PEMBROKE, Bermuda–(BUSINESS WIRE)–Arch Capital Group Ltd. (NASDAQ: ACGL) announces its 2018 fourth quarter
results. The results included:
“after-tax operating income or
loss available to Arch common shareholders”
-
Net income available to Arch common shareholders of $126.1 million, or
$0.31 per share, a 5.9% annualized return on average common equity,
compared to $203.5 million, or $0.49 per share, for the 2017 fourth
quarter; -
After-tax operating income available to Arch common shareholders, a
non-GAAP measure, of $189.2 million, or $0.46 per share, an 8.8%
annualized return on average common equity, compared to $187.4
million, or $0.45 per share, for the 2017 fourth quarter; -
Pre-tax current accident year catastrophic losses, net of reinsurance
and reinstatement premiums(1), of $118.2 million, primarily
related to Hurricane Michael and the California wildfires; -
Favorable development in prior year loss reserves, net of related
adjustments(1), of $74.4 million; -
Combined ratio excluding catastrophic activity and prior year
development(1) of 80.8%; -
Book value per common share of $21.52 at December 31, 2018, a 1.7%
increase in the 2018 fourth quarter and a 6.0% increase for the year; - Share repurchases of $98.2 million.
All earnings per share amounts discussed in this release are on a
diluted basis. The following table summarizes the Company’s underwriting
results, both (i) on a consolidated basis and (ii) on a consolidated
basis excluding the ‘other’ segment (i.e., results of Watford Re,
as defined below):
| (U.S. dollars in thousands) | Consolidated | Consolidated Excluding ‘Other’ Segment (1) | |||||||||||||||||||||
| Three Months Ended December 31, | Three Months Ended December 31, | ||||||||||||||||||||||
| 2018 | 2017 | % Change | 2018 | 2017 | % Change | ||||||||||||||||||
| Gross premiums written | $ | 1,694,918 | $ | 1,452,530 | 16.7 | $ | 1,599,085 | $ | 1,391,247 | 14.9 | |||||||||||||
| Net premiums written | 1,301,754 | 1,111,015 | 17.2 | 1,169,394 | 995,714 | 17.4 | |||||||||||||||||
| Net premiums earned | 1,369,435 | 1,224,755 | 11.8 | 1,222,462 | 1,094,409 | 11.7 | |||||||||||||||||
| Underwriting income | 166,955 | 182,111 | (8.3 | ) | 188,986 | 206,012 | (8.3 | ) | |||||||||||||||
| Underwriting Ratios |
% Point |
% Point |
|||||||||||||||||||||
| Loss ratio | 60.4 | % | 55.4 | % | 5.0 | 57.1 | % | 51.4 | % | 5.7 | |||||||||||||
| Underwriting expense ratio | 27.4 | % | 30.9 | % | (3.5 | ) | 27.3 | % | 31.1 | % | (3.8 | ) | |||||||||||
| Combined ratio | 87.8 | % | 86.3 | % | 1.5 | 84.4 | % | 82.5 | % | 1.9 | |||||||||||||
|
Combined ratio excluding catastrophic activity and prior year development |
80.8 | % | 87.0 | % | (6.2 | ) | |||||||||||||||||
| (1) |
Excluding the ‘other’ segment. See ‘Comments on Regulation G’ for further details. |
|
Pursuant to GAAP, the Company consolidates the results of Watford
Holdings Ltd. in its financial statements, although it only owns
approximately 11% of Watford Holdings Ltd.’s outstanding common equity.
Watford Holdings Ltd. is the parent of Watford Re Ltd., a multi-line
Bermuda reinsurance company (together with Watford Holdings Ltd.,
“Watford Re”). See ‘Comments on Regulation G’ for further details.
The Company’s 2018 fourth quarter results reflect estimated pre-tax net
losses from current accident year catastrophic events of $118.2 million,
net of reinsurance and reinstatement premiums. Such amounts were
primarily related to Hurricane Michael and the California wildfires as
well as other minor global events. The Company’s pre-tax loss estimates
for these events are based on currently available information derived
from modeling techniques, industry assessments of exposure, preliminary
claims information obtained from the Company’s clients and brokers to
date and a review of in-force contracts. The Company’s actual losses
from these events may vary materially from the estimates due to the
inherent uncertainties in making such determinations resulting from
several factors, including the preliminary nature of available
information, the potential inaccuracies and inadequacies in the data
provided by clients and brokers, the modeling techniques and the
application of such techniques, the contingent nature of business
interruption exposures, the effects of any resultant demand surge on
claims activity and attendant coverage issues. In addition, actual
losses may increase if the Company’s reinsurers fail to meet their
obligations to the Company or the reinsurance protections purchased by
the Company are exhausted or are otherwise unavailable.
