HAMILTON, Bermuda--(BUSINESS WIRE)--
Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income available
to Arch common shareholders for the 2016 third quarter was $247.4
million, or $1.98 per share, compared to $74.5 million, or $0.60 per
share, for the 2015 third quarter. The Company’s net income available to
Arch common shareholders represented an annualized return on average
common equity of 15.3% for the 2016 third quarter, compared to 5.1% for
the 2015 third quarter. For the trailing twelve months ended September
30, 2016, net income available to Arch common shareholders produced a
10.6% return on average common equity. The Company’s book value per
common share was $53.62 at September 30, 2016, a 3.0% increase from
$52.04 per share at June 30, 2016 and a 12.5% increase from $47.68 per
share at September 30, 2015. All earnings per share amounts discussed in
this release are on a diluted basis.
The Company also reported after-tax operating income available to Arch
common shareholders of $142.5 million, or $1.14 per share, for the 2016
third quarter, compared to $125.8 million, or $1.01 per share, for the
2015 third quarter. The Company’s after-tax operating income available
to Arch common shareholders represented an annualized return on average
common equity of 8.8% for the 2016 third quarter, compared to 8.6% for
the 2015 third quarter. For the trailing twelve months ended September
30, 2016, after-tax operating income available to Arch common
shareholders produced a 9.2% return on average common equity. After-tax
operating income or loss available to Arch common shareholders and the
related return on average common equity are non-GAAP measures. See
‘Comments on Regulation G’ for further details.
The following table summarizes the Company’s consolidated underwriting
results:
|
|
|
| |
| |
|
(U.S. dollars in thousands)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | 2016 |
| 2015 |
| % Change | | 2016 |
| 2015 |
| % Change |
| | | | | | | | | | | | | |
|
|
Gross premiums written
| | | |
$
|
1,278,765
| | |
$
|
1,189,192
| | |
7.5
| | |
$
|
4,046,667
| | |
$
|
3,730,423
| | |
8.5
| |
|
Net premiums written
| | | |
1,014,278
| | |
971,972
| | |
4.4
| | |
3,159,076
| | |
2,982,547
| | |
5.9
| |
|
Net premiums earned
| | | |
958,403
| | |
936,683
| | |
2.3
| | |
2,915,967
| | |
2,790,385
| | |
4.5
| |
|
Underwriting income
| | | |
122,782
| | |
94,779
| | |
29.5
| | |
345,471
| | |
316,364
| | |
9.2
| |
| Underwriting Ratios | | | | | | | | % Point
Change | | | | | | % Point
Change |
|
Loss ratio
| | | |
54.7
|
%
| |
56.8
|
%
| |
(2.1
|
)
| |
56.0
|
%
| |
55.4
|
%
| |
0.6
| |
|
Acquisition expense ratio
| | | |
17.1
|
%
| |
18.3
|
%
| |
(1.2
|
)
| |
17.5
|
%
| |
18.3
|
%
| |
(0.8
|
)
|
|
Other operating expense ratio
| | | |
16.2
|
%
| |
15.6
|
%
| |
0.6
|
| |
16.0
|
%
| |
16.0
|
%
| |
—
|
|
|
Combined ratio
| | | |
88.0
|
%
| |
90.7
|
%
| |
(2.7
|
)
| |
89.5
|
%
| |
89.7
|
%
| |
(0.2
|
)
|
| | | | | | | | | | | | | | | | | | | |
|
Please note that these amounts include the impact of the ‘other’ segment
(i.e., results of Watford Re). See ‘Comments on Regulation G’ for
a reconciliation of underwriting income or loss to income before income
taxes and net income available to Arch common shareholders. The ‘other’
segment includes amounts related to Watford Re. Pursuant to generally
accepted accounting principles, Watford Re is considered a variable
interest entity and the Company concluded that it is the primary
beneficiary of Watford Re. As such, the Company consolidates the results
of Watford Re in its consolidated financial statements, although it only
owns approximately 11% of Watford Re’s common equity.
