UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018 | |
Or | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-16209
ARCH CAPITAL GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda | Not applicable |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Waterloo House, Ground Floor | |
100 Pitts Bay Road, Pembroke HM 08, Bermuda | (441) 278-9250 |
(Address of principal executive offices) | (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated Filer þ Accelerated Filer o Non-accelerated Filer o Smaller reporting
company o Emerging growth company o
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of August 3, 2018, there were 405,299,490 common shares, $0.0011 par value per share, of the registrant outstanding.
ARCH CAPITAL GROUP LTD.
INDEX TO FORM 10-Q
Page No. | |||
PART I | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 5. | |||
Item 6. | |||
ARCH CAPITAL | 1 | 2018 SECOND QUARTER FORM 10-Q |
PART I. FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. This report or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this report are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology.
Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this report and in our periodic reports filed with the Securities and Exchange Commission (the “SEC”), and include:
• | our ability to successfully implement our business strategy during “soft” as well as “hard” markets; |
• | acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and our insureds and reinsureds; |
• | the integration of any businesses we have acquired or may acquire into our existing operations; |
• | our ability to maintain or improve our ratings, which may be affected by our ability to raise additional equity or debt financings, by ratings agencies’ existing or new policies and practices, as well as other factors described herein; |
• | general economic and market conditions (including inflation, interest rates, unemployment, housing prices, foreign currency exchange rates, prevailing credit terms and the depth and duration of a recession) and conditions specific to the reinsurance and insurance markets (including the length and magnitude of the current “soft” market) in which we operate; |
• | competition, including increased competition, on the basis of pricing, capacity (including alternative sources of capital), coverage terms, or other factors; |
• | developments in the world’s financial and capital markets and our access to such markets; |
• | our ability to successfully enhance, integrate and maintain operating procedures (including information technology) to effectively support our current and new business; |
• | the loss of key personnel; |
• | accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like our company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to us through June 30, 2018; |
• | greater than expected loss ratios on business written by us and adverse development on claim and/or claim expense liabilities related to business written by our insurance and reinsurance subsidiaries; |
• | severity and/or frequency of losses; |
• | claims for natural or man-made catastrophic events or severe economic events in our insurance, reinsurance and mortgage businesses could cause large losses and substantial volatility in our results of operations; |
• | acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events; |
• | availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance; |
• | the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to us; |
• | the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us; |
• | our investment performance, including legislative or regulatory developments that may adversely affect the fair value of our investments; |
ARCH CAPITAL | 2 | 2018 SECOND QUARTER FORM 10-Q |
• | changes in general economic conditions, including new or continued sovereign debt concerns in Eurozone countries or downgrades of U.S. securities by credit rating agencies, which could affect our business, financial condition and results of operations; |
• | the volatility of our shareholders’ equity from foreign currency fluctuations, which could increase due to us not matching portions of our projected liabilities in foreign currencies with investments in the same currencies; |
• | changes in accounting principles or policies or in our application of such accounting principles or policies; |
• | changes in the political environment of certain countries in which we operate or underwrite business; |
• | a disruption caused by cyber-attacks or other technology breaches or failures on us or our business partners and service providers, which could negatively impact our business and/or expose us to litigation; |
• | statutory or regulatory developments, including as to tax matters and insurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers, including the Tax Cuts and Jobs Act of 2017; and |
• | the other matters set forth under Item 1A “Risk Factors”, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of our Annual Report on Form 10-K for the year ended December 31, 2017, as well as the other factors set forth in our other documents on file with the SEC, and management’s response to any of the aforementioned factors. |
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
ARCH CAPITAL | 3 | 2018 SECOND QUARTER FORM 10-Q |
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Page No. | ||
