The following financial supplement is provided to assist in your understanding of Arch Capital Group Ltd. (“Arch Capital”) and its subsidiaries (collectively, the “Company”).
This report is for informational purposes only. It should be read in conjunction with documents filed by Arch Capital with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q. Please refer to the Company’s website at www.archcapgroup.com for further information describing Arch Capital.
Contacts
Arch Capital Group Ltd.
Investor Relations
François Morin: (441) 278-9250
Donald Watson: (914) 872-3616; dwatson@archgroup.com
All financial information contained herein is unaudited, however, certain information relating to the consolidated balance sheet at December 31, 2020 is derived from or agrees to audited financial information. During the 2021 first quarter, the Company changed its presentation of ‘income (loss) from operating affiliates’ on its consolidated statements of income for all periods presented to reclass such item from ‘other income (loss)’. The Company also changed its presentation of ‘investment in operating affiliates’ on its consolidated balance sheet for all periods presented to reclass such item from ‘other assets’. Unless otherwise noted, all data is in thousands, except for share and per share amounts and ratio information.
In March 2014, the Company invested $100.0 million to acquire common equity and a warrant to purchase additional common equity of Watford Holdings Ltd. In accordance with GAAP, the Company consolidates the results of Watford Holdings Ltd. (“Watford”) in its financial statements, although it only owned approximately 10% of Watford’s outstanding common equity at June 30, 2021. Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, 100% of the results of Watford are included in the Company’s consolidated financial statements. The portion of Watford’s earnings owned by third parties is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ In addition, the Company reflects Watford’s redeemable preference shares in the mezzanine section of the Company’s consolidated balance sheets as ‘redeemable noncontrolling interests’ because they have redemption features that are not solely within the control of Watford.
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital and its subsidiaries may include forward-looking statements, which reflect the Company’s 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 release 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 the Company’s 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 the Company’s ability to maintain and improve the Company’s ratings; investment performance; the loss of key personnel; the adequacy of the Company’s 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; including pandemics such as COVID-19; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; the Company’s 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 the Company of reinsurance to manage gross and net exposures; the failure of others to meet their obligations to the Company; changes in the method for determining the London Inter-bank Offered Rate (“LIBOR”) and the potential replacement of LIBOR and other factors identified in the Company’s 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 the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
2
Arch Capital Group Ltd. and Subsidiaries
Financial Highlights
The following table presents financial highlights (1):
(U.S. Dollars in thousands, except share data)
Three Months Ended
Six Months Ended
June 30,
June 30,
2021
2020
Change
2021
2020
Change
Underwriting results:
Gross premiums written
$
3,117,505
$
2,206,410
41.3
%
$
6,394,798
$
4,904,947
30.4
%
Net premiums written
2,224,133
1,562,455
42.3
%
4,553,279
3,513,001
29.6
%
Net premiums earned
1,936,672
1,533,819
26.3
%
3,737,363
3,138,224
19.1
%
Underwriting income (loss) (2)
395,387
(13,410)
n/m
594,384
146,650
305.3
%
Loss ratio
52.6
%
73.4
%
(20.8)
56.3
%
67.9
%
(11.6)
Acquisition expense ratio
15.5
%
15.1
%
0.4
15.4
%
14.6
%
0.8
Other operating expense ratio
11.7
%
12.7
%
(1.0)
12.7
%
13.3
%
(0.6)
Combined ratio
79.8
%
101.2
%
(21.4)
84.4
%
95.8
%
(11.4)
Net investment income
$
89,430
$
101,031
(11.5)
%
$
168,159
$
214,059
(21.4)
%
Per diluted share
$
0.22
$
0.25
(12.0)
%
$
0.41
$
0.52
(21.2)
%
Net income available to Arch common shareholders
$
663,820
$
288,418
130.2
%
$
1,091,573
$
422,132
158.6
%
Per diluted share
$
1.63
$
0.71
129.6
%
$
2.68
$
1.03
160.2
%
After-tax operating income available to Arch common shareholders (2)
$
407,216
$
16,614
2,351.0
%
$
646,985
$
206,370
213.5
%
Per diluted share
$
1.00
$
0.04
2,400.0
%
$
1.59
$
0.50
218.0
%
Comprehensive income (loss) available to Arch
$
699,705
$
626,366
11.7
%
$
854,794
$
580,336
47.3
%
Net cash provided by operating activities
$
809,790
$
648,427
24.9
%
$
1,565,718
$
1,234,383
26.8
%
Weighted average common shares and common share equivalents outstanding — diluted
406,485,994
408,119,681
(0.4)
%
407,687,680
411,005,591
(0.8)
%
Financial measures:
Change in book value per common share during period
4.8
%
5.8
%
(1.0)
5.6
%
4.5
%
1.1
Annualized return on average common equity
21.2
%
10.6
%
10.6
17.4
%
7.7
%
9.7
Annualized operating return on average common equity (2)
13.0
%
0.6
%
12.4
10.3
%
3.8
%
6.5
Total return on investments (3)
1.58
%
3.72
%
-214 bps
1.39
%
2.82
%
-143 bps
(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)See ‘Comments on Regulation G’ for a further discussion of consolidated underwriting income or loss, after-tax operating income or loss available to Arch common shareholders and annualized operating return on average common equity.
(3)Total return on investments includes net investment income, equity in net income (loss) of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses and is calculated on a pre-tax basis and before investment expenses. See ‘Comments on Regulation G’ for a further discussion of the presentation of total return on investments.
3
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Income
(U.S. Dollars in thousands, except share data)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Revenues
Net premiums earned
$
2,120,909
$
1,948,422
$
1,811,045
$
1,771,092
$
1,665,354
$
4,069,331
$
3,409,798
Net investment income
111,613
98,856
114,458
128,512
131,485
210,469
276,638
Net realized gains (losses)
202,907
142,461
353,333
280,499
556,588
345,368
189,628
Other underwriting income
5,529
6,110
7,852
5,413
6,667
11,639
13,519
Equity in net income (loss) of investment funds accounted for using the equity method
122,186
71,686
89,286
126,735
(65,119)
193,872
(69,328)
Other income (loss)
6,852
(1,741)
(36)
—
33
5,111
65
Total revenues
2,569,996
2,265,794
2,375,938
2,312,251
2,295,008
4,835,790
3,820,320
Expenses
Losses and loss adjustment expenses
(1,159,831)
(1,203,100)
(1,127,385)
(1,216,273)
(1,230,522)
(2,362,931)
(2,345,941)
Acquisition expenses
(335,143)
(304,481)
(254,828)
(247,942)
(254,789)
(639,624)
(502,072)
Other operating expenses
(244,943)
(261,033)
(215,697)
(215,686)
(209,249)
(505,976)
(443,793)
Corporate expenses
(15,951)
(25,384)
(25,335)
(17,937)
(17,920)
(41,335)
(38,716)
Amortization of intangible assets
(15,286)
(14,402)
(19,196)
(16,715)
(16,489)
(29,688)
(33,120)
Interest expense
(35,700)
(38,346)
(38,419)
(41,343)
(31,139)
(74,046)
(63,694)
Net foreign exchange gains (losses)
(17,775)
20,063
(72,209)
(44,885)
(39,211)
2,288
33,460
Total expenses
(1,824,629)
(1,826,683)
(1,753,069)
(1,800,781)
(1,799,319)
(3,651,312)
(3,393,876)
Income (loss) before income taxes and income (loss) from operating affiliates
745,367
439,111
622,869
511,470
495,689
1,184,478
426,444
Income tax expense
(51,179)
(38,860)
(34,059)
(23,707)
(26,127)
(90,039)
(54,072)
Income (loss) from operating affiliates
24,476
75,457
10,504
919
(3,173)
99,933
5,343
Net income (loss)
718,664
475,708
599,314
488,682
466,389
1,194,372
377,715
Net (income) loss attributable to noncontrolling interests
(43,178)
(37,552)
(55,770)
(69,643)
(167,568)
(80,730)
65,223
Net income (loss) attributable to Arch
675,486
438,156
543,544
419,039
298,821
1,113,642
442,938
Preferred dividends
(11,666)
(10,403)
(10,403)
(10,403)
(10,403)
(22,069)
(20,806)
Net income (loss) available to Arch common shareholders
$
663,820
$
427,753
$
533,141
$
408,636
$
288,418
$
1,091,573
$
422,132
Comprehensive income (loss) available to Arch
$
699,705
$
155,089
$
646,082
$
455,907
$
626,366
$
854,794
$
580,336
Net income (loss) per common share and common share equivalent
Basic
$
1.67
$
1.07
$
1.32
$
1.01
$
0.72
$
2.73
$
1.05
Diluted
$
1.63
$
1.05
$
1.30
$
1.00
$
0.71
$
2.68
$
1.03
Weighted average common shares and common share equivalents outstanding
Basic
397,743,402
400,807,895
403,005,335
402,850,485
402,503,687
399,267,183
403,197,924
Diluted
406,485,994
409,223,253
410,281,852
409,194,657
408,119,681
407,687,680
411,005,591
4
Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets
(U.S. Dollars in thousands, except share data)
June 30,
March 31,
December 31,
September 30,
June 30,
2021
2021
2020
2020
2020
Assets
Investments:
