Arch Capital Group Ltd. (NASDAQ:ACGL) reports that net income available
to Arch common shareholders for the 2016 first quarter was $149.3
million, or $1.20 per share, compared to $277.9 million, or $2.16 per
share, for the 2015 first quarter. The Company also reported after-tax
operating income available to Arch common shareholders of $145.7
million, or $1.17 per share, for the 2016 first quarter, compared to
$149.8 million, or $1.17 per share, for the 2015 first quarter (see note
1). The Company’s after-tax operating income available to Arch common
shareholders represented an annualized return on average common equity
of 9.7% for the 2016 first quarter, compared to 10.2% for the 2015 first
quarter. For the trailing twelve months ended March 31, 2016, after-tax
operating income available to Arch common shareholders produced a 9.3%
return on average common equity while net income available to Arch
common shareholders produced a 6.4% return on average common equity. The
Company’s book value per common share was $49.87 at March 31, 2016, a
4.0% increase from $47.95 per share at December 31, 2015 and a 4.3%
increase from $47.80 per share at March 31, 2015. All earnings per share
amounts discussed in this release are on a diluted basis.
The following table summarizes the Company’s ‘core’ underwriting results
(see note 2). See ‘Segment Information’ for a further discussion of
segment results and a reconciliation of ‘core’ and consolidated results.
|
(U.S. dollars in thousands)
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
Gross premiums written
|
|
|
|
|
$
|
1,391,061
|
|
|
|
$
|
1,311,678
|
|
|
|
6.1
|
|
Net premiums written
|
|
|
|
|
977,101
|
|
|
|
942,417
|
|
|
|
3.7
|
|
Net premiums earned
|
|
|
|
|
836,062
|
|
|
|
837,998
|
|
|
|
(0.2
|
)
|
Underwriting income
|
|
|
|
|
111,887
|
|
|
|
114,703
|
|
|
|
(2.5
|
)
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
% Point
Change
|
Loss ratio
|
|
|
|
|
53.1
|
%
|
|
|
53.0
|
%
|
|
|
0.1
|
|
Acquisition expense ratio
|
|
|
|
|
16.4
|
%
|
|
|
17.0
|
%
|
|
|
(0.6
|
)
|
Other operating expense ratio
|
|
|
|
|
17.6
|
%
|
|
|
17.5
|
%
|
|
|
0.1
|
|
Combined ratio
|
|
|
|
|
87.1
|
%
|
|
|
87.5
|
%
|
|
|
(0.4
|
)
|
|
|
(1) 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.
|
|
(2) Amounts presented on a ‘core’ basis, which are non-GAAP
measures, exclude amounts related to the ‘other’ segment (i.e.,
results of Watford Re). See ‘Comments on Regulation G’ for a further
discussion of the presentation of ‘core’ results.
|
|
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
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2016
|
|
|
|
2015
|
After-tax operating income available to Arch common shareholders
|
|
|
|
|
$
|
145,742
|
|
|
|
|
$
|
149,846
|
|
Net realized gains (losses), net of tax
|
|
|
|
|
26,901
|
|
|
|
|
61,934
|
|
Net impairment losses recognized in earnings, net of tax
|
|
|
|
|
(7,639
|
)
|
|
|
|
(5,799
|
)
|
Equity in net income (loss) of investment funds accounted for using
the equity method, net of tax
|
|
|
|
|
6,475
|
|
|
|
|
5,532
|
|
Net foreign exchange gains (losses), net of tax
|
|
|
|
|
(22,165
|
)
|
|
|
|
66,339
|
|
Net income available to Arch common shareholders
|
|
|
|
|
$
|
149,314
|
|
|
|
|
$
|
277,852
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per common share results:
|
|
|
|
|
|
|
|
|
|
After-tax operating income available to Arch common shareholders
|
|
|
|
|
$
|
1.17
|
|
|
|
|
$
|
1.17
|
|
Net realized gains (losses), net of tax
|
|
|
|
|
0.22
|
|
|
|
|
0.48
|
|
Net impairment losses recognized in earnings, net of tax
|
|
|
|
|
(0.06
|
)
|
|
|
|
(0.05
|
)
|
Equity in net income (loss) of investment funds accounted for using
the equity method, net of tax
|
|
|
|
|
0.05
|
|
|
|
|
0.04
|
|
Net foreign exchange gains (losses), net of tax
|
|
|
|
|
(0.18
|
)
|
|
|
|
0.52
|
|
Net income available to Arch common shareholders
|
|
|
|
|
$
|
1.20
|
|
|
|
|
$
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common share equivalents
outstanding - diluted
|
|
|
|
|
124,496,496
|
|
|
|
|
128,451,054
|
|
|
All discussions of line items in the following section are on a ‘core’
basis. See ‘Comments on Regulation G’ for a further discussion of ‘core’
results.
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 3.56 years at March 31, 2016, compared to 3.43 years at
December 31, 2015. Including the effects of foreign exchange, total
return on the Company’s investment portfolio was 1.82% for the 2016
first quarter, compared to 1.11% for the 2015 first quarter. Total
return in the 2016 first quarter reflected strong returns on fixed
income securities, both investment-grade and non-investment grade, which
were partially offset by negative returns on equities and on private
credit and private equity funds. Excluding the effects of foreign
exchange, total return was 1.48% for the 2016 first quarter.
