ARCH CAPITAL GROUP LTD. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2025

Arch Capital Delivers Solid First Quarter Results Despite Elevated Catastrophe Losses

Arch Capital, a leading global insurance and reinsurance company, has reported its financial results for the first quarter of 2025. Despite facing significant catastrophe losses, the company managed to deliver a solid performance, demonstrating the strength and resilience of its diversified business model.

Overview of Financial Performance

Arch Capital reported net income of $564 million for the first quarter of 2025, representing an 11.1% annualized net income return on average common equity. This was achieved despite incurring $547 million in current year catastrophe losses, primarily related to the California wildfires.

The company’s book value per share, a key measure of the value generated for shareholders, increased by 3.8% during the quarter, reaching $55.15 as of March 31, 2025. This growth was driven by strong investment and underwriting returns, despite the elevated level of catastrophe activity.

Arch Capital’s annualized operating return on average common equity (Operating ROAE) was 11.5% for the first quarter, compared to 20.7% in the same period of 2024. The decrease in returns was primarily due to the higher level of catastrophe losses, but the company still managed to deliver an attractive level of profitability.

Revenue and Profit Trends

The company’s insurance segment reported a $2 million underwriting loss, primarily due to the impact of the California wildfires. However, the segment generated meaningful growth in net premiums written, driven by the successful integration of the U.S. MidCorp and Entertainment Insurance businesses acquired from Allianz in 2024.

The reinsurance segment contributed $167 million of underwriting income, demonstrating the strong underlying profitability of Arch Capital’s diversified reinsurance portfolio. While growth in net premiums written was modest due to increased competition and greater risk retention by ceding companies, the company expects additional demand from existing and new clients during the upcoming mid-year renewals, particularly in loss-impacted accounts.

The mortgage segment continued to deliver a steady level of earnings, generating $252 million of underwriting income in the first quarter. Although new originations remain tempered by relatively high mortgage interest rates, the underlying fundamentals of the U.S. mortgage insurance portfolio remained strong, with a healthy persistency rate and low delinquency levels.

Strengths and Weaknesses

One of Arch Capital’s key strengths is its diversified business mix, which includes insurance, reinsurance, and mortgage insurance operations. This diversification helps to mitigate the impact of volatility in any one business line and provides the company with a more stable and resilient earnings profile.

Another strength is the company’s strong underwriting culture and disciplined approach to risk management. Arch Capital’s focus on underwriting excellence and data-driven decision-making has enabled it to navigate challenging market conditions and maintain profitability, even in the face of significant catastrophe losses.

However, the company’s exposure to catastrophic and severe economic events remains a potential weakness. While Arch Capital has implemented measures to limit its probable maximum loss from such events, there is always the risk of losses exceeding the company’s expectations, which could have a material impact on its financial results.

Outlook and Future Prospects

Despite the increased competition in certain property and casualty lines, Arch Capital remains optimistic about its future prospects. The company believes that its underwriting expertise, investments in data and analytics, and strong financial resources will enable it to differentiate itself in the market and continue to maximize returns for its shareholders.

In the insurance segment, the company expects continued growth in casualty-led lines, as well as in the U.S. middle market, where opportunities remain for both rate and premium growth. In the reinsurance segment, the company anticipates additional demand from existing and new clients during the upcoming mid-year renewals, particularly in loss-impacted accounts.

The mortgage segment is expected to continue generating attractive underwriting income, given the high credit quality and embedded equity of the in-force portfolio. While recessionary trends could create some headwinds, the company believes the mortgage business will remain a steady contributor to its overall performance.

Overall, Arch Capital’s management remains confident in the company’s ability to deliver long-term value for its shareholders. The company’s focus on building a diversified mix of businesses, actively managing the underwriting cycle, and prudent capital management should position it well for continued success in the years ahead.