Arch Capital Group Ltd. Reports 2018 First Quarter Results
For the 2018 first quarter, the Company reports:
- Net income available to Arch common shareholders of
$137.3 million , or$0.99 per share, a 6.6% annualized return on average common equity, and after-tax operating income to Arch common shareholders, a non-GAAP measure, of$235.1 million , or$1.69 per share, a 11.3% annualized return on average common equity; - Book value per common share of
$61.24 atMarch 31, 2018 , a 0.5% increase in the 2018 first quarter and a 6.2% increase for the trailing twelve months; - Pre-tax catastrophic losses, net of reinsurance and reinstatement premiums(1), of
$2.0 million ; - Favorable development in prior year loss reserves, net of related adjustments(1), of
$50.6 million ; - Combined ratio excluding catastrophic activity and prior year development(1) of 83.2%.
PEMBROKE,
The Company also reported after-tax operating income to Arch common shareholders, a non-GAAP measure, of
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 Re). Pursuant to GAAP, the Company consolidates the results of Watford Re in its financial statements, although it only owns approximately 11% of Watford Re’s common equity. See ‘Comments on Regulation G’ for further details.
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Consolidated | Consolidated Excluding ‘Other’ Segment (1) | ||||||||||||||||||||||||||
Three Months Ended |
Three Months Ended |
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2018 | 2017 | % Change | 2018 | 2017 | % Change | |||||||||||||||||||||||
Gross premiums written | $ | 1,838,214 | $ | 1,657,990 | 10.9 | $ | 1,721,605 | $ | 1,606,686 | 7.2 | ||||||||||||||||||
Net premiums written | 1,412,544 | 1,276,260 | 10.7 | 1,232,992 | 1,132,574 | 8.9 | ||||||||||||||||||||||
Net premiums earned | 1,234,899 | 1,117,017 | 10.6 | 1,098,151 | 995,020 | 10.4 | ||||||||||||||||||||||
Underwriting income | 236,997 | 212,072 | 11.8 | 237,557 | 214,367 | 10.8 | ||||||||||||||||||||||
Underwriting Ratios |
% Point |
% Point |
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Loss ratio | 51.6 | % | 49.5 | % | 2.1 | 49.1 | % | 46.9 | % | 2.2 | ||||||||||||||||||
Underwriting expense ratio | 29.7 | % | 31.9 | % | (2.2 | ) | 29.7 | % | 31.9 | % | (2.2 | ) | ||||||||||||||||
Combined ratio | 81.3 | % | 81.4 | % | (0.1 | ) | 78.8 | % | 78.8 | % | — | |||||||||||||||||
Combined ratio excluding catastrophic activity and prior year development | 83.2 | % | 86.1 | % | (2.9 | ) | ||||||||||||||||||||||
(1) | Excluding the ‘other’ segment (i.e., results of Watford Re). 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:
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Three Months Ended | ||||||||
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2018 | 2017 | ||||||||
Net income available to Arch common shareholders | $ | 137,276 | $ | 241,909 | |||||
Net realized (gains) losses | 111,764 | (29,134 | ) | ||||||
Net impairment losses recognized in earnings | 162 | 1,807 | |||||||
Equity in net (income) loss of investment funds accounted for using the equity method | (28,069 | ) | (48,088 | ) | |||||
Net foreign exchange (gains) losses | 15,556 | 19,796 | |||||||
UGC transaction costs and other | 830 | 15,584 | |||||||
Loss on redemption of preferred shares | 2,710 | — | |||||||
Income tax expense (benefit) (1) | (5,086 | ) | (3,909 | ) | |||||
After-tax operating income available to Arch common shareholders | $ | 235,143 | $ | 197,965 | |||||
Diluted per common share results: |
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Net income available to Arch common shareholders | $ | 0.99 | $ | 1.74 | |||||
