Arch Capital Group Ltd. (NASDAQ: ACGL; “Arch” or “the Company”)
announces its 2022 second quarter results. The results
included:
- Net income available to Arch common shareholders of $394.2
million, or $1.04 per share, a 13.3% annualized net income return
on average common equity, compared to $663.8 million, or $1.63 per
share, for the 2021 second quarter;
- After-tax operating income available to Arch common
shareholders(1) of $506.5 million, or $1.34 per share, a 17.1%
annualized operating return on average common equity, compared to
$407.2 million, or $1.00 per share, for the 2021 second
quarter;
- Combined ratio excluding catastrophic activity and prior year
development(1) of 80.8%, compared to 80.7% for the 2021 second
quarter;
- Pre-tax current accident year catastrophic losses for the
Company’s insurance and reinsurance segments, net of reinsurance
and reinstatement premiums(1) of $82.4 million;
- Favorable development in prior year loss reserves, net of
related adjustments(1) of $166.6 million;
- 7.1 million shares repurchased at an aggregate cost of
approximately $320.7 million;
- Book value per common share of $31.37 at June 30, 2022, a 2.5%
decrease from March 31, 2022.
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 Somers). Effective July 1, 2021, the Company no longer
consolidates the results of Somers in its consolidated financial
statements.
(U.S. dollars in thousands)
Consolidated
Consolidated Excluding ‘Other’
Segment (1)
Three Months Ended June
30,
Three Months Ended June
30,
2022
2021
% Change
2022
2021
% Change
Gross premiums written
$
3,869,727
$
3,286,291
17.8
$
3,869,727
$
3,117,505
24.1
Net premiums written
2,684,639
2,399,524
11.9
2,684,639
2,224,133
20.7
Net premiums earned
2,325,775
2,120,909
9.7
2,325,775
1,936,672
20.1
Underwriting income
535,378
386,521
38.5
535,378
395,387
35.4
Underwriting Ratios
% Point
Change
% Point
Change
Loss ratio
47.4%
54.7%
(7.3)
47.4%
52.6%
(5.2)
Underwriting expense ratio
29.7%
27.3%
2.4
29.7%
27.2%
2.5
Combined ratio
77.1%
82.0%
(4.9)
77.1%
79.8%
(2.7)
Combined ratio excluding catastrophic
activity and prior year development (1)
80.8%
80.7%
0.1
(1)
Presentation represents a “non-GAAP” financial measure as defined
in Regulation G. Such presentation excludes the results of Somers
Group Holdings Ltd. (“Somers”), formerly known as Watford Holdings
Ltd., which the Company consolidated in its financial statements
through June 30, 2021 pursuant to GAAP. 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 (see ‘Comments on Regulation G’ for a discussion
of non-GAAP financial measures):
(U.S. dollars in thousands, except share
data)
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
Net income available to Arch common
shareholders
$
394,160
$
663,820
$
579,776
$
1,091,573
Net realized (gains) losses
266,579
(167,438)
558,993
(272,989)
Equity in net (income) loss of investment
funds accounted for using the equity method
(58,061)
(122,186)
(94,366)
(193,872)
Net foreign exchange (gains) losses
(87,797)
17,888
(91,652)
(3,444)
Transaction costs and other
261
(1,421)
658
(147)
Income tax expense (benefit) (1)
(8,646)
16,553
(24,914)
25,864
After-tax operating income available to
Arch common shareholders
$
506,496
$
407,216
$
928,495
$
646,985
Diluted per common
share results:
Net income available to Arch common
shareholders
$
1.04
$
1.63
$
1.52
$
2.68
Net realized (gains) losses
0.70
(0.41)
1.47
(0.66)
Equity in net (income) loss of investment
funds accounted for using the equity method
(0.15)
(0.30)
(0.25)
(0.48)
Net foreign exchange (gains) losses
(0.23)
0.04
(0.24)
(0.01)
Transaction costs and other
0.00
0.00
0.00
0.00
Income tax expense (benefit) (1)
(0.02)
0.04
(0.06)
0.06
After-tax operating income available to
Arch common shareholders
$
1.34
$
1.00
$
2.44
$
1.59
Weighted average common shares and common
share equivalents outstanding — diluted
377,952,988
406,485,994
380,905,512
407,687,680
Beginning common shareholders’ equity
$
12,089,589
$
12,316,472
$
12,715,896
$
12,325,886
Ending common shareholders’ equity
11,587,566
12,706,072
11,587,566
12,706,072
Average common shareholders’ equity
$
11,838,578
$
12,511,272
$
12,151,731
$
12,515,979
Annualized net income return on average
common equity
13.3%
21.2%
9.5%
17.4%
Annualized operating return on average
common equity
17.1%
13.0%
15.3%
10.3%
(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.
