Arch Capital Group Ltd. (NASDAQ: ACGL) announces its 2021 third
quarter results. The results included:
- Net income available to Arch common shareholders of $388.8
million, or $0.98 per share, a 12.3% annualized net income return
on average common equity, compared to $408.6 million, or $1.00 per
share, for the 2020 third quarter;
- After-tax operating income available to Arch common
shareholders(1) of $294.7 million, or $0.74 per share, a 9.3%
annualized operating return on average common equity, compared to
$120.3 million, or $0.29 per share, for the 2020 third
quarter;
- Pre-tax current accident year catastrophic losses for the
Company’s insurance and reinsurance segments, net of reinsurance
and reinstatement premiums(1) of $335.9 million, primarily related
to Hurricane Ida, European floods and other global events;
- Favorable development in prior year loss reserves, net of
related adjustments(1) of $118.3 million;
- Combined ratio excluding catastrophic activity and prior year
development(1) of 80.1%, compared to 84.3% for the 2020 third
quarter;
- The percentage of loans in default on U.S. primary mortgage
business was 2.67% at September 30, 2021, compared to 3.11% at June
30, 2021;
- Closing of the Watford transaction resulted in a one-time net
income gain of $62.5 million, or $0.16 per share, as well as an
additional $161.2 million in ceded premiums written in the quarter
for the reinsurance segment due to retrocessions to Watford, with
no corresponding impact to underwriting income;
- 9.7 million shares repurchased at an aggregate cost of $386.9
million;
- Book value per common share of $32.43 at September 30, 2021, a
1.3% increase from June 30, 2021 and a 12.8% increase from
September 30, 2020.
All earnings per share amounts discussed in this release are on
a diluted basis. The following table summarizes the Company’s
underwriting results, both (i) on a consolidated basis and (ii) on
a consolidated basis excluding the ‘other’ segment (i.e., results
of Watford). Effective July 1, 2021, the Company no longer
consolidates the results of Watford in its consolidated financial
statements.
(U.S. dollars in thousands)
Consolidated
Consolidated Excluding ‘Other’
Segment (1)
Three Months Ended September
30,
Three Months Ended September
30,
2021
2020
% Change
2021
2020
% Change
Gross premiums written
$
3,207,415
$
2,681,032
19.6
$
3,207,415
$
2,556,914
25.4
Net premiums written
2,075,929
1,874,144
10.8
2,075,929
1,726,828
20.2
Net premiums earned
1,929,337
1,771,092
8.9
1,929,337
1,625,061
18.7
Underwriting income
173,745
96,604
79.9
173,745
104,877
65.7
Underwriting Ratios
% Point
Change
% Point
Change
Loss ratio
63.5
%
68.7
%
(5.2)
63.5
%
67.7
%
(4.2)
Underwriting expense ratio
27.9
%
26.2
%
1.7
27.9
%
26.2
%
1.7
Combined ratio
91.4
%
94.9
%
(3.5)
91.4
%
93.9
%
(2.5)
Combined ratio excluding catastrophic
activity and prior year development (1)
80.1
%
84.3
%
(4.2)
(1) Presentation represents a “non-GAAP” financial measure as
defined in Regulation G. Such presentation excludes the results of
Watford Holdings Ltd. (“Watford”). Pursuant to GAAP, the Company
consolidated the results of Watford in its financial statements
through June 30, 2021. See ‘Comments on Regulation G’ for further
details.
The following table summarizes the Company’s consolidated
financial data, including a reconciliation of net income or loss
available to Arch common shareholders to after-tax operating income
or loss available to Arch common shareholders and related diluted
per share results:
(U.S. dollars in thousands, except share
data)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
Net income available to Arch common
shareholders
$
388,751
$
408,636
$
1,480,324
$
830,768
Net realized (gains) losses
25,040
(219,726)
(247,949)
(517,007)
Equity in net (income) loss of investment
funds accounted for using the equity method
(105,398)
(126,735)
(299,270)
(57,407)
Net foreign exchange (gains) losses
(36,078)
39,462
(39,522)
17,003
Transaction costs and other
1,036
1,674
889
5,246
Loss on redemption of preferred shares
15,101
—
15,101
—
Income tax expense (benefit) (1)
6,236
17,010
32,100
48,088
After-tax operating income available to
Arch common shareholders
$
294,688
$
120,321
$
941,673
$
326,691
Diluted per common
share results:
Net income available to Arch common
shareholders
$
0.98
$
1.00
$
3.66
$
2.02
Net realized (gains) losses
0.05
(0.54)
(0.61)
(1.25)
Equity in net (income) loss of investment
funds accounted for using the equity method
(0.26)
(0.31)
(0.74)
(0.14)
Net foreign exchange (gains) losses
(0.09)
0.10
(0.10)
0.04
Transaction costs and other
0.00
0.00
0.00
0.01
Loss on redemption of preferred shares
0.04
—
0.04
—
Income tax expense (benefit) (1)
0.02
0.04
0.08
0.12
After-tax operating income available to
Arch common shareholders
$
0.74
$
0.29
$
2.33
$
0.80
Weighted average common shares and common
share equivalents outstanding — diluted
397,903,347
409,194,657
404,260,485
410,314,897
Beginning common shareholders’ equity
$
12,706,072
$
11,211,825
$
12,325,886
$
10,717,371
Ending common shareholders’ equity
12,557,526
11,671,997
12,557,526
11,671,997
Average common shareholders’ equity
$
12,631,799
$
11,441,911
$
12,441,706
$
11,194,684
Annualized net income return on average
common equity
12.3
%
14.3
%
15.9
%
9.9
%
Annualized operating return on average
common equity
9.3
%
4.2
%
10.1
%
3.9
%
(1) Income tax expense (benefit) on net realized gains or
losses, equity in net income (loss) of investment funds accounted
for using the equity method, net foreign exchange gains or losses,
transaction costs and other and loss on redemption of preferred
shares reflects the relative mix reported by jurisdiction and the
varying tax rates in each jurisdiction.
