10-Q: Arch Capital Reports Solid Q2 2025 Results

Arch Capital Group Ltd. delivered solid second-quarter results, driven by strong underwriting and investment performance, with book value per share increasing 7.3%.

Summary

• Annualized net income return on average common equity was 22.9% for the second quarter of 2025, compared to 26.3% for the same period in 2024.
• Annualized operating return on average common equity was 18.2% for the second quarter of 2025, down from 20.5% in the prior year quarter.
• Book value per share grew 7.3% in the second quarter of 2025, reaching $59.17 at June 30, 2025, up from $55.15 at March 31, 2025.
• The insurance segment reported $129 million in underwriting income for the second quarter of 2025, with net premiums written increasing 30.7% to $2.036 billion.
• The reinsurance segment contributed $451 million in underwriting income in the second quarter of 2025, with net premiums written exceeding $2 billion, a 5.8% increase.
• The mortgage segment generated $238 million of underwriting income in the second quarter of 2025, though net premiums written decreased 8.3% to $253 million.
• Total return on investments was 3.09% for the second quarter of 2025, slightly underperforming its benchmark return of 3.26%.
• The effective tax rate for the six months ended June 30, 2025, increased to 15.6% from 7.7% in the prior year, primarily due to the new 15% Bermuda corporate income tax effective January 1, 2025.
• The company repurchased 4.1 million common shares for an aggregate purchase price of $359.7 million during the six months ended June 30, 2025.
• The Arch MI U.S. PMIERs sufficiency ratio was estimated at 168% at June 30, 2025, down from 186% at December 31, 2024, with a pro-forma ratio of 147% if new PMIERs updates were fully implemented.

Sentiment

Score: 7

Explanation: The company reported solid Q2 2025 results with strong book value per share growth and robust underwriting income across its insurance and reinsurance segments. While net income and operating returns saw slight year-over-year declines and investment performance slightly lagged its benchmark, the overall financial health and strategic execution appear strong, supported by favorable prior period reserve development and effective capital management.

Positives

• Achieved a strong annualized net income return on average common equity of 22.9% and operating return on average common equity of 18.2% for Q2 2025.
• Book value per share increased significantly by 7.3% in Q2 2025 to $59.17, driven by robust underwriting and investment performance.
• The insurance segment's net premiums written grew by 30.7% in Q2 2025, benefiting from the MCE Acquisition and selective organic growth.
• The reinsurance segment's underwriting income increased by 23.2% to $451 million in Q2 2025, reflecting selective growth in attractive margin areas.
• The mortgage segment continued to deliver steady earnings, generating $238 million of underwriting income in Q2 2025, supported by a strong in-force portfolio.
• Reported net favorable prior period reserve development of $153 million for Q2 2025 and $350 million for H1 2025 across all segments.
• Net investment income increased to $405 million in Q2 2025 and $783 million in H1 2025, primarily due to growth in average invested assets and strong operating cash flows.
• Maintained a relatively short duration of 3.48 years on the fixed income portfolio at June 30, 2025.
• Arch MI U.S. successfully met PMIERs financial requirements with an estimated sufficiency ratio of 168% at June 30, 2025.
• The U.S. primary mortgage insurance portfolio maintained a healthy persistency rate of 81.9% and a low delinquency rate.

