Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income
available to Arch common shareholders for the 2015 first quarter
was $277.9 million, or $2.16 per share, compared to $177.0 million,
or $1.30 per share, for the 2014 first quarter. The Company also
reported after-tax operating income available to Arch common
shareholders of $149.8 million, or $1.17 per share, for the 2015
first quarter, compared to after-tax operating income available to
Arch common shareholders of $164.4 million, or $1.20 per share, for
the 2014 first quarter. The Company’s after-tax operating income
available to Arch common shareholders represented an annualized
return on average common equity of 10.2% for the 2015 first
quarter, compared to 12.1% for the 2014 first quarter. The
Company’s net income available to Arch common shareholders
represented an annualized return on average common equity of 18.9%
for the 2015 first quarter, compared to 13.0% for the 2014 first
quarter. The Company’s book value per common share was $47.80 at
March 31, 2015, a 4.9% increase from $45.58 per share at December
31, 2014 and a 15.1% increase from $41.52 per share at March 31,
2014.
After-tax operating income or loss available to Arch common
shareholders, a non-GAAP measure, is defined as net income
available to Arch common shareholders, excluding net realized gains
or losses, net impairment losses recognized in earnings, equity in
net income or loss of investment funds accounted for using the
equity method and net foreign exchange gains or losses, net of
income taxes. See ‘Comments on Regulation G’ for a further
discussion of after-tax operating income or loss available to Arch
common shareholders. All earnings per share amounts discussed in
this release are on a diluted basis.
The following table summarizes the Company’s underwriting
results, excluding amounts related to the ‘other’ segment (i.e.,
results of Watford Re). Although the Company owns approximately 11%
of Watford Re’s common equity, it consolidates the results of
Watford Re 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 and 12 of the Company’s Financial Supplement dated
March 31, 2015.
(U.S. dollars in thousands)
Three Months Ended March
31, 2015 2014 % Change Gross
premiums written $ 1,311,678 $ 1,295,136 1.3 Net premiums written
942,417 1,032,796 (8.8 ) Net premiums earned 837,998 857,614 (2.3 )
Underwriting income 114,703 133,578 (14.1 )
Underwriting
Ratios % Point Change Loss ratio 53.0 % 50.7 % 2.3
Acquisition expense ratio 17.0 % 18.6 % (1.6 ) Other operating
expense ratio 17.5 % 15.3 % 2.2 Combined ratio 87.5 % 84.6 %
2.9
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
to net income available to Arch common shareholders and related
diluted per share results:
(U.S. dollars in thousands, except share data)
Three
Months Ended March 31, 2015 2014
After-tax operating income available to Arch common shareholders $
149,846 $ 164,404 Net realized gains, net of tax 61,934 18,273 Net
impairment losses recognized in earnings, net of tax (5,799 )
(2,971 ) Equity in net income of investment funds accounted for
using the equity method, net of tax 5,532 3,164 Net foreign
exchange gains (losses), net of tax 66,339 (5,854 ) Net
income available to Arch common shareholders $ 277,852 $
177,016
Diluted per common
share results:
After-tax operating income available to Arch common shareholders $
1.17 $ 1.20 Net realized gains, net of tax 0.48 0.14 Net impairment
losses recognized in earnings, net of tax (0.05 ) (0.02 ) Equity in
net income of investment funds accounted for using the equity
method, net of tax 0.04 0.02 Net foreign exchange gains (losses),
net of tax 0.52 (0.04 ) Net income available to Arch common
shareholders $ 2.16 $ 1.30 Weighted average
common shares and common share equivalents outstanding - diluted
128,451,054 136,562,717
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 3.35 years at March 31, 2015,
compared to 3.34 years at December 31, 2014. Including the
effects of foreign exchange, total return on the Company’s
investment portfolio was 1.11% for the 2015 first quarter, compared
to 1.00% for the 2014 first quarter. Total return in the 2015 first
quarter reflects favorable returns in equities, high yield and term
loan investments, partially offset by 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 2.05%
for the 2015 first quarter, compared to 1.02% for the 2014 first
quarter.