Each line item in the table above reflects the impact of the
Company’s ownership of Watford’s outstanding common equity through
June 30, 2021. See ‘Comments on Regulation G’ for a discussion of
non-GAAP financial measures.
Segment Information
The following section provides analysis on the Company’s 2021
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, 2021. The
Company’s segment information includes the use of underwriting
income (loss) and a combined ratio excluding catastrophic activity
and prior year development. Such items are non-GAAP financial
measures (see ‘Comments on Regulation G’ for further details).
Insurance Segment
Three Months Ended September
30,
(U.S. dollars in thousands)
2021
2020
% Change
Gross premiums written
$
1,596,619
$
1,206,328
32.4
Net premiums written
1,153,813
824,161
40.0
Net premiums earned
938,670
719,154
30.5
Underwriting income (loss)
$
(21,358)
$
(31,159)
31.5
Underwriting Ratios
% Point
Change
Loss ratio
71.2
%
73.0
%
(1.8)
Underwriting expense ratio
31.0
%
31.2
%
(0.2)
Combined ratio
102.2
%
104.2
%
(2.0)
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
12.2
%
10.3
%
1.9
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(0.5)
%
(0.2)
%
(0.3)
Combined ratio excluding catastrophic
activity and prior year development (1)
90.5
%
94.1
%
(3.6)
(1) See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the insurance segment in the 2021
third quarter were 32.4% higher than in the 2020 third quarter
while net premiums written were 40.0% higher than in the 2020 third
quarter. The higher level of net premiums written reflected
increases in most lines of business, due in part to rate increases,
new business opportunities and growth in existing accounts. Net
premiums earned in the 2021 third quarter were 30.5% higher than in
the 2020 third quarter, and reflect changes in net premiums written
over the previous five quarters.
The 2021 third quarter loss ratio reflected 12.2 points of
current year catastrophic activity, primarily related to Hurricane
Ida and other global events, compared to 10.3 points in the 2020
third quarter. Estimated net favorable development of prior year
loss reserves, before related adjustments, reduced the loss ratio
by 0.5 points in the 2021 third quarter, compared to 0.3 points in
the 2020 third quarter. The improvement in the 2021 third quarter
loss ratio also reflected the effect of changes in mix of business
and the impact of rate increases.
The underwriting expense ratio was 31.0% in the 2021 third
quarter, consistent with 31.2% in the 2020 third quarter.
Reinsurance Segment
Three Months Ended September
30,
(U.S. dollars in thousands)
2021
2020
% Change
Gross premiums written
$
1,251,760
$
1,004,590
24.6
Net premiums written
621,389
604,202
2.8
Net premiums earned
678,702
554,498
22.4
Other underwriting income (loss)
3,293
298
1,005.0
Underwriting income (loss)
$
(38,948)
$
5,506
(807.4)
Underwriting Ratios
% Point
Change
Loss ratio
80.4
%
76.1
%
4.3
Underwriting expense ratio
25.8
%
22.9
%
2.9
Combined ratio
106.2
%
99.0
%
7.2
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
32.6
%
23.3
%
9.3
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(9.6)
%
(7.4)
%
(2.2)
Combined ratio excluding catastrophic
activity and prior year development (1)
83.2
%
83.1
%
0.1
(1) See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the reinsurance segment in the 2021
third quarter were 24.6% higher than in the 2020 third quarter,
while net premiums written were 2.8% higher than in the 2020 third
quarter. The lower level of growth in net premiums written compared
to gross premiums written primarily reflected a higher level of
premiums ceded due to a one-time $161.2 million adjustment,
resulting from retrocessions to Watford following its ownership
change on July 1, 2021. Absent this item, the growth in net
premiums written would have been 29.5%, consistent with the level
of growth in gross premiums written, reflecting increases in most
lines of business, due in part to new business opportunities and
rate increases. Net premiums earned by the reinsurance segment in
the 2021 third quarter were 22.4% higher than in the 2020 third
quarter, and reflect changes in net premiums written over the
previous five quarters.