Fixed maturities available for sale, at fair value
$
18,073,779
$
18,723,035
$
18,717,825
$
18,452,888
$
17,207,731
Short-term investments available for sale, at fair value
2,248,613
1,269,631
1,924,922
2,039,097
2,277,866
Collateral received under securities lending, at fair value
172,116
143,894
301,096
64,259
473,790
Equity securities, at fair value
1,693,552
1,532,906
1,444,830
1,502,015
1,257,317
Other investments
4,571,497
4,435,354
4,324,796
3,749,575
3,520,771
Investments accounted for using the equity method
2,539,124
2,256,327
2,047,889
1,883,702
1,727,302
Total investments
29,298,681
28,361,147
28,761,358
27,691,536
26,464,777
Cash
1,234,059
941,951
906,448
976,398
854,259
Accrued investment income
96,546
101,108
103,299
106,940
102,064
Securities pledged under securities lending, at fair value
168,548
140,949
294,912
62,749
464,503
Investment in operating affiliates
731,810
739,783
129,291
115,411
111,175
Premiums receivable
2,866,578
2,618,175
2,064,586
2,225,311
2,203,753
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
4,314,515
4,041,076
4,500,802
4,621,937
4,363,507
Contractholder receivables
1,882,948
1,919,655
1,986,924
2,185,614
2,179,124
Ceded unearned premiums
1,541,093
1,406,489
1,234,075
1,450,200
1,364,603
Deferred acquisition costs
1,013,657
919,740
790,708
750,901
714,531
Receivable for securities sold
309,234
199,424
92,743
158,674
167,281
Goodwill and intangible assets
667,153
679,509
692,863
713,777
688,490
Other assets
2,357,064
2,135,261
1,724,288
1,656,587
1,521,581
Total assets
$
46,481,886
$
44,204,267
$
43,282,297
$
42,716,035
$
41,199,648
Liabilities
Reserve for losses and loss adjustment expenses
$
17,196,648
$
16,443,952
$
16,513,929
$
15,900,526
$
15,044,874
Unearned premiums
6,011,369
5,549,127
4,838,965
5,062,052
4,827,445
Reinsurance balances payable
1,079,106
919,125
683,263
873,067
793,467
Contractholder payables
1,887,418
1,925,508
1,995,562
2,191,515
2,185,414
Collateral held for insured obligations
235,618
222,245
215,581
221,957
208,449
Senior notes
2,861,728
2,861,417
2,861,113
2,860,811
2,860,733
Revolving credit agreement borrowings
155,687
155,687
155,687
210,687
335,587
Securities lending payable
172,109
143,886
301,089
64,251
473,783
Payable for securities purchased
586,881
386,453
218,779
382,236
275,257
Other liabilities
1,332,843
1,565,861
1,510,888
1,681,181
1,467,739
Total liabilities
31,519,407
30,173,261
29,294,856
29,448,283
28,472,748
Redeemable noncontrolling interests
57,533
57,670
58,548
57,835
55,986
Shareholders’ equity
Non-cumulative preferred shares
1,280,000
780,000
780,000
780,000
780,000
Common shares
647
645
643
642
642
Additional paid-in capital
2,028,919
2,014,741
1,977,794
1,950,782
1,935,514
Retained earnings
13,454,036
12,790,216
12,362,463
11,829,322
11,420,686
Accumulated other comprehensive income (loss), net of deferred income tax
230,048
205,827
488,895
386,357
349,488
Common shares held in treasury, at cost
(3,007,578)
(2,694,957)
(2,503,909)
(2,495,106)
(2,494,505)
Total shareholders’ equity available to Arch
13,986,072
13,096,472
13,105,886
12,451,997
11,991,825
Non-redeemable noncontrolling interests
918,874
876,864
823,007
757,920
679,089
Total shareholders’ equity
14,904,946
13,973,336
13,928,893
13,209,917
12,670,914
Total liabilities, noncontrolling interests and shareholders’ equity
$
46,481,886
$
44,204,267
$
43,282,297
$
42,716,035
$
41,199,648
Common shares and common share equivalents outstanding, net of treasury shares
396,771,251
403,313,377
406,720,642
406,018,958
405,970,251
Book value per common share (1)
$
32.02
$
30.54
$
30.31
$
28.75
$
27.62
(1) Excludes the effects of stock options and restricted stock units outstanding.
5
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Non-cumulative preferred shares
Balance at beginning of period
$
780,000
$
780,000
$
780,000
$
780,000
$
780,000
$
780,000
$
780,000
Preferred shares issued
500,000
—
—
—
—
500,000
—
Balance at beginning and end of period
$
1,280,000
$
780,000
$
780,000
$
780,000
$
780,000
$
1,280,000
$
780,000
Common shares
Balance at beginning of period
645
643
642
642
642
643
638
Common shares issued, net
2
2
1
—
—
4
4
Balance at end of period
647
645
643
642
642
647
642
Additional paid-in capital
Balance at beginning of period
2,014,741
1,977,794
1,950,782
1,935,514
1,921,487
1,977,794
1,889,683
Issue costs on preferred shares
(14,179)
—
—
—
—
(14,179)
—
Amortization of share-based compensation
16,490
40,573
14,663
14,662
13,160
57,063
41,210
All other
11,867
(3,626)
12,349
606
867
8,241
4,621
Balance at end of period
2,028,919
2,014,741
1,977,794
1,950,782
1,935,514
2,028,919
1,935,514
Retained earnings
Balance at beginning of period
12,790,216
12,362,463
11,829,322
11,420,686
11,132,268
12,362,463
11,021,006
Cumulative effect of an accounting change (1)
—
—
—
—
—
—
(22,452)
Balance at beginning of period, as adjusted
12,790,216
12,362,463
11,829,322
11,420,686
11,132,268
12,362,463
10,998,554
Net income
718,664
475,708
599,314
488,682
466,389
1,194,372
377,715
Amounts attributable to noncontrolling interests
(43,178)
(37,552)
(55,770)
(69,643)
(167,568)
(80,730)
65,223
Preferred share dividends
(11,666)
(10,403)
(10,403)
(10,403)
(10,403)
(22,069)
(20,806)
Balance at end of period
13,454,036
12,790,216
12,362,463
11,829,322
11,420,686
13,454,036
11,420,686
Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period
205,827
488,895
386,357
349,488
21,944
488,895
212,091
Change in unrealized appreciation (decline) in value of available-for-sale investments
17,991
(254,584)
63,008
19,800
305,338
(236,593)
160,001
Change in foreign currency translation adjustments
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses
(218,042)
(161,007)
(366,942)
(282,907)
(557,740)
(379,049)
(194,776)
Equity in net (income) or loss of investment funds accounted for using the equity method and other income or loss
(45,089)
(135,939)
(78,257)
(95,078)
96,350
(181,028)
125,384
Amortization of intangible assets
15,286
14,402
19,196
16,715
16,489
29,688
33,120
Share-based compensation
16,752
40,812
14,829
14,521
13,363
57,564
41,912
Changes in:
Reserve for losses and loss adjustment expenses, net
388,352
560,153
445,758
509,623
652,389
948,505
1,158,446
Unearned premiums, net
278,615
560,035
(53,030)
103,052
2,957
838,650
395,759
Premiums receivable
(173,141)
(608,250)
143,123
1,872
(45,181)
(781,391)
(463,638)
Deferred acquisition costs
(88,192)
(126,701)
(36,710)
(14,801)
(17,302)
(214,893)
(92,437)
Reinsurance balances payable
91,255
240,206
(139,670)
73,459
52,354
331,461
132,161
Other items, net
(134,733)
(96,574)
7,444
194,732
31,058
(231,307)
(192,066)
Net cash provided by operating activities
849,727
762,845
555,055
1,009,870
711,126
1,612,572
1,321,580
Investing Activities
Purchases of fixed maturity investments
(12,023,416)
(11,530,968)
(5,714,394)
(8,640,034)
(13,444,854)
(23,554,384)
(25,410,849)
Purchases of equity securities
(311,355)
(309,419)
(239,162)
(330,699)
(264,466)
(620,774)
(1,025,149)
Purchases of other investments
(602,173)
(430,961)
(966,841)
(340,194)
(273,221)
(1,033,134)
(501,692)
Proceeds from sales of fixed maturity investments
12,213,254
10,917,134
5,404,479
7,711,837
13,109,907
23,130,388
24,833,030
Proceeds from sales of equity securities
257,304
284,986
415,471
151,447
314,045
542,290
580,346
Proceeds from sales, redemptions and maturities of other investments
448,958
323,591
237,771
319,619
256,057
772,549
472,188
Proceeds from redemptions and maturities of fixed maturity investments
384,794
421,042
225,842
276,052
170,884
805,836
369,240
Net settlements of derivative instruments
(30,374)
47,660
15,716
12,819
(45,017)
17,286
150,471
Net (purchases) sales of short-term investments
(967,261)
589,175
129,670
164,012
(1,311,586)
(378,086)
(1,323,363)
Change in cash collateral related to securities lending
(826)
—
—
26,614
(405)
(826)
54,596
Purchase of operating affiliate, net
—
(546,349)
—
—
—
(546,349)
—
Purchases of fixed assets
(11,095)
(12,490)
(13,155)
(9,030)
(9,217)
(23,585)
(17,687)
Other
41,701
(246,590)
69,795
(140,671)
(33,821)
(204,889)
8,679
Net cash provided by (used for) investing activities
(600,489)
(493,189)
(434,808)
(798,228)
(1,531,694)
(1,093,678)
(1,810,190)
Financing Activities
Proceeds from issuance of preferred shares, net
485,821
—
—
—
—
485,821
—
Purchases of common shares under share repurchase program
(306,049)
(179,266)
(7,986)
—
—
(485,315)
(75,486)
Proceeds from common shares issued, net
10,193
(10,008)
11,532
5
(5,134)
185
(9,661)
Proceeds from borrowings
—
—
—
13,875
988,618
—
1,004,918
Repayments of borrowings
—
—
(55,000)
(139,000)
(165,000)
—
(165,000)
Change in cash collateral related to securities lending
826
—
—
(26,614)
405
826
(54,596)
Change in third party investment in non-redeemable noncontrolling interests
—
15,971
—
—
—
15,971
(2,867)
Dividends paid to redeemable noncontrolling interests
(959)
(948)
(1,404)
(1,001)
(1,359)
(1,907)
(2,540)
Other
29,587
(1,948)
18,449
57,891
(1,294)
27,639
(2,625)
Preferred dividends paid
(10,402)
(10,403)
(10,403)
(10,403)
(10,403)
(20,805)
(20,806)
Net cash provided by (used for) financing activities