Net investment income for the 2015 first quarter was $70.3
million, or $0.55 per share, compared to $67.0 million, or $0.49
per share, for the 2014 first quarter, reflecting a higher level of
income recorded on certain fund investments, partially offset by a
higher level of related investment expenses. Net investment income
for the 2015 first quarter was lower than the $72.6 million, or
$0.56 per share, for the 2014 fourth quarter. The difference was
related to a lower level of income on fixed maturities due, in
part, to changes in the mix of investments, changes in underlying
assumptions on mortgage-backed securities and the impact of foreign
exchange. The annualized pre-tax investment income yield was 2.09%
for the 2015 first quarter, compared to 2.16% for the 2014 fourth
quarter and 2.08% for the 2014 first quarter. Such yields reflect
the effects of low prevailing interest rates available in the
market and the Company’s investment strategy, which puts an
emphasis on total return.
Cash flow provided by operating activities was $15.6 million for
the 2015 first quarter, compared to $197.4 million for the 2014
first quarter. The lower level of operating cash flows in the 2015
first quarter reflected an increase in outflows related to claim
payments, including amounts which are reimbursable from insureds,
reinsurers and others, and increases in net outflows to Watford Re
and other reinsurers. In addition, the 2015 first quarter reflected
a higher level of outflows related to the Company’s mortgage
operations.
On a pre-tax basis, net foreign exchange gains for the 2015
first quarter were $66.9 million, compared to net foreign exchange
losses for the 2014 first quarter of $6.7 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.
The Company’s effective tax rate on income before income taxes
(based on the Company’s estimated annual effective tax rate) was
4.3% for the 2015 first quarter, compared to 2.0% for the 2014
first quarter. The Company’s effective tax rate on pre-tax
operating income available to Arch shareholders was 3.9% for the
2015 first quarter, compared to 1.7% for the 2014 first quarter.
The Company’s effective tax rate fluctuates from year to year
consistent with the relative mix of income or loss reported by
jurisdiction and the varying tax rates in each jurisdiction. The
Company’s quarterly tax provision is adjusted to reflect changes in
its estimated annual effective tax rate, if any.
During the 2015 first quarter, the Company repurchased 2.7
million common shares for an aggregate purchase price of $162.9
million under its share repurchase program. Since the inception of
the share repurchase program through March 31, 2015, ACGL has
repurchased 120.9 million common shares for an aggregate purchase
price of $3.40 billion. At March 31, 2015, $724.2 million of
repurchases were available under the share repurchase program.
At March 31, 2015, total capital available to Arch of $7.19
billion consisted of $800.0 million of senior notes, representing
11.1% 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 4.5% of the total, and
common shareholders’ equity of $5.96 billion, representing 83.0% of
the total. 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, 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.
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on April 29, 2015. A live
webcast of this call will be available via the Investors section of
the Company’s website at http://www.archcapgroup.com. A telephone replay of
the conference call also will be available beginning on April 29,
2015 at 3:00 p.m. Eastern Time until May 6, 2015 at midnight
Eastern Time. To access the replay, domestic callers should dial
888-286-8010 (passcode 38733037), and international callers should
dial 617-801-6888 (passcode 38733037).
Please refer to the Company’s Financial Supplement dated March
31, 2015, which is available via the Investors section of the
Company’s website at http://www.archcapgroup.com. The Financial
Supplement provides additional detail regarding the financial
performance of the Company. From time to time, the Company posts
additional financial information and presentations to its website,
including information with respect to its subsidiaries. Investors
and other recipients of this information are encouraged to check
the Company’s website regularly for additional information
regarding the Company.
Arch Capital Group Ltd., a Bermuda-based company with
approximately $7.19 billion in capital at March 31, 2015, provides
insurance and reinsurance on a worldwide basis through its wholly
owned subsidiaries.
Supplemental Information
Book Value Per
Common Share
(U.S. dollars in thousands, except share data)
March
31, December 31, 2015 2014 Calculation
of book value per common share: Total shareholders’ equity
available to Arch $ 6,288,702 $ 6,130,053 Less preferred
shareholders’ equity 325,000 325,000 Common shareholders’
equity available to Arch 5,963,702 5,805,053 Common shares
outstanding, net of treasury shares (1) 124,760,841
127,367,934 Book value per common share $ 47.80 $ 45.58
(1) Excludes the effects of 7,736,178 and 7,804,033 stock
options and 440,848 and 447,073 restricted stock units outstanding
at March 31, 2015 and December 31, 2014, respectively.