The 2021 third quarter loss ratio reflected 34.6 points of
current year catastrophic activity, primarily related to Hurricane
Ida, European floods and other global events, compared to 26.1
points in the 2020 third quarter. Estimated net favorable
development of prior year loss reserves, before related
adjustments, reduced the loss ratio by 10.7 points in the 2021
third quarter, compared to 7.6 points in the 2020 third quarter.
The 2021 third quarter loss ratio also reflected the effect of
changes in the mix of business.
The underwriting expense ratio was 25.8% in the 2021 third
quarter, compared to 22.9% in the 2020 third quarter, with the
increase primarily resulting from changes in mix of business to
lines with higher acquisition costs and a higher level of expenses
related to favorable development of prior year loss reserves.
Mortgage Segment
Three Months Ended September
30,
(U.S. dollars in thousands)
2021
2020
% Change
Gross premiums written
$
360,934
$
346,248
4.2
Net premiums written
300,727
298,465
0.8
Net premiums earned
311,965
351,409
(11.2)
Other underwriting income
3,981
4,600
(13.5)
Underwriting income
$
234,051
$
130,530
79.3
Underwriting Ratios
% Point
Change
Loss ratio
3.7
%
43.6
%
(39.9)
Underwriting expense ratio
22.5
%
20.6
%
1.9
Combined ratio
26.2
%
64.2
%
(38.0)
Prior year development:
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(15.5)
%
(1.3)
%
(14.2)
Combined ratio excluding prior year
development (1)
41.7
%
65.5
%
(23.8)
(1) See ‘Comments on Regulation G’ for further discussion.
Gross premiums written by the mortgage segment in the 2021 third
quarter were 4.2% higher than in the 2020 third quarter, while net
premiums written were 0.8% higher. The increase in gross premiums
written reflected growth in Australian single premium mortgage
insurance as a result of the previously disclosed acquisition of
Westpac Lenders Mortgage Insurance Limited. The lower increase in
net premiums written reflected a higher level of premiums ceded on
U.S. primary mortgage insurance. Net premiums earned in the 2021
third quarter were 11.2% lower than in the 2020 third quarter,
primarily reflecting a lower level of single premium policy
terminations.
The 2021 third quarter loss ratio reflected the impact of lower
new delinquencies and favorable cure activity. The percentage of
loans in default on U.S. primary mortgage insurance business was
2.67% at September 30, 2021, compared to 3.11% at June 30, 2021.
Estimated net favorable development in prior year loss reserves,
before related adjustments, reduced the 2021 third quarter loss
ratio by 14.5 points, compared to 1.3 points in the 2020 third
quarter.
The underwriting expense ratio was 22.5% in the 2021 third
quarter, compared to 20.6% in the 2020 third quarter, with the
increase primarily due to a lower level in net premiums earned on
U.S. primary mortgage insurance business.
Corporate and Non-Underwriting
Corporate and non-underwriting results include net investment
income, other income (loss), corporate expenses, transaction costs
and other, amortization of intangible assets, interest expense,
items related to the Company’s non-cumulative preferred shares, net
realized gains or losses (which includes changes in the allowance
for credit losses on financial assets and net impairment losses
recognized in earnings), equity in net income or loss of investment
funds accounted for using the equity method, net foreign exchange
gains or losses, income or loss from operating affiliates and
income taxes. Such amounts exclude the results of the ‘other’
segment.
Pre-tax net investment income for the 2021 third quarter was
$0.22 per share, or $88.2 million, compared to $0.24 per share, or
$99.9 million, for the 2020 third quarter. The annualized pre-tax
investment income yield was 1.41% for the 2021 third quarter,
compared to 1.76% for the 2020 third quarter, with the decrease
primarily due to lower yields available in the financial markets.
Total return, a non-GAAP measure, was 0.01% for the 2021 third
quarter, compared to 2.30% for the 2020 third quarter, primarily as
a result of the mark-to-market impacts of higher interest rates in
the 2021 period. See ‘Comments on Regulation G’ for a discussion of
non-GAAP financial measures.