209,017
(186,602)
(44,812)
(105,247)
805,833
22,415
671,337
Effects of exchange rate changes on foreign currency cash and restricted cash
(7,306)
(6,084)
28,136
15,895
8,981
(13,390)
(21,742)
Increase (decrease) in cash and restricted cash
450,949
76,970
103,571
122,290
(5,754)
527,919
160,985
Cash and restricted cash, beginning of period
1,367,514
1,290,544
1,186,973
1,064,683
1,070,437
1,290,544
903,698
Cash and restricted cash, end of period
$
1,818,463
$
1,367,514
$
1,290,544
$
1,186,973
$
1,064,683
$
1,818,463
$
1,064,683
Income taxes paid (received)
$
133,997
$
7,099
$
56,126
$
136,404
$
3,023
$
141,096
$
10,410
Interest paid
$
73,711
$
988
$
72,936
$
3,141
$
50,767
$
74,699
$
57,414
Net cash provided by operating activities, excluding the ‘other’ segment
$
809,790
$
755,928
$
507,017
$
963,654
$
648,427
$
1,565,718
$
1,234,383
7
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview
The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — ‘other’ and corporate (non-underwriting). The Company’s Insurance, Reinsurance and Mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the Chief Executive Officer of Arch Capital, the Chief Financial Officer and Treasurer of Arch Capital and the President and Chief Underwriting Officer of Arch Capital. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for its three core underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment and, accordingly, investment income is not allocated to each underwriting segment.
The Company determined its reportable operating segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
Insurance Segment
The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:
• Construction and national accounts: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).
• Excess and surplus casualty: primary and excess casualty insurance coverages, including middle market energy business, and contract binding, which primarily provides casualty coverage through a network of appointed agents to small and medium risks.
• Lenders products: collateral protection, debt cancellation and service contract reimbursement products to banks, credit unions, automotive dealerships and original equipment manufacturers and other specialty programs that pertain to automotive lending and leasing.
• Professional lines: directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity and other financial related coverages for corporate, private equity, venture capital, real estate investment trust, limited partnership, financial institution and not-for-profit clients of all sizes and medical professional and general liability insurance coverages for the healthcare industry. The business is predominately written on a claims-made basis.
• Programs: primarily package policies, underwriting workers’ compensation and umbrella liability business in support of desirable package programs, targeting program managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.
• Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, war, specie and liability. Aviation and stand alone terrorism are also offered.
• Travel, accident and health: specialty travel and accident and related insurance products for individual, group travelers, travel agents and suppliers, as well as accident and health, which provides accident, disability and medical plan insurance coverages for employer groups, medical plan members, students and other participant groups.
• Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract and commercial surety coverages, including contract bonds (payment and performance bonds) primarily for medium and large contractors and commercial surety bonds for Fortune 1,000 companies and smaller transaction business programs.
8
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview
Reinsurance Segment
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:
•Casualty: provides coverage to ceding company clients on third party liability and workers’ compensation exposures from ceding company clients, primarily on a treaty basis. Exposures include, among others, executive assurance, professional liability, workers’ compensation, excess and umbrella liability, excess motor and healthcare business.
•Marine and aviation: provides coverage for energy, hull, cargo, specie, liability and transit, and aviation business, including airline and general aviation risks. Business written may also include space business, which includes coverages for satellite assembly, launch and operation for commercial space programs.
•Other specialty: provides coverage to ceding company clients for proportional motor and other lines including surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk.
•Property catastrophe: provides protection for most catastrophic losses that are covered in the underlying policies written by reinsureds, including hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expense from a single occurrence of a covered peril exceed the retention specified in the contract.
•Property excluding property catastrophe: provides coverage for both personal lines and commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on both a proportional and excess of loss basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.
•Other. includes life reinsurance business on both a proportional and non-proportional basis, casualty clash business and, in limited instances, non-traditional business which is intended to provide insurers with risk management solutions that complement traditional reinsurance.
Mortgage Segment
The mortgage segment includes the Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Fannie Mae and Freddie Mac.
Corporate (Non-Underwriting) Segment
The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, income or loss from operating affiliates and income taxes. Such amounts exclude the results of the ‘other’ segment.
Other Segment
Through June 30, 2021, the ‘other’ segment included the results of Watford. Pursuant to GAAP, Watford was considered a variable interest entity and the Company concluded that it was the primary beneficiary of Watford. As such, the Company consolidated the results of Watford in its consolidated financial statements through June 30, 2021, although it only owned approximately 10% of Watford’s common equity. The portion of Watford’s earnings attributable to third party investors is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ Management measures segment performance for the ‘other’ segment based on net income or loss.
9
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)
Three Months Ended
June 30, 2021
Insurance
Reinsurance
Mortgage
Sub-total (Core)
Other
Total
Gross premiums written (1)
$
1,368,867
$
1,358,020
$
391,511
$
3,117,505
$
240,942
$
3,286,291
Premiums ceded
(405,312)
(433,288)
(55,665)
(893,372)
(65,551)
(886,767)
Net premiums written
963,555
924,732
335,846
2,224,133
175,391
2,399,524
Change in unearned premiums
(98,128)
(187,708)
(1,625)
(287,461)
8,846
(278,615)
Net premiums earned
865,427
737,024
334,221
1,936,672
184,237
2,120,909
Other underwriting income (loss)
—
1,053
4,148
5,201
328
5,529
Losses and loss adjustment expenses
(545,880)
(463,823)
(9,880)
(1,019,583)
(140,248)
(1,159,831)
Acquisition expenses
(136,852)
(133,585)
(30,117)
(300,554)
(34,589)
(335,143)
Other operating expenses
(133,342)
(44,695)
(48,312)
(226,349)
(18,594)
(244,943)
Underwriting income (loss)
$
49,353
$
95,974
$
250,060
395,387
(8,866)
386,521
Net investment income
89,430
22,183
111,613
Net realized gains (losses)
163,394
39,513
202,907
Equity in net income (loss) of investment funds accounted for using the equity method
122,186
—
122,186
Other income (loss)
6,852
—
6,852
Corporate expenses (2)
(17,175)
—
(17,175)
Transaction costs and other (2)
1,444
(220)
1,224
Amortization of intangible assets
(14,388)
(898)
(15,286)
Interest expense
(31,439)
(4,261)
(35,700)
Net foreign exchange gains (losses)
(17,892)
117
(17,775)
Income (loss) before income taxes and income (loss) from operating affiliates
697,799
47,568
745,367
Income tax (expense) benefit
(50,953)
(226)
(51,179)
Income (loss) from operating affiliates
24,476
—
24,476
Net income (loss)
671,322
47,342
718,664
Dividends attributable to redeemable noncontrolling interests
(580)
(981)
(1,561)
Amounts attributable to nonredeemable noncontrolling interests
—
(41,617)
(41,617)
Net income (loss) available to Arch
670,742
4,744
675,486
Preferred dividends
(11,666)
—
(11,666)
Net income (loss) available to Arch common shareholders
$
659,076
$
4,744
$
663,820
Underwriting Ratios
Loss ratio
63.1
%
62.9
%
3.0
%
52.6
%
76.1
%
54.7
%
Acquisition expense ratio
15.8
%
18.1
%
9.0
%
15.5
%
18.8
%
15.8
%
Other operating expense ratio
15.4
%
6.1
%
14.5
%
11.7
%
10.1
%
11.5
%
Combined ratio
94.3
%
87.1
%
26.5
%
79.8
%
105.0
%
82.0
%
Net premiums written to gross premiums written
70.4
%
68.1
%
85.8
%
71.3
%
72.8
%
73.0
%
Total investable assets
$
27,291,414
$
2,932,043
$
30,223,457
Total assets
42,171,541
4,310,345
46,481,886
Total liabilities
28,281,668
3,237,739
31,519,407
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.
