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    ACGL
    Earnings call· Dec 2024(Q4 FY24)

    ARCH CAPITAL GROUP Q4 FY24 earnings call ACGL

    Feb 11, 2025 Source

    Executive summary

    Arch Capital Q4 FY24 — Strong Underwriting Income and Capital Management

    Arch Capital delivered solid Q4 FY24 results, marked by strong premium growth and excellent full-year operating income and ROAE, despite increased catastrophe losses including the California wildfires. The company demonstrated active capital management through a special dividend and share repurchases, while strategically deploying capital in attractive lines and managing competitive pressures in others. Integration of the MidCorp and Entertainment acquisition is progressing as planned, contributing to growth and expected to reach target combined ratios post-integration.

    Highlights

    5

    • Net premium written increased 17% to $3.8 billion in Q4 FY24.

    • Full-year FY24 after-tax operating income was $3.5 billion, with an operating return on average common equity of 18.9%.

    • Book value per share ended 2024 at $53.11, representing a 13% increase for the year, or nearly 24% adjusted for the $5 per share special dividend.

    • The Mortgage segment delivered over $1 billion of underwriting income for the third consecutive year in FY24.

    • Full-year FY24 cash flow from operations was $6.7 billion, up 16% from 2023.

    Concerns

    5

    • Q4 FY24 underwriting income was $625 million, down 13% from last year, primarily due to catastrophe activities.

    • The California wildfires are expected to result in a net loss between $450 million and $550 million.

    • Competitive pressures are eroding margins in public D&O and cyber lines, with double-digit rate decreases observed.

    • Delinquency rates in the U.S. MI business increased modestly to just over 2% at the end of December.

    • The realizable value of the $1.2 billion deferred tax asset may be partially impacted by recent OECD guidance.

    Guidance & targets

    4
    CategoryTargetConfidence
    California wildfires net loss
    $450M-$550M
    high materiality
    High
    Full-year effective tax rate
    16%-18%
    medium materiality
    Medium
    Cat load as % of full-year group-wide net earned premium
    7%-8%
    medium materiality
    Medium
    MidCorp combined ratio
    low 90s
    high materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Reinsurance
    Finished the year with a strong fourth quarter, delivering $328 million of underwriting income. Full-year results were excellent, with a record $1.2 billion of underwriting income while writing over $7.7 billion of net premium. Grew the business at the January 1 renewal by selectively increasing writings in property, liability, and specialty lines.
    Underwriting income (Q4): $328MUnderwriting income (FY): $1.2BNet premium written (FY): $7.7B
    		———$328M underwriting income
    Insurance
    Q4 underwriting income was limited to $30 million by Hurricanes Helene and Milton. For the full year, the group wrote $6.9 billion of net premium, a 17% increase from 2023, and delivered $345 million of underwriting income. Growth was enhanced by the acquisition of the U.S. MidCorp and Entertainment business. International insurance remained a bright spot, rising over $2 billion of net premium in 2024, primarily in specialty lines out of the Lloyd's platform.
    Underwriting income (Q4): $30MUnderwriting income (FY): $345MNet premium written (FY): $6.9BInternational net premium written (FY): $2BAcquired business net written premium (Q4): $393MAcquired business contribution to premium growth (Q4): 27.1 pointsAcquired business impact on accident year ex cat combined ratio (Q4): -1.6 points
    		—17%—$30M underwriting income
    Mortgage
    Contributed $267 million of underwriting income in Q4, resulting in the third consecutive year of delivering over $1 billion of underwriting income. Fundamentals remained positive, including strong persistency of the $500 billion plus insurance in force portfolio. Delinquency rates in the U.S. MI business increased modestly to just over 2% at the end of December, attributed to expected defaults in cat-affected areas and seasoning.
    Underwriting income (Q4): $267MUnderwriting income (FY): over $1BInsurance in force portfolio: $500B+Delinquency rate (U.S. MI, end of Dec): just over 2%
    		———$267M underwriting income