The following table summarizes the Company’s consolidated financial
data, including a reconciliation of net income or loss available to Arch
common shareholders to after-tax operating income or loss available to
Arch common shareholders and related diluted per share results:
| (U.S. dollars in thousands, except share data) | Three Months Ended | Year Ended | |||||||||||||||
| December 31, | December 31, | ||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||||
| Net income available to Arch common shareholders | $ | 126,091 | $ | 203,535 | $ | 713,616 | $ | 566,502 | |||||||||
| Net realized (gains) losses | 77,037 | (36,906 | ) | 297,755 | (148,836 | ) | |||||||||||
| Net impairment losses recognized in earnings | 1,705 | 1,723 | 2,829 | 7,138 | |||||||||||||
|
Equity in net (income) loss of investment funds accounted for using the equity method |
6,882 | (30,402 | ) | (45,641 | ) | (142,286 | ) | ||||||||||
| Net foreign exchange (gains) losses | (20,869 | ) | 27,994 | (59,890 | ) | 113,613 | |||||||||||
| Transaction costs and other | 3,548 | 901 | 12,377 | 22,150 | |||||||||||||
| Loss on redemption of preferred shares | — | — | 2,710 | 6,735 | |||||||||||||
| Income tax expense (benefit) (1) | (5,223 | ) | 20,559 | (14,566 | ) | 22,139 | |||||||||||
| After-tax operating income available to Arch common shareholders | $ | 189,171 | $ | 187,404 | $ | 909,190 | $ | 447,155 | |||||||||
|
Diluted per common share results: |
|||||||||||||||||
| Net income available to Arch common shareholders | $ | 0.31 | $ | 0.49 | $ | 1.73 | $ | 1.36 | |||||||||
| Net realized (gains) losses | 0.18 | (0.09 | ) | 0.72 | (0.36 | ) | |||||||||||
| Net impairment losses recognized in earnings | 0.00 | 0.00 | 0.01 | 0.02 | |||||||||||||
|
Equity in net (income) loss of investment funds accounted for using the equity method |
0.02 | (0.07 | ) | (0.11 | ) | (0.34 | ) | ||||||||||
| Net foreign exchange (gains) losses | (0.05 | ) | 0.07 | (0.15 | ) | 0.27 | |||||||||||
| Transaction costs and other | 0.01 | 0.00 | 0.03 | 0.05 | |||||||||||||
| Loss on redemption of preferred shares | — | — | 0.01 | 0.02 | |||||||||||||
| Income tax expense (benefit) (1) | (0.01 | ) | 0.05 | (0.04 | ) | 0.05 | |||||||||||
| After-tax operating income available to Arch common shareholders | $ | 0.46 | $ | 0.45 | $ | 2.20 | $ | 1.07 | |||||||||
|
Weighted average common shares and common share equivalents outstanding — diluted |
410,112,097 | 418,735,890 | 412,906,478 | 417,785,025 | |||||||||||||
| Beginning common shareholders’ equity | $ | 8,575,148 | $ | 8,138,589 | $ | 8,324,047 | $ | 7,481,163 | |||||||||
| Ending common shareholders’ equity | 8,659,827 | 8,324,047 | 8,659,827 | 8,324,047 | |||||||||||||
| Average common shareholders’ equity | $ | 8,617,488 | $ | 8,231,318 | $ | 8,491,937 | $ | 7,902,605 | |||||||||
| Annualized return on average common equity | 5.9 | % | 9.9 | % | 8.4 | % | 7.2 | % | |||||||||
| Annualized operating return on average common equity | 8.8 | % | 9.1 | % | 10.7 | % | 5.7 | % | |||||||||
| (1) |
Income tax expense on net realized gains or losses, net impairment losses recognized in earnings, equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction. |
|
Each line item in the table above reflects the impact of the Company’s
approximate 11% ownership of Watford Re’s outstanding common equity. See
‘Comments on Regulation G’ for a discussion of non-GAAP financial
measures.
Segment Information
The following section provides analysis on the Company’s 2018 fourth
quarter performance by operating segment. For additional details
regarding the Company’s operating segments, please refer to the
Company’s Financial Supplement dated December 31, 2018. The Company’s
segment information includes the use of underwriting income (loss) and a
combined ratio excluding catastrophic activity (if applicable for the
segment) and prior year development. Such items are non-GAAP financial
measures (see ‘Comments on Regulation G’ for further details).
|
Insurance Segment |
|||||||||||
| Three Months Ended December 31, | |||||||||||
| (U.S. dollars in thousands) | 2018 | 2017 | % Change | ||||||||
| Gross premiums written | $ | 832,762 | $ | 767,456 | 8.5 | ||||||
| Net premiums written | 534,968 | 512,867 | 4.3 | ||||||||
| Net premiums earned | 559,417 | 554,633 | 0.9 | ||||||||
| Underwriting income (loss) | $ | (15,644 | ) | $ | 9,047 | (272.9) | |||||
| Underwriting Ratios |
% Point |
||||||||||
| Loss ratio | 71.5 | % | 66.7 | % | 4.8 | ||||||
| Underwriting expense ratio | 31.3 | % | 31.6 | % | (0.3) | ||||||
| Combined ratio | 102.8 | % | 98.3 | % | 4.5 | ||||||
| Catastrophic activity and prior year development: | |||||||||||
|
Current accident year catastrophic events, net of reinsurance and reinstatement premiums |
6.0 | % | (1.3 | )% | 7.3 | ||||||
|
Net (favorable) adverse development in prior year loss reserves, net of related adjustments |
(1.5 | )% | (0.1 | )% | (1.4) | ||||||
|
Combined ratio excluding catastrophic activity and prior year development (1) |
98.3 | % | 99.7 | % | (1.4) | ||||||
| (1) | See ‘Comments on Regulation G’ for further discussion. | |
Gross premiums written by the insurance segment in the 2018 fourth
quarter were 8.5% higher than in the 2017 fourth quarter while net
premiums written were 4.3% higher than in the 2017 fourth quarter. The
increase in net premiums written reflected growth in most lines of
business, due to a mix of new business, growth in existing accounts and
rate increases. This increase was partially offset by lower writings in
contract binding, higher cessions in professional lines and a
non-recurring item in the 2017 fourth quarter within national accounts.
Net premiums earned by the insurance segment in the 2018 fourth quarter
were 0.9% higher than in the 2017 fourth quarter, and reflect changes in
net premiums written over the previous five quarters.