June 30, 2018 (unaudited) and December 31, 2017 | ||
For the three and six month periods ended June 30, 2018 and 2017 (unaudited) | ||
For the three and six month periods ended June 30, 2018 and 2017 (unaudited) | ||
For the six month periods ended June 30, 2018 and 2017 (unaudited) | ||
For the six month periods ended June 30, 2018 and 2017 (unaudited) | ||
Notes to Consolidated Financial Statements (unaudited) | ||
ARCH CAPITAL | 4 | 2018 SECOND QUARTER FORM 10-Q |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Arch Capital Group Ltd.:
Results of Review of Financial Statements
We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries as of June 30, 2018, and the related consolidated statements of income and of comprehensive income for the three-month and six-month periods ended June 30, 2018 and June 30, 2017, and the consolidated statements of changes in shareholders’ equity and cash flows for the six-month periods ended June 30, 2018 and June 30, 2017 including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 28, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, NY
August 8, 2018
ARCH CAPITAL | 5 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands, except share data) | |||||||
(Unaudited) | |||||||
June 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Investments: | |||||||
Fixed maturities available for sale, at fair value (amortized cost: $14,293,121 and $13,869,460) | $ | 14,128,989 | $ | 13,876,003 | |||
Short-term investments available for sale, at fair value (amortized cost: $1,096,532 and $1,468,955) | 1,096,798 | 1,469,042 | |||||
Collateral received under securities lending, at fair value (amortized cost: $236,948 and $476,605) | 236,956 | 476,615 | |||||
Equity securities, at fair value | 534,482 | 495,804 | |||||
Other investments available for sale, at fair value (cost: $0 and $198,163) | — | 264,989 | |||||
Investments accounted for using the fair value option | 4,111,611 | 4,216,237 | |||||
Investments accounted for using the equity method | 1,428,582 | 1,041,322 | |||||
Total investments | 21,537,418 | 21,840,012 | |||||
Cash | 526,628 | 606,199 | |||||
Accrued investment income | 114,307 | 113,133 | |||||
Securities pledged under securities lending, at fair value (amortized cost: $229,857 and $463,181) | 230,064 | 464,917 | |||||
Premiums receivable | 1,351,310 | 1,135,249 | |||||
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses | 2,727,303 | 2,540,143 | |||||
Contractholder receivables | 2,044,322 | 1,978,414 | |||||
Ceded unearned premiums | 1,014,663 | 926,611 | |||||
Deferred acquisition costs net | 569,817 | 535,824 | |||||
Receivable for securities sold | 143,809 | 205,536 | |||||
Goodwill and intangible assets | 593,008 | 652,611 | |||||
Other assets | 1,000,471 | 1,053,009 | |||||
Total assets | $ | 31,853,120 | $ | 32,051,658 | |||
Liabilities | |||||||
Reserve for losses and loss adjustment expenses | $ | 11,424,337 | $ | 11,383,792 | |||
Unearned premiums | 3,833,540 | 3,622,314 | |||||
Reinsurance balances payable | 411,082 | 323,496 | |||||
Contractholder payables | 2,044,322 | 1,978,414 | |||||
Collateral held for insured obligations | 257,396 | 240,183 | |||||
Senior notes | 1,733,211 | 1,732,884 | |||||
Revolving credit agreement borrowings | 572,289 | 816,132 | |||||
Securities lending payable | 236,948 | 476,605 | |||||
Payable for securities purchased | 356,583 | 449,186 | |||||
Other liabilities | 752,399 | 782,717 | |||||
Total liabilities | 21,622,107 | 21,805,723 | |||||
Commitments and Contingencies | |||||||
Redeemable noncontrolling interests | 206,105 | 205,922 | |||||
Shareholders' Equity | |||||||
Non-cumulative preferred shares | 780,000 | 872,555 | |||||
Convertible non-voting common equivalent preferred shares | — | 489,627 | |||||
Common shares ($0.0011 par, shares issued: 569,458,341 and 549,872,226) | 633 | 611 | |||||
Additional paid-in capital | 1,760,606 | 1,230,617 | |||||
Retained earnings | 9,083,202 | 8,562,889 | |||||
Accumulated other comprehensive income (loss), net of deferred income tax | (194,157 | ) | 118,044 | ||||
Common shares held in treasury, at cost (shares: 164,021,704 and 156,938,409) | (2,266,529 | ) | (2,077,741 | ) | |||
Total shareholders' equity available to Arch | 9,163,755 | 9,196,602 | |||||
Non-redeemable noncontrolling interests | 861,153 | 843,411 | |||||
Total shareholders' equity | 10,024,908 | 10,040,013 | |||||
Total liabilities, noncontrolling interests and shareholders' equity | $ | 31,853,120 | $ | 32,051,658 | |||
See Notes to Consolidated Financial Statements
ARCH CAPITAL | 6 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in thousands, except share data) | |||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues | |||||||||||||||
Net premiums written | $ | 1,298,896 | $ | 1,248,695 | $ | 2,711,440 | $ | 2,524,955 | |||||||
Change in unearned premiums | 37,867 | (7,821 | ) | (139,778 | ) | (167,064 | ) | ||||||||
Net premiums earned | 1,336,763 | 1,240,874 | 2,571,662 | 2,357,891 | |||||||||||
Net investment income | 135,668 | 111,124 | 262,392 | 228,998 | |||||||||||
Net realized gains (losses) | (76,611 | ) | 21,735 | (187,609 | ) | 55,888 | |||||||||
Other-than-temporary impairment losses | (470 | ) | (1,730 | ) | (632 | ) | (3,537 | ) | |||||||
Less investment impairments recognized in other comprehensive income, before taxes | — | — | — | — | |||||||||||
