Arch Capital Group Ltd. (NASDAQ: ACGL) announces its 2020 third
quarter results. The results included:
- Net income available to Arch common shareholders of $408.6
million, or $1.00 per share, a 14.3% annualized return on average
common equity, compared to $382.1 million, or $0.92 per share, for
the 2019 third quarter;
- After-tax operating income available to Arch common
shareholders(1) of $120.3 million, or $0.29 per share, a 4.2%
annualized return on average common equity, compared to $261.0
million, or $0.63 per share, for the 2019 third quarter;
- Pre-tax current accident year catastrophic losses for the
Company’s insurance and reinsurance segments, net of reinsurance
and reinstatement premiums(1) of $203.3 million, primarily related
to Hurricanes Isaias, Laura and Sally along with losses related to
the Derecho Windstorm, California wildfires and other events. Such
amount also includes $11.9 million of COVID-19 related losses;
- Favorable development in prior year loss reserves, net of
related adjustments(1) of $46.4 million;
- Combined ratio excluding catastrophic activity and prior year
development(1) of 84.3%, compared to 80.9% for the 2019 third
quarter;
- The percentage of loans in default on U.S. primary mortgage
business was 4.69% at September 30, 2020, compared to 5.14% at June
30, 2020;
- Total return on investments(1) of 2.30%;
- Book value per common share of $28.75 at September 30, 2020, a
4.1% increase from June 30, 2020 and a 12.2% increase from
September 30, 2019.
All earnings per share amounts discussed in this release are on
a diluted basis. The following table summarizes the Company’s
underwriting results, both (i) on a consolidated basis and (ii) on
a consolidated basis excluding the ‘other’ segment (i.e., results
of Watford):
(U.S. dollars in thousands)
Consolidated
Consolidated Excluding ‘Other’
Segment (1)
Three Months Ended September
30,
Three Months Ended September
30,
2020
2019
% Change
2020
2019
% Change
Gross premiums written
$
2,681,032
$
2,181,121
22.9
$
2,556,914
$
2,043,292
25.1
Net premiums written
1,874,144
1,613,457
16.2
1,726,828
1,457,705
18.5
Net premiums earned
1,771,092
1,438,023
23.2
1,625,061
1,312,191
23.8
Underwriting income
96,604
231,262
(58.2
)
104,877
235,705
(55.5
)
Underwriting Ratios
% Point Change
% Point Change
Loss ratio
68.7
%
55.8
%
12.9
67.7
%
53.8
%
13.9
Underwriting expense ratio
26.2
%
28.4
%
(2.2
)
26.2
%
28.4
%
(2.2
)
Combined ratio
94.9
%
84.2
%
10.7
93.9
%
82.2
%
11.7
Combined ratio excluding catastrophic
activity and prior year development (1)
84.3
%
80.9
%
3.4
(1)
Presentation represents a “non-GAAP”
financial measure as defined in Regulation G. Such presentation
excludes the results of Watford Holdings Ltd. (“Watford”). Pursuant
to GAAP, the Company consolidates the results of Watford in its
financial statements, although it only owns approximately 13% of
Watford’s outstanding common equity as of September 30, 2020. See
‘Comments on Regulation G’ for further details.