Net realized (gains) losses | 0.80 | (0.21 | ) | ||||||
Net impairment losses recognized in earnings | 0.00 | 0.01 | |||||||
Equity in net (income) loss of investment funds accounted for using the equity method | (0.20 | ) | (0.34 | ) | |||||
Net foreign exchange (gains) losses | 0.11 | 0.14 | |||||||
UGC transaction costs and other | 0.01 | 0.11 | |||||||
Loss on redemption of preferred shares | 0.02 | — | |||||||
Income tax expense (benefit) (1) | (0.04 | ) | (0.03 | ) | |||||
After-tax operating income available to Arch common shareholders | $ | 1.69 | $ | 1.42 | |||||
Weighted average common shares and common share equivalents outstanding-diluted | 139,297,934 | 139,047,672 | |||||||
Beginning common shareholders’ equity | $ | 8,324,047 | $ | 7,481,163 | |||||
Ending common shareholders’ equity | 8,370,372 | 7,833,289 | |||||||
Average common shareholders’ equity | $ | 8,347,210 | $ | 7,657,226 | |||||
Annualized return on average common equity | 6.6 | % | 12.6 | % | |||||
Annualized operating return on average common equity | 11.3 | % | 10.3 | % |
(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, UGC 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 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 2018 first quarter performance by operating segment. For additional details regarding the Company’s operating segments, please refer to the Company’s Financial Supplement dated
Insurance Segment
Three Months Ended |
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2018 | 2017 | % Change | ||||||||||
Gross premiums written | $ | 823,378 | $ | 782,281 | 5.3 | ||||||||
Net premiums written | 576,198 | 548,186 | 5.1 | ||||||||||
Net premiums earned | 538,737 | 505,646 | 6.5 | ||||||||||
Underwriting income | $ | 7,864 | $ | 10,011 | (21.4) | ||||||||
Underwriting Ratios | % Point Change | ||||||||||||
Loss ratio | 65.7 | % | 65.8 | % | (0.1) | ||||||||
Underwriting expense ratio | 32.9 | % | 32.2 | % | 0.7 | ||||||||
Combined ratio | 98.6 | % | 98.0 | % | 0.6 | ||||||||
Catastrophic activity and prior year development: | |||||||||||||
Current accident year catastrophic events, net of reinsurance and reinstatement premiums | 0.2 | % | 0.5 | % | (0.3) | ||||||||
Net (favorable) adverse development in prior year loss reserves, net of related adjustments | (0.3 | )% | (0.3 | )% | — | ||||||||
Combined ratio excluding catastrophic activity and prior year development (1) | 98.7 | % | 97.8 | % | 0.9 | ||||||||
(1) | See ‘Comments on Regulation G’ for further discussion. | |
Gross premiums written by the insurance segment in the 2018 first quarter were 5.3% higher than in the 2017 first quarter while net premiums written were 5.1% higher than in the 2017 first quarter. Changes in foreign currency rates resulted in an increase in net premiums written in the 2018 first quarter of
The 2018 first quarter loss ratio reflected 0.2 points for current year catastrophic activity, compared to 0.5 points in the 2017 first quarter. Estimated net favorable development in prior year loss reserves, before related adjustments, reduced the loss ratio by 0.4 points in the 2018 first quarter, consistent with the 0.4 points in the 2017 first quarter. The balance of the change in the 2018 first quarter loss ratio resulted, in part, from a lower level of large loss activity than in the 2017 first quarter and changes in mix of business.
The underwriting expense ratio was 32.9% in the 2018 first quarter, compared to 32.2% in the 2017 first quarter, reflecting changes in the mix and type of business.
