Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income available
to Arch common shareholders for the 2015 second quarter was $110.3
million, or $0.88 per share, compared to $202.5 million, or $1.48 per
share, for the 2014 second quarter. The Company also reported after-tax
operating income available to Arch common shareholders of $146.0
million, or $1.16 per share, for the 2015 second quarter, compared to
$160.7 million, or $1.17 per share, for the 2014 second quarter. The
Company’s after-tax operating income available to Arch common
shareholders represented an annualized return on average common equity
of 9.9% for the 2015 second quarter, compared to 11.2% for the 2014
second quarter. For the trailing twelve months ended June 30, 2015,
after-tax operating income available to Arch common shareholders
produced a 10.0% return on average common equity while net income
available to Arch common shareholders produced a 14.0% return on average
common equity. The Company’s book value per common share was $47.49 at
June 30, 2015, a 0.6% decrease from $47.80 per share at March 31, 2015
and an 8.6% increase from $43.73 per share at June 30, 2014.
After-tax operating income or loss available to Arch common
shareholders, a non-GAAP measure, 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 and net
foreign exchange gains or losses, net of income taxes. See ‘Comments on
Regulation G’ for a further discussion of after-tax operating income or
loss available to Arch common shareholders. All earnings per share
amounts discussed in this release are on a diluted basis.
The following table summarizes the Company’s underwriting results,
excluding amounts related to the ‘other’ segment (i.e., results
of Watford Re). Although the Company owns approximately 11% of Watford
Re’s common equity, pursuant to generally accepted accounting
principles, it consolidates the results of Watford Re in its financial
statements. All discussions of line items in this release exclude
amounts related to the ‘other’ segment. For segment results reflecting
the contribution of the ‘other’ segment, see pages 11 to 14 of the
Company’s Financial Supplement dated June 30, 2015.
|
(U.S. dollars in thousands)
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
% Change
|
|
|
2015
|
|
|
2014
|
|
|
% Change
|
Gross premiums written
|
|
|
|
|
$
|
1,155,253
|
|
|
|
$
|
1,256,934
|
|
|
|
(8.1
|
)
|
|
|
$
|
2,466,931
|
|
|
|
$
|
2,552,070
|
|
|
|
(3.3
|
)
|
Net premiums written
|
|
|
|
|
823,392
|
|
|
|
920,126
|
|
|
|
(10.5
|
)
|
|
|
1,765,809
|
|
|
|
1,952,922
|
|
|
|
(9.6
|
)
|
Net premiums earned
|
|
|
|
|
836,249
|
|
|
|
894,172
|
|
|
|
(6.5
|
)
|
|
|
1,674,247
|
|
|
|
1,751,786
|
|
|
|
(4.4
|
)
|
Underwriting income
|
|
|
|
|
108,343
|
|
|
|
125,133
|
|
|
|
(13.4
|
)
|
|
|
223,046
|
|
|
|
258,711
|
|
|
|
(13.8
|
)
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
% Point Change
|
|
|
|
|
|
|
|
|
% Point Change
|
Loss ratio
|
|
|
|
|
52.8
|
%
|
|
|
53.4
|
%
|
|
|
(0.6
|
)
|
|
|
52.9
|
%
|
|
|
52.1
|
%
|
|
|
0.8
|
|
Acquisition expense ratio
|
|
|
|
|
17.4
|
%
|
|
|
17.2
|
%
|
|
|
0.2
|
|
|
|
17.2
|
%
|
|
|
17.9
|
%
|
|
|
(0.7
|
)
|
Other operating expense ratio
|
|
|
|
|
17.7
|
%
|
|
|
15.6
|
%
|
|
|
2.1
|
|
|
|
17.6
|
%
|
|
|
15.5
|
%
|
|
|
2.1
|
|
Combined ratio
|
|
|
|
|
87.9
|
%
|
|
|
86.2
|
%
|
|
|
1.7
|
|
|
|
87.7
|
%
|
|
|
85.5
|
%
|
|
|
2.2
|
|
|
The following table summarizes, on an after-tax basis, the Company’s
consolidated financial data, including a reconciliation of after-tax
operating income available to Arch common shareholders to net income
available to Arch common shareholders and related diluted per share
results:
|
(U.S. dollars in thousands, except share data)
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
After-tax operating income available to Arch common shareholders
|
|
|
|
|
$
|
145,956
|
|
|
|
$
|
160,669
|
|
|
|
$
|
295,802
|
|
|
|
$
|
325,073
|
|
Net realized gains (losses), net of tax
|
|
|
|
|
(28,074
|
)
|
|
|
50,267
|
|
|
|
33,860
|
|
|
|
68,540
|
|
Net impairment losses recognized in earnings, net of tax
|
|
|
|
|
(1,113
|
)
|
|
|
(14,749
|
)
|
|
|
(6,912
|
)
|
|
|
(17,720
|
)
|
Equity in net income of investment funds accounted for using the
equity method, net of tax
|
|
|
|
|
16,113
|
|
|
|
9,054
|
|
|
|
21,645
|
|
|
|
12,218
|
|
Net foreign exchange gains (losses), net of tax
|
|
|
|
|
(22,577
|
)
|
|
|
(2,710
|
)
|
|
|
43,762
|
|
|
|
(8,564
|
)
|
Net income available to Arch common shareholders
|
|
|
|
|
$
|
110,305
|
|
|
|
$
|
202,531
|
|
|
|
$
|
388,157
|
|
|
|
$
|
379,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per common share results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-tax operating income available to Arch common shareholders
|
|
|
|
|
$
|
1.16
|
|
|
|
$
|
1.17
|
|
|
|
$
|
2.33
|
|
|
|
$
|
2.38
|
|
Net realized gains (losses), net of tax
|
|
|
|
|
(0.22
|
)
|
|
|
0.37
|
|
|
|
0.27
|
|
|
|
0.50
|
|
Net impairment losses recognized in earnings, net of tax
|
|
|
|
|
(0.01
|
)
|
|
|
(0.11
|
)
|
|
|
(0.06
|
)
|
|
|
(0.13
|
)
|
Equity in net income of investment funds accounted for using the
equity method, net of tax
|
|
|
|
|
0.13
|
|
|
|
0.07
|
|
|
|
0.17
|
|
|
|
0.09
|
|
Net foreign exchange gains (losses), net of tax
|
|
|
|
|
(0.18
|
)
|
|
|
(0.02
|
)
|
|
|
0.34
|
|
|
|
(0.06
|
)
|
Net income available to Arch common shareholders
|
|
|
|
|
$
|
0.88
|
|
|
|
$
|
1.48
|
|
|
|
$
|
3.05
|
|
|
|
$
|
2.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common share equivalents
outstanding - diluted
|
|
|
|
|
125,885,420
|
|
|
|
136,889,944
|
|
|
|
127,156,713
|
|
|
|
136,716,889
|
|
|
The Company’s investment portfolio continues to be comprised primarily
of high quality fixed income securities with an average credit quality
of “AA/Aa2.” The average effective duration of the Company’s investment
portfolio was 3.05 years at June 30, 2015, compared to 3.34 years at
December 31, 2014. Including the effects of foreign exchange, total
return on the Company’s investment portfolio was (0.04)% for the 2015
second quarter, compared to 1.80% for the 2014 second quarter. Total
return in the 2015 second quarter reflected the impact of the U.S.
