Business context and reporting period
Arch Capital Group Ltd. is a Bermuda-based global insurance, reinsurance and mortgage insurance company. This unaudited Form 10-Q covers the three months ended March 31, 2024; comparisons are with the first quarter of 2023 unless otherwise noted. Amounts are U.S. dollars.
Financial performance and condition
- Revenue and earnings: Total revenue was $3.941 billion, up 24%. Net income was $1.120 billion, versus $717 million; net income available to common shareholders was $1.110 billion, or $2.99 per basic share and $2.92 diluted, versus $705 million, or $1.92 basic and $1.87 diluted.
- Underwriting: Net premiums earned rose 19% to $3.422 billion. Total underwriting income was $736 million, up from $570 million, and the combined ratio improved to 78.8% from 80.6%. Insurance underwriting income fell to $86 million from $114 million, with its combined ratio worsening to 94.1% from 90.9%. Reinsurance underwriting income increased to $379 million from $213 million, with its combined ratio improving to 77.4% from 84.3%. Mortgage underwriting income rose to $271 million from $243 million; its combined ratio was 14.5% versus 20.0%.
- Investment results: Net investment income increased to $327 million from $199 million. Net realized gains were $67 million, versus $17 million, and equity-method investment fund income was $99 million, versus $48 million. Pre-tax total investment return was 0.80%, below the 0.83% benchmark and down from 2.54% a year earlier.
- Cash flow: Operating cash flow was $1.564 billion, versus $963 million. Investing activities used $1.409 billion, and financing activities used $42 million. Cash and restricted cash ended the quarter at $1.600 billion, up $102 million from year-end.
- Balance sheet and capital: Total assets were $62.768 billion and total liabilities were $43.411 billion. Shareholders’ equity available to Arch was $19.355 billion; common equity was $18.525 billion. Book value per share increased 5.2% from year-end to $49.36. Total capital available to Arch was $22.082 billion, including $2.727 billion of senior notes; debt-to-total-capital was 12.3%.
- Liquidity and reserves: Management expects liquidity needs to be met by underwriting cash generation, investment income, cash and liquid investments, asset maturities or sales, and credit facilities. Arch Re Bermuda paid $68 million in dividends to the holding company during the quarter. Loss and loss adjustment expense reserves were $23.705 billion, up from $22.752 billion at year-end.
- Returns: Annualized net income return on average common equity was 24.6%, versus 22.3%. Operating ROAE, a non-GAAP measure, was 20.7% in both periods.
Material changes versus the prior comparable period
- Gross premiums written across the property and casualty underwriting businesses grew 26%, according to management. Reinsurance gross premiums written increased 41%; insurance grew 7%. Mortgage gross premiums written were slightly lower, while net premiums written increased 6%.
- Higher investment yields and a larger invested asset base contributed to the increase in net investment income; the annualized pre-tax investment income yield rose to 4.14% from 3.03%.
- Net favorable prior-year reserve development was $124 million, compared with $136 million. Mortgage contributed $74 million, reinsurance $40 million and insurance $10 million.
- Other comprehensive income was negative $145 million, mainly reflecting unrealized declines in available-for-sale investments and foreign currency translation. The portfolio had $828 million of gross unrealized losses on available-for-sale securities at quarter-end.
Outlook, management commentary, risks and unusual items
- Management described market conditions as strong and said rate changes were exceeding loss trends. It emphasized disciplined underwriting, cycle management and allocating capital to opportunities with attractive risk-adjusted returns. No specific full-year earnings or revenue guidance was provided.
- Management said insurance growth had moderated as rate increases slowed, while specialty pricing remained healthy. It reported that mortgage new originations remained tempered by high mortgage rates, but U.S. primary mortgage insurance persistency was 83.6% and delinquency was described as low.
- The Baltimore bridge collapse contributed an estimated 2.1 points to the insurance current-year loss ratio and 3.0 points to the reinsurance current-year loss ratio. The company also reported global catastrophe activity during the quarter.
- Management’s modeled peak-zone catastrophe loss was $1.7 billion, or 9% of tangible shareholders’ equity, for a Florida Tri-County windstorm scenario. Modeled U.S. mortgage severe-economic-event loss was approximately $1.1 billion, or 6% of tangible shareholders’ equity. The filing cautions these estimates are not maximum exposures and actual losses may differ materially.
- Key risks include catastrophe severity and frequency, reserve-estimation uncertainty, inflation’s effects on claims and investment values, interest-rate and credit-spread movements, foreign exchange, reinsurer counterparty performance, competition, economic conditions, cyber events and regulatory or tax changes.
- Investment commitments were approximately $3.7 billion at March 31, 2024. Reinsurance recoverables were $7.509 billion; 66.6% were due from carriers rated A- or better, and more than 94% of amounts due from unrated carriers were collateralized.
- Subsequent events: Arch agreed to acquire specified U.S. middle market and entertainment insurance businesses from Allianz for $450 million in cash, subject to regulatory approval and expected to close in the second half of 2024. Arch completed the sale of Castel on May 1, 2024 and expects to record a gain in the second quarter; the gain amount was not stated.
- Management reported no litigation or arbitration expected to have a material adverse effect and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether underwriting performance remains strong when the quarter’s favorable prior-year reserve development is excluded, particularly in mortgage and reinsurance.
- How the Baltimore bridge loss, other catastrophe claims and inflation affect subsequent loss estimates and reserve adequacy.
- Whether investment income growth persists, and how interest rates, credit spreads and equity markets affect portfolio returns and book value.
- Liquidity and capital implications of the $3.7 billion in investment commitments, the planned $450 million Allianz acquisition and the Castel sale.
- Mortgage portfolio trends, including delinquencies, persistency, new insurance written and PMIERs sufficiency; reported PMIER sufficiency was 223% at March 31, 2024.