The 2018 fourth quarter loss ratio reflected 6.0 points for current year
catastrophic activity, primarily related to Hurricane Michael and the
California wildfires, while the 2017 fourth quarter loss ratio reflected
a benefit of 1.3 points due to reserve releases in the quarter from 2017
third quarter hurricanes. Estimated net favorable development of prior
year loss reserves, before related adjustments, reduced the loss ratio
by 1.8 points in the 2018 fourth quarter, compared to 0.3 points in the
2017 fourth quarter. The balance of the change in the 2018 fourth
quarter loss ratio resulted, in part, from a lower level of large
attritional losses and changes in mix of business.
The underwriting expense ratio was 31.3% in the 2018 fourth quarter,
compared to 31.6% in the 2017 fourth quarter.
|
Reinsurance Segment |
|||||||||||
| Three Months Ended December 31, | |||||||||||
| (U.S. dollars in thousands) | 2018 | 2017 | % Change | ||||||||
| Gross premiums written | $ | 409,316 | $ | 289,348 | 41.5 | ||||||
| Net premiums written | 325,048 | 210,166 | 54.7 | ||||||||
| Net premiums earned | 348,453 | 259,495 | 34.3 | ||||||||
| Other underwriting income (loss) | (3,172 | ) | 10,193 | (131.1) | |||||||
| Underwriting income (loss) | $ | (41,174 | ) | $ | 24,617 | (267.3) | |||||
| Underwriting Ratios |
% Point |
||||||||||
| Loss ratio | 83.8 | % | 54.8 | % | 29.0 | ||||||
| Underwriting expense ratio | 27.1 | % | 39.7 | % | (12.6) | ||||||
| Combined ratio | 110.9 | % | 94.5 | % | 16.4 | ||||||
| Catastrophic activity and prior year development: | |||||||||||
|
Current accident year catastrophic events, net of reinsurance and reinstatement premiums |
24.3 | % | 3.0 | % | 21.3 | ||||||
|
Net (favorable) adverse development in prior year loss reserves, net of related adjustments |
(9.6 | )% | (11.7 | )% | 2.1 | ||||||
|
Combined ratio excluding catastrophic activity and prior year development (1) |
96.2 | % | 103.2 | % | (7.0) | ||||||
| (1) | See ‘Comments on Regulation G’ for further discussion. | |
Gross premiums written by the reinsurance segment in the 2018 fourth
quarter were 41.5% higher than in the 2017 fourth quarter, while net
premiums written were 54.7% higher than in the 2017 fourth quarter. Net
premiums written for the 2018 fourth quarter included $25.6 million of
reinstatement premiums and premium adjustments that were substantially
earned. The 2017 fourth quarter also included non-recurring retrocession
premiums of $10 million. The balance of the increase in net premiums
written in the 2018 fourth quarter reflected continued growth in
casualty business, other specialty business, primarily in international
motor quota share contracts, and opportunistic growth in non-catastrophe
property business. Net premiums earned by the reinsurance segment in the
2018 fourth quarter were 34.3% higher than in the 2017 fourth quarter,
and reflect the reinstatement premiums and premium adjustments discussed
above, as well as changes in net premiums written over the previous five
quarters.
The 2018 fourth quarter loss ratio included 26.1 points of current year
catastrophic activity, primarily related to Hurricane Michael and the
California wildfires, compared to 2.3 points of catastrophic activity in
the 2017 fourth quarter. Estimated net favorable development of prior
year loss reserves, before related adjustments, reduced the loss ratio
by 9.9 points in the 2018 fourth quarter, compared to 12.4 points in the
2017 fourth quarter. The estimated net favorable development in the 2018
fourth 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 remainder
of the change is primarily due to a large attritional casualty loss
arising from the California wildfires that increased the loss ratio by
5.0 points, as well as changes in mix of business.
The underwriting expense ratio was 27.1% in the 2018 fourth quarter,
compared to 39.7% in the 2017 fourth quarter. The 2018 fourth quarter
benefited from the reinstatement premium and earned premium adjustments,
discussed above, that reduced the expense ratio by 2.6 points. The 2017
fourth quarter included 5.3 points of federal excise taxes in connection
with intercompany loss portfolio transfers that were effective on
December 31, 2017. The balance of the reduction is primarily due to the
effects of growth in premiums discussed above, combined with lower
operating expenses.
|
Mortgage Segment |
|||||||||||
| Three Months Ended December 31, | |||||||||||
| (U.S. dollars in thousands) | 2018 | 2017 | % Change | ||||||||
| Gross premiums written | $ | 357,981 | $ | 335,338 | 6.8 | ||||||
| Net premiums written | 309,378 | 272,681 | 13.5 | ||||||||
| Net premiums earned | 314,592 | 280,281 | 12.2 | ||||||||
| Other underwriting income | 2,569 | 3,738 | (31.3) | ||||||||
| Underwriting income | $ | 245,804 | $ | 172,348 | 42.6 | ||||||
| Underwriting Ratios |
% Point |
||||||||||
| Loss ratio | 2.1 | % | 17.8 | % | (15.7) | ||||||
| Underwriting expense ratio | 20.5 | % | 22.1 | % | (1.6) | ||||||
| Combined ratio | 22.6 | % | 39.9 | % | (17.3) | ||||||
| Prior year development: | |||||||||||
|
Net (favorable) adverse development in prior year loss reserves, net of related adjustments |
(10.4 | )% | (7.2 | )% | (3.2) | ||||||
| Combined ratio excluding prior year development (1) | 33.0 | % | 47.1 | % | (14.1) | ||||||
| (1) | See ‘Comments on Regulation G’ for further discussion. | |
Gross premiums written by the mortgage segment in the 2018 fourth
quarter were 6.8% higher than in the 2017 fourth quarter, while net
premiums written were 13.5% higher. The growth in gross premiums written
primarily reflected an increase in U.S. insurance in force and
government sponsored enterprise (“GSE”) credit-risk sharing
transactions, partially offset by a lower level of U.S. single premium
business and a decrease in Australian mortgage reinsurance business. Net
premiums written for the 2018 fourth quarter reflected lower ceded
premiums on the 50% quota share agreement with AIG, that continues to
run-off, partially offset by higher ceded premiums related to Bellemeade
transactions issued in 2018. In addition, the 2017 fourth quarter
reflected higher retrocessions of Australian mortgage reinsurance
business. The increase in net premiums earned for the 2018 fourth
quarter primarily reflected the growth in insurance in force in the U.S.