The following table summarizes the Company’s consolidated
financial data, including a reconciliation of net income or loss
available to Arch common shareholders to after-tax operating income
or loss available to Arch common shareholders and related diluted
per share results:
(U.S. dollars in thousands, except share
data)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net income available to Arch common
shareholders
$
408,636
$
382,050
$
830,768
$
1,278,726
Net realized (gains) losses
(219,726
)
(77,959
)
(517,007
)
(316,882
)
Equity in net (income) loss of investment
funds accounted for using the equity method
(126,735
)
(17,130
)
(57,407
)
(96,533
)
Net foreign exchange (gains) losses
39,462
(30,160
)
17,003
(29,100
)
Transaction costs and other
1,674
1,995
5,246
5,363
Income tax expense (benefit) (1)
17,010
2,156
48,088
12,708
After-tax operating income available to
Arch common shareholders
$
120,321
$
260,952
$
326,691
$
854,282
Diluted per common
share results:
Net income available to Arch common
shareholders
$
1.00
$
0.92
$
2.02
$
3.11
Net realized (gains) losses
(0.54
)
(0.19
)
(1.25
)
(0.77
)
Equity in net (income) loss of investment
funds accounted for using the equity method
(0.31
)
(0.04
)
(0.14
)
(0.23
)
Net foreign exchange (gains) losses
0.10
(0.07
)
0.04
(0.07
)
Transaction costs and other
0.00
0.00
0.01
0.01
Income tax expense (benefit) (1)
0.04
0.01
0.12
0.03
After-tax operating income available to
Arch common shareholders
$
0.29
$
0.63
$
0.80
$
2.08
Weighted average common shares and common
share equivalents outstanding — diluted
409,194,657
413,180,201
410,314,897
410,807,402
Beginning common shareholders’ equity
$
11,211,825
$
9,977,352
$
10,717,371
$
8,659,827
Ending common shareholders’ equity
11,671,997
10,378,096
11,671,997
10,378,096
Average common shareholders’ equity
$
11,441,911
$
10,177,724
$
11,194,684
$
9,518,962
Annualized return on average common
equity
14.3
%
15.0
%
9.9
%
17.9
%
Annualized operating return on average
common equity
4.2
%
10.3
%
3.9
%
12.0
%
(1)
Income tax expense (benefit) on net
realized gains or losses, equity in net income (loss) of investment
funds accounted for using the equity method, net foreign exchange
gains or losses and transaction costs and other reflects the
relative mix reported by jurisdiction and the varying tax rates in
each jurisdiction.
Each line item in the table above reflects the impact of the
Company’s ownership of Watford’s outstanding common equity. See
‘Comments on Regulation G’ for a discussion of non-GAAP financial
measures.
Segment Information
The following section provides analysis on the Company’s 2020
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, 2020. The
Company’s segment information includes the use of underwriting
income (loss) and a combined ratio excluding catastrophic activity
and prior year development. Such items are non-GAAP financial
measures (see ‘Comments on Regulation G’ for further details).
Insurance Segment
Three Months Ended September
30,
(U.S. dollars in thousands)
2020
2019
% Change
Gross premiums written
$
1,206,328
$
1,005,874
19.9
Net premiums written
824,161
703,840
17.1
Net premiums earned
719,154
605,336
18.8
Underwriting income (loss)
$
(31,159
)
$
(24,113
)
(29.2
)
Underwriting Ratios
% Point Change
Loss ratio
73.0
%
69.8
%
3.2
Underwriting expense ratio
31.2
%
34.2
%
(3.0
)
Combined ratio
104.2
%
104.0
%
0.2
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
10.3
%
4.3
%
6.0
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(0.2
)
%
(0.6
)
%
0.4
Combined ratio excluding catastrophic
activity and prior year development (1)
94.1
%
100.3
%
(6.2
)
(1) See ‘Comments on Regulation G’ for further
discussion.
Gross premiums written by the insurance segment in the 2020
third quarter were 19.9% higher than in the 2019 third quarter
while net premiums written were 17.1% higher than in the 2019 third
quarter. The higher level of net premiums written reflected
increases across most lines of business, due in part to new
business opportunities, rate increases and growth in existing
accounts, partially offset by a decrease in travel business,
reflecting the ongoing impact of the COVID-19 global pandemic. Net
premiums earned in the 2020 third quarter were 18.8% higher than in
the 2019 third quarter, and reflect changes in net premiums written
over the previous five quarters.
The 2020 third quarter loss ratio reflected 10.3 points of
current year catastrophic activity, primarily related to Hurricanes
Isaias, Laura and Sally, including 0.5 points related to COVID-19.
The 2019 third quarter included 4.3 points of current year
catastrophic activity. Estimated net favorable development of prior
year loss reserves, before related adjustments, reduced the loss
ratio by 0.3 points in the 2020 third quarter, compared to 0.7
points in the 2019 third quarter. The 2020 third quarter loss ratio
also reflected changes in mix of business, the effect of rate
increases and a lower level of attritional losses than in the 2019
third quarter.
The underwriting expense ratio was 31.2% in the 2020 third
quarter, compared to 34.2% in the 2019 third quarter, with the
decrease due primarily to growth in net premiums earned.
