Business context and reporting period
Arch Capital Group Ltd. is a Bermuda-based global provider of insurance, reinsurance and mortgage insurance. This Form 10-Q covers the three months ended March 31, 2022; financial statements are unaudited and were reviewed by PricewaterhouseCoopers LLP. Amounts below are U.S. dollars unless stated otherwise.
Financial and operating performance
- Revenue and earnings: Net premiums earned rose 8.8% to $2.12 billion. Total revenue declined to $1.94 billion from $2.27 billion, largely reflecting a $292.4 million net realized investment loss versus a $142.5 million gain a year earlier. Net income available to common shareholders was $185.6 million, or $0.48 diluted per share, versus $427.8 million, or $1.05.
- Operating measure: After-tax operating income available to common shareholders, a non-GAAP measure, increased to $422.0 million from $239.8 million; operating ROAE was 13.6% versus 7.8%.
- Underwriting: Underwriting income was $457.6 million versus $185.9 million. The reported combined ratio was 78.7%, compared with 90.7%; the comparison is affected by Somers being consolidated in the prior-year period but not in 2022. Insurance and reinsurance combined ratios were 93.8% and 86.6%, respectively. Mortgage’s ratio was 3.1%, benefiting from favorable reserve development.
- Cash flow and liquidity: Operating cash flow was $551.6 million, versus $762.8 million. Cash and restricted cash ended at $1.32 billion. Management said expected liquidity needs for the next 12 months should be met through operating cash generation, investment income, cash and liquid investments, investment maturities or sales, and credit facilities. Arch Capital received $0.3 billion of dividends from Arch Re Bermuda during the quarter.
- Capital and debt: Total assets were $45.68 billion and total shareholders’ equity available to Arch was $12.92 billion at March 31. Senior notes were $2.72 billion; debt to total capital was 17.4%. Book value per share was $32.18, down 4.1% from year-end 2021. Arch repurchased 5.6 million shares for $255.0 million; $927.2 million remained authorized at quarter-end.
- Investments: Net investment income was $80.4 million versus $98.9 million. Pre-tax total investment return was negative 3.07%; rising interest rates and weak equity markets drove investment losses. Available-for-sale fixed maturities had $726.0 million of gross unrealized losses at quarter-end, compared with $171.0 million at December 31, 2021.
Material changes versus the prior comparable period
- Insurance net premiums written grew 21.3% and reinsurance net premiums written grew 14.0%, reflecting rate increases, new business and growth in existing accounts. Their underwriting results improved; reinsurance moved from a loss to underwriting income.
- Mortgage underwriting income increased to $285.3 million from $200.3 million, principally reflecting $102.1 million of favorable prior-year reserve development, compared with $10.9 million in Q1 2021. Mortgage net premiums written fell 14.0%, partly due to higher ceded premiums.
- Favorable prior-year reserve development totaled $141.8 million, versus $41.7 million. The mortgage segment contributed $102.1 million; insurance and reinsurance contributed $7.3 million and $32.5 million, respectively.
- Comparability is also affected by the July 2021 change in Somers ownership: Arch stopped consolidating Somers and now accounts for its investment through Greysbridge using the equity method. Q1 2021 included Somers results and noncontrolling interests.
- Accumulated other comprehensive loss widened to $649.4 million from $64.6 million at year-end, mainly reflecting declines in available-for-sale investment values. Common shareholders’ equity decreased to $12.09 billion from $12.72 billion.
Outlook, commentary and risks
Management said its 2022 objective remains long-term shareholder value creation, citing improving underwriting fundamentals and continued growth where pricing supports returns above required thresholds. It described property-casualty markets as favorable and said mortgage insurance in force stabilized and grew modestly. Management highlighted disciplined catastrophe exposure, pricing and reserving, and said inflation and supply-chain conditions are being monitored. No specific earnings or revenue guidance was provided.
The quarter reflected the war in Ukraine, natural catastrophes, inflation and supply-chain pressures. Management noted the war and other catastrophes contributed to current-year catastrophe losses. Key risks include reserve-estimate uncertainty, catastrophe and severe economic losses, inflation and interest-rate movements, investment-market volatility, reinsurance recoverability, and the ongoing effects of COVID-19. Modeled peak catastrophe losses and mortgage stress estimates are not maximum exposures and may differ materially from actual losses. Management reported no litigation or arbitration expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Review the drivers and sustainability of $422.0 million in non-GAAP operating income, including the impact of investment losses and reserve development.
- Assess the mortgage segment’s dependence on favorable cures and reserve development, and monitor delinquency trends and housing-market conditions.
- Compare underwriting trends on a consistent basis, accounting for Somers’s deconsolidation and the resulting segment-reporting differences.
- Monitor interest-rate and credit-spread effects on the investment portfolio, unrealized losses, book value and future investment income.
- Evaluate liquidity, reinsurance recoverables and commitments: investment commitments were approximately $3.1 billion; $5.94 billion of reinsurance recoverables were reported, with 30.4% due from carriers without an A.M. Best rating.
- Check catastrophe exposures, reinsurance protection and mortgage capital adequacy; Arch MI U.S. reported a 205% estimated PMIER sufficiency ratio.