Interest expense for the 2021 third quarter was $33.2 million,
compared to $36.2 million for the 2020 third quarter. Interest
expense primarily reflects amounts related to the Company’s
outstanding senior notes. Preferred dividends for the 2021 third
quarter were $16.1 million, compared to $10.4 million for the 2020
third quarter, with the increase reflecting the impact of the
issuance of series G preferred shares in June 2021. The proceeds
from the preferred offering were used to redeem the Company’s
Series E preferred shares on September 30, 2021. As such, in
accordance with GAAP, the Company recorded a loss of $15.1 million
to remove original issuance costs related to the redeemed shares
from additional paid-in capital. For additional information on the
Company’s capital structure, please refer to the Financial
Supplement dated September 30, 2021.
On a pre-tax basis, net foreign exchange gains for the 2021
third quarter were $36.1 million, compared to net foreign exchange
losses for the 2020 third quarter of $38.7 million. For both
periods, such amounts were primarily unrealized and resulted from
the effects of revaluing the Company’s net insurance liabilities
required to be settled in foreign currencies at each balance sheet
date. Changes in the value of available-for-sale investments held
in foreign currencies due to foreign currency rate movements are
reflected as a direct increase or decrease to shareholders’ equity
and are not included in the consolidated statements of income.
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 an
expense of 1.0% for the 2021 third quarter, compared to an expense
of 5.3% for the 2020 third quarter. The Company’s effective tax
rate on pre-tax operating income available to Arch common
shareholders was a benefit of 0.7% for the 2021 third quarter,
compared to an expense of 4.8% for the 2020 third quarter. The
effective tax rates for the 2021 third quarter included discrete
income tax benefits of $25.3 million which had the effect of
decreasing the 2021 third quarter effective tax rate on operating
income available to Arch common shareholders by 8.2%. The discrete
tax items in the 2021 third quarter primarily relate to the partial
release of a valuation allowance on certain U.K. deferred tax
assets. The Company’s effective tax rate may fluctuate from period
to period based upon the relative mix of income or loss reported by
jurisdiction, the level of catastrophic loss activity incurred, and
the varying tax rates in each jurisdiction. The Company’s quarterly
tax provision is adjusted to reflect changes in its estimated
annual effective tax rate, if any.
During the 2021 first quarter, the Company changed its
presentation of ‘income (loss) from operating affiliates’ on its
consolidated statements of income for all periods presented to
reclass such item from ‘other income (loss).’ The Company also
changed its presentation of ‘investment in operating affiliates’ on
its consolidated balance sheet for all periods presented to reclass
such item from ‘other assets.’ Income from operating affiliates for
the 2021 third quarter was $124.1 million, or $0.31 per share,
compared to income of $0.9 million, or $0.00 per share, for the
2020 third quarter. Results for the 2021 third quarter reflected a
one-time gain of $95.7 million recognized from the Company’s
previously disclosed acquisition of a 40% share of Watford. In
addition, the ‘net realized gains (losses)’ line on the Company’s
consolidated statements of income included a $33.1 million loss as
a result of this transaction this quarter.
Conference Call
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on October 28, 2021. A live
webcast of this call will be available via the Investors section of
the Company’s website at http://www.archgroup.com. A telephone replay of
the conference call also will be available beginning on October 28,
2021 at 2:00 p.m. Eastern Time until November 4, 2021 at midnight
Eastern Time. To access the replay, domestic callers should dial
855-859-2056, and international callers should dial 404-537-3406
(passcode 3440118 for all callers).
Please refer to the Company’s Financial Supplement dated
September 30, 2021, which is available via the Investors section of
the Company’s website at http://www.archgroup.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 publicly listed Bermuda exempted
company with approximately $16.1 billion in capital at September
30, 2021, provides insurance, reinsurance and mortgage insurance on
a worldwide basis through its wholly owned subsidiaries.
Comments on Regulation G
Throughout this release, the Company presents its operations in
the way it believes will be the most meaningful and useful to
investors, analysts, rating agencies and others who use the
Company’s financial information in evaluating the performance of
the Company and that investors and such other persons benefit from
having a consistent basis for comparison between quarters and for
comparison with other companies within the industry. These measures
may not, however, be comparable to similarly titled measures used
by companies outside of the insurance industry. Investors are
cautioned not to place undue reliance on these non-GAAP financial
measures in assessing the Company’s overall financial
performance.
This presentation includes the use of “after-tax operating
income or loss available to Arch common shareholders,” which is
defined as net income available to Arch common shareholders,
excluding net realized gains or losses (which includes changes in
the allowance for credit losses on financial assets and net
impairment losses recognized in earnings), equity in net income or
loss of investment funds accounted for using the equity method, net
foreign exchange gains or losses, transaction costs and other and
loss on redemption of preferred shares, net of income taxes, and
the use of annualized operating return on average common equity.