Reinsurance Segment
Three Months Ended September
30,
(U.S. dollars in thousands)
2020
2019
% Change
Gross premiums written
$
1,004,590
$
662,572
51.6
Net premiums written
604,202
436,476
38.4
Net premiums earned
554,498
363,855
52.4
Other underwriting income (loss)
298
(1,208
)
124.7
Underwriting income (loss)
$
5,506
$
(2,658
)
307.1
Underwriting Ratios
% Point Change
Loss ratio
76.1
%
74.3
%
1.8
Underwriting expense ratio
22.9
%
26.0
%
(3.1
)
Combined ratio
99.0
%
100.3
%
(1.3
)
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
23.3
%
11.5
%
11.8
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(7.4
)
%
(4.0
)
%
(3.4
)
Combined ratio excluding catastrophic
activity and prior year development (1)
83.1
%
92.8
%
(9.7
)
(1) See ‘Comments on Regulation G’ for further
discussion.
Gross premiums written by the reinsurance segment in the 2020
third quarter were 51.6% higher than in the 2019 third quarter,
while net premiums written were 38.4% higher than 2019 third
quarter. The growth in net premiums written is less than the growth
in gross premiums written, primarily reflecting a higher level of
retrocessions on certain property and casualty business. The higher
level of net premiums written primarily reflected increases in
property and other specialty lines, mainly due to new business and
rate increases. Net premiums earned by the reinsurance segment in
the 2020 third quarter were 52.4% higher than in the 2019 third
quarter, and reflect changes in net premiums written over the
previous five quarters.
The 2020 third quarter loss ratio reflected 26.1 points of
current year catastrophic activity, primarily related to Hurricanes
Laura and Sally and the Derecho Windstorm, including 1.5 points
related to COVID-19. The 2019 third quarter included 12.2 points of
current year catastrophic activity, primarily related to Hurricane
Dorian and Typhoon Faxai. Estimated net favorable development of
prior year loss reserves, before related adjustments, reduced the
loss ratio by 7.6 points in the 2020 third quarter, compared to 4.2
points in the 2019 third quarter. The 2020 third quarter loss ratio
also reflected a lower level of attritional losses, changes in the
mix of business and the effect of rate increases.
The underwriting expense ratio was 22.9% in the 2020 third
quarter, compared to 26.0% in the 2019 third quarter, with the
decrease due primarily to growth in net premiums earned.
Mortgage Segment
Three Months Ended September
30,
(U.S. dollars in thousands)
2020
2019
% Change
Gross premiums written
$
346,248
$
375,092
(7.7
)
Net premiums written
298,465
317,389
(6.0
)
Net premiums earned
351,409
343,000
2.5
Other underwriting income
4,600
3,955
16.3
Underwriting income
$
130,530
$
262,476
(50.3
)
Underwriting Ratios
% Point Change
Loss ratio
43.6
%
3.8
%
39.8
Underwriting expense ratio
20.6
%
20.8
%
(0.2
)
Combined ratio
64.2
%
24.6
%
39.6
Prior year development:
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(1.3
)
%
(9.6
)
%
8.3
Combined ratio excluding prior year
development (1)
65.5
%
34.2
%
31.3
(1) See ‘Comments on Regulation G’ for further
discussion.
Gross premiums written by the mortgage segment in the 2020 third
quarter were 7.7% lower than in the 2019 third quarter, while net
premiums written were 6.0% lower, primarily reflecting a reduction
in U.S. primary mortgage insurance in force due to mortgage
refinance activity and a lower contribution from single premium
policies. Net premiums written for the 2020 third quarter also
reflected a lower level of ceded premiums on U.S. primary mortgage
business. Net premiums earned were 2.5% higher for the 2020 third
quarter and reflected a higher level of single premiums earned as a
result of policy terminations due to mortgage refinance activity,
which more than offset the reduction in U.S. primary mortgage
insurance in force noted above.
U.S. primary mortgage business generated $32.8 billion of new
insurance written (“NIW”) in the 2020 third quarter, compared to
$25.3 billion in the 2019 third quarter, with the growth primarily
reflecting the significant increase in mortgage originations in the
market. Monthly premium policies contributed 97.4% of NIW in the
2020 third quarter, compared to 92.3% in the 2019 third
quarter.
