Arch Capital Group Ltd. Reports 2019 First Quarter Results

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    PEMBROKE, Bermuda–(BUSINESS WIRE)–Arch Capital Group Ltd. (NASDAQ: ACGL) announces its 2019 first quarter
    results. The results included:

    • Net income available to Arch common shareholders of $438.1 million, or
      $1.07 per share, a 19.5% annualized return on average common equity,
      compared to $137.3 million, or $0.33 per share, for the 2018 first
      quarter;
    • After-tax operating income available to Arch common shareholders, a
      non-GAAP measure, of $275.9 million, or $0.67 per share, a 12.3%
      annualized return on average common equity, compared to $235.1
      million, or $0.56 per share, for the 2018 first quarter;
    • Book value per common share of $23.12 at March 31, 2019, a 7.4%
      increase in the 2019 first quarter and a 13.3% increase for the
      trailing twelve months;
    • Pre-tax current accident year catastrophic losses, net of reinsurance
      and reinstatement premiums(1) of $7.9 million;
    • Favorable development in prior year loss reserves, net of related
      adjustments(1) of $36.7 million;
    • Combined ratio excluding catastrophic activity and prior year
      development(1) of 81.4%.

    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 March 31, Three Months Ended March 31,
    2019   2018   % Change 2019   2018   % Change
    Gross premiums written $ 2,077,879 $ 1,838,214 13.0 $ 1,980,453 $ 1,721,605 15.0
    Net premiums written 1,525,259 1,412,544 8.0 1,379,872 1,232,992 11.9
    Net premiums earned 1,368,866 1,234,899 10.8 1,222,772 1,098,151 11.3
    Underwriting income 260,148 236,997 9.8 265,526 237,557 11.8
    Underwriting Ratios % Point Change % Point Change
    Loss ratio 52.5 % 51.6 % 0.9 49.7 % 49.1 % 0.6
    Underwriting expense ratio 29.2 % 29.7 % (0.5 ) 29.3 % 29.7 % (0.4 )
    Combined ratio 81.7 % 81.3 % 0.4   79.0 % 78.8 % 0.2  
    Combined ratio excluding catastrophic activity and prior year
    development
    81.4 % 83.2 % (1.8 )
    (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 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
    March 31,
    2019   2018
    Net income available to Arch common shareholders $ 438,125 $ 137,276
    Net realized (gains) losses (115,644 ) 111,764
    Net impairment losses recognized in earnings 1,309 162
    Equity in net (income) loss of investment funds accounted for using
    the equity method
    (46,867 ) (28,069 )
    Net foreign exchange (gains) losses (4,994 ) 15,556
    Transaction costs and other 1,190 830
    Loss on redemption of preferred shares 2,710
    Income tax expense (benefit) (1) 2,778   (5,086 )
    After-tax operating income available to Arch common shareholders $ 275,897   $ 235,143  
     

    Diluted per common share results:

    Net income available to Arch common shareholders $ 1.07 $ 0.33
    Net realized (gains) losses (0.29 ) 0.26
    Net impairment losses recognized in earnings 0.00 0.00
    Equity in net (income) loss of investment funds accounted for using
    the equity method
    (0.11 ) (0.07 )
    Net foreign exchange (gains) losses (0.01 ) 0.04
    Transaction costs and other 0.00 0.00
    Loss on redemption of preferred shares 0.01
    Income tax expense (benefit) (1) 0.01   (0.01 )
    After-tax operating income available to Arch common shareholders $ 0.67   $ 0.56  
     
    Weighted average common shares and common share equivalents
    outstanding — diluted
    408,971,029 417,893,802
     
    Beginning common shareholders’ equity $ 8,659,827 $ 8,324,047
    Ending common shareholders’ equity 9,334,596   8,370,372  
    Average common shareholders’ equity $ 8,997,212   $ 8,347,210  
     
    Annualized return on average common equity 19.5 % 6.6 %
    Annualized operating return on average common equity 12.3 % 11.3 %
    (1)   Income tax expense on net realized gains or losses, net impairment
    losses recognized in earnings, equity in net income (loss) of
    investment funds accounted for using the equity method, net foreign
    exchange gains or losses, 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 2019 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, 2019. 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 March 31,
    (U.S. dollars in thousands) 2019   2018   % Change
     
    Gross premiums written $ 941,954 $ 823,378 14.4
    Net premiums written 621,332 576,198 7.8
    Net premiums earned 553,505 538,737 2.7
     
    Underwriting income $ 562 $ 7,864 (92.9 )
     
    Underwriting Ratios % Point Change
    Loss ratio 64.4 % 65.7 % (1.3 )
    Underwriting expense ratio 35.5 % 32.9 % 2.6  
    Combined ratio 99.9 % 98.6 % 1.3  
     
    Catastrophic activity and prior year development:
    Current accident year catastrophic events, net of reinsurance and
    reinstatement premiums
    0.0 % 0.2 % (0.2 )
    Net (favorable) adverse development in prior year loss reserves, net
    of related adjustments
    (0.3 )% (0.3 )% 0.0  
    Combined ratio excluding catastrophic activity and prior year
    development (1)
    100.2 % 98.7 % 1.5  
    (1)   See ‘Comments on Regulation G’ for further discussion.
     