Negatives

• Net income available to common shareholders decreased to $1.227 billion in Q2 2025 from $1.259 billion in Q2 2024, and to $1.791 billion in H1 2025 from $2.369 billion in H1 2024.
• Annualized net income return on average common equity declined to 22.9% in Q2 2025 from 26.3% in Q2 2024, and to 17.0% in H1 2025 from 25.4% in H1 2024.
• Annualized operating return on average common equity decreased to 18.2% in Q2 2025 from 20.5% in Q2 2024, and to 14.8% in H1 2025 from 20.5% in H1 2024.
• The mortgage segment's net premiums written decreased 8.3% in Q2 2025, partly due to a one-time $15 million expense related to a tender offer of certain Bellemeade Re mortgage insurance linked notes and lower international mortgage originations.
• The reinsurance segment's underwriting income decreased 17.0% for the six months ended June 30, 2025, compared to the prior year period.
• The insurance segment's underwriting income decreased 34.9% for the six months ended June 30, 2025, compared to the prior year period.
• The current year loss ratio for the insurance segment increased to 60.2% in Q2 2025 from 57.6% in Q2 2024, reflecting higher catastrophic activity (2.9 points vs. 2.0 points).
• The current year loss ratio for the reinsurance segment increased to 65.3% for H1 2025 from 57.0% for H1 2024, reflecting higher catastrophic activity (13.5 points vs. 6.1 points), primarily related to California wildfires.
• Incurred net foreign exchange losses of $88 million in Q2 2025 and $115 million in H1 2025, primarily unrealized.
• Total return on investments for Q2 2025 (3.09%) and H1 2025 (5.17%) slightly underperformed their respective benchmarks (3.26% and 5.37%).
• The PMIERs sufficiency ratio for Arch MI U.S. decreased to 168% at June 30, 2025, from 186% at December 31, 2024.

Risks

• Ability to successfully implement business strategy during both soft and hard market conditions.
• Acceptance of business strategy, security, and financial condition by rating agencies, regulators, brokers, insureds, and reinsureds.
• Ability to consummate acquisitions and effectively integrate acquired businesses into existing operations.
• Maintaining or improving ratings, which can be affected by additional equity or debt financings, rating agency policies, and other factors.
• Impact of general economic and market conditions, including inflation, interest rates, unemployment, housing prices, foreign currency exchange rates, credit terms, tariffs, and the depth/duration of a recession.
• Increased competition based on pricing, capacity (including alternative capital sources), and coverage terms.
• Developments in global financial and capital markets and access to such markets.
• Ability to successfully enhance, integrate, and maintain operating procedures (including information technology) to support current and new business.
• Loss or addition of key personnel.
• Material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements.
• Accuracy of estimates and judgments in financial statements, particularly for revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, deferred income tax assets, contingencies, and litigation.
• Greater than expected loss ratios on business written and adverse development on claim and/or claim expense liabilities.
• Adequacy of the company's loss reserves.
• Severity and/or frequency of losses.
• Greater frequency or severity of unpredictable natural and man-made catastrophic events, including those causing large losses and substantial volatility.
• Availability and cost of reinsurance to manage net exposure.
• Failure of reinsurers, managing general agents, or third-party administrators to meet their obligations.
• Timing of loss payments being faster or receipt of reinsurance recoverables being slower than anticipated.
• Investment performance, including legislative or regulatory developments that may adversely affect the fair value of investments.
• Changes in general economic conditions, including sovereign debt concerns or downgrades of U.S. securities by credit rating agencies.
• Incidents, disruptions, or cyber events caused by cyber attacks, inadvertent errors, or the use of artificial intelligence technologies, potentially leading to negative business impacts or litigation.
• Effect of climate change on the business.
• Effect of contagious diseases on the business.
• Acts of terrorism, political unrest, other hostilities, or unforecasted and unpredictable events.
• Volatility of shareholders' equity from foreign currency fluctuations, potentially increasing if projected liabilities in foreign currencies are not matched with investments in the same currencies.
• Changes in accounting principles or policies or their application.
• Changes in the political environment of certain countries where operations or underwriting occur.
• Statutory or regulatory developments, including tax matters (e.g., OECD Pillar I and Pillar II initiatives, Bermuda corporate income tax) and insurance regulations.
• Inherent uncertainties in estimating the frequency and severity of catastrophic events and severe economic events, and the margin of error in such determinations.
• Actual incurred losses potentially varying materially from modeled estimates, or increasing if reinsurers fail to meet obligations or reinsurance protections are exhausted/unavailable.

Future Outlook

The company anticipates continued selective growth in casualty lines, particularly in quota share arrangements, and expects the mortgage segment to continue generating attractive underwriting income despite potential economic uncertainty. Property and casualty market conditions are largely consistent with the first quarter of 2025, with some sectors experiencing increased price competition and others seeing rate improvements. The company believes the property and casualty market still presents meaningful opportunities for disciplined underwriters and is maintaining a cautious stance in E&S property, excess D&O, and cyber, prioritizing margin over volume. The integration of the MCE Acquisition is progressing well and is expected to enhance capabilities.