10
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)
Three Months Ended
June 30, 2020
Insurance
Reinsurance
Mortgage
Sub-total (Core)
Other
Total
Gross premiums written (1)
$
1,030,362
$
807,065
$
369,144
$
2,206,410
$
157,927
$
2,317,692
Premiums ceded
(358,101)
(241,971)
(44,044)
(643,955)
(52,071)
(649,381)
Net premiums written
672,261
565,094
325,100
1,562,455
105,856
1,668,311
Change in unearned premiums
15,648
(84,897)
40,613
(28,636)
25,679
(2,957)
Net premiums earned
687,909
480,197
365,713
1,533,819
131,535
1,665,354
Other underwriting income (loss)
—
(651)
6,450
5,799
868
6,667
Losses and loss adjustment expenses
(518,203)
(383,433)
(224,100)
(1,125,736)
(104,786)
(1,230,522)
Acquisition expenses
(107,671)
(90,522)
(34,052)
(232,245)
(22,544)
(254,789)
Other operating expenses
(118,757)
(38,716)
(37,574)
(195,047)
(14,202)
(209,249)
Underwriting income (loss)
$
(56,722)
$
(33,125)
$
76,437
(13,410)
(9,129)
(22,539)
Net investment income
101,031
30,454
131,485
Net realized gains (losses)
385,089
171,499
556,588
Equity in net income (loss) of investment funds accounted for using the equity method
(65,119)
—
(65,119)
Other income (loss)
33
—
33
Corporate expenses (2)
(16,943)
—
(16,943)
Transaction costs and other (2)
(977)
—
(977)
Amortization of intangible assets
(16,489)
—
(16,489)
Interest expense
(25,130)
(6,009)
(31,139)
Net foreign exchange gains (losses)
(42,438)
3,227
(39,211)
Income (loss) before income taxes and income (loss) from operating affiliates
305,647
190,042
495,689
Income tax (expense) benefit
(26,529)
402
(26,127)
Income (loss) from operating affiliates
(3,173)
—
(3,173)
Net income (loss)
275,945
190,444
466,389
Dividends attributable to redeemable noncontrolling interests
(934)
(1,036)
(1,970)
Amounts attributable to nonredeemable noncontrolling interests
—
(165,598)
(165,598)
Net income (loss) available to Arch
275,011
23,810
298,821
Preferred dividends
(10,403)
—
(10,403)
Net income (loss) available to Arch common shareholders
$
264,608
$
23,810
$
288,418
Underwriting Ratios
Loss ratio
75.3
%
79.8
%
61.3
%
73.4
%
79.7
%
73.9
%
Acquisition expense ratio
15.7
%
18.9
%
9.3
%
15.1
%
17.1
%
15.3
%
Other operating expense ratio
17.3
%
8.1
%
10.3
%
12.7
%
10.8
%
12.6
%
Combined ratio
108.3
%
106.8
%
80.9
%
101.2
%
107.6
%
101.8
%
Net premiums written to gross premiums written
65.2
%
70.0
%
88.1
%
70.8
%
67.0
%
72.0
%
Total investable assets
$
24,531,194
$
2,641,290
$
27,172,484
Total assets
37,693,482
3,506,166
41,199,648
Total liabilities
25,787,697
2,685,051
28,472,748
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.
11
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)
Six Months Ended
June 30, 2021
Insurance
Reinsurance
Mortgage
Sub-total (Core)
Other
Total
Gross premiums written (1)
$
2,784,753
$
2,829,080
$
782,757
$
6,394,798
$
457,465
$
6,683,497
Premiums ceded
(826,359)
(905,236)
(111,716)
(1,841,519)
(102,763)
(1,775,516)
Net premiums written
1,958,394
1,923,844
671,041
4,553,279
354,702
4,907,981
Change in unearned premiums
(273,493)
(541,920)
(503)
(815,916)
(22,734)
(838,650)
Net premiums earned
1,684,901
1,381,924
670,538
3,737,363
331,968
4,069,331
Other underwriting income (loss)
—
(145)
11,045
10,900
739
11,639
Losses and loss adjustment expenses
(1,081,627)
(948,693)
(73,569)
(2,103,889)
(259,042)
(2,362,931)
Acquisition expenses
(265,074)
(251,610)
(60,199)
(576,883)
(62,741)
(639,624)
Other operating expenses
(270,455)
(105,209)
(97,443)
(473,107)
(32,869)
(505,976)
Underwriting income (loss)
$
67,745
$
76,267
$
450,372
594,384
(21,945)
572,439
Net investment income
168,159
42,310
210,469
Net realized gains (losses)
264,730
80,638
345,368
Equity in net income (loss) of investment funds accounted for using the equity method
193,872
—
193,872
Other income (loss)
5,111
—
5,111
Corporate expenses (2)
(40,643)
—
(40,643)
Transaction costs and other (2)
243
(935)
(692)
Amortization of intangible assets
(28,790)
(898)
(29,688)
Interest expense
(65,636)
(8,410)
(74,046)
Net foreign exchange gains (losses)
3,613
(1,325)
2,288
Income (loss) before income taxes and income (loss) from operating affiliates
1,095,043
89,435
1,184,478
Income tax (expense) benefit
(89,805)
(234)
(90,039)
Income (loss) from operating affiliates
99,933
—
99,933
Net income (loss)
1,105,171
89,201
1,194,372
Dividends attributable to redeemable noncontrolling interests
(463)
(1,953)
(2,416)
Amounts attributable to nonredeemable noncontrolling interests
—
(78,314)
(78,314)
Net income (loss) available to Arch
1,104,708
8,934
1,113,642
Preferred dividends
(22,069)
—
(22,069)
Net income (loss) available to Arch common shareholders
$
1,082,639
$
8,934
$
1,091,573
Underwriting Ratios
Loss ratio
64.2
%
68.7
%
11.0
%
56.3
%
78.0
%
58.1
%
Acquisition expense ratio
15.7
%
18.2
%
9.0
%
15.4
%
18.9
%
15.7
%
Other operating expense ratio
16.1
%
7.6
%
14.5
%
12.7
%
9.9
%
12.4
%
Combined ratio
96.0
%
94.5
%
34.5
%
84.4
%
106.8
%
86.2
%
Net premiums written to gross premiums written
70.3
%
68.0
%
85.7
%
71.2
%
77.5
%
73.4
%
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.
12
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)
Six Months Ended
June 30, 2020
Insurance
Reinsurance
Mortgage
Sub-total (Core)
Other
Total
Gross premiums written (1)
$
2,238,007
$
1,929,584
$
738,089
$
4,904,947
$
392,829
$
5,150,522
Premiums ceded
(736,998)
(567,310)
(88,371)
(1,391,946)
(100,273)
(1,344,965)
Net premiums written
1,501,009
1,362,274
649,718
3,513,001
292,556
3,805,557
Change in unearned premiums
(97,181)
(338,617)
61,021
(374,777)
(20,982)
(395,759)
Net premiums earned
1,403,828
1,023,657
710,739
3,138,224
271,574
3,409,798
Other underwriting income (loss)
—
1,469
11,049
12,518
1,001
13,519
Losses and loss adjustment expenses
(1,025,311)
(813,502)
(291,666)
(2,130,479)
(215,462)
(2,345,941)
Acquisition expenses
(215,008)
(170,128)
(72,588)
(457,724)
(44,348)
(502,072)
Other operating expenses
(248,406)
(84,013)
(83,470)
(415,889)
(27,904)
(443,793)
Underwriting income (loss)
$
(84,897)
$
(42,517)
$
274,064
146,650
(15,139)
131,511
Net investment income
214,059
62,579
276,638
Net realized gains (losses)
312,980
(123,352)
189,628
Equity in net income (loss) of investment funds accounted for using the equity method
(69,328)
—
(69,328)
Other income (loss)
65
—
65
Corporate expenses (2)
(35,144)
—
(35,144)
Transaction costs and other (2)
(3,572)
—
(3,572)
Amortization of intangible assets
(33,120)
—
(33,120)
Interest expense
(50,375)
(13,319)
(63,694)
Net foreign exchange gains (losses)
20,869
12,591
33,460
Income (loss) before income taxes and income (loss) from operating affiliates
503,084
(76,640)
426,444
Income tax (expense) benefit
(54,474)
402
(54,072)
Income (loss) from operating affiliates
5,343
—
5,343
Net income (loss)
453,953
(76,238)
377,715
Dividends attributable to redeemable noncontrolling interests
(991)
(2,132)
(3,123)
Amounts attributable to nonredeemable noncontrolling interests
—
68,346
68,346
Net income (loss) available to Arch
452,962
(10,024)
442,938
Preferred dividends
(20,806)
—
(20,806)
Net income (loss) available to Arch common shareholders
$
432,156
$
(10,024)
$
422,132
Underwriting Ratios
Loss ratio
73.0
%
79.5
%
41.0
%
67.9
%
79.3
%
68.8
%
Acquisition expense ratio
15.3
%
16.6
%
10.2
%
14.6
%
16.3
%
14.7
%
Other operating expense ratio
17.7
%
8.2
%
11.7
%
13.3
%
10.3
%
13.0
%
Combined ratio
106.0
%
104.3
%
62.9
%
95.8
%
105.9
%
96.5
%
Net premiums written to gross premiums written
67.1
%
70.6
%
88.0
%
71.6
%
74.5
%
73.9
%
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.
