HAMILTON, Bermuda--(BUSINESS WIRE)--
Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income available
to Arch common shareholders for the 2017 first quarter was $241.9
million, or $1.74 per share, compared to $149.3 million, or $1.20 per
share, for the 2016 first quarter. The Company’s net income available to
Arch common shareholders represented an annualized return on average
common equity of 12.6% for the 2017 first quarter, compared to 10.0% for
the 2016 first quarter. For the trailing twelve months ended March 31,
2017, net income available to Arch common shareholders produced a 10.9%
return on average common equity. The Company’s book value per common
share was $57.69 at March 31, 2017, a 4.5% increase from $55.19 per
share at December 31, 2016 and a 16.4% increase from $49.55 per share at
March 31, 2016. 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, a non-GAAP measure, of $198.0 million, or $1.42 per
share, for the 2017 first quarter, compared to $145.7 million, or $1.17
per share, for the 2016 first quarter. The Company’s after-tax operating
income available to Arch common shareholders represented an annualized
return on average common equity of 10.3% for the 2017 first quarter,
compared to 9.8% for the 2016 first quarter. For the trailing twelve
months ended March 31, 2017, after-tax operating income available to
Arch common shareholders produced a 9.1% return on average common
equity. 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 March 31, |
| | | 2017 |
| 2016 |
| % Change |
| | | | | | |
|
|
Gross premiums written
| | |
$
|
1,657,990
| | |
$
|
1,437,966
| | |
15.3
| |
|
Net premiums written
| | |
1,276,260
| | |
1,121,235
| | |
13.8
| |
|
Net premiums earned
| | |
1,117,017
| | |
951,579
| | |
17.4
| |
|
Underwriting income
| | |
212,072
| | |
115,691
| | |
83.3
| |
Underwriting Ratios | | | | | | | % Point Change |
|
Loss ratio
| | |
49.5
|
%
| |
55.0
|
%
| |
(5.5
|
)
|
|
Acquisition expense ratio
| | |
16.3
|
%
| |
17.6
|
%
| |
(1.3
|
)
|
|
Other operating expense ratio
| | |
15.6
|
%
| |
15.8
|
%
| |
(0.2
|
)
|
|
Combined ratio
| | |
81.4
|
%
| |
88.4
|
%
| |
(7.0
|
)
|
| | | | | | | | | |
|
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.
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:
|
|
| |
|
(U.S. dollars in thousands, except share data)
| | | Three Months Ended |
| | | March 31, |
| | | 2017 |
| 2016 |
|
Net income available to Arch common shareholders
| | |
$
|
241,909
| | |
$
|
149,314
| |
|
Net realized (gains) losses
| | |
(29,134
|
)
| |
(32,464
|
)
|
|
Net impairment losses recognized in earnings
| | |
1,807
| | |
7,639
| |
|
Equity in net (income) loss of investment funds accounted for using
the equity method
| | |
(48,088
|
)
| |
(6,655
|
)
|
|
Net foreign exchange (gains) losses
| | |
19,796
| | |
22,209
| |
|
UGC transaction costs and other
| | |
15,584
| | |
—
| |
|
Income tax (benefit) expense (1)
| | |
(3,909
|
)
| |
5,699
|
|
|
After-tax operating income available to Arch common shareholders
| | |
$
|
197,965
|
| |
$
|
145,742
|
|
| | | | |
|
Diluted per common share results: | | | | | |
|
Net income available to Arch common shareholders
| | |
$
|
1.74
| | |
$
|
1.20
| |
|
Net realized (gains) losses
| | |
(0.21
|
)
| |
(0.26
|
)
|
|
Net impairment losses recognized in earnings
| | |
0.01
| | |
0.06
| |
|
Equity in net (income) loss of investment funds accounted for using
the equity method
| | |
(0.34
|
)
| |
(0.05
|
)
|
|
Net foreign exchange (gains) losses
| | |
0.14
| | |
0.18
| |
|
UGC transaction costs and other
| | |
0.11
| | |
—
| |
|
Income tax (benefit) expense (1)
| | |
(0.03
|
)
| |
0.04
|
|
|
After-tax operating income available to Arch common shareholders