Net investment income for the 2016 first quarter was $0.57 per share, or
$70.4 million, compared to $0.55 per share, or $70.3 million, for the
2015 first quarter, and $0.53 per share, or $67.0 million, for the 2015
fourth quarter. The annualized pre-tax investment income yield was 2.13%
for the 2016 first quarter, compared to 2.09% for the 2015 first quarter
and 2.02% for the 2015 fourth 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 $257.3 million for the
2016 first quarter, compared to $15.6 million for the 2015 first
quarter, reflecting a higher level of premiums collected and a lower
level of claim payments, including amounts which are reimbursable from
insureds, reinsurers and others, than in the 2015 first quarter. The
2015 first quarter also reflected a higher level of outflows related to
the Company’s mortgage operations.
On a pre-tax basis, net foreign exchange losses for the 2016 first
quarter were $22.0 million, compared to net foreign exchange gains for
the 2015 first quarter of $66.9 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. 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.
The Company’s effective tax rate on income before income taxes (based on
the Company’s estimated annual effective tax rate) was 9.6% for the 2016
first quarter, compared to 4.3% for the 2015 first quarter. The
Company’s effective tax rate on pre-tax operating income available to
Arch shareholders was 6.6% for the 2016 first quarter, compared to 3.9%
for the 2015 first quarter. The 2016 first quarter reflected a $1.6
million discrete income tax expense which resulted from an adjustment
relating to a prior year tax provision. The impact of this one time
adjustment increased the effective tax rate for the 2016 first quarter
by 1.0%. 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 2016 first quarter, the Company repurchased 1.1 million
common shares for an aggregate purchase price of $75.3 million under its
share repurchase program. Since the inception of the share repurchase
program through March 31, 2016, ACGL has repurchased 125.2 million
common shares for an aggregate purchase price of $3.68 billion. At March
31, 2016, $446.5 million of repurchases were available under the share
repurchase program.
At March 31, 2016, total capital available to Arch of $7.30 billion
consisted of $791.3 million of senior notes, representing 10.8% of the
total, $100.0 million of revolving credit agreement borrowings,
representing 1.4% of the total, $325.0 million of preferred shares,
representing 4.4% of the total, and common shareholders’ equity of $6.09
billion, representing 83.3% of the total. At December 31, 2015, total
capital available to Arch of $7.10 billion consisted of $791.3 million
of senior notes, representing 11.2% 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 $5.88 billion, representing 82.9% of the
total.
The Company will hold a conference call for investors and analysts at
11:00 a.m. Eastern Time on April 28, 2016. A live webcast of this call
will be available via the Investors section of the Company’s website at http://www.archcapgroup.com.
A telephone replay of the conference call also will be available
beginning on April 28, 2016 at 2:00 p.m. Eastern Time until May 5, 2016
at midnight Eastern Time. To access the replay, domestic callers should
dial 855-859-2056, and international callers should dial 404-537-3406
(passcode 85885091 for all callers).
Please refer to the Company’s Financial Supplement dated March 31, 2016,
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
$7.30 billion in capital at March 31, 2016, 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)
|
|
|
|
|
March 31,
2016
|
|
|
|
December 31,
2015
|
Calculation of book value per common share:
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity available to Arch
|
|
|
|
|
$
|
6,413,587
|
|
|
|
|
$
|
6,204,881
|
Less preferred shareholders’ equity
|
|
|
|
|
325,000
|
|
|
|
|
325,000
|
Common shareholders’ equity available to Arch
|
|
|
|
|
6,088,587
|
|
|
|
|
5,879,881
|
Common shares outstanding, net of treasury shares (1)
|
|
|
|
|
122,093,596
|
|
|
|
|
122,627,783
|
Book value per common share
|
|
|
|
|
$
|
49.87
|
|
|
|
|
$
|
47.95
|
|
(1) Excludes the effects of 6,889,451 and 7,482,462 stock options and
411,929 and 413,364 restricted stock units outstanding at March 31, 2016
and December 31, 2015, respectively.
|
Investment Information
|
|
(U.S. dollars in thousands, except share data)
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2016
|
|
|
|
2015
|
Components of net investment income (1):
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
$
|
59,001
|
|
|
|
|
$
|
62,368
|
|
Term loan investments (2)
|
|
|
|
|
4,858
|
|
|
|
|
4,275
|
|
Equity securities (dividends)
|
|
|
|
|
3,756
|
|
|
|
|
2,679
|
|
Short-term investments
|
|
|
|
|
458
|
|
|
|
|
195
|
|
Other (3)
|
|
|
|
|
13,672
|
|
|
|
|
12,737
|
|
Gross investment income
|
|
|
|
|
81,745
|
|
|
|
|
82,254
|
|
Investment expenses
|
|
|
|
|
(11,336
|
)
|
|
|
|
(11,966
|
)
|
Net investment income
|
|
|
|
|
$
|
70,409
|
|
|
|
|
$
|
70,288
|
|
Per share
|
|
|
|
|
$
|
0.57
|
|
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
Investment income yield, at amortized cost (1) (4):
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
|
|
|
2.13
|
%
|
|
|
|
2.09
|
%
|
After-tax
|
|
|
|
|
1.91
|
%
|
|
|
|
1.94
|
%
|
Total return (1) (5):
|
|
|
|
|
|
|
|
|
|
Including effects of foreign exchange
|
|
|
|
|
1.82
|
%
|
|
|
|
1.11
|
%
|
Excluding effects of foreign exchange
|
|
|
|
|
1.48
|
%
|
|
|
|
2.05
|
%
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operations (1)
|
|
|
|
|
$
|
257,279
|
|
|
|
|
$
|
15,599
|
|
|
|
(1)
|
|
Presented on a ‘core’ basis (excluding amounts related to the
‘other’ segment). See ‘Comments on Regulation G’ for further details.