    Operational metrics

    21
    After-tax operating income
    $3.5B
    FY24

    Full year results were excellent

    Operating return on average common equity (ROAE)
    18.9%
    FY24

    despite an increased level of natural catastrophes

    After-tax operating income per share
    $2.26
    Q4 FY24

    for an annualized operating return on average common equity of 16.7%

    Net income return on average common equity
    22.8%
    FY24

    excellent

    Ex-cat accident year combined ratio
    79%
    Q4 FY24

    overall

    Ex-cat accident year combined ratio
    78.6%
    FY24

    overall

    Current accident year catastrophe losses
    $393M
    Q4 FY24

    split roughly 60% and 40% between the reinsurance and Insurance segments, respectively.

    Favorable prior year development
    $146M
    Q4 FY24

    on a pretax basis or 3.5 points on the combined ratio across our 3 segments

    Intangible amortization expense
    $99M
    Q4 FY24

    more than 75% of which was for the MidCorp and Entertainment acquisition

    Net investment income and equity method income
    $548M
    Q4 FY24

    pretax

    Net investment income
    $1.5B
    FY24

    annual

    Investable assets
    $40B+
    FY24

    after accounting for the special dividend

    Effective tax rate on pretax operating income
    6.7%
    Q4 FY24

    expense

    Effective tax rate on pretax operating income
    8.2%
    FY24

    expense

    Common shareholders' equity
    $20B
    Q4 FY24

    after recognition of the $1.9 billion common dividend

    Debt plus preferred to capital ratio
    15.1%
    Q4 FY24

    remains low

    Special dividend
    $5 per share
    Q4 FY24

    paid in December

    Share repurchases
    $24M
    Q4 FY24

    repurchased shares worth

    PML for single event (1 in 250-year)
    9.2%increased slightly
    Jan 1

    peak zone natural cat probable maximum loss on a net basis

    Casualty GL loss trend assumption (excess business)
    12%-14%
    current

    double digits

    Casualty GL loss trend assumption (primary E&S low limit)
    5%-6%
    current

    probably around 5%

    Industry KPIs

    11
    MetricValueDetails
    Combined ratio79% (Q4), 78.6% (FY)%
    Capital returns$5 per share special dividend, $24M share repurchasesUSD
    ROE operating ROE18.9% (operating FY), 16.7% (annualized operating Q4), 22.8% (net income FY)%
    Catastrophe losses$393MUSD
    Book value per share$53.11USD
    Net investment income$1.5B (annual), $548M (Q4)USD
    Retention persistencystrong persistency
    Net premiums written earned$3.8B (Q4), $6.9B (Insurance FY), $7.7B (Reinsurance FY)USD
    Renewal rate change pricingslightly above loss trend
    Statutory regulatory capital9.2%% of tangible shareholders' equity
    Prior year reserve development$146M favorableUSD

    Deals & partnerships

    1
    AllianzAcquisition of U.S. MidCorp and Entertainment business

    Integration is on plan, with business performance consistent with expectations. Remediation efforts on certain program business are underway, with impacts on top-line expected in H2 2025. The acquisition enhanced full-year Insurance group growth.

    Risks & headwinds

    4
    California wildfires net lossQ1 FY25

    $450M-$550M net loss (based on $35B-$45B industry loss estimate)

    Mitigation: None stated directly, but implies market will react with rate increases.

    Competitive pressures in public D&O and cyber linesOngoing

    Double-digit rate decreases in the last 2 years for public D&O and on the excess side for cyber.

    Mitigation: Reallocating capital to more profitable opportunities, focusing on improving business mix to meet minimum profitability targets.

    Increased delinquency rates in U.S. MI businessQ4 FY24

    Just over 2% at end of December.

    Mitigation: Attributed to expected defaults in cat-affected areas and seasoning; historical cure rate on these types of delinquencies is extremely high, so financial impact expected to be minimal.