The presentation of after-tax operating income available to Arch
common shareholders and annualized operating return on average
common equity are non-GAAP financial measures as defined in
Regulation G. The reconciliation of such measures to net income
available to Arch common shareholders and annualized net income
return on average common equity (the most directly comparable GAAP
financial measures) in accordance with Regulation G is included on
page 2 of this release.
The Company believes that net realized gains or losses, equity
in net income or loss of investment funds accounted for using the
equity method, net foreign exchange gains or losses, transaction
costs and other and loss on redemption of preferred shares in any
particular period are not indicative of the performance of, or
trends in, the Company’s business performance. Although net
realized gains or losses, equity in net income or loss of
investment funds accounted for using the equity method and net
foreign exchange gains or losses are an integral part of the
Company’s operations, the decision to realize investment gains or
losses, the recognition of the change in the carrying value of
investments accounted for using the fair value option in net
realized gains or losses, the recognition of equity in net income
or loss of investment funds accounted for using the equity method
and the recognition of foreign exchange gains or losses are
independent of the insurance underwriting process and result, in
large part, from general economic and financial market conditions.
Furthermore, certain users of the Company’s financial information
believe that, for many companies, the timing of the realization of
investment gains or losses is largely opportunistic. In addition,
changes in the allowance for credit losses and net impairment
losses recognized in earnings on the Company’s investments
represent other-than-temporary declines in expected recovery values
on securities without actual realization. The use of the equity
method on certain of the Company’s investments in certain funds
that invest in fixed maturity securities is driven by the ownership
structure of such funds (either limited partnerships or limited
liability companies). In applying the equity method, these
investments are initially recorded at cost and are subsequently
adjusted based on the Company’s proportionate share of the net
income or loss of the funds (which include changes in the fair
value of the underlying securities in the funds). This method of
accounting is different from the way the Company accounts for its
other fixed maturity securities and the timing of the recognition
of equity in net income or loss of investment funds accounted for
using the equity method may differ from gains or losses in the
future upon sale or maturity of such investments. Transaction costs
and other include advisory, financing, legal, severance, incentive
compensation and other costs related to acquisitions. The Company
believes that transaction costs and other, due to their
non-recurring nature, are not indicative of the performance of, or
trends in, the Company’s business performance. The loss on
redemption of preferred shares related to the redemption of the
Company's Series E preferred shares in September 2021 and had no
impact on shareholders' equity or cash flows. Due to these reasons,
the Company excludes net realized gains or losses, equity in net
income or loss of investment funds accounted for using the equity
method, net foreign exchange gains or losses and transaction costs
and other from the calculation of after-tax operating income or
loss available to Arch common shareholders.
The Company believes that showing net income available to Arch
common shareholders exclusive of the items referred to above
reflects the underlying fundamentals of the Company’s business
since the Company evaluates the performance of and manages its
business to produce an underwriting profit. In addition to
presenting net income available to Arch common shareholders, the
Company believes that this presentation enables investors and other
users of the Company’s financial information to analyze the
Company’s performance in a manner similar to how the Company’s
management analyzes performance. The Company also believes that
this measure follows industry practice and, therefore, allows the
users of the Company’s financial information to compare the
Company’s performance with its industry peer group. The Company
believes that the equity analysts and certain rating agencies which
follow the Company and the insurance industry as a whole generally
exclude these items from their analyses for the same reasons.
The Company’s segment information includes the presentation of
consolidated underwriting income or loss and a subtotal of
underwriting income or loss before the contribution from the
‘other’ segment. Such measures represent the pre-tax profitability
of its underwriting operations and include net premiums earned plus
other underwriting income, less losses and loss adjustment
expenses, acquisition expenses and other operating expenses. Other
operating expenses include those operating expenses that are
incremental and/or directly attributable to the Company’s
individual underwriting operations. Underwriting income or loss
does not incorporate items included in the Company’s corporate
(non-underwriting) segment. While these measures are presented in
the Segment Information footnote to the Company’s Consolidated
Financial Statements, they are considered non-GAAP financial
measures when presented elsewhere on a consolidated basis. The
reconciliations of underwriting income or loss to income before
income taxes (the most directly comparable GAAP financial measure)
on a consolidated basis and a subtotal before the contribution from
the ‘other’ segment, in accordance with Regulation G, is shown on
the following pages.
Management measures segment performance for its three
underwriting segments based on underwriting income or loss. The
Company does not manage its assets by underwriting segment and,
accordingly, investment income and other non-underwriting related
items are not allocated to each underwriting segment. As noted
earlier, the ‘other’ segment includes the results of Watford
through June 30, 2021.