|
(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)
|
|
|
|
|
March 31, 2016
|
|
|
|
December 31, 2015
|
|
|
|
|
|
Amount
|
|
|
|
% of Total
|
|
|
|
Amount
|
|
|
|
% of Total
|
Investable assets (1) (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale, at fair value
|
|
|
|
|
$
|
10,645,257
|
|
|
|
|
71.2
|
|
|
|
|
$
|
10,459,353
|
|
|
|
|
71.4
|
|
Fixed maturities, at fair value (3)
|
|
|
|
|
371,298
|
|
|
|
|
2.5
|
|
|
|
|
367,780
|
|
|
|
|
2.5
|
|
Fixed maturities pledged under securities lending agreements, at
fair value
|
|
|
|
|
558,603
|
|
|
|
|
3.7
|
|
|
|
|
373,304
|
|
|
|
|
2.5
|
|
Total fixed maturities
|
|
|
|
|
11,575,158
|
|
|
|
|
77.4
|
|
|
|
|
11,200,437
|
|
|
|
|
76.5
|
|
Short-term investments available for sale, at fair value
|
|
|
|
|
623,844
|
|
|
|
|
4.2
|
|
|
|
|
587,904
|
|
|
|
|
4.0
|
|
Short-term investments pledged under securities lending agreements,
at fair value
|
|
|
|
|
6,000
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Cash
|
|
|
|
|
479,545
|
|
|
|
|
3.2
|
|
|
|
|
444,776
|
|
|
|
|
3.0
|
|
Equity securities available for sale, at fair value
|
|
|
|
|
506,915
|
|
|
|
|
3.4
|
|
|
|
|
618,405
|
|
|
|
|
4.2
|
|
Equity securities, at fair value (3)
|
|
|
|
|
437
|
|
|
|
|
—
|
|
|
|
|
798
|
|
|
|
|
—
|
|
Equity securities pledged under securities lending agreements, at
fair value
|
|
|
|
|
16,163
|
|
|
|
|
0.1
|
|
|
|
|
10,777
|
|
|
|
|
0.1
|
|
Other investments available for sale, at fair value
|
|
|
|
|
195,079
|
|
|
|
|
1.3
|
|
|
|
|
300,476
|
|
|
|
|
2.1
|
|
Other investments, at fair value (3)
|
|
|
|
|
1,010,450
|
|
|
|
|
6.8
|
|
|
|
|
908,809
|
|
|
|
|
6.2
|
|
Investments accounted for using the equity method (4)
|
|
|
|
|
628,832
|
|
|
|
|
4.2
|
|
|
|
|
592,973
|
|
|
|
|
4.0
|
|
Securities transactions entered into but not settled at the balance
sheet date
|
|
|
|
|
(88,129
|
)
|
|
|
|
(0.6
|
)
|
|
|
|
(20,524
|
)
|
|
|
|
(0.1
|
)
|
Total investable assets managed by the Company
|
|
|
|
|
$
|
14,954,294
|
|
|
|
|
100.0
|
|
|
|
|
$
|
14,644,831
|
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment portfolio statistics (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average effective duration (in years)
|
|
|
|
|
3.56
|
|
|
|
|
|
|
|
|
3.43
|
|
|
|
|
|
Average credit quality (Standard & Poor’s/Moody’s Investors Service)
|
|
|
|
|
AA/Aa2
|
|
|
|
|
|
|
|
AA/Aa2
|
|
|
|
|
Embedded book yield (before investment expenses)
|
|
|
|
|
2.07
|
%
|
|
|
|
|
|
|
|
2.16
|
%
|
|
|
|
|
|
(1)
|
|
Presented on a ‘core’ basis (excluding amounts related to the
‘other’ segment). See ‘Comments on Regulation G’ for further details.
|
(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
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2016
|
|
|
|
2015
|
Components of losses and loss adjustment expenses incurred
|
|
|
|
|
|
|
|
|
|
Paid losses and loss adjustment expenses
|
|
|
|
|
$
|
391,543
|
|
|
|
|
$
|
432,634
|
|
Change in unpaid losses and loss adjustment expenses
|
|
|
|
|
52,293
|
|
|
|
|
11,603
|
|
Total losses and loss adjustment expenses
|
|
|
|
|
$
|
443,836
|
|
|
|
|
$
|
444,237
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net (favorable) adverse development in prior year
loss reserves, net of related
adjustments
|
|
|
|
|
|
|
|
|
|
Net impact on underwriting results:
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
(4,177
|
)
|
|
|
|
$
|
(4,955
|
)
|
Reinsurance
|
|
|
|
|
(46,943
|
)
|
|
|
|
(57,279
|
)
|
Mortgage
|
|
|
|
|
(2,735
|
)
|
|
|
|
(2,812
|
)
|
Total
|
|
|
|
|
$
|
(53,855
|
)
|
|
|
|
$
|
(65,046
|
)
|
Impact on losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
(6,150
|
)
|
|
|
|
$
|
(8,754
|
)
|
Reinsurance
|
|
|
|
|
(47,364
|
)
|
|
|
|
(58,011
|
)
|
Mortgage
|
|
|
|
|
(2,735
|
)
|
|
|
|
(2,615
|
)
|
Total
|
|
|
|
|
$
|
(56,249
|
)
|
|
|
|
$
|
(69,380
|
)
|
Impact on acquisition expenses:
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
1,973
|
|
|
|
|
$
|
3,799
|
|
Reinsurance
|
|
|
|
|
421
|
|
|
|
|
732
|
|
Mortgage
|
|
|
|
|
—
|
|
|
|
|
(197
|
)
|
Total
|
|
|
|
|
$
|
2,394
|
|
|
|
|
$
|
4,334
|
|
Impact on combined ratio:
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
(0.8
|
)%
|
|
|
|
(1.0
|
)%
|
Reinsurance
|
|
|
|
|
(18.0
|
)%
|
|
|
|
(20.5