    Potential impact on deferred tax asset (DTA) from OECD guidancePotentially '26 or '27 for write-off of the rest.

    May only realize up to 20% of the $1.2B DTA.

    Mitigation: Bermuda law has not changed, company is following it; monitoring additional information.

    What to watch in Q1 FY25

    4

    Impact of California wildfires on reinsurance rates

    Rest of the year (2025)
    CurrentExpected net loss $450M-$550M
    TargetMarket reaction and rate increases for the rest of the year

    Why it matters

    This significant market event could influence pricing and underwriting opportunities in reinsurance, impacting future profitability.

    So I think -- as I mentioned in my remarks, I mean, this is a significant loss for the market. I mean we pitch it between $35 and $45 billion. We believe that a significant part of that losses will go to the reinsurance market. And I think it will -- I think most reinsurer, including ourselves, will start the year with a loss ratio in the 20s or the 30s or depending of your luck, maybe higher than that. So I think it would -- it should damper the enthusiasm of many markets trying to be heroes and writing the business. So I would think that it will have an effect on the rates at -- for the rest of the year or so.

    Q&A highlights

    6

    Clarification on the Insurance segment's underlying loss ratio after the MidCorp acquisition, specifically if it's around 58% on an ongoing basis.

    The impact of the MidCorp acquisition adds about 1 point to the loss ratio, making the blended underlying loss ratio for the Insurance segment around 58% on an ongoing basis, assuming the pre-MidCorp run rate was stable.

    “Yes, that's about right. I think the impact of MC is, call it, on the loss ratio about 1 point, so whatever the assumption you have around the pre-MC kind of run rate loss ratio which is pretty stable -- has been pretty stable. There's some movements up and down from quarter-to-quarter, but generally speaking, it's been stable and introducing the MC maybe adds about 1 point to that.”

    asked by Elyse Greenspan · answered by François Morin

    2 min read6 chapters

    Detailed Narrative

    01

    California Wildfires Impact

    The company expects a net loss of $450 million to $550 million from the California wildfires, based on an industry loss estimate of $35 billion to $45 billion. This significant event is anticipated to impact reinsurance rates for the remainder of the year, as most reinsurers will start the year with elevated loss ratios.

    02

    Capital Management and Shareholder Returns

    Arch demonstrated strong capital management by paying a $5 per share special dividend in December and repurchasing $24 million in shares during Q4. This reflects the company's ongoing commitment to returning excess capital to shareholders when deployment opportunities in the business are not fully available, while maintaining a strong capital position.

    03

    Strategic Underwriting and Cycle Management

    Management emphasized selective capital deployment in attractive areas such as insurance and reinsurance liability lines, specialty business at Lloyd's, and property cat reinsurance. Conversely, capital is reallocated from lines where competitive pressures have eroded margins, such as public D&O and cyber, to maintain minimum profitability targets and ensure attractive risk-adjusted returns.

    04

    MidCorp and Entertainment Acquisition Integration

    The acquisition contributed $393 million in net written premium for the quarter, adding 27.1 points to the Insurance segment's premium growth. Integration is progressing on plan, with the business performing as expected. Remediation efforts on certain program business are underway, with impacts on the top-line expected to show more in the second half of 2025.

    05

    Mortgage Segment Performance and Delinquency Trends

    The mortgage segment delivered over $1 billion in underwriting income for the third consecutive year, supported by strong persistency in its $500 billion+ insurance in force portfolio and excellent credit quality. Delinquency rates increased modestly to just over 2% due to natural catastrophes and seasoning, but remain near historic lows with high cure rates expected, leading to minimal financial impact.

    06

    Investment Income Tailwinds

    The Investment Group generated nearly $1.5 billion in annual net investment income, with an asset base exceeding $40 billion after accounting for the special dividend. Rising investment yields and growing investable assets from strong operating cash flows are expected to provide additional tailwinds for earnings and book value growth in the future.

    AI-generated summary of the company’s earnings call. Not investment advice.