Reinsurance Segment
Three Months Ended |
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2018 | 2017 | % Change | ||||||||||
Gross premiums written | $ | 577,483 | $ | 475,782 | 21.4 | ||||||||
Net premiums written | 381,753 | 309,690 | 23.3 | ||||||||||
Net premiums earned | 279,172 | 244,851 | 14.0 | ||||||||||
Other underwriting income (loss) | 1,232 | (306 | ) | (502.6) | |||||||||
Underwriting income | $ | 54,839 | $ | 55,411 | (1.0) | ||||||||
Underwriting Ratios | % Point Change | ||||||||||||
Loss ratio | 50.7 | % | 43.1 | % | 7.6 | ||||||||
Underwriting expense ratio | 30.0 | % | 34.1 | % | (4.1) | ||||||||
Combined ratio | 80.7 | % | 77.2 | % | 3.5 | ||||||||
Catastrophic activity and prior year development: | |||||||||||||
Current accident year catastrophic events, net of reinsurance and reinstatement premiums | 0.3 | % | 4.0 | % | (3.7) | ||||||||
Net (favorable) adverse development in prior year loss reserves, net of related adjustments | (13.0 | )% | (24.4 | )% | 11.4 | ||||||||
Combined ratio excluding catastrophic activity and prior year development (1) | 93.4 | % | 97.6 | % | (4.2) | ||||||||
(1) | See ‘Comments on Regulation G’ for further discussion. | |
Gross premiums written by the reinsurance segment in the 2018 first quarter were 21.4% higher than in the 2017 first quarter, while net premiums written were 23.3% higher than in the 2017 first quarter. Changes in foreign currency rates resulted in an increase in net premiums written in the 2018 first quarter of
The 2018 first quarter loss ratio included 0.4 points of current year catastrophic activity, compared to 4.0 points of catastrophic activity in the 2017 first quarter. Estimated net favorable development in prior year loss reserves, before related adjustments, reduced the loss ratio by 13.1 points in the 2018 first quarter, compared to 23.4 points in the 2017 first quarter. The estimated net favorable development in the 2018 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 2018 first quarter loss ratio resulted, in part, from a higher level of large loss activity than in the 2017 first quarter.
The underwriting expense ratio was 30.0% in the 2018 first quarter, compared to 34.1% in the 2017 first quarter, reflecting changes in the mix and type of business and a higher level of net premiums earned. The underwriting expense ratio benefited from a reduction in federal excise taxes incurred of
Mortgage Segment
Three Months Ended |
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2018 | 2017 | % Change | ||||||||||
Gross premiums written | $ | 321,178 | $ | 348,623 | (7.9) | ||||||||
Net premiums written | 275,041 | 274,698 | 0.1 | ||||||||||
Net premiums earned | 280,242 | 244,523 | 14.6 | ||||||||||
Other underwriting income | 3,416 | 4,123 | (17.1) | ||||||||||
Underwriting income | $ | 174,854 | $ | 148,945 | 17.4 | ||||||||
Underwriting Ratios | % Point Change | ||||||||||||
Loss ratio | 15.5 | % | 11.9 | % | 3.6 | ||||||||
Underwriting expense ratio | 23.3 | % | 28.9 | % | (5.6) | ||||||||
Combined ratio | 38.8 | % | 40.8 | % | (2.0) | ||||||||
Prior year development: | |||||||||||||
Net (favorable) adverse development in prior year loss reserves, net of related adjustments | (4.6 | )% | (9.6 | )% | 5.0 | ||||||||
Combined ratio excluding prior year development (1) | 43.4 | % | 50.4 | % | (7.0) | ||||||||
(1) | See ‘Comments on Regulation G’ for further discussion. | |
The mortgage segment includes the Company’s
Gross premiums written by the mortgage segment in the 2018 first quarter were 7.9% lower than in the 2017 first quarter, while net premiums written were 0.1% higher than in the 2017 first quarter. The reduction in gross premiums written primarily reflected a lower level of Australian mortgage reinsurance business and a lower level of
Arch MI
The loss ratio for the 2018 first quarter reflected estimated net favorable development in prior year loss reserves, before related adjustments, of 4.6 points, compared to 9.6 points in the 2017 first quarter. The estimated net favorable development in the 2018 first quarter was primarily driven by lower than expected claim rates on first lien business and subrogation activity on second lien business. The ending percentage of loans in default on first lien business decreased to 1.98% at
The mortgage segment’s underwriting expense ratio was 23.3% in the 2018 first quarter, compared to 28.9% in the 2017 first quarter. The lower underwriting expense ratio in the 2018 first quarter reflected a higher level of net premiums earned and expense savings from integration efforts following the acquisition of UGC.
