio excluding prior year
development 98.9 % 62.1 % 36.8
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 fourth quarter included $25.3
million of business underwritten by Arch MI U.S., compared to $32.2
million in the 2014 third quarter. The lower sequential level of
net premiums written primarily resulted from a lower level of
lender paid mortgage insurance (“LPMI”) single business than in the
2014 third quarter. In addition, net premiums written for the 2014
fourth quarter included $7.7 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 fourth quarter were
substantially higher than in the 2013 fourth 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 fourth quarter continues to reflect
relatively low levels of reported delinquencies and a higher
contribution from Arch MI U.S. while the 2013 fourth quarter loss
ratio reflected favorable development in current year and prior
year loss reserves on certain U.S. mortgage reinsurance business.
This also resulted in an increase to the acquisition expense ratio
for the 2013 fourth quarter. The acquisition expense ratio for the
2014 fourth quarter increased sequentially from 22.6% in the 2014
third quarter, reflecting a higher level of costs related to
certain U.S. mortgage reinsurance business. The operating expense
ratio and overall underwriting expense ratio are expected to stay
at elevated levels until Arch MI U.S. reaches scale.
At December 31, 2014, the mortgage segment’s risk-in-force of
$10.1 billion consisted of $5.6 billion from Arch MI U.S. and an
additional $4.5 billion through the mortgage segment’s reinsurance
and risk-sharing operations. Arch MI U.S. generated $1.36 billion
of new insurance written (“NIW”) during the 2014 fourth quarter,
primarily for 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 December 31, 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;
- the volatility of the Company’s
shareholders’ equity from foreign currency fluctuations, which
could increase due to the Company not matching portions of its
projected liabilities in foreign currencies with investments in the
same currencies in current and future periods.
- 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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