|
)%
|
Mortgage
|
|
|
|
|
(4.4
|
)%
|
|
|
|
(5.6
|
)%
|
Total
|
|
|
|
|
(6.4
|
)%
|
|
|
|
(7.8
|
)%
|
Impact on loss ratio:
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
(1.2
|
)%
|
|
|
|
(1.7
|
)%
|
Reinsurance
|
|
|
|
|
(18.1
|
)%
|
|
|
|
(20.7
|
)%
|
Mortgage
|
|
|
|
|
(4.4
|
)%
|
|
|
|
(5.2
|
)%
|
Total
|
|
|
|
|
(6.7
|
)%
|
|
|
|
(8.3
|
)%
|
Impact on acquisition expense ratio:
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
0.4
|
%
|
|
|
|
0.7
|
%
|
Reinsurance
|
|
|
|
|
0.1
|
%
|
|
|
|
0.2
|
%
|
Mortgage
|
|
|
|
|
—
|
%
|
|
|
|
(0.4
|
)%
|
Total
|
|
|
|
|
0.3
|
%
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Estimated net losses incurred from current accident year
catastrophic events (2)
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
$
|
428
|
|
|
|
|
$
|
3,181
|
|
Reinsurance
|
|
|
|
|
3,774
|
|
|
|
|
1,430
|
|
Total
|
|
|
|
|
$
|
4,202
|
|
|
|
|
$
|
4,611
|
|
Impact on combined ratio:
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
0.1
|
%
|
|
|
|
0.6
|
%
|
Reinsurance
|
|
|
|
|
1.4
|
%
|
|
|
|
0.5
|
%
|
Total
|
|
|
|
|
0.5
|
%
|
|
|
|
0.6
|
%
|
|
|
(1)
|
|
Presented on a ‘core’ basis (excluding amounts related to the
‘other’ segment). See ‘Comments on Regulation G’ for further details.
|
(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 tables summarize the Company’s segment results for
the 2016 first quarter and 2015 first quarter:
|
|
(U.S. Dollars in thousands)
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
Insurance
|
|
|
|
Reinsurance
|
|
|
|
Mortgage
|
|
|
|
Sub-total (Core)
|
|
|
|
Other
|
|
|
|
Total
|
Gross premiums written (1)
|
|
|
|
|
|
$
|
798,553
|
|
|
|
|
$
|
481,390
|
|
|
|
|
$
|
111,280
|
|
|
|
|
$
|
1,391,061
|
|
|
|
|
$
|
148,606
|
|
|
|
|
$
|
1,437,966
|
|
Premiums ceded
|
|
|
|
|
|
(248,789
|
)
|
|
|
|
(160,566
|
)
|
|
|
|
(4,767
|
)
|
|
|
|
(413,960
|
)
|
|
|
|
(4,472
|
)
|
|
|
|
(316,731
|
)
|
Net premiums written
|
|
|
|
|
|
549,764
|
|
|
|
|
320,824
|
|
|
|
|
106,513
|
|
|
|
|
977,101
|
|
|
|
|
144,134
|
|
|
|
|
1,121,235
|
|
Change in unearned premiums
|
|
|
|
|
|
(36,675
|
)
|
|
|
|
(59,616
|
)
|
|
|
|
(44,748
|
)
|
|
|
|
(141,039
|
)
|
|
|
|
(28,617
|
)
|
|
|
|
(169,656
|
)
|
Net premiums earned
|
|
|
|
|
|
513,089
|
|
|
|
|
261,208
|
|
|
|
|
61,765
|
|
|
|
|
836,062
|
|
|
|
|
115,517
|
|
|
|
|
951,579
|
|
Other underwriting income
|
|
|
|
|
|
—
|
|
|
|
|
325
|
|
|
|
|
3,793
|
|
|
|
|
4,118
|
|
|
|
|
929
|
|
|
|
|
5,047
|
|
Losses and loss adjustment expenses
|
|
|
|
|
|
(323,609
|
)
|
|
|
|
(111,598
|
)
|
|
|
|
(8,629
|
)
|
|
|
|
(443,836
|
)
|
|
|
|
(79,113
|
)
|
|
|
|
(522,949
|
)
|
Acquisition expenses, net
|
|
|
|
|
|
(74,354
|
)
|
|
|
|
(54,787
|
)
|
|
|
|
(8,385
|
)
|
|
|
|
(137,526
|
)
|
|
|
|
(32,939
|
)
|
|
|
|
(170,465
|
)
|
Other operating expenses
|
|
|
|
|
|
(85,861
|
)
|
|
|
|
(36,455
|
)
|
|
|
|
(24,615
|
)
|
|
|
|
(146,931
|
)
|
|
|
|
(5,338
|
)
|
|
|
|
(152,269
|
)
|
Underwriting income (loss)
|
|
|
|
|
|
$
|
29,265
|
|
|
|
|
$
|
58,693
|
|
|
|
|
$
|
23,929
|
|
|
|
|
111,887
|
|
|
|
|
(944
|
)
|
|
|
|
110,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,409
|
|
|
|
|
23,326
|
|
|
|
|
93,735
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,862
|
|
|
|
|
5,462
|
|
|
|
|
37,324
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,639
|
)
|
|
|
|
—
|
|
|
|
|
(7,639
|
)
|
Equity in net income (loss) of investment funds
accounted for using the equity method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,655
|
|
|
|
|
—
|
|
|
|
|
6,655
|
|
Other income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
—
|
|
|
|
|
(25
|
)
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,383
|
)
|
|
|
|
—
|
|
|
|
|
(9,383
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,627
|
)
|
|
|
|
(3,480
|
)
|
|
|
|
(16,107
|
)
|
Net foreign exchange gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,041
|
)
|
|
|
|
(1,525
|
)
|
|
|
|
(23,566
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,098
|
|
|
|
|
22,839
|
|
|
|
|
191,937
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,310
|
)
|
|
|
|
—
|
|
|
|
|
(16,310
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,788
|
|
|
|
|
22,839
|
|
|
|
|
175,627
|
|