Dollar weakening against the British Pound Sterling, Euro and other
major currencies on non-U.S. Dollar denominated investments and
benefited from strong returns on alternatives and non-investment grade
fixed income securities. Excluding the effects of foreign exchange,
total return was (0.38)% for the 2015 second quarter, compared to 1.63%
for the 2014 second quarter.
Net investment income for the 2015 second quarter was $0.53 per share,
or $67.2 million, compared to $0.53 per share, or $72.5 million, for the
2014 second quarter, and $0.55 per share, or $70.3 million, for the 2015
first quarter. The lower level of net investment income per share
compared to the 2015 first quarter was primarily related to a lower
level of income on certain fund investments. The annualized pre-tax
investment income yield was 2.05% for the 2015 second quarter, compared
to 2.05% for the 2014 second quarter and 2.09% for the 2015 first
quarter. Such yields reflect the effects of low prevailing interest
rates available in the market and the Company’s investment strategy,
which puts an emphasis on total return. Cash flow provided by operating
activities was $231.8 million for the 2015 second quarter, compared to
$254.2 million for the 2014 second quarter, primarily reflecting a lower
level of net premiums collected than in the 2014 second quarter.
On a pre-tax basis, net foreign exchange losses for the 2015 second
quarter were $22.6 million, compared to net foreign exchange losses for
the 2014 second quarter of $2.8 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. The Company has not matched a portion of its
projected liabilities in foreign currencies with investments in the same
currencies and may not match such amounts in future periods, which could
increase the Company’s exposure to foreign currency fluctuations and
increase the volatility of the Company’s shareholders’ equity.
Interest expense of $4.0 million for the 2015 second quarter included
$12.4 million related to the Company’s senior notes and other
borrowings, partially offset by an $8.4 million reduction in interest
expense on a deposit accounting liability (i.e., a contract that,
in accordance with GAAP, does not pass risk transfer). The reduction in
the 2015 second quarter resulted from a reassessment of this estimated
ultimate liability due to a determination that paid losses are expected
to be lower than previously anticipated.
The Company’s effective tax rate on income before income taxes (based on
the Company’s estimated annual effective tax rate) was 5.5% for the 2015
second quarter, compared to 3.4% for the 2014 second quarter. The
Company’s effective tax rate on pre-tax operating income available to
Arch shareholders was 3.9% for the 2015 second quarter, compared to 3.6%
for the 2014 second quarter. The Company’s effective tax rate fluctuates
from year to year based upon the relative mix of income or loss reported
by jurisdiction and the varying tax rates in each jurisdiction. The
Company’s quarterly tax provision is adjusted to reflect changes in its
estimated annual effective tax rate, if any.
During the 2015 second quarter, the Company repurchased 3.2 million
common shares for an aggregate purchase price of $199.0 million under
its share repurchase program. Since the inception of the share
repurchase program through June 30, 2015, ACGL has repurchased 124.0
million common shares for an aggregate purchase price of $3.60 billion.
At June 30, 2015, $525.3 million of repurchases were available under the
share repurchase program.
At June 30, 2015, total capital available to Arch of $7.03 billion
consisted of $791.2 million of senior notes, representing 11.3% of the
total, $100.0 million of revolving credit agreement borrowings,
representing 1.4% of the total, $325.0 million of preferred shares,
representing 4.6% of the total, and common shareholders’ equity of $5.81
billion, representing 82.7% of the total. At March 31, 2015, total
capital available to Arch of $7.18 billion consisted of $791.2 million
of senior notes, representing 11.0% of the total, $100.0 million of
revolving credit agreement borrowings, representing 1.4% of the total,
$325.0 million of preferred shares, representing 4.5% of the total, and
common shareholders’ equity of $5.96 billion, representing 83.1% of the
total.
The Company will hold a conference call for investors and analysts at
11:00 a.m. Eastern Time on July 30, 2015. A live webcast of this call
will be available via the Investors section of the Company’s website at http://www.archcapgroup.com.
A telephone replay of the conference call also will be available
beginning on July 30, 2015 at 3:00 p.m. Eastern Time until August 6,
2015 at midnight Eastern Time. To access the replay, domestic callers
should dial 888-286-8010 (passcode 92454111), and international callers
should dial 617-801-6888 (passcode 92454111).