Segment Information
The following section provides analysis on the Company’s 2022
second quarter performance by operating segment. For additional
details regarding the Company’s operating segments, please refer to
the Company’s Financial Supplement dated June 30, 2022. 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 June
30,
(U.S. dollars in thousands)
2022
2021
% Change
Gross premiums written
$
1,705,167
$
1,368,867
24.6
Net premiums written
1,228,257
963,555
27.5
Net premiums earned
1,102,144
865,427
27.4
Underwriting income
$
97,609
$
49,353
97.8
Underwriting Ratios
% Point
Change
Loss ratio
57.1%
63.1%
(6.0)
Underwriting expense ratio
34.0%
31.2%
2.8
Combined ratio
91.1%
94.3%
(3.2)
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
1.5%
3.2%
(1.7)
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(0.4)%
(0.3)%
(0.1)
Combined ratio excluding catastrophic
activity and prior year development
90.0%
91.4%
(1.4)
Gross premiums written by the insurance segment in the 2022
second quarter were 24.6% higher than in the 2021 second quarter
while net premiums written were 27.5% higher than in the 2021
second 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 2022 second quarter were 27.4% higher than
in the 2021 second quarter, and reflect changes in net premiums
written over the previous five quarters.
The 2022 second quarter loss ratio reflected 1.2 points of
current year catastrophic activity, compared to 3.2 points of
catastrophic activity in the 2021 second quarter. Estimated net
favorable development of prior year loss reserves, before related
adjustments, reduced the loss ratio by 0.6 points in the 2022
second quarter, compared to 0.5 in the 2021 second quarter. The
improvement in the 2022 second quarter loss ratio also reflected
the impact of rate increases and changes in mix of business.
The underwriting expense ratio was 34.0% in the 2022 second
quarter, compared to 31.2% in the 2021 second quarter. The increase
in the 2022 second quarter was primarily due to higher gross
commission ratios, growth in lines with higher acquisition costs,
such as travel, and targeted personnel expansion to support our
growth. This increase was partially offset by a higher level of net
premiums earned.
Reinsurance Segment
Three Months Ended June
30,
(U.S. dollars in thousands)
2022
2021
% Change
Gross premiums written
$
1,793,398
$
1,358,020
32.1
Net premiums written
1,162,634
924,732
25.7
Net premiums earned
927,999
737,024
25.9
Other underwriting income (loss)
4,526
1,053
329.8
Underwriting income (loss)
$
139,400
$
95,974
45.2
Underwriting Ratios
% Point
Change
Loss ratio
57.9%
62.9%
(5.0)
Underwriting expense ratio
27.5%
24.2%
3.3
Combined ratio
85.4%
87.1%
(1.7)
Catastrophic activity and prior year
development:
Current accident year catastrophic events,
net of reinsurance and reinstatement premiums
7.1%
2.5%
4.6
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(4.5)%
(2.5)%
(2.0)
Combined ratio excluding catastrophic
activity and prior year development
82.8%
87.1%
(4.3)
Gross premiums written by the reinsurance segment in the 2022
second quarter were 32.1% higher than in the 2021 second quarter,
while net premiums written were 25.7% higher than in the 2021
second quarter. The growth in net premiums written reflected
increases in other specialty, property catastrophe and property
excluding property catastrophe lines, primarily related to rate
increases, new business opportunities and growth in existing
accounts. Net premiums earned by the reinsurance segment in the
2022 second quarter were 25.9% higher than in the 2021 second
quarter, and reflect changes in net premiums written over the
previous five quarters.
The 2022 second quarter loss ratio reflected 7.5 points of
current year catastrophic activity, primarily due to a series of
natural events outside the U.S., compared to 2.6 points of
catastrophic activity in the 2021 second quarter. Estimated net
favorable development of prior year loss reserves, before related
adjustments, reduced the loss ratio by 5.0 points in the 2022
second quarter, compared to 2.8 points in the 2021 second quarter.
The improvement in the 2022 second quarter loss ratio also
reflected the impact of rate increases and changes in mix of
business.
The underwriting expense ratio was 27.5% in the 2022 second
quarter, compared to 24.2% in the 2021 second quarter, with the
increase primarily resulting from growth in lines with higher
acquisition costs and targeted personnel expansion to support our
growth. This increase was partially offset by a higher level of net
premiums earned.