Investment
Information
(U.S. dollars in thousands, except share data)
Three Months Ended March 31, 2015
2014 Components of net investment income (1): Fixed
maturities $ 62,368 $ 62,449 Term loan investments (2) 4,275 5,669
Equity securities (dividends) 2,679 2,921 Short-term investments
195 405 Other (3) 12,737 4,718 Gross investment
income 82,254 76,162 Investment expenses (11,966 ) (9,169 ) Net
investment income $ 70,288 $ 66,993 Per share $ 0.55
$ 0.49
Investment income yield, at amortized cost (1)
(4): Pre-tax 2.09 % 2.08 % After-tax 1.94 % 1.94 %
Total
return (1) (5): Including effects of foreign exchange 1.11 %
1.00 % Excluding effects of foreign exchange 2.05 % 1.02 %
Cash flow from operations (1) $ 15,599 $ 197,395 (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)
March 31,
2015 December 31, 2014 Amount % of
Total Amount % of Total
Investable assets (1) (2): Fixed maturities available for
sale, at fair value $ 10,568,135 73.1 $ 10,750,770 73.6 Fixed
maturities, at fair value (3) 348,689 2.4 377,053 2.6 Fixed
maturities pledged under securities lending agreements, at fair
value 112,790 0.8 50,802 0.3 Total
fixed maturities 11,029,614 76.3 11,178,625 76.5 Short-term
investments available for sale, at fair value 855,032 5.9 797,226
5.5 Cash 402,314 2.8 474,247 3.2 Equity securities available for
sale, at fair value 687,713 4.8 658,182 4.5
Equity securities, at fair value (3)
907 — — — Other investments available for sale, at fair value
329,677 2.3 296,224 2.0 Other investments, at fair value (3)
901,124 6.2 889,253 6.1 Investments accounted for using the equity
method (4) 412,367 2.8 349,014 2.4 Securities transactions entered
into but not settled at the balance sheet date (162,136 ) (1.1 )
(32,802 ) (0.2 ) Total investable assets managed by the Company $
14,456,612 100.0 $ 14,609,969 100.0
Investment portfolio statistics (1): Average
effective duration (in years) 3.35 3.34 Average credit quality
(Standard & Poor’s/Moody’s Investors Service) AA/Aa2 AA/Aa2
Embedded book yield (before investment expenses) 2.21 % 2.18 % (1)
Excludes amounts related to the ‘other’ segment. (2) This
table excludes the collateral received and reinvested and includes
the fixed maturities and short-term investments pledged under
securities lending agreements, at fair value. (3) Represents
investments which are carried at fair value under the fair value
option and reflected as “investments accounted for using the fair
value option” on the Company’s balance sheet. Changes in the
carrying value of such investments are recorded in net realized
gains or losses. (4) Changes in the carrying value of investment
funds accounted for using the equity method are recorded as “equity
in net income (loss) of investment funds accounted for using the
equity method” rather than as an unrealized gain or loss component
of accumulated other comprehensive income.