Please refer to the Company’s Financial Supplement dated June 30, 2015,
which is available via the Investors section of the Company’s website at http://www.archcapgroup.com.
The Financial Supplement provides additional detail regarding the
financial performance of the Company. From time to time, the Company
posts additional financial information and presentations to its website,
including information with respect to its subsidiaries. Investors and
other recipients of this information are encouraged to check the
Company’s website regularly for additional information regarding the
Company.
Arch Capital Group Ltd., a Bermuda-based company with approximately
$7.03 billion in capital at June 30, 2015, provides insurance and
reinsurance on a worldwide basis through its wholly owned subsidiaries.
|
Supplemental Information
|
|
Book Value Per Common Share
|
|
(U.S. dollars in thousands, except share data)
|
|
|
|
|
June 30,
2015
|
|
|
|
December 31,
2014
|
Calculation of book value per common share:
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity available to Arch
|
|
|
|
|
$
|
6,137,515
|
|
|
|
|
$
|
6,130,053
|
Less preferred shareholders’ equity
|
|
|
|
|
325,000
|
|
|
|
|
325,000
|
Common shareholders’ equity available to Arch
|
|
|
|
|
5,812,515
|
|
|
|
|
5,805,053
|
Common shares outstanding, net of treasury shares (1)
|
|
|
|
|
122,403,909
|
|
|
|
|
127,367,934
|
Book value per common share
|
|
|
|
|
$
|
47.49
|
|
|
|
|
$
|
45.58
|
|
(1)
|
|
Excludes the effects of 7,913,680 and 7,804,033 stock options and
438,155 and 447,073 restricted stock units outstanding at June 30,
2015 and December 31, 2014, respectively.
|
|
|
|
|
Investment Information
|
|
(U.S. dollars in thousands, except share data)
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
2015
|
|
|
|
2014
|
Components of net investment income (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
$
|
61,191
|
|
|
|
|
$
|
64,499
|
|
|
|
|
$
|
123,559
|
|
|
|
|
$
|
126,948
|
|
Term loan investments (2)
|
|
|
|
|
4,566
|
|
|
|
|
5,233
|
|
|
|
|
8,841
|
|
|
|
|
10,902
|
|
Equity securities (dividends)
|
|
|
|
|
2,742
|
|
|
|
|
3,271
|
|
|
|
|
5,421
|
|
|
|
|
6,192
|
|
Short-term investments
|
|
|
|
|
183
|
|
|
|
|
103
|
|
|
|
|
378
|
|
|
|
|
508
|
|
Other (3)
|
|
|
|
|
10,472
|
|
|
|
|
9,067
|
|
|
|
|
23,209
|
|
|
|
|
13,785
|
|
Gross investment income
|
|
|
|
|
79,154
|
|
|
|
|
82,173
|
|
|
|
|
161,408
|
|
|
|
|
158,335
|
|
Investment expenses
|
|
|
|
|
(11,983
|
)
|
|
|
|
(9,715
|
)
|
|
|
|
(23,949
|
)
|
|
|
|
(18,884
|
)
|
Net investment income
|
|
|
|
|
$
|
67,171
|
|
|
|
|
$
|
72,458
|
|
|
|
|
$
|
137,459
|
|
|
|
|
$
|
139,451
|
|
Per share
|
|
|
|
|
$
|
0.53
|
|
|
|
|
$
|
0.53
|
|
|
|
|
$
|
1.08
|
|
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income yield, at amortized cost (1) (4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
|
|
|
2.05
|
%
|
|
|
|
2.05
|
%
|
|
|
|
2.07
|
%
|
|
|
|
2.07
|
%
|
After-tax
|
|
|
|
|
1.90
|
%
|
|
|
|
1.91
|
%
|
|
|
|
1.92
|
%
|
|
|
|
1.93
|
%
|
Total return (1) (5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including effects of foreign exchange
|
|
|
|
|
(0.04
|
)%
|
|
|
|
1.80
|
%
|
|
|
|
1.07
|
%
|
|
|
|
2.84
|
%
|
Excluding effects of foreign exchange
|
|
|
|
|
(0.38
|
)%
|
|
|
|
1.63
|
%
|
|
|
|
1.68
|
%
|
|
|
|
2.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operations (1)
|
|
|
|
|
$
|
231,762
|
|
|
|
|
$
|
254,168
|
|
|
|
|
$
|
247,361
|
|
|
|
|
$
|
451,563
|
|
|
(1)
|
|
Excludes amounts related to the ‘other’ segment.
|
(2)
|
|
Included in “investments accounted for using the fair value option”
on the Company’s balance sheet.
|
(3)
|
|
Includes income on other investments, funds held balances, cash
balances and other.
|
(4)
|
|
Presented on an annualized basis and excluding the impact of
investments for which returns are not included within investment
income, such as investments accounted for using the equity method
and certain equities.
|
(5)
|
|
Includes net investment income, equity in net income or loss of
investment funds accounted for using the equity method, net realized
gains and losses and the change in unrealized gains or losses
generated by the Company’s investment portfolio. Total return is
calculated on a pre-tax basis and before investment expenses.