At
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, items related to 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 2018 first quarter was
Corporate expenses were
Interest expense for the 2018 first quarter was
On a pre-tax basis, net foreign exchange losses for the 2018 first quarter were
The Company’s effective tax rate on income before income taxes (based on the Company’s annual effective tax rate) was 12.7% for the 2018 first quarter, compared to 10.1% for the 2017 first quarter, while the effective tax rate on pre-tax operating income available to Arch shareholders was 9.9% for the 2018 first quarter, compared to 13.4% for the 2017 first quarter. The effective tax rates for the 2018 first quarter included a discrete income tax benefit of
As disclosed previously, the Company adopted new accounting guidance for equity instruments on
Conference Call
The Company will hold a conference call for investors and analysts at
Please refer to the Company’s Financial Supplement dated
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 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 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, UGC 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, 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. 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. The loss on redemption of preferred shares related to the redemption of the Company's Series C preferred shares in
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 2018 first quarter and 2017 first 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:
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Three Months Ended | |||||||||||||||||||||||||||||
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Insurance | Reinsurance | Mortgage | Sub-total | Other | Total | |||||||||||||||||||||||||
Gross premiums written (1) | $ | 823,378 | $ | 577,483 | $ | 321,178 | $ | 1,721,605 | $ | 213,870 | $ | 1,838,214 | ||||||||||||||||||
Premiums ceded | (247,180 | ) | (195,730 | ) | (46,137 | ) | (488,613 | ) | (34,318 | ) | (425,670 | ) | ||||||||||||||||||
Net premiums written | 576,198 | 381,753 | 275,041 | 1,232,992 | 179,552 | 1,412,544 | ||||||||||||||||||||||||
Change in unearned premiums | (37,461 | ) | (102,581 | ) | 5,201 | (134,841 | ) | (42,804 | ) | (177,645 | ) | |||||||||||||||||||
Net premiums earned | 538,737 | 279,172 | 280,242 | 1,098,151 | 136,748 | 1,234,899 | ||||||||||||||||||||||||
Other underwriting income | — | 1,232 | 3,416 | 4,648 | 701 | 5,349 | ||||||||||||||||||||||||
Losses and loss adjustment expenses | (353,730 | ) | (141,675 | ) | (43,466 | ) | (538,871 | ) | (97,989 | ) | (636,860 | ) | ||||||||||||||||||
Acquisition expenses | (85,169 | ) | (48,319 | ) | (26,567 | ) | (160,055 | ) | (31,321 | ) | (191,376 | ) | ||||||||||||||||||
Other operating expenses | (91,974 | ) | (35,571 | ) | (38,771 | ) | (166,316 | ) | (8,699 | ) | (175,015 | ) | ||||||||||||||||||
Underwriting income (loss) | $ | 7,864 | $ | 54,839 | $ | 174,854 | 237,557 | (560 | ) | 236,997 | ||||||||||||||||||||
Net investment income | 100,243 | 26,481 | 126,724 | |||||||||||||||||||||||||||
Net realized gains (losses) | (111,859 | ) | 861 | (110,998 | ) | |||||||||||||||||||||||||
Net impairment losses recognized in earnings | (162 | ) | — | (162 | ) | |||||||||||||||||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 28,069 | — | 28,069 | |||||||||||||||||||||||||||
Other income | 74 | — | 74 | |||||||||||||||||||||||||||
Corporate expenses | (14,482 | ) | — | (14,482 | ) | |||||||||||||||||||||||||
UGC transaction costs and other | (830 | ) | — | (830 | ) | |||||||||||||||||||||||||
Amortization of intangible assets | (26,736 | ) | — | (26,736 | ) | |||||||||||||||||||||||||
Interest expense | (25,907 | ) | (4,729 | ) | (30,636 | ) | ||||||||||||||||||||||||
Net foreign exchange gains (losses) | (15,039 | ) | (4,682 | ) | (19,721 | ) | ||||||||||||||||||||||||
