Business context and reporting period
Arch Capital Group Ltd. (NASDAQ: ACGL) filed its Form 10-K for the fiscal year ended December 31, 2021. The Bermuda-based group provides specialty insurance, reinsurance and mortgage insurance worldwide. Its three underwriting segments are insurance, reinsurance and mortgage; results also include corporate and, through June 30, 2021, Somers.
Financial results and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $9.25 billion | $8.51 billion |
| Net premiums earned | $8.08 billion | $6.99 billion |
| Net premiums written | $9.02 billion | $7.44 billion |
| Net income available to common shareholders | $2.09 billion | $1.36 billion |
| Diluted earnings per share | $5.23 | $3.32 |
| Consolidated underwriting income | $1.22 billion | $449 million |
| Combined ratio | 85.2% | 94.0% |
| Net cash provided by operating activities | $3.43 billion | $2.89 billion |
Book value per share rose 10.7% to $33.56. Operating return on average common equity, a non-GAAP measure, was 11.5%, versus 4.8%. Net investment income fell to $389 million from $520 million, while net realized gains declined to $380 million from $823 million. Equity-method investment income increased to $366 million from $147 million.
At year-end, total assets were $45.1 billion, total shareholders’ equity available to Arch was $13.5 billion, and senior notes totaled $2.72 billion. Debt was 16.7% of total capital. Cash was $859 million; cash and restricted cash totaled $1.31 billion. Investable assets were $27.4 billion, including $18.4 billion of fixed maturities. The company reported $17.8 billion of gross loss reserves and $5.9 billion of reinsurance recoverables.
Material changes versus 2020
- Insurance underwriting income improved to $117 million from a $129 million loss; its combined ratio improved to 96.7% from 104.5%.
- Reinsurance underwriting income increased to $170 million from $16 million; its combined ratio improved to 94.2% from 99.5%.
- Mortgage underwriting income rose to $953 million from $593 million, despite lower earned premiums. Its 2021 results included $170 million of favorable prior-year reserve development, versus $19 million in 2020.
- Across the company, favorable prior-year reserve development was $356 million, compared with $161 million in 2020. Current-year catastrophe losses included Hurricane Ida and winter storms Uri and Viola.
- Arch repurchased $1.23 billion of common shares in 2021. It issued $500 million of Series G preferred shares and redeemed $450 million of Series E preferred shares.
- Arch acquired Somerset Group and Westpac’s Australian mortgage insurance business. It also completed the Somers transaction: from July 1, Arch held a 40% interest in Greysbridge and ceased consolidating Somers. It acquired approximately 29.86% of Coface by year-end.
Outlook, commentary and risks
Management said pricing was attractive across almost all insurance markets and expected favorable market conditions to continue in 2022, provided rate increases support returns above its thresholds. It emphasized disciplined underwriting and selective growth. Management described U.S. mortgage delinquencies as below its initial pandemic expectations and the market as competitive but rational; it reported mid-teens returns on capital for that business.
Management cited catastrophe activity, inflation, COVID-19 and low interest rates as continuing uncertainties. Other key risks include reserve estimation, climate-related losses, market and investment volatility, reinsurer collectability, mortgage and housing-market deterioration, regulation, cyber incidents, and Brexit-related uncertainty. The company’s catastrophe and mortgage stress models are estimates, not maximum-loss guarantees. It reported a modeled peak-zone catastrophe loss of $748 million and a modeled U.S. mortgage severe-economic-event loss equal to 6.3% of tangible shareholders’ equity; actual losses may differ materially.
The company said its liquidity needs for at least the next 12 months were expected to be met from operating cash flows, investment income, liquid assets and credit facilities. That assessment is subject to claims-payment timing and access to reinsurance recoveries. Restricted assets were $8.25 billion, and unfunded investment commitments were approximately $3.0 billion. Management reported no litigation or arbitration expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control; reserve valuation was identified as a critical audit matter. No material weakness in internal control was reported.
Important facts for investors to verify
- Whether favorable reserve development—especially the mortgage segment’s $170 million—continues, and how actual claims compare with reserve assumptions.
- How catastrophe losses, inflation and changing market pricing affect underwriting margins and the stated 2022 outlook.
- The performance and integration of the 2021 acquisitions, and the accounting and earnings effects of the Somers deconsolidation and Coface investment.
- Investment income, realized gains and portfolio sensitivity to interest rates, credit spreads and equity-market movements.
- Available parent-company liquidity and subsidiary dividend capacity after share repurchases, preferred-share transactions and regulatory restrictions.
- Reinsurance recoverability, including exposure to unrated counterparties and related-party transactions with Somers.