|
|
|
Investment Information (continued)
|
|
(U.S. dollars in thousands)
|
|
|
|
|
June 30, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Amount
|
|
|
% of Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investable assets (1) (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale, at fair value
|
|
|
|
|
$
|
9,927,603
|
|
|
|
68.4
|
|
|
|
$
|
10,750,770
|
|
|
|
73.6
|
|
Fixed maturities, at fair value (3)
|
|
|
|
|
387,941
|
|
|
|
2.7
|
|
|
|
377,053
|
|
|
|
2.6
|
|
Fixed maturities pledged under securities lending agreements, at
fair value
|
|
|
|
|
373,969
|
|
|
|
2.6
|
|
|
|
50,802
|
|
|
|
0.3
|
|
Total fixed maturities
|
|
|
|
|
10,689,513
|
|
|
|
73.7
|
|
|
|
11,178,625
|
|
|
|
76.6
|
|
Short-term investments available for sale, at fair value
|
|
|
|
|
875,727
|
|
|
|
6.0
|
|
|
|
797,226
|
|
|
|
5.5
|
|
Cash
|
|
|
|
|
470,011
|
|
|
|
3.2
|
|
|
|
474,247
|
|
|
|
3.2
|
|
Equity securities available for sale, at fair value
|
|
|
|
|
701,623
|
|
|
|
4.8
|
|
|
|
658,182
|
|
|
|
4.5
|
|
Equity securities, at fair value (3)
|
|
|
|
|
248
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other investments available for sale, at fair value
|
|
|
|
|
377,677
|
|
|
|
2.6
|
|
|
|
296,224
|
|
|
|
2.0
|
|
Other investments, at fair value (3)
|
|
|
|
|
899,763
|
|
|
|
6.2
|
|
|
|
878,774
|
|
|
|
6.0
|
|
Investments accounted for using the equity method (4)
|
|
|
|
|
472,926
|
|
|
|
3.3
|
|
|
|
349,014
|
|
|
|
2.4
|
|
Securities transactions entered into but not settled at the balance
sheet date
|
|
|
|
|
26,066
|
|
|
|
0.2
|
|
|
|
(32,802
|
)
|
|
|
(0.2
|
)
|
Total investable assets managed by the Company
|
|
|
|
|
$
|
14,513,554
|
|
|
|
100.0
|
|
|
|
$
|
14,599,490
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment portfolio statistics (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average effective duration (in years)
|
|
|
|
|
3.05
|
|
|
|
|
|
|
3.34
|
|
|
|
|
Average credit quality (Standard & Poor’s/Moody’s Investors Service)
|
|
|
|
|
AA/Aa2
|
|
|
|
|
|
AA/Aa2
|
|
|
|
Embedded book yield (before investment expenses)
|
|
|
|
|
2.07
|
%
|
|
|
|
|
|
2.18
|
%
|
|
|
|
|
(1)
|
|
|
Excludes amounts related to the ‘other’ segment.
|
(2)
|
|
|
This table excludes the collateral received and reinvested and
includes the fixed maturities and short-term investments pledged
under securities lending agreements, at fair value.
|
(3)
|
|
|
Represents investments which are carried at fair value under the
fair value option and reflected as “investments accounted for using
the fair value option” on the Company’s balance sheet. Changes in
the carrying value of such investments are recorded in net realized
gains or losses.
|
(4)
|
|
|
Changes in the carrying value of investment funds accounted for
using the equity method are recorded as “equity in net income (loss)
of investment funds accounted for using the equity method” rather
than as an unrealized gain or loss component of accumulated other
comprehensive income.
|
|
|
Selected Information on Losses and Loss
Adjustment Expenses (1)
|
|
(U.S. dollars in thousands)
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
Components of losses and loss adjustment expenses incurred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses and loss adjustment expenses
|
|
|
|
|
$
|
465,053
|
|
|
|
$
|
435,370
|
|
|
|
$
|
897,687
|
|
|
|
$
|
861,284
|
|
Change in unpaid losses and loss adjustment expenses
|
|
|
|
|
(23,305
|
)
|
|
|
41,954
|
|
|
|
(11,702
|
)
|
|
|
50,924
|
|
Total losses and loss adjustment expenses
|
|
|
|
|
$
|
441,748
|
|
|
|
$
|
477,324
|
|
|
|
$
|
885,985
|
|
|
|
$
|
912,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net (favorable) adverse development in prior
year loss reserves, net of related adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact on underwriting results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
(17,167
|
)
|
|
|
$
|
(16,137
|
)
|
|
|
$
|
(22,122
|
)
|
|
|
$
|
(26,554
|
)
|
Reinsurance
|
|
|
|
|
(58,802
|
)
|
|
|
(67,700
|
)
|
|
|
(116,081
|
)
|
|
|
(137,802
|
)
|
Mortgage
|
|
|
|
|
(1,108
|
)
|
|
|
58
|
|
|
|
(3,920
|
)
|
|
|
(1,112
|
)
|
Total
|
|
|
|
|
$
|
(77,077
|
)
|
|
|
$
|
(83,779
|
)
|
|
|
$
|
(142,123
|
)
|
|
|
$
|
(165,468
|
)
|
Impact on losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
(18,595
|
)
|
|
|
$
|
(19,388
|
)
|
|
|
$
|
(27,349
|
)
|
|
|
$
|
(34,960
|
)
|
Reinsurance
|
|
|
|
|
(57,798
|
)
|
|
|
(69,115
|
)
|
|
|
(115,809
|
)
|
|
|
(139,514
|
)
|
Mortgage
|
|
|
|
|
(1,125
|
)
|
|
|
88
|
|
|
|
(3,740
|
)
|
|
|
(1,046
|
)
|
Total
|
|
|
|
|
$
|
(77,518
|