Dividends attributable to redeemable noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
(4,587
|
)
|
|
|
|
(4,587
|
)
|
Amounts attributable to nonredeemable noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
(16,242
|
)
|
|
|
|
(16,242
|
)
|
Net income available to Arch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,788
|
|
|
|
|
2,010
|
|
|
|
|
154,798
|
|
Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,484
|
)
|
|
|
|
—
|
|
|
|
|
(5,484
|
)
|
Net income available to Arch common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
147,304
|
|
|
|
|
$
|
2,010
|
|
|
|
|
$
|
149,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
|
|
|
63.1
|
%
|
|
|
|
42.7
|
%
|
|
|
|
14.0
|
%
|
|
|
|
53.1
|
%
|
|
|
|
68.5
|
%
|
|
|
|
55.0
|
%
|
Acquisition expense ratio
|
|
|
|
|
|
14.5
|
%
|
|
|
|
21.0
|
%
|
|
|
|
13.6
|
%
|
|
|
|
16.4
|
%
|
|
|
|
28.5
|
%
|
|
|
|
17.9
|
%
|
Other operating expense ratio
|
|
|
|
|
|
16.7
|
%
|
|
|
|
14.0
|
%
|
|
|
|
39.9
|
%
|
|
|
|
17.6
|
%
|
|
|
|
4.6
|
%
|
|
|
|
16.0
|
%
|
Combined ratio
|
|
|
|
|
|
94.3
|
%
|
|
|
|
77.7
|
%
|
|
|
|
67.5
|
%
|
|
|
|
87.1
|
%
|
|
|
|
101.6
|
%
|
|
|
|
88.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written to gross premiums written
|
|
|
|
|
|
68.8
|
%
|
|
|
|
66.6
|
%
|
|
|
|
95.7
|
%
|
|
|
|
70.2
|
%
|
|
|
|
97.0
|
%
|
|
|
|
78.0
|
%
|
|
(1)
|
|
Certain amounts included in the gross premiums written of each
segment are related to intersegment transactions and are included in
the gross premiums written of each segment. Accordingly, the sum of
gross premiums written for each segment does not agree to the total
gross premiums written as shown in the table above due to the
elimination of intersegment transactions in the total.
|
|
|
(U.S. Dollars in thousands)
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31, 2015
|
|
|
|
|
|
|
Insurance
|
|
|
|
Reinsurance
|
|
|
|
Mortgage
|
|
|
|
Sub-total (Core)
|
|
|
|
Other
|
|
|
|
Total
|
Gross premiums written (1)
|
|
|
|
|
|
$
|
766,153
|
|
|
|
|
$
|
485,112
|
|
|
|
|
$
|
60,541
|
|
|
|
|
$
|
1,311,678
|
|
|
|
|
$
|
128,633
|
|
|
|
|
$
|
1,342,022
|
|
Premiums ceded
|
|
|
|
|
|
(224,150
|
)
|
|
|
|
(136,569
|
)
|
|
|
|
(8,670
|
)
|
|
|
|
(369,261
|
)
|
|
|
|
(4,055
|
)
|
|
|
|
(275,027
|
)
|
Net premiums written
|
|
|
|
|
|
542,003
|
|
|
|
|
348,543
|
|
|
|
|
51,871
|
|
|
|
|
942,417
|
|
|
|
|
124,578
|
|
|
|
|
1,066,995
|
|
Change in unearned premiums
|
|
|
|
|
|
(34,089
|
)
|
|
|
|
(68,826
|
)
|
|
|
|
(1,504
|
)
|
|
|
|
(104,419
|
)
|
|
|
|
(52,312
|
)
|
|
|
|
(156,731
|
)
|
Net premiums earned
|
|
|
|
|
|
507,914
|
|
|
|
|
279,717
|
|
|
|
|
50,367
|
|
|
|
|
837,998
|
|
|
|
|
72,266
|
|
|
|
|
910,264
|
|
Other underwriting income
|
|
|
|
|
|
427
|
|
|
|
|
1,429
|
|
|
|
|
7,718
|
|
|
|
|
9,574
|
|
|
|
|
1,962
|
|
|
|
|
11,536
|
|
Losses and loss adjustment expenses
|
|
|
|
|
|
(317,896
|
)
|
|
|
|
(112,532
|
)
|
|
|
|
(13,809
|
)
|
|
|
|
(444,237
|
)
|
|
|
|
(49,479
|
)
|
|
|
|
(493,716
|
)
|
Acquisition expenses, net
|
|
|
|
|
|
(75,078
|
)
|
|
|
|
(56,604
|
)
|
|
|
|
(10,418
|
)
|
|
|
|
(142,100
|
)
|
|
|
|
(20,976
|
)
|
|
|
|
(163,076
|
)
|
Other operating expenses
|
|
|
|
|
|
(88,119
|
)
|
|
|
|
(38,044
|
)
|
|
|
|
(20,369
|
)
|
|
|
|
(146,532
|
)
|
|
|
|
(2,005
|
)
|
|
|
|
(148,537
|
)
|
Underwriting income (loss)
|
|
|
|
|
|
$
|
27,248
|
|
|
|
|
$
|
73,966
|
|
|
|
|
$
|
13,489
|
|
|
|
|
114,703
|
|
|
|
|
1,768
|
|
|
|
|
116,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,288
|
|
|
|
|
8,706
|
|
|
|
|
78,994
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,509
|
|
|
|
|
17,839
|
|
|
|
|
83,348
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,799
|
)
|
|
|
|
—
|
|
|
|
|
(5,799
|
)
|
Equity in net income (loss) of investment funds
accounted for using the equity method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,889
|
|
|
|
|
—
|
|
|
|
|
5,889
|
|
Other income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,888
|
)
|
|
|
|
—
|
|
|
|
|
(1,888
|
)
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,345
|
)
|
|
|
|
—
|
|
|
|
|
(9,345
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,736
|
)
|
|
|
|
—
|
|
|
|
|
(12,736
|
)
|
Net foreign exchange gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,853
|
|
|
|
|
(352