Net impairment losses recognized in earnings | (470 | ) | (1,730 | ) | (632 | ) | (3,537 | ) | |||||||
Other underwriting income | 3,874 | 4,822 | 9,223 | 9,455 | |||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 8,472 | 32,706 | 36,541 | 80,794 | |||||||||||
Other income (loss) | 3,113 | (1,994 | ) | 3,187 | (2,776 | ) | |||||||||
Total revenues | 1,410,809 | 1,407,537 | 2,694,764 | 2,726,713 | |||||||||||
Expenses | |||||||||||||||
Losses and loss adjustment expenses | 726,153 | 689,860 | 1,363,013 | 1,242,430 | |||||||||||
Acquisition expenses | 202,838 | 190,436 | 394,214 | 372,725 | |||||||||||
Other operating expenses | 176,181 | 169,981 | 351,196 | 344,700 | |||||||||||
Corporate expenses | 22,512 | 24,876 | 37,824 | 52,668 | |||||||||||
Amortization of intangible assets | 26,472 | 30,824 | 53,208 | 62,118 | |||||||||||
Interest expense | 30,344 | 28,749 | 60,980 | 57,425 | |||||||||||
Net foreign exchange (gains) losses | (53,706 | ) | 39,543 | (33,985 | ) | 58,947 | |||||||||
Total expenses | 1,130,794 | 1,174,269 | 2,226,450 | 2,191,013 | |||||||||||
Income before income taxes | 280,015 | 233,268 | 468,314 | 535,700 | |||||||||||
Income tax expense | (23,668 | ) | (34,169 | ) | (45,583 | ) | (62,566 | ) | |||||||
Net income | $ | 256,347 | $ | 199,099 | $ | 422,731 | $ | 473,134 | |||||||
Net (income) loss attributable to noncontrolling interests | (12,701 | ) | (13,932 | ) | (28,662 | ) | (34,840 | ) | |||||||
Net income available to Arch | 243,646 | 185,167 | 394,069 | 438,294 | |||||||||||
Preferred dividends | (10,403 | ) | (11,349 | ) | (20,840 | ) | (22,567 | ) | |||||||
Loss on redemption of preferred shares | — | — | (2,710 | ) | — | ||||||||||
Net income available to Arch common shareholders | $ | 233,243 | $ | 173,818 | $ | 370,519 | $ | 415,727 | |||||||
Net income per common share and common share equivalent | |||||||||||||||
Basic | $ | 0.58 | $ | 0.43 | $ | 0.91 | $ | 1.03 | |||||||
Diluted | $ | 0.56 | $ | 0.42 | $ | 0.89 | $ | 1.00 | |||||||
Weighted average common shares and common share equivalents outstanding | |||||||||||||||
Basic | 404,800,421 | 403,459,992 | 406,162,508 | 402,786,129 | |||||||||||
Diluted | 413,111,205 | 417,733,938 | 415,460,756 | 417,421,896 | |||||||||||
See Notes to Consolidated Financial Statements
ARCH CAPITAL | 7 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in thousands) | |||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Comprehensive Income | |||||||||||||||
Net income | $ | 256,347 | $ | 199,099 | $ | 422,731 | $ | 473,134 | |||||||
Other comprehensive income (loss), net of deferred income tax | |||||||||||||||
Unrealized appreciation (decline) in value of available-for-sale investments: | |||||||||||||||
Unrealized holding gains (losses) arising during period | (85,271 | ) | 92,969 | (251,948 | ) | 193,761 | |||||||||
Reclassification of net realized (gains) losses, net of income taxes, included in net income | 36,643 | (17,224 | ) | 99,104 | (22,268 | ) | |||||||||
Foreign currency translation adjustments | (12,595 | ) | 18,297 | (11,313 | ) | 21,421 | |||||||||
Comprehensive income | 195,124 | 293,141 | 258,574 | 666,048 | |||||||||||
Net (income) loss attributable to noncontrolling interests | (12,701 | ) | (13,932 | ) | (28,662 | ) | (34,840 | ) | |||||||
Other comprehensive (income) loss attributable to noncontrolling interests | 1,077 | 76 | 1,750 | 68 | |||||||||||
Comprehensive income available to Arch | $ | 183,500 | $ | 279,285 | $ | 231,662 | $ | 631,276 | |||||||
See Notes to Consolidated Financial Statements
ARCH CAPITAL | 8 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (U.S. dollars in thousands) | |||||||
(Unaudited) | |||||||
Six Months Ended | |||||||
June 30, | |||||||
2018 | 2017 | ||||||
Non-cumulative preferred shares | |||||||
Balance at beginning of year | $ | 872,555 | $ | 772,555 | |||
Preferred shares redeemed | (92,555 | ) | — | ||||
Balance at end of period | 780,000 | 772,555 | |||||
Convertible non-voting common equivalent preferred shares | |||||||
Balance at beginning of year | 489,627 | 1,101,304 | |||||
Preferred shares converted to common shares | (489,627 | ) | (611,677 | ) | |||
Balance at end of period | — | 489,627 | |||||
Common shares | |||||||
Balance at beginning of year | 611 | 582 | |||||
Common shares issued, net | 22 | 27 | |||||
Balance at end of period | 633 | 609 | |||||
Additional paid-in capital | |||||||
Balance at beginning of year | 1,230,617 | 531,687 | |||||
Preferred shares converted to common shares | 489,608 | 611,653 | |||||
Reversal of issue costs on preferred shares redeemed | 2,710 | — | |||||
All other | 37,671 | 53,544 | |||||
Balance at end of period | 1,760,606 | 1,196,884 | |||||
Retained earnings | |||||||
Balance at beginning of year | 8,562,889 | 7,996,701 | |||||
Cumulative effect of an accounting change (see Note 2) | 149,794 | (314 | ) | ||||
Balance at beginning of year, as adjusted | 8,712,683 | 7,996,387 | |||||
Net income | 422,731 | 473,134 | |||||
Net (income) loss attributable to noncontrolling interests | (28,662 | ) | (34,840 | ) | |||
Preferred share dividends | (20,840 | ) | (22,567 | ) | |||
Loss on redemption of preferred shares | (2,710 | ) | — | ||||
Balance at end of period | 9,083,202 | 8,412,114 | |||||
Accumulated other comprehensive income (loss), net of deferred income tax | |||||||
Balance at beginning of year | 118,044 | (114,541 | ) | ||||
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax: | |||||||