)
|
|
|
$
|
(88,415
|
)
|
|
|
$
|
(146,898
|
)
|
|
|
(175,520
|
)
|
Impact on acquisition expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
1,428
|
|
|
|
$
|
3,251
|
|
|
|
$
|
5,227
|
|
|
|
$
|
8,406
|
|
Reinsurance
|
|
|
|
|
(1,004
|
)
|
|
|
1,415
|
|
|
|
(272
|
)
|
|
|
1,712
|
|
Mortgage
|
|
|
|
|
17
|
|
|
|
(30
|
)
|
|
|
(180
|
)
|
|
|
(66
|
)
|
Total
|
|
|
|
|
$
|
441
|
|
|
|
$
|
4,636
|
|
|
|
$
|
4,775
|
|
|
|
$
|
10,052
|
|
Impact on combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
(3.4
|
)%
|
|
|
(3.2
|
)%
|
|
|
(2.2
|
)%
|
|
|
(2.7
|
)%
|
Reinsurance
|
|
|
|
|
(21.5
|
)%
|
|
|
(20.2
|
)%
|
|
|
(21.0
|
)%
|
|
|
(20.4
|
)%
|
Mortgage
|
|
|
|
|
(2.1
|
)%
|
|
|
0.1
|
%
|
|
|
(3.8
|
)%
|
|
|
(1.2
|
)%
|
Total
|
|
|
|
|
(9.2
|
)%
|
|
|
(9.4
|
)%
|
|
|
(8.5
|
)%
|
|
|
(9.4
|
)%
|
Impact on loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
(3.6
|
)%
|
|
|
(3.8
|
)%
|
|
|
(2.7
|
)%
|
|
|
(3.5
|
)%
|
Reinsurance
|
|
|
|
|
(21.1
|
)%
|
|
|
(20.6
|
)%
|
|
|
(20.9
|
)%
|
|
|
(20.6
|
)%
|
Mortgage
|
|
|
|
|
(2.1
|
)%
|
|
|
0.2
|
%
|
|
|
(3.6
|
)%
|
|
|
(1.2
|
)%
|
Total
|
|
|
|
|
(9.3
|
)%
|
|
|
(9.9
|
)%
|
|
|
(8.8
|
)%
|
|
|
(10.0
|
)%
|
Impact on acquisition expense ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
0.2
|
%
|
|
|
0.6
|
%
|
|
|
0.5
|
%
|
|
|
0.8
|
%
|
Reinsurance
|
|
|
|
|
(0.4
|
)%
|
|
|
0.4
|
%
|
|
|
(0.1
|
)%
|
|
|
0.2
|
%
|
Mortgage
|
|
|
|
|
—
|
%
|
|
|
(0.1
|
)%
|
|
|
(0.2
|
)%
|
|
|
—
|
%
|
Total
|
|
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
|
|
0.3
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net losses incurred from current accident year
catastrophic events (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
6,019
|
|
|
|
$
|
3,739
|
|
|
|
$
|
9,200
|
|
|
|
$
|
6,353
|
|
Reinsurance
|
|
|
|
|
9,842
|
|
|
|
12,748
|
|
|
|
11,272
|
|
|
|
15,682
|
|
Total
|
|
|
|
|
$
|
15,861
|
|
|
|
$
|
16,487
|
|
|
|
$
|
20,472
|
|
|
|
$
|
22,035
|
|
Impact on combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
1.2
|
%
|
|
|
0.7
|
%
|
|
|
0.9
|
%
|
|
|
0.6
|
%
|
Reinsurance
|
|
|
|
|
3.6
|
%
|
|
|
3.8
|
%
|
|
|
2.0
|
%
|
|
|
2.3
|
%
|
Total
|
|
|
|
|
1.9
|
%
|
|
|
1.8
|
%
|
|
|
1.2
|
%
|
|
|
1.3
|
%
|
|
(1)
|
|
Excludes amounts related to the ‘other’ segment.
|
(2)
|
|
Equals estimated losses from catastrophic events occurring in the
current accident year, net of reinsurance and reinstatement
premiums. Amounts shown for the insurance segment are for named
catastrophic events only. Amounts shown for the reinsurance segment
include (i) named events with over $5 million of losses incurred by
its Bermuda and Europe operations and (ii) all catastrophe losses
incurred by its U.S. operations. Amounts not applicable for the
mortgage segment.
|
|
Segment Information
The following section provides analysis on the Company’s 2015 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, 2015. 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. See ‘Comments on
Regulation G’ for further details.
Insurance Segment
|
|
|
|
|
|
Three Months Ended June 30,
|
(U.S. dollars in thousands)
|
|
|
|
|
2015
|
|
|
2014
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
|
|
|
$
|
744,810
|
|
|
|
$
|
852,231
|
|
|
|
(12.6
|
)
|
Net premiums written
|
|
|
|
|
509,067
|
|
|
|
578,882
|
|
|
|
(12.1
|
)
|
Net premiums earned
|
|
|
|
|
509,825
|
|
|
|
507,712
|
|
|
|
0.4
|
|
Underwriting income
|
|
|
|
|
23,643
|
|
|
|
34,422
|
|
|
|
(31.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
% Point Change
|
Loss ratio
|
|
|
|
|
62.9
|
%
|
|
|
61.4
|
%
|
|
|
1.5
|
|
Acquisition expense ratio
|
|
|
|
|
15.0
|
%
|
|
|
15.1
|
%
|
|
|
(0.1
|
)
|
Other operating expense ratio
|
|
|
|
|
17.5
|
%
|
|
|
16.9
|
%
|
|
|
0.6
|
|
Combined ratio
|
|
|
|
|
95.4
|
%
|
|
|
93.4
|
%
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophic activity and prior year development:
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year catastrophic events, net of
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance and reinstatement premiums
|
|
|
|
|
1.2
|
%
|
|
|
0.7
|
%
|
|
|
0.5
|
|
Net (favorable) adverse development in prior year loss
|
|
|
|
|
|
|
|
|
|
|
|
reserves, net of related adjustments
|
|
|
|
|
(3.4
|
)%
|
|
|
(3.2
|
)%
|
|
|
(0.2
|
)
|
Combined ratio excluding catastrophic activity and prior year
development
|
|
|
|
|
97.6
|
%
|
|
|
95.9
|
%
|
|
|
1.7
|
|
|
Gross premiums written by the insurance segment in the 2015 second
quarter were 12.6% lower than in the 2014 second quarter while net
premiums written were 12.1% lower than in the 2014 second quarter.
