Arch Capital .(US:ACGL)2025-08-05 20:45PART I Consolidated Financial Statements This section presents Arch Capital Group Ltd.'s unaudited consolidated financial statements for Q2 2025, covering balance sheets, income, equity, and cash flows, with notes on acquisition, segment performance, and investment portfolio Key Financial Highlights (Q2 2025 vs Q2 2024) | Metric | Q2 2025 | Q2 2024 | | :--- | :--- | :--- | | Net Premiums Earned ($M) | 4,337 | 3,565 | | Total Revenues ($M) | 5,213 | 4,229 | | Net Income to Arch Common Shareholders ($M) | 1,227 | 1,259 | | Diluted EPS ($) | 3.23 | 3.30 | Key Balance Sheet Data (as of June 30, 2025) | Metric | June 30, 2025 ($M) | December 31, 2024 ($M) | | :--- | :--- | :--- | | Total Investments | 44,293 | 40,540 | | Total Assets | 78,788 | 70,906 | | Reserve for Losses & LAE | 32,089 | 29,369 | | Total Liabilities | 55,747 | 50,086 | | Total Shareholders' Equity | 23,041 | 20,820 | - On August 1, 2024, the company completed the acquisition of the U.S MidCorp and Entertainment insurance business from Allianz (MCE Acquisition) for an aggregate cash consideration of $450 million, resulting in $276 million of goodwill343540 - For the six months ended June 30, 2025, the company repurchased 4.1 million common shares for an aggregate price of $359.7 million, with no shares repurchased in the same period of 202445 - From July 1 to August 5, 2025, the company repurchased an additional 2.8 million common shares for approximately $244 million179 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strong Q2 2025 performance, emphasizing disciplined underwriting and capital management, covering segment results, investment performance, financial condition, liquidity, and risk exposures - The company reported a strong Q2 2025, with an annualized net income return on average common equity of 22.9% and an operating return on average common equity of 18.2%, while book value per share grew 7.3% during the quarter184 - Management notes that overall property and casualty market conditions remain largely consistent with Q1 2025, with some sectors seeing increased price competition while others continue to experience rate improvements186 Results of Operations This section details underwriting and financial results for the Insurance, Reinsurance, and Mortgage segments, alongside corporate-level items like investment income and taxes Consolidated Underwriting Income by Segment (Q2 2025) | Segment | Underwriting Income (Loss) ($M) | | :--- | :--- | | Insurance | 129 | | Reinsurance | 451 | | Mortgage | 238 | | Total | 818 | Insurance Segment The Insurance segment reported $129 million underwriting income in Q2 2025, a 18.3% YoY increase, with net premiums written up 30.7% due to the MCE Acquisition, and a combined ratio of 93.4% Insurance Segment Underwriting Results (Q2) | Metric | 2025 | 2024 | | :--- | :--- | :--- | | Net Premiums Written ($M) | 2,036 | 1,558 | | Net Premiums Earned ($M) | 1,969 | 1,478 | | Underwriting Income ($M) | 129 | 109 | | Loss Ratio | 59.8% | 57.3% | | Combined Ratio | 93.4% | 92.6% | - Growth in net premiums written was primarily driven by the MCE Acquisition, with organic growth of 1.7% in Q2 2025 compared to Q2 2024187214 - The Q2 2025 loss ratio included 2.9 points of current year catastrophic activity, compared to 2.0 points in Q2 2024223 Reinsurance Segment The Reinsurance segment achieved $451 million underwriting income in Q2 2025, up 23.2% YoY, with net premiums written growing 5.8%, and an improved combined ratio of 78.5% due to lower catastrophic activity and favorable reserve development Reinsurance Segment Underwriting Results (Q2) | Metric | 2025 | 2024 | | :--- | :--- | :--- | | Net Premiums Written ($M) | 2,059 | 1,947 | | Net Premiums Earned ($M) | 2,087 | 1,780 | | Underwriting Income ($M) | 451 | 366 | | Loss Ratio | 54.1% | 56.5% | | Combined Ratio | 78.5% | 79.5% | - The segment expanded its property catastrophe writings, particularly in Florida, due to attractive risk-adjusted returns and increased client demand189 - The Q2 2025 loss ratio included 5.5 points of current year catastrophic activity, compared to 10.0 points in Q2 2024, while favorable prior period reserve development was $81 million (3.9 points) in Q2 2025, up from $34 million (1.9 points) in Q2 2024237239 Mortgage Segment The Mortgage segment's Q2 2025 underwriting income decreased to $238 million, with net premiums written down 8.3% due to a one-time expense and lower originations, and the combined ratio increased to 15.2% due to reduced favorable prior period development Mortgage Segment Underwriting Results (Q2) | Metric | 2025 | 2024 | | :--- | :--- | :--- | | Net Premiums Written ($M) | 253 | 276 | | Net Premiums Earned ($M) | 281 | 307 | | Underwriting Income ($M) | 238 | 287 | | Loss Ratio | (1.2)% | (8.6)% | | Combined Ratio | 15.2% | 7.4% | - The persistency rate for the