10-QPeriod: Q3 FY2017

ARCH CAPITAL GROUP LTD. Quarterly Report for Q3 Ended Sep 30, 2017

Filed November 3, 2017For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) reported a net loss for the third quarter of 2017, primarily driven by significant catastrophe losses from Hurricanes Harvey, Irma, and Maria, as well as earthquakes in Mexico. Despite the quarterly loss, the company's overall financial position remains robust, with total shareholders' equity increasing to $9.77 billion. The acquisition of United Guaranty Corporation (UGC) in late 2016 has significantly boosted the mortgage segment, showing strong premium growth. Investment income contributed positively, though net realized gains were lower than the prior year. The company's book value per share saw an increase of 11.8% over the trailing twelve months, reaching $59.61. Management highlighted disciplined underwriting and strategic investment management as key to navigating market conditions and a challenging catastrophe environment, aiming for an average operating return on equity of 15% or greater over the insurance cycle.

Financial Highlights

29 data points
Beta

Revenue

$1.48B

Net Income

-$33.66M

-2.3% Net Margin

EPS (Diluted)

$-0.13

Total Assets

$32.62B

Cash & Equivalents

$862.36M

Free Cash Flow

$527.17M

Financial Statements
Beta
Revenue$1.48B
Interest Expense$29.51M
Net Income-$33.66M
EPS (Basic)$-0.13
EPS (Diluted)$-0.13
Shares Outstanding (Basic)404.66M
Shares Outstanding (Diluted)404.66M

Key Highlights

  • 1Net loss of $52.76 million for the third quarter of 2017, impacted by approximately $347.8 million in catastrophe losses.
  • 2Book value per share increased to $59.61 as of September 30, 2017, an 11.8% increase year-over-year.
  • 3Total shareholders' equity grew to $9.77 billion.
  • 4Net premiums earned increased across all segments, with significant growth in the mortgage segment driven by the UGC acquisition.
  • 5The reinsurance segment experienced strong growth in net premiums written, up 34.9% year-over-year, driven by casualty and other specialty lines.
  • 6Investment portfolio generated a total return of 1.60% for the third quarter of 2017, outperforming its benchmark.
  • 7The company completed a $230 million offering of Series F Preferred Shares and used proceeds to partially redeem Series C Preferred Shares.

Frequently Asked Questions

The primary driver of the net loss was a significant increase in losses and loss adjustment expenses due to catastrophic events, including Hurricanes Harvey, Irma, and Maria, and earthquakes in Mexico. These events resulted in estimated net losses of $347.8 million.

The acquisition of United Guaranty Corporation (UGC) in late 2016 significantly expanded the company's mortgage segment. This led to substantial growth in gross and net premiums written and earned for the mortgage segment, contributing positively to the overall financial results despite the catastrophe losses.

Management noted that the property casualty insurance market remains competitive with slight rate deterioration in some sectors. However, they anticipate that recent catastrophic events may lead to rate improvements and create opportunities for growth. The company remains committed to disciplined underwriting.

Arch Capital manages its investment portfolio to maximize total return within certain guidelines, with a focus on equity and alternative strategies. The total return on investments for Q3 2017 was 1.60%, outperforming the benchmark. The company also uses derivative instruments to manage portfolio duration and hedge currency exposures.