Segment Information
The following section provides analysis on the Company’s 2016 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, 2016. The Company’s
segment information includes the use of underwriting income and a
combined ratio excluding catastrophic activity and prior year
development for the insurance segment and reinsurance segment and a
combined ratio excluding prior year development for the mortgage
segment. 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)
| | | | 2016 |
| 2015 |
| % Change |
| | | | | | | |
|
|
Gross premiums written
| | | |
$
|
758,934
| | |
$
|
752,438
| | |
0.9
| |
|
Net premiums written
| | | |
541,488
| | |
542,995
| | |
(0.3
|
)
|
|
Net premiums earned
| | | |
519,078
| | |
522,544
| | |
(0.7
|
)
|
| | | | | | | |
|
|
Underwriting income
| | | |
21,568
| | |
21,508
| | |
0.3
| |
| | | | | | | |
|
| Underwriting Ratios | | | | | | | | % Point Change |
|
Loss ratio
| | | |
64.1
|
%
| |
65.0
|
%
| |
(0.9
|
)
|
|
Acquisition expense ratio
| | | |
14.9
|
%
| |
14.8
|
%
| |
0.1
| |
|
Other operating expense ratio
| | | |
16.9
|
%
| |
16.2
|
%
| |
0.7
|
|
|
Combined ratio
| | | |
95.9
|
%
| |
96.0
|
%
| |
(0.1
|
)
|
| | | | | | | |
|
|
Catastrophic activity and prior year development:
| | | | | | | | |
|
Current accident year catastrophic events, net of
| | | | | | | | |
|
reinsurance and reinstatement premiums
| | | |
0.3
|
%
| |
1.6
|
%
| |
(1.3
|
)
|
|
Net (favorable) adverse development in prior year loss
| | | | | | | | |
|
reserves, net of related adjustments
| | | |
(2.3
|
)%
| |
(1.4
|
)%
| |
(0.9
|
)
|
|
Combined ratio excluding catastrophic activity and prior year
development (1)
| | | |
97.9
|
%
| |
95.8
|
%
| |
2.1
|
|
| | | | | | | | | | |
|
|
(1)
|
|
See ‘Comments on Regulation G’ for further discussion.
|
| |
|
Gross premiums written by the insurance segment in the 2016 third
quarter were 0.9% higher than in the 2015 third quarter while net
premiums written were 0.3% lower than in the 2015 third quarter. The
decrease in net premiums written reflected reductions in programs and
property lines, partially offset by growth in travel and in ‘other’
lines including alternative markets and high excess comp business. The
reduction in program business primarily reflected the continued impact
of the non-renewal of a large program in the latter part of 2015 while
the lower level in property lines reflected continued weak market
conditions. The growth in travel and alternative markets reflected both
new business and continued expansion in existing accounts while the
increase in high excess comp primarily reflected new business. Net
premiums earned by the insurance segment in the 2016 third quarter were
0.7% lower than in the 2015 third quarter, and reflect changes in net
premiums written over the previous five quarters.
The 2016 third quarter loss ratio reflected 0.3 points of current year
catastrophic activity, compared to 1.6 points in the 2015 third quarter.
Estimated net favorable development in prior year loss reserves, before
related adjustments, reduced the loss ratio by 2.6 points in the 2016
third quarter, compared to 1.9 points in the 2015 third quarter. The
estimated net favorable development in the 2016 third quarter primarily
resulted from better than expected claims emergence in longer-tail and
medium-tail lines from earlier accident years. The balance of the change
in the 2016 third quarter loss ratio resulted, in part, from changes in
the mix of business.
The underwriting expense ratio was 31.8% in the 2016 third quarter,
compared to 31.0% in the 2015 third quarter. The comparison of the
underwriting expense ratios and the underlying acquisition expense and
other operating expense ratios reflected changes in the mix of business
and the level of reinsurance ceded on a quota share basis.
Reinsurance Segment
|
|
|
| |
| | | | Three Months Ended September 30, |
|
(U.S. dollars in thousands)
| | | | 2016 |
| 2015 |
| % Change |
| | | | | | | |
|
|
Gross premiums written
| | | |
$
|
324,361
| | |
$
|
329,327
| | |
(1.5
|
)
|
|
Net premiums written
| | | |
234,810
| | |
237,145
| | |
(1.0
|
)
|
|
Net premiums earned
| | | |
251,927
| | |
260,431
| | |
(3.3
|
)
|
|
Other underwriting income
| | | |
2,216
| | |
2,783
| | |
(20.4
|
)
|
| | | | | | | |
|
|
Underwriting income
| | | |
62,413
| | |
54,887
| | |
13.7
| |
| | | | | | | |
|
| Underwriting Ratios | | | | | | | | % Point
Change |
|
Loss ratio
| | | |
42.0
|
%
| |
44.5
|
%
| |
(2.5
|
)
|
|
Acquisition expense ratio
| | | |
19.9
|
%
| |
21.3
|
%
| |
(1.4
|
)
|
|
Other operating expense ratio
| | | |
14.1
|
%
| |
14.3
|
%
| |
(0.2
|
)
|
|
Combined ratio
| | | |
76.0
|
%
| |
80.1
|
%
| |
(4.1
|
)
|
| | | | | | | |
|
|
Catastrophic activity and prior year development:
| | | | | | | | |
|
Current accident year catastrophic events, net of
| | | | | | | | |
|
reinsurance and reinstatement premiums
| | | |
3.5
|
%
| |
4.0
|
%
| |
(0.5
|
)
|
|
Net (favorable) adverse development in prior year loss
| | | | | | | | |
|
reserves, net of related adjustments
| | | |
(24.0
|
)%
| |
(18.5
|
)%
| |
(5.5
|
)
|
|
Combined ratio excluding catastrophic activity and prior year
development (1)
| | | |
96.5
|
%
| |
94.6
|
%
| |
1.9
|
|
| | | | | | | | | | |
|
|
(1)
|
|
See ‘Comments on Regulation G’ for further discussion.