Balance at beginning of year | 157,400 | (27,641 | ) | ||||
Cumulative effect of an accounting change (see Note 2) | (149,794 | ) | — | ||||
Balance at beginning of year, as adjusted | 7,606 | (27,641 | ) | ||||
Unrealized holding gains (losses) arising during period, net of reclassification adjustment | (152,844 | ) | 171,493 | ||||
Unrealized holding gains (losses) arising during period attributable to noncontrolling interests | 1,885 | — | |||||
Balance at end of period | (143,353 | ) | 143,852 | ||||
Foreign currency translation adjustments, net of deferred income tax: | |||||||
Balance at beginning of year | (39,356 | ) | (86,900 | ) | |||
Foreign currency translation adjustments | (11,313 | ) | 21,421 | ||||
Foreign currency translation adjustments attributable to noncontrolling interests | (135 | ) | 68 | ||||
Balance at end of period | (50,804 | ) | (65,411 | ) | |||
Balance at end of period | (194,157 | ) | 78,441 | ||||
Common shares held in treasury, at cost | |||||||
Balance at beginning of year | (2,077,741 | ) | (2,034,570 | ) | |||
Shares repurchased for treasury | (188,788 | ) | (16,773 | ) | |||
Balance at end of period | (2,266,529 | ) | (2,051,343 | ) | |||
Total shareholders’ equity available to Arch | 9,163,755 | 8,898,887 | |||||
Non-redeemable noncontrolling interests | 861,153 | 877,456 | |||||
Total shareholders’ equity | $ | 10,024,908 | $ | 9,776,343 | |||
See Notes to Consolidated Financial Statements
ARCH CAPITAL | 9 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands) | |||||||
(Unaudited) | |||||||
Six Months Ended | |||||||
June 30, | |||||||
2018 | 2017 | ||||||
Operating Activities | |||||||
Net income | $ | 422,731 | $ | 473,134 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Net realized (gains) losses | 177,442 | (74,985 | ) | ||||
Net impairment losses recognized in earnings | 632 | 3,537 | |||||
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss | (13,543 | ) | (47,529 | ) | |||
Amortization of intangible assets | 53,208 | 62,118 | |||||
Share-based compensation | 35,419 | 42,739 | |||||
Changes in: | |||||||
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable | (77,891 | ) | 180,342 | ||||
Unearned premiums, net of ceded unearned premiums | 139,778 | 167,064 | |||||
Premiums receivable | (236,950 | ) | (222,498 | ) | |||
Deferred acquisition costs | (35,111 | ) | (53,553 | ) | |||
Reinsurance balances payable | 88,961 | 50,112 | |||||
Other items, net | (57,790 | ) | (46,946 | ) | |||
Net cash provided by operating activities | 496,886 | 533,535 | |||||
Investing Activities | |||||||
Purchases of fixed maturity investments | (16,867,570 | ) | (19,899,326 | ) | |||
Purchases of equity securities | (679,663 | ) | (400,155 | ) | |||
Purchases of other investments | (1,017,147 | ) | (883,704 | ) | |||
Proceeds from sales of fixed maturity investments | 16,090,543 | 19,611,680 | |||||
Proceeds from sales of equity securities | 622,068 | 473,064 | |||||
Proceeds from sales, redemptions and maturities of other investments | 773,298 | 614,494 | |||||
Proceeds from redemptions and maturities of fixed maturity investments | 511,448 | 447,941 | |||||
Net settlements of derivative instruments | 4,498 | (5,984 | ) | ||||
Net sales (purchases) of short-term investments | 451,901 | (445,203 | ) | ||||
Change in cash collateral related to securities lending | 176,304 | 175,693 | |||||
Purchases of fixed assets | (13,242 | ) | (11,103 | ) | |||
Other | 49,961 | 33,488 | |||||
Net cash provided by (used for) investing activities | 102,399 | (289,115 | ) | ||||
Financing Activities | |||||||
Redemption of preferred shares | (92,555 | ) | — | ||||
Purchases of common shares under share repurchase program | (173,575 | ) | — | ||||
Proceeds from common shares issued, net | (13,851 | ) | (6,838 | ) | |||
Proceeds from borrowings | 130,579 | — | |||||
Repayments of borrowings | (373,000 | ) | (72,000 | ) | |||
Change in cash collateral related to securities lending | (176,304 | ) | (175,693 | ) | |||
Dividends paid to redeemable noncontrolling interests | (8,994 | ) | (8,994 | ) | |||
Other | (4,489 | ) | (41,698 | ) | |||
Preferred dividends paid | (20,840 | ) | (22,567 | ) | |||
Net cash provided by (used for) financing activities | (733,029 | ) | (327,790 | ) | |||
Effects of exchange rate changes on foreign currency cash and restricted cash | (10,431 | ) | 9,616 | ||||
Increase (decrease) in cash and restricted cash | (144,175 | ) | (73,754 | ) | |||
Cash and restricted cash, beginning of year | 727,284 | 969,569 | |||||
Cash and restricted cash, end of period | $ | 583,109 | $ | 895,815 | |||
Reconciliation of cash and restricted cash within the Consolidated Balance Sheets: | June 30, 2018 | December 31, 2017 | |||||
Cash | $ | 526,628 | $ | 606,199 | |||
Restricted cash (included in ‘other assets’) | $ | 56,481 | $ | 121,085 | |||
Cash and restricted cash | $ | 583,109 | $ | 727,284 | |||
See Notes to Consolidated Financial Statements
ARCH CAPITAL | 10 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
Arch Capital Group Ltd. (“Arch Capital”) is a Bermuda public limited liability company which provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. As used herein, the “Company” means Arch Capital and its subsidiaries. The Company’s consolidated financial statements include the results of Watford Holdings Ltd. and its wholly owned subsidiaries. See Note 11.