over the last twelve months. Insurance in force increased to $383.7
billion at December 31, 2018, compared to $351.8 billion at December 31,
2017.
Arch MI U.S. generated $16.7 billion of new insurance written (“NIW”) in
the 2018 fourth quarter, compared to $14.4 billion in the 2017 fourth
quarter, as a higher level of purchase market activity more than offset
a reduction in refinance market activity. Monthly premium policies
contributed 91.4% of NIW in the 2018 fourth quarter, compared to 88.7%
in the 2017 fourth quarter.
The loss ratio for the 2018 fourth quarter reflected 4.1 points of
favorable current year development on delinquencies from the first nine
months of 2018, which cured at a higher rate in the period, compared to
1.8 points of unfavorable current year development in the 2017 fourth
quarter, that resulted from a higher expected ultimate claim rate and a
catch-up of 2017 reported losses from one lender. In addition, expected
losses from new delinquencies in the quarter were lower in fourth
quarter 2018 than fourth quarter 2017. Estimated net favorable
development in prior year loss reserves reduced the loss ratio by 10.4
points in the 2018 fourth quarter, compared to 7.2 points in the 2017
fourth quarter. The estimated net favorable development in the 2018
fourth quarter was primarily driven by lower expected claim rates on
first lien business and subrogation activity on second lien business.
The percentage of loans in default on first lien business was 1.60% at
December 31, 2018, unchanged from 1.60% at September 30, 2018, and a
decrease from 2.23% at December 31, 2017.
The mortgage segment’s underwriting expense ratio was 20.5% in the 2018
fourth quarter, compared to 22.1% in the 2017 fourth quarter, reflecting
higher net premiums earned and lower level of other operating expenses,
partially offset by higher acquisition expenses resulting from higher
NIW.
At December 31, 2018, the mortgage segment’s risk-in-force (before
reinsurance) of $76.9 billion consisted of $71.0 billion from Arch MI
U.S. with the remainder from reinsurance and credit-risk sharing
operations.
Corporate and Non-Underwriting
Corporate and non-underwriting results include net investment income,
other income (loss), corporate expenses, transaction costs and other,
amortization of intangible assets, interest expense, items related to
the Company’s non-cumulative preferred shares, net realized gains or
losses, net impairment losses included in earnings, equity in net income
or loss of investment funds accounted for using the equity method, net
foreign exchange gains or losses and income taxes. Such amounts exclude
the results of the ‘other’ segment.
Pre-tax net investment income for the 2018 fourth quarter was $0.28 per
share, or $115.6 million, compared to $0.24 per share, or $99.6 million,
for the 2017 fourth quarter. The growth in 2018 fourth quarter net
investment income reflected the reinvestment of fixed income securities
at higher available yields and a shift from municipal bonds to
corporates. The annualized pre-tax investment income yield was 2.49% for
the 2018 fourth quarter, compared to 2.08% for the 2017 fourth quarter.
Amortization of intangible assets for the 2018 fourth quarter was $26.1
million, compared to $31.8 million for the 2017 fourth quarter. Amounts
in both periods primarily related to amortization of finite-lived
intangible assets related to the UGC acquisition, as disclosed in the
Company’s Form 10-K.
Interest expense for the 2018 fourth quarter was $24.4 million, compared
to $25.7 million for the 2017 fourth quarter, reflecting the lower
revolving credit agreement borrowings outstanding, partially offset by
higher borrowing costs. During the 2018 fourth quarter, the Company
repaid the remaining $125 million revolving credit agreement borrowings.
On a pre-tax basis, net foreign exchange gains for the 2018 fourth
quarter were $20.4 million, compared to net foreign exchange losses for
the 2017 fourth quarter of $27.9 million. For both periods, such amounts
were primarily unrealized and resulted from the effects of revaluing the
Company’s net insurance liabilities required to be settled in foreign
currencies at each balance sheet date. Changes in the value of
available-for-sale investments held in foreign currencies due to foreign
currency rate movements are reflected as a direct increase or decrease
to shareholders’ equity and are not included in the consolidated
statements of income. Although the Company generally attempts to match
the currency of its projected liabilities with investments in the same
currencies, the Company may elect to over or underweight one or more
currencies from time to time, which could increase the Company’s
exposure to foreign currency fluctuations and increase the volatility of
the Company’s shareholders’ equity.