|
| |
|
Gross premiums written by the reinsurance segment in the 2016 third
quarter were 1.5% lower than in the 2015 third quarter, while net
premiums written were 1.0% lower than in the 2015 third quarter. The
decrease in net premiums written reflected reductions in casualty and
marine and aviation lines, due in part to reductions in premium
estimates reflecting current market conditions. Such amounts were
partially offset by growth in other specialty business, reflecting
additional agriculture business and strong renewals on pro rata U.K.
motor business.
The 2016 third quarter loss ratio included 4.1 points of current year
catastrophic activity, compared to 4.2 points of catastrophic activity
in the 2015 third quarter, and a higher level of current year
facultative attritional losses than in the 2015 third quarter. Estimated
net favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 23.6 points in the 2016 third
quarter, compared to 19.2 points in the 2015 third quarter. The
estimated net favorable development in the 2016 third quarter primarily
resulted from better than expected claims emergence in short-tail
business from most underwriting years and in longer-tail business across
earlier underwriting years.
The underwriting expense ratio was 34.0% in the 2016 third quarter,
compared to 35.6% in the 2015 third quarter. The comparison of the
underwriting expense ratios and the underlying acquisition expense and
other operating expense ratios reflected changes in the mix and type of
business, and the impact of reinstatement premiums.
Mortgage Segment
|
|
|
| |
| | | | Three Months Ended September 30, |
|
(U.S. dollars in thousands)
| | | | 2016 |
| 2015 |
| % Change |
| | | | | | | |
|
|
Gross premiums written
| | | |
$
|
131,726
| | |
$
|
74,657
| | |
76.4
| |
|
Net premiums written
| | | |
80,544
| | |
66,825
| | |
20.5
| |
|
Net premiums earned
| | | |
76,962
| | |
54,548
| | |
41.1
| |
|
Other underwriting income
| | | |
4,740
| | |
3,565
| | |
33.0
| |
| | | | | | | |
|
|
Underwriting income
| | | |
37,422
| | |
17,075
| | |
119.2
| |
| | | | | | | |
|
| Underwriting Ratios | | | | | | | | % Point
Change |
|
Loss ratio
| | | |
14.4
|
%
| |
17.5
|
%
| |
(3.1
|
)
|
|
Acquisition expense ratio
| | | |
10.1
|
%
| |
19.1
|
%
| |
(9.0
|
)
|
|
Other operating expense ratio
| | | |
33.0
|
%
| |
38.6
|
%
| |
(5.6
|
)
|
|
Combined ratio
| | | |
57.5
|
%
| |
75.2
|
%
| |
(17.7
|
)
|
| | | | | | | |
|
|
Net (favorable) adverse development in prior year loss
| | | | | | | | |
|
reserves, net of related adjustments
| | | |
(3.2
|
)%
| |
(7.3
|
)%
| |
4.1
|
|
|
Combined ratio excluding prior year development (1)
| | | |
60.7
|
%
| |
82.5
|
%
| |
(21.8
|
)
|
| | | | | | | | | | |
|
|
(1)
|
|
See ‘Comments on Regulation G’ for further discussion.
|
| |
|
The mortgage segment includes the Company’s U.S. and international
mortgage insurance and reinsurance operations as well as government
sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch
Mortgage Insurance Company (“Arch MI U.S.”) is approved as an eligible
mortgage insurer by Fannie Mae and Freddie Mac.
Gross premiums written by the mortgage segment in the 2016 third quarter
were 76.4% higher than in the 2015 third quarter, reflecting growth in
Australian mortgage reinsurance and in U.S. primary business and from
GSE credit risk-sharing transactions receiving insurance accounting
treatment. The lower increase in net premiums written of 20.5% reflected
a $45.4 million retrocession on Australian mortgage reinsurance business
covering exposures written since May 2015. Roughly three fourths of the
2016 third quarter retrocession represented catch up premiums. Net
premiums earned for the 2016 third quarter were 41.1% higher than in the
2015 third quarter, reflecting the growth in insurance in force.