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
2. Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted
The Company adopted ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities,” which enhances the
reporting model for financial instruments and provides improved financial information to readers of the financial statements. Among other provisions focused on improving the recognition and measurement of financial instruments, the ASU significantly changes the income statement impact of equity instruments and the recognition of changes in fair value of financial liabilities attributable to an entity's own credit risk when the fair value option is elected. The ASU requires equity instruments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with any changes in fair value recognized in net income rather than other comprehensive income. Upon adoption of this ASU, the Company recorded a cumulative effect adjustment of $149.8 million in retained earnings and an offsetting decrease in accumulated other comprehensive income. The adoption of this ASU did not have a material impact on the Company's financial position, cash flows, or total comprehensive income, but may increase volatility in the Company's results of operations in future periods.
The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which creates a new comprehensive revenue recognition standard that serves as a single source of revenue guidance for all companies in all industries. The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, such as insurance contracts or financial instruments. The ASU also requires enhanced disclosures about revenue. The Company adopted the ASU using the modified retrospective method, whereby the cumulative effect of adoption was recognized as an adjustment to retained earnings at the date of initial application. The impact of the adoption of this ASU was not material, mostly because the accounting for insurance contracts is outside of the scope of ASU 2014-09.
The Company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” which requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the reconciliation of beginning and ending cash on the statements of cash flows. As a result, transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented on the statement of cash flows. The revised presentation required in this ASU is reflected in the Company’s consolidated statements of cash flows for both periods presented. The adoption of this ASU did not have any effect on the Company’s results of operations, financial position or comprehensive income.
Recently Issued Accounting Standards Not Yet Adopted
For information regarding accounting standards that the Company has not yet adopted, see note 3(q), “Significant
ARCH CAPITAL | 11 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accounting Policies—Recent Accounting Pronouncements,” of the notes to consolidated financial statements in the Company’s 2017 Form 10-K.
3. Share Transactions
Three-For-One Common Share Split
In May 2018, shareholders approved a proposal to amend the memorandum of association by sub-dividing the authorized common shares of Arch Capital to effect a three-for-one split of Arch Capital’s common shares. The share split changed the Company’s authorized common shares to 1.8 billion common shares (600 million previously), with a par value of $.0011 per share ($.0033 previously). Information pertaining to the composition of the Company’s shareholders’ equity accounts, shares and earnings per share has been retroactively restated in the accompanying financial statements and notes to the consolidated financial statements to reflect the share split.
Share-Based Compensation
During the 2018 second quarter, the Company granted 2,199,656 stock options, 1,264,931 restricted shares and units and 705,345 performance shares and units to certain employees and directors with weighted average grant-date fair values of $7.43, $26.56 and $24.65, respectively. During the 2017 second quarter, the Company granted 1,477,398 stock options and 1,534,908 restricted shares and units to certain employees and directors with weighted average grant-date fair values of $8.22 and $32.09, respectively. The stock options were valued at the grant date using the Black-Scholes option pricing model. Such values are being amortized over the respective substantive vesting period. For awards granted to retirement-eligible employees where no service is required for the employee to retain the award, the grant date fair value is immediately recognized as compensation expense at the grant date because the employee is able to retain the award without continuing to provide service. For employees near retirement eligibility, attribution of compensation cost is recognized over the period from the grant date to the retirement eligibility date.
Share Repurchases
The board of directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. Since the inception of the share repurchase program, Arch Capital has repurchased 382.2 million common shares for an aggregate purchase price of $3.86 billion. For the six months ended June 30, 2018, Arch Capital repurchased 6,522,645 shares under the share repurchase program with an aggregate purchase price of $173.6 million. Arch Capital did not repurchase any shares under the share repurchase program during the six months ended June 30, 2017. At June 30, 2018, $272.9 million of share repurchases were available under the program, which may be effected from time to time in open market or privately negotiated transactions through December 31, 2019. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.
Conversion of Convertible Non-Voting Common Equivalent Preferred Shares
In March 2018, Arch Capital completed an underwritten public secondary offering of 17,022,600 common shares (split adjusted) by American International Group, Inc. (“AIG”) following transfer of 567,420 Series D convertible non-voting common equivalent preferred shares (“Series D Preferred Shares”). Proceeds from the sale of common shares pursuant to the public offering were received by AIG. At June 30, 2018, no Series D Preferred Shares were outstanding.
Series C Preferred Shares
On January 2, 2018, Arch Capital redeemed all outstanding 6.75% Series C non-cumulative preferred shares. The preferred shares were redeemed at a redemption price equal to $25 per share, plus all declared and unpaid dividends to (but excluding) the redemption date. In accordance with GAAP, following the redemption, original issuance costs related to such shares have been removed from additional paid-in capital and recorded as a “loss on redemption of preferred shares.” Such adjustment had no impact on total shareholders’ equity or cash flows.