13
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Gross premiums written
$
1,368,867
$
1,415,886
$
1,244,227
$
1,206,328
$
1,030,362
$
2,784,753
$
2,238,007
Premiums ceded
(405,312)
(421,047)
(406,490)
(382,167)
(358,101)
(826,359)
(736,998)
Net premiums written
963,555
994,839
837,737
824,161
672,261
1,958,394
1,501,009
Change in unearned premiums
(98,128)
(175,365)
(89,299)
(105,007)
15,648
(273,493)
(97,181)
Net premiums earned
865,427
819,474
748,438
719,154
687,909
1,684,901
1,403,828
Other underwriting income (loss)
—
—
—
(31)
—
—
—
Losses and loss adjustment expenses
(545,880)
(535,747)
(541,821)
(525,321)
(518,203)
(1,081,627)
(1,025,311)
Acquisition expenses
(136,852)
(128,222)
(101,055)
(102,420)
(107,671)
(265,074)
(215,008)
Other operating expenses
(133,342)
(137,113)
(118,206)
(122,541)
(118,757)
(270,455)
(248,406)
Underwriting income (loss)
$
49,353
$
18,392
$
(12,644)
$
(31,159)
$
(56,722)
$
67,745
$
(84,897)
Underwriting Ratios
Loss ratio
63.1
%
65.4
%
72.4
%
73.0
%
75.3
%
64.2
%
73.0
%
Acquisition expense ratio
15.8
%
15.6
%
13.5
%
14.2
%
15.7
%
15.7
%
15.3
%
Other operating expense ratio
15.4
%
16.7
%
15.8
%
17.0
%
17.3
%
16.1
%
17.7
%
Combined ratio
94.3
%
97.7
%
101.7
%
104.2
%
108.3
%
96.0
%
106.0
%
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums
3.2
%
5.1
%
8.3
%
10.3
%
12.5
%
4.1
%
9.6
%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
(0.3)
%
(0.7)
%
(0.2)
%
(0.2)
%
(0.3)
%
(0.5)
%
(0.2)
%
Combined ratio excluding catastrophic activity and prior year development (1)
91.4
%
93.3
%
93.6
%
94.1
%
96.1
%
92.4
%
96.6
%
Net premiums written to gross premiums written
70.4
%
70.3
%
67.3
%
68.3
%
65.2
%
70.3
%
67.1
%
(1)See ‘Comments on Regulation G’ for further discussion.
14
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Net premiums written
Property, energy, marine and aviation
$
207,762
21.6
%
$
170,498
17.1
%
$
179,455
21.4
%
$
152,193
18.5
%
$
159,801
23.8
%
$
378,260
19.3
%
$
287,386
19.1
%
Professional lines (1)
254,961
26.5
%
238,246
23.9
%
217,306
25.9
%
199,163
24.2
%
157,899
23.5
%
493,207
25.2
%
327,017
21.8
%
Programs
149,373
15.5
%
158,401
15.9
%
96,743
11.5
%
123,768
15.0
%
104,930
15.6
%
307,774
15.7
%
217,462
14.5
%
Construction and national accounts
77,579
8.1
%
134,792
13.5
%
102,171
12.2
%
88,790
10.8
%
57,144
8.5
%
212,371
10.8
%
173,143
11.5
%
Excess and surplus casualty (2)
74,346
7.7
%
85,593
8.6
%
88,319
10.5
%
78,889
9.6
%
64,703
9.6
%
159,939
8.2
%
130,122
8.7
%
Travel, accident and health
71,071
7.4
%
92,306
9.3
%
29,959
3.6
%
28,972
3.5
%
27,997
4.2
%
163,377
8.3
%
154,043
10.3
%
Lenders products
40,386
4.2
%
34,860
3.5
%
38,307
4.6
%
60,830
7.4
%
23,690
3.5
%
75,246
3.8
%
56,982
3.8
%
Other (3)
88,077
9.1
%
80,143
8.1
%
85,477
10.2
%
91,556
11.1
%
76,097
11.3
%
168,220
8.6
%
154,854
10.3
%
Total
$
963,555
100.0
%
$
994,839
100.0
%
$
837,737
100.0
%
$
824,161
100.0
%
$
672,261
100.0
%
$
1,958,394
100.0
%
$
1,501,009
100.0
%
Underwriting location
United States
$
658,964
68.4
%
$
675,840
67.9
%
$
527,824
63.0
%
$
574,699
69.7
%
$
453,215
67.4
%
$
1,334,804
68.2
%
$
1,055,892
70.3
%
Europe
254,602
26.4
%
276,122
27.8
%
266,761
31.8
%
212,203
25.7
%
181,566
27.0
%
530,724
27.1
%
377,608
25.2
%
Other
49,989
5.2
%
42,877
4.3
%
43,152
5.2
%
37,259
4.5
%
37,480
5.6
%
92,866
4.7
%
67,509
4.5
%
Total
$
963,555
100.0
%
$
994,839
100.0
%
$
837,737
100.0
%
$
824,161
100.0
%
$
672,261
100.0
%
$
1,958,394
100.0
%
$
1,501,009
100.0
%
Net premiums earned
Property, energy, marine and aviation
$
167,716
19.4
%
$
157,259
19.2
%
$
151,456
20.2
%
$
133,827
18.6
%
$
120,781
17.6
%
$
324,975
19.3
%
$
231,964
16.5
%
Professional lines (1)
214,098
24.7
%
199,671
24.4
%
180,858
24.2
%
168,502
23.4
%
154,812
22.5
%
413,769
24.6
%
306,512
21.8
%
Programs
118,974
13.7
%
112,840
13.8
%
110,651
14.8
%
104,861
14.6
%
108,464
15.8
%
231,814
13.8
%
217,342
15.5
%
Construction and national accounts
95,849
11.1
%
102,671
12.5
%
101,243
13.5
%
95,386
13.3
%
91,605
13.3
%
198,520
11.8
%
191,305
13.6
%
Excess and surplus casualty (2)
72,899
8.4
%
75,367
9.2
%
74,579
10.0
%
69,978
9.7
%
60,966
8.9
%
148,266
8.8
%
126,063
9.0
%
Travel, accident and health
62,610
7.2
%
49,666
6.1
%
24,726
3.3
%
36,726
5.1
%
52,117
7.6
%
112,276
6.7
%
129,492
9.2
%
Lenders products
46,396
5.4
%
40,081
4.9
%
32,832
4.4
%
33,401
4.6
%
23,111
3.4
%
86,477
5.1
%
48,454
3.5
%
Other (3)
86,885
10.0
%
81,919
10.0
%
72,093
9.6
%
76,473
10.6
%
76,053
11.1
%
168,804
10.0
%
152,696
10.9
%
Total
$
865,427
100.0
%
$
819,474
100.0
%
$
748,438
100.0
%
$
719,154
100.0
%
$
687,909
100.0
%
$
1,684,901
100.0
%
$
1,403,828
100.0
%
(1) Includes professional liability, executive assurance and healthcare business.
(2) Includes casualty and contract binding business.
(3) Includes alternative markets, excess workers’ compensation and surety business.