Other underwriting income, which is primarily related to GSE
risk-sharing transactions receiving derivative accounting treatment, was
$4.7 million for the 2016 third quarter, compared to $3.6 million for
the 2015 third quarter.
The loss ratio for the 2016 third quarter reflected estimated net
favorable development in prior year loss reserves, before related
adjustments, of 3.2 points, compared to 7.3 points in the 2015 third
quarter, driven primarily by continued lower than expected claim rates.
At September 30, 2016, the mortgage segment’s risk-in-force consisted of
$10.17 billion from Arch MI U.S. and $4.66 billion from the mortgage
segment’s reinsurance and risk-sharing operations. Arch MI U.S.
generated $8.75 billion of new insurance written (“NIW”) during the 2016
third quarter, of which 79% was from banks and other non-credit union
mortgage originators. For additional information on the mortgage
segment, please refer to the Company’s Financial Supplement.
Corporate (Non-Underwriting) Segment
The corporate (non-underwriting) segment results include net investment
income, other income (loss), corporate expenses, interest expense, net
realized gains or losses, net impairment losses included in earnings,
equity in net income or loss of investment funds accounted for using the
equity method, net foreign exchange gains or losses, income taxes and
items related to the Company’s non-cumulative preferred shares. Such
amounts exclude the results of the ‘other’ segment.
Net investment income for the 2016 third quarter was $0.53 per share, or
$66.3 million, compared to $0.54 per share, or $67.3 million, for the
2015 third quarter, and $0.57 per share, or $70.4 million, for the 2016
second quarter. The 2016 third quarter net investment income reflected
lower fixed income returns, as well as lower reinvestment rates
available in the market, along with a lower benefit from inflation
adjustments on U.S. Treasury Inflation-Protected Securities than in the
2016 second quarter. The annualized pre-tax investment income yield was
1.81% for the 2016 third quarter, compared to 2.04% for the 2015 third
quarter and 2.08% for the 2016 second quarter.
Corporate expenses were $18.5 million for the 2016 third quarter,
compared to $10.7 million for the 2015 third quarter. The higher level
of corporate expenses in the 2016 third quarter was primarily due to
nonrecurrent costs related to the UGC Acquisition discussed below.
Interest expense for the 2016 third quarter was $12.9 million, compared
to $12.0 million for the 2015 third quarter. Amounts in both periods
included approximately $12.0 million related to the Company’s
outstanding senior notes, with the remainder attributable to revolving
credit agreement borrowings and other.
On a pre-tax basis, net foreign exchange losses for the 2016 third
quarter were $4.2 million, compared to net foreign exchange gains for
the 2015 third quarter of $16.1 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, from time to time the Company may elect to over or
underweight one or more currencies, 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 5.0% for the 2016
third quarter and 6.6% for the nine months ended September 30, 2016,
compared to 10.8% for the 2015 third quarter and 5.7% for the nine
months ended September 30, 2015. The Company’s effective tax rate on
pre-tax operating income available to Arch shareholders was 6.5% for the
2016 third quarter and 6.3% for the nine months ended September 30,
2016, compared to 5.7% for the 2015 third quarter and 4.5% for the nine
months ended September 30, 2015. The Company’s effective tax rate
fluctuates from year to year based upon 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. The
adjustment to the estimated annual effective tax rate in the 2016 third
quarter did not have a material impact on the Company’s after-tax
results.
UGC Acquisition
On August 15, 2016, the Company entered into a Stock Purchase Agreement
(the “Stock Purchase Agreement”) with American International Group, Inc.
(“AIG”) pursuant to which, upon the terms and subject to the conditions
thereof, ACGL agreed to purchase from AIG all of the issued and
outstanding shares of capital stock of United Guaranty Corporation, a
North Carolina corporation, and AIG United Guaranty (Asia) Limited
(combined, “United Guaranty”). The acquisition under the Stock Purchase
Agreement is referred to herein as the “UGC Acquisition.”
The UGC Acquisition is subject to certain closing conditions, including,
among others, (i) expiration or early termination of the waiting period
required by the HSR Act, (ii) the receipt of certain approvals of
regulatory authorities and government-sponsored entities, (iii) the
execution of an excess of loss agreement between subsidiaries of AIG and
United Guaranty and (iv) receipt by AIG of confirmation from the Board
of Governors of the Federal Reserve System that none of the Company,
United Guaranty or any of their respective subsidiaries will be subject
to “Systemically Important Financial Institutions” rules and
regulations. There is no financing condition for the UGC Acquisition.
For a complete description of the UGC Acquisition, please refer to the
Company’s Form 8-K filed on August 15, 2016 and other documents on file
with the SEC.