Mortgage Segment
Three Months Ended June
30,
(U.S. dollars in thousands)
2022
2021
% Change
Gross premiums written
$
371,896
$
391,511
(5.0)
Net premiums written
293,748
335,846
(12.5)
Net premiums earned
295,632
334,221
(11.5)
Other underwriting income
(1,556)
4,148
(137.5)
Underwriting income
$
298,369
$
250,060
19.3
Underwriting Ratios
% Point
Change
Loss ratio
(21.9)%
3.0%
(24.9)
Underwriting expense ratio
20.4%
23.5%
(3.1)
Combined ratio
(1.5)%
26.5%
(28.0)
Prior year development:
Net (favorable) adverse development in
prior year loss reserves, net of related adjustments
(40.7)%
(13.1)%
(27.6)
Combined ratio excluding prior year
development
39.2%
39.6%
(0.4)
Gross premiums written by the mortgage segment in the 2022
second quarter were 5.0% lower than in the 2021 second quarter,
while net premiums written were 12.5% lower. The reduction in gross
premiums written primarily reflected lower U.S. primary mortgage
insurance single premium volume and a decrease in monthly premiums.
Net premiums written for the 2022 second quarter reflected a higher
level of premiums ceded than in the 2021 second quarter, while the
reduction in net premiums earned also reflected a lower level of
earnings from single premium policy terminations and a decline in
monthly premiums.
Estimated net favorable development of prior year loss reserves,
before related adjustments, reduced the loss ratio by 39.9 points,
primarily related to the U.S. first lien portfolio from the 2020
accident year, compared to 12.9 points in the 2021 second quarter.
The percentage of loans in default on U.S. primary mortgage
insurance business was 1.77% at June 30, 2022, compared to 2.09% at
March 31, 2022. The 2022 second quarter loss ratio also reflected
the lower level of net premiums earned in the U.S. primary mortgage
insurance business.
The underwriting expense ratio was 20.4% in the 2022 second
quarter, compared to 23.5% in the 2021 second quarter, with the
decrease primarily due to lower acquisition expenses on Australian
mortgage insurance following the acquisition of Westpac LMI in the
2021 third quarter and profit commissions on business ceded related
to favorable development of prior year loss reserves. Such amounts
were partially offset by a lower level of net premiums earned in
the U.S. primary mortgage insurance business.
Corporate Segment
The corporate segment results include net investment income, 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, other income (loss),
corporate expenses, transaction costs and other, amortization of
intangible assets, interest expense, net foreign exchange gains or
losses, income taxes items, income or loss from operating
affiliates and items related to the Company’s non-cumulative
preferred shares. Such amounts exclude the results of the ‘other’
segment.
Pre-tax net investment income for the 2022 second quarter was
$0.28 per share, or $106.4 million, reflecting the effects of
higher interest rates available in the market, compared to $0.21
per share, or $80.4 million, for the 2022 first quarter, and $0.22
per share, or $89.4 million, for the 2021 second quarter. The
annualized pre-tax investment income yield was 1.76% for the 2022
second quarter, compared to 1.34% for the 2022 first quarter and
1.47% for the 2021 second quarter. Total return, a non-GAAP
measure, was -3.02% for the 2022 second quarter, compared to -3.07%
for the 2022 first quarter and 1.58% for the 2021 second quarter.
Total return for the 2022 periods primarily reflected the impact of
rising interest rates. See ‘Comments on Regulation G’ for a
discussion of non-GAAP financial measures.
Net realized gains or losses reflect sales of investments along
with the impact of financial market movements on the Company’s
investment portfolio, including realized and unrealized changes in
the fair value of equity securities and assets accounted for using
the fair value option, realized and unrealized gains and losses on
derivative instruments and changes in the allowance for credit
losses on financial assets. On a pre-tax basis, net realized losses
for the 2022 second quarter were $266.6 million, which included
$109.9 million of mark-to-market losses on equity securities,
compared to net realized gains of $163.4 million for the 2021
second quarter.
Interest expense for the 2022 second quarter was $32.8 million,
compared to $31.4 million for the 2021 second quarter, and
primarily reflects amounts related to the Company’s outstanding
senior notes.
On a pre-tax basis, net foreign exchange gains for the 2022
second quarter were $87.8 million, compared to net foreign exchange
losses for the 2021 second quarter of $17.9 million. For both
periods, such amounts were primarily unrealized and resulted from
the effects of revaluing the Company’s net insurance liabilities
required to be settled in foreign currencies at each balance sheet
date. Changes in the value of available-for-sale investments held
in foreign currencies due to foreign currency rate movements are
reflected as a direct increase or decrease to shareholders’ equity
and are not included in the consolidated statements of income.