Incurred losses for the 2020 third quarter reflected elevated
delinquency rates in comparison to the 2019 third quarter due, in
part, to financial stress from the COVID-19 pandemic. The
percentage of loans in default on U.S. primary mortgage business
was 4.69% at September 30, 2020, compared to 5.14% at June 30,
2020. Estimated net favorable development in prior year loss
reserves, before related adjustments, reduced the 2020 third
quarter loss ratio by 1.3 points, compared to 9.6 points in the
2019 third quarter.
Corporate and Non-Underwriting
Corporate and non-underwriting results include net investment
income, other income (loss), corporate expenses, transaction costs
and other, amortization of intangible assets, interest expense,
items related to the Company’s non-cumulative preferred shares, net
realized gains or losses (which includes changes in the allowance
for credit losses on financial assets and net impairment losses
recognized in earnings), equity in net income or loss of investment
funds accounted for using the equity method, net foreign exchange
gains or losses and income taxes. Such amounts exclude the results
of the ‘other’ segment.
Pre-tax net investment income for the 2020 third quarter was
$0.24 per share, or $99.9 million, compared to $0.31 per share, or
$126.9 million, for the 2019 third quarter. The annualized pre-tax
investment income yield was 1.76% for the 2020 third quarter,
compared to 2.58% for the 2019 third quarter, with the decrease
primarily due to lower yields available in the financial markets.
Total return, a non-GAAP measure, was 2.30% for the 2020 third
quarter. See ‘Comments on Regulation G’ for a discussion of
non-GAAP financial measures.
Interest expense for the 2020 third quarter was $36.2 million,
compared to $23.2 million for the 2019 third quarter. The higher
level of interest expense mainly resulted from the issuance of $1.0
billion of 3.635% senior notes in June 2020.
On a pre-tax basis, net foreign exchange losses for the 2020
third quarter were $38.7 million, compared to net foreign exchange
gains for the 2019 third quarter of $29.8 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.
Although the Company generally attempts to match the currency of
its projected liabilities with investments in the same currencies,
the Company may elect to over or underweight one or more currencies
from time to time, 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
5.3% for the 2020 third quarter, compared to 8.9% for the 2019
third quarter. The Company’s effective tax rate on pre-tax
operating income available to Arch common shareholders was 4.8% for
the 2020 third quarter, compared to 11.7% for the 2019 third
quarter. The Company’s effective tax rate may fluctuate from period
to period based upon the relative mix of income or loss reported by
jurisdiction, the level of catastrophic loss activity incurred, 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.
Conference Call
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on October 30, 2020. 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,
2020 at 2:00 p.m. Eastern Time until November 6, 2020 at midnight
Eastern Time. To access the replay, domestic callers should dial
855-859-2056, and international callers should dial 404-537-3406
(passcode 6457629 for all callers).
Please refer to the Company’s Financial Supplement dated
September 30, 2020, 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 $15.2 billion in capital at September 30, 2020,
provides insurance, reinsurance and mortgage insurance on a
worldwide basis through its wholly owned subsidiaries.
Comments on Regulation G
Throughout this release, the Company presents its operations in
the way it believes will be the most meaningful and useful to
investors, analysts, rating agencies and others who use the
Company’s financial information in evaluating the performance of
the Company and that investors and such other persons benefit from
having a consistent basis for comparison between quarters and for
comparison with other companies within the industry. These measures
may not, however, be comparable to similarly titled measures used
by companies outside of the insurance industry. Investors are
cautioned not to place undue reliance on these non-GAAP financial
measures in assessing the Company’s overall financial
performance.
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 (which includes changes in
the allowance for credit losses on financial assets and net
impairment losses recognized in earnings), equity in net income or
loss of investment funds accounted for using the equity method, net
foreign exchange gains or losses and transaction costs and other,
net of income taxes, and the use of annualized operating return on
average common equity. The presentation of after-tax operating
income available to Arch common shareholders and annualized
operating return on average common equity are non-GAAP financial
measures as defined in Regulation G. The reconciliation of such
measures to net income available to Arch common shareholders and
annualized return on average common equity (the most directly
comparable GAAP financial measures) in accordance with Regulation G
is included on page 2 of this release.