Capitalization and Shareholders’ Equity
On September 29, 2016, the Company completed a $450 million underwritten
public offering of 5.25% Non-Cumulative Preferred Shares, through the
issuance of depositary shares which represents a proportional interest
in such shares. Except in specified circumstances relating to certain
tax or corporate events, the Series E non-cumulative preferred shares
are not redeemable prior to September 29, 2021. We intend to use the net
proceeds from the offering of approximately $434.9 million to fund a
portion of the cash consideration required in the UGC Acquisition, to
pay related costs and expenses and for general corporate purposes.
At September 30, 2016, total capital available to Arch of $8.24 billion
consisted of $791.4 million of senior notes, representing 9.6% of the
total, $100.0 million of revolving credit agreement borrowings,
representing 1.2% of the total, $775.0 million of preferred shares,
representing 9.4% of the total, and common shareholders’ equity of $6.58
billion, representing 79.8% of the total. At December 31, 2015, total
capital available to Arch of $7.10 billion consisted of $791.3 million
of senior notes, representing 11.2% 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 $5.88 billion, representing 82.9% of the
total.
Conference Call
The Company will hold a conference call for investors and analysts at
11:00 a.m. Eastern Time on October 27, 2016. 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 27, 2016 at 2:00 p.m. Eastern Time until November
3, 2016 at midnight Eastern Time. To access the replay, domestic callers
should dial 855-859-2056, and international callers should dial
404-537-3406 (passcode 92881326 for all callers).
Please refer to the Company’s Financial Supplement dated September 30,
2016, 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
$8.24 billion in capital at September 30, 2016, provides insurance and
reinsurance 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, 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, 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 the following page 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.
The following table summarizes the Company’s consolidated financial
data, including a reconciliation of net income available to Arch common
shareholders to after-tax operating income available to Arch common
shareholders and related diluted per share results. Each line item
reflects the impact of the Company’s approximate 11% ownership of
Watford Re’s common equity:
|
|
|
| |
| |
|
(U.S. dollars in thousands, except share data)
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
| | | | 2016 |
| 2015 | | 2016 |
| 2015 |
|
Net income available to Arch common shareholders
| | | |
$
|
247,388
| | |
$
|
74,549
| | |
$
|
602,272
| | |
$
|
462,706
| |
|
Net realized (gains) losses
| | | |
(99,159
|
)
| |
57,472
| | |
(175,558
|
)
| |
17,834
| |
|
Net impairment losses recognized in earnings
| | | |
3,867
| | |
5,868
| | |
16,849
| | |
12,780
| |
|
Equity in net (income) loss of investment funds accounted for using
the equity method
| | | |
(16,662
|
)
| |
2,118
| | |
(32,054
|
)
| |
(19,939
|
)
|
|
Net foreign exchange (gains) losses
| | | |
4,054
| | |
(15,904
|
)
| |
3,560
| | |
(60,478
|
)
|
|
Income tax expense (1)
| | | |
2,970
|
| |
1,695
|
| |
13,705
|
| |
8,697
|
|
|
After-tax operating income available to Arch common shareholders
| | | |
$
|
142,458
|
| |
$
|
125,798
|
| |
$
|
428,774
|
| |
$
|
421,600
|
|
| | | | | | | | | |
|
Diluted per common share results: | | | | | | | | | | |
|
Net income available to Arch common shareholders
| | | |
$
|
1.98
| | |
$
|
0.60
| | |
$
|
4.84
| | |
$
|
3.66
| |
|
Net realized (gains) losses
| | | |
(0.79
|
)
| |
0.46
| | |
(1.41
|
)
| |
0.14
| |
|
Net impairment losses recognized in earnings
| | | |
0.03
| | |
0.05
| | |
0.14
| | |
0.10
| |
|
Equity in net (income) loss of investment funds accounted for using
the equity method
| | | |
(0.13
|
)
| |
0.02
| | |
(0.27
|
)
| |
(0.15
|
)
|
|
Net foreign exchange (gains) losses
| | | |
0.03
| | |
(0.13
|
)
| |
0.03
| | |
(0.48
|
)
|
|
Income tax expense
| | | |
0.02
|
| |
0.01
|
| |
0.11
|
| |
0.07
|
|
|
After-tax operating income available to Arch common shareholders
| | | |
$
|
1.14
|
| |
$
|
1.01
|
| |
$
|
3.44
|
| |
$
|
3.34
|
|
| | | | | | | | | |
|
|
Weighted average common shares and common share equivalents
outstanding — diluted
| | | |
124,931,653
| | |
125,011,773
| | |
124,528,174
| | |
126,354,759
| |
| | | | | | | | | |
|
|
Beginning common shareholders’ equity
| | | |
$
|
6,378,922
| | |
$
|
5,812,515
| | |
$
|
5,879,881
| | |
$
|
5,805,053
| |
|
Ending common shareholders’ equity
| | | |
6,577,322
|
| |
5,837,815
|
| |
6,577,322
|
| |
5,837,815
|
|
|
Average common shareholders’ equity
| | | |
$
|
6,478,122
|
| |
$
|
5,825,165
|
| |
$
|
6,228,602
|
| |
$
|
5,821,434
|
|
| | | | | | | | | |
|
|
Annualized return on average common equity
| | | |
15.3
|
%
| |
5.1
|
%
| |
12.9
|
%
| |
10.6
|
%
|
|
Annualized operating return on average common equity
| | | |
8.8
|
%
| |
8.6
|
%
| |
9.2
|
%
| |
9.7
|
%
|
| | | | | | | | | | | | | |
|
|
(1)
|
|
Income tax expense on net realized gains or losses, net impairment
losses recognized in earnings, equity in net income (loss) of
investment funds accounted for using the equity method and net
foreign exchange gains or losses reflects the relative mix reported
by jurisdiction and the varying tax rates in each jurisdiction.