Although the Company generally attempts to match the currency of
its projected liabilities with investments in the same currencies,
the Company may elect to over or underweight one or more currencies
from time to time, which could increase the Company’s exposure to
foreign currency fluctuations and increase the volatility of the
Company’s shareholders’ equity.
The Company’s effective tax rate on income before income taxes
(based on the Company’s estimated annual effective tax rate) was
5.2% for the 2022 second quarter, compared to 7.0% for the 2021
second quarter. The Company’s effective tax rate on pre-tax
operating income available to Arch common shareholders was 5.7% for
the 2022 second quarter, compared to 7.6% for the 2021 second
quarter. The Company’s effective tax rate may fluctuate from period
to period based upon the relative mix of income or loss reported by
jurisdiction, the level of catastrophic loss activity incurred, and
the varying tax rates in each jurisdiction.
Income from operating affiliates for the 2022 second quarter was
$4.6 million, or $0.01 per share, compared to $24.5 million, or
$0.06 per share, for the 2021 second quarter, and primarily
reflects amounts related to Company’s investment in Somers and
Coface SA.
Conference Call
The Company will hold a conference call for investors and
analysts at 11:00 a.m. Eastern Time on July 28, 2022. A live
webcast of this call will be available via the Investors section of
the Company’s website at http://www.archgroup.com/investors. A recording of
the webcast will be available in the Investors section of the
Company’s website approximately two hours after the event concludes
and will be archived on the site for one year.
Please refer to the Company’s Financial Supplement dated June
30, 2022, which is available via the Investors section of the
Company’s website at http://www.archgroup.com/investors. 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 $15.1 billion in capital at June 30,
2022, 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 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
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, income from operating affiliates
and other corporate segment related items are not allocated to each
underwriting segment. As noted earlier, the ‘other’ segment
includes the results of Somers 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, Somers was considered a
variable interest entity and the Company concluded that it was the
primary beneficiary of Somers through June 30, 2021. As such, the
Company consolidated the results of Somers 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, Somers, and
Greysbridge Ltd., a wholly-owned subsidiary of Arch
(“Greysbridge”), entered into an Agreement and Plan of Merger (as
amended, the “Merger Agreement”). The merger and the related
Greysbridge equity financing closed on July 1, 2021. Effective July
1, 2021, Somers 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. Accordingly, effective July
1, 2021, Arch no longer consolidates the results of Somers 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 2022 second quarter and 2021 second 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
June 30, 2022
Insurance
Reinsurance
Mortgage
Sub-total
Other
Total
Gross premiums written (1)
$
1,705,167
$
1,793,398
$
371,896
$
3,869,727
$
—
$
3,869,727
Premiums ceded
(476,910)
(630,764)
(78,148)
(1,185,088)
—
(1,185,088)
Net premiums written
1,228,257
1,162,634
293,748
2,684,639
—
2,684,639
Change in unearned premiums
(126,113)
(234,635)
1,884
(358,864)
—
(358,864)
Net premiums earned
1,102,144
927,999
295,632
2,325,775
—
2,325,775
Other underwriting income (loss)
—
4,526
(1,556)
2,970
—
2,970
Losses and loss adjustment expenses
(629,759)
(537,578)
64,681
(1,102,656)
—
(1,102,656)
Acquisition expenses
(213,688)
(189,494)
(10,137)
(413,319)
—
(413,319)
Other operating expenses
(161,088)
(66,053)
(50,251)
(277,392)
—
(277,392)
Underwriting income (loss)
$
97,609
$
139,400
$
298,369
535,378
—
535,378
Net investment income
106,392
—
106,392
Net realized gains (losses)
(266,579)
—
(266,579)
Equity in net income (loss) of investment
funds accounted for using the equity method
58,061
—
58,061
Other income (loss)
(11,777)
—
(11,777)
Corporate expenses (2)
(27,359)
—
(27,359)
Transaction costs and other (2)
(261)
—
(261)
Amortization of intangible assets
(27,207)
—
(27,207)
Interest expense
(32,795)
—
(32,795)
Net foreign exchange gains (losses)
87,775
—
87,775
Income (loss) before income taxes and
income (loss) from operating affiliates
421,628
—
421,628
Income tax expense
(22,323)
—
(22,323)
Income (loss) from operating
affiliates
4,640
—
4,640
Net income (loss)
403,945
—
403,945
Dividends attributable to redeemable
noncontrolling interests
399
—
399
Net income (loss) available to
Arch
404,344
—
404,344
Preferred dividends
(10,184)
—
(10,184)
Net income (loss) available to Arch
common shareholders
$
394,160
$
—
$
394,160
Underwriting Ratios
Loss ratio
57.1%
57.9%
(21.9)%
47.4%
— %
47.4%
Acquisition expense ratio
19.4%
20.4%
3.4%
17.8%
— %
17.8%
Other operating expense ratio
14.6%
7.1%
17.0%
11.9%
— %
11.9%
Combined ratio
91.1%
85.4%
(1.5)%
77.1%
— %
77.1%
Net premiums written to gross premiums
written
72.0%
64.8%
79.0%
69.4%
— %
69.4%
(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.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and
reflected in ‘Transaction costs and other.’ See ‘Comments on
Regulation G’ for a further discussion of such items.
