Arch Capital .(ACGL) - 2024 Q3 - Quarterly Results

I. Financial Highlights Financial Highlights The company saw strong nine-month growth in premiums and net income, though Q3 underwriting income declined due to a higher combined ratio Q3 2024 vs. Q3 2023 Performance | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Gross Premiums Written | $5,440M | $4,527M | 20.2% | | Net Premiums Earned | $3,970M | $3,248M | 22.2% | | Underwriting Income | $538M | $721M | (25.4)% | | Net Income to Common Shareholders | $978M | $713M | 37.2% | | Diluted EPS | $2.56 | $1.88 | 36.2% | | Combined Ratio | 86.6% | 77.9% | +8.7 pts | Nine Months Ended Sep 30, 2024 vs. 2023 Performance | Metric | Nine Months 2024 | Nine Months 2023 | Change | | :--- | :--- | :--- | :--- | | Gross Premiums Written | $16,755M | $14,152M | 18.4% | | Net Premiums Earned | $10,957M | $9,096M | 20.5% | | Underwriting Income | $2,036M | $1,897M | 7.3% | | Net Income to Common Shareholders | $3,347M | $2,079M | 61.0% | | Diluted EPS | $8.78 | $5.50 | 59.6% | | Combined Ratio | 81.6% | 79.4% | +2.2 pts | - Net cash provided by operating activities increased by 24.9% to $5.1 billion for the first nine months of 2024, up from $4.1 billion in the prior-year period[5] II. Consolidated Financial Statements Consolidated Statements of Income Nine-month revenue and net income grew substantially, driven by higher net premiums earned and net investment income Nine Months Ended September 30 - Income Statement Highlights | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Net Premiums Earned | $10,957M | $9,096M | 20.5% | | Net Investment Income | $1,090M | $710M | 53.5% | | Total Revenues | $12,892M | $9,659M | 33.5% | | Total Expenses | ($9,355M) | ($7,462M) | 25.4% | | Net Income to Common Shareholders | $3,347M | $2,079M | 61.0% | | Diluted EPS | $8.78 | $5.50 | 59.6% | Consolidated Balance Sheets Total assets and shareholders' equity grew significantly as of September 30, 2024, boosting book value per common share Balance Sheet Comparison | Metric | Sep 30, 2024 | Sep 30, 2023 | Change | | :--- | :--- | :--- | :--- | | Total Investments | $41,903M | $31,380M | 33.5% | | Total Assets | $73,656M | $55,227M | 33.4% | | Total Liabilities | $51,382M | $39,986M | 28.5% | | Total Shareholders' Equity | $22,274M | $15,239M | 46.2% | | Book Value per Common Share | $57.00 | $38.62 | 47.6% | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased by $3.9 billion in the first nine months of 2024, primarily driven by net income Shareholders' Equity Roll-Forward (Nine Months Ended Sep 30, 2024) | Item | Amount (in millions) | | :--- | :--- | | Beginning Equity (Dec 31, 2023) | $18,353 | | Net Income | $3,377 | | Change in AOCI | $500 | | Share-based Compensation & Other | $138 | | Share Repurchases | ($40) | | Preferred Dividends | ($30) | | Ending Equity (Sep 30, 2024) | $22,274 | Consolidated Statements of Cash Flows Net cash from operations increased to $5.1 billion for the first nine months of 2024, reflecting strong business performance Cash Flow Summary (Nine Months Ended Sep 30) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $5,100M | $4,084M | | Net Cash used for Investing Activities | ($4,881M) | ($3,936M) | | Net Cash used for Financing Activities | ($35M) | ($52M) | III. Segment Information Overview The company operates through Insurance, Reinsurance, and Mortgage segments, with performance evaluated based on underwriting income - The company's three core operating segments are Insurance, Reinsurance, and Mortgage, which offer specialty commercial products, worldwide reinsurance, and mortgage credit solutions, respectively[11][12][14] - Management measures segment performance based on underwriting income, while investment income is managed at the corporate level and not allocated to segments[10] Consolidated Segment Results The Reinsurance segment led in premiums written, while the Mortgage segment generated the highest underwriting income in Q3 2024 Q3 2024 Segment Performance | Segment | Net Premiums Written | Underwriting Income | Combined Ratio | | :--- | :--- | :--- | :--- | | Insurance | $1,820M | $120M | 93.1% | | Reinsurance | $1,945M | $149M | 92.3% | | Mortgage | $282M | $269M | 14.8% | Nine Months 2024 Segment Performance | Segment | Net Premiums Written | Underwriting Income | Combined Ratio | | :--- | :--- | :--- | :--- | | Insurance | $4,920M | $315M | 93.3% | | Reinsurance | $6,158M | $894M | 83.4% | | Mortgage | $835M | $827M | 12.2% | Insurance Segment Results The Insurance segment's net premiums