Changes in foreign currency rates resulted in a decrease in net premiums
written in the 2015 second quarter of approximately $8 million, or 1.4%,
compared to the 2014 second quarter. The lower level of net premiums
written reflected reductions in property, energy and marine business,
programs, professional lines and alternative markets business. The
decrease in property, energy and marine business reflected rate
decreases and strategic reductions in certain lines, while the reduction
in program business reflected underwriting decisions to terminate two
programs. The decline in professional lines was primarily related to the
timing of premiums on renewal accounts while the decrease in alternative
markets primarily reflected changes in renewal dates on business
acquired as part of the renewal rights agreement entered into in the
2014 second quarter. Net premiums earned by the insurance segment in the
2015 second quarter were 0.4% higher than in the 2014 second quarter,
and reflect changes in net premiums written over the previous five
quarters.
The 2015 second quarter loss ratio reflected 1.2 points of current year
catastrophic activity, compared to 0.7 points in the 2014 second
quarter. Estimated net favorable development in prior year loss
reserves, before related adjustments, reduced the loss ratio by 3.6
points in the 2015 second quarter, compared to 3.8 points in the 2014
second quarter. The estimated net favorable development in the 2015
second quarter primarily resulted from better than expected claims
emergence in short-tail business from more recent accident years. The
balance of the increase in the 2015 second quarter loss ratio primarily
resulted from a higher level of non-catastrophic large loss activity.
The underwriting expense ratio was 32.5% in the 2015 second quarter,
compared to 32.0% in the 2014 second quarter. The acquisition expense
ratio was 15.0% in the 2015 second quarter, compared to 15.1% in the
2014 second quarter. The operating expense ratio was 17.5% in the 2015
second quarter, compared to 16.9% in the 2014 second quarter, and
consistent with the 2015 first quarter ratio.
|
Reinsurance Segment
|
|
|
|
|
|
Three Months Ended June 30,
|
(U.S. dollars in thousands)
|
|
|
|
|
2015
|
|
|
2014
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
|
|
|
$
|
342,101
|
|
|
|
$
|
349,841
|
|
|
|
(2.2
|
)
|
Net premiums written
|
|
|
|
|
252,655
|
|
|
|
290,847
|
|
|
|
(13.1
|
)
|
Net premiums earned
|
|
|
|
|
273,965
|
|
|
|
335,627
|
|
|
|
(18.4
|
)
|
Other underwriting income
|
|
|
|
|
2,658
|
|
|
|
303
|
|
|
|
777.2
|
|
Underwriting income
|
|
|
|
|
68,073
|
|
|
|
81,904
|
|
|
|
(16.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
% Point Change
|
Loss ratio
|
|
|
|
|
40.6
|
%
|
|
|
44.8
|
%
|
|
|
(4.2
|
)
|
Acquisition expense ratio
|
|
|
|
|
21.3
|
%
|
|
|
19.7
|
%
|
|
|
1.6
|
|
Other operating expense ratio
|
|
|
|
|
14.2
|
%
|
|
|
11.2
|
%
|
|
|
3.0
|
|
Combined ratio
|
|
|
|
|
76.1
|
%
|
|
|
75.7
|
%
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophic activity and prior year development:
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year catastrophic events, net of
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance and reinstatement premiums
|
|
|
|
|
3.6
|
%
|
|
|
3.8
|
%
|
|
|
(0.2
|
)
|
Net (favorable) adverse development in prior year loss
|
|
|
|
|
|
|
|
|
|
|
|
reserves, net of related adjustments
|
|
|
|
|
(21.5
|
)%
|
|
|
(20.2
|
)%
|
|
|
(1.3
|
)
|
Combined ratio excluding catastrophic activity and prior year
development
|
|
|
|
|
94.0
|
%
|
|
|
92.1
|
%
|
|
|
1.9
|
|
|
Gross premiums written by the reinsurance segment in the 2015 second
quarter were 2.2% lower than in the 2014 second quarter, while net
premiums written were 13.1% lower than in the 2014 second quarter. The
difference in gross versus net premiums written primarily reflects an
increase in cessions to Watford Re in the 2015 second quarter compared
to the 2014 second quarter, primarily in casualty lines. Changes in
foreign currency rates resulted in a decrease in net premiums written in
the 2015 second quarter of approximately $14 million, or 4.8%, compared
to the 2014 second quarter. The lower level of net premiums written
reflected decreases in other specialty and property catastrophe
business. The decrease in other specialty reflected non-renewals and
share decreases in response to current market conditions, primarily in
proportional motor contracts. The lower level of property catastrophe
business reflected non-renewals and share decreases, also in response to
current market conditions. Net premiums earned in the 2015 second
quarter were 18.4% lower than in the 2014 second quarter, and primarily
reflect changes in net premiums written over the previous five quarters,
including the mix and type of business written.
The 2015 second quarter loss ratio reflected 3.7 points of current year
catastrophic activity, compared to 4.1 points of catastrophic activity
in the 2014 second quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss ratio
by 21.1 points in the 2015 second quarter, compared to 20.6 points in
the 2014 second quarter. The estimated net favorable development in the
2015 second 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 decrease in the 2015 second quarter loss ratio primarily resulted
from a lower level of non-catastrophic large loss activity, partially
offset by the effects of a lower level of property catastrophe business
than in the 2014 second quarter.
The underwriting expense ratio was 35.5% in the 2015 second quarter,
compared to 30.9% in the 2014 second quarter. The acquisition expense
ratio for the 2015 second quarter was 21.3%, compared to 19.7% for the
2014 second quarter. The comparison of the acquisition expense ratios in
each period is influenced by, among other things, the mix and type of
business written and earned, including a lower contribution from
property catastrophe business than in the 2014 second quarter, and an
increase in the level of ceding commissions. The operating expense ratio
for the 2015 second quarter was 14.2%, compared to 11.2% in the 2014
second quarter, primarily reflecting the lower level of net premiums
earned.
