What drove the unusually large net income figure this quarter, and is it repeatable?

The $2.3 billion of net income was driven primarily by a one-time $1.18 billion net deferred tax asset recorded in Q4 2023 under Bermuda's new Corporate Income Tax Act. That item, along with realized gains, equity-method income, and FX effects, is excluded from the non-GAAP after-tax operating income of $945 million ($2.49 per share), which management views as the better measure of ongoing performance. The tax benefit is non-recurring, so the GAAP figure should not be extrapolated.

How is the new Bermuda tax expected to affect Arch's future earnings?

Bermuda's 15% corporate income tax applies to fiscal years beginning on or after January 1, 2025. Arch expects to incur and pay increased Bermuda taxes starting in 2025. The deferred tax asset is expected to be used predominantly over about ten years, which partly offsets the new cost, but future effective tax rates on operating income are likely to rise from the 8.0% level reported for 2023.

Is the underwriting business still performing well, or was the quarter driven by investments?

Underwriting remained strong. The consolidated combined ratio was 78.9%, underwriting income was $715 million, and gross and net premiums written grew 12.0% and 7.4%. Growth reflected rate increases and new business, particularly in insurance and property reinsurance. Investment income also rose substantially, but the core underwriting engine contributed the majority of operating earnings.

What were the main risks or soft spots in the quarter?

The mortgage segment's underwriting income fell 23.3% year over year, as favorable reserve development was smaller than in the prior year and premiums declined 7.3% on higher ceded premiums and Bellemeade termination payments. Catastrophe losses in reinsurance were 5.1 points of the segment's loss ratio, and the insurance segment's expense ratio rose on higher incentive compensation. Net foreign exchange losses of $59 million also weighed on results.

Does Arch have capital available for buybacks or further growth?

Arch had $21.1 billion of total capital at year-end 2023, with debt-to-capital of 12.9%, and total shareholders' equity of $18.4 billion. The company had $1.0 billion remaining under its share repurchase authorization through December 31, 2024, but made no repurchases in the fourth quarter. Management said it is bullish on 2024 opportunities, which suggests capital will continue to be deployed primarily into underwriting growth.

ARCH CAPITAL GROUP LTD. 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed February 14, 2024. Cited figures are marked; the original filing is the authoritative source.

Arch Capital Group (ACGL) reported strong fourth-quarter 2023 results, with net income available to common shareholders of $2.3 billion^a, or $6.12 per diluted share, representing a 58.2% annualized return on average common equity.

However, this headline figure was inflated by a one-time $1.18 billion^b net deferred tax asset ($3.10 per share) recorded in connection with Bermuda's new 15% corporate income tax, enacted December 27, 2023. Excluding that item and other non-operating items such as realized gains, equity-method income, and FX, after-tax operating income available to common shareholders was $945 million, or $2.49 per share, a 23.7% annualized operating ROE, up from $2.14 per share a year earlier. Underlying underwriting performance remained excellent.

Gross premiums written rose 12.0% to $4.25 billion^c and net premiums written rose 7.4% to $3.26 billion, with the insurance and reinsurance segments driving growth on higher rates and new business. The consolidated combined ratio was 78.9%, flat with the prior-year excluding catastrophe and prior-year development, while catastrophe losses of $137 million (about 4.1 points) were offset by $135 million of favorable prior-year reserve development. Net investment income more than doubled year over year to $313 million, reflecting higher yields and invested asset growth, and the pre-tax investment yield rose to 4.11%.

Book value per common share reached $46.94^d, up 21.5% in the quarter and 43.9% for the full year, though investors should note the book value boost includes the tax asset. For investors, the key takeaways are the durability of the hard-market pricing cycle and the strong operating earnings base, tempered by the new Bermuda tax regime, which Arch expects will increase its tax expense beginning in 2025.

The $1.18 billion deferred tax asset is expected to be utilized predominantly over roughly ten years, so it should be viewed as a non-cash, accounting-driven component of reported equity and earnings rather than recurring profit. Management also remains bullish on 2024 pricing and opportunity, and the Company retains $1.0 billion of remaining share repurchase authorization through December 31, 2024.

02—Key points

Key Highlights

Reported net income available to common shareholders of $2.3 billion ($6.12 per diluted share), a 58.2% annualized ROE, inflated by a one-time $1.18 billion ($3.10 per share) net deferred tax asset from Bermuda's new corporate income tax.
After-tax operating income available to common shareholders was $945 million ($2.49 per share), up 16.4% per share year over year, with a 23.7% annualized operating ROE.
Gross premiums written grew 12.0% to $4.25 billion and net premiums written grew 7.4% to $3.26 billion, led by insurance (+19.1% NPW) and reinsurance (property and other specialty lines).
Consolidated combined ratio of 78.9%, with $137 million of current-year catastrophe losses (about 4.1 points) partly offset by $135 million of favorable prior-year reserve development.
Net investment income nearly tripled to $313 million from $181 million a year earlier, with the pre-tax investment yield rising to 4.11% from 2.80%.
Book value per common share rose 21.5% in the quarter to $46.94 and 43.9% for the full year, though much of the quarterly gain reflects the non-cash tax asset.
Bermuda's 15% corporate income tax takes effect for fiscal years beginning on or after January 1, 2025, and Arch expects increased Bermuda taxes starting in 2025; the mortgage segment's underwriting income declined 23.3% year over year on lower favorable development.

03—Questions

Frequently Asked Questions

What drove the unusually large net income figure this quarter, and is it repeatable?
The $2.3 billion of net income was driven primarily by a one-time $1.18 billion net deferred tax asset recorded in Q4 2023 under Bermuda's new Corporate Income Tax Act. That item, along with realized gains, equity-method income, and FX effects, is excluded from the non-GAAP after-tax operating income of $945 million ($2.49 per share), which management views as the better measure of ongoing performance. The tax benefit is non-recurring, so the GAAP figure should not be extrapolated.
How is the new Bermuda tax expected to affect Arch's future earnings?
Bermuda's 15% corporate income tax applies to fiscal years beginning on or after January 1, 2025. Arch expects to incur and pay increased Bermuda taxes starting in 2025. The deferred tax asset is expected to be used predominantly over about ten years, which partly offsets the new cost, but future effective tax rates on operating income are likely to rise from the 8.0% level reported for 2023.
Is the underwriting business still performing well, or was the quarter driven by investments?
Underwriting remained strong. The consolidated combined ratio was 78.9%, underwriting income was $715 million, and gross and net premiums written grew 12.0% and 7.4%. Growth reflected rate increases and new business, particularly in insurance and property reinsurance. Investment income also rose substantially, but the core underwriting engine contributed the majority of operating earnings.
What were the main risks or soft spots in the quarter?
The mortgage segment's underwriting income fell 23.3% year over year, as favorable reserve development was smaller than in the prior year and premiums declined 7.3% on higher ceded premiums and Bellemeade termination payments. Catastrophe losses in reinsurance were 5.1 points of the segment's loss ratio, and the insurance segment's expense ratio rose on higher incentive compensation. Net foreign exchange losses of $59 million also weighed on results.
Does Arch have capital available for buybacks or further growth?
Arch had $21.1 billion of total capital at year-end 2023, with debt-to-capital of 12.9%, and total shareholders' equity of $18.4 billion. The company had $1.0 billion remaining under its share repurchase authorization through December 31, 2024, but made no repurchases in the fourth quarter. Management said it is bullish on 2024 opportunities, which suggests capital will continue to be deployed primarily into underwriting growth.

04—Continue

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