15
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Gross premiums written
$
1,358,020
$
1,471,060
$
537,912
$
1,004,590
$
807,065
$
2,829,080
$
1,929,584
Premiums ceded
(433,288)
(471,948)
(47,018)
(400,388)
(241,971)
(905,236)
(567,310)
Net premiums written
924,732
999,112
490,894
604,202
565,094
1,923,844
1,362,274
Change in unearned premiums
(187,708)
(354,212)
93,180
(49,704)
(84,897)
(541,920)
(338,617)
Net premiums earned
737,024
644,900
584,074
554,498
480,197
1,381,924
1,023,657
Other underwriting income (loss)
1,053
(1,198)
2,687
298
(651)
(145)
1,469
Losses and loss adjustment expenses
(463,823)
(484,870)
(392,734)
(422,084)
(383,433)
(948,693)
(813,502)
Acquisition expenses
(133,585)
(118,025)
(98,532)
(85,388)
(90,522)
(251,610)
(170,128)
Other operating expenses
(44,695)
(60,514)
(42,180)
(41,818)
(38,716)
(105,209)
(84,013)
Underwriting income (loss)
$
95,974
$
(19,707)
$
53,315
$
5,506
$
(33,125)
$
76,267
$
(42,517)
Underwriting Ratios
Loss ratio
62.9
%
75.2
%
67.2
%
76.1
%
79.8
%
68.7
%
79.5
%
Acquisition expense ratio
18.1
%
18.3
%
16.9
%
15.4
%
18.9
%
18.2
%
16.6
%
Other operating expense ratio
6.1
%
9.4
%
7.2
%
7.5
%
8.1
%
7.6
%
8.2
%
Combined ratio
87.1
%
102.9
%
91.3
%
99.0
%
106.8
%
94.5
%
104.3
%
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums
2.5
%
22.7
%
16.1
%
23.3
%
25.3
%
11.9
%
18.6
%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
(2.5)
%
(3.8)
%
(6.9)
%
(7.4)
%
(6.0)
%
(3.1)
%
(3.9)
%
Combined ratio excluding catastrophic activity and prior year development (1)
87.1
%
84.0
%
82.1
%
83.1
%
87.5
%
85.7
%
89.6
%
Net premiums written to gross premiums written
68.1
%
67.9
%
91.3
%
60.1
%
70.0
%
68.0
%
70.6
%
(1)See ‘Comments on Regulation G’ for further discussion.
16
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Net premiums written
Property excluding property catastrophe
$
249,101
26.9
%
$
292,833
29.3
%
$
150,643
30.7
%
$
223,880
37.1
%
$
163,639
29.0
%
$
541,934
28.2
%
$
322,563
23.7
%
Property catastrophe
87,642
9.5
%
117,207
11.7
%
37,317
7.6
%
42,125
7.0
%
117,676
20.8
%
204,849
10.6
%
206,768
15.2
%
Other specialty (1)
296,325
32.0
%
284,331
28.5
%
147,012
29.9
%
159,969
26.5
%
117,375
20.8
%
580,656
30.2
%
402,327
29.5
%
Casualty (2)
225,890
24.4
%
218,256
21.8
%
103,989
21.2
%
142,401
23.6
%
105,049
18.6
%
444,146
23.1
%
295,929
21.7
%
Marine and aviation
50,248
5.4
%
61,638
6.2
%
31,418
6.4
%
27,839
4.6
%
32,372
5.7
%
111,886
5.8
%
82,157
6.0
%
Other (3)
15,526
1.7
%
24,847
2.5
%
20,515
4.2
%
7,988
1.3
%
28,983
5.1
%
40,373
2.1
%
52,530
3.9
%
Total
$
924,732
100.0
%
$
999,112
100.0
%
$
490,894
100.0
%
$
604,202
100.0
%
$
565,094
100.0
%
$
1,923,844
100.0
%
$
1,362,274
100.0
%
Underwriting location
Bermuda
$
477,609
51.6
%
$
518,241
51.9
%
$
187,727
38.2
%
$
240,193
39.8
%
$
240,451
42.6
%
$
995,850
51.8
%
$
574,070
42.1
%
United States
211,509
22.9
%
208,101
20.8
%
148,994
30.4
%
189,135
31.3
%
162,027
28.7
%
419,610
21.8
%
349,493
25.7
%
Europe and other
235,614
25.5
%
272,770
27.3
%
154,173
31.4
%
174,874
28.9
%
162,616
28.8
%
508,384
26.4
%
438,711
32.2
%
Total
$
924,732
100.0
%
$
999,112
100.0
%
$
490,894
100.0
%
$
604,202
100.0
%
$
565,094
100.0
%
$
1,923,844
100.0
%
$
1,362,274
100.0
%
Net premiums earned
Property excluding property catastrophe
$
202,780
27.5
%
$
187,782
29.1
%
$
162,456
27.8
%
$
163,081
29.4
%
$
124,019
25.8
%
$
390,562
28.3
%
$
236,671
23.1
%
Property catastrophe
76,167
10.3
%
88,011
13.6
%
59,986
10.3
%
69,524
12.5
%
55,226
11.5
%
164,178
11.9
%
108,226
10.6
%
Other specialty (1)
211,817
28.7
%
163,898
25.4
%
158,817
27.2
%
141,201
25.5
%
123,006
25.6
%
375,715
27.2
%
326,391
31.9
%
Casualty (2)
183,846
24.9
%
149,031
23.1
%
144,808
24.8
%
136,421
24.6
%
132,756
27.6
%
332,877
24.1
%
267,827
26.2
%
Marine and aviation
42,773
5.8
%
40,108
6.2
%
33,062
5.7
%
26,744
4.8
%
24,960
5.2
%
82,881
6.0
%
49,818
4.9
%
Other (3)
19,641
2.7
%
16,070
2.5
%
24,945
4.3
%
17,527
3.2
%
20,230
4.2
%
35,711
2.6
%
34,724
3.4
%
Total
$
737,024
100.0
%
$
644,900
100.0
%
$
584,074
100.0
%
$
554,498
100.0
%
$
480,197
100.0
%
$
1,381,924
100.0
%
$
1,023,657
100.0
%
(1) Includes proportional motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.
(2) Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.
(3) Includes life, casualty clash and other.
17
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Gross premiums written
$
391,511
$
391,246
$
389,662
$
346,248
$
369,144
$
782,757
$
738,089
Premiums ceded
(55,665)
(56,051)
(57,995)
(47,783)
(44,044)
(111,716)
(88,371)
Net premiums written
335,846
335,195
331,667
298,465
325,100
671,041
649,718
Change in unearned premiums
(1,625)
1,122
4,120
52,944
40,613
(503)
61,021
Net premiums earned
334,221
336,317
335,787
351,409
365,713
670,538
710,739
Other underwriting income (1)
4,148
6,897
4,667
4,600
6,450
11,045
11,049
Losses and loss adjustment expenses
(9,880)
(63,689)
(83,623)
(153,055)
(224,100)
(73,569)
(291,666)
Acquisition expenses
(30,117)
(30,082)
(25,936)
(35,716)
(34,052)
(60,199)
(72,588)
Other operating expenses
(48,312)
(49,131)
(42,024)
(36,708)
(37,574)
(97,443)
(83,470)
Underwriting income
$
250,060
$
200,312
$
188,871
$
130,530
$
76,437
$
450,372
$
274,064
Underwriting Ratios
Loss ratio
3.0
%
18.9
%
24.9
%
43.6
%
61.3
%
11.0
%
41.0
%
Acquisition expense ratio
9.0
%
8.9
%
7.7
%
10.2
%
9.3
%
9.0
%
10.2
%
Other operating expense ratio
14.5
%
14.6
%
12.5
%
10.4
%
10.3
%
14.5
%
11.7
%
Combined ratio
26.5
%
42.4
%
45.1
%
64.2
%
80.9
%
34.5
%
62.9
%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
(13.1)
%
(3.4)
%
(2.4)
%
(1.3)
%
(0.1)
%
(8.3)
%
(0.9)
%
Combined ratio excluding prior year development (2)
39.6
%
45.8
%
47.5
%
65.5
%
81.0
%
42.8
%
63.8
%
Net premiums written to gross premiums written
85.8
%
85.7
%
85.1
%
86.2
%
88.1
%
85.7
%
88.0
%
Net premiums written by underwriting location
United States
$
234,645
$
247,529
$
250,747
$
245,971
$
261,124
$
482,174
$
525,232
Other
101,201
87,666
80,920
52,494
63,976
188,867
124,486
Total
$
335,846
$
335,195
$
331,667
$
298,465
$
325,100
$
671,041
$
649,718
United States %
69.9
%
73.8
%
75.6
%
82.4
%
80.3
%
71.9
%
80.8
%
Other %
30.1
%
26.2
%
24.4
%
17.6
%
19.7
%
28.1
%
19.2
%
(1) Primarily related to income earned on various risk-sharing products offered to government sponsored enterprises and mortgage lenders.
(2) See ‘Comments on Regulation G’ for further discussion.