Management Comments

• Reported solid results for the 2025 second quarter, with an annualized net income return on average common equity and operating return on average common equity of 22.9% and 18.2%, respectively.
• Book value per share grew 7.3% in the 2025 second quarter, reflecting disciplined underwriting and capital management.
• Continue to execute cycle management strategy by actively allocating capital to the segments with the best risk-adjusted returns, while retaining the flexibility to invest in the platform when attractive opportunities are found.
• Our core objective to deliver long-term value for our shareholders remains unchanged.
• The integration of the MCE Acquisition is progressing well, and we remain excited about the increased capabilities this team brings to our insurance platform.
• We saw selective growth in casualty lines, particularly in alternative market, E&S casualty and large account casualty, where pricing continued to outpace loss trends.
• Competitive pressure persists in E&S property, excess D&O and cyber; while pricing appears to be stabilizing, we are maintaining a cautious stance, prioritizing margin over volume.
• Our long-term investment in establishing a leadership position at Lloyds continues to yield strong results reflected in favorable signings and our ability to attract top-tier underwriting talent.
• We are growing selectively and focusing on areas where margins are attractive.
• We also expanded our property catastrophe writings, primarily in Florida, where we saw attractive risk-adjusted returns and increased demand from clients for additional limits.
• We were generally pleased with the state of the mid-year catastrophe excess of loss renewals. While pricing was slightly down, margins remain attractive with primary insurers maintaining high retentions.
• Our mortgage segment continued to deliver a steady level of earnings for our shareholders, generating $238 million of underwriting income in the 2025 second quarter, due to the strength of our in-force portfolio.
• While new originations were tempered by relatively high mortgage interest rates, underlying fundamentals remained strong and our U.S. market share was stable as industry pricing discipline held.
• While economic uncertainty could create headwinds, we still expect the mortgage segment to continue generating attractive underwriting income given the high credit quality and embedded equity of our in-force portfolio.

Industry Context

The property and casualty market conditions remain largely consistent with the first quarter of 2025, with some sectors experiencing increased price competition while others continue to see rate improvements. The company believes the market still presents meaningful opportunities for disciplined underwriters. Internationally, the Lloyd's and London market businesses are experiencing increased, but rational, competition. Mid-year catastrophe excess of loss renewals saw slightly lower pricing but maintained attractive margins due to primary insurers retaining high retentions. In the U.S. mortgage market, new originations were tempered by relatively high mortgage interest rates, but underlying fundamentals remained strong, and industry pricing discipline held.

Comparison to Industry Standards

• The company's total return on investments for Q2 2025 was 3.09%, slightly underperforming its customized benchmark return of 3.26%.
• For the six months ended June 30, 2025, the total return on investments was 5.17%, slightly underperforming the benchmark return of 5.37%.
• The investment benchmark is a customized combination of indices, including ICE BofA 1-10 Year U.S. Corporate Index (26.70%), Yield on 3-5 Year U.S. Treasury Index plus 6% (17.00%), ICE BofA 1-10 Year U.S. Treasury Index (15.00%), JPM CLOIE Investment Grade (6.00%), S&P 500 Total Return Index (4.50%), and various other U.S. and international government and corporate bond indices.
• At June 30, 2025, the fixed income portion of the benchmark had an average credit quality of A1 by Moody's and an estimated fixed income duration of 3.24 years, which the company's portfolio (average AA-/Aa3, 3.48 years duration) is broadly comparable to.
• The Arch MI U.S. PMIERs sufficiency ratio of 168% at June 30, 2025, indicates the company's mortgage insurance capital significantly exceeds the requirements set by government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, demonstrating strong financial health relative to regulatory benchmarks.