Arch MI U.S. portfolio remained high at 81.9% as of June 30, 2025249 - Net favorable prior period reserve development was $64 million (22.8 points) in Q2 2025, compared to $82 million (26.9 points) in Q2 2024258 Financial Condition This section details the company's financial position, highlighting its investment portfolio with a 3.48-year duration and AA-/Aa3 credit quality, along with $23.6 billion in net loss reserves Fixed Income Portfolio Characteristics | Metric | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Average Duration (years) | 3.48 | 3.31 | | Average S&P/Moody's Rating | AA-/Aa3 | AA-/Aa3 | - The company utilizes Bellemeade Re special purpose vehicles for mortgage reinsurance, with total remaining coverage of $872 million against a remaining retention of $801 million as of June 30, 2025287 Net Loss Reserves by Segment (June 30, 2025) | Segment | Net Reserves ($M) | | :--- | :--- | | Insurance | 12,511 | | Reinsurance | 10,603 | | Mortgage | 462 | | Total | 23,576 | Liquidity and Capital Resources The company maintains strong liquidity and capital, with $2.6 billion net cash from operations, $25.8 billion total capital, a 10.6% debt-to-total capital ratio, and a 168% PMIERs sufficiency ratio for its U.S. mortgage insurance subsidiary Cash Flow Summary (Six Months Ended June 30) | Activity | 2025 ($M) | 2024 ($M) | | :--- | :--- | :--- | | Operating | 2,582 | 3,082 | | Investing | (2,236) | (2,918) | | Financing | (369) | (28) | Capital Structure (June 30, 2025) | Component | Amount ($M) | Ratio | | :--- | :--- | :--- | | Senior Notes | 2,728 | 10.6% | | Preferred Equity | 830 | 3.2% | | Common Equity | 22,211 | 86.2% | | Total Capital | 25,769 | 100.0% | - Arch MI U.S. satisfied the PMIERs financial requirements with an estimated sufficiency ratio of 168% at June 30, 2025308 Catastrophic and Severe Economic Events Arch manages catastrophic exposure, targeting a 1-in-250 year net probable maximum loss of 25% of tangible equity, with peak modeled losses of $1.9 billion for a Florida windstorm and $1.2 billion for a severe mortgage economic downturn - The company's modeled peak zone catastrophe exposure is a windstorm affecting the Florida Tri-County regions, with a net probable maximum pre-tax loss of $1.9 billion, representing 8.6% of tangible shareholders' equity as of July 1, 2025315 - The proprietary "Realistic Disaster Scenario" (RDS) model for the U.S. mortgage insurance business projects a maximum loss of approximately $1.2 billion from a severe economic downturn, or 5.5% of tangible shareholders' equity318 Quantitative and Qualitative Disclosures About Market Risk This section incorporates MD&A's detailed market risk discussion, covering investment market risk sensitivity to interest rates and credit spreads, and foreign currency exchange risk Interest Rate Sensitivity on Fixed Income Securities (June 30, 2025) | Interest Rate Shift | Change in Fair Value | Change in Unrealized Value ($B) | | :--- | :--- | :--- | | +100 bps | -2.9% | -1.2 | | -100 bps | +2.9% | +1.2 | - As of June 30, 2025, the company's net exposure to foreign currencies was $1.015 billion, where a hypothetical 10% appreciation of the U.S. Dollar would result in a pre-tax reduction to shareholders' equity of $102 million329 Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2025, excluding the recently acquired MCE business currently undergoing integration - The company's management concluded that disclosure controls and procedures were effective as of the end of the period334 - The evaluation of internal controls excluded the MCE Acquisition, completed on August 1, 2024, which is in the process of integration and represents 1.4% of total assets and 7.8% of total revenues as of June 30, 2025335 PART II—Other Information Legal Proceedings The company is subject to routine litigation and arbitration but is not a party to any proceedings expected to materially adversely affect its financial condition or operations - As of June 30, 2025, Arch Capital was not a party to any litigation or arbitration expected by management to have a material adverse effect on the company337 Risk Factors No material changes to risk factors were reported from the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes from the risk factors disclosed in the 2024 Form 10-K were reported338 Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's Q2 2025 equity repurchase program, with 1.86 million shares bought at an average of $87.96 per share, leaving $637.1 million available Share Repurchases (Q2 2025) | Period | Total Shares Purchased | Average Price Paid ($) | | :--- | :--- | :--- | | April 2025 | 1,152,118 | 86.80 | | May 2025 | 84,298 | 89.91 | | June 2025 | 619,815 | 89.84 | | Total | 1,856,231 | 87.96 | - As of June 30, 2025, approximately $637.1 million remained available for future repurchases under the company's authorized plan339