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. Pursuant to GAAP, Watford was considered a
variable interest entity and the Company concluded that it was the
primary beneficiary of Watford through June 30, 2021. As such, the
Company consolidated the results of Watford in its consolidated
financial statements. The Company’s presentation of information on
a ‘core’ basis enabled 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 analyzed
performance. In the 2020 fourth quarter, Arch Capital, Watford, and
Greysbridge Ltd., a wholly-owned subsidiary of Arch Capital
(“Greysbridge”), entered into an Agreement and Plan of Merger (as
amended, the “Merger Agreement”) pursuant to which, among other
things, Arch Capital agreed to acquire all of the common shares of
Watford Holdings Ltd. not owned by Arch. Arch Capital assigned its
rights under the Merger Agreement to Greysbridge. The merger and
the related Greysbridge equity financing closed on July 1, 2021.
Effective July 1, 2021, Watford is wholly owned by Greysbridge and
Greysbridge is owned 40% by the Company, 30% by certain investment
funds managed by Kelso & Company and 30% by certain investment
funds managed by Warburg Pincus LLC. Based on the governing
documents of Greysbridge, the Company has concluded that, while it
retains significant influence over Greysbridge, Greysbridge does
not constitute a variable interest entity of which the Company is
the primary beneficiary. Accordingly, effective July 1, 2021, Arch
no longer consolidates the results of Watford in its consolidated
financial statements and footnotes.
In addition, the Company’s segment information includes the use
of a combined ratio excluding catastrophic activity and prior year
development, for the insurance and reinsurance segments, and a
combined ratio excluding prior year development, for the mortgage
segment. These ratios are non-GAAP financial measures as defined in
Regulation G. The reconciliation of such measures to the combined
ratio (the most directly comparable GAAP financial measure) in
accordance with Regulation G are shown on the individual segment
pages. The Company’s management utilizes the adjusted combined
ratios excluding current accident year catastrophic events and
favorable or adverse development in prior year loss reserves in its
analysis of the underwriting performance of each of its
underwriting segments.
Total return on investments includes investment income, equity
in net income or loss of investment funds accounted for using the
equity method, net realized gains and losses (excluding changes in
the allowance for credit losses on non-investment related financial
assets) and the change in unrealized gains and losses generated by
Arch’s investment portfolio. Total return is calculated on a
pre-tax basis and before investment expenses, excludes amounts
reflected in the ‘other’ segment, and reflects the effect of
financial market conditions along with foreign currency
fluctuations. Management uses total return on investments as a key
measure of the return generated to Arch common shareholders, and
compares the return generated by the Company’s investment portfolio
against benchmark returns during the periods presented.
The following tables summarize the Company’s results by segment
for the 2021 third quarter and 2020 third quarter and a
reconciliation of underwriting income or loss to income or loss
before income taxes and net income or loss available to Arch common
shareholders:
(U.S. Dollars in thousands)
Three Months Ended
September 30, 2021
Insurance
Reinsurance
Mortgage
Sub-total
Other
Total
Gross premiums written (1)
$
1,596,619
$
1,251,760
$
360,934
$
3,207,415
$
—
$
3,207,415
Premiums ceded
(442,806)
(630,371)
(60,207)
(1,131,486)
—
(1,131,486)
Net premiums written
1,153,813
621,389
300,727
2,075,929
—
2,075,929
Change in unearned premiums
(215,143)
57,313
11,238
(146,592)
—
(146,592)
Net premiums earned
938,670
678,702
311,965
1,929,337
—
1,929,337
Other underwriting income (loss)
—
3,293
3,981
7,274
—
7,274
Losses and loss adjustment expenses
(668,630)
(545,846)
(11,543)
(1,226,019)
—
(1,226,019)
Acquisition expenses
(152,467)
(129,450)
(24,098)
(306,015)
—
(306,015)
Other operating expenses
(138,931)
(45,647)
(46,254)
(230,832)
—
(230,832)
Underwriting income (loss)
$
(21,358)
$
(38,948)
$
234,051
173,745
—
173,745
Net investment income
88,195
—
88,195
Net realized gains (losses)
(25,040)
—
(25,040)
Equity in net income (loss) of investment
funds accounted for using the equity method
105,398
—
105,398
Other income (loss)
(3,960)
—
(3,960)
Corporate expenses
(18,636)
—
(18,636)
Transaction costs and other
(1,036)
—
(1,036)
Amortization of intangible assets
(20,135)
—
(20,135)
Interest expense
(33,176)
—
(33,176)
Net foreign exchange gains (losses)
36,078
—
36,078
Income (loss) before income taxes and
income (loss) from operating affiliates
301,433
—
301,433
Income tax expense
(4,137)
—
(4,137)
Income (loss) from operating
affiliates
124,119
—
124,119
Net income (loss)
421,415
—
421,415
Dividends attributable to redeemable
noncontrolling interests
(1,473)
—
(1,473)
Amounts attributable to nonredeemable
noncontrolling interests
—
—
—
Net income (loss) available to
Arch
419,942
—
419,942
Preferred dividends
(16,090)
—
(16,090)
Loss on redemption of preferred shares
(15,101)
—
(15,101)
Net income (loss) available to Arch
common shareholders
$
388,751
$
—
$
388,751
Underwriting Ratios
Loss ratio
71.2
%
80.4
%
3.7
%
63.5
%
—
%
63.5
%
Acquisition expense ratio
16.2
%
19.1
%
7.7
%
15.9
%
—
%
15.9
%
Other operating expense ratio
14.8
%
6.7
%
14.8
%
12.0
%
—
%
12.0
%
Combined ratio
102.2
%
106.2
%
26.2
%
91.4
%
—
%
91.4
%
Net premiums written to gross premiums
written
72.3
%
49.6
%
83.3
%
64.7
%
—
%
64.7
%
(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.
