Investor Presentation
2019 Fourth Quarter
ClickInformato editionalMasterStatementsti le style
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. This presentation or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. and its subsidiaries may include forward looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this presentation are forward looking statements.
Forward looking statements can generally be identified by the use of forward looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology. Forward looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward- looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and our ability to maintain and improve our ratings; investment performance; the loss of key personnel; the adequacy of our loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; our ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to us of reinsurance to manage our gross and net exposures; the failure of others to meet their obligations to us; and other factors identified in our filings with the U.S. Securities and Exchange Commission.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. All subsequent written and oral forward looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise.
Some non-GAAP measures of financial performance also may be referred to during this presentation. The reconciliation to GAAP and definition of operating income can be found in the Current Report on Form 8-K furnished to the SEC by Arch Capital Group Ltd. (the "Company") in connection with its most recent earnings press release, and is also available on the Company's website: www.archcapgroup.com. From time to time, the Company posts additional financial information and presentations to its website, including information with respect to its subsidiaries, and investors and other recipients of this information are encouraged to check the website.
© 202019 Arch Capital Group Ltd. All rights reserved. | 2 |
ClickCreatingto editShareholderMaster titleValuestyleThroughout The Cycle
Generate
Superior
Risk Adjusted
Returns
Thorough risk assessment of underlying exposures
Align executive compensation with long term performance
Efficient capital
management
Focus on
Underwriting
Talent intensive,
not people
intensive
Specialty lines
platforms
Active cycle
management
Conservative
Balance Sheet
Minimize
investment risk
Cautious reserving philosophy
Low financial leverage and strong liquidity
© 202019 Arch Capital Group Ltd. All rights reserved. | 3 |
ClickSpecialtyto edit Master(Re)insurancetitle styleStrategy
Arch operates leading Specialty P&C and Mortgage Insurance businesses across a wide range of geographies and products providing meaningful diversification and earnings stability.
Trailing Twelve Months Ended December 31, 2019
Gross premiums written ($7.7B) | 51% insurance | 30% reinsurance | 19% mortgage |
Net premiums written ($5.5B) | 48% insurance | 29% reinsurance | 23% mortgage |
Underwriting Location¹
Bermuda and
other, 17%
Europe, 19%
U.S., 64%
¹ Based on net premiums written, excluding amounts attributable to the 'other' segment (Watford)
-
Includes casualty, professional liability, executive assurance, healthcare, contract binding, and excess motor ³ Includes insurance for lenders products, alternative markets, and other insurance and reinsurance
4 Includes reinsurance for proportional motor, trade credit, surety, workers' compensation catastrophe, and other
Line of Business¹
Travel, Accident
& Health, 6%
Mortgage,
24%
Casualty &
Professional
Lines(2), 23%
© 202019 Arch Capital Group Ltd. All rights reserved. | 4 |
Property Casualty Segments
Strong Underwriting and Risk Management Culture
- Talent intensive platform creates resiliency through market cycle.
- Manage the cycle by allocating capital to those lines with better expected returns.
- Diversified by lines of business and geography.
- In primary insurance, focus on smaller risks and low limit business produces more predictable and less volatile results over time.
Trailing Twelve Months Ended December 31, 2019 | ||||||
Reinsurance Net Premiums Written $1.6B | Insurance Net Premiums Written $2.6B | |||||
Marine, Aviation and Space, 3% | Other, 4% | Other, 12% | Professional Lines, 20% | |||
Specialty, 29% | Lender | |||||
Property Catastrophe, | Products, 4% | |||||
7% | ||||||
Property, Energy, | ||||||
Marine and | ||||||
Aviation, 14% | Programs, | |||||
Property, 25% | 16% | |||||
Excess and | ||||||
Surplus | ||||||
Casualty, 8% | Construction and | |||||
Casualty, 32% | ||||||
Travel, Accident and | National Accounts, | |||||
14% | ||||||
Health, 12% | ||||||
© 2020 Arch Capital Group Ltd. All rights reserved. | 5 |
Cycle Management
Insurance Segment | Reinsurance Segment | |
Calendar Year Net Premiums Written ($M) | Calendar Year Net Premiums Written by Line ($M) | |
3,000 | 1,800 | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||
2,500 | 1,600 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Marine, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cycle | 1,400 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
aviation and | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2,000 | Managed | space | |||||||||||||||||||||||||||||||||||||||||||||||||||||
1,200 | Property | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
catastrophe | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,500 | Controlling | 1,000 | Specialty | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Positions | 800 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,000 | Property | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
600 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Low | excl. CAT | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Motor XOL | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Volatility / | 400 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
500 | Low Limit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
200 | Casualty | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
Insurance Segment: Low Volatility includes Programs, A&H, Travel, Contract Binding. Controlling Positions includes Construction, Alt Markets, National Accts, Surety. Cycle Managed includes Property, Marine, Offshore, Casualty, High Capacity EA, Onshore Energy, Med Mal.