Income before income taxes | 170,928 | 17,371 | 188,299 | |||||||||||||||||||||||||||
Income tax expense | (21,912 | ) | (3 | ) | (21,915 | ) | ||||||||||||||||||||||||
Net income | 149,016 | 17,368 | 166,384 | |||||||||||||||||||||||||||
Dividends attributable to redeemable noncontrolling interests | — | (4,585 | ) | (4,585 | ) | |||||||||||||||||||||||||
Amounts attributable to nonredeemable noncontrolling interests | — | (11,376 | ) | (11,376 | ) | |||||||||||||||||||||||||
Net income available to Arch | 149,016 | 1,407 | 150,423 | |||||||||||||||||||||||||||
Preferred dividends | (10,437 | ) | — | (10,437 | ) | |||||||||||||||||||||||||
Loss on redemption of preferred shares | (2,710 | ) | — | (2,710 | ) | |||||||||||||||||||||||||
Net income available to Arch common shareholders | $ | 135,869 | $ | 1,407 | $ | 137,276 | ||||||||||||||||||||||||
Underwriting Ratios | ||||||||||||||||||||||||||||||
Loss ratio | 65.7 | % | 50.7 | % | 15.5 | % | 49.1 | % | 71.7 | % | 51.6 | % | ||||||||||||||||||
Acquisition expense ratio | 15.8 | % | 17.3 | % | 9.5 | % | 14.6 | % | 22.9 | % | 15.5 | % | ||||||||||||||||||
Other operating expense ratio | 17.1 | % | 12.7 | % | 13.8 | % | 15.1 | % | 6.4 | % | 14.2 | % | ||||||||||||||||||
Combined ratio | 98.6 | % | 80.7 | % | 38.8 | % | 78.8 | % | 101.0 | % | 81.3 | % | ||||||||||||||||||
Net premiums written to gross premiums written | 70.0 | % | 66.1 | % | 85.6 | % | 71.6 | % | 84.0 | % | 76.8 | % | ||||||||||||||||||
(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. | |
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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 (loss) | — | (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) benefit | (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. | |
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
- 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;
- 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, 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, 2018 ; - greater than expected loss ratios on business written by the Company and adverse development on claim and/or claim expense liabilities related to business written by its insurance and reinsurance subsidiaries;
- severity and/or frequency of losses;
- claims resulting from natural or man-made catastrophic events in the Company’s insurance, reinsurance and mortgage businesses could cause large losses and substantial volatility in our 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 ofU.S. securities by credit rating agencies, which could affect the Company’s business, financial condition and results of operations; - the volatility of the Company’s shareholders’ equity from foreign currency fluctuations, which could increase due to us not matching portions of the Company’s projected liabilities in foreign currencies with investments in the same currencies;
- losses relating to aviation business and business produced by a certain managing underwriting agency for which the Company may be liable to the purchaser of its prior reinsurance business or to others in connection with the
May 5, 2000 asset sale described in the Company’s periodic reports filed with theSEC ; - changes in accounting principles or policies or in the Company’s application of such accounting principles or policies;
- changes in the political environment of certain countries in which the Company operates, underwrites business or invests;
- statutory or regulatory developments, including as to tax policy matters and insurance and other regulatory matters such as the adoption of proposed legislation that would affect
Bermuda -headquartered companies and/orBermuda -based insurers or reinsurers and/or changes in regulations or tax laws applicable to the Company, its subsidiaries, brokers or customers, including the recently enacted 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.
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