Arch Capital Group Ltd. Reports 2021 First Quarter Results

Rhea-AI Summary

Arch Capital Group Ltd. (NASDAQ: ACGL) reported its Q1 2021 results, showing significant growth. Net income to common shareholders reached $427.8 million, or $1.05 per share, up from $133.7 million a year prior. The after-tax operating income was $239.8 million, or $0.59 per share, with a 7.8% annualized return on equity. Gross premiums written increased by 19.9% to $3.4 billion. The company experienced a combined ratio of 90.7%, improving from 91.5% in Q1 2020. Arch also repurchased 5.3 million shares for $179.3 million, reflecting strong shareholder returns.

Positive

• Net income increased to $427.8 million from $133.7 million YoY.
• After-tax operating income rose to $239.8 million, up from $189.8 million.
• Gross premiums written increased by 19.9% to $3.4 billion.
• Combined ratio improved to 90.7% from 91.5% YoY.
• 5.3 million shares repurchased, totaling $179.3 million.

Negative

• Pre-tax current accident year catastrophic losses amounted to $188.3 million.
• Total return on investments was -0.18%.

Arch Capital Group Ltd. (NASDAQ: ACGL) announces its 2021 first quarter results. The results included:

• Net income available to Arch common shareholders of $427.8 million, or $1.05 per share, a 13.9% annualized return on average common equity, compared to $133.7 million, or $0.32 per share, for the 2020 first quarter;
• After-tax operating income available to Arch common shareholders⁽¹⁾ of $239.8 million, or $0.59 per share, a 7.8% annualized return on average common equity, compared to $189.8 million, or $0.46 per share, for the 2020 first quarter;
• Pre-tax current accident year catastrophic losses for the Company’s insurance and reinsurance segments, net of reinsurance and reinstatement premiums⁽¹⁾ of $188.3 million, including $0.6 million of COVID-19 related losses;
• Favorable development in prior year loss reserves, net of related adjustments⁽¹⁾ of $41.7 million;
• Combined ratio excluding catastrophic activity and prior year development⁽¹⁾ of 81.0%, compared to 84.2% for the 2020 first quarter;
• The percentage of loans in default on U.S. primary mortgage business was 3.86% at March 31, 2021, compared to 4.19% at December 31, 2020;
• Results for the 2021 first quarter reflect a one-time gain of $74.5 million, or $0.18 per share, related to the purchase of a 29.5% stake in Coface. Such amount is reflected in income (loss) from operating affiliates and included in after-tax operating income available to Arch common shareholders;
• Total return on investments⁽¹⁾ of -0.18%;
• Book value per common share of $30.54 at March 31, 2021, a 0.8% increase from December 31, 2020 and a 17.0% increase from March 31, 2020;
• 5.3 million shares repurchased at an aggregate cost of $179.3 million;
• Regulatory approvals are ongoing for the announced acquisition of Watford Holdings Ltd. Shareholder approval has been obtained. The Company expects the transaction to close in the second quarter of 2021.

All earnings per share amounts discussed in this release are on a diluted basis. The following table summarizes the Company’s underwriting results, both (i) on a consolidated basis and (ii) on a consolidated basis excluding the ‘other’ segment (i.e., results of Watford):

(U.S. dollars in thousands)	Consolidated												Consolidated Excluding ‘Other’ Segment (1)
	Three Months Ended March 31,												Three Months Ended March 31,
	2021				2020				% Change				2021				2020				% Change
Gross premiums written	$	3,397,206			$	2,832,830			19.9				$	3,277,293			$	2,698,537			21.4
Net premiums written	2,508,457				2,137,246				17.4				2,329,146				1,950,546				19.4
Net premiums earned	1,948,422				1,744,444				11.7				1,800,691				1,604,405				12.2
Underwriting income	185,918				154,050				20.7				198,997				160,060				24.3
Underwriting Ratios									% Point Change												% Point Change
Loss ratio	61.7		%		63.9		%		(2.2	)			60.2		%		62.6		%		(2.4	)
Underwriting expense ratio	29.0		%		27.6		%		1.4				29.0		%		27.9		%		1.1
Combined ratio	90.7		%		91.5		%		(0.8	)			89.2		%		90.5		%		(1.3	)
Combined ratio excluding catastrophic activity and prior year development (1)													81.0		%		84.2		%		(3.2	)

(1)

Presentation represents a “non-GAAP” financial measure as defined in Regulation G. Such presentation excludes the results of Watford Holdings Ltd. (“Watford”). Pursuant to GAAP, the Company consolidates the results of Watford in its financial statements, although it only owns approximately 10% of Watford’s outstanding common equity as of March 31, 2021. See ‘Comments on Regulation G’ for further details.