Reinsurance Segment: Casualty includes executive assurance, professional liability, workers' compensation, healthcare and other. Specialty includes proportional motor, surety, accident and health, workers' compensation catastrophe, agriculture, trade credit and other. Other includes life, casualty clash and other.
© 2020 Arch Capital Group Ltd. All rights reserved. | 6 |
Mortgage Segment
Differentiated Business Model
- Arch aggregates risk from diversified sources and then utilizes a variety of tools for managing mortgage and credit risk.
- Arch seeks to limit risk exposure from a severe economic event (RDS) to protect capital.
- Mortgage Segment is positioned for consistent attractive returns throughout the cycle.
Arch MI RateStar® risk based pricing approach constructs risk portfolios
Realistic Disaster
Scenario informs cost of capital for RateStar
Bellemeade (ILNs) and traditional reinsurance reduce risk exposure
Realistic Disaster Scenario sets parameters for risk retention vs risk transfer
Cost of risk transfer provides independent third party view of risk
Mortgage originations and credit risk trends create risk transfer opportunities
© 2020 Arch Capital Group Ltd. All rights reserved. | 7 |
Mortgage Insurance Segment
Insurance In Force (IIF) and Underwriting Income
$440 | $277 | $300 | ||||
$258 | $263 | |||||
$246 | ||||||
$244 | $250 | |||||
$420 | $231 | |||||
$206 | $418 | |||||
$408 | ||||||
$400 | $184 | $186 | $175 | $404 | $200 | |
$380 | $149 | $172 | $390 | |
$384 | $150 | |||
$373
$360
$360 | $100 | ||||||||||||||
$352 | $350 | ||||||||||||||
$340 | $346 | ||||||||||||||
$333 | $50 | ||||||||||||||
$320 | $325 | ||||||||||||||
$300 | $0 | ||||||||||||||
1Q17 | 2Q17 | 3Q17 | 4Q17 | 1Q18 | 2Q18 | 3Q18 | 4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||
IIF $B (Left Axis) | Underwriting Income $M (Right Axis) | ||||||||||||||
Insurance In Force ($418B)
December 31, 2019
U.S.
Mortgage
Insurance
69%GSE Credit
Risk Sharing
and Intl
Insurance
25%
Mortgage
Reinsurance
6%
© 2020 Arch Capital Group Ltd. All rights reserved. | 8 |
Private Mortgage Insurance vs FHA/VA Origination
FHA/VA's Share of the Insured Mortgage Market has Declined since 2010
Market Shares of Insured Originations
100% | PMI | FHA | VA/USDA | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
7% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
13% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
90% | 17% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
25% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
80% | 16% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
70% | 31% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
60% | 28% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
50% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
67% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
40% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
77% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
56% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
20% | 47% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
10% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
16% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
0% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 9M19 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Source: Inside Mortgage Finance
© 2020 Arch Capital Group Ltd. All rights reserved. | 9 |
Arch MI US - Delinquency Rate Low
Loans in Default and Default Rate | ||||||||||||||||||||||||||||||||
31,000 | ||||||||||||||||||||||||||||||||
29,691 | ||||||||||||||||||||||||||||||||
Elevated due to | ||||||||||||||||||||||||||||||||
29,000 | ||||||||||||||||||||||||||||||||
hurricanes | ||||||||||||||||||||||||||||||||
27,000 | 2.57% | 27,068 | ||||||||||||||||||||||||||||||
26,234 | ||||||||||||||||||||||||||||||||
2.25% | ||||||||||||||||||||||||||||||||
25,000 | 2.23% | |||||||||||||||||||||||||||||||
23,903 | 23,770 | 24,062 | ||||||||||||||||||||||||||||||
23,000 | 2.02% | |||||||||||||||||||||||||||||||
1.98% | 1.98% | |||||||||||||||||||||||||||||||
21,037 | 20,361 | 20,665 | ||||||||||||||||||||||||||||||
21,000 | 20,163 | |||||||||||||||||||||||||||||||
19,827 | ||||||||||||||||||||||||||||||||
1.70% | 19,243 | |||||||||||||||||||||||||||||||
19,000 | 1.60% | 1.60% | 18,761 | |||||||||||||||||||||||||||||
1.54% | 1.54% | |||||||||||||||||||||||||||||||