|
| |
|
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 pages 9 and 10.
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, with the exception of
goodwill and intangible assets, 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 Re. Watford Re has its own management and board of
directors that is responsible for the overall profitability of the
‘other’ segment. For the ‘other’ segment, performance is measured based
on net income or loss. The Company does not guarantee or provide credit
support for Watford Re, and the Company’s financial exposure to Watford
Re is limited to its investment in Watford Re’s 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 segment and reinsurance segment 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 ratio 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.
The following tables summarize the Company’s results by segment for the
2016 third quarter and 2015 third quarter and a reconciliation of
underwriting income or loss to income before income taxes and net income
available to Arch common shareholders:
|
(U.S. Dollars in thousands)
|
|
|
| Three Months Ended |
| | | | September 30, 2016 |
| | | | Insurance |
| Reinsurance |
| Mortgage |
| Sub-total |
| Other |
| Total |
|
Gross premiums written (1)
| | | |
$
|
758,934
| | |
$
|
324,361
| | |
$
|
131,726
| | |
$
|
1,214,765
| | |
$
|
163,736
| | |
$
|
1,278,765
| |
|
Premiums ceded
| | | |
(217,446
|
)
| |
(89,551
|
)
| |
(51,182
|
)
| |
(357,923
|
)
| |
(6,300
|
)
| |
(264,487
|
)
|
|
Net premiums written
| | | |
541,488
| | |
234,810
| | |
80,544
| | |
856,842
| | |
157,436
| | |
1,014,278
| |
|
Change in unearned premiums
| | | |
(22,410
|
)
| |
17,117
|
| |
(3,582
|
)
| |
(8,875
|
)
| |
(47,000
|
)
| |
(55,875
|
)
|
|
Net premiums earned
| | | |
519,078
| | |
251,927
| | |
76,962
| | |
847,967
| | |
110,436
| | |
958,403
| |
|
Other underwriting income
| | | |
—
| | |
2,216
| | |
4,740
| | |
6,956
| | |
1,024
| | |
7,980
| |
|
Losses and loss adjustment expenses
| | | |
(332,845
|
)
| |
(105,924
|
)
| |
(11,107
|
)
| |
(449,876
|
)
| |
(74,307
|
)
| |
(524,183
|
)
|
|
Acquisition expenses, net
| | | |
(77,148
|
)
| |
(50,217
|
)
| |
(7,757
|
)
| |
(135,122
|
)
| |
(28,739
|
)
| |
(163,861
|
)
|
|
Other operating expenses
| | | |
(87,517
|
)
| |
(35,589
|
)
| |
(25,416
|
)
| |
(148,522
|
)
| |
(7,035
|
)
| |
(155,557
|
)
|
|
Underwriting income (loss)
| | | |
$
|
21,568
|
| |
$
|
62,413
|
| |
$
|
37,422
|
| |
121,403
| | |
1,379
| | |
122,782
| |
| | | | | | | | | | | | | |
|
|
Net investment income
| | | | | | | | | |
66,282
| | |
27,336
| | |
93,618
| |
|
Net realized gains (losses)
| | | | | | | | | |
95,946
| | |
29,159
| | |
125,105
| |
|
Net impairment losses recognized in earnings
| | | | | | | | | |
(3,867
|
)
| |
—
| | |
(3,867
|
)
|
Equity in net income (loss) of investment funds
accounted for
using the equity method
| | | | | | | | | |
16,662
| | |
—
| | |
16,662
| |
|
Other income (loss)
| | | | | | | | | |
(400
|
)
| |
—
| | |
(400
|
)
|
|
Corporate expenses
| | | | | | | | | |
(18,485
|
)
| |
—
| | |
(18,485
|
)
|
|
Interest expense
| | | | | | | | | |
(12,924
|
)
| |
(3,019
|
)
| |
(15,943
|
)
|
|
Net foreign exchange gains (losses)
| | | | | | | | | |
(4,232
|
)
| |
1,611
|
| |
(2,621
|
)
|
| Income before income taxes | | | | | | | | | |
260,385