Corporate Governance

Legal Proceedings

• The company is subject to litigation and arbitration in the normal course of its business, common within the insurance industry.
• As of June 30, 2025, management does not expect any current litigation or arbitration to have a material adverse effect on the company's results of operations, financial condition, or liquidity.

Related Party Transactions

• No new reinsurance transactions were entered into with Premia Reinsurance Ltd. during the six months ended June 30, 2025. A funds held asset from Premia was $127 million at June 30, 2025, down from $137 million at December 31, 2024.
• Net premiums written were reduced by $419 million for the six months ended June 30, 2025, due to certain reinsurance transactions with Somers Group Holdings Ltd. (an affiliate where Arch owns 40% of Greysbridge, which wholly owns Somers).
• Somers Group Holdings Ltd. paid certain acquisition costs and administrative fees to the company.
• A reinsurance recoverable on unpaid and paid losses from Somers was $1.8 billion at June 30, 2025, and a reinsurance balance payable to Somers was $602 million.
• Warburg and Kelso, other investors in Greysbridge Holdings Ltd., delivered put option notices in 2024 to sell a certain amount of their initial shares, with the transaction expected to close in the 2025 calendar year, subject to regulatory approvals. This resulted in $290 million reflected in both other assets and other liabilities on the balance sheet at June 30, 2025.

Stakeholder Impact

• Shareholders: Positive impact from strong book value growth, ongoing share repurchase program, and management's focus on long-term value creation. Potential negative impact from slight year-over-year declines in net income and operating returns, and increased tax rate.
• Employees: Benefit from the Second Amended and Restated 2007 Employee Share Purchase Plan and the Amended and Restated 2018 and 2022 Long Term Incentive and Share Award Plans, designed to attract, retain, and motivate talent through equity participation and performance alignment.
• Customers/Insureds/Reinsureds: Benefit from the company's disciplined underwriting, diversified global platform, and strong distribution relationships, which aim to provide stable and attractive insurance and reinsurance offerings.
• Regulators: The company's compliance with PMIERs financial requirements for its mortgage insurance business demonstrates adherence to regulatory standards. The new Bermuda corporate income tax will impact the company's tax obligations.
• Investment Professionals: The detailed financial metrics, strategic insights, and risk disclosures provide comprehensive information for investment analysis and decision-making.

Next Steps

• Continue to execute cycle management strategy by actively allocating capital to segments with the best risk-adjusted returns.
• Retain flexibility to invest in the platform when attractive opportunities are identified.
• Continue practicing disciplined underwriting, building a meaningful margin of safety into pricing, taking a long-term view of risk, and a prudent approach to reserving.
• Execute on key strategic pillars: building a diversified mix of businesses, actively managing the underwriting cycle, remaining prudent stewards of capital, and being dynamic managers of a data-driven enterprise with best-in-class talent.
• Monitor and maintain a cautious stance in E&S property, excess D&O, and cyber lines, prioritizing margin over volume.
• Continue the integration of the MCE Acquisition.
• Expect to close the transaction involving third-party purchasers of Warburg and Kelso's shares in Greysbridge in the 2025 calendar year, subject to any required regulatory approvals and other closing conditions.
• Continue common share repurchases under the authorized program, with approximately $393 million remaining as of August 5, 2025.

Key Dates

Recommendation

While Arch Capital demonstrated strong book value growth and solid underwriting performance across its segments, the slight year-over-year decline in net income and operating returns, coupled with increased catastrophic activity and a higher effective tax rate due to Bermuda's new corporate income tax, present some headwinds. The investment portfolio slightly underperformed its benchmark. The company's disciplined underwriting, diversified platform, and ongoing share repurchase program are positive, but the mixed financial performance and persistent competitive pressures in certain lines suggest a 'Hold' recommendation for a seasoned investor, awaiting clearer trends in profitability and market conditions.

Keywords

Insurance, Reinsurance, Mortgage Insurance, Financial Results, Underwriting, Investment Performance, Share Repurchase, SEC Filing, Catastrophe Risk, Economic Events, Corporate Income Tax, Bermuda, Financial Services, Risk Management, Earnings, Book Value, Combined Ratio, Loss Reserves, PMIERs