ARCH CAPITAL | 12 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Numerator: | |||||||||||||||
Net income | $ | 256,347 | $ | 199,099 | $ | 422,731 | $ | 473,134 | |||||||
Amounts attributable to noncontrolling interests | (12,701 | ) | (13,932 | ) | (28,662 | ) | (34,840 | ) | |||||||
Net income available to Arch | 243,646 | 185,167 | 394,069 | 438,294 | |||||||||||
Preferred dividends | (10,403 | ) | (11,349 | ) | (20,840 | ) | (22,567 | ) | |||||||
Loss on redemption of preferred shares | — | — | (2,710 | ) | — | ||||||||||
Net income available to Arch common shareholders | $ | 233,243 | $ | 173,818 | $ | 370,519 | $ | 415,727 | |||||||
Denominator: | |||||||||||||||
Weighted average common shares outstanding | 404,800,421 | 369,027,702 | 399,485,135 | 366,436,407 | |||||||||||
Series D preferred shares (1) | — | 34,432,290 | 6,677,373 | 36,349,722 | |||||||||||
Weighted average common shares and common share equivalents outstanding — basic | 404,800,421 | 403,459,992 | 406,162,508 | 402,786,129 | |||||||||||
Effect of dilutive common share equivalents: | |||||||||||||||
Nonvested restricted shares | 1,575,749 | 4,448,889 | 1,837,356 | 4,670,889 | |||||||||||
Stock options (2) | 6,735,035 | 9,825,057 | 7,460,892 | 9,964,878 | |||||||||||
Weighted average common shares and common share equivalents outstanding — diluted | 413,111,205 | 417,733,938 | 415,460,756 | 417,421,896 | |||||||||||
Earnings per common share: | |||||||||||||||
Basic | $ | 0.58 | $ | 0.43 | $ | 0.91 | $ | 1.03 | |||||||
Diluted | $ | 0.56 | $ | 0.42 | $ | 0.89 | $ | 1.00 | |||||||
(1) | Such shares are convertible non-voting common equivalent preferred shares issued in connection with the UGC acquisition. See Note 3. |
(2) | Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2018 second quarter and 2017 second quarter, the number of stock options excluded were 5,350,733 and 1,499,997, respectively. For the six months ended June 30, 2018 and 2017, the number of stock options excluded were 5,372,789 and 2,292,228, respectively. |
ARCH CAPITAL | 13 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Segment Information
The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — ‘other’ and corporate (non-underwriting). The Company determined its reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the President and Chief Executive Officer of Arch Capital, and the Chief Financial Officer of Arch Capital. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for its three underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.
The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: construction and national accounts; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).
The mortgage segment includes the Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE.
The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, UGC transaction costs and other, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.
The ‘other’ segment includes the results of Watford Re (see Note 11). Watford Re has its own management and board of directors that is responsible for the overall profitability of the ‘other’ segment. For the ‘other’ segment, performance is measured based on net income or loss.
ARCH CAPITAL | 14 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to Arch common shareholders:
Three Months Ended | |||||||||||||||||||||||
June 30, 2018 | |||||||||||||||||||||||
Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | ||||||||||||||||||
Gross premiums written (1) | $ | 769,372 | $ | 490,327 | $ | 330,990 | $ | 1,591,202 | $ | 175,175 | $ | 1,696,544 | |||||||||||
Premiums ceded | (245,265 | ) | (136,247 | ) | (50,867 | ) | (432,892 | ) | (34,589 | ) | (397,648 | ) | |||||||||||
Net premiums written | 524,107 | 354,080 | 280,123 | 1,158,310 | 140,586 | 1,298,896 | |||||||||||||||||
Change in unearned premiums | 22,342 | (13,762 | ) | 10,355 | 18,935 | 18,932 | 37,867 | ||||||||||||||||
Net premiums earned | 546,449 | 340,318 | 290,478 | 1,177,245 | 159,518 | 1,336,763 | |||||||||||||||||
Other underwriting income (loss) | — | (129 | ) | 3,315 | 3,186 | 688 | 3,874 | ||||||||||||||||
Losses and loss adjustment expenses | (357,465 | ) | (229,956 | ) | (21,591 | ) | (609,012 | ) | (117,141 | ) | (726,153 | ) | |||||||||||
Acquisition expenses | (90,670 | ) | (50,142 | ) | (27,737 | ) | (168,549 | ) | (34,289 | ) | (202,838 | ) | |||||||||||
Other operating expenses | (92,680 | ) | (35,678 | ) | (38,729 | ) | (167,087 | ) | (9,094 | ) | (176,181 | ) | |||||||||||
Underwriting income (loss) | $ | 5,634 | $ | 24,413 | $ | 205,736 | 235,783 | (318 | ) | 235,465 | |||||||||||||
Net investment income | 107,761 | 27,907 | 135,668 | ||||||||||||||||||||
Net realized gains (losses) | (59,545 | ) | (17,066 | ) | (76,611 | ) | |||||||||||||||||