| | |
$
|
1.42
|
| |
$
|
1.17
|
|
| | | | |
|
|
Weighted average common shares and common share equivalents
outstanding — diluted
| | |
139,047,672
| | |
124,496,496
| |
| | | | |
|
|
Beginning common shareholders’ equity
| | |
$
|
7,481,163
| | |
$
|
5,841,542
| |
|
Ending common shareholders’ equity
| | |
7,833,289
|
| |
6,050,248
|
|
|
Average common shareholders’ equity
| | |
$
|
7,657,226
|
| |
$
|
5,945,895
|
|
| | | | |
|
|
Annualized return on average common equity
| | |
12.6
|
%
| |
10.0
|
%
|
|
Annualized operating return on average common equity
| | |
10.3
|
%
| |
9.8
|
%
|
(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, net foreign
exchange gains or losses and UGC 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
approximate 11% ownership of Watford Re’s 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 2017 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, 2017. 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 March 31, |
|
(U.S. dollars in thousands)
| | | 2017 |
| 2016 |
| % Change |
| | | | | | |
|
|
Gross premiums written
| | |
$
|
782,281
| | |
$
|
798,553
| | |
(2.0
|
)
|
|
Net premiums written
| | |
548,186
| | |
549,764
| | |
(0.3
|
)
|
|
Net premiums earned
| | |
505,646
| | |
513,089
| | |
(1.5
|
)
|
| | | | | | |
|
|
Underwriting income
| | |
$
|
10,011
| | |
$
|
30,074
| | |
(66.7
|
)
|
| | | | | | |
|
| Underwriting Ratios | | | | | | | % Point Change |
|
Loss ratio
| | |
65.8
|
%
| |
63.1
|
%
| |
2.7
| |
|
Underwriting expense ratio
| | |
32.2
|
%
| |
31.1
|
%
| |
1.1
|
|
|
Combined ratio
| | |
98.0
|
%
| |
94.2
|
%
| |
3.8
|
|
| | | | | | |
|
|
Catastrophic activity and prior year development:
| | | | | | | |
|
Current accident year catastrophic events, net of
| | | | | | | |
|
reinsurance and reinstatement premiums
| | |
0.5
|
%
| |
0.1
|
%
| |
0.4
| |
|
Net (favorable) adverse development in prior year loss
| | | | | | | |
|
reserves, net of related adjustments
| | |
(0.3
|
)%
| |
(0.8
|
)%
| |
0.5
|
|
|
Combined ratio excluding catastrophic activity and prior year
development (1)
| | |
97.8
|
%
| |
94.9
|
%
| |
2.9
|
|
|
(1)
|
See ‘Comments on Regulation G’ for further discussion.
|
Gross premiums written by the insurance segment in the 2017 first
quarter were 2.0% lower than in the 2016 first quarter while net
premiums written were 0.3% lower than in the 2016 first quarter. The
decrease in net premiums written reflected reductions in property,
energy, marine and aviation and excess and surplus casualty, both
reflecting weak market conditions, partially offset by growth in
programs and travel, accident and health. Growth in program business
primarily reflected the impact of two new programs while the increase in
travel, accident and health reflected continued expansion in existing
travel accounts. Net premiums earned by the insurance segment in the
2017 first quarter were 1.5% lower than in the 2016 first quarter, and
reflect changes in net premiums written over the previous five quarters.
The 2017 first quarter loss ratio reflected 0.5 points of current year
catastrophic activity, compared to 0.1 points in the 2016 first quarter.
Estimated net favorable development in prior year loss reserves, before
related adjustments, reduced the loss ratio by 0.4 points in the 2017
first quarter, compared to 1.2 points in the 2016 first quarter. The
estimated net favorable development in the 2017 first quarter primarily
resulted from better than expected claims emergence in longer-tail lines
from earlier accident years. The balance of the change in the 2017 first
quarter loss ratio resulted, in part, from deteriorating market
conditions and changes in the mix of business.