Mortgage Segment
|
|
|
|
|
|
Three Months Ended June 30,
|
(U.S. dollars in thousands)
|
|
|
|
|
2015
|
|
|
2014
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
|
|
|
$
|
68,572
|
|
|
|
$
|
55,476
|
|
|
|
23.6
|
|
Net premiums written
|
|
|
|
|
61,670
|
|
|
|
50,397
|
|
|
|
22.4
|
|
Net premiums earned
|
|
|
|
|
52,459
|
|
|
|
50,833
|
|
|
|
3.2
|
|
Other underwriting income
|
|
|
|
|
3,686
|
|
|
|
1,216
|
|
|
|
203.1
|
|
Underwriting income
|
|
|
|
|
16,627
|
|
|
|
8,807
|
|
|
|
88.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
% Point Change
|
Loss ratio
|
|
|
|
|
18.4
|
%
|
|
|
30.4
|
%
|
|
|
(12.0
|
)
|
Acquisition expense ratio
|
|
|
|
|
19.4
|
%
|
|
|
22.6
|
%
|
|
|
(3.2
|
)
|
Other operating expense ratio
|
|
|
|
|
37.5
|
%
|
|
|
32.0
|
%
|
|
|
5.5
|
|
Combined ratio
|
|
|
|
|
75.3
|
%
|
|
|
85.0
|
%
|
|
|
(9.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (favorable) adverse development in prior year loss
|
|
|
|
|
|
|
|
|
|
|
|
reserves, net of related adjustments
|
|
|
|
|
(2.1
|
)%
|
|
|
0.1
|
%
|
|
|
(2.2
|
)
|
Combined ratio excluding prior year development
|
|
|
|
|
77.4
|
%
|
|
|
84.9
|
%
|
|
|
(7.5
|
)
|
|
The mortgage segment includes the results of Arch Mortgage Insurance
Company (“Arch MI U.S.”), a leading provider of mortgage insurance
products and services to the U.S. marketplace, along with the Company’s
other global mortgage insurance, reinsurance and risk-sharing products.
Gross premiums written by the mortgage segment in the 2015 second
quarter were 23.6% higher than in the 2014 second quarter, while net
premiums written were 22.4% higher than in the 2014 second quarter. Net
premiums written in the 2015 second quarter included $30.6 million of
business underwritten by Arch MI U.S., compared to $24.6 million in the
2014 second quarter. The 2015 second quarter amount reflected $23.8
million from credit union clients and $6.8 million from banks and other
mortgage originators while substantially all of the 2014 second quarter
amount related to credit union clients. Premiums written on reinsurance
treaties covering U.S. and international mortgages were higher by $5.3
million compared to the 2014 second quarter.
Net premiums earned for the 2015 second quarter were 3.2% higher than in
the 2014 second quarter, reflecting the contribution of Arch MI U.S.
business and higher earnings from the mortgage segment’s quota share
reinsurance business. Other underwriting income, which is primarily
related to risk-sharing products issued to GSEs and mortgage lenders,
was $3.7 million for the 2015 second quarter, compared to $1.2 million
for the 2014 second quarter, and in line with the $7.7 million in the
2015 first quarter when taking into consideration approximately $3.5
million of non-recurring income in the period.
The loss ratio for the 2015 second quarter continues to reflect
relatively low levels of reported delinquencies and reflects new
business generated by the mortgage segment. As noted previously, the
mortgage segment’s underwriting expense ratio is expected to stay at an
elevated level until Arch MI U.S. reaches scale. At June 30, 2015, the
mortgage segment’s risk-in-force consisted of $6.05 billion from Arch MI
U.S. and an additional $4.61 billion through the mortgage segment’s
reinsurance and risk-sharing operations. Arch MI U.S. generated $2.71
billion of new insurance written (“NIW”) during the 2015 second quarter,
of which approximately 50% was from bank channel clients. For additional
information on the mortgage segment, please refer to the Company’s
Financial Supplement.
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides
a “safe harbor” for forward-looking statements. This release or any
other written or oral statements made by or on behalf of the Company may
include forward-looking statements, which reflect the Company’s current
views with respect to future events and financial performance. All
statements other than statements of historical fact included in or
incorporated by reference in this release are forward-looking
statements. Forward-looking statements, for purposes of the PSLRA or
otherwise, can generally be identified by the use of forward-looking
terminology such as “may,” “will,” “expect,” “intend,” “estimate,”
“anticipate,” “believe” or “continue” and similar statements of a future
or forward-looking nature or their negative or variations or similar
terminology.