Net impairment losses recognized in earnings | (470 | ) | — | (470 | ) | ||||||||||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 8,472 | — | 8,472 | ||||||||||||||||||||
Other income (loss) | 3,113 | — | 3,113 | ||||||||||||||||||||
Corporate expenses (2) | (15,604 | ) | — | (15,604 | ) | ||||||||||||||||||
UGC transaction costs and other (2) | (6,908 | ) | — | (6,908 | ) | ||||||||||||||||||
Amortization of intangible assets | (26,472 | ) | — | (26,472 | ) | ||||||||||||||||||
Interest expense | (26,058 | ) | (4,286 | ) | (30,344 | ) | |||||||||||||||||
Net foreign exchange gains (losses) | 46,211 | 7,495 | 53,706 | ||||||||||||||||||||
Income before income taxes | 266,283 | 13,732 | 280,015 | ||||||||||||||||||||
Income tax expense | (23,644 | ) | (24 | ) | (23,668 | ) | |||||||||||||||||
Net income | 242,639 | 13,708 | 256,347 | ||||||||||||||||||||
Dividends attributable to redeemable noncontrolling interests | — | (4,585 | ) | (4,585 | ) | ||||||||||||||||||
Amounts attributable to nonredeemable noncontrolling interests | — | (8,116 | ) | (8,116 | ) | ||||||||||||||||||
Net income available to Arch | 242,639 | 1,007 | 243,646 | ||||||||||||||||||||
Preferred dividends | (10,403 | ) | — | (10,403 | ) | ||||||||||||||||||
Net income available to Arch common shareholders | $ | 232,236 | $ | 1,007 | $ | 233,243 | |||||||||||||||||
Underwriting Ratios | |||||||||||||||||||||||
Loss ratio | 65.4 | % | 67.6 | % | 7.4 | % | 51.7 | % | 73.4 | % | 54.3 | % | |||||||||||
Acquisition expense ratio | 16.6 | % | 14.7 | % | 9.5 | % | 14.3 | % | 21.5 | % | 15.2 | % | |||||||||||
Other operating expense ratio | 17.0 | % | 10.5 | % | 13.3 | % | 14.2 | % | 5.7 | % | 13.2 | % | |||||||||||
Combined ratio | 99.0 | % | 92.8 | % | 30.2 | % | 80.2 | % | 100.6 | % | 82.7 | % | |||||||||||
Goodwill and intangible assets | $ | 20,724 | $ | — | $ | 564,634 | $ | 585,358 | $ | 7,650 | $ | 593,008 | |||||||||||
(1) | Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. |
(2) | Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction costs and other.’ |
ARCH CAPITAL | 15 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended | |||||||||||||||||||||||
June 30, 2017 | |||||||||||||||||||||||
Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | ||||||||||||||||||
Gross premiums written (1) | $ | 743,902 | $ | 453,186 | $ | 336,226 | $ | 1,533,142 | $ | 152,813 | $ | 1,609,659 | |||||||||||
Premiums ceded | (247,446 | ) | (115,262 | ) | (62,314 | ) | (424,850 | ) | (12,410 | ) | (360,964 | ) | |||||||||||
Net premiums written | 496,456 | 337,924 | 273,912 | 1,108,292 | 140,403 | 1,248,695 | |||||||||||||||||
Change in unearned premiums | 21,118 | (23,222 | ) | (16,068 | ) | (18,172 | ) | 10,351 | (7,821 | ) | |||||||||||||
Net premiums earned | 517,574 | 314,702 | 257,844 | 1,090,120 | 150,754 | 1,240,874 | |||||||||||||||||
Other underwriting income (loss) | — | (279 | ) | 4,277 | 3,998 | 824 | 4,822 | ||||||||||||||||
Losses and loss adjustment expenses | (350,939 | ) | (207,606 | ) | (20,694 | ) | (579,239 | ) | (110,621 | ) | (689,860 | ) | |||||||||||
Acquisition expenses | (78,872 | ) | (51,151 | ) | (25,666 | ) | (155,689 | ) | (34,747 | ) | (190,436 | ) | |||||||||||
Other operating expenses | (92,267 | ) | (36,711 | ) | (32,150 | ) | (161,128 | ) | (8,853 | ) | (169,981 | ) | |||||||||||
Underwriting income (loss) | $ | (4,504 | ) | $ | 18,955 | $ | 183,611 | 198,062 | (2,643 | ) | 195,419 | ||||||||||||
Net investment income | 92,520 | 18,604 | 111,124 | ||||||||||||||||||||
Net realized gains (losses) | 18,046 | 3,689 | 21,735 | ||||||||||||||||||||
Net impairment losses recognized in earnings | (1,730 | ) | — | (1,730 | ) | ||||||||||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 32,706 | — | 32,706 | ||||||||||||||||||||
Other income (loss) | (1,994 | ) | — | (1,994 | ) | ||||||||||||||||||
Corporate expenses (2) | (22,201 | ) | — | (22,201 | ) | ||||||||||||||||||
UGC transaction costs and other (2) | (2,675 | ) | — | (2,675 | ) | ||||||||||||||||||
Amortization of intangible assets | (30,824 | ) | — | (30,824 | ) | ||||||||||||||||||
Interest expense | (25,912 | ) | (2,837 | ) | (28,749 | ) | |||||||||||||||||
Net foreign exchange gains (losses) | (37,821 | ) | (1,722 | ) | (39,543 | ) | |||||||||||||||||
Income before income taxes | 218,177 | 15,091 | 233,268 | ||||||||||||||||||||
Income tax expense | (34,169 | ) | — | (34,169 | ) | ||||||||||||||||||
Net income | 184,008 | 15,091 | 199,099 | ||||||||||||||||||||
Dividends attributable to redeemable noncontrolling interests | — | (4,586 | ) | (4,586 | ) | ||||||||||||||||||
Amounts attributable to nonredeemable noncontrolling interests | — | (9,346 | ) | (9,346 | ) | ||||||||||||||||||
Net income available to Arch | 184,008 | 1,159 | 185,167 | ||||||||||||||||||||
Preferred dividends | (11,349 | ) | — | (11,349 | ) | ||||||||||||||||||