The Company believes that net realized gains or losses, equity
in net income or loss of investment funds accounted for using the
equity method, net foreign exchange gains or losses and transaction
costs and other 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, 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 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,
changes in the allowance for credit losses and 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. Transaction costs
and other include advisory, financing, legal, severance, incentive
compensation and other costs related to acquisitions and Watford’s
non-recurring listing expenses. The Company believes that
transaction costs and other, due to their non-recurring nature, are
not indicative of the performance of, or trends in, the Company’s
business performance. Due to these reasons, the Company excludes
net realized gains or losses, equity in net income or loss of
investment funds accounted for using the equity method, net foreign
exchange gains or losses and transaction costs and other 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.
The Company’s segment information includes the presentation of
consolidated underwriting income or loss and a subtotal of
underwriting income or loss before the contribution from the
‘other’ segment. Such measures represent the pre-tax profitability
of its underwriting operations and include net premiums earned plus
other underwriting income, less losses and loss adjustment
expenses, acquisition expenses and other operating expenses. Other
operating expenses include those operating expenses that are
incremental and/or directly attributable to the Company’s
individual underwriting operations. Underwriting income or loss
does not incorporate items included in the Company’s corporate
(non-underwriting) segment. While these measures are presented in
the Segment Information footnote to the Company’s Consolidated
Financial Statements, they are considered non-GAAP financial
measures when presented elsewhere on a consolidated basis. The
reconciliations of underwriting income or loss to income before
income taxes (the most directly comparable GAAP financial measure)
on a consolidated basis and a subtotal before the contribution from
the ‘other’ segment, in accordance with Regulation G, is shown on
the following pages.
Management measures segment performance for its three
underwriting segments based on underwriting income or loss. The
Company does not manage its assets by underwriting segment and,
accordingly, investment income and other non-underwriting related
items are not allocated to each underwriting segment. As noted
earlier, the ‘other’ segment includes the results of Watford.
Watford has its own management and board of directors that is
responsible for its own results and profitability. For the ‘other’
segment, performance is measured based on net income or loss. The
Company does not guarantee or provide credit support for Watford,
and the Company’s financial exposure to Watford is limited to its
investment in Watford’s senior notes, common and preferred shares
and counterparty credit risk (mitigated by collateral) arising from
reinsurance transactions.
Along with consolidated underwriting income, the Company
provides a subtotal of underwriting income or loss before the
contribution from the ‘other’ segment and believes that this
presentation enables investors and other users of the Company’s
financial information to analyze the Company’s underwriting
performance in a manner similar to how the Company’s management
analyzes performance.
In addition, the Company’s segment information includes the use
of a combined ratio excluding catastrophic activity and prior year
development, for the insurance and reinsurance segments, and a
combined ratio excluding prior year development, for the mortgage
segment. These ratios are non-GAAP financial measures as defined in
Regulation G. The reconciliation of such measures to the combined
ratio (the most directly comparable GAAP financial measure) in
accordance with Regulation G are shown on the individual segment
pages. The Company’s management utilizes the adjusted combined
ratios excluding current accident year catastrophic events and
favorable or adverse development in prior year loss reserves in its
analysis of the underwriting performance of each of its
underwriting segments.
Total return on investments includes investment income, equity
in net income or loss of investment funds accounted for using the
equity method, net realized gains and losses (excluding changes in
the allowance for credit losses on non-investment related financial
assets) and the change in unrealized gains and losses generated by
Arch’s investment portfolio. Total return is calculated on a
pre-tax basis and before investment expenses, excludes amounts
reflected in the ‘other’ segment, and reflects the effect of
financial market conditions along with foreign currency
fluctuations. Management uses total return on investments as a key
measure of the return generated to Arch common shareholders, and
compares the return generated by the Company’s investment portfolio
against benchmark returns during the periods presented.
