10-QPeriod: Q2 FY2017

ARCH CAPITAL GROUP LTD. Quarterly Report for Q2 Ended Jun 30, 2017

Filed August 4, 2017For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported its second-quarter 2017 financial results, demonstrating solid performance across its core business segments. The company experienced growth in net premiums written, particularly in its mortgage and reinsurance segments, driven by strategic acquisitions and favorable market conditions. Investment income also contributed positively to the overall results. The company's financial position remains strong, with total shareholders' equity increasing to $9.78 billion. Management highlighted a continued focus on underwriting discipline and efficient capital allocation, aiming for an operating return on equity of 15% or greater over the insurance cycle. The report indicates a robust operational performance, with a significant increase in net premiums earned, especially in the mortgage segment following the acquisition of United Guaranty Corporation (UGC). The reinsurance segment also saw increased net premiums written, partly due to retroactive reinsurance contracts. While the insurance segment faced slightly weaker market conditions leading to a decrease in net premiums written, it maintained a combined ratio close to 100%. Overall, ACGL delivered positive underwriting income and a healthy total return on investments, positioning the company for continued growth.

Financial Highlights

29 data points
Beta

Revenue

$1.41B

Net Income

$185.17M

13.2% Net Margin

EPS (Diluted)

$0.42

Total Assets

$30.86B

Cash & Equivalents

$740.32M

Free Cash Flow

$349.88M

Financial Statements
Beta
Revenue$1.41B
Interest Expense$28.75M
Net Income$185.17M
EPS (Basic)$0.43
EPS (Diluted)$0.42
Shares Outstanding (Basic)403.46M
Shares Outstanding (Diluted)417.73M

Key Highlights

  • 1Net premiums earned increased by 8.0% in the reinsurance segment and a substantial 287.7% in the mortgage segment (year-over-year for Q2 2017), driven by strategic growth and acquisitions.
  • 2The company reported a strong net income of $199.1 million for the three months ended June 30, 2017, and $473.1 million for the six months ended June 30, 2017.
  • 3Total shareholders' equity available to Arch grew to $8.90 billion as of June 30, 2017, up from $8.25 billion at December 31, 2016.
  • 4Book value per common share increased to $59.60 at June 30, 2017, a 15.2% increase over the trailing twelve months, reflecting strong underwriting and investment returns.
  • 5The mortgage segment's underwriting income saw a significant increase of 342.7% year-over-year in Q2 2017, largely due to the UGC acquisition.
  • 6Net favorable development on prior year loss reserves was reported across segments, contributing positively to underwriting results.
  • 7The company's investment portfolio generated a total return of 1.63% for the 2017 second quarter, outperforming its benchmark return of 1.53%.

Frequently Asked Questions

The acquisition of United Guaranty Corporation (UGC) significantly boosted the mortgage segment's results. This is evident in the substantial increase in net premiums earned (287.7% year-over-year for Q2 2017) and underwriting income (342.7% year-over-year for Q2 2017) in the mortgage segment. The acquisition also contributed to the overall growth in total shareholders' equity and book value per share.

The reinsurance segment showed strong growth in net premiums written, increasing by 15.7% year-over-year in Q2 2017, partly due to retroactive reinsurance contracts. Net premiums earned increased by 8.0%. While the segment reported a lower underwriting income compared to the prior year, this was mainly due to a decrease in 'other underwriting income' from a one-time contract commutation in the prior year. The segment maintained a favorable loss ratio and improved its combined ratio to 94.0%.

Arch Capital views the broad property casualty insurance market as competitive with slight deterioration in rates in certain sectors. To address this, the company is emphasizing smaller and medium-sized accounts and utilizing reinsurance for larger, high-capacity business. The mortgage segment, however, is experiencing favorable market conditions. The company's objective is to achieve an average operating return on average equity of 15% or greater over the insurance cycle, demonstrating a commitment to disciplined underwriting and capital allocation.

Investment income and realized gains contributed positively to the company's overall financial performance. Net investment income increased significantly year-over-year. The total return on investments for the second quarter of 2017 was 1.63%, slightly outperforming the benchmark return of 1.53%. The company's investment portfolio is actively managed to maximize total return within established guidelines.