Business context and reporting period
Arch Capital Group Ltd. is a Bermuda-based global insurer, reinsurer and mortgage insurer. This 10-K covers the fiscal year ended December 31, 2022; it reports annual results, not standalone fourth-quarter results. Amounts below are U.S. dollars.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Net premiums written | $11.08 billion | $9.02 billion |
| Net premiums earned | $9.68 billion | $8.08 billion |
| Total revenues | $9.61 billion | $9.25 billion |
| Net income available to common shareholders | $1.44 billion | $2.09 billion |
| Diluted earnings per share | $3.80 | $5.23 |
| After-tax operating income available to common shareholders (non-GAAP) | $1.84 billion | $1.43 billion |
| Operating return on average common equity (non-GAAP) | 14.8% | 11.5% |
| Cash provided by operating activities | $3.82 billion | $3.43 billion |
Underwriting income was $1.80 billion, versus $1.22 billion in 2021; the 2021 comparison included the results of the “other” segment, including Somers, which Arch stopped consolidating in July 2021. 2022 combined ratios were 95.0% for insurance, 92.2% for reinsurance and (7.7)% for mortgage. The mortgage ratio reflects substantial prior-year reserve releases.
At year-end, total assets were $47.99 billion, total shareholders’ equity available to Arch was $12.91 billion and book value per share was $32.62, down from $33.56. Senior notes totaled $2.73 billion; debt was 17.4% of total capital. Cash and restricted cash totaled $1.27 billion, and investable assets were $28.1 billion. The company reported $500 million of unused unsecured revolving capacity and $101.9 million of remaining secured letter-of-credit capacity. Operating cash flow is not a measure of free cash flow.
Changes versus the prior year
- Net premiums written increased 22.8%; insurance grew 21.0% and reinsurance 51.3%, while mortgage declined 10.2%.
- Common-shareholder net income fell 31.4%, while non-GAAP operating income rose 28.3%. The gap chiefly reflects $662.7 million of net realized investment losses in 2022, versus $379.8 million of gains in 2021, and lower equity-method investment income.
- Net investment income increased to $496.5 million from $389.1 million, as higher market yields lifted the portfolio’s pre-tax investment-income yield to 1.99% from 1.41%.
- Investment market losses weighed on capital: accumulated other comprehensive loss was $1.65 billion at year-end, and book value per share declined 2.8%. The portfolio’s pre-tax total return was (6.45)%, compared with a (9.60)% benchmark return.
- Operating cash flow increased to $3.82 billion. Investing activities used $3.10 billion and financing activities used $706 million, including $585.8 million of common-share repurchases.
Outlook, commentary and risks
Management said underwriting discipline and risk-adjusted returns remain priorities and described 2023 opportunities as attractive where pricing and terms meet return thresholds. January 1 property-catastrophe renewals achieved effective rate changes of 30%–50%; management expected favorable trends to continue into mid-year and support property growth. It also cited stable, disciplined insurance-market conditions and planned continued capital allocation toward attractive returns.
Mortgage insurance in force for U.S. primary business reached $295.7 billion. Persistency rose to 79.5% from 62.4%, largely as higher interest rates reduced refinancing. Management described borrower credit quality as strong, while acknowledging reduced new-loan origination volume from higher rates.
- Reserves: Net favorable prior-year reserve development was $771.0 million, including $554.1 million in mortgage, primarily releases on COVID-related delinquencies. Net reserves were $13.75 billion; gross reserves were $20.03 billion. Reserve estimates are uncertain, and the auditor identified reserve valuation as a critical audit matter.
- Catastrophe and geopolitical exposure: 2022 losses included Hurricane Ian, Russia’s invasion of Ukraine and other catastrophes. Climate change, inflation and severe events could increase claims and volatility; reinsurance may not fully protect against losses.
- Investments and liquidity: Rising rates and market volatility generated realized and unrealized losses. Liquidity may be affected by the timing of large claims, delayed reinsurance recoveries, illiquid investments and $2.9 billion of callable unfunded investment commitments. Restricted assets were $8.7 billion.
- Mortgage and regulation: Results depend on housing, employment and home prices, as well as GSE eligibility and capital rules. Regulatory, tax, cyber, sanctions and post-Brexit changes may add costs or constrain operations.
- Legal and controls: Management reported no litigation expected to have a material adverse effect. The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether underwriting earnings remain strong excluding favorable reserve development, particularly the large mortgage releases.
- How 2022 catastrophe losses and 2023 pricing and renewal conditions affect subsequent segment growth and combined ratios.
- Whether investment losses, credit allowances and accumulated other comprehensive losses recover or remain a drag on book value and capital.
- Mortgage portfolio performance under higher rates, lower originations and potential home-price or employment deterioration; review PMIER sufficiency, reported at 236% versus 197% in 2021.
- Availability of subsidiary dividends and liquidity after claims, collateral needs, investment commitments and share repurchases.