| | |
56,466
| | |
316,851
| |
|
Income tax expense
| | | | | | | | | |
(13,232
|
)
| |
1
|
| |
(13,231
|
)
|
| Net income | | | | | | | | | |
247,153
| | |
56,467
| | |
303,620
| |
|
Dividends attributable to redeemable noncontrolling interests
| | | | | | | | | |
—
| | |
(4,588
|
)
| |
(4,588
|
)
|
|
Amounts attributable to nonredeemable noncontrolling interests
| | | | | | | | | |
—
|
| |
(46,160
|
)
| |
(46,160
|
)
|
| Net income available to Arch | | | | | | | | | |
247,153
| | |
5,719
| | |
252,872
| |
|
Preferred dividends
| | | | | | | | | |
(5,484
|
)
| |
—
|
| |
(5,484
|
)
|
| Net income available to Arch common shareholders | | | | | | | | | |
$
|
241,669
|
| |
$
|
5,719
|
| |
$
|
247,388
|
|
| | | | | | | | | | | | | |
|
| Underwriting Ratios | | | | | | | | | | | | | | |
|
Loss ratio
| | | |
64.1
|
%
| |
42.0
|
%
| |
14.4
|
%
| |
53.1
|
%
| |
67.3
|
%
| |
54.7
|
%
|
|
Acquisition expense ratio
| | | |
14.9
|
%
| |
19.9
|
%
| |
10.1
|
%
| |
15.9
|
%
| |
26.0
|
%
| |
17.1
|
%
|
|
Other operating expense ratio
| | | |
16.9
|
%
| |
14.1
|
%
| |
33.0
|
%
| |
17.5
|
%
| |
6.4
|
%
| |
16.2
|
%
|
|
Combined ratio
| | | |
95.9
|
%
| |
76.0
|
%
| |
57.5
|
%
| |
86.5
|
%
| |
99.7
|
%
| |
88.0
|
%
|
| | | | | | | | | | | | | |
|
|
Net premiums written to gross premiums written
| | | |
71.3
|
%
| |
72.4
|
%
| |
61.1
|
%
| |
70.5
|
%
| |
96.2
|
%
| |
79.3
|
%
|
| | | | | | | | | | | | | | | | | | | |
|
|
(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, 2015 |
| | | | Insurance |
| Reinsurance |
| Mortgage |
| Sub-total |
| Other |
| Total |
|
Gross premiums written (1)
| | | |
$
|
752,438
| | |
$
|
329,327
| | |
$
|
74,657
| | |
$
|
1,158,451
| | |
$
|
131,165
| | |
$
|
1,189,192
| |
|
Premiums ceded
| | | |
(209,443
|
)
| |
(92,182
|
)
| |
(7,832
|
)
| |
(311,486
|
)
| |
(6,158
|
)
| |
(217,220
|
)
|
|
Net premiums written
| | | |
542,995
| | |
237,145
| | |
66,825
| | |
846,965
| | |
125,007
| | |
971,972
| |
|
Change in unearned premiums
| | | |
(20,451
|
)
| |
23,286
|
| |
(12,277
|
)
| |
(9,442
|
)
| |
(25,847
|
)
| |
(35,289
|
)
|
|
Net premiums earned
| | | |
522,544
| | |
260,431
| | |
54,548
| | |
837,523
| | |
99,160
| | |
936,683
| |
|
Other underwriting income
| | | |
519
| | |
2,783
| | |
3,565
| | |
6,867
| | |
756
| | |
7,623
| |
|
Losses and loss adjustment expenses
| | | |
(339,859
|
)
| |
(115,780
|
)
| |
(9,562
|
)
| |
(465,201
|
)
| |
(66,540
|
)
| |
(531,741
|
)
|
|
Acquisition expenses, net
| | | |
(77,076
|
)
| |
(55,416
|
)
| |
(10,428
|
)
| |
(142,920
|
)
| |
(28,646
|
)
| |
(171,566
|
)
|
|
Other operating expenses
| | | |
(84,620
|
)
| |
(37,131
|
)
| |
(21,048
|
)
| |
(142,799
|
)
| |
(3,421
|
)
| |
(146,220
|
)
|
|
Underwriting income (loss)
| | | |
$
|
21,508
|
| |
$
|
54,887
|
| |
$
|
17,075
|
| |
93,470
| | |
1,309
| | |
94,779
| |
| | | | | | | | | | | | | |
|
|
Net investment income
| | | | | | | | | |
67,251
| | |
18,982
| | |
86,233
| |
|
Net realized gains (losses)
| | | | | | | | | |
(53,480
|
)
| |
(36,218
|
)
| |
(89,698
|
)
|
|
Net impairment losses recognized in earnings
| | | | | | | | | |
(5,868
|
)
| |
—
| | |
(5,868
|
)
|
Equity in net income (loss) of investment funds
accounted for
using the equity method
| | | | | | | | | |
(2,118
|
)
| |
—
| | |
(2,118
|
)
|
|
Other income (loss)
| | | | | | | | | |
(265
|
)
| |