written grew, but its combined ratio increased due to higher catastrophe losses Insurance Segment Key Metrics (Q3 2024 vs. Q3 2023) | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Net Premiums Written | $1,820M | $1,522M | 19.6% | | Underwriting Income | $120M | $129M | (7.0)% | | Combined Ratio | 93.1% | 90.9% | +2.2 pts | - The combined ratio excluding catastrophic activity and prior year development was 88.9% in Q3 2024, compared to 89.1% in Q3 2023[21] - North America operations represented 71.5% of the segment's net premiums written in Q3 2024, with International operations accounting for the remaining 28.5%[23] Reinsurance Segment Results The Reinsurance segment's net premiums written grew strongly, but its combined ratio deteriorated significantly due to catastrophe events Reinsurance Segment Key Metrics (Q3 2024 vs. Q3 2023) | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Net Premiums Written | $1,945M | $1,562M | 24.5% | | Underwriting Income | $149M | $310M | (51.9)% | | Combined Ratio | 92.3% | 80.0% | +12.3 pts | - The Q3 2024 combined ratio was heavily impacted by 19.3 points from current accident year catastrophic events, compared to a 9.3 point impact in Q3 2023[25] - By line of business, 'Other specialty' (39.5%) and 'Property excluding property catastrophe' (34.5%) were the largest contributors to net premiums written in Q3 2024[26] Mortgage Segment Results The Mortgage segment delivered strong underwriting income and a very low combined ratio, benefiting from favorable prior year development Mortgage Segment Key Metrics (Q3 2024 vs. Q3 2023) | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Net Premiums Written | $282M | $271M | 4.1% | | Underwriting Income | $269M | $282M | (4.6)% | | Combined Ratio | 14.8% | 4.7% | +10.1 pts | - The combined ratio excluding prior year development was 37.6% in Q3 2024, compared to 38.2% in Q3 2023[27] - U.S. primary mortgage insurance Risk In Force (RIF) was $76.4 billion as of September 30, 2024, with a weighted average FICO score of 748 and a weighted average LTV of 93.1%[29][31] - The delinquency rate for insured loans in the U.S. primary mortgage business was 1.96% at the end of Q3 2024, up from 1.65% at the end of Q3 2023[32] Consolidated Underwriting Results The consolidated combined ratio increased significantly in Q3 2024, driven primarily by higher catastrophic event losses Consolidated Underwriting Ratios (Q3 2024 vs. Q3 2023) | Ratio | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Loss Ratio | 60.5% | 50.7% | | Acquisition Expense Ratio | 17.2% | 17.7% | | Other Operating Expense Ratio | 8.9% | 9.5% | | Combined Ratio | 86.6% | 77.9% | - The combined ratio excluding catastrophic activity and prior year development was 78.3% in Q3 2024, compared to 77.0% in Q3 2023[36] Selected Information on Losses and Loss Adjustment Expenses Q3 2024 results included $450 million in catastrophe losses, primarily in the Reinsurance segment, partially offset by favorable prior year development Q3 2024 Loss Development & Catastrophes (in millions) | Segment | Net Favorable Prior Year Development | Current Year Catastrophe Losses | | :--- | :--- | :--- | | Insurance | ($12) | $86 | | Reinsurance | ($36) | $364 | | Mortgage | ($71) | N/A | | Total | ($119) | $450 | - Catastrophic events added 11.3 points to the consolidated combined ratio in Q3 2024, while favorable prior year development reduced it by 3.0 points[38] IV. Investment Information Investable Asset Summary and Investment Portfolio Metrics Total investable assets reached $42.8 billion, consisting primarily of high-quality fixed maturities with a short effective duration Composition of Investable Assets (Sep 30, 2024) | Asset Class | Amount (in millions) | % of Total | | :--- | :--- | :--- | | Total Fixed Maturities | $29,531 | 69.1% | | Investments using Equity Method | $5,244 | 12.3% | | Total Short-term Investments | $3,402 | 8.0% | | Total Equity Securities | $1,630 | 3.8% | | Other | $3,121 | 7.3% | | Total Investable Assets | $42,751 | 100.0% | - Key portfolio metrics as of September 30, 2024 include an average effective duration of 2.68 years and an average S&P/Moody's credit rating of AA-/Aa3[40] Composition of Net Investment Income, Yield and Total Return Net investment income increased significantly in Q3 2024, driven by higher income from fixed maturities and a strong total return Net Investment Income (Q3 2024 vs. Q3 2023) | Source | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Fixed Maturities | $340M | $243M | | Short-term