|
)
|
|
|
|
66,501
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293,474
|
|
|
|
|
27,961
|
|
|
|
|
321,435
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,678
|
)
|
|
|
|
—
|
|
|
|
|
(12,678
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280,796
|
|
|
|
|
27,961
|
|
|
|
|
308,757
|
|
Dividends attributable to redeemable noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
(4,908
|
)
|
|
|
|
(4,908
|
)
|
Amounts attributable to nonredeemable noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
(20,513
|
)
|
|
|
|
(20,513
|
)
|
Net income available to Arch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280,796
|
|
|
|
|
2,540
|
|
|
|
|
283,336
|
|
Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,484
|
)
|
|
|
|
—
|
|
|
|
|
(5,484
|
)
|
Net income available to Arch common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
275,312
|
|
|
|
|
$
|
2,540
|
|
|
|
|
$
|
277,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
|
|
|
62.6
|
%
|
|
|
|
40.2
|
%
|
|
|
|
27.4
|
%
|
|
|
|
53.0
|
%
|
|
|
|
68.5
|
%
|
|
|
|
54.2
|
%
|
Acquisition expense ratio
|
|
|
|
|
|
14.8
|
%
|
|
|
|
20.2
|
%
|
|
|
|
20.7
|
%
|
|
|
|
17.0
|
%
|
|
|
|
29.0
|
%
|
|
|
|
17.9
|
%
|
Other operating expense ratio
|
|
|
|
|
|
17.3
|
%
|
|
|
|
13.6
|
%
|
|
|
|
40.4
|
%
|
|
|
|
17.5
|
%
|
|
|
|
2.8
|
%
|
|
|
|
16.3
|
%
|
Combined ratio
|
|
|
|
|
|
94.7
|
%
|
|
|
|
74.0
|
%
|
|
|
|
88.5
|
%
|
|
|
|
87.5
|
%
|
|
|
|
100.3
|
%
|
|
|
|
88.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written to gross premiums written
|
|
|
|
|
|
70.7
|
%
|
|
|
|
71.8
|
%
|
|
|
|
85.7
|
%
|
|
|
|
71.8
|
%
|
|
|
|
96.8
|
%
|
|
|
|
79.5
|
%
|
|
(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.
|
|
The following section provides analysis on the Company’s 2016 first
quarter performance by operating segment. For additional details
regarding the Company’s operating segments, please refer to the
Company’s Financial Supplement dated March 31, 2016. 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 (see ‘Comments on Regulation G’ for further details).
|
Insurance Segment
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(U.S. dollars in thousands)
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
|
|
|
$
|
798,553
|
|
|
|
|
$
|
766,153
|
|
|
|
|
4.2
|
|
Net premiums written
|
|
|
|
|
549,764
|
|
|
|
|
542,003
|
|
|
|
|
1.4
|
|
Net premiums earned
|
|
|
|
|
513,089
|
|
|
|
|
507,914
|
|
|
|
|
1.0
|
|
Underwriting income
|
|
|
|
|
29,265
|
|
|
|
|
27,248
|
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
% Point
Change
|
Loss ratio
|
|
|
|
|
63.1
|
%
|
|
|
|
62.6
|
%
|
|
|
|
0.5
|
|
Acquisition expense ratio
|
|
|
|
|
14.5
|
%
|
|
|
|
14.8
|
%
|
|
|
|
(0.3
|
)
|
Other operating expense ratio
|
|
|
|
|
16.7
|
%
|
|
|
|
17.3
|
%
|
|
|
|
(0.6
|
)
|
Combined ratio
|
|
|
|
|
94.3
|
%
|
|
|
|
94.7
|
%
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophic activity and prior year development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year catastrophic events, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance and reinstatement premiums
|
|
|
|
|
0.1
|
%
|
|
|
|
0.6
|
%
|
|
|
|
(0.5
|
)
|
Net (favorable) adverse development in prior year loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, net of related adjustments
|
|
|
|
|
(0.8
|
)%
|
|
|
|
(1.0
|
)%
|
|
|
|
0.2
|
|
Combined ratio excluding catastrophic activity and prior year
development
|
|
|
|
|
95.0
|
%
|
|
|
|
95.1
|
%
|
|
|
|
(0.1
|
)
|
|
Gross premiums written by the insurance segment in the 2016 first
quarter were 4.2% higher than in the 2015 first quarter while net
premiums written were 1.4% higher than in the 2015 first quarter. The
higher growth in gross premiums written than net premiums written
reflected expansion in business subject to a greater level of cessions,
primarily in alternative markets and construction. The increase in net
premiums written reflected growth in travel, accident and health,
construction and alternative markets business, partially offset by a
reduction in programs and property lines. The growth in travel, accident
and health reflected expansion in international and U.S. travel
business, while growth in construction primarily reflected new accounts.