The Company’s effective tax rate on income before income taxes was 20.4%
for the 2018 fourth quarter and 13.1% for the year ended December 31,
2018. The Company’s effective tax rate on pre-tax operating income
available to Arch common shareholders was 16.8% for the 2018 fourth
quarter and 11.9% for the year ended December 31, 2018. The effective
tax rates for the 2018 fourth quarter and the year ended December 31,
2018 included a discrete income tax expense of $5.0 million and $7.7
million respectively, which had the effect of increasing the effective
tax rate on operating income available to Arch common shareholders by
2.1% and 0.7%, respectively. Discrete tax items include changes in
judgment regarding the realizability of certain tax receivables and
deferred tax assets outside of the U.S., net of share based compensation
tax benefits. The Company’s effective tax rate fluctuates from period to
period based upon the relative mix of income or loss reported by
jurisdiction, the level of catastrophic loss activity incurred, and the
varying tax rates in each jurisdiction. The Company currently expects
that its annual effective tax rate on pre-tax operating income available
to Arch common shareholders for the year ended December 31, 2019 will be
in the range of 11% to 14%.
During the 2018 fourth quarter, the Company repurchased 3.6 million
common shares for an aggregate purchase price of $98.2 million, an
average of $27.11 per share. As a result of the share repurchase
transactions during the quarter, book value per common share was reduced
by $0.05 per share at December 31, 2018.
Conference Call
The Company will hold a conference call for investors and analysts at
11:00 a.m. Eastern Time on February 13, 2019. A live webcast of this
call will be available via the Investors section of the Company’s
website at https://www.archgroup.com.
A telephone replay of the conference call also will be available
beginning on February 13, 2019 at 2:00 p.m. Eastern Time until February
20, 2019 at midnight Eastern Time. To access the replay, domestic
callers should dial 855-859-2056, and international callers should dial
404-537-3406 (passcode 77721284 for all callers).
Please refer to the Company’s Financial Supplement dated December 31,
2018, which is available via the Investors section of the Company’s
website at https://www.archgroup.com.
The Financial Supplement provides additional detail regarding the
financial performance of the Company. From time to time, the Company
posts additional financial information and presentations to its website,
including information with respect to its subsidiaries. Investors and
other recipients of this information are encouraged to check the
Company’s website regularly for additional information regarding the
Company.
Arch Capital Group Ltd., a Bermuda-based company with approximately
$11.17 billion in capital at December 31, 2018, provides insurance,
reinsurance and mortgage insurance on a worldwide basis through its
wholly owned subsidiaries.
Comments on Regulation G
Throughout this release, the Company presents its operations in the way
it believes will be the most meaningful and useful to investors,
analysts, rating agencies and others who use the Company’s financial
information in evaluating the performance of the Company and that
investors and such other persons benefit from having a consistent basis
for comparison between quarters and for comparison with other companies
within the industry. These measures may not, however, be comparable to
similarly titled measures used by companies outside of the insurance
industry. Investors are cautioned not to place undue reliance on these
non-GAAP financial measures in assessing the Company’s overall financial
performance.
This presentation includes the use of “after-tax operating income or
loss available to Arch common shareholders,” which is defined as net
income available to Arch common shareholders, excluding net realized
gains or losses, net impairment losses recognized in earnings, equity in
net income or loss of investment funds accounted for using the equity
method, net foreign exchange gains or losses, transaction costs and
other and loss on redemption of preferred shares, net of income taxes,
and the use of annualized operating return on average common equity. The
presentation of after-tax operating income available to Arch common
shareholders and annualized operating return on average common equity
are non-GAAP financial measures as defined in Regulation G. The
reconciliation of such measures to net income available to Arch common
shareholders and annualized return on average common equity (the most
directly comparable GAAP financial measures) in accordance with
Regulation G is included on the following page of this release.
The Company believes that net realized gains or losses, net impairment
losses recognized in earnings, equity in net income or loss of
investment funds accounted for using the equity method, net foreign
exchange gains or losses, transaction costs and other and loss on
redemption of preferred shares in any particular period are not
indicative of the performance of, or trends in, the Company’s business
performance. Although net realized gains or losses, net impairment
losses recognized in earnings, equity in net income or loss of
investment funds accounted for using the equity method and net foreign
exchange gains or losses are an integral part of the Company’s
operations, the decision to realize investment gains or losses, the
recognition of the change in the carrying value of investments accounted
for using the fair value option in net realized gains or losses, the
recognition of net impairment losses, the recognition of equity in net
income or loss of investment funds accounted for using the equity method
and the recognition of foreign exchange gains or losses are independent
of the insurance underwriting process and result, in large part, from
general economic and financial market conditions. Furthermore, certain
users of the Company’s financial information believe that, for many
companies, the timing of the realization of investment gains or losses
is largely opportunistic. In addition, net impairment losses recognized
in earnings on the Company’s investments represent other-than-temporary
declines in expected recovery values on securities without actual
realization. The use of the equity method on certain of the Company’s
investments in certain funds that invest in fixed maturity securities is
driven by the ownership structure of such funds (either limited
partnerships or limited liability companies). In applying the equity
method, these investments are initially recorded at cost and are
subsequently adjusted based on the Company’s proportionate share of the
net income or loss of the funds (which include changes in the fair value
of the underlying securities in the funds). This method of accounting is
different from the way the Company accounts for its other fixed maturity
securities and the timing of the recognition of equity in net income or
loss of investment funds accounted for using the equity method may
differ from gains or losses in the future upon sale or maturity of such
investments. Transaction costs and other include advisory, financing,
legal, severance, incentive compensation and other costs related to
acquisitions and Watford Re’s non-recurring listing expenses. The
Company believes that transaction costs and other, due to their
non-recurring nature, are not indicative of the performance of, or
trends in, the Company’s business performance. The loss on redemption of
preferred shares related to the redemption of the Company’s Series C
preferred shares in September 2017 and January 2018 and had no impact on
shareholders’ equity or cash flows. 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, net foreign exchange gains or losses,
transaction costs and other and loss on redemption of preferred shares
from the calculation of after-tax operating income or loss available to
Arch common shareholders. In addition, for the 2017 fourth quarter and
year ended December 31, 2017, income tax expense included $21.5 million
charge due to the revaluation of the Company’s net deferred tax asset
resulting from the reduction in the U.S. corporate income tax rate from
35% to 21% effective January 1, 2018. Due to the non-recurring nature of
this item, the Company excluded it from after-tax operating income
available to Arch common shareholders.