Investments | $38M | $19M | | Other | $44M | $27M | | Investment Expenses | ($23M) | ($20M) | | Net Investment Income | $399M | $269M | - The pre-tax investment income yield was 4.40% for Q3 2024, up from 3.68% in Q3 2023[42] Composition of Fixed Maturities The $29.5 billion fixed maturity portfolio is primarily allocated to corporate bonds and U.S. government securities Fixed Maturity Portfolio by Type (Sep 30, 2024) | Security Type | Fair Value (in millions) | % of Total | | :--- | :--- | :--- | | Corporates | $15,081 | 51.1% | | U.S. Government & Agencies | $5,867 | 19.9% | | Asset-backed Securities | $2,989 | 10.1% | | Non-U.S. Government | $2,861 | 9.7% | | Other | $2,733 | 9.2% | | Total | $29,531 | 100.0% | Credit Quality Distribution and Maturity Profile The fixed maturity portfolio maintains high credit quality, with a concentration in short-to-medium term maturities - The credit quality of the fixed maturity portfolio is strong, with 77.1% rated 'A' or higher (including U.S. government/agencies)[45] - The majority of the portfolio (55.0%) has a maturity of one to five years, indicating a relatively low duration risk[45] Analysis of Corporate Exposures The corporate bond portfolio is concentrated in the Industrials and Financials sectors, with diversified issuer exposure - The corporate bond portfolio is concentrated in two main sectors: Industrials (54.0%) and Financials (34.5%)[47] Top 5 Corporate Issuers by Fair Value (Sep 30, 2024) | Issuer | Fair Value (in millions) | % of Investable Assets | | :--- | :--- | :--- | | JPMorgan Chase & Co. | $412 | 1.0% | | Morgan Stanley | $359 | 0.8% | | Bank of America Corporation | $332 | 0.8% | | The Goldman Sachs Group, Inc. | $263 | 0.6% | | Citigroup Inc. | $257 | 0.6% | Structured Securities The structured securities portfolio grew to $5.4 billion and is primarily composed of highly-rated asset-backed and mortgage-backed securities Structured Securities Composition (Sep 30, 2024) | Security Type | Total Fair Value (in millions) | | :--- | :--- | | Asset-backed securities | $2,989 | | Residential mortgage-backed securities | $1,313 | | Commercial mortgage-backed securities | $1,146 | | Total | $5,448 | V. Other Information Comments on Non-GAAP Financial Measures The company uses non-GAAP measures like after-tax operating income to provide insight into core business performance - Management uses after-tax operating income to evaluate performance, as it excludes items not indicative of the insurance underwriting process[52] - Other non-GAAP measures include underwriting income and adjusted combined ratios to analyze the performance of the underwriting segments[52] Operating Income Reconciliation and Annualized Operating Return on Average Common Equity After-tax operating income was $762 million in Q3 2024, resulting in an annualized operating return on average common equity of 14.8% Reconciliation of Net Income to After-tax Operating Income (Q3 2024) | Item | Amount (in millions) | | :--- | :--- | | Net Income to Common Shareholders | $978 | | Less: Net Realized Gains | ($169) | | Less: Equity Method Investment Income | ($171) | | Add: Net Foreign Exchange Losses | $63 | | Add: Transaction Costs | $30 | | Add: Income Tax Impact | $31 | | After-tax Operating Income | $762 | - The annualized operating return on average common equity was 14.8% for Q3 2024, compared to the annualized net income return of 19.0%[53] Operating Income and Effective Tax Rate Calculations Pre-tax operating income for Q3 2024 was $839 million after adjusting for non-operating items like realized gains and foreign exchange effects Calculation of Pre-tax Operating Income (Q3 2024) | Item | Amount (in millions) | | :--- | :--- | | Income before income taxes | $1,050 | | Adjustments (Gains, FX, etc.) | ($241) | | Income from operating affiliates | $36 | | Pre-tax operating income | $839 | Capital Structure and Share Repurchases The company maintained a strong capital position with a debt-to-total capital ratio of 10.9% and did not repurchase shares in Q3 2024 Capital Structure Summary (Sep 30, 2024) | Component | Amount (in millions) | | :--- | :--- | | Total Debt | $2,727 | | Total Shareholders' Equity | $22,274 | | Total Capital | $25,001 | - Key leverage and value metrics as of September 30, 2024 include a Debt/Total Capital ratio of 10.9% and a Book Value per Common Share of $57.00[57] - The company had a $1.0 billion share repurchase authorization remaining, effective through December 31, 2024, with no shares repurchased in Q3 2024[58]