PEMBROKE, Bermuda–(BUSINESS WIRE)–Arch Capital Group Ltd. (NASDAQ: ACGL; “Arch” or “the Company”) announces its 2022 fourth quarter results. The results included:
- Net income available to Arch common shareholders of $849.5 million, or $2.26 per share, a 29.5% annualized net income return on average common equity, compared to $613.1 million, or $1.58 per share, for the 2021 fourth quarter;
- After-tax operating income available to Arch common shareholders(1) of $805.9 million, or $2.14 per share, a 28.0% annualized operating return on average common equity, compared to $493.3 million, or $1.27 per share, for the 2021 fourth quarter;
- Pre-tax current accident year catastrophic losses for the Company’s insurance and reinsurance segments, net of reinsurance and reinstatement premiums (1), of $34.6 million;
- Combined ratio excluding catastrophic activity and prior year development(1) of 82.0%, compared to 80.1% for the 2021 fourth quarter;
- Favorable development in prior year loss reserves, net of related adjustments(1) of $270.1 million;
- Book value per common share of $32.62 at December 31, 2022, a 9.9% increase from September 30, 2022.
All earnings per share amounts discussed in this release are on a diluted basis. The following table summarizes the Company’s underwriting results:
|
(U.S. Dollars in thousands) |
|
Three Months Ended December 31, |
|||||||||
|
|
|
|
2022 |
|
|
|
2021 |
|
|
% Change |
|
|
Gross premiums written |
|
$ |
3,795,262 |
|
|
$ |
2,861,575 |
|
|
32.6 |
|
|
Net premiums written |
|
|
3,034,636 |
|
|
|
2,034,427 |
|
|
49.2 |
|
|
Net premiums earned |
|
|
2,760,919 |
|
|
|
2,083,630 |
|
|
32.5 |
|
|
Underwriting income |
|
|
734,264 |
|
|
|
471,611 |
|
|
55.7 |
|
|
Underwriting Ratios |
|
|
|
|
|
% Point |
|||||
|
Loss ratio |
|
|
45.0 |
% |
|
|
47.8 |
% |
|
(2.8 |
) |
|
Underwriting expense ratio |
|
|
28.5 |
% |
|
|
29.8 |
% |
|
(1.3 |
) |
|
Combined ratio |
|
|
73.5 |
% |
|
|
77.6 |
% |
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|||||
|
Combined ratio excluding catastrophic activity and prior year development (1) |
|
|
82.0 |
% |
|
|
80.1 |
% |
|
1.9 |
|
|
(1) |
Presentation represents a “non-GAAP” financial measure as defined in Regulation G. See ‘Comments on Regulation G’ for further details. |
|
The following table summarizes the Company’s consolidated financial data, including a reconciliation of net income or loss available to Arch common shareholders to after-tax operating income or loss available to Arch common shareholders and related diluted per share results (see ‘Comments on Regulation G’ for a discussion of non-GAAP financial measures):
|
(U.S. Dollars in thousands, except share data) |
Three Months Ended |
||||||
|
|
December 31, |
||||||
|
|
2022 |
|
2021 |
||||
|
Net income available to Arch common shareholders |
$ |
849,504 |
|
|
$ |
613,081 |
|
|
Net realized (gains) losses |
|
(79,932 |
) |
|
|
(59,517 |
) |
|
Equity in net (income) loss of investment funds accounted for using the equity method |
|
(40,351 |
) |
|
|
(67,132 |
) |
|
Net foreign exchange (gains) losses |
|
81,201 |
|
|
|
(3,221 |
) |
|
Transaction costs and other |
|
358 |
|
|
|
310 |
|
|
Income tax expense (benefit) (1) |
|
(4,858 |
) |
|
|
9,736 |
|
|
After-tax operating income available to Arch common shareholders |
$ |
805,922 |
|
|
$ |
493,257 |
|
|
|
|
|
|
||||
|
Diluted per common share results: |
|
|
|
||||
|
Net income available to Arch common shareholders |
$ |
2.26 |
|
|
$ |
1.58 |
|
|
Net realized (gains) losses |
|
(0.22 |
) |
|
|
(0.16 |
) |
|
Equity in net (income) loss of investment funds accounted for using the equity method |
|
(0.11 |
) |
|
|
(0.17 |
) |
|
Net foreign exchange (gains) losses |
|
0.22 |
|
|
|
(0.01 |
) |
|
Transaction costs and other |
|
0.00 |
|
|
|
0.00 |
|
|
Income tax expense (benefit) (1) |
|
(0.01 |
) |
|
|
0.03 |