18
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in millions)
June 30, 2021
March 31, 2021
December 31, 2020
September 30, 2020
June 30, 2020
Insurance In Force (IIF) (1)
U.S. primary mortgage insurance
$
277,887
65.8
%
$
276,179
64.7
%
$
280,579
66.2
%
$
275,846
66.8
%
$
276,643
65.9
%
Mortgage reinsurance
32,666
7.7
%
31,699
7.4
%
31,220
7.4
%
28,421
6.9
%
27,457
6.5
%
Other (2)
111,884
26.5
%
119,138
27.9
%
111,740
26.4
%
108,786
26.3
%
115,803
27.6
%
Total
$
422,437
100.0
%
$
427,016
100.0
%
$
423,539
100.0
%
$
413,053
100.0
%
$
419,903
100.0
%
Risk In Force (RIF) (3)
U.S. primary mortgage insurance
$
69,587
90.3
%
$
69,234
89.9
%
$
70,522
90.5
%
$
69,620
91.0
%
$
70,200
91.0
%
Mortgage reinsurance
2,245
2.9
%
2,214
2.9
%
2,226
2.9
%
2,145
2.8
%
2,116
2.7
%
Other (2)
5,188
6.7
%
5,573
7.2
%
5,146
6.6
%
4,750
6.2
%
4,795
6.2
%
Total
$
77,020
100.0
%
$
77,021
100.0
%
$
77,894
100.0
%
$
76,515
100.0
%
$
77,111
100.0
%
Supplemental disclosures for U.S. primary mortgage insurance:
Total RIF by credit quality (FICO score):
>=740
$
41,156
59.1
%
$
40,230
58.1
%
$
40,774
57.8
%
$
40,017
57.5
%
$
40,297
57.4
%
680-739
23,663
34.0
%
24,006
34.7
%
24,498
34.7
%
24,236
34.8
%
24,346
34.7
%
620-679
4,401
6.3
%
4,607
6.7
%
4,837
6.9
%
5,016
7.2
%
5,188
7.4
%
<620
367
0.5
%
391
0.6
%
413
0.6
%
351
0.5
%
369
0.5
%
Total
$
69,587
100.0
%
$
69,234
100.0
%
$
70,522
100.0
%
$
69,620
100.0
%
$
70,200
100.0
%
Weighted average FICO score
745
744
743
743
743
Total RIF by Loan-To-Value (LTV):
95.01% and above
$
7,975
11.5
%
$
8,310
12.0
%
$
8,643
12.3
%
$
8,789
12.6
%
$
8,859
12.6
%
90.01% to 95.00%
37,619
54.1
%
37,193
53.7
%
37,877
53.7
%
37,278
53.5
%
37,830
53.9
%
85.01% to 90.00%
19,784
28.4
%
19,648
28.4
%
20,013
28.4
%
19,870
28.5
%
20,071
28.6
%
85.00% and below
4,209
6.0
%
4,083
5.9
%
3,989
5.7
%
3,683
5.3
%
3,440
4.9
%
Total
$
69,587
100.0
%
$
69,234
100.0
%
$
70,522
100.0
%
$
69,620
100.0
%
$
70,200
100.0
%
Weighted average LTV
92.8
%
92.8
%
92.8
%
92.9
%
92.9
%
Total RIF by State:
Texas
$
5,560
8.0
%
$
5,569
8.0
%
$
5,636
8.0
%
$
5,536
8.0
%
$
5,560
7.9
%
California
5,324
7.7
%
5,343
7.7
%
5,261
7.5
%
5,019
7.2
%
4,948
7.0
%
Florida
3,367
4.8
%
3,544
5.1
%
3,632
5.2
%
3,648
5.2
%
3,737
5.3
%
Minnesota
2,973
4.3
%
2,452
3.5
%
2,520
3.6
%
2,489
3.6
%
2,473
3.5
%
North Carolina
2,924
4.2
%
2,610
3.8
%
2,622
3.7
%
2,516
3.6
%
2,459
3.5
%
Georgia
2,886
4.1
%
2,929
4.2
%
2,959
4.2
%
2,890
4.2
%
2,861
4.1
%
Illinois
2,832
4.1
%
2,728
3.9
%
2,762
3.9
%
2,670
3.8
%
2,643
3.8
%
Massachusetts
2,459
3.5
%
2,434
3.5
%
2,464
3.5
%
2,344
3.4
%
2,345
3.3
%
Virginia
2,372
3.4
%
2,458
3.6
%
2,526
3.6
%
2,540
3.6
%
2,656
3.8
%
Ohio
2,229
3.2
%
2,239
3.2
%
2,264
3.2
%
2,210
3.2
%
2,151
3.1
%
Other
36,661
52.7
%
36,928
53.3
%
37,876
53.7
%
37,758
54.2
%
38,367
54.7
%
Total
$
69,587
100.0
%
$
69,234
100.0
%
$
70,522
100.0
%
$
69,620
100.0
%
$
70,200
100.0
%
Weighted average coverage (end of period RIF divided by IIF)
25.0
%
25.1
%
25.1
%
25.2
%
25.4
%
U.S. mortgage insurance total RIF, net of reinsurance (4)
$
55,557
$
55,503
$
56,658
$
56,067
$
57,258
Analysts’ persistency (5)
54.8
%
54.1
%
58.7
%
62.5
%
66.6
%
Risk-to-capital ratio -- Arch MI U.S. (6)
8.5:1
8.7:1
9.3:1
9.6:1
10.2:1
PMIER sufficiency ratio -- Arch MI U.S. (7)
196
%
190
%
173
%
158
%
161
%
(1) The aggregate dollar amount of each insured mortgage loan’s current principal balance. (4) Total RIF for the U.S. mortgage insurance operations (see note 3) after external reinsurance.
(2) Includes GSE credit risk-sharing transactions and international insurance business. (5) Represents the % of IIF at the beginning of a 12-month period that remained in force at the end of the period.
(3) The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied (6) Represents current (non-delinquent) RIF, net of reinsurance, divided by statutory capital (estimate for June 30, 2021).
by the insurance coverage percentage specified in the policy for insurance policies issued and (7) Calculated as available assets divided by required assets as defined within PMIERs (estimate for June 30, 2021).
after contract limits and/or loss ratio caps for risk-sharing or reinsurance transactions. There was approximately $1.9 billion of excess available assets at June 30, 2021.
19
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in millions, except policy/loan/claim count)
Three Months Ended
June 30, 2021
March 31, 2021
December 31, 2020
September 30, 2020
June 30, 2020
Supplemental disclosures for U.S. primary mortgage insurance:
Total new insurance written (NIW) (1)
$
28,372
$
27,019
$
38,011
$
32,787
$
24,551
Total NIW by credit quality (FICO score):
>=740
$
19,240
67.8
%
$
17,818
65.9
%
$
25,128
66.1
%
$
21,160
64.5
%
$
15,851
64.6
%
680-739
8,113
28.6
%
8,418
31.2
%
11,877
31.2
%
10,562
32.2
%
7,781
31.7
%
620-679
1,019
3.6
%
783
2.9
%
1,006
2.6
%
1,065
3.2
%
919
3.7
%
Total
$
28,372
100.0
%
$
27,019
100.0
%
$
38,011
100.0
%
$
32,787
100.0
%
$
24,551
100.0
%
Total NIW by LTV:
95.01% and above
$
1,484
5.2
%
$
1,608
6.0
%
$
2,475
6.5
%
$
2,561
7.8
%
$
1,948
7.9
%
90.01% to 95.00%
13,936
49.1
%
12,288
45.5
%
17,783
46.8
%
13,967
42.6
%
9,403
38.3
%
85.01% to 90.00%
8,675
30.6
%
8,312
30.8
%
11,014
29.0
%
10,052
30.7
%
8,140
33.2
%
85.00% and below
4,277
15.1
%
4,811
17.8
%
6,739
17.7
%
6,207
18.9
%
5,060
20.6
%
Total
$
28,372
100.0
%
$
27,019
100.0
%
$
38,011
100.0
%
$
32,787
100.0
%
$
24,551
100.0
%
Total NIW monthly vs. single:
Monthly
$
26,725
94.2
%
$
24,989
92.5
%
$
35,672
93.8
%
$
31,928
97.4
%
$
23,391
95.3
%
Single
1,647
5.8
%
2,030
7.5
%
2,339
6.2
%
859
2.6
%
1,160
4.7
%
Total
$
28,372
100.0
%
$
27,019
100.0
%
$
38,011
100.0
%
$
32,787
100.0
%
$
24,551
100.0
%
Total NIW purchase vs. refinance:
Purchase
$
25,010
88.2
%
$
20,505
75.9
%
$
29,584
77.8
%
$
24,256
74.0
%
$
14,956
60.9
%
Refinance
3,362
11.8
%
6,514
24.1
%
8,427
22.2
%
8,531
26.0
%
9,595
39.1
%
Total
$
28,372
100.0
%
$
27,019
100.0
%
$
38,011
100.0
%
$
32,787
100.0
%
$
24,551
100.0
%
Ending number of policies in force (PIF) (2)
1,199,918
1,214,245
1,245,771
1,245,408
1,259,328
Rollforward of insured loans in default:
Beginning delinquent number of loans
46,914
52,234
58,362
64,667
18,414
Plus: new notices
7,425
10,990
14,564
19,967
58,374
Less: cures
(16,793)
(16,131)
(20,457)
(26,029)
(11,664)
Less: paid claims
(227)
(179)
(235)
(243)
(457)
Ending delinquent number of loans (2)
37,319
46,914
52,234
58,362
64,667
Ending percentage of loans in default (2)
3.11
%
3.86
%
4.19
%
4.69
%
5.14
%
Losses:
Number of claims paid
227
179
235
243
457
Total paid claims (in thousands)
$
8,415
$
6,882
$
9,344
$
9,420
$
20,101
Average per claim (in thousands)
$
37.1
$
38.4
$
39.8
$
38.8
$
44.0
Severity (3)
80.3
%
82.0
%
87.2
%
88.6
%
96.3
%
Average case reserve per default (in thousands)
$
19.5
$
15.2
$
12.6
$
10.1
$
6.9
(1) The original principal balance of all loans that received coverage during the period.
