Arch Capital Group Ltd. — 2023 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023, with comparisons primarily to 2022. Arch is a Bermuda-based global insurer, reinsurer and mortgage insurer, organized into insurance, reinsurance and mortgage underwriting segments. Amounts below are U.S. dollars unless noted.
Financial performance and condition
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $13.634 billion | $9.613 billion |
| Net premiums earned | $12.440 billion | $9.679 billion |
| Net income available to common shareholders | $4.403 billion | $1.436 billion |
| Diluted earnings per share | $11.62 | $3.80 |
| Operating income available to common shareholders (non-GAAP) | $3.201 billion | $1.840 billion |
| Operating return on average common equity (non-GAAP) | 21.6% | 14.8% |
| Operating cash flow | $5.749 billion | $3.816 billion |
- Common book value per share rose 43.9% to $46.94 from $32.62. Total shareholders’ equity available to Arch was $18.353 billion, versus $12.910 billion.
- Underwriting income increased to $2.612 billion from $1.796 billion; the consolidated combined ratio improved to 79.3% from 81.6%.
- Insurance: underwriting income $450 million (up 101%); combined ratio 91.7% versus 95.0%. Reinsurance: $1.098 billion (up 249%); combined ratio 81.4% versus 92.2%. Mortgage: $1.064 billion (down 15%); combined ratio 9.3% versus negative 7.7%.
- Net investment income more than doubled to $1.023 billion from $496 million, principally reflecting higher market yields. Pre-tax investment income yield was 3.53%, versus 1.99%. Total investment return was 7.57%, below the 8.28% benchmark.
- Net realized investment losses narrowed to $165 million from $663 million. The portfolio’s total return benefited from fixed income, equity and alternative strategies, though it trailed its benchmark.
- At year-end, total assets were $58.906 billion, investable assets were $34.6 billion and cash plus restricted cash was $1.498 billion. Senior notes totaled $2.726 billion; debt was 12.9% of total capital. No revolving-credit borrowings were outstanding.
- Operating cash flow exceeded investing cash outflow of $5.468 billion; financing cash outflow was $69 million. Restricted assets totaled $9.932 billion. Unfunded investment commitments were $3.587 billion.
- Net loss reserves were $16.062 billion, after reinsurance recoverables; the balance-sheet reserve before recoverables was $22.752 billion. Reinsurance recoverables on paid and unpaid losses were $7.064 billion.
Material changes and unusual items
- Net premiums written increased 21.6% to $13.468 billion. Insurance and reinsurance grew 16.7% and 33.1%, respectively; mortgage premiums written declined 7.1% amid fewer originations, partly offset by more credit-risk-transfer business.
- Favorable prior-year reserve development was $538 million, compared with $769 million in 2022. Mortgage contributed $344 million; insurance $42 million; reinsurance $152 million. Mortgage reserve releases were chiefly associated with U.S. first-lien portfolios from 2020–2022.
- 2023 common-shareholder net income included a one-time $1.18 billion deferred tax benefit and corresponding net deferred tax asset following Bermuda’s enactment of a 15% corporate income tax for in-scope entities, effective for tax years beginning in 2025. Management’s non-GAAP operating income excludes the one-time benefit. This item materially boosted reported earnings and book value.
- Book value per share increased with strong underwriting and investment results and the deferred tax asset. Arch repurchased no shares under its public repurchase program in 2023; the fourth-quarter share purchases reported were employee tax-withholding-related, not program repurchases.
Outlook, risks and contingencies
- Management gave no quantified earnings or premium guidance. It described 2023 as a record year and said its priorities remain underwriting discipline, prudent reserving and allocating capital to the best risk-adjusted returns. It expected favorable opportunities to persist in several property and casualty lines at the January 2024 renewals, while noting pricing declines in some lines, including large public-company D&O.
- Management said property and casualty growth opportunities were stronger than mortgage growth opportunities; mortgage earnings remained substantial, supported by portfolio persistency and international business. U.S. primary mortgage persistency increased to 83.6% from 79.5%; the default rate eased to 1.74% from 1.77%.
- Management identifies catastrophe and severe economic events, climate change, inflation, competition and underwriting cycles, reserve uncertainty, investment-market volatility, reinsurance counterparty risk, and mortgage-market and GSE policy changes as significant risks. Catastrophe and mortgage-loss models are estimates and actual losses could differ materially.
- As of January 1, 2024, modeled peak-zone net probable maximum pre-tax losses were $1.6 billion for a Florida Tri-County windstorm, $1.4 billion for a Northeast U.S. windstorm and $1.3 billion for a Gulf of Mexico windstorm. Modeled U.S. mortgage severe-economic-event loss was 7.0% of tangible shareholders’ equity. These estimates are not maximum exposures.
- In November 2023, Arch agreed to acquire RMIC’s run-off mortgage insurance business; in December 2023, it agreed to sell Castel Underwriting Agencies. Both transactions were expected to close in the first half of 2024, subject to approvals and other conditions.
- Arch reported no litigation or arbitration expected by management to have a material adverse effect on results, financial condition or liquidity. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much of 2023’s reported earnings and book-value growth reflects recurring underwriting and investment performance versus the one-time $1.18 billion Bermuda tax-related deferred benefit?
- Whether favorable reserve development continues, particularly the sizable mortgage releases, and how actual claims compare with the company’s actuarial assumptions and reserve sensitivities.
- Whether catastrophe losses, inflation and reinsurance recoveries remain consistent with modeled exposures and the company’s risk appetite.
- How mortgage performance responds to home prices, employment, interest rates, new originations, FHA pricing and GSE eligibility or credit-risk-transfer policy changes.
- The effects of Bermuda’s 15% corporate income tax from 2025, including the timing and realizability of the recorded deferred tax asset and the resulting cash tax burden.
- Closing, regulatory approval and financial effects of the announced RMIC acquisition and Castel sale; also review subsidiary dividend restrictions, collateral needs and $3.587 billion of unfunded investment commitments.