(U.S. Dollars in thousands)
Three Months Ended
September 30, 2020
Insurance
Reinsurance
Mortgage
Sub-total
Other
Total
Gross premiums written (1)
$
1,206,328
$
1,004,590
$
346,248
$
2,556,914
$
197,480
$
2,681,032
Premiums ceded
(382,167)
(400,388)
(47,783)
(830,086)
(50,164)
(806,888)
Net premiums written
824,161
604,202
298,465
1,726,828
147,316
1,874,144
Change in unearned premiums
(105,007)
(49,704)
52,944
(101,767)
(1,285)
(103,052)
Net premiums earned
719,154
554,498
351,409
1,625,061
146,031
1,771,092
Other underwriting income (loss)
(31)
298
4,600
4,867
546
5,413
Losses and loss adjustment expenses
(525,321)
(422,084)
(153,055)
(1,100,460)
(115,813)
(1,216,273)
Acquisition expenses
(102,420)
(85,388)
(35,716)
(223,524)
(24,418)
(247,942)
Other operating expenses
(122,541)
(41,818)
(36,708)
(201,067)
(14,619)
(215,686)
Underwriting income (loss)
$
(31,159)
$
5,506
$
130,530
104,877
(8,273)
96,604
Net investment income
99,857
28,655
128,512
Net realized gains (losses)
210,984
69,515
280,499
Equity in net income (loss) of investment
funds accounted for using the equity method
126,735
—
126,735
Other income (loss)
—
—
—
Corporate expenses
(16,263)
—
(16,263)
Transaction costs and other
(1,674)
—
(1,674)
Amortization of intangible assets
(16,715)
—
(16,715)
Interest expense
(36,224)
(5,119)
(41,343)
Net foreign exchange gains (losses)
(38,681)
(6,204)
(44,885)
Income (loss) before income taxes and
income (loss) from operating affiliates
432,896
78,574
511,470
Income tax expense
(23,638)
(69)
(23,707)
Income (loss) from operating
affiliates
919
—
919
Net income (loss)
410,177
78,505
488,682
Dividends attributable to redeemable
noncontrolling interests
(882)
(993)
(1,875)
Amounts attributable to nonredeemable
noncontrolling interests
—
(67,768)
(67,768)
Net income (loss) available to
Arch
409,295
9,744
419,039
Preferred dividends
(10,403)
—
(10,403)
Net income (loss) available to Arch
common shareholders
$
398,892
$
9,744
$
408,636
Underwriting Ratios
Loss ratio
73.0
%
76.1
%
43.6
%
67.7
%
79.3
%
68.7
%
Acquisition expense ratio
14.2
%
15.4
%
10.2
%
13.8
%
16.7
%
14.0
%
Other operating expense ratio
17.0
%
7.5
%
10.4
%
12.4
%
10.0
%
12.2
%
Combined ratio
104.2
%
99.0
%
64.2
%
93.9
%
106.0
%
94.9
%
Net premiums written to gross premiums
written
68.3
%
60.1
%
86.2
%
67.5
%
74.6
%
69.9
%
(1) Certain amounts included in the gross premiums written of
each segment are related to intersegment transactions and are
included in the gross premiums written of each segment.
Accordingly, the sum of gross premiums written for each segment
does not agree to the total gross premiums written as shown in the
table above due to the elimination of intersegment transactions in
the total.
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (“PSLRA”)
provides a “safe harbor” for forward-looking statements. This
release or any other written or oral statements made by or on
behalf of the Company may include forward-looking statements, which
reflect the Company’s current views with respect to future events
and financial performance. All statements other than statements of
historical fact included in or incorporated by reference in this
release are forward-looking statements. Forward-looking statements,
for purposes of the PSLRA or otherwise, can generally be identified
by the use of forward-looking terminology such as “may,” “will,”
“expect,” “intend,” “estimate,” “anticipate,” “believe” or
“continue” and similar statements of a future or forward-looking
nature or their negative or variations or similar terminology.