    Gross premiums written by the insurance segment in the 2019 first
    quarter were 14.4% higher than in the 2018 first quarter while net
    premiums written were 7.8% higher than in the 2018 first quarter. The
    increase in net premiums written primarily reflects the acquisition of a
    U.K. commercial lines book of business on January 1, 2019, along with
    the growth in most lines of business. The percentage increase in gross
    premiums written is higher than the increase in net premiums written due
    to a single large national account, for which the premium written in the
    quarter was substantially ceded. Net premiums earned by the insurance
    segment in the 2019 first quarter were 2.7% higher than in the 2018
    first quarter, and reflect changes in net premiums written over the
    previous five quarters.

    The 2019 first quarter loss ratio reflected minimal current year
    catastrophic activity, compared to 0.2 points in the 2018 first quarter.
    Estimated net favorable development of prior year loss reserves, before
    related adjustments, reduced the loss ratio by 0.8 points in the 2019
    first quarter, compared to 0.4 points in the 2018 first quarter. The
    balance of the change in the 2019 first quarter loss ratio primarily
    resulted from changes in mix of business.

    The underwriting expense ratio was 35.5% in the 2019 first quarter,
    compared to 32.9% in the 2018 first quarter. The increase in the
    underwriting expense ratio reflected a previously announced change in
    the timing of our incentive compensation practices, with a large portion
    of the expense associated with the share based compensation grants
    reflected in the 2019 first quarter. In prior periods, share based
    compensation grants occurred in the second quarter. On the U.K.
    acquisition noted above, only a small portion of net premiums written
    were earned in the 2019 first quarter while the Company incurred a full
    quarter of expenses. This resulted in a higher expense ratio in the
    period, which is expected to moderate as the business matures. The
    Company did not acquire any loss reserves or unearned premiums as part
    of the transaction.

    Reinsurance Segment

        Three Months Ended March 31,
    (U.S. dollars in thousands) 2019   2018   % Change
     
    Gross premiums written $ 682,855 $ 577,483 18.2
    Net premiums written 451,288 381,753 18.2
    Net premiums earned 346,365 279,172 24.1
    Other underwriting income (loss) 4,377 1,232 255.3
     
    Underwriting income $ 20,902 $ 54,839 (61.9 )
     
    Underwriting Ratios % Point Change
    Loss ratio 69.2 % 50.7 % 18.5
    Underwriting expense ratio 26.0 % 30.0 % (4.0 )
    Combined ratio 95.2 % 80.7 % 14.5  
     
    Catastrophic activity and prior year development:
    Current accident year catastrophic events, net of reinsurance and
    reinstatement premiums
    2.3 % 0.3 % 2.0
    Net (favorable) adverse development in prior year loss reserves, net
    of related adjustments
    0.5 % (13.0 )% 13.5  
    Combined ratio excluding catastrophic activity and prior year
    development (1)
    92.4 % 93.4 % (1.0 )
    (1)   See ‘Comments on Regulation G’ for further discussion.
     

    Gross and net premiums written by the reinsurance segment in the 2019
    first quarter were 18.2% higher than in the 2018 first quarter. The
    increase in net premiums written in the 2019 first quarter primarily
    reflected growth from selected new business opportunities in casualty
    and property excluding property catastrophe. Net premiums earned by the
    reinsurance segment in the 2019 first quarter were 24.1% higher than in
    the 2018 first quarter, and reflect changes in net premiums written over
    the previous five quarters.

    The 2019 first quarter loss ratio included 2.3 points of current year
    catastrophic activity, compared to 0.4 points of catastrophic activity
    in the 2018 first quarter. Estimated net adverse development of prior
    year loss reserves, before related adjustments, increased the loss ratio
    by 0.5 points in the 2019 first quarter, compared to 13.1 points of
    favorable development in the 2018 first quarter. The estimated net
    adverse development in the 2019 first quarter included an increase in
    reserves on Typhoon Jebi of $16.0 million, or 4.6 points, based on
    receipt of updated information from cedents and additional updated
    industry data.

    The underwriting expense ratio was 26.0% in the 2019 first quarter,
    compared to 30.0% in the 2018 first quarter, primarily as a result of
    growth in net premiums earned and changes in mix of business.

    Mortgage Segment

        Three Months Ended March 31,
    (U.S. dollars in thousands) 2019   2018   % Change
     
    Gross premiums written $ 356,050 $ 321,178 10.9
    Net premiums written 307,252 275,041 11.7
    Net premiums earned 322,902 280,242 15.2
    Other underwriting income 3,856 3,416 12.9
     
    Underwriting income $ 244,062 $ 174,854 39.6
     
    Underwriting Ratios % Point Change
    Loss ratio 3.5 % 15.5 % (12.0 )
    Underwriting expense ratio 22.1 % 23.3 % (1.2 )
    Combined ratio 25.6 % 38.8 % (13.2 )
     
    Prior year development:
    Net (favorable) adverse development in prior year loss reserves, net
    of related adjustments
    (11.3 )% (4.6 )% (6.7 )
    Combined ratio excluding prior year development (1) 36.9 % 43.4 % (6.5 )
    (1)   See ‘Comments on Regulation G’ for further discussion.
     

