Arch Capital .(ACGL) - 2025 Q2 - Quarterly Results

Financial Highlights Financial Highlights Arch Capital Group saw strong premium growth in Q2 and H1 2025, but net income declined due to a higher combined ratio Q2 2025 Key Financial Metrics (Three Months Ended June 30) | Metric | Q2 2025 ($ Millions) | Q2 2024 ($ Millions) | Change | | :--- | :--- | :--- | :--- | | Gross Premiums Written | $6,196 | $5,382 | 15.1% | | Net Premiums Earned | $4,337 | $3,565 | 21.7% | | Underwriting Income | $818 | $762 | 7.3% | | Net Income to Common Shareholders | $1,227 | $1,259 | (2.5)% | | Diluted EPS | $3.23 | $3.30 | (2.1)% | | After-tax Operating Income | $979 | $981 | (0.2)% | | Diluted Operating EPS | $2.58 | $2.57 | 0.4% | | Combined Ratio | 81.2% | 78.7% | 2.5 percentage points | H1 2025 Key Financial Metrics (Six Months Ended June 30) | Metric | H1 2025 ($ Millions) | H1 2024 ($ Millions) | Change | | :--- | :--- | :--- | :--- | | Gross Premiums Written | $12,659 | $11,315 | 11.9% | | Net Premiums Earned | $8,525 | $6,987 | 22.0% | | Underwriting Income | $1,235 | $1,498 | (17.6)% | | Net Income to Common Shareholders | $1,791 | $2,369 | (24.4)% | | Diluted EPS | $4.70 | $6.22 | (24.4)% | | After-tax Operating Income | $1,566 | $1,914 | (18.2)% | | Diluted Operating EPS | $4.11 | $5.02 | (18.1)% | | Combined Ratio | 85.5% | 78.7% | 6.8 percentage points | - The book value per common share increased by 7.3% during Q2 2025 and 11.4% during the first six months of 2025[14] - The pre-tax total return on investments was 3.09% for Q2 2025, a significant improvement from 1.33% in Q2 2024[14][15] Consolidated Financial Statements Consolidated Statements of Income Total revenues increased in Q2 2025, but net income available to common shareholders slightly decreased due to higher losses and expenses Consolidated Income Statement Highlights (Q2 2025 vs Q2 2024) | (In millions) | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Net premiums earned | $4,337 | $3,565 | | Total revenues | $5,213 | $4,229 | | Losses and loss adjustment expenses | $(2,303) | $(1,827) | | Total expenses | $(3,802) | $(2,908) | | Net income available to Arch common shareholders | $1,227 | $1,259 | | Diluted EPS | $3.23 | $3.30 | Consolidated Balance Sheets Total assets and shareholders' equity significantly increased as of June 30, 2025, driven by investment growth and improved book value per share Consolidated Balance Sheet Highlights (As of June 30) | (In millions, except per share data) | 2025 | 2024 | | :--- | :--- | :--- | | Total investments | $44,293 | $37,085 | | Total assets | $78,788 | $65,465 | | Reserve for losses and loss adjustment expenses | $32,089 | $24,466 | | Total liabilities | $55,747 | $44,800 | | Total shareholders' equity | $23,041 | $20,665 | | Book value per common share | $59.17 | $52.75 | Consolidated Statements of Changes in Shareholders' Equity Total shareholders' equity increased in Q2 2025, driven by net income and investment appreciation, partially offset by share repurchases - Retained earnings increased by $1,230 million in Q2 2025, reflecting net income of $1,240 million less $10 million in preferred dividends[23] - The company repurchased $163 million of its common shares for treasury in Q2 2025, and $392 million in the first six months of 2025[23] - Accumulated other comprehensive income improved from a loss of $408 million at the start of the quarter to a loss of $48 million at the end, mainly due to a $296 million change in unrealized appreciation on available-for-sale investments[23] Consolidated Statements of Cash Flows Net cash from operations decreased in H1 2025, with significant cash used for fixed maturity investments and share repurchases Consolidated Cash Flow Highlights (Six Months Ended June 30) | (In millions) | 2025 | 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,582 | $3,082 | | Net cash provided by (used for) investing activities | $(2,236) | $(2,918) | | Net cash provided by (used for) financing activities | $(369) | $(28) | | Increase (decrease) in cash and restricted cash | $48 | $129 | Segment Information Overview The company operates through three underwriting segments: Insurance, Reinsurance, and Mortgage, with performance measured by underwriting income - Insurance Segment: Focuses on specialty commercial insurance products in North America, Bermuda, the UK, Europe, and Australia[29] - Reinsurance Segment: Offers a variety of reinsurance products on a worldwide basis, including casualty, property catastrophe, and specialty lines[30] - Mortgage Segment: Consists of U.S. primary mortgage insurance, credit-risk transfer (CRT) business primarily with GSEs, and international mortgage insurance and reinsurance[31] Consolidated Segment Results All three segments contributed positively to Q2 2025 underwriting income, with Reinsurance leading, resulting in an overall combined ratio of 81.2% Segment Underwriting Income (Q2 2025 vs Q2 2024) | (In