Selected
Information on Losses and Loss Adjustment Expenses
(1)
(U.S. dollars in thousands)
Three Months Ended
March 31, 2015 2014 Components of
losses and loss adjustment expenses incurred Paid losses and
loss adjustment expenses $ 432,634 $ 425,914 Change in unpaid
losses and loss adjustment expenses 11,603 8,970
Total losses and loss adjustment expenses $ 444,237 $
434,884
Estimated net (favorable) adverse
development in prior year loss reserves, net of related
adjustments Net impact on underwriting results: Insurance $
(4,955 ) $ (10,417 ) Reinsurance (57,279 ) (70,102 ) Mortgage
(2,812 ) (1,170 ) Total $ (65,046 ) $ (81,689 ) Impact on losses
and loss adjustment expenses: Insurance $ (8,754 ) $ (15,572 )
Reinsurance (58,011 ) (70,399 ) Mortgage (2,615 ) (1,134 ) Total $
(69,380 ) $ (87,105 ) Impact on acquisition expenses: Insurance $
3,799 $ 5,155 Reinsurance 732 297 Mortgage (197 ) (36 ) Total $
4,334 $ 5,416 Impact on combined ratio: Insurance
(1.0 )% (2.2 )% Reinsurance (20.5 )% (20.5 )% Mortgage (5.6 )% (3.0
)% Total (7.8 )% (9.5 )% Impact on loss ratio: Insurance (1.7 )%
(3.3 )% Reinsurance (20.7 )% (20.6 )% Mortgage (5.2 )% (2.9 )%
Total (8.3 )% (10.2 )% Impact on acquisition expense ratio:
Insurance 0.7 % 1.1 % Reinsurance 0.2 % 0.1 % Mortgage (0.4 )% (0.1
)% Total 0.5 % 0.7 %
Estimated net losses incurred from
current accident year catastrophic events (2) Insurance $ 3,181
$ 2,614 Reinsurance 1,430 2,934 Total $ 4,611
$ 5,548 Impact on combined ratio: Insurance 0.6 % 0.5 %
Reinsurance 0.5 % 0.9 % Total 0.6 % 0.6 % (1) Excludes
amounts related to the ‘other’ segment. (2) Equals estimated losses
from catastrophic events occurring in the current accident year,
net of reinsurance and reinstatement premiums. Amounts shown for
the insurance segment are for named catastrophic events only.
Amounts shown for the reinsurance segment include (i) named events
with over $5 million of losses incurred by its Bermuda and Europe
operations and (ii) all catastrophe losses incurred by its U.S.
operations. Amounts not applicable for the mortgage segment.
Segment Information
The following section provides analysis on the Company’s 2015
first quarter performance by operating segment. For additional
details regarding the Company’s operating segments, please refer to
the Company’s Financial Supplement dated March 31, 2015.
Insurance
Segment
Three Months Ended March 31, (U.S. dollars in
thousands)
2015 2014 % Change
Gross premiums written $ 766,153 $ 730,646 4.9 Net premiums
written 542,003 545,602 (0.7 ) Net premiums earned 507,914 477,501
6.4 Underwriting income 27,248 33,155 (17.8 )
Underwriting Ratios % Point Change Loss ratio 62.6 %
60.1 % 2.5 Acquisition expense ratio 14.8 % 16.1 % (1.3 ) Other
operating expense ratio 17.3 % 17.0 % 0.3 Combined ratio
94.7 % 93.2 % 1.5 Catastrophic activity and prior
year development: Current accident year catastrophic events, net of
reinsurance and reinstatement premiums 0.6 % 0.5 % 0.1 Net
(favorable) adverse development in prior year loss reserves, net of
related adjustments (1.0 )% (2.2 )% 1.2 Combined ratio
excluding such items 95.1 % 94.9 % 0.2
Gross premiums written by the insurance segment in the 2015
first quarter were 4.9% higher than in the 2014 first quarter while
net premiums written were 0.7% lower than in the 2014 first
quarter. The differential in gross versus net premiums written
primarily reflects growth in alternative markets business which is
subject to a high level of cessions to captives. Changes in foreign
currency rates resulted in a decrease in net premiums written in
the 2015 first quarter of approximately $9 million compared to the
2014 first quarter. The change in net premiums written primarily
resulted from reductions in professional lines, energy and marine
and program business, partially offset by growth in alternative
markets and excess and surplus casualty business. The decrease in
professional lines and energy and marine business was primarily due
to a strategic reduction in exposure to international business
while the lower level of program business reflected the termination
of one account. The increase in alternative markets primarily
reflected new accounts resulting from a renewal rights agreement
entered into in the 2014 second quarter while growth in excess and
surplus casualty primarily resulted from contract binding business.
Net premiums earned by the insurance segment in the 2015 first
quarter were 6.4% higher than in the 2014 first quarter, and
reflect changes in net premiums written over the previous five
quarters.
The 2015 first quarter loss ratio reflected 0.6 points of
current year catastrophic activity, compared to 0.5 points in the
2014 first quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss
ratio by 1.7 points in the 2015 first quarter, compared to 3.3
points in the 2014 first quarter. The estimated net favorable
development in the 2015 first quarter primarily resulted from
better than expected claims emergence in short-tail business from
more recent accident years.