Net income available to Arch common shareholders | $ | 172,659 | $ | 1,159 | $ | 173,818 | |||||||||||||||||
Underwriting Ratios | |||||||||||||||||||||||
Loss ratio | 67.8 | % | 66.0 | % | 8.0 | % | 53.1 | % | 73.4 | % | 55.6 | % | |||||||||||
Acquisition expense ratio | 15.2 | % | 16.3 | % | 10.0 | % | 14.3 | % | 23.0 | % | 15.3 | % | |||||||||||
Other operating expense ratio | 17.8 | % | 11.7 | % | 12.5 | % | 14.8 | % | 5.9 | % | 13.7 | % | |||||||||||
Combined ratio | 100.8 | % | 94.0 | % | 30.5 | % | 82.2 | % | 102.3 | % | 84.6 | % | |||||||||||
Goodwill and intangible assets | $ | 24,480 | $ | 609 | $ | 680,236 | $ | 705,325 | $ | 7,650 | $ | 712,975 | |||||||||||
(1) | Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. |
(2) | Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction costs and other.’ |
ARCH CAPITAL | 16 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six Months Ended | |||||||||||||||||||||||
June 30, 2018 | |||||||||||||||||||||||
Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | ||||||||||||||||||
Gross premiums written (1) | $ | 1,592,750 | $ | 1,067,810 | $ | 652,168 | $ | 3,312,807 | $ | 389,045 | $ | 3,534,758 | |||||||||||
Premiums ceded | (492,445 | ) | (331,977 | ) | (97,004 | ) | (921,505 | ) | (68,907 | ) | (823,318 | ) | |||||||||||
Net premiums written | 1,100,305 | 735,833 | 555,164 | 2,391,302 | 320,138 | 2,711,440 | |||||||||||||||||
Change in unearned premiums | (15,119 | ) | (116,343 | ) | 15,556 | (115,906 | ) | (23,872 | ) | (139,778 | ) | ||||||||||||
Net premiums earned | 1,085,186 | 619,490 | 570,720 | 2,275,396 | 296,266 | 2,571,662 | |||||||||||||||||
Other underwriting income (loss) | — | 1,103 | 6,731 | 7,834 | 1,389 | 9,223 | |||||||||||||||||
Losses and loss adjustment expenses | (711,195 | ) | (371,631 | ) | (65,057 | ) | (1,147,883 | ) | (215,130 | ) | (1,363,013 | ) | |||||||||||
Acquisition expenses | (175,839 | ) | (98,461 | ) | (54,304 | ) | (328,604 | ) | (65,610 | ) | (394,214 | ) | |||||||||||
Other operating expenses | (184,654 | ) | (71,249 | ) | (77,500 | ) | (333,403 | ) | (17,793 | ) | (351,196 | ) | |||||||||||
Underwriting income (loss) | $ | 13,498 | $ | 79,252 | $ | 380,590 | 473,340 | (878 | ) | 472,462 | |||||||||||||
Net investment income | 208,004 | 54,388 | 262,392 | ||||||||||||||||||||
Net realized gains (losses) | (171,404 | ) | (16,205 | ) | (187,609 | ) | |||||||||||||||||
Net impairment losses recognized in earnings | (632 | ) | — | (632 | ) | ||||||||||||||||||
Equity in net income (loss) of investment funds accounted for using the equity method | 36,541 | — | 36,541 | ||||||||||||||||||||
Other income (loss) | 3,187 | — | 3,187 | ||||||||||||||||||||
Corporate expenses (2) | (30,086 | ) | — | (30,086 | ) | ||||||||||||||||||
UGC transaction costs and other (2) | (7,738 | ) | — | (7,738 | ) | ||||||||||||||||||
Amortization of intangible assets | (53,208 | ) | — | (53,208 | ) | ||||||||||||||||||
Interest expense | (51,965 | ) | (9,015 | ) | (60,980 | ) | |||||||||||||||||
Net foreign exchange gains (losses) | 31,172 | 2,813 | 33,985 | ||||||||||||||||||||
Income before income taxes | 437,211 | 31,103 | 468,314 | ||||||||||||||||||||
Income tax expense | (45,556 | ) | (27 | ) | (45,583 | ) | |||||||||||||||||
Net income | 391,655 | 31,076 | 422,731 | ||||||||||||||||||||
Dividends attributable to redeemable noncontrolling interests | — | (9,170 | ) | (9,170 | ) | ||||||||||||||||||
Amounts attributable to nonredeemable noncontrolling interests | — | (19,492 | ) | (19,492 | ) | ||||||||||||||||||
Net income available to Arch | 391,655 | 2,414 | 394,069 | ||||||||||||||||||||
Preferred dividends | (20,840 | ) | — | (20,840 | ) | ||||||||||||||||||
Loss on redemption of preferred shares | (2,710 | ) | — | (2,710 | ) | ||||||||||||||||||
Net income available to Arch common shareholders | $ | 368,105 | $ | 2,414 | $ | 370,519 | |||||||||||||||||
Underwriting Ratios | |||||||||||||||||||||||
Loss ratio | 65.5 | % | 60.0 | % | 11.4 | % | 50.4 | % | 72.6 | % | 53.0 | % | |||||||||||
Acquisition expense ratio | 16.2 | % | 15.9 | % | 9.5 | % | 14.4 | % | 22.1 | % | 15.3 | % | |||||||||||
Other operating expense ratio | 17.0 | % | 11.5 | % | 13.6 | % | 14.7 | % | 6.0 | % | 13.7 | % | |||||||||||
Combined ratio | 98.7 | % | 87.4 | % | 34.5 | % | 79.5 | % | 100.7 | % | 82.0 | % | |||||||||||
(1) | Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total. |
(2) | Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘UGC transaction costs and other.’ |
ARCH CAPITAL | 17 | 2018 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six Months Ended | |||||||||||||||||||||||
June 30, 2017 | |||||||||||||||||||||||
Insurance | Reinsurance | Mortgage | Sub-Total | Other | Total | ||||||||||||||||||
Gross premiums written (1) | $ | 1,526,183 | $ | 928,968 | |||||||||||||||||||