millions) | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Insurance | $129 | $109 | | Reinsurance | $451 | $366 | | Mortgage | $238 | $287 | | Total | $818 | $762 | Segment Combined Ratios (Q2 2025 vs Q2 2024) | Segment | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Insurance | 93.4% | 92.6% | | Reinsurance | 78.5% | 79.5% | | Mortgage | 15.2% | 7.4% | | Total | 81.2% | 78.7% | Insurance Segment Results The Insurance segment reported strong gross premium growth and increased underwriting income in Q2 2025, with its combined ratio at 93.4% Insurance Segment Performance (Q2 2025 vs Q2 2024) | (In millions, except ratios) | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Gross premiums written | $2,681 | $2,102 | | Net premiums earned | $1,969 | $1,478 | | Underwriting income | $129 | $109 | | Loss ratio | 59.8% | 57.3% | | Combined ratio | 93.4% | 92.6% | - The combined ratio excluding catastrophic activity and prior year development was 90.6% in Q2 2025, compared to 90.8% in Q2 2024[47] - For the first six months of 2025, net premiums written in North America grew to $2,950 million, representing 74.2% of the segment's total, up from 68.4% in the prior year period[50] Reinsurance Segment Results The Reinsurance segment achieved increased gross premiums and underwriting income in Q2 2025, improving its combined ratio to 78.5% Reinsurance Segment Performance (Q2 2025 vs Q2 2024) | (In millions, except ratios) | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Gross premiums written | $3,196 | $2,941 | | Net premiums earned | $2,087 | $1,780 | | Underwriting income | $451 | $366 | | Loss ratio | 54.1% | 56.5% | | Combined ratio | 78.5% | 79.5% | - The combined ratio excluding catastrophic activity and prior year development was 77.2% in Q2 2025[52] - For the first six months of 2025, the Specialty line of business was the largest contributor to net premiums written at $1,320 million (30.2% of total), followed by Property excluding property catastrophe at $1,010 million (23.1%)[55] Mortgage Segment Results The Mortgage segment's underwriting income decreased in Q2 2025, but its combined ratio remained exceptionally low due to favorable prior year loss reserve development Mortgage Segment Performance (Q2 2025 vs Q2 2024) | (In millions, except ratios) | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Gross premiums written | $323 | $340 | | Net premiums earned | $281 | $307 | | Underwriting income | $238 | $287 | | Loss ratio | (1.2)% | (8.6)% | | Combined ratio | 15.2% | 7.4% | - The segment benefited from a 24.1% favorable development in prior year loss reserves. The combined ratio excluding this development was 39.3%[57] - U.S. primary mortgage insurance continues to be the largest part of the segment, with $74,900 million in Risk in Force (RIF) as of June 30, 2025[61] - The credit quality of the U.S. primary mortgage insurance portfolio remains high, with a weighted average FICO score of 749 and 63.1% of RIF having a FICO score of 740 or greater[65] Consolidated Underwriting Results Consolidated underwriting income for Q2 2025 reflected a combined ratio of 81.2%, influenced by both catastrophic events and favorable prior year loss reserve development Consolidated Underwriting Ratios (Q2 2025 vs Q2 2024) | Ratio | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Loss ratio | 53.1% | 51.2% | | Acquisition expense ratio | 19.0% | 17.8% | | Other operating expense ratio | 9.1% | 9.7% | | Combined ratio | 81.2% | 78.7% | - The combined ratio excluding catastrophic activity and prior year development was 80.9% in Q2 2025, compared to 76.7% in Q2 2024[78] Selected Information on Losses and Loss Adjustment Expenses In Q2 2025, the company reported net favorable prior year loss reserve development, primarily from Mortgage and Reinsurance, alongside current catastrophic losses Net Favorable Prior Year Development (Q2 2025) | (In millions) | Insurance | Reinsurance | Mortgage | Total | | :--- | :--- | :--- | :--- | :--- | | Net Impact on Underwriting | $(2) | $(69) | $(68) | $(139) | Current Accident Year Catastrophe Losses (Q2 2025) | (In millions) | Insurance | Reinsurance | Total | | :--- | :--- | :--- | :--- | | Estimated Net Losses | $58 | $96 | $154 | Investment Information Investable Asset Summary and Investment Portfolio Metrics Total investable assets grew to $44,938 million as of June 30, 2025, primarily in high-quality fixed maturities with a short duration Investable Asset Composition (June 30, 2025) | Asset Class | Fair Value ($ Millions) | % of Total | | :--- | :--- | :--- | | Total fixed maturities | $31,341 | 69.7% | | Investments accounted for using the equity method | $6,566 | 14.6% | | Total short-term investments | $2,856 | 6.4% | | Total equity securities | $1,720 | 3.8% | | Cash | $983 | 2.2% | | Other | $1,472 | 3.3% | | Total Investable Assets | $44,938 | 100.0% | Composition of Net Investment Income, Yield and Total Return