The Company believes that showing net income available to Arch common
shareholders exclusive of the items referred to above reflects the
underlying fundamentals of the Company’s business since the Company
evaluates the performance of and manages its business to produce an
underwriting profit. In addition to presenting net income available to
Arch common shareholders, the Company believes that this presentation
enables investors and other users of the Company’s financial information
to analyze the Company’s performance in a manner similar to how the
Company’s management analyzes performance. The Company also believes
that this measure follows industry practice and, therefore, allows the
users of the Company’s financial information to compare the Company’s
performance with its industry peer group. The Company believes that the
equity analysts and certain rating agencies which follow the Company and
the insurance industry as a whole generally exclude these items from
their analyses for the same reasons.
The Company’s segment information includes the presentation of
consolidated underwriting income or loss and a subtotal of underwriting
income or loss before the contribution from the ‘other’ segment. Such
measures represent the pre-tax profitability of its underwriting
operations and include net premiums earned plus other underwriting
income, less losses and loss adjustment expenses, acquisition expenses
and other operating expenses. Other operating expenses include those
operating expenses that are incremental and/or directly attributable to
the Company’s individual underwriting operations. Underwriting income or
loss does not incorporate items included in the Company’s corporate
(non-underwriting) segment. While these measures are presented in the
Segment Information footnote to the Company’s Consolidated Financial
Statements, they are considered non-GAAP financial measures when
presented elsewhere on a consolidated basis. The reconciliations of
underwriting income or loss to income before income taxes (the most
directly comparable GAAP financial measure) on a consolidated basis and
a subtotal before the contribution from the ‘other’ segment, in
accordance with Regulation G, is shown on the following pages.
Management measures segment performance for its three underwriting
segments based on underwriting income or loss. The Company does not
manage its assets by underwriting segment and, accordingly, investment
income and other non-underwriting related items are not allocated to
each underwriting segment. As noted earlier, the ‘other’ segment
includes the results of Watford Re. Watford Re has its own management
and board of directors that is responsible for the overall profitability
of the ‘other’ segment. For the ‘other’ segment, performance is measured
based on net income or loss. The Company does not guarantee or provide
credit support for Watford Re, and the Company’s financial exposure to
Watford Re is limited to its investment in Watford Re’s common and
preferred shares and counterparty credit risk (mitigated by collateral)
arising from reinsurance transactions.
Along with consolidated underwriting income, the Company provides a
subtotal of underwriting income or loss before the contribution from the
‘other’ segment and believes that this presentation enables investors
and other users of the Company’s financial information to analyze the
Company’s underwriting performance in a manner similar to how the
Company’s management analyzes performance.
In addition, the Company’s segment information includes the use of a
combined ratio excluding catastrophic activity (if applicable for the
segment) and prior year development. These ratios are non-GAAP financial
measures as defined in Regulation G. The reconciliation of such measures
to the combined ratio (the most directly comparable GAAP financial
measure) in accordance with Regulation G are shown on the individual
segment pages. The Company’s management utilizes the adjusted combined
ratio excluding current accident year catastrophic events and favorable
or adverse development in prior year loss reserves in its analysis of
the underwriting performance of each of its underwriting segments.
The following tables summarize the Company’s results by segment for the
2018 fourth quarter and 2017 fourth quarter and a reconciliation of
underwriting income or loss to income or loss before income taxes and
net income or loss available to Arch common shareholders:
| (U.S. Dollars in thousands) | Three Months Ended | |||||||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||
| Insurance | Reinsurance | Mortgage | Sub-total | Other | Total | |||||||||||||||||||
| Gross premiums written (1) | $ | 832,762 | $ | 409,316 | $ | 357,981 | $ | 1,599,085 | $ | 160,937 | $ | 1,694,918 | ||||||||||||
| Premiums ceded | (297,794 | ) | (84,268 | ) | (48,603 | ) | (429,691 | ) | (28,577 | ) | (393,164 | ) | ||||||||||||
| Net premiums written | 534,968 | 325,048 | 309,378 | 1,169,394 | 132,360 | 1,301,754 | ||||||||||||||||||
| Change in unearned premiums | 24,449 | 23,405 | 5,214 | 53,068 | 14,613 | 67,681 | ||||||||||||||||||
| Net premiums earned | 559,417 | 348,453 | 314,592 | 1,222,462 | 146,973 | 1,369,435 | ||||||||||||||||||
| Other underwriting income (loss) | — | (3,172 | ) | 2,569 | (603 | ) | 630 | 27 | ||||||||||||||||
| Losses and loss adjustment expenses | (400,050 | ) | (291,838 | ) | (6,617 | ) | (698,505 | ) | (129,168 | ) | (827,673 | ) | ||||||||||||
| Acquisition expenses | (85,608 | ) | (62,452 | ) | (30,930 | ) | (178,990 | ) | (30,329 | ) | (209,319 | ) | ||||||||||||