(U.S. Dollars in thousands)
Three Months Ended
June 30, 2021
Insurance
Reinsurance
Mortgage
Sub-total
Other
Total
Gross premiums written (1)
$
1,368,867
$
1,358,020
$
391,511
$
3,117,505
$
240,942
$
3,286,291
Premiums ceded
(405,312)
(433,288)
(55,665)
(893,372)
(65,551)
(886,767)
Net premiums written
963,555
924,732
335,846
2,224,133
175,391
2,399,524
Change in unearned premiums
(98,128)
(187,708)
(1,625)
(287,461)
8,846
(278,615)
Net premiums earned
865,427
737,024
334,221
1,936,672
184,237
2,120,909
Other underwriting income (loss)
—
1,053
4,148
5,201
328
5,529
Losses and loss adjustment expenses
(545,880)
(463,823)
(9,880)
(1,019,583)
(140,248)
(1,159,831)
Acquisition expenses
(136,852)
(133,585)
(30,117)
(300,554)
(34,589)
(335,143)
Other operating expenses
(133,342)
(44,695)
(48,312)
(226,349)
(18,594)
(244,943)
Underwriting income (loss)
$
49,353
$
95,974
$
250,060
395,387
(8,866)
386,521
Net investment income
89,430
22,183
111,613
Net realized gains (losses)
163,394
39,513
202,907
Equity in net income (loss) of investment
funds accounted for using the equity method
122,186
—
122,186
Other income (loss)
6,852
—
6,852
Corporate expenses (2)
(17,175)
—
(17,175)
Transaction costs and other (2)
1,444
(220)
1,224
Amortization of intangible assets
(14,388)
(898)
(15,286)
Interest expense
(31,439)
(4,261)
(35,700)
Net foreign exchange gains (losses)
(17,892)
117
(17,775)
Income (loss) before income taxes and
income (loss) from operating affiliates
697,799
47,568
745,367
Income tax expense
(50,953)
(226)
(51,179)
Income (loss) from operating
affiliates
24,476
—
24,476
Net income (loss)
671,322
47,342
718,664
Dividends attributable to redeemable
noncontrolling interests
(580)
(981)
(1,561)
Amounts attributable to nonredeemable
noncontrolling interests
—
(41,617)
(41,617)
Net income (loss) available to
Arch
670,742
4,744
675,486
Preferred dividends
(11,666)
—
(11,666)
Net income (loss) available to Arch
common shareholders
$
659,076
$
4,744
$
663,820
Underwriting Ratios
Loss ratio
63.1%
62.9%
3.0%
52.6%
76.1%
54.7%
Acquisition expense ratio
15.8%
18.1%
9.0%
15.5%
18.8%
15.8%
Other operating expense ratio
15.4%
6.1%
14.5%
11.7%
10.1%
11.5%
Combined ratio
94.3%
87.1%
26.5%
79.8%
105.0%
82.0%
Net premiums written to gross premiums
written
70.4%
68.1%
85.8%
71.3%
72.8%
73.0%
(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.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and
reflected in ‘Transaction costs and other.’ See ‘Comments on
Regulation G’ for a further discussion of such items.
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 and addition of key personnel;
- material differences between actual and expected assessments
for guaranty funds and mandatory pooling arrangements;
- 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 replacement of LIBOR with
alternative benchmark rates;
- 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 new
guidance implementing the Tax Cuts and Jobs Act of 2017 and the
possible implementation of the Organization for Economic
Cooperation and Development (“OECD”) Pillar I and Pillar II
initiative; 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.
arch-corporate
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version on businesswire.com: https://www.businesswire.com/news/home/20220727005886/en/
Arch Capital Group Ltd. François Morin: (441)
278-9250
Investor Relations Donald Watson: (914) 872-3616;
dwatson@archgroup.com
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