Pre-tax net investment income increased in Q2 2025, primarily from fixed maturities, resulting in a strong total return on investments Net Investment Income and Returns (Q2 2025) | Metric | Value | | :--- | :--- | | Pre-tax net investment income | $405 million | | Pre-tax equity in net income of investments | $162 million | | Annualized pre-tax investment income yield | 4.25% | | Total return on investments | 3.09% | Composition of Fixed Maturities The fixed maturity portfolio totaled $31,341 million as of June 30, 2025, primarily in corporate and U.S. government bonds, with improved unrealized gains Fixed Maturity Composition (June 30, 2025) | Security Type | Fair Value ($ Millions) | % of Total | | :--- | :--- | :--- | | Corporates | $15,417 | 49.2% | | U.S. government and government agencies | $6,591 | 21.0% | | Non-U.S. government securities | $3,164 | 10.1% | | Asset-backed securities | $2,770 | 8.8% | | Residential mortgage-backed securities | $2,386 | 7.6% | | Other | $1,013 | 3.3% | | Total | $31,341 | 100.0% | Credit Quality Distribution and Maturity Profile The fixed maturity portfolio maintains high credit quality, with most securities rated investment grade or U.S. government, and a short duration - Investment grade securities (BBB and above) plus U.S. government securities comprise 92.2% of the total fixed income portfolio[95] - The majority of the portfolio (56.3%) has a maturity of one to five years, indicating a focus on shorter-duration assets[95] Analysis of Corporate Exposures The corporate bond portfolio is primarily invested in Industrials and Financials, predominantly investment grade, with top ten exposures in major financial institutions - The largest sector exposures are Industrials ($8,000 million) and Financials ($5,900 million)[99] - The top ten corporate issuers account for $2,600 million, or 16.8% of the corporate bond portfolio, with JPMorgan Chase & Co. being the largest single exposure at $417 million[100] Structured Securities The structured securities portfolio grew to $5,994 million as of June 30, 2025, primarily in highly-rated ABS, CMBS, and RMBS Structured Securities by Type and Rating (June 30, 2025) | (In millions) | Agencies | AAA | AA | A | BBB | Non-Inv. Grade | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | RMBS | $1,759 | $626 | $1 | $— | $— | $— | $2,386 | | CMBS | $6 | $415 | $172 | $45 | $132 | $68 | $838 | | ABS | $— | $1,426 | $317 | $725 | $125 | $177 | $2,770 | | Total | $1,765 | $2,467 | $490 | $770 | $257 | $245 | $5,994 | Other Information Comments on Non-GAAP Financial Measures The company utilizes non-GAAP measures like after-tax operating income and operating return on equity to reflect core business performance - After-tax operating income is used to reflect the underlying fundamentals of the business by focusing on underwriting profit[105][109] - The company also presents adjusted combined ratios that exclude catastrophic activity and prior year reserve development to help analyze the underwriting performance of its segments[111] Operating Income Reconciliation and Annualized Operating Return on Average Common Equity Q2 2025 after-tax operating income was $979 million, with an annualized operating return on average common equity of 18.2% Reconciliation of Net Income to Operating Income (Q2 2025) | (In millions) | Amount | Per Share | | :--- | :--- | :--- | | Net income available to Arch common shareholders | $1,227 | $3.23 | | Adjustments (Net realized gains, FX, etc.) | $(248) | $(0.65) | | After-tax operating income available to Arch common shareholders | $979 | $2.58 | Return on Equity (Q2 2025, Annualized) | Metric | Percentage | | :--- | :--- | | Annualized net income return on average common equity | 22.9% | | Annualized operating return on average common equity | 18.2% | Operating Income and Effective Tax Rate Calculations The company's Q2 2025 pre-tax operating income was $1,166 million, with an effective tax rate of 15.2%, yielding $989 million after-tax Effective Tax Rate on Operating Income (Q2 2025) | (In millions) | Amount | | :--- | :--- | | Pre-tax operating income available to Arch | $1,166 | | Income tax expense on operating income | $(177) | | Effective tax rate on pre-tax operating income | 15.2% | Capital Structure and Share Repurchase Activity As of June 30, 2025, total capital was $25,769 million, with a 10.6% debt-to-total capital ratio, and $163.2 million in shares repurchased Capital Structure (June 30, 2025) | (In millions) | Amount | | :--- | :--- | | Total debt | $2,728 | | Total shareholders' equity | $23,041 | | Total capital available to Arch | $25,769 | | Debt/total capital ratio | 10.6% | | Debt and preferred/total capital ratio | 13.8% | - In Q2 2025, the company repurchased 1.9 million shares at an aggregate cost of $163.2 million, with an average price of $87.94 per share[122] - There is $637.1 million remaining under the current share repurchase authorization[122]