| Other operating expenses | (89,403 | ) | (32,165 | ) | (33,810 | ) | (155,378 | ) | (10,137 | ) | (165,515 | ) | ||||||||||||
| Underwriting income (loss) | $ | (15,644 | ) | $ | (41,174 | ) | $ | 245,804 | 188,986 | (22,031 | ) | 166,955 | ||||||||||||
| Net investment income | 115,626 | 41,591 | 157,217 | |||||||||||||||||||||
| Net realized gains (losses) | (66,015 | ) | (100,015 | ) | (166,030 | ) | ||||||||||||||||||
| Net impairment losses recognized in earnings | (1,705 | ) | — | (1,705 | ) | |||||||||||||||||||
|
Equity in net income (loss) of investment funds accounted for using the equity method |
(6,882 | ) | — | (6,882 | ) | |||||||||||||||||||
| Other income | (42 | ) | — | (42 | ) | |||||||||||||||||||
| Corporate expenses | (15,278 | ) | — | (15,278 | ) | |||||||||||||||||||
| Transaction costs and other | (2,557 | ) | (9,000 | ) | (11,557 | ) | ||||||||||||||||||
| Amortization of intangible assets | (26,147 | ) | — | (26,147 | ) | |||||||||||||||||||
| Interest expense | (24,388 | ) | (5,386 | ) | (29,774 | ) | ||||||||||||||||||
| Net foreign exchange gains (losses) | 20,409 | 4,170 | 24,579 | |||||||||||||||||||||
| Income before income taxes | 182,007 | (90,671 | ) | 91,336 | ||||||||||||||||||||
| Income tax expense | (35,012 | ) | — | (35,012 | ) | |||||||||||||||||||
| Net income (loss) | 146,995 | (90,671 | ) | 56,324 | ||||||||||||||||||||
| Dividends attributable to redeemable noncontrolling interests | — | (4,588 | ) | (4,588 | ) | |||||||||||||||||||
| Amounts attributable to nonredeemable noncontrolling interests | — | 84,758 | 84,758 | |||||||||||||||||||||
| Net income (loss) available to Arch | 146,995 | (10,501 | ) | 136,494 | ||||||||||||||||||||
| Preferred dividends | (10,403 | ) | — | (10,403 | ) | |||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 136,592 | $ | (10,501 | ) | $ | 126,091 | |||||||||||||||||
| Underwriting Ratios | ||||||||||||||||||||||||
| Loss ratio | 71.5 | % | 83.8 | % | 2.1 | % | 57.1 | % | 87.9 | % | 60.4 | % | ||||||||||||
| Acquisition expense ratio | 15.3 | % | 17.9 | % | 9.8 | % | 14.6 | % | 20.6 | % | 15.3 | % | ||||||||||||
| Other operating expense ratio | 16.0 | % | 9.2 | % | 10.7 | % | 12.7 | % | 6.9 | % | 12.1 | % | ||||||||||||
| Combined ratio | 102.8 | % | 110.9 | % | 22.6 | % | 84.4 | % | 115.4 | % | 87.8 | % | ||||||||||||
| Net premiums written to gross premiums written | 64.2 | % | 79.4 | % | 86.4 | % | 73.1 | % | 82.2 | % | 76.8 | % | ||||||||||||
| (1) |
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. |
|
| (U.S. Dollars in thousands) | Three Months Ended | |||||||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||
| Insurance | Reinsurance | Mortgage | Sub-total | Other | Total | |||||||||||||||||||
| Gross premiums written (1) | $ | 767,456 | $ | 289,348 | $ | 335,338 | $ | 1,391,247 | $ | 127,173 | $ | 1,452,530 | ||||||||||||
| Premiums ceded | (254,589 | ) | (79,182 | ) | (62,657 | ) | (395,533 | ) | (11,872 | ) | (341,515 | ) | ||||||||||||
| Net premiums written | 512,867 | 210,166 | 272,681 | 995,714 | 115,301 | 1,111,015 | ||||||||||||||||||
| Change in unearned premiums | 41,766 | 49,329 | 7,600 | 98,695 | 15,045 | 113,740 | ||||||||||||||||||
| Net premiums earned | 554,633 | 259,495 | 280,281 | 1,094,409 | 130,346 | 1,224,755 | ||||||||||||||||||
| Other underwriting income | — | 10,193 | 3,738 | 13,931 | 803 | 14,734 | ||||||||||||||||||
| Losses and loss adjustment expenses | (370,069 | ) | (142,254 | ) | (49,762 | ) | (562,085 | ) | (116,790 | ) | (678,875 | ) | ||||||||||||
| Acquisition expenses | (87,261 | ) | (66,612 | ) | (24,363 | ) | (178,236 | ) | (30,643 | ) | (208,879 | ) | ||||||||||||
| Other operating expenses | (88,256 | ) | (36,205 | ) | (37,546 | ) | (162,007 | ) | (7,617 | ) | (169,624 | ) | ||||||||||||
| Underwriting income (loss) | $ | 9,047 | $ | 24,617 | $ | 172,348 | 206,012 | (23,901 | ) | 182,111 | ||||||||||||||
| Net investment income | 99,613 | 25,802 | 125,415 | |||||||||||||||||||||
| Net realized gains (losses) | 38,136 | (11,158 | ) | 26,978 | ||||||||||||||||||||
| Net impairment losses recognized in earnings | (1,723 | ) | — | (1,723 | ) | |||||||||||||||||||
|
Equity in net income (loss) of investment funds accounted for using the equity method |
30,402 | — | 30,402 | |||||||||||||||||||||
| Other income | 547 | — | 547 | |||||||||||||||||||||
| Corporate expenses | (13,085 | ) | — | (13,085 | ) | |||||||||||||||||||
| Transaction costs and other | (901 | ) | — | (901 | ) | |||||||||||||||||||
| Amortization of intangible assets | (31,836 | ) | — | (31,836 | ) | |||||||||||||||||||
| Interest expense | (25,660 | ) | (4,836 | ) | (30,496 | ) | ||||||||||||||||||
| Net foreign exchange gains (losses) | (27,894 | ) | (913 | ) | (28,807 | ) | ||||||||||||||||||
| Income (loss) before income taxes | 273,611 | (15,006 | ) | 258,605 | ||||||||||||||||||||
| Income tax (expense) benefit | (56,813 | ) | — | (56,813 | ) | |||||||||||||||||||
| Net income (loss) | 216,798 | (15,006 | ) | 201,792 | ||||||||||||||||||||
| Dividends attributable to redeemable noncontrolling interests | — | (4,588 | ) | (4,588 | ) | |||||||||||||||||||
| Amounts attributable to nonredeemable noncontrolling interests | — | 17,436 | 17,436 | |||||||||||||||||||||
| Net income (loss) available to Arch | 216,798 | (2,158 | ) | 214,640 | ||||||||||||||||||||
| Preferred dividends | (11,105 | ) | — | (11,105 | ) | |||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 205,693 | $ | (2,158 | ) | $ | 203,535 | |||||||||||||||||
| Underwriting Ratios | ||||||||||||||||||||||||