1.48% | ||||||||||||||||||||||||||||||||
1.45% | ||||||||||||||||||||||||||||||||
17,000 | ||||||||||||||||||||||||||||||||
15,000 | ||||||||||||||||||||||||||||||||
12/31/16 | 3/31/17 | 6/30/17 | 9/30/17 | 12/31/17 | 3/31/18 | 6/30/18 | 9/30/18 | 12/31/18 | 3/31/19 | 6/30/19 | 9/30/19 | 12/31/19 | ||||||||||||||||||||
Loans in Default (Bar, LHS) | Default Rate (Line, RHS) | |||||||||||||||||||||||||||||||
2.8%
2.6%
2.4%
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
© 2020 Arch Capital Group Ltd. All rights reserved. | 10 |
ClickBellemeadeto edit MastRer-titleInitialstyleCoverage & Spreads
As of December 31, 2019, $3.3B of coverage from Bellemeade Re
800 | |||
700 | 701 | ||
653 | |||
621 | |||
600 | 577 | ||
$M | 500 | 506 | |
Coverage | 342 | ||
400 | 368 | 374 | |
Initial | 299 | 299 | |
300 | |||
200 |
100
-
BMIR 2015-1 | BMIR 2016-1 | BMIR 2017-1 | BMIR 2018-1 | BMIR 2018-2 | BMIR 2018-3 | BMIR 2019-1 | BMIR 2019-2 | BMIR 2019-3 | BMIR 2019-4 |
Initial Coverage $M Weighted Average Initial Spread (bps) | |||||||||
700 | |
600 | |
500 | (bps) |
400 | Spread |
Initial | |
300 | Average |
200 | Weighted |
100 | |
0 |
© 202019 Arch Capital Group Ltd. All rights reserved. | 11 |
ClickKeytoTermsdit Masterof Bellemeadetitle style Re 2019-4
Cedants | | United Guaranty Residential Insurance Co. and Arch Mortgage Insurance Co. |
Reinsurer | | Bellemeade Re 2019-4 Ltd. (Bellemeade Re), a special purpose reinsurer domiciled in Bermuda |
Effective Date | | August 1, 2019 |
Maturity | | October 25, 2029 (optional call on October 25, 2026) |
Bellemeade Re will reinsure cedants' RIF on a pool of loans that was predominately originated | ||
Coverage | during 2019 | |
| Bellemeade Re is responsible for all losses exceeding 2.25% of RIF subject to an initial limit of | |
$577M | ||
Reinsurance from Bellemeade Re will inure to the benefit of Arch Re Ltd | ||
If the default rate is less than 5% and Class A's subordination is at least 11.25%, Class A's | ||
Allocation of Principal | coverage will be reduced by its pro rata share of principal repayments on covered loans, and the | |
remaining principal repayments on covered loans will be allocated to the most senior class with | ||
Repayments | coverage remaining | |
| If the default rate is greater than 5% or Class A's subordination is less than 11.25%, all principal | |
repayments on covered loans will be allocated to Class A (i.e., no amortization of bonds) | ||
Allocation of Losses | | Covered losses are allocated sequentially to the most junior class with coverage remaining |
Pricing | Initial: M-1A (BB+ rating by Fitch): 140 basis points (bps), M-1B (BB): 200 bps, M-1C (NR): 250 | |
bps, M-2 (NR): 285 bps, B-1 (NR): 385 bps (duration weighted average: 251 bps assuming | ||
exercise of call) | ||
Bellemeade Re will maintain a trust account with funds equal to the coverage it provides | ||
Security | to the cedants | |
| Eligible investments for trust are money market funds that invest directly in U.S. Treasuries |
and Agencies
© 202019 Arch Capital Group Ltd. All rights reserved. | 12 |
ClickOurtoApproachedit M stertotitleEnvironmental,style Social & Governance
At Arch, we believe that it is our responsibility to do the right thing for our employees, our clients, our shareholders and our communities. We acknowledge this responsibility to our stakeholders in these key areas:
Community Impact
Our people give both their time and their financial resources to charities of all types, and the company promotes corporate citizenship through charitable donations and company-sponsored volunteer activities.
Arch is committed to making a positive impact on the communities where our employees live and work through our matching gift program, corporate giving and employee volunteerism. We help employees amplify their community impact by providing the majority of our employees with a 1:1 match on their donations to recognized charitable organizations.
Environmental Stewardship: Our Environmental Policy
We understand the risks that environmental challenges present to people and communities. As environmental stewards, we take an active role in reducing our environmental impact and look for cost-effective ways to protect and conserve natural resources. We are committed to long-term, sustainable approaches to protecting the environment.