The underwriting expense ratio was 32.1% in the 2015 first
quarter, compared to 33.1% in the 2014 first quarter. The
acquisition expense ratio was 14.8% in the 2015 first quarter,
compared to 16.1% in the 2014 first quarter. The lower 2015 first
quarter ratio primarily resulted from an increase in ceding
commission rates. The operating expense ratio was 17.3% in the 2015
first quarter, compared to 17.0% in the 2014 first quarter, as a
higher level of aggregate expenses was substantially offset by
growth in net premiums earned.
Reinsurance
Segment
Three Months Ended March 31, (U.S. dollars in
thousands)
2015 2014 % Change
Gross premiums written $ 485,112 $ 517,053 (6.2 ) Net
premiums written 348,543 443,926 (21.5 ) Net premiums earned
279,717 341,348 (18.1 ) Underwriting income 73,966 92,400 (20.0 )
Underwriting Ratios % Point Change Loss ratio
40.2 % 40.9 % (0.7 ) Acquisition expense ratio 20.2 % 21.5 % (1.3 )
Other operating expense ratio 13.6 % 10.6 % 3.0 Combined
ratio 74.0 % 73.0 % 1.0 Catastrophic activity and
prior year development: Current accident year catastrophic events,
net of reinsurance and reinstatement premiums 0.5 % 0.9 % (0.4 )
Net (favorable) adverse development in prior year loss
reserves, net of related adjustments
(20.5 )% (20.5 )%
-
Combined ratio excluding such items 94.0 % 92.6 % 1.4
Gross premiums written by the reinsurance segment in the 2015
first quarter were 6.2% lower than in the 2014 first quarter, while
net premiums written were 21.5% lower than in the 2014 first
quarter. The difference in gross versus net premiums written
primarily reflects an increase in cessions to Watford Re in the
2015 first quarter compared to the 2014 first quarter. Changes in
foreign currency rates resulted in a decrease in net premiums
written in the 2015 first quarter of approximately $23 million
compared to the 2014 first quarter. The lower level of net premiums
written reflected decreases in other specialty, property
catastrophe and casualty lines. The decrease in other specialty
reflected non-renewals and share decreases in response to current
market conditions. The lower level of property catastrophe business
reflected non-renewals and share decreases in response to current
market conditions and a higher usage of retrocessional coverage.
The decrease in casualty premiums primarily resulted from cessions
to Watford Re. Net premiums earned in the 2015 first quarter were
18.1% lower than in the 2014 first quarter, and primarily reflect
changes in net premiums written over the previous five quarters,
including the mix and type of business written.
The 2015 first quarter loss ratio reflected 0.6 points of
current year catastrophic activity, compared to 1.0 points of
catastrophic activity in the 2014 first quarter. Estimated net
favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 20.7 points in the 2015
first quarter, compared to 20.6 points in the 2014 first quarter.
The estimated net favorable development in the 2015 first quarter
primarily resulted from better than expected claims emergence in
short-tail business from more recent underwriting years and in
longer-tail business across all underwriting years.
The underwriting expense ratio was 33.8% in the 2015 first
quarter, compared to 32.1% in the 2014 first quarter. The
acquisition expense ratio for the 2015 first quarter was 20.2%,
compared to 21.5% for the 2014 first 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 2015 first quarter was 13.6%, compared to 10.6% in the 2014
first quarter, primarily reflecting the lower level of net premiums
earned.
Mortgage
Segment
Three Months Ended March 31, (U.S. dollars in
thousands)
2015 2014 % Change
Gross premiums written $ 60,541 $ 47,907 26.4 Net premiums
written 51,871 43,268 19.9 Net premiums earned 50,367 38,765 29.9
Underwriting income 13,489 8,023 68.1
Underwriting
Ratios % Point Change Loss ratio 27.4 % 21.9 % 5.5
Acquisition expense ratio 20.7 % 23.6 % (2.9 ) Other operating
expense ratio 40.4 % 35.8 % 4.6 Combined ratio 88.5 % 81.3 %
7.2 Net (favorable) adverse development in prior year
loss reserves, net of related adjustments (5.6 )% (3.0 )% (2.6 )
Combined ratio excluding prior year development 94.1 % 84.3 % 9.8
The mortgage segment includes the results of Arch Mortgage
Insurance Company (“Arch MI U.S.”), a leading provider of mortgage
insurance products and services to the U.S. marketplace, along with
the Company’s other global mortgage insurance, reinsurance and
risk-sharing products.