|
|
After-tax operating income available to Arch common shareholders |
$ |
2.14 |
|
|
$ |
1.27 |
|
|
|
|
|
|
||||
|
Weighted average common shares and common share equivalents outstanding — diluted |
|
375,878,279 |
|
|
|
388,869,378 |
|
|
|
|
|
|
||||
|
Beginning common shareholders’ equity |
$ |
10,965,110 |
|
|
$ |
12,557,526 |
|
|
Ending common shareholders’ equity |
|
12,080,073 |
|
|
|
12,715,896 |
|
|
Average common shareholders’ equity |
$ |
11,522,592 |
|
|
$ |
12,636,711 |
|
|
|
|
|
|
||||
|
Annualized net income return on average common equity |
|
29.5 |
% |
|
|
19.4 |
% |
|
Annualized operating return on average common equity |
|
28.0 |
% |
|
|
15.6 |
% |
|
(1) |
Income tax expense (benefit) on net realized gains or losses, equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction. |
|
Segment Information
The following section provides analysis on the Company’s 2022 fourth quarter performance by operating segment. For additional details regarding the Company’s operating segments, please refer to the Company’s Financial Supplement dated December 31, 2022. The Company’s segment information includes the use of underwriting income (loss) and a combined ratio excluding catastrophic activity and prior year development. Such items are non-GAAP financial measures (see ‘Comments on Regulation G’ for further details).
Insurance Segment
|
|
Three Months Ended December 31, |
|||||||||
|
(U.S. Dollars in thousands) |
2022 |
|
2021 |
|
% Change |
|||||
|
|
|
|
|
|
|
|||||
|
Gross premiums written |
$ |
1,644,066 |
|
|
$ |
1,486,362 |
|
|
10.6 |
|
|
Net premiums written |
|
1,216,730 |
|
|
|
1,035,986 |
|
|
17.4 |
|
|
Net premiums earned |
|
1,243,587 |
|
|
|
1,002,897 |
|
|
24.0 |
|
|
|
|
|
|
|
|
|||||
|
Underwriting income |
$ |
97,684 |
|
|
$ |
70,545 |
|
|
38.5 |
|
|
|
|
|
|
|
|
|||||
|
Underwriting Ratios |
|
|
|
|
% Point |
|||||
|
Loss ratio |
|
58.7 |
% |
|
|
59.2 |
% |
|
(0.5 |
) |
|
Underwriting expense ratio |
|
33.4 |
% |
|
|
33.7 |
% |
|
(0.3 |
) |
|
Combined ratio |
|
92.1 |
% |
|
|
92.9 |
% |
|
(0.8 |
) |
|
|
|
|
|
|
|
|||||
|
Catastrophic activity and prior year development: |
|
|
|
|
|
|||||
|
Current accident year catastrophic events, net of reinsurance and reinstatement premiums |
|
2.8 |
% |
|
|
2.0 |
% |
|
0.8 |
|
|
Net (favorable) adverse development in prior year loss reserves, net of related adjustments |
|
(0.3 |
) % |
|
|
(0.3 |
) % |
|
— |
|
|
Combined ratio excluding catastrophic activity and prior year development |
|
89.6 |
% |
|
|
91.2 |
% |
|
(1.6 |
) |
Gross premiums written by the insurance segment in the 2022 fourth quarter were 10.6% higher than in the 2021 fourth quarter while net premiums written were 17.4% higher than in the 2021 fourth quarter. The higher level of net premiums written reflected increases in most lines of business, due in part to rate increases, new business opportunities and growth in existing accounts. In addition, the insurance segment is retaining more business due to ongoing changes in its reinsurance programs, as well as higher levels of growth in lines with a higher retention rate. Net premiums earned in the 2022 fourth quarter were 24.0% higher than in the 2021 fourth quarter, and reflect changes in net premiums written over the previous five quarters.
The 2022 fourth quarter loss ratio reflected 2.8 points of current year catastrophic activity, spread across a series of global events that occurred in 2022, compared to 2.0 points of catastrophic activity in the 2021 fourth quarter. Estimated net favorable development of prior year loss reserves, before related adjustments, reduced the loss ratio by 0.5 points in the 2022 fourth quarter, compared to 0.3 in the 2021 fourth quarter. The improvement in the 2022 fourth quarter loss ratio also reflected the impact of rate increases and changes in mix of business.