The underwriting expense ratio was 32.2% in the 2017 first quarter,
compared to 31.1% in the 2016 first quarter. The comparison of the two
periods was affected by certain non-recurring items which benefited the
2016 first quarter. In addition, 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 March 31, |
|
(U.S. dollars in thousands)
| | | 2017 |
| 2016 |
| % Change |
| | | | | | |
|
|
Gross premiums written
| | |
$
|
475,782
| | |
$
|
481,390
| | |
(1.2
|
)
|
|
Net premiums written
| | |
309,690
| | |
320,824
| | |
(3.5
|
)
|
|
Net premiums earned
| | |
244,851
| | |
261,208
| | |
(6.3
|
)
|
|
Other underwriting income
| | |
(306
|
)
| |
325
| | |
(194.2
|
)
|
| | | | | | |
|
|
Underwriting income
| | |
$
|
55,411
| | |
$
|
58,919
| | |
(6.0
|
)
|
| | | | | | |
|
| Underwriting Ratios | | | | | | | % Point Change |
|
Loss ratio
| | |
43.1
|
%
| |
42.7
|
%
| |
0.4
| |
|
Underwriting expense ratio
| | |
34.1
|
%
| |
34.9
|
%
| |
(0.8
|
)
|
|
Combined ratio
| | |
77.2
|
%
| |
77.6
|
%
| |
(0.4
|
)
|
| | | | | | |
|
|
Catastrophic activity and prior year development:
| | | | | | | |
|
Current accident year catastrophic events, net of
| | | | | | | |
|
reinsurance and reinstatement premiums
| | |
4.0
|
%
| |
1.4
|
%
| |
2.6
| |
|
Net (favorable) adverse development in prior year loss
| | | | | | | |
|
reserves, net of related adjustments
| | |
(24.4
|
)%
| |
(18.0
|
)%
| |
(6.4
|
)
|
|
Combined ratio excluding catastrophic activity and prior year
development (1)
| | |
97.6
|
%
| |
94.2
|
%
| |
3.4
|
|
|
(1)
|
See ‘Comments on Regulation G’ for further discussion.
|
Gross premiums written by the reinsurance segment in the 2017 first
quarter were 1.2% lower than in the 2016 first quarter, while net
premiums written were 3.5% lower than in the 2016 first quarter. The
lower level of net premiums written in the 2017 first quarter reflected
decreases in casualty, marine and aviation and property catastrophe
lines. The reduction in casualty business and marine and aviation
business both reflected share decreases and non-renewals. Property
catastrophe net premiums written in both periods reflects the impact of
retrocessional portfolio transactions, with a higher level of cessions
in the 2017 first quarter. Such amounts were partially offset by growth
in other specialty business.
The 2017 first quarter loss ratio included 4.0 points of current year
catastrophic activity, compared to 1.4 points of catastrophic activity
in the 2016 first quarter, and a higher level of current year
facultative attritional losses than in the 2016 first quarter. Estimated
net favorable development in prior year loss reserves, before related
adjustments, reduced the loss ratio by 23.4 points in the 2017 first
quarter, compared to 18.1 points in the 2016 first quarter. The
estimated net favorable development in the 2017 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 earlier underwriting years. The balance of the change in the 2017
first quarter loss ratio resulted, in part, from a higher level of large
loss activity and changes in the mix of business.
The underwriting expense ratio was 34.1% in the 2017 first quarter,
compared to 34.9% in the 2016 first 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.