Forward-looking statements involve the Company’s current
assessment of risks and uncertainties. Actual events and results
may differ materially from those expressed or implied in these
statements. Important factors that could cause actual events or
results to differ materially from those indicated in such
statements are discussed below and elsewhere in this release and in
the Company’s periodic reports filed with the Securities and
Exchange Commission (the “SEC”), and include:
- the Company’s ability to successfully implement its business
strategy during “soft” as well as “hard” markets;
- acceptance of the Company’s business strategy, security and
financial condition by rating agencies and regulators, as well as
by brokers and its insureds and reinsureds;
- the Company’s ability to consummate acquisitions and integrate
any businesses it has acquired or may acquire into its existing
operations;
- the Company’s ability to maintain or improve its ratings, which
may be affected by its ability to raise additional equity or debt
financings, by ratings agencies’ existing or new policies and
practices, as well as other factors described herein;
- general economic and market conditions (including inflation,
interest rates, unemployment, housing prices, foreign currency
exchange rates, prevailing credit terms and the depth and duration
of a recession, including those resulting from COVID-19) and
conditions specific to the reinsurance and insurance markets in
which the Company operates;
- competition, including increased competition, on the basis of
pricing, capacity (including alternative sources of capital),
coverage terms or other factors;
- developments in the world’s financial and capital markets and
the Company’s access to such markets;
- the Company’s ability to successfully enhance, integrate and
maintain operating procedures (including information technology) to
effectively support its current and new business;
- the loss of key personnel;
- accuracy of those estimates and judgments utilized in the
preparation of the Company’s financial statements, including those
related to revenue recognition, insurance and other reserves,
reinsurance recoverables, investment valuations, intangible assets,
bad debts, income taxes, contingencies and litigation, and any
determination to use the deposit method of accounting;
- greater than expected loss ratios on business written by the
Company and adverse development on claim and/or claim expense
liabilities related to business written by its insurance and
reinsurance subsidiaries;
- the adequacy of the Company’s loss reserves;
- severity and/or frequency of losses;
- greater frequency or severity of unpredictable natural and
man-made catastrophic events;
- claims resulting from natural or man-made catastrophic events
or severe economic events in the Company’s insurance, reinsurance
and mortgage businesses could cause large losses and substantial
volatility in the Company’s results of operations;
- the effect of climate change on the Company’s business;
- the effect of contagious diseases (including COVID-19) on the
Company’s business;
- acts of terrorism, political unrest and other hostilities or
other unforecasted and unpredictable events;
- availability to the Company of reinsurance to manage its gross
and net exposures and the cost of such reinsurance;
- the failure of reinsurers, managing general agents, third party
administrators or others to meet their obligations to the
Company;
- the timing of loss payments being faster or the receipt of
reinsurance recoverables being slower than anticipated by the
Company;
- the Company’s investment performance, including legislative or
regulatory developments that may adversely affect the fair value of
the Company’s investments;
- changes in general economic conditions, including new or
continued sovereign debt concerns or downgrades of U.S. securities
by credit rating agencies, which could affect the Company’s
business, financial condition and results of operations;
- changes in the method for determining the London Inter-bank
Offered Rate (“LIBOR”) and the potential replacement of LIBOR;
- the volatility of the Company’s shareholders’ equity from
foreign currency fluctuations, which could increase due to us not
matching portions of the Company’s projected liabilities in foreign
currencies with investments in the same currencies;
- changes in accounting principles or policies or in the
Company’s application of such accounting principles or
policies;
- changes in the political environment of certain countries in
which the Company operates, underwrites business or invests;
- a disruption caused by cyber-attacks or other technology
breaches or failures on the Company or the Company’s business
partners and service providers, which could negatively impact the
Company’s business and/or expose the Company to litigation;
- statutory or regulatory developments, including as to tax
policy matters and insurance and other regulatory matters such as
the adoption of proposed legislation that would affect
Bermuda-headquartered companies and/or Bermuda-based insurers or
reinsurers and/or changes in regulations or tax laws applicable to
the Company, its subsidiaries, brokers or customers, including the
Tax Cuts and Jobs Act of 2017; and
- the other matters set forth under Item 1A “Risk Factors”, Item
7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and other sections of the Company’s Annual
Report on Form 10-K, as well as the other factors set forth in the
Company’s other documents on file with the SEC, and management’s
response to any of the aforementioned factors.
All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary
statements. The foregoing review of important factors should not be
construed as exhaustive and should be read in conjunction with
other cautionary statements that are included herein or elsewhere.
The Company undertakes no obligation to publicly update or revise
any forward-looking statement, whether as a result of new
information, future events or otherwise.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20211027006106/en/
Arch Capital Group Ltd. François Morin: (441)
278-9250
Investor Relations Donald Watson: (914) 872-3616;
dwatson@archgroup.com
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