The increase in alternative markets resulted from new accounts, exposure
growth and audit premiums. The reduction in program business primarily
reflected the non-renewal of a large program while the lower level in
property lines reflected continued weak market conditions. Changes in
foreign currency rates resulted in a decrease in net premiums written in
the 2016 first quarter of approximately $6.1 million, or 1.1%, compared
to the 2015 first quarter. Net premiums earned by the insurance segment
in the 2016 first quarter were 1.0% higher than in the 2015 first
quarter, and reflect changes in net premiums written over the previous
five quarters.
The 2016 first quarter loss ratio reflected 0.1 points of current year
catastrophic activity, compared to 0.6 points in the 2015 first quarter.
Estimated net favorable development in prior year loss reserves, before
related adjustments, reduced the loss ratio by 1.2 points in the 2016
first quarter, compared to 1.7 points in the 2015 first quarter. The
estimated net favorable development in the 2016 first quarter primarily
resulted from better than expected claims emergence in property lines
from more recent accident years and in longer-tailed lines from earlier
accident years. The balance of the change in the 2016 first quarter loss
ratio resulted, in part, from changes in the mix of business.
The underwriting expense ratio was 31.2% in the 2016 first quarter,
compared to 32.1% in the 2015 first quarter. The comparison of the
underwriting expense ratios and the underlying acquisition expense and
other operating expense ratios reflected an increase in the level of
reinsurance ceded on a quota share basis in the 2016 first quarter and
changes in the mix of business.
|
Reinsurance Segment
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(U.S. dollars in thousands)
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
|
|
|
$
|
481,390
|
|
|
|
|
$
|
485,112
|
|
|
|
|
(0.8
|
)
|
Net premiums written
|
|
|
|
|
320,824
|
|
|
|
|
348,543
|
|
|
|
|
(8.0
|
)
|
Net premiums earned
|
|
|
|
|
261,208
|
|
|
|
|
279,717
|
|
|
|
|
(6.6
|
)
|
Other underwriting income
|
|
|
|
|
325
|
|
|
|
|
1,429
|
|
|
|
|
(77.3
|
)
|
Underwriting income
|
|
|
|
|
58,693
|
|
|
|
|
73,966
|
|
|
|
|
(20.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
% Point
Change
|
Loss ratio
|
|
|
|
|
42.7
|
%
|
|
|
|
40.2
|
%
|
|
|
|
2.5
|
|
Acquisition expense ratio
|
|
|
|
|
21.0
|
%
|
|
|
|
20.2
|
%
|
|
|
|
0.8
|
|
Other operating expense ratio
|
|
|
|
|
14.0
|
%
|
|
|
|
13.6
|
%
|
|
|
|
0.4
|
|
Combined ratio
|
|
|
|
|
77.7
|
%
|
|
|
|
74.0
|
%
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophic activity and prior year development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year catastrophic events, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance and reinstatement premiums
|
|
|
|
|
1.4
|
%
|
|
|
|
0.5
|
%
|
|
|
|
0.9
|
|
Net (favorable) adverse development in prior year loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, net of related adjustments
|
|
|
|
|
(18.0
|
)%
|
|
|
|
(20.5
|
)%
|
|
|
|
2.5
|
|
Combined ratio excluding catastrophic activity and prior year
development
|
|
|
|
|
94.3
|
%
|
|
|
|
94.0
|
%
|
|
|
|
0.3
|
|
|
Gross premiums written by the reinsurance segment in the 2016 first
quarter were 0.8% lower than in the 2015 first quarter, while net
premiums written were 8.0% lower than in the 2015 first quarter. The
difference in gross versus net premiums written primarily reflected
increased retrocessions on property and other lines and changes in the
mix of business. The lower level of net premiums written reflected
decreases in property excluding property catastrophe and property
catastrophe business, partially offset by growth in casualty business.
The decrease in property lines reflected share decreases and timing of
renewals in response to current market conditions and a higher level of
retrocessional usage. Growth in casualty business reflected exposure
growth and new business. Changes in foreign currency rates resulted in a
decrease in net premiums written in the 2016 first quarter of
approximately $4.3 million, or 1.2%, compared to the 2015 first quarter.
Net premiums earned in the 2016 first quarter were 6.6% lower than in
the 2015 first quarter, and primarily reflect changes in net premiums
written over the previous five quarters, including the mix and type of
business written.
The 2016 first quarter loss ratio reflected 1.4 points of current year
catastrophic activity, compared to 0.6 points of catastrophic activity
in the 2015 first quarter. Estimated net favorable development in prior
year loss reserves, before related adjustments, reduced the loss ratio
by 18.1 points in the 2016 first quarter, compared to 20.7 points in the
2015 first quarter. The estimated net favorable development in the 2016
first quarter primarily resulted from better than expected claims
emergence in short-tail business from most underwriting years and in
longer-tail business across earlier underwriting years.