Mortgage Segment |
|
| |
| | | Three Months Ended March 31, |
|
(U.S. dollars in thousands)
| | | 2017 |
| 2016 |
| % Change |
| | | | | | |
|
|
Gross premiums written
| | |
$
|
348,623
| | |
$
|
111,280
| | |
213.3
| |
|
Net premiums written
| | |
274,698
| | |
106,513
| | |
157.9
| |
|
Net premiums earned
| | |
244,523
| | |
61,765
| | |
295.9
| |
|
Other underwriting income
| | |
4,123
| | |
3,793
| | |
8.7
| |
| | | | | | |
|
|
Underwriting income
| | |
$
|
148,945
| | |
$
|
27,642
| | |
438.8
| |
| | | | | | |
|
| Underwriting Ratios | | | | | | | % Point Change |
|
Loss ratio
| | |
11.9
|
%
| |
14.0
|
%
| |
(2.1
|
)
|
|
Underwriting expense ratio
| | |
28.9
|
%
| |
47.4
|
%
| |
(18.5
|
)
|
|
Combined ratio
| | |
40.8
|
%
| |
61.4
|
%
| |
(20.6
|
)
|
| | | | | | |
|
|
Net (favorable) adverse development in prior year loss
| | | | | | | |
|
reserves, net of related adjustments
| | |
(9.6
|
)%
| |
(4.4
|
)%
| |
(5.2
|
)
|
|
Combined ratio excluding prior year development (1)
| | |
50.4
|
%
| |
65.8
|
%
| |
(15.4
|
)
|
|
(1)
|
See ‘Comments on Regulation G’ for further discussion.
|
The mortgage segment includes the Company’s U.S. mortgage insurance
operations (“Arch MI U.S.”), international mortgage insurance and
reinsurance operations as well as government sponsored enterprise
(“GSE”) credit-risk sharing transactions. On December 31, 2016, the
Company completed the acquisition of United Guaranty Corporation
(“UGC”). As such, the 2017 first quarter results reflect the combination
of Arch and UGC while the 2016 first quarter does not reflect UGC
activity. The acquisition of UGC expanded the scale of Arch MI U.S. by
combining UGC’s position as the market leader in the U.S. private
mortgage insurance industry with Arch’s financial strength and history
of innovation.
Gross premiums written by the mortgage segment in the 2017 first quarter
were 213.3% higher than in the 2016 first quarter, driven by U.S.
primary business growth. The lower growth in net premiums written of
157.9% primarily reflected cessions to AIG under the 50% quota share
reinsurance agreement, which covers 2014 to 2016 policy years on a
run-off basis. Net premiums earned for the 2017 first quarter were
295.9% higher than in the 2016 first quarter.
Other underwriting income, which is primarily related to older GSE
risk-sharing transactions receiving derivative accounting treatment, was
$4.1 million for the 2017 first quarter, compared to $3.8 million for
the 2016 first quarter. The higher level of income in the 2017 first
quarter primarily resulted from mark-to-market adjustments.
The loss ratio for the 2017 first quarter reflected estimated net
favorable development in prior year loss reserves, before related
adjustments, of 9.6 points, compared to 4.4 points in the 2016 first
quarter. The estimated net favorable development in the 2017 first
quarter was primarily driven by continued lower than expected claim
rates and subrogation activity.
At March 31, 2017, the mortgage segment’s risk-in-force (before
reinsurance) of $65.49 billion consisted of $60.59 billion from Arch MI
U.S. with the remainder from reinsurance and risk-sharing operations.
Arch MI U.S. generated $12.66 billion of new insurance written (“NIW”)
during the 2017 first quarter, of which 81.9% was from monthly premium
policies. For additional information on the mortgage segment, please
refer to the Company’s Financial Supplement dated March 31, 2017.
Corporate and Non-Underwriting
Corporate and non-underwriting results include net investment income,
other income (loss), corporate expenses, UGC transaction costs and
other, amortization of intangible assets, interest expense, dividends on
the Company’s non-cumulative preferred shares, 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 and income taxes. Such amounts exclude
the results of the ‘other’ segment.