The underwriting expense ratio was 33.4% in the 2022 fourth quarter, compared to 33.7% in the 2021 fourth quarter, with the decrease primarily due to growth in net premiums earned.
Reinsurance Segment
|
|
Three Months Ended December 31, |
|||||||||
|
(U.S. Dollars in thousands) |
2022 |
|
2021 |
|
% Change |
|||||
|
|
|
|
|
|
|
|||||
|
Gross premiums written |
$ |
1,797,037 |
|
|
$ |
1,013,090 |
|
|
77.4 |
|
|
Net premiums written |
|
1,543,382 |
|
|
|
709,141 |
|
|
117.6 |
|
|
Net premiums earned |
|
1,225,208 |
|
|
|
779,817 |
|
|
57.1 |
|
|
Other underwriting income (loss) |
|
(943 |
) |
|
|
521 |
|
|
(281.0 |
) |
|
|
|
|
|
|
|
|||||
|
Underwriting income (loss) |
$ |
263,046 |
|
|
$ |
132,510 |
|
|
98.5 |
|
|
|
|
|
|
|
|
|||||
|
Underwriting Ratios |
|
|
|
|
% Point |
|||||
|
Loss ratio |
|
52.9 |
% |
|
|
55.2 |
% |
|
(2.3 |
) |
|
Underwriting expense ratio |
|
25.5 |
% |
|
|
27.9 |
% |
|
(2.4 |
) |
|
Combined ratio |
|
78.4 |
% |
|
|
83.1 |
% |
|
(4.7 |
) |
|
|
|
|
|
|
|
|||||
|
Catastrophic activity and prior year development: |
|
|
|
|
|
|||||
|
Current accident year catastrophic events, net of reinsurance and reinstatement premiums |
|
0.0 |
% |
|
|
6.7 |
% |
|
(6.7 |
) |
|
Net (favorable) adverse development in prior year loss reserves, net of related adjustments |
|
(4.5 |
) % |
|
|
(6.4 |
) % |
|
1.9 |
|
|
Combined ratio excluding catastrophic activity and prior year development |
|
82.9 |
% |
|
|
82.8 |
% |
|
0.1 |
|
Gross premiums written by the reinsurance segment in the 2022 fourth quarter were 77.4% higher than in the 2021 fourth quarter, while net premiums written were 117.6% higher than in the 2021 fourth quarter. The comparison of gross and net premiums written in the 2022 fourth quarter were affected by a few non-recurring transactions, primarily impacting the other specialty line of business. Absent these items, gross and net premiums written would have been higher than in the 2021 fourth quarter by 47.9% and 61.0%, respectively. The growth in net premiums written reflected increases in most lines of business, primarily related to rate increases, new business opportunities and growth in existing accounts. Excluding the transactions mentioned above, net premiums earned in the 2022 fourth quarter were 38.1% higher than in the 2021 fourth quarter, and reflect changes in net premiums written over the previous five quarters.
The 2022 fourth quarter loss ratio reflected minimal current year catastrophic activity, compared to 7.1 points of catastrophic activity in the 2021 fourth quarter. Estimated net favorable development of prior year loss reserves, before related adjustments, reduced the loss ratio by 5.2 points in the 2022 fourth quarter, compared to 7.6 points in the 2021 fourth quarter. In addition, the 2022 fourth quarter loss ratio reflected the impact of rate increases and changes in mix of business. Absent the non-recurring transactions noted above, the 2022 fourth quarter loss ratio would have been 5.0 points lower than reported.
The underwriting expense ratio was 25.5% in the 2022 fourth quarter, compared to 27.9% in the 2021 fourth quarter. Absent the non-recurring transactions noted above, the 2022 fourth quarter underwriting expense ratio would have been 2.0 points higher than reported.