Responsible Investing
We believe that the incorporation of material, non-financial factors into investment selection and risk management has the potential to enhance long-term investment returns. We use Environmental, Social & Governance (ESG) factors with respect to our directly managed assets and with respect to assets managed for us by third-party managers. We measure our exposure to ESG risks at both individual asset classes and total portfolio levels.
© 202019 Arch Capital Group Ltd. All rights reserved. | 13 |
ClickOurtoApproachedit M stertotitleESG,stylecontinued
Employer Responsibility
We create a workplace culture where all employees are treated with dignity and respect, and individual differences are valued, all with the goal of securing trust, empowerment and satisfaction for our employees. We foster this culture through our learning and development programs and our competitive compensation and health and welfare programs.
Diversity and Inclusion
Arch recognizes that bringing together diverse backgrounds and experiences drives innovation and leads to better outcomes for all stakeholders. We seek to foster a culture that embraces diversity and gives all employees the opportunity to succeed. This commitment is embedded in our values and contained in our company policies. Earlier this year, 78% of Arch employees participated in our first global employee engagement survey. The results indicated that our people share a bright outlook for our future, with an 84% engagement score (nine points above the industry norm).
Governance
We maintain the highest standards of corporate governance and ethical conduct. Our Board of Directors oversees the company's strategic direction and approach to risk management. In selecting Board members, our Nominating and Governance Committee's objective is to choose individuals with skills and experience who can best represent our shareholders and assist Arch's management in operating the business. The company endeavors to maintain a Board representing a diverse spectrum of expertise, background, perspective, race, gender and experience.
Data Security
Arch is committed to applying high standards of diligence and security when it comes to handling and protecting personal data and observing data protection laws and regulations. Our commitment is documented in our Privacy and Data Protection Policy.
© 202019 Arch Capital Group Ltd. All rights reserved. | 14 |
Growth and Book Value
Book value per common share1
$30.00 | ||||||||||||||||||||||||||||||||||||||
$25.00 | ||||||||||||||||||||||||||||||||||||||
$20.00 | ||||||||||||||||||||||||||||||||||||||
$15.00 | $20.30 | $21.52 | $26.42 | |||||||||||||||||||||||||||||||||||
$10.00 | $15.09 | $15.88 | $18.40 | |||||||||||||||||||||||||||||||||||
$5.00 | $9.91 | $10.49 | $11.97 | $13.18 | ||||||||||||||||||||||||||||||||||
$8.11 | ||||||||||||||||||||||||||||||||||||||
$6.12 | $5.71 | |||||||||||||||||||||||||||||||||||||
$4.89 | ||||||||||||||||||||||||||||||||||||||
$3.45 | $3.76 | |||||||||||||||||||||||||||||||||||||
$2.84 | ||||||||||||||||||||||||||||||||||||||
$0.00 | $2.03 | |||||||||||||||||||||||||||||||||||||
Mar-02Dec-03Dec-04Dec-05Dec-06 | Dec-07 | Dec-08 | Dec-09 | Dec-10 | Dec-11 | Dec-12 | Dec-13 | Dec-14 | Dec-15 | Dec-16 | Dec-17 | Dec-18 | Dec-19 | |||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||
Capitalization2 | $1.0 | $1.9 | $2.5 | $2.8 | $3.9 | $4.3 | $3.8 | $4.7 | $4.9 | $5.0 | $5.6 | $6.5 | $7.0 | $7.1 | $10.5 | $11.3 | $11.2 | $13.2 | ||||||||||||||||||||
($B): | ||||||||||||||||||||||||||||||||||||||
Debt/Preferred | ||||||||||||||||||||||||||||||||||||||
to Total | 0.0% | 10.5% | 11.8% | 10.8% | 7.7% | 6.9% | 10.4% | 8.5% | 8.2% | 8.0% | 7.2% | 18.7% | 17.3% | 17.2% | 28.7% | 26.4% | 22.5% | 19.0% | ||||||||||||||||||||
Capitalization2 |
1 Split adjusted as of December 31, 2019, excluding the effects of stock options and restricted stock units outstanding 2Available to Arch, including senior debt, preferred equity, common stock and AOCI.
Investor Inquiries:
Donald Watson | Vinay Misquith |
Executive Vice President, | Vice President, |
Financial Services | Financial Services |
(914) 872 3616 | (914) 872 3666 |
DWatson@archcapservices.com | VMisquith@archcapservices.com |
© 2019 Arch Capital Group Ltd. All rights reserved. | 15 |
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Arch Capital Group Ltd. published this content on 12 February 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 12 February 2020 23:00:02 UTC