Net investment income for the 2017 first quarter was $0.69 per share, or
$95.8 million, compared to $0.57 per share, or $70.4 million, for the
2016 first quarter, and $0.56 per share, or $70.1 million, for the 2016
fourth quarter. The 2017 first quarter net investment income reflected
income on the acquired UGC portfolio and higher returns on fund
investments. The annualized pre-tax investment income yield was 2.13%
for the 2017 first quarter, compared to 2.13% for the 2016 first quarter
and 1.92% for the 2016 fourth quarter.
Corporate expenses were $12.2 million for the 2017 first quarter,
compared to $9.4 million for the 2016 first quarter, with the increase
primarily due to higher incentive compensation costs. UGC transaction
costs and other were $15.6 million for the 2017 first quarter, compared
to $34.6 million in the 2016 fourth quarter. UGC transaction costs and
other include advisory, financing, legal and other transaction costs
related to the UGC acquisition. Amounts for the 2017 first quarter
reflected $8.2 million of severance and severance related costs, with
the remainder primarily due to incentive compensation paid in
conjunction with the UGC acquisition.
Amortization of intangible assets for the 2017 first quarter was $31.3
million, compared to $4.7 million for the 2016 first quarter. During the
2017 first quarter, the Company reclassified its presentation of
amortization of intangible assets on its consolidated statements of
income to reflect such item separately (previously reflected in
underwriting expenses). The higher level of expense for the 2017 first
quarter reflects the amortization of intangible assets included in the
UGC acquisition, including intangible assets related to acquired
insurance contracts and distribution relationships.
Interest expense for the 2017 first quarter was $25.8 million, compared
to $12.6 million for the 2016 first quarter, with the increase primarily
reflecting the impact of the issuance of the Company’s 2026 and 2046
senior notes in December 2016 and the higher level of borrowings under
the Company’s revolving credit agreement. Preferred dividends for the
2017 first quarter were $11.2 million, compared to $5.5 million for the
2016 first quarter, with the increase reflecting the impact of the
issuance of series E preferred shares in September 2016. For additional
information on the Company’s capital structure, please refer to the
Financial Supplement dated March 31, 2017.
On a pre-tax basis, net foreign exchange losses for the 2017 first
quarter were $19.8 million, compared to net foreign exchange losses for
the 2016 first quarter of $22.0 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 10.1% for the
2017 first quarter, compared to 9.5% for the 2016 first quarter. The
Company’s effective tax rate on pre-tax operating income available to
Arch shareholders was 13.4% for the 2017 first quarter, compared to 6.6%
for the 2016 first quarter. 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.
Capitalization and Shareholders’ Equity
At March 31, 2017, total capital available to Arch of $10.84 billion
consisted of $1.73 billion of senior notes, representing 16.0% of the
total, $500.0 million of revolving credit agreement borrowings,
representing 4.6% of the total, $772.6 million of preferred shares,
representing 7.1% of the total, and common shareholders’ equity of $7.83
billion, representing 72.3% of the total. At December 31, 2016, total
capital available to Arch of $10.49 billion consisted of $1.73 billion
of senior notes, representing 16.5% of the total, $500.0 million of
revolving credit agreement borrowings, representing 4.8% of the total,
$772.6 million of preferred shares, representing 7.4% of the total, and
common shareholders’ equity of $7.48 billion, representing 71.3% of the
total.
Conference Call
The Company will hold a conference call for investors and analysts at
11:00 a.m. Eastern Time on April 26, 2017. 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 26, 2017 at 2:00 p.m. Eastern Time until May 3, 2017
at midnight Eastern Time. To access the replay, domestic callers should
dial 855-859-2056, and international callers should dial 404-537-3406
(passcode 1339544 for all callers).
Please refer to the Company’s Financial Supplement dated March 31, 2017,
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
$10.84 billion in capital at March 31, 2017, 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, UGC transaction costs and
other 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, net foreign
exchange gains or losses and UGC 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, 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. UGC transaction
costs and other include advisory, financing, legal, severance, incentive
compensation and other transaction costs related to the UGC acquisition.