The following tables summarize the Company’s results by segment
for the 2020 third quarter and 2019 third quarter and a
reconciliation of underwriting income or loss to income or loss
before income taxes and net income or loss available to Arch common
shareholders:
(U.S. Dollars in thousands)
Three Months Ended
September 30, 2020
Insurance
Reinsurance
Mortgage
Sub-total
Other
Total
Gross premiums written (1)
$
1,206,328
$
1,004,590
$
346,248
$
2,556,914
$
197,480
$
2,681,032
Premiums ceded
(382,167
)
(400,388
)
(47,783
)
(830,086
)
(50,164
)
(806,888
)
Net premiums written
824,161
604,202
298,465
1,726,828
147,316
1,874,144
Change in unearned premiums
(105,007
)
(49,704
)
52,944
(101,767
)
(1,285
)
(103,052
)
Net premiums earned
719,154
554,498
351,409
1,625,061
146,031
1,771,092
Other underwriting income (loss)
(31
)
298
4,600
4,867
546
5,413
Losses and loss adjustment expenses
(525,321
)
(422,084
)
(153,055
)
(1,100,460
)
(115,813
)
(1,216,273
)
Acquisition expenses
(102,420
)
(85,388
)
(35,716
)
(223,524
)
(24,418
)
(247,942
)
Other operating expenses
(122,541
)
(41,818
)
(36,708
)
(201,067
)
(14,619
)
(215,686
)
Underwriting income (loss)
$
(31,159
)
$
5,506
$
130,530
104,877
(8,273
)
96,604
Net investment income
99,857
28,655
128,512
Net realized gains (losses)
210,984
69,515
280,499
Equity in net income (loss) of investment
funds accounted for using the equity method
126,735
—
126,735
Other income
919
—
919
Corporate expenses
(16,263
)
—
(16,263
)
Transaction costs and other
(1,674
)
—
(1,674
)
Amortization of intangible assets
(16,715
)
—
(16,715
)
Interest expense
(36,224
)
(5,119
)
(41,343
)
Net foreign exchange gains (losses)
(38,681
)
(6,204
)
(44,885
)
Income (loss) before income
taxes
433,815
78,574
512,389
Income tax expense
(23,638
)
(69
)
(23,707
)
Net income (loss)
410,177
78,505
488,682
Dividends attributable to redeemable
noncontrolling interests
(882
)
(993
)
(1,875
)
Amounts attributable to nonredeemable
noncontrolling interests
—
(67,768
)
(67,768
)
Net income (loss) available to
Arch
409,295
9,744
419,039
Preferred dividends
(10,403
)
—
(10,403
)
Net income (loss) available to Arch
common shareholders
$
398,892
$
9,744
$
408,636
Underwriting Ratios
Loss ratio
73.0
%
76.1
%
43.6
%
67.7
%
79.3
%
68.7
%
Acquisition expense ratio
14.2
%
15.4
%
10.2
%
13.8
%
16.7
%
14.0
%
Other operating expense ratio
17.0
%
7.5
%
10.4
%
12.4
%
10.0
%
12.2
%
Combined ratio
104.2
%
99.0
%
64.2
%
93.9
%
106.0
%
94.9
%
Net premiums written to gross premiums
written
68.3
%
60.1
%
86.2
%
67.5
%
74.6
%
69.9
%
(1)
Certain amounts included in the gross
premiums written of each segment are related to intersegment
transactions and are included in the gross premiums written of each
segment. Accordingly, the sum of gross premiums written for each
segment does not agree to the total gross premiums written as shown
in the table above due to the elimination of intersegment
transactions in the total.
