Arch Capital's Profit Slips as Insurance Underwriting Falters
Arch Capital Group reported net income of $1.0 billion, or $3.00 a share, down from $1.2 billion a year earlier as its insurance segment's underwriting income fell 79% to $27 million.
Arch Capital Group (ACGL) reported second-quarter net income available to common shareholders of $1.0 billion, or $3.00 a share, down from $1.2 billion, or $3.23 a share, a year earlier, as the specialty insurer's underwriting results weakened across its largest segment.
The decline extended a trend that began earlier in the year. Annualized return on equity fell to 18.0% from 22.9% in the prior-year quarter and slipped from 17.8% in the first quarter of 2024, while after-tax operating income of $893 million, or $2.56 a share, came in below the $979 million, or $2.58 a share, reported a year earlier. The combined ratio excluding catastrophes and prior-year development rose to 82.5% from 80.9%, continuing a gradual deterioration from 82.3% in the first quarter.
The reported combined ratio increased 2.3 points to 83.5% from 81.2%, driven by a 2.0-point rise in the loss ratio to 55.1%. That reversed the trajectory of the first quarter, when the combined ratio had improved 8.4 points from a year earlier. Underwriting income fell 19.7% to $657 million from $818 million, a sharp turn from the first quarter's 74.6% year-over-year gain to $728 million. Net premiums written declined 6.9% to $4.05 billion and net premiums earned fell 8.1% to $3.99 billion, a steeper contraction than the first quarter's 3.7% and 4.8% declines, respectively.
The insurance segment accounted for much of the pressure. Underwriting income there collapsed 79.1% to $27 million from $129 million, as the combined ratio deteriorated 5.1 points to 98.5%, with the loss ratio up 3.2 points to 63.0% and the expense ratio up 1.9 points to 35.5%. Part of the increase was tied to transitional costs from the MCE Acquisition and to 7.6 points of catastrophe losses, up from 2.9 points a year earlier. The reinsurance segment fared better on profitability even as premium volume shrank: net premiums written and earned fell 10.4% and 12.8%, respectively, on non-renewals, share reductions and increased retrocessions, but underwriting income of $410 million was down only 9.1% and the combined ratio improved a point to 77.5%. In mortgage, the combined ratio excluding prior-year development ticked up to 39.8% from 39.3% as favorable reserve development narrowed to a 15.7-point benefit from 22.8 points, even as net premiums written rose 7.5% following termination of the Bellemeade and quota-share agreements.
Below the underwriting line, results were mixed. Net realized results swung to a $17 million loss from a $229 million gain a year earlier, while net foreign exchange flipped to a $10 million gain from an $88 million loss. The effective tax rate fell to 13.4% from 14.7%, helped by Bermuda qualified refundable tax credits that cut corporate expenses to $12 million from $29 million.
Arch also refinanced part of its debt stack during the quarter, completing a $2.0 billion senior notes offering on June 9, split between notes due 2036 at 5.250% and notes due 2056 at 5.950%. The company tendered for $217.8 million and $199.1 million of existing 2043 and 2046 notes, respectively, generating a $16 million realized gain, and interest expense rose to $44 million from $38 million a year earlier as a result.
Capital return accelerated alongside the softer underwriting quarter. Arch repurchased $1.2 billion of stock, up from $783 million in the first quarter, and book value per share grew 2.8% sequentially to $68.04 at June 30, decelerating slightly from 1.7% growth to $66.19 at March 31.