During the 2016 fourth quarter, UGC transaction costs and other included
non-recurring expenses related to a change in the Company’s approach on
the deferral of certain internal underwriting costs which are no longer
being deferred. The Company believes that UGC 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, 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 UGC 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 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
2017 first quarter and 2016 first 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 |
| | | March 31, 2017 |
| | | Insurance |
| Reinsurance |
| Mortgage |
| Sub-total |
| Other |
| Total |
|
Gross premiums written (1)
| | |
$
|
782,281
| | |
$
|
475,782
| | |
$
|
348,623
| | |
$
|
1,606,686
| | |
$
|
154,120
| | |
$
|
1,657,990
| |
|
Premiums ceded
| | |
(234,095
|
)
| |
(166,092
|
)
| |
(73,925
|
)
| |
(474,112
|
)
| |
(10,434
|
)
| |
(381,730
|
)
|
|
Net premiums written
| | |
548,186
| | |
309,690
| | |
274,698
| | |
1,132,574
| | |
143,686
| | |
1,276,260
| |
|
Change in unearned premiums
| | |
(42,540
|
)
| |
(64,839
|
)
| |
(30,175
|
)
| |
(137,554
|
)
| |
(21,689
|
)
| |
(159,243
|
)
|
|
Net premiums earned
| | |
505,646
| | |
244,851
| | |
244,523
| | |
995,020
| | |
121,997
| | |
1,117,017
| |
|
Other underwriting income
| | |
—
| | |
(306
|
)
| |
4,123
| | |
3,817
| | |
816
| | |
4,633
| |
|
Losses and loss adjustment expenses
| | |
(332,641
|
)
| |
(105,454
|
)
| |
(29,065
|
)
| |
(467,160
|
)
| |
(85,410
|
)
| |
(552,570
|
)
|
|
Acquisition expenses
| | |
(74,868
|
)
| |
(46,147
|
)
| |
(28,766
|
)
| |
(149,781
|
)
| |
(32,508
|
)
| |
(182,289
|
)
|
|
Other operating expenses
| | |
(88,126
|
)
| |
(37,533
|
)
| |
(41,870
|
)
| |
(167,529
|
)
| |
(7,190
|
)
| |
(174,719
|
)
|
|
Underwriting income (loss)
| | |
$
|
10,011
|
| |
$
|
55,411
|
| |
$
|
148,945
|
| |
214,367
| | |
(2,295
|
)
| |
212,072
| |
| | | | | | | | | | | | |
|
|
Net investment income
| | | | | | | | |
95,812
| | |
22,062
| | |
117,874
| |
|
Net realized gains (losses)
| | | | | | | | |
28,512
| | |
5,641
| | |
34,153
| |
|
Net impairment losses recognized in earnings
| | | | | | | | |
(1,807
|
)
| |
—
| | |
(1,807
|
)
|
|
Equity in net income (loss) of investment funds accounted for using
the equity method
| | | | | | | | |
48,088
| | |
—
| | |
48,088
| |
|
Other income (loss)
| | | | | | | | |
(782
|
)
| |
—
| | |
(782
|
)
|
|
Corporate expenses
| | | | | | | | |
(12,208
|
)
| |
—
| | |
(12,208
|
)
|
|
UGC transaction costs and other
| | | | | | | | |
(15,584
|
)
| |
—
| | |
(15,584
|
)
|
|
Amortization of intangible assets
| | | | | | | | |
(31,294
|
)
| |
—
| | |
(31,294
|
)
|
|
Interest expense
| | | | | | | | |
(25,756
|
)
| |
(2,920
|
)
| |
(28,676
|
)
|
|
Net foreign exchange gains (losses)
| | | | | | | | |
(19,845
|
)
| |
441
|
| |
(19,404
|
)
|
| Income before income taxes | | | | | | | | |
279,503
| | |
22,929
| | |
302,432
| |
|
Income tax expense
| | | | | | | | |
(28,397
|
)
| |
—
|
| |
(28,397
|
)
|