Forward-looking statements involve the Company’s current assessment of
risks and uncertainties. Actual events and results may differ materially
from those expressed or implied in these statements. Important factors
that could cause actual events or results to differ materially from
those indicated in such statements are discussed below and elsewhere in
this release and in the Company’s periodic reports filed with the
Securities and Exchange Commission (the “SEC”), and include:
-
the Company’s ability to successfully implement its business strategy
during “soft” as well as “hard” markets;
-
acceptance of the Company’s business strategy, security and financial
condition by rating agencies and regulators, as well as by brokers and
its insureds and reinsureds;
-
the Company’s ability to maintain or improve its ratings, which may be
affected by its ability to raise additional equity or debt financings,
by ratings agencies’ existing or new policies and practices, as well
as other factors described herein;
-
general economic and market conditions (including inflation, interest
rates, foreign currency exchange rates, prevailing credit terms and
the depth and duration of a recession) and conditions specific to the
reinsurance and insurance markets (including the length and magnitude
of the current “soft” market) in which the Company operates;
-
competition, including increased competition, on the basis of pricing,
capacity, coverage terms or other factors;
-
developments in the world’s financial and capital markets and the
Company’s access to such markets;
-
the Company’s ability to successfully enhance, integrate and maintain
operating procedures (including information technology) to effectively
support its current and new business;
-
the loss of key personnel;
-
the integration of businesses the Company has acquired or may acquire
into its existing operations;
-
accuracy of those estimates and judgments utilized in the preparation
of the Company’s financial statements, including those related to
revenue recognition, insurance and other reserves, reinsurance
recoverables, investment valuations, intangible assets, bad debts,
income taxes, contingencies and litigation, and any determination to
use the deposit method of accounting, which for a relatively new
insurance and reinsurance company, like the Company, are even more
difficult to make than those made in a mature company since relatively
limited historical information has been reported to the Company
through June 30, 2015;
-
greater than expected loss ratios on business written by the Company
and adverse development on claim and/or claim expense liabilities
related to business written by its insurance and reinsurance
subsidiaries;
-
severity and/or frequency of losses;
-
claims for natural or man-made catastrophic events in the Company’s
insurance or reinsurance business could cause large losses and
substantial volatility in its results of operations;
-
acts of terrorism, political unrest and other hostilities or other
unforecasted and unpredictable events;
-
availability to the Company of reinsurance to manage its gross and net
exposures and the cost of such reinsurance;
-
the failure of reinsurers, managing general agents, third party
administrators or others to meet their obligations to the Company;
-
the timing of loss payments being faster or the receipt of reinsurance
recoverables being slower than anticipated by the Company;
-
the Company’s investment performance, including legislative or
regulatory developments that may adversely affect the fair value of
the Company’s investments;
-
the impact of the continued weakness of the U.S., European countries
and other key economies, projected budget deficits for the U.S.,
European countries and other governments and the consequences
associated with possible additional downgrades of securities of the
U.S., European countries and other governments by credit rating
agencies, and the resulting effect on the value of securities in the
Company’s investment portfolio as well as the uncertainty in the
market generally;
-
losses relating to aviation business and business produced by a
certain managing underwriting agency for which the Company may be
liable to the purchaser of its prior reinsurance business or to others
in connection with the May 5, 2000 asset sale described in the
Company’s periodic reports filed with the SEC;
-
changes in accounting principles or policies or in the Company’s
application of such accounting principles or policies;
-
changes in the political environment of certain countries in which the
Company operates, underwrites business or invests;
-
statutory or regulatory developments, including as to tax policy
matters and insurance and other regulatory matters such as the
adoption of proposed legislation that would affect
Bermuda-headquartered companies and/or Bermuda-based insurers or
reinsurers and/or changes in regulations or tax laws applicable to the
Company, its subsidiaries, brokers or customers; and
-
the other matters set forth under Item 1A “Risk Factors”, Item 7
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and other sections of the Company’s Annual
Report on Form 10-K, as well as the other factors set forth in the
Company’s other documents on file with the SEC, and management’s
response to any of the aforementioned factors.
All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified
in their entirety by these cautionary statements. The foregoing review
of important factors should not be construed as exhaustive and should be
read in conjunction with other cautionary statements that are included
herein or elsewhere. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
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. 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
and net foreign exchange gains or losses, net of income taxes. The
presentation of after-tax operating income or loss available to Arch
common shareholders is a “non-GAAP financial measure” as defined in
Regulation G. The reconciliation of such measure to net income available
to Arch common shareholders (the most directly comparable GAAP financial
measure) in accordance with Regulation G is included on page 2 of this
release.
The Company believes that net realized gains or losses, net impairment
losses recognized in earnings, equity in net income or loss of
investment funds accounted for using the equity method and net foreign
exchange gains or losses in any particular period are not indicative of
the performance of, or trends in, the Company’s business performance.
Although net realized gains or losses, net impairment losses recognized
in earnings, equity in net income or loss of investment funds accounted
for using the equity method and net foreign exchange gains or losses are
an integral part of the Company’s operations, the decision to realize
investment gains or losses, the recognition of the change in the
carrying value of investments accounted for using the fair value option
in net realized gains or losses, the recognition of net impairment
losses, the recognition of equity in net income or loss of investment
funds accounted for using the equity method and the recognition of
foreign exchange gains or losses are independent of the insurance
underwriting process and result, in large part, from general economic
and financial market conditions. Furthermore, certain users of the
Company’s financial information believe that, for many companies, the
timing of the realization of investment gains or losses is largely
opportunistic. In addition, net impairment losses recognized in earnings
on the Company’s investments represent other-than-temporary declines in
expected recovery values on securities without actual realization. The
use of the equity method on certain of the Company’s investments in
certain funds that invest in fixed maturity securities is driven by the
ownership structure of such funds (either limited partnerships or
limited liability companies). In applying the equity method, these
investments are initially recorded at cost and are subsequently adjusted
based on the Company’s proportionate share of the net income or loss of
the funds (which include changes in the fair value of the underlying
securities in the funds). This method of accounting is different from
the way the Company accounts for its other fixed maturity securities and
the timing of the recognition of equity in net income or loss of
investment funds accounted for using the equity method may differ from
gains or losses in the future upon sale or maturity of such investments.
Due to these reasons, the Company excludes net realized gains or losses,
net impairment losses recognized in earnings, equity in net income or
loss of investment funds accounted for using the equity method and net
foreign exchange gains or losses from the calculation of after-tax
operating income or loss available to Arch common shareholders.
The Company believes that showing net income available to Arch common
shareholders exclusive of the items referred to above reflects the
underlying fundamentals of the Company’s business since the Company
evaluates the performance of and manages its business to produce an
underwriting profit. In addition to presenting net income available to
Arch common shareholders, the Company believes that this presentation
enables investors and other users of the Company’s financial information
to analyze the Company’s performance in a manner similar to how the
Company’s management analyzes performance. The Company also believes
that this measure follows industry practice and, therefore, allows the
users of the Company’s financial information to compare the Company’s
performance with its industry peer group. The Company believes that the
equity analysts and certain rating agencies which follow the Company and
the insurance industry as a whole generally exclude these items from
their analyses for the same reasons.
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 core underwriting
performance of each of its underwriting segments.
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