Mortgage Segment
|
|
Three Months Ended December 31, |
|||||||||
|
(U.S. Dollars in thousands) |
2022 |
|
2021 |
|
% Change |
|||||
|
|
|
|
|
|
|
|||||
|
Gross premiums written |
$ |
355,827 |
|
|
$ |
364,134 |
|
|
(2.3 |
) |
|
Net premiums written |
|
274,524 |
|
|
|
289,300 |
|
|
(5.1 |
) |
|
Net premiums earned |
|
292,124 |
|
|
|
300,916 |
|
|
(2.9 |
) |
|
Other underwriting income |
|
2,226 |
|
|
|
2,639 |
|
|
(15.6 |
) |
|
|
|
|
|
|
|
|||||
|
Underwriting income |
$ |
373,534 |
|
|
$ |
268,556 |
|
|
39.1 |
|
|
|
|
|
|
|
|
|||||
|
Underwriting Ratios |
|
|
|
|
% Point |
|||||
|
Loss ratio |
|
(46.9 |
) % |
|
|
(9.4 |
) % |
|
(37.5 |
) |
|
Underwriting expense ratio |
|
19.8 |
% |
|
|
21.1 |
% |
|
(1.3 |
) |
|
Combined ratio |
|
(27.1 |
) % |
|
|
11.7 |
% |
|
(38.8 |
) |
|
|
|
|
|
|
|
|||||
|
Prior year development: |
|
|
|
|
|
|||||
|
Net (favorable) adverse development in prior year loss reserves, net of related adjustments |
|
(72.1 |
) % |
|
|
(24.2 |
) % |
|
(47.9 |
) |
|
Combined ratio excluding prior year development |
|
45.0 |
% |
|
|
35.9 |
% |
|
9.1 |
|
Gross premiums written by the mortgage segment in the 2022 fourth quarter were 2.3% lower than in the 2021 fourth quarter, while net premiums written were 5.1% lower. The decrease in gross premiums written primarily reflected lower origination volume in the Australian market and lower U.S. primary mortgage insurance single premium business, which was partially offset by a higher volume of credit risk transfer contracts. Net premiums earned in the 2022 fourth quarter were 2.9% lower than in the 2021 fourth quarter, primarily due to a reduction in earnings from single premium policy terminations and an increase in ceded premiums earned, partially offset by growth in credit risk transfer business.
Estimated net favorable development of prior year loss reserves, before related adjustments, reduced the loss ratio by 71.1 points, primarily related to reserves on loans becoming delinquent after the onset of the COVID-19 pandemic, compared to 23.4 points in the 2021 fourth quarter. The percentage of loans in default on U.S. primary mortgage insurance business was 1.77% at December 31, 2022, compared to 1.73% at September 30, 2022.
The underwriting expense ratio was 19.8% in the 2022 fourth quarter, compared to 21.1% in the 2021 fourth quarter, with the decrease reflecting lower operating expenses due in part to profit commissions on business ceded related to favorable development of prior year loss reserves in the U.S.
Corporate Segment
The corporate segment results include net investment income, net realized gains or losses (which includes changes in the allowance for credit losses on financial assets), equity in net income or loss of investment funds accounted for using the equity method, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, net foreign exchange gains or losses, income taxes items, income or loss from operating affiliates and items related to the Company’s non-cumulative preferred shares.
Investment returns were as follows:
|
(U.S. Dollars in thousands, except per share data) |
|
Three Months Ended |
||||||||||
|
|
|
December 31, |
|
September 30, |
|
December 31, |
||||||
|
|
|
2022 |
|
2022 |
|
2021 |
||||||
|
Pre-tax net investment income |
|
$ |
181,079 |
|
|
$ |
128,640 |
|
|
$ |
90,454 |
|
|
Per diluted share |
|
$ |
0.48 |
|
|
$ |
0.34 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
||||||
|
Pre-tax investment income yield, at amortized cost (1) |
|
|
2.80 |
% |
|
|
2.06 |
% |
|
|
1.46 |
% |
|
|
|
|
|
|
|
|
||||||
|
Total return on investments (2) |
|
|
2.60 |
% |
|
|
(3.01 |
) % |
|
|
0.39 |
% |
|
(1) |
Presented on an annualized basis and excluding the impact of investments for which returns are not included within investment income, such as investments accounted for using the equity method and certain equities. |
|
|
(2) |
Presentation represents a “non-GAAP” financial measure as defined in Regulation G. See ‘Comments on Regulation G’ for further details. |
The growth in net investment income in the 2022 fourth quarter compared to the 2022 third quarter and 2021 fourth quarter primarily reflects the effects of higher interest rates available in the market. Net realized gains or losses reflect sales of investments along with the impact of financial market movements on the Company’s investment portfolio, including realized and unrealized changes in the fair value of equity securities and assets accounted for using the fair value option, realized and unrealized gains and losses on derivative instruments and changes in the allowance for credit losses on financial assets. On a pre-tax basis, net realized gains for the 2022 fourth quarter were $79.9 million, a substantial portion of which represented unrealized changes in the fair value of equity securities and assets accounted for using the fair value option.