| Net income | | | | | | | | |
251,106
| | |
22,929
| | |
274,035
| |
|
Dividends attributable to redeemable noncontrolling interests
| | | | | | | | |
—
| | |
(4,584
|
)
| |
(4,584
|
)
|
|
Amounts attributable to nonredeemable noncontrolling interests
| | | | | | | | |
—
|
| |
(16,324
|
)
| |
(16,324
|
)
|
| Net income available to Arch | | | | | | | | |
251,106
| | |
2,021
| | |
253,127
| |
|
Preferred dividends
| | | | | | | | |
(11,218
|
)
| |
—
|
| |
(11,218
|
)
|
| Net income available to Arch common shareholders | | | | | | | | |
$
|
239,888
|
| |
$
|
2,021
|
| |
$
|
241,909
|
|
| | | | | | | | | | | | |
|
| Underwriting Ratios | | | | | | | | | | | | | |
|
Loss ratio
| | |
65.8
|
%
| |
43.1
|
%
| |
11.9
|
%
| |
46.9
|
%
| |
70.0
|
%
| |
49.5
|
%
|
|
Acquisition expense ratio
| | |
14.8
|
%
| |
18.8
|
%
| |
11.8
|
%
| |
15.1
|
%
| |
26.6
|
%
| |
16.3
|
%
|
|
Other operating expense ratio
| | |
17.4
|
%
| |
15.3
|
%
| |
17.1
|
%
| |
16.8
|
%
| |
5.9
|
%
| |
15.6
|
%
|
|
Combined ratio
| | |
98.0
|
%
| |
77.2
|
%
| |
40.8
|
%
| |
78.8
|
%
| |
102.5
|
%
| |
81.4
|
%
|
| | | | | | | | | | | | |
|
|
Net premiums written to gross premiums written
| | |
70.1
|
%
| |
65.1
|
%
| |
78.8
|
%
| |
70.5
|
%
| |
93.2
|
%
| |
77.0
|
%
|
|
(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.
|
|
|
| |
|
(U.S. Dollars in thousands)
| | | Three Months Ended |
| | | March 31, 2016 |
| | | Insurance |
| Reinsurance |
| Mortgage |
| Sub-total |
| Other |
| Total |
|
Gross premiums written (1)
| | |
$
|
798,553
| | |
$
|
481,390
| | |
$
|
111,280
| | |
$
|
1,391,061
| | |
$
|
148,606
| | |
$
|
1,437,966
| |
|
Premiums ceded
| | |
(248,789
|
)
| |
(160,566
|
)
| |
(4,767
|
)
| |
(413,960
|
)
| |
(4,472
|
)
| |
(316,731
|
)
|
|
Net premiums written
| | |
549,764
| | |
320,824
| | |
106,513
| | |
977,101
| | |
144,134
| | |
1,121,235
| |
|
Change in unearned premiums
| | |
(36,675
|
)
| |
(59,616
|
)
| |
(44,748
|
)
| |
(141,039
|
)
| |
(28,617
|
)
| |
(169,656
|
)
|
|
Net premiums earned
| | |
513,089
| | |
261,208
| | |
61,765
| | |
836,062
| | |
115,517
| | |
951,579
| |
|
Other underwriting income
| | |
—
| | |
325
| | |
3,793
| | |
4,118
| | |
929
| | |
5,047
| |
|
Losses and loss adjustment expenses
| | |
(323,609
|
)
| |
(111,598
|
)
| |
(8,629
|
)
| |
(443,836
|
)
| |
(79,113
|
)
| |
(522,949
|
)
|
|
Acquisition expenses
| | |
(74,348
|
)
| |
(54,758
|
)
| |
(5,793
|
)
| |
(134,899
|
)
| |
(32,939
|
)
| |
(167,838
|
)
|
|
Other operating expenses
| | |
(85,058
|
)
| |
(36,258
|
)
| |
(23,494
|
)
| |
(144,810
|
)
| |
(5,338
|
)
| |
(150,148
|
)
|
|
Underwriting income (loss)
| | |
$
|
30,074
|
| |
$
|
58,919
|
| |
$
|
27,642
|
| |
116,635
| | |
(944
|
)
| |
115,691
| |
| | | | | | | | | | | | |
|
|
Net investment income
| | | | | | | | |
70,409
| | |
23,326
| | |
93,735
| |
|
Net realized gains (losses)
| | | | | | | | |
31,862
| | |
5,462
| | |
37,324
| |
|
Net impairment losses recognized in earnings
| | | | | | | | |
(7,639
|
)
| |
—
| | |
(7,639
|
)
|
|
Equity in net income (loss) of investment funds accounted for using