    Gross premiums written by the mortgage segment in the 2019 first quarter
    were 10.9% higher than in the 2018 first quarter, while net premiums
    written were 11.7% higher. The growth in net premiums written primarily
    reflected an increase in monthly premiums business due to growth in U.S.
    insurance in force, partially offset by a lower level of U.S. single
    premium business, a decrease in Australian mortgage reinsurance business
    and higher ceded premiums related to Bellemeade transactions. The
    increase in net premiums earned for the 2019 first quarter primarily
    reflected the growth in insurance in force over the last twelve months,
    with $390.4 billion of insurance in force at March 31, 2019, compared to
    $349.9 billion at March 31, 2018.

    Arch MI U.S. generated $11.2 billion of new insurance written (“NIW”) in
    the 2019 first quarter, consistent with the $11.4 billion in the 2018
    first quarter. Monthly premium policies contributed 91.6% of NIW in the
    2019 first quarter, compared to 91.4% in the 2018 first quarter.

    The loss ratio for the 2019 first quarter reflected estimated net
    favorable development in prior year loss reserves, before related
    adjustments, of 11.3 points in the 2019 first quarter, compared to 4.6
    points in the 2018 first quarter. The estimated net favorable
    development in the 2019 first 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 1.54% at March 31, 2019, a decrease from 1.60% at
    December 31, 2018 and from 1.98% at March 31, 2018.

    The mortgage segment’s underwriting expense ratio was 22.1% in the 2019
    first quarter, compared to 23.3% in the 2018 first quarter. The lower
    ratio in the 2019 first quarter primarily resulted from the higher level
    of net premiums earned.

    At March 31, 2019, the mortgage segment’s risk-in-force (before
    reinsurance) of $77.1 billion consisted of $71.1 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 2019 first quarter was $0.30 per
    share, or $121.2 million, compared to $0.24 per share, or $100.2
    million, for the 2018 first quarter. The growth in 2019 first quarter
    net investment income reflected the reinvestment of fixed income
    securities at higher available yields and the shift from municipal bonds
    to corporates. The annualized pre-tax investment income yield was 2.67%
    for the 2019 first quarter, compared to 2.13% for the 2018 first
    quarter. Total return, a non-GAAP measure, was 2.70% for the 2019 first
    quarter, primarily reflecting the decline in interest rates during the
    period and attendant appreciation in the Company’s fixed income
    portfolio. See ‘Comments on Regulation G’ for a discussion of non-GAAP
    financial measures.

    Interest expense for the 2019 first quarter was $23.5 million, compared
    to $25.9 million for the 2018 first quarter, reflecting the paydown of
    revolving credit agreement borrowings in the second half of 2018.

    On a pre-tax basis, net foreign exchange gains for the 2019 first
    quarter were $5.2 million, compared to net foreign exchange losses for
    the 2018 first quarter of $15.0 million. For both periods, such amounts
    were primarily unrealized and resulted from the effects of revaluing the
    Company’s net insurance liabilities required to be settled in foreign
    currencies at each balance sheet date. Changes in the value of
    available-for-sale investments held in foreign currencies due to foreign
    currency rate movements are reflected as a direct increase or decrease
    to shareholders’ equity and are not included in the consolidated
    statements of income. Although the Company generally attempts to match
    the currency of its projected liabilities with investments in the same
    currencies, the Company may elect to over or underweight one or more
    currencies from time to time, which could increase the Company’s
    exposure to foreign currency fluctuations and increase the volatility of
    the Company’s shareholders’ equity.

    The Company’s effective tax rate on income before income taxes (based on
    the Company’s annual effective tax rate) was 9.3% for the 2019 first
    quarter, compared to 12.7% for the 2018 first quarter. The Company’s
    effective tax rate on pre-tax operating income available to Arch common
    shareholders was 13.1% for the 2019 first quarter, compared to 9.9% for
    the 2018 first quarter. The effective tax rates for the 2019 first
    quarter included a discrete income tax benefit of $1.8 million related
    to share-based compensation. This benefit had the effect of reducing the
    effective tax rate on operating income available to Arch common
    shareholders by 0.5%. The Company’s effective tax rate may fluctuate
    from period to period based upon the relative mix of income or loss
    reported by jurisdiction, the level of catastrophic loss activity
    incurred, and the varying tax rates in each jurisdiction.

    Conference Call

    The Company will hold a conference call for investors and analysts at
    11:00 a.m. Eastern Time on May 1, 2019. 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 May 1, 2019 at 2:00 p.m. Eastern Time until May 8, 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 7196298 for all callers).

    Please refer to the Company’s Financial Supplement dated March 31, 2019,
    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
    $11.85 billion in capital at March 31, 2019, 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.

    Contacts

    Arch Capital Group Ltd.
    François Morin: (441) 278-9250

    Investor Relations
    Donald Watson: (914) 872-3616; [email protected]

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