—
| | |
(265
|
)
|
|
Corporate expenses
| | | | | | | | | |
(10,739
|
)
| |
—
| | |
(10,739
|
)
|
|
Interest expense
| | | | | | | | | |
(12,014
|
)
| |
(1,286
|
)
| |
(13,300
|
)
|
|
Net foreign exchange gains (losses)
| | | | | | | | | |
16,056
|
| |
(1,376
|
)
| |
14,680
|
|
| Income before income taxes | | | | | | | | | |
92,293
| | |
(18,589
|
)
| |
73,704
| |
|
Income tax expense
| | | | | | | | | |
(9,704
|
)
| |
—
|
| |
(9,704
|
)
|
| Net income | | | | | | | | | |
82,589
| | |
(18,589
|
)
| |
64,000
| |
|
Dividends attributable to redeemable noncontrolling interests
| | | | | | | | | |
—
| | |
(4,588
|
)
| |
(4,588
|
)
|
|
Amounts attributable to nonredeemable noncontrolling interests
| | | | | | | | | |
—
|
| |
20,621
|
| |
20,621
|
|
| Net income available to Arch | | | | | | | | | |
82,589
| | |
(2,556
|
)
| |
80,033
| |
|
Preferred dividends
| | | | | | | | | |
(5,484
|
)
| |
—
|
| |
(5,484
|
)
|
| Net income available to Arch common shareholders | | | | | | | | | |
$
|
77,105
|
| |
$
|
(2,556
|
)
| |
$
|
74,549
|
|
| | | | | | | | | | | | | |
|
| Underwriting Ratios | | | | | | | | | | | | | | |
|
Loss ratio
| | | |
65.0
|
%
| |
44.5
|
%
| |
17.5
|
%
| |
55.5
|
%
| |
67.1
|
%
| |
56.8
|
%
|
|
Acquisition expense ratio
| | | |
14.8
|
%
| |
21.3
|
%
| |
19.1
|
%
| |
17.1
|
%
| |
28.9
|
%
| |
18.3
|
%
|
|
Other operating expense ratio
| | | |
16.2
|
%
| |
14.3
|
%
| |
38.6
|
%
| |
17.1
|
%
| |
3.4
|
%
| |
15.6
|
%
|
|
Combined ratio
| | | |
96.0
|
%
| |
80.1
|
%
| |
75.2
|
%
| |
89.7
|
%
| |
99.4
|
%
| |
90.7
|
%
|
| | | | | | | | | | | | | |
|
|
Net premiums written to gross premiums written
| | | |
72.2
|
%
| |
72.0
|
%
| |
89.5
|
%
| |
73.1
|
%
| |
95.3
|
%
| |
81.7
|
%
|
| | | | | | | | | | | | | | | | | | | |
|
|
(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 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 (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;
-
the integration of businesses the Company has acquired or may acquire
into its existing operations;
-
accuracy of those estimates and judgments utilized in the preparation
of the Company’s financial statements, including those related to
revenue recognition, insurance and other reserves, reinsurance
recoverables, investment valuations, intangible assets, bad debts,
income taxes, contingencies and litigation, and any determination to
use the deposit method of accounting, which for a relatively new
insurance and reinsurance company, like the Company, are even more
difficult to make than those made in a mature company since relatively
limited historical information has been reported to the Company
through September 30, 2016;
-
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;
-
changes in general economic conditions, including new or continued
sovereign debt concerns in Eurozone countries or downgrades of U.S.
securities by credit rating agencies, which could affect the Company’s
business, financial condition and results of operations;
-
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;
-
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.
View source version on businesswire.com: http://www.businesswire.com/news/home/20161026006793/en/
Arch Capital Group Ltd.
Mark D. Lyons, 441-278-9250
Executive
Vice President and
Chief Financial Officer
Source: Arch Capital Group Ltd.