Gross premiums written by the mortgage segment in the 2015 first
quarter were 26.4% higher than in the 2014 first quarter, while net
premiums written were 19.9% higher than in the 2014 first quarter.
Net premiums written in the 2015 first quarter included $27.9
million of business underwritten by Arch MI U.S., compared to $16.7
million in the 2014 first quarter. The 2015 first quarter amount
reflected $23.7 million from credit union clients and $4.2 million
from banks and other mortgage originators while the 2014 first
quarter amount reflected two months of activity due to the
acquisition of Arch MI U.S. effective January 30, 2014. Premiums
written on reinsurance treaties covering U.S. and international
mortgages were lower by $2.6 million compared to the 2014 first
quarter.
Net premiums earned for the 2015 first quarter were 29.9% higher
than in the 2014 first quarter, reflecting the contribution of Arch
MI U.S. business and higher earnings from the mortgage segment’s
quota share reinsurance business. Other underwriting income was
$7.7 million for the 2015 first quarter, compared to $0.8 million
for the 2014 first quarter. Such amounts were primarily related to
risk-sharing products issued to government sponsored entities and
mortgage lenders.
The loss ratio for the 2015 first 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 March 31, 2015, the mortgage segment’s risk-in-force
consisted of $5.73 billion from Arch MI U.S. and an additional
$4.83 billion through the mortgage segment’s reinsurance and
risk-sharing operations. Arch MI U.S. generated $1.81 billion of
new insurance written (“NIW”) during the 2015 first quarter, of
which approximately 50% was from 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 March 31, 2015;
- greater than expected loss ratios on
business written by the Company and adverse development on claim
and/or claim expense liabilities related to business written by its
insurance and reinsurance subsidiaries;
- severity and/or frequency of
losses;
- claims for natural or man-made
catastrophic events in the Company’s insurance or reinsurance
business could cause large losses and substantial volatility in its
results of operations;
- acts of terrorism, political unrest and
other hostilities or other unforecasted and unpredictable
events;
- availability to the Company of
reinsurance to manage its gross and net exposures and the cost of
such reinsurance;
- the failure of reinsurers, managing
general agents, third party administrators or others to meet their
obligations to the Company;
- the timing of loss payments being
faster or the receipt of reinsurance recoverables being slower than
anticipated by the Company;
- the Company’s investment performance,
including legislative or regulatory developments that may adversely
affect the fair value of the Company’s investments;
- the impact of the continued weakness of
the U.S., European countries and other key economies, projected
budget deficits for the U.S., European countries and other
governments and the consequences associated with possible
additional downgrades of securities of the U.S., European countries
and other governments by credit rating agencies, and the resulting
effect on the value of securities in the Company’s investment
portfolio as well as the uncertainty in the market generally;
- losses relating to aviation business
and business produced by a certain managing underwriting agency for
which the Company may be liable to the purchaser of its prior
reinsurance business or to others in connection with the
May 5, 2000 asset sale described in the Company’s periodic
reports filed with the SEC;
- changes in accounting principles or
policies or in the Company’s application of such accounting
principles or policies;
- changes in the political environment of
certain countries in which the Company operates, underwrites
business or invests;
- statutory or regulatory developments,
including as to tax policy matters and insurance and other
regulatory matters such as the adoption of proposed legislation
that would affect Bermuda-headquartered companies and/or
Bermuda-based insurers or reinsurers and/or changes in regulations
or tax laws applicable to the Company, its subsidiaries, brokers or
customers; and
- the other matters set forth under Item
1A “Risk Factors”, Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and other sections
of the Company’s Annual Report on Form 10-K, as well as the other
factors set forth in the Company’s other documents on file with the
SEC, and management’s response to any of the aforementioned
factors.
All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary
statements. The foregoing review of important factors should not be
construed as exhaustive and should be read in conjunction with
other cautionary statements that are included herein or elsewhere.
The Company undertakes no obligation to publicly update or revise
any forward-looking statement, whether as a result of new
information, future events or otherwise.
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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