The underwriting expense ratio was 35.0% in the 2016 first quarter,
compared to 33.8% in the 2015 first quarter. The acquisition expense
ratio for the 2016 first quarter was 21.0%, compared to 20.2% for the
2015 first quarter. The 2016 first quarter ratio reflected a higher
level of ceding commissions incurred compared to the 2015 first quarter
and changes in the mix and type of business. The operating expense ratio
for the 2016 first quarter was 14.0%, compared to 13.6% in the 2015
first quarter, primarily reflecting the lower level of net premiums
earned.
|
Mortgage Segment
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(U.S. dollars in thousands)
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
|
|
|
$
|
111,280
|
|
|
|
|
$
|
60,541
|
|
|
|
|
83.8
|
|
Net premiums written
|
|
|
|
|
106,513
|
|
|
|
|
51,871
|
|
|
|
|
105.3
|
|
Net premiums earned
|
|
|
|
|
61,765
|
|
|
|
|
50,367
|
|
|
|
|
22.6
|
|
Other underwriting income
|
|
|
|
|
3,793
|
|
|
|
|
7,718
|
|
|
|
|
(50.9
|
)
|
Underwriting income
|
|
|
|
|
23,929
|
|
|
|
|
13,489
|
|
|
|
|
77.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
% Point
Change
|
Loss ratio
|
|
|
|
|
14.0
|
%
|
|
|
|
27.4
|
%
|
|
|
|
(13.4
|
)
|
Acquisition expense ratio
|
|
|
|
|
13.6
|
%
|
|
|
|
20.7
|
%
|
|
|
|
(7.1
|
)
|
Other operating expense ratio
|
|
|
|
|
39.9
|
%
|
|
|
|
40.4
|
%
|
|
|
|
(0.5
|
)
|
Combined ratio
|
|
|
|
|
67.5
|
%
|
|
|
|
88.5
|
%
|
|
|
|
(21.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (favorable) adverse development in prior year loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, net of related adjustments
|
|
|
|
|
(4.4
|
)%
|
|
|
|
(5.6
|
)%
|
|
|
|
1.2
|
|
Combined ratio excluding prior year development
|
|
|
|
|
71.9
|
%
|
|
|
|
94.1
|
%
|
|
|
|
(22.2
|
)
|
|
The mortgage segment includes the Company’s U.S. and international
mortgage insurance and reinsurance operations as well as government
sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch
Mortgage Insurance Company (“Arch MI U.S.”) is approved as an eligible
mortgage insurer by Fannie Mae and Freddie Mac.
Gross premiums written by the mortgage segment in the 2016 first quarter
were 83.8% higher than in the 2015 first quarter, while net premiums
written were 105.3% higher than in the 2015 first quarter, reflecting
$43.5 million of growth in Australian mortgage reinsurance business. In
addition, net premiums written in the 2016 first quarter reflected
growth in U.S. primary business of $5.4 million, primarily from banks
and other mortgage originators, and an increase in GSE credit
risk-sharing transactions receiving insurance accounting treatment. Net
premiums earned for the 2016 first quarter were 22.6% higher than in the
2015 first quarter, reflecting the growth in insurance in force.
Other underwriting income, which is primarily related to GSE
risk-sharing transactions receiving derivative accounting treatment, was
$3.8 million for the 2016 first quarter, compared to $7.7 million for
the 2015 first quarter, and comparable with the $3.5 million recorded in
the 2015 fourth quarter. The 2015 first quarter amount included
approximately $3.4 million of catch up income due to the timing of the
insurance product and securitization transactions.
The loss ratio for the 2016 first quarter reflected estimated net
favorable development in prior year loss reserves, before related
adjustments, of 4.4 points, compared to 5.2 points in the 2015 first
quarter, driven primarily by lower than expected claim rates. 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 March 31, 2016, the mortgage segment’s risk-in-force consisted of
$7.17 billion from Arch MI U.S. and an additional $5.59 billion through
the mortgage segment’s reinsurance and risk-sharing operations. Arch MI
U.S. generated $2.91 billion of new insurance written (“NIW”) during the
2016 first quarter, of which 69% was from banks and other non-credit
union mortgage originators. 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 (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;
-
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 March 31, 2016;
-
greater than expected loss ratios on business written by the Company
and adverse development on claim and/or claim expense liabilities
related to business written by its insurance and reinsurance
subsidiaries;
-
severity and/or frequency of losses;
-
claims for natural or man-made catastrophic events in the Company’s
insurance or reinsurance business could cause large losses and
substantial volatility in its results of operations;
-
acts of terrorism, political unrest and other hostilities or other
unforecasted and unpredictable events;
-
availability to the Company of reinsurance to manage its gross and net
exposures and the cost of such reinsurance;
-
the failure of reinsurers, managing general agents, third party
administrators or others to meet their obligations to the Company;
-
the timing of loss payments being faster or the receipt of reinsurance
recoverables being slower than anticipated by the Company;
-
the Company’s investment performance, including legislative or
regulatory developments that may adversely affect the fair value of
the Company’s investments;
-
changes in general economic conditions, including new or continued
sovereign debt concerns in Eurozone countries or downgrades of U.S.
securities by credit rating agencies, which could affect our business,
financial condition and results of operations;
-
the volatility of our shareholders’ equity from foreign currency
fluctuations, which could increase due to us not matching portions of
our 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 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 presentation includes the use of information
prepared on a ‘core’ basis, which excludes amounts related to the
‘other’ segment (i.e., results of Watford Re). Information
provided on a ‘core’ basis are non-GAAP financial measures as defined in
Regulation G. Pursuant to generally accepted accounting principles,
Watford Re is considered a variable interest entity and the Company
concluded that it is the primary beneficiary of Watford Re. As such, the
Company consolidates the results of Watford Re in its consolidated
financial statements, although it only owns approximately 11% of Watford
Re’s common equity. Watford Re has its own management and board of
directors that is responsible for its overall profitability. In
addition, the Company does not guarantee or provide credit support for
Watford Re. Because Watford Re is an independent company, the assets of
Watford Re can be used only to settled obligations of Watford Re and
Watford Re is solely responsible for its own liabilities and
commitments. 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 the
reinsurance transactions. The Company believes that presenting
information on a ‘core’ basis 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.
See ‘Segment Information’ for a further discussion of segment results
and a reconciliation of core and consolidated results.
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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