10-QPeriod: Q3 FY2014

ARCH CAPITAL GROUP LTD. Quarterly Report for Q3 Ended Sep 30, 2014

Filed November 7, 2014For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported its third quarter 2014 results, demonstrating growth across its insurance, reinsurance, and mortgage segments. The company completed a significant acquisition of CMG Mortgage Insurance Company (now Arch Mortgage Insurance Company) in January 2014, which is expected to bolster its U.S. mortgage insurance offerings. Strategic initiatives, including the launch of Watford Re Ltd. and continued disciplined underwriting, aim to achieve a target operating return on average equity of 15% or greater over the insurance cycle. While facing competitive market conditions and pressure on property catastrophe rates in its reinsurance business, ACGL is focused on disciplined underwriting and strategic growth, particularly in the excess and surplus market and its program business. For the third quarter of 2014, ACGL saw an increase in net premiums written in its insurance segment, driven by growth in programs and travel, accident, and health lines, though property, energy, marine, and aviation business saw reductions. The reinsurance segment experienced a decrease in net premiums written due to retrocessions to Watford Re, alongside shifts in business mix. The newly acquired mortgage segment showed substantial growth in gross premiums written. The company maintained a strong capital position, with total capital available to Arch at $6.98 billion as of September 30, 2014, and continued its share repurchase program, indicating confidence in its financial health and future prospects.

Financial Highlights

28 data points
Beta

Revenue

$992.53M

Net Income

$228.68M

23.0% Net Margin

EPS (Diluted)

$0.55

Total Assets

$22.61B

Cash & Equivalents

$663.73M

Free Cash Flow

$346.60M

Financial Statements
Beta
Revenue$992.53M
Interest Expense$4.15M
Net Income$228.68M
EPS (Basic)$0.56
EPS (Diluted)$0.55
Shares Outstanding (Basic)395.84M
Shares Outstanding (Diluted)407.63M

Key Highlights

  • 1Acquisition of CMG Mortgage Insurance Company (now Arch Mortgage Insurance Company) in January 2014 to strengthen U.S. mortgage insurance capabilities.
  • 2Launch of Watford Re Ltd., a multi-line Bermuda reinsurance company, with ACGL investing $100 million for an approximate 11% stake.
  • 3Increase in gross premiums written for the insurance segment by 6.4% and for the mortgage segment by 169.5% in Q3 2014 compared to Q3 2013.
  • 4Net premiums earned in the insurance segment increased by 8.4% year-over-year for Q3 2014.
  • 5Reinsurance segment saw a decrease in net premiums written (-16.1%) due to retrocessions to Watford Re, though net premiums earned grew 9.8% year-over-year for the nine-month period.
  • 6Book value per common share increased to $44.04 at September 30, 2014, from $38.34 at September 30, 2013.
  • 7ACGL maintained a robust capital position with $6.98 billion in total capital as of September 30, 2014, and continued its share repurchase program.

Frequently Asked Questions

Key drivers included the continued growth in the insurance segment's premiums written, particularly in programs and travel, accident, and health. The significant acquisition of Arch Mortgage Insurance Company (formerly CMG Entities) in January 2014 contributed substantially to the mortgage segment's growth. The reinsurance segment faced some headwinds with reduced net premiums written due to retrocessions to Watford Re, but net premiums earned showed resilience.

The acquisition of CMG Mortgage Insurance Company (now Arch Mortgage Insurance Company) in January 2014 was a strategic move to expand ACGL's presence in the U.S. mortgage insurance market. The mortgage segment saw a dramatic increase in gross premiums written (169.5% year-over-year for Q3 2014) and significant growth in net premiums earned (314.5% year-over-year for Q3 2014). The company is actively building out its sales force to serve a broader range of mortgage originators beyond credit unions.

Arch Capital manages natural catastrophe risk by monitoring it globally across all perils and regions. They aim to limit their 1-in-250 year return period net probable maximum pre-tax loss from a severe catastrophic event in any geographic zone to approximately 25% of total shareholders' equity. The company employs proprietary and vendor-based modeling systems, and the report details peak zone exposures for windstorms in the Northeastern U.S. and Gulf of Mexico, as well as earthquake exposure in Los Angeles.

The total return on investments for the 2014 third quarter was (0.51)%, compared to the benchmark of (0.89)%. This performance was impacted by the strengthening of the U.S. Dollar against other major currencies, affecting non-U.S. Dollar denominated investments. Excluding foreign exchange effects, the total return was 0.21% for the quarter. The company's investment strategy emphasizes total return and preservation of capital, with a diversified portfolio of fixed maturities, equity securities, and other investments.