The following table summarizes the Company’s consolidated financial data, including a reconciliation of net income or loss available to Arch common shareholders to after-tax operating income or loss available to Arch common shareholders and related diluted per share results:

(U.S. dollars in thousands, except share data)	Three Months Ended
	March 31,
	2021					2020
Net income available to Arch common shareholders	$	427,753				$	133,714
Net realized (gains) losses	(105,551		)			109,364
Equity in net (income) loss of investment funds accounted for using the equity method	(71,686		)			4,209
Net foreign exchange (gains) losses	(21,332		)			(64,491		)
Transaction costs and other	1,274					2,595
Income tax expense (benefit) (1)	9,311					4,365
After-tax operating income available to Arch common shareholders	$	239,769				$	189,756
Diluted per common share results:
Net income available to Arch common shareholders	$	1.05				$	0.32
Net realized (gains) losses	(0.25		)			0.27
Equity in net (income) loss of investment funds accounted for using the equity method	(0.18		)			0.01
Net foreign exchange (gains) losses	(0.05		)			(0.16		)
Transaction costs and other	0.00					0.01
Income tax expense (benefit) (1)	0.02					0.01
After-tax operating income available to Arch common shareholders	$	0.59				$	0.46
Weighted average common shares and common share equivalents outstanding — diluted	409,223,253					414,033,570
Beginning common shareholders’ equity	$	12,325,886				$	10,717,371
Ending common shareholders’ equity	12,316,472					10,587,244
Average common shareholders’ equity	$	12,321,179				$	10,652,308
Annualized return on average common equity	13.9			%		5.0			%
Annualized operating return on average common equity	7.8			%		7.1			%

(1)

Income tax expense (benefit) on net realized gains or losses, equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction.

Each line item in the table above reflects the impact of the Company’s ownership of Watford’s outstanding common equity. See ‘Comments on Regulation G’ for a discussion of non-GAAP financial measures.

Segment Information

The following section provides analysis on the Company’s 2021 first quarter performance by operating segment. For additional details regarding the Company’s operating segments, please refer to the Company’s Financial Supplement dated March 31, 2021. The Company’s segment information includes the use of underwriting income (loss) and a combined ratio excluding catastrophic activity and prior year development. Such items are non-GAAP financial measures (see ‘Comments on Regulation G’ for further details).

Insurance Segment

	Three Months Ended March 31,
(U.S. dollars in thousands)	2021					2020					% Change
Gross premiums written	$	1,415,886				$	1,207,645				17.2
Net premiums written	994,839					828,748					20.0
Net premiums earned	819,474					715,919					14.5
Underwriting income (loss)	$	18,392				$	(28,175	)			165.3
Underwriting Ratios											% Point Change
Loss ratio	65.4			%		70.8			%		(5.4	)
Underwriting expense ratio	32.3			%		33.1			%		(0.8	)
Combined ratio	97.7			%		103.9			%		(6.2	)
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums	5.1			%		6.9			%		(1.8	)
Net (favorable) adverse development in prior year loss reserves, net of related adjustments	(0.7		)	%		(0.1		)	%		(0.6	)
Combined ratio excluding catastrophic activity and prior year development (1)	93.3			%		97.1			%		(3.8	)

(1)

See ‘Comments on Regulation G’ for further discussion.

Gross premiums written by the insurance segment in the 2021 first quarter were 17.2% higher than in the 2020 first quarter while net premiums written were 20.0% higher than in the 2020 first quarter. The higher level of net premiums written reflected increases across most lines of business, due in part to rate increases, new business opportunities and growth in existing accounts, partially offset by a decrease in travel business, reflecting the ongoing impact of the COVID-19 global pandemic. Net premiums earned in the 2021 first quarter were 14.5% higher than in the 2020 first quarter, and reflect changes in net premiums written over the previous five quarters.

The 2021 first quarter loss ratio reflected 5.1 points of current year catastrophic activity, primarily from winter storms Uri and Viola, compared to 6.9 points in the 2020 first quarter. Estimated net favorable development of prior year loss reserves, before related adjustments, reduced the loss ratio by 0.5 points in the 2021 first quarter, compared to 0.2 points in the 2020 first quarter. The 2021 first quarter loss ratio also reflected the effect of rate increases, changes in mix of business and a lower level of attritional losses compared to the 2020 first quarter.

The underwriting expense ratio was 32.3% in the 2021 first quarter, compared to 33.1% in the 2020 first quarter, with the decrease primarily due to growth in net premiums earned.

Reinsurance Segment

	Three Months Ended March 31,
(U.S. dollars in thousands)	2021					2020					% Change
Gross premiums written	$	1,471,060				$	1,122,519				31.0
Net premiums written	999,112					797,180					25.3
Net premiums earned	644,900					543,460					18.7
Other underwriting income (loss)	(1,198		)			2,120					(156.5	)
Underwriting income (loss)	$	(19,707	)			$	(9,392	)			(109.8	)
Underwriting Ratios											% Point Change
Loss ratio	75.2			%		79.1			%		(3.9	)
Underwriting expense ratio	27.7			%		22.9			%		4.8
Combined ratio	102.9			%		102.0

FAQ

What was Arch Capital Group's net income for Q1 2021?

Arch Capital Group reported a net income of $427.8 million for Q1 2021.

How much did Arch Capital earn per share in Q1 2021?

In Q1 2021, Arch Capital earned $1.05 per share.

What was the combined ratio for Arch Capital in Q1 2021?

The combined ratio for Arch Capital in Q1 2021 was 90.7%.

How much were gross premiums written by Arch Capital in Q1 2021?

Arch Capital wrote gross premiums of $3.4 billion in Q1 2021.

What was the percentage increase in gross premiums written year-over-year for Arch Capital?

Gross premiums written increased by 19.9% year-over-year.