the equity method
| | | | | | | | |
6,655
| | |
—
| | |
6,655
| |
|
Other income (loss)
| | | | | | | | |
(25
|
)
| |
—
| | |
(25
|
)
|
|
Corporate expenses
| | | | | | | | |
(9,383
|
)
| |
—
| | |
(9,383
|
)
|
|
Amortization of intangible assets
| | | | | | | | |
(4,748
|
)
| |
—
| | |
(4,748
|
)
|
|
Interest expense
| | | | | | | | |
(12,627
|
)
| |
(3,480
|
)
| |
(16,107
|
)
|
|
Net foreign exchange gains (losses)
| | | | | | | | |
(22,041
|
)
| |
(1,525
|
)
| |
(23,566
|
)
|
| Income before income taxes | | | | | | | | |
169,098
| | |
22,839
| | |
191,937
| |
|
Income tax expense
| | | | | | | | |
(16,310
|
)
| |
—
|
| |
(16,310
|
)
|
| Net income | | | | | | | | |
152,788
| | |
22,839
| | |
175,627
| |
|
Dividends attributable to redeemable noncontrolling interests
| | | | | | | | |
—
| | |
(4,587
|
)
| |
(4,587
|
)
|
|
Amounts attributable to nonredeemable noncontrolling interests
| | | | | | | | |
—
|
| |
(16,242
|
)
| |
(16,242
|
)
|
| Net income available to Arch | | | | | | | | |
152,788
| | |
2,010
| | |
154,798
| |
|
Preferred dividends
| | | | | | | | |
(5,484
|
)
| |
—
|
| |
(5,484
|
)
|
| Net income available to Arch common shareholders | | | | | | | | |
$
|
147,304
|
| |
$
|
2,010
|
| |
$
|
149,314
|
|
| | | | | | | | | | | | |
|
| Underwriting Ratios | | | | | | | | | | | | | |
|
Loss ratio
| | |
63.1
|
%
| |
42.7
|
%
| |
14.0
|
%
| |
53.1
|
%
| |
68.5
|
%
| |
55.0
|
%
|
|
Acquisition expense ratio
| | |
14.5
|
%
| |
21.0
|
%
| |
9.4
|
%
| |
16.1
|
%
| |
28.5
|
%
| |
17.6
|
%
|
|
Other operating expense ratio
| | |
16.6
|
%
| |
13.9
|
%
| |
38.0
|
%
| |
17.3
|
%
| |
4.6
|
%
| |
15.8
|
%
|
|
Combined ratio
| | |
94.2
|
%
| |
77.6
|
%
| |
61.4
|
%
| |
86.5
|
%
| |
101.6
|
%
| |
88.4
|
%
|
| | | | | | | | | | | | |
|
|
Net premiums written to gross premiums written
| | |
68.8
|
%
| |
66.6
|
%
| |
95.7
|
%
| |
70.2
|
%
| |
97.0
|
%
| |
78.0
|
%
|
|
(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 integration of United Guaranty Corporation and any other
businesses the Company 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, 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;
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the loss of key personnel;
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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, 2017;
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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;
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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;
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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;
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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
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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/20170425006815/en/
Arch Capital Group Ltd.
Mark D. Lyons, 441-278-9250
Executive
Vice President andChief Financial Officer
Source: Arch Capital Group Ltd.