| Loss ratio | 66.7 | % | 54.8 | % | 17.8 | % | 51.4 | % | 89.6 | % | 55.4 | % | ||||||||||||
| Acquisition expense ratio | 15.7 | % | 25.7 | % | 8.7 | % | 16.3 | % | 23.5 | % | 17.1 | % | ||||||||||||
| Other operating expense ratio | 15.9 | % | 14.0 | % | 13.4 | % | 14.8 | % | 5.8 | % | 13.8 | % | ||||||||||||
| Combined ratio | 98.3 | % | 94.5 | % | 39.9 | % | 82.5 | % | 118.9 | % | 86.3 | % | ||||||||||||
| Net premiums written to gross premiums written | 66.8 | % | 72.6 | % | 81.3 | % | 71.6 | % | 90.7 | % | 76.5 | % | ||||||||||||
| (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. |
|
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 integration of any businesses the Company has acquired or may
acquire into its existing operations; -
the Company’s ability to maintain or improve its ratings, which may be
affected by its ability to raise additional equity or debt financings,
by ratings agencies’ existing or new policies and practices, as well
as other factors described herein; -
general economic and market conditions (including inflation, interest
rates, foreign currency exchange rates, prevailing credit terms and
the depth and duration of a recession) and conditions specific to the
reinsurance and insurance markets (including the length and magnitude
of the current “soft” market) in which the Company operates; -
competition, including increased competition, on the basis of pricing,
capacity (including alternative sources of capital), coverage terms or
other factors; -
developments in the world’s financial and capital markets and the
Company’s access to such markets; -
the Company’s ability to successfully enhance, integrate and maintain
operating procedures (including information technology) to effectively
support its current and new business; - the loss of key personnel;
-
accuracy of those estimates and judgments utilized in the preparation
of the Company’s financial statements, including those related to
revenue recognition, insurance and other reserves, reinsurance
recoverables, investment valuations, intangible assets, bad debts,
income taxes, contingencies and litigation, and any determination to
use the deposit method of accounting, which for a relatively new
insurance and reinsurance company, like the Company, are even more
difficult to make than those made in a mature company since relatively
limited historical information has been reported to the Company
through December 31, 2018; -
greater than expected loss ratios on business written by the Company
and adverse development on claim and/or claim expense liabilities
related to business written by its insurance and reinsurance
subsidiaries; - severity and/or frequency of losses;
-
claims resulting from natural or man-made catastrophic events in the
Company’s insurance, reinsurance and mortgage businesses could cause
large losses and substantial volatility in our results of operations; -
acts of terrorism, political unrest and other hostilities or other
unforecasted and unpredictable events; -
availability to the Company of reinsurance to manage its gross and net
exposures and the cost of such reinsurance; -
the failure of reinsurers, managing general agents, third party
administrators or others to meet their obligations to the Company; -
the timing of loss payments being faster or the receipt of reinsurance
recoverables being slower than anticipated by the Company; -
the Company’s investment performance, including legislative or
regulatory developments that may adversely affect the fair value of
the Company’s investments; -
changes in general economic conditions, including new or continued
sovereign debt concerns in Eurozone countries or downgrades of U.S.
securities by credit rating agencies, which could affect the Company’s
business, financial condition and results of operations; -
the volatility of the Company’s shareholders’ equity from foreign
currency fluctuations, which could increase due to us not matching
portions of the Company’s projected liabilities in foreign currencies
with investments in the same currencies; -
changes in accounting principles or policies or in the Company’s
application of such accounting principles or policies; -
changes in the political environment of certain countries in which the
Company operates, underwrites business or invests; -
a disruption caused by cyber-attacks or other technology breaches or
failures on the Company or the Company’s business partners and service
providers, which could negatively impact the Company’s business and/or
expose the Company to litigation; -
statutory or regulatory developments, including as to tax policy
matters and insurance and other regulatory matters such as the
adoption of proposed legislation that would affect
Bermuda-headquartered companies and/or Bermuda-based insurers or
reinsurers and/or changes in regulations or tax laws applicable to the
Company, its subsidiaries, brokers or customers, including the Tax
Cuts and Jobs Act of 2017; and -
the other matters set forth under Item 1A “Risk Factors”, Item 7
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and other sections of the Company’s Annual
Report on Form 10-K, as well as the other factors set forth in the
Company’s other documents on file with the SEC, and management’s
response to any of the aforementioned factors.
All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified
in their entirety by these cautionary statements. The foregoing review
of important factors should not be construed as exhaustive and should be
read in conjunction with other cautionary statements that are included
herein or elsewhere. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.