Arch Capital Group (NASDAQ:ACGL) reported second-quarter after-tax operating income of $893 million, or $2.56 per share, as all three operating segments produced what management described as strong underlying underwriting results. The insurer and reinsurer also accelerated capital returns, repurchasing $1.2 billion of stock during the quarter.
Chief Executive Officer Nicolas Papadopoulo said the company is entering the early stages of a softer and more competitive insurance market, particularly in property and other short-tail lines. Still, he said Arch’s diversified operations across specialty insurance, reinsurance and mortgage insurance provide opportunities to deploy capital where returns remain attractive.
Capital Returns and Investment Income
Arch repurchased 12.4 million shares for $1.2 billion during the second quarter, bringing first-half repurchases to $1.95 billion. Executive Vice President and Chief Financial Officer François Morin said the company repurchased approximately 94% of its net income during the first six months of the year.
Morin said buybacks remained an accretive use of excess capital at current share prices after the company evaluated organic and new-business investment opportunities. He said Arch has capacity for further repurchases, though management does not maintain a specific repurchase target and will consider catastrophe exposure during wind season.
Book value per share increased 2.8% during the quarter and 4.5% in the first half, according to Papadopoulo. Arch’s debt plus preferred-to-capital leverage ratio was 18.1% at quarter-end.
The company also raised $2 billion through 10-year and 30-year senior notes in May. The proceeds will be used in part to redeem $500 million of notes maturing later this year and to purchase $418 million of 2043 and 2046 senior notes through a tender offer. Management expects interest expense of approximately $60 million to $63 million in each of the next two quarters as a result of the debt issuance.
Net investment income totaled $417 million, or $1.20 per share, supported by a $49.5 billion asset base with an average credit quality of A. Investments accounted for under the equity method contributed an additional $196 million, or $0.56 per share, to net income. Combined net investment income and equity-method fund income was $613 million before tax, or $1.76 per share.
Underwriting Results and Catastrophe Losses
Arch’s overall current accident-year combined ratio excluding catastrophe losses was 82.5%, up 160 basis points from a year earlier. The company recorded $165 million of favorable prior-year development before tax, equal to 4.1 points on the overall combined ratio. Favorable development occurred across all three segments, primarily in short-tail property and casualty lines and mortgage insurance, where strong cure activity contributed.
Current-year catastrophe losses totaled $201 million net of reinsurance and reinstatement premiums. Management attributed the losses to the Iran conflict and severe U.S. convective storms. Papadopoulo said Arch is a significant writer of political violence, terrorism and marine war coverage in the London market, and that the conflict has also created selective opportunities to provide additional capacity for clients with regional assets.
Management said the industry estimate for Middle East war-related losses remained around $3 billion. Morin said Arch’s exposure is evaluated property by property and that additional losses could emerge if further insured assets are damaged.
Insurance and Reinsurance Market Conditions
The insurance segment generated $27 million of underwriting income, with a current accident-year combined ratio excluding catastrophes of 91.6%. Net premiums written declined 5.1% from the prior year, partly because of the non-renewal of certain program business and reduced excess and surplus property writings.
Morin said the insurance segment’s ex-catastrophe accident-year loss ratio improved 90 basis points to 56.4%, helped by international operations and the effect of program business non-renewals. He said there were no systematic changes to loss picks during the quarter beyond routine rate-over-trend adjustments.
Arch continued to see premium growth in North American casualty-oriented businesses, including excess and surplus casualty, construction and national accounts. The company also cited positive trends in specialty London market lines such as war and terrorism. Middle-market commercial business and casualty-oriented lines continued to experience rate increases, while directors and officers pricing was gradually improving and cyber rate declines had moderated.
In reinsurance, underwriting income was $410 million, helped by relatively light catastrophe activity. The segment’s current accident-year ex-catastrophe combined ratio was 79.9%, up 270 basis points from the prior year due to business mix changes and lower property pricing.
Reinsurance net premiums written fell 10.4% year over year as clients retained more risk, property rates declined and Arch increased purchases of traditional reinsurance and third-party capital. Papadopoulo said casualty reinsurance remains attractive in select specialty lines and with select ceding companies, though abundant capacity has made terms and conditions more challenging.
At midyear renewals, Papadopoulo said property-catastrophe rate reductions were in the mid-teens. He said pricing remains above pre-Hurricane Ian levels overall, although adequacy varies by region and zone. Arch’s peak-zone natural catastrophe probable maximum loss for a single 1-in-250-year event was $1.8 billion as of July 1, equal to 8% of tangible shareholders’ equity.
Mortgage Insurance Remains Steady Contributor
Arch’s mortgage segment generated $220 million in underwriting income. The U.S. mortgage insurance portfolio delinquency rate was unchanged at 2.1%, while favorable reserve development continued at a slower pace than in earlier quarters.
Management said mortgage insurance profitability continues to benefit from the quality of the in-force portfolio and favorable credit characteristics, despite affordability and housing-supply constraints that have limited mortgage originations. Net premiums earned were flat sequentially, as lower U.S. mortgage insurance premiums were largely offset by higher earned premiums in Australia.
Papadopoulo said a new Australian client and reduced quota-share reinsurance contributed to growth in new insurance written during the quarter. He described the mortgage market as stable, noting that competitors have generally reacted quickly to pricing changes in order to protect market share.
About Arch Capital Group (NASDAQ:ACGL)
Arch Capital Group Ltd. (NASDAQ: ACGL) is a Bermuda-based insurance and reinsurance holding company that underwrites a broad range of property and casualty, mortgage, and specialty risk products. The company operates through a group of underwriting subsidiaries and platforms to provide insurance, reinsurance and related risk solutions tailored to commercial, institutional and individual clients.
Arch’s product mix includes treaty and facultative reinsurance, primary casualty and property insurance, mortgage insurance and other specialty lines.