(U.S. Dollars in thousands)
Three Months Ended
September 30, 2019
Insurance
Reinsurance
Mortgage
Sub-total
Other
Total
Gross premiums written (1)
$
1,005,874
$
662,572
$
375,092
$
2,043,292
$
249,960
$
2,181,121
Premiums ceded
(302,034
)
(226,096
)
(57,703
)
(585,587
)
(94,208
)
(567,664
)
Net premiums written
703,840
436,476
317,389
1,457,705
155,752
1,613,457
Change in unearned premiums
(98,504
)
(72,621
)
25,611
(145,514
)
(29,920
)
(175,434
)
Net premiums earned
605,336
363,855
343,000
1,312,191
125,832
1,438,023
Other underwriting income (loss)
—
(1,208
)
3,955
2,747
579
3,326
Losses and loss adjustment expenses
(422,782
)
(270,379
)
(13,080
)
(706,241
)
(96,214
)
(802,455
)
Acquisition expenses
(91,259
)
(62,393
)
(34,396
)
(188,048
)
(23,072
)
(211,120
)
Other operating expenses
(115,408
)
(32,533
)
(37,003
)
(184,944
)
(11,568
)
(196,512
)
Underwriting income (loss)
$
(24,113
)
$
(2,658
)
$
262,476
235,705
(4,443
)
231,262
Net investment income
126,874
34,614
161,488
Net realized gains (losses)
80,014
(18,659
)
61,355
Equity in net income (loss) of investment
funds accounted for using the equity method
17,130
—
17,130
Other income
1,338
—
1,338
Corporate expenses
(15,066
)
—
(15,066
)
Transaction costs and other
(1,995
)
—
(1,995
)
Amortization of intangible assets
(20,003
)
—
(20,003
)
Interest expense
(23,237
)
(8,091
)
(31,328
)
Net foreign exchange gains (losses)
29,794
3,330
33,124
Income (loss) before income
taxes
430,554
6,751
437,305
Income tax expense
(38,116
)
—
(38,116
)
Net income (loss)
392,438
6,751
399,189
Dividends attributable to redeemable
noncontrolling interests
—
(6,600
)
(6,600
)
Amounts attributable to nonredeemable
noncontrolling interests
—
(136
)
(136
)
Net income (loss) available to
Arch
392,438
15
392,453
Preferred dividends
(10,403
)
—
(10,403
)
Net income (loss) available to Arch
common shareholders
$
382,035
$
15
$
382,050
Underwriting Ratios
Loss ratio
69.8
%
74.3
%
3.8
%
53.8
%
76.5
%
55.8
%
Acquisition expense ratio
15.1
%
17.1
%
10.0
%
14.3
%
18.3
%
14.7
%
Other operating expense ratio
19.1
%
8.9
%
10.8
%
14.1
%
9.2
%
13.7
%
Combined ratio
104.0
%
100.3
%
24.6
%
82.2
%
104.0
%
84.2
%
Net premiums written to gross premiums
written
70.0
%
65.9
%
84.6
%
71.3
%
62.3
%
74.0
%
(1)
Certain amounts included in the gross
premiums written of each segment are related to intersegment
transactions and are included in the gross premiums written of each
segment. Accordingly, the sum of gross premiums written for each
segment does not agree to the total gross premiums written as shown
in the table above due to the elimination of intersegment
transactions in the total.
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 consummate acquisitions and integrate
any businesses it has acquired or may acquire into its existing
operations;
- 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, unemployment, housing prices, foreign currency
exchange rates, prevailing credit terms and the depth and duration
of a recession) and conditions specific to the reinsurance and
insurance markets in which the Company operates;
- competition, including increased competition, on the basis of
pricing, capacity (including alternative sources of capital),
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;
- 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;
- 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 resulting from natural or man-made catastrophic events
or severe economic events in the Company’s insurance, reinsurance
and mortgage businesses could cause large losses and substantial
volatility in the Company’s results of operations;
- the effect of climate change on the Company’s business;
- the effect of contagious diseases (including COVID-19) on the
Company’s business;
- 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;
- changes in general economic conditions, including new or
continued sovereign debt concerns or downgrades of U.S. securities
by credit rating agencies, which could affect the Company’s
business, financial condition and results of operations;
- changes in the method for determining the London Inter-bank
Offered Rate (“LIBOR”) and the potential replacement of LIBOR;
- the volatility of the Company’s shareholders’ equity from
foreign currency fluctuations, which could increase due to us not
matching portions of the Company’s projected liabilities in foreign
currencies with investments in the same currencies;
- 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;
- a disruption caused by cyber-attacks or other technology
breaches or failures on the Company or the Company’s business
partners and service providers, which could negatively impact the
Company’s business and/or expose the Company to litigation;
- 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, including the
Tax Cuts and Jobs Act of 2017; 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20201029006257/en/
Arch Capital Group Ltd. François Morin: (441)
278-9250
Investor Relations Donald Watson: (914) 872-3616;
dwatson@archcapservices.com
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