(2) Includes first lien primary and pool policies.
(3) Represents total paid claims divided by RIF of loans for which claims were paid.
20
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
Supplemental disclosures for U.S. primary mortgage insurance:
(U.S. Dollars in millions)
June 30, 2021
December 31, 2020
Loss Reserves, Net (1)
Primary IIF (2)
Primary RIF (3)
Delinquency Rate
Loss Reserves, Net (1)
Primary IIF (2)
Primary RIF (3)
Delinquency Rate
% of Total
Total
% of Total
Total
% of Total
% of Total
Total
% of Total
Total
% of Total
Policy year:
2011 and prior
28.0
%
$
12,591
4.5
%
$
2,839
4.1
%
9.75
%
28.3
%
$
14,588
5.2
%
$
3,327
4.7
%
11.36
%
2012
1.2
%
2,261
0.8
%
587
0.8
%
3.00
%
1.3
%
3,651
1.3
%
992
1.4
%
2.98
%
2013
2.8
%
5,635
2.0
%
1,563
2.2
%
2.95
%
3.0
%
7,546
2.7
%
2,107
3.0
%
3.30
%
2014
2.2
%
6,288
2.3
%
1,729
2.5
%
3.52
%
2.2
%
8,261
2.9
%
2,273
3.2
%
4.06
%
2015
3.4
%
11,208
4.0
%
3,017
4.3
%
3.19
%
3.4
%
15,032
5.4
%
4,048
5.7
%
3.72
%
2016
8.6
%
18,500
6.7
%
4,958
7.1
%
4.11
%
8.8
%
24,958
8.9
%
6,648
9.4
%
4.77
%
2017
11.9
%
17,577
6.3
%
4,574
6.6
%
4.87
%
12.9
%
24,748
8.8
%
6,413
9.1
%
5.52
%
2018
16.3
%
19,044
6.9
%
4,827
6.9
%
6.25
%
16.8
%
27,304
9.7
%
6,918
9.8
%
6.76
%
2019
17.3
%
34,944
12.6
%
8,727
12.5
%
4.02
%
17.8
%
48,304
17.2
%
12,001
17.0
%
4.61
%
2020
8.2
%
95,419
34.3
%
23,316
33.5
%
0.88
%
5.5
%
106,187
37.8
%
25,795
36.6
%
0.76
%
2021
0.2
%
54,420
19.6
%
13,450
19.3
%
0.10
%
Total
100.0
%
$
277,887
100.0
%
$
69,587
100.0
%
3.11
%
100.0
%
$
280,579
100.0
%
$
70,522
100.0
%
4.19
%
(1) Total reserves for losses and loss adjustment expenses, net of recoverables, was $713.1 million at June 30, 2021, compared to $649.7 million at December 31, 2020.
(2) The aggregate dollar amount of each insured mortgage loan’s current principal balance.
(3) The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied by the insurance coverage percentage specified in the policy for insurance policies issued and after contract limits and/or loss ratio caps for risk-sharing transactions.
21
Arch Capital Group Ltd. and Subsidiaries
Segment Information - Consolidated Excluding the 'Other' Segment (Sub-Total (Core))
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Gross premiums written
$
3,117,505
$
3,277,293
$
2,170,831
$
2,556,914
$
2,206,410
$
6,394,798
$
4,904,947
Premiums ceded
(893,372)
(948,147)
(510,533)
(830,086)
(643,955)
(1,841,519)
(1,391,946)
Net premiums written
2,224,133
2,329,146
1,660,298
1,726,828
1,562,455
4,553,279
3,513,001
Change in unearned premiums
(287,461)
(528,455)
8,001
(101,767)
(28,636)
(815,916)
(374,777)
Net premiums earned
1,936,672
1,800,691
1,668,299
1,625,061
1,533,819
3,737,363
3,138,224
Other underwriting income (loss)
5,201
5,699
7,354
4,867
5,799
10,900
12,518
Losses and loss adjustment expenses
(1,019,583)
(1,084,306)
(1,018,178)
(1,100,460)
(1,125,736)
(2,103,889)
(2,130,479)
Acquisition expenses
(300,554)
(276,329)
(225,523)
(223,524)
(232,245)
(576,883)
(457,724)
Other operating expenses
(226,349)
(246,758)
(202,410)
(201,067)
(195,047)
(473,107)
(415,889)
Underwriting income (loss)
$
395,387
$
198,997
$
229,542
$
104,877
$
(13,410)
$
594,384
$
146,650
Underwriting Ratios
Loss ratio
52.6
%
60.2
%
61.0
%
67.7
%
73.4
%
56.3
%
67.9
%
Acquisition expense ratio
15.5
%
15.3
%
13.5
%
13.8
%
15.1
%
15.4
%
14.6
%
Other operating expense ratio
11.7
%
13.7
%
12.1
%
12.4
%
12.7
%
12.7
%
13.3
%
Combined ratio
79.8
%
89.2
%
86.6
%
93.9
%
101.2
%
84.4
%
95.8
%
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums
2.4
%
10.5
%
9.4
%
12.5
%
13.5
%
6.3
%
10.4
%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
(3.3)
%
(2.3)
%
(3.0)
%
(2.9)
%
(2.0)
%
(2.9)
%
(1.6)
%
Combined ratio excluding catastrophic activity and prior year development (1)
80.7
%
81.0
%
80.2
%
84.3
%
89.7
%
81.0
%
87.0
%
Components of losses and loss adjustment expenses incurred (1)
Paid losses and loss adjustment expenses
$
684,087
$
572,589
$
652,077
$
618,638
$
550,481
$
1,256,676
$
1,080,493
Change in unpaid losses and loss adjustment expenses
335,496
511,717
366,101
481,822
575,255
847,213
1,049,986
Total losses and loss adjustment expenses
$
1,019,583
$
1,084,306
$
1,018,178
$
1,100,460
$
1,125,736
$
2,103,889
$
2,130,479
Net premiums written to gross premiums written
71.3
%
71.1
%
76.5
%
67.5
%
70.8
%
71.2
%
71.6
%
(1)See ‘Comments on Regulation G’ for further discussion.
22
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Selected Information on Losses and Loss Adjustment Expenses
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
Net impact on underwriting results:
Insurance
$
(2,640)
$
(5,474)
$
(1,158)
$
(1,136)
$
(2,148)
$
(8,114)
$
(2,924)
Reinsurance
(18,309)
(24,765)
(40,472)
(40,766)
(28,933)
(43,074)
(39,893)
Mortgage
(43,883)
(11,492)
(8,151)
(4,523)
(306)
(55,375)
(6,407)
Total
$
(64,832)
$
(41,731)
$
(49,781)
$
(46,425)
$
(31,387)
$
(106,563)
$
(49,224)
Impact on losses and loss adjustment expenses:
Insurance
$
(3,998)
$
(4,057)
$
(1,906)
$
(2,282)
$
(2,518)
$
(8,055)
$
(3,633)
Reinsurance
(20,476)
(26,809)
(40,156)
(41,960)
(40,211)
(47,285)
(51,838)
Mortgage
(43,102)
(10,913)
(8,151)
(4,523)
(208)
(54,015)
(6,309)
Total
$
(67,576)
$
(41,779)
$
(50,213)
$
(48,765)
$
(42,937)
$
(109,355)
$
(61,780)
Impact on acquisition expenses:
Insurance
$
1,358
$
(1,417)
$
748
$
1,146
$
370
$
(59)
$
709
Reinsurance
2,167
2,044
(316)
1,194
11,278
4,211
11,945
Mortgage
(781)
(579)
—
—
(98)
(1,360)
(98)
Total
$
2,744
$
48
$
432
$
2,340
$
11,550
$
2,792
$
12,556
Impact on combined ratio:
Insurance
(0.3)
%
(0.7)
%
(0.2)
%
(0.2)
%
(0.3)
%
(0.5)
%
(0.2)
%
Reinsurance
(2.5)
%
(3.8)
%
(6.9)
%
(7.4)
%
(6.0)
%
(3.1)
%
(3.9)
%
Mortgage
(13.1)
%
(3.4)
%
(2.4)
%
(1.3)
%
(0.1)
%
(8.3)
%
(0.9)
%
Total
(3.3)
%
(2.3)
%
(3.0)
%
(2.9)
%
(2.0)
%
(2.9)
%
(1.6)
%
Impact on loss ratio:
Insurance
(0.5)
%
(0.5)
%
(0.3)
%