10-QPeriod: Q1 FY2013

ARCH CAPITAL GROUP LTD. Quarterly Report for Q1 Ended Mar 31, 2013

Filed May 10, 2013For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported solid results for the first quarter ended March 31, 2013, demonstrating growth and improved profitability across its insurance and reinsurance segments. The company experienced a notable increase in net premiums written, particularly in its reinsurance operations, driven by a strong performance in specialty lines, casualty, and a new mortgage reinsurance treaty. The insurance segment also saw modest growth in net premiums written, with key increases in programs and construction business. Profitability improved year-over-year, with a significant rise in after-tax operating income, primarily due to better underwriting results in both segments, benefiting from relatively light catastrophic activity. The company's operating return on average common equity (Operating ROAE) also saw an improvement. ACGL continues to focus on disciplined underwriting, emphasizing small and medium-sized accounts and short-tail business, while also strategically investing in catastrophe-exposed business. The company maintains a strong capital position, with book value per common share increasing to $37.66. Key financial highlights include a substantial increase in underwriting income for the reinsurance segment and a return to profitability for the insurance segment compared to the prior year. The company's investment portfolio also contributed positively, albeit with lower overall total return compared to the prior year's quarter due to market conditions. ACGL's focus remains on achieving its long-term objective of an average operating return on average equity of 15% or greater.

Financial Highlights

29 data points
Beta

Revenue

$890.14M

Net Income

$256.48M

28.8% Net Margin

EPS (Diluted)

$0.62

Total Assets

$18.76B

Cash & Equivalents

$356.77M

Free Cash Flow

$205.66M

Financial Statements
Beta
Revenue$890.14M
Interest Expense$5.90M
Net Income$256.48M
EPS (Basic)$0.64
EPS (Diluted)$0.62
Shares Outstanding (Basic)392.72M
Shares Outstanding (Diluted)406.23M

Key Highlights

  • 1Reinsurance segment underwriting income increased by 34.7% to $101.4 million, driven by strong premium growth and improved loss ratios.
  • 2Insurance segment transitioned from an underwriting loss of ($8.1 million) in Q1 2012 to an underwriting income of $15.0 million in Q1 2013.
  • 3After-tax operating income available to common shareholders rose by 39.6% to $158.7 million compared to the prior year quarter.
  • 4Book value per common share grew to $37.66 as of March 31, 2013, up from $36.19 at the end of 2012.
  • 5The company is expanding its insurance underwriting platform in the excess and surplus lines market with a new binding authority insurance facility.
  • 6Reinsurance segment net premiums written increased by 20.2% to $448.2 million, bolstered by specialty lines and casualty business.
  • 7Operating ROAE improved to 12.9% for Q1 2013, compared to 10.4% for Q1 2012, reflecting better underwriting results.

Frequently Asked Questions

The improved underwriting results were primarily driven by a relatively light level of catastrophic activity during the quarter across both the insurance and reinsurance segments. Additionally, improved underwriting discipline, a favorable mix of business, and rate increases in certain insurance lines contributed to the positive performance.

The total return on the investment portfolio was 0.50% (pre-tax, before expenses) for the first quarter of 2013, compared to 1.87% in the prior year's quarter. This reflected strong returns on equities and alternatives, but flat to negative returns on fixed income investments due to prevailing market conditions. Investment expenses increased slightly.

Arch Capital Group Ltd. believes that catastrophe-exposed business remains an attractive area from a pricing perspective and expects it to continue representing a significant proportion of its overall book. While this focus could increase the volatility of operating results, the company manages this risk by limiting its 1-in-250 year return period net probable maximum pre-tax loss from a severe catastrophic event to approximately 25% of total shareholders' equity.

Yes, the company announced in February 2013 an agreement to acquire CMG Mortgage Insurance Company and PMI's mortgage insurance operating platform and related assets for approximately $300 million, subject to regulatory approvals. This acquisition is expected to close in late 2013 at the earliest.