10-QPeriod: Q3 FY2015

ARCH CAPITAL GROUP LTD. Quarterly Report for Q3 Ended Sep 30, 2015

Filed November 9, 2015For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported its financial results for the third quarter of 2015, highlighting a competitive market environment characterized by softening pricing. The company continues to focus on underwriting discipline, emphasizing smaller and medium-sized accounts. Key financial metrics show a slight increase in book value per common share to $47.68 from $47.49 in the prior quarter, driven by underwriting returns partially offset by negative investment returns. Operating Return on Average Equity (Operating ROAE) was 8.6% for the quarter, a decrease from 9.7% in the prior year's third quarter, reflecting lower underwriting income due to market conditions and business mix changes. The company maintained a disciplined investment strategy focused on capital preservation and diversification.

Financial Highlights

29 data points
Beta

Revenue

$932.59M

Net Income

$80.03M

8.6% Net Margin

EPS (Diluted)

$0.20

Total Assets

$23.77B

Cash & Equivalents

$649.78M

Free Cash Flow

$422.38M

Financial Statements
Beta
Revenue$932.59M
Interest Expense$13.30M
Net Income$80.03M
EPS (Basic)$0.21
EPS (Diluted)$0.20
Shares Outstanding (Basic)361.70M
Shares Outstanding (Diluted)375.04M

Key Highlights

  • 1Book value per common share increased to $47.68 as of September 30, 2015, up from $47.49 at June 30, 2015, and $44.04 a year prior.
  • 2Operating Return on Average Equity (Operating ROAE) was 8.6% for the third quarter of 2015, down from 9.7% in the third quarter of 2014.
  • 3The insurance segment saw a 0.7% increase in net premiums written, driven by growth in construction and travel, accident, and health, despite reductions in program business.
  • 4The reinsurance segment experienced a 9.6% decrease in net premiums written, attributed to non-renewals and share decreases in response to market conditions, particularly in other specialty and property lines.
  • 5The mortgage segment demonstrated strong growth with a 14.3% increase in net premiums written, bolstered by increased business from credit unions and mortgage originators, alongside growth in Australian single premium business.
  • 6The company's investment portfolio maintained an average credit quality rating of 'AA/Aa2' and an average yield to maturity of 2.10% as of September 30, 2015.
  • 7Arch Capital Group Ltd. continued its share repurchase program, with approximately $521.8 million remaining available as of September 30, 2015.

Frequently Asked Questions

The decrease in Operating ROAE from 9.7% in Q3 2014 to 8.6% in Q3 2015 was primarily due to a lower level of underwriting income. This was influenced by current market conditions, including competitive pricing, and changes in the mix of business written.

Arch Capital is executing a disciplined strategy by emphasizing small and medium-sized accounts over large accounts. They are also continuing to reduce writings in certain lines where they deem it necessary to achieve their return requirements in the low-interest rate environment.

The company monitors its natural catastrophe risk globally. Their models aim to limit net probable maximum loss from a severe catastrophic event to approximately 25% of total shareholders' equity. The most significant modeled exposures as of October 1, 2015, were windstorms affecting the Northeastern U.S. ($509 million loss), the Gulf of Mexico ($473 million loss), and Florida ($414 million loss).

Arch Capital uses three key financial indicators: Book Value per Common Share (believed to be the key driver of ACGL's share price), Operating Return on Average Common Equity (with an objective of 15% or greater over the insurance cycle), and Total Return on Investments.