On a pre-tax basis, net foreign exchange losses for the 2022 fourth quarter were $81.2 million, compared to net foreign exchange gains for the 2021 fourth quarter of $3.2 million. For both periods, such amounts were primarily unrealized and resulted from the effects of revaluing the Company’s net insurance liabilities required to be settled in foreign currencies at each balance sheet date. Changes in the value of available-for-sale investments held in foreign currencies due to foreign currency rate movements are reflected as a direct increase or decrease to shareholders’ equity and are not included in the consolidated statements of income. Although the Company generally attempts to match the currency of its projected liabilities with investments in the same currencies, the Company may elect to over or underweight one or more currencies from time to time, which could increase the Company’s exposure to foreign currency fluctuations and increase the volatility of the Company’s shareholders’ equity.
The Company’s effective tax rate on income before income taxes was 6.6% for the 2022 fourth quarter and 5.1% for the year ended December 31, 2022, compared to 5.2% for the 2021 fourth quarter and 5.6% for the year ended December 31, 2021. The Company’s effective tax rate on pre-tax operating income available to Arch common shareholders was 7.5% for the 2022 fourth quarter, compared to 4.7% for the 2021 fourth quarter. The Company’s effective tax rate may fluctuate from period to period based upon the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction. The 2022 fourth quarter included a net discrete income tax benefit of $4.1 million, which decreased the effective tax rate on operating income available to Arch common shareholders by 0.5%, compared to a net discrete income tax benefit of $10.6 million for the 2021 fourth quarter, which decreased the effective tax rate on operating income available to Arch common shareholders by 2.0%. The discrete tax items in both periods primarily related to valuation allowance adjustments and prior year true-ups of non-U.S. deferred tax assets.
Income from operating affiliates for the 2022 fourth quarter was $36.2 million, or $0.10 per share, compared to $40.6 million, or $0.10 per share, for the 2021 fourth quarter, and primarily reflects amounts related to the Company’s investment in Somers Group Holdings Ltd. (“Somers”) and Coface SA.
Conference Call
The Company will hold a conference call for investors and analysts at 11:00 a.m. Eastern Time on February 14, 2023. A live webcast of this call will be available via the Investors section of the Company’s website at http://www.archgroup.com/investors. A recording of the webcast will be available in the Investors section of the Company’s website approximately two hours after the event concludes and will be archived on the site for one year.
Please refer to the Company’s Financial Supplement dated December 31, 2022, which is available via the Investors section of the Company’s website at http://www.archgroup.com/investors. The Financial Supplement provides additional detail regarding the financial performance of the Company. From time to time, the Company posts additional financial information and presentations to its website, including information with respect to its subsidiaries. Investors and other recipients of this information are encouraged to check the Company’s website regularly for additional information regarding the Company.
Arch Capital Group Ltd., is a publicly listed Bermuda exempted company with approximately $15.6 billion in capital at December 31, 2022. Arch, which is part of the S&P 500 index, provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly owned subsidiaries.
Comments on Regulation G
Throughout this release, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company and that investors and such other persons benefit from having a consistent basis for comparison between quarters and for comparison with other companies within the industry. These measures may not, however, be comparable to similarly titled measures used by companies outside of the insurance industry. Investors are cautioned not to place undue reliance on these non-GAAP financial measures in assessing the Company’s overall financial performance.
This presentation includes the use of “after-tax operating income or loss available to Arch common shareholders,” which is defined as net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares, net of income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized net income return on average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included on page 2 of this release.
The Company believes that net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, changes in the allowance for credit losses and net impairment losses recognized in earnings on the Company’s investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of the Company’s investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Transaction costs and other include advisory, financing, legal, severance, incentive compensation and other costs related to acquisitions. The Company believes that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. The loss on redemption of preferred shares related to the redemption of the Company’s Series E preferred shares in September 2021 had no impact on shareholders’ equity or cash flows. Due to these reasons, the Company excludes net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other from the calculation of after-tax operating income or loss available to Arch common shareholders.
The Company believes that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, the Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance.
Contacts
Arch Capital Group Ltd.
François Morin: (441) 278-9250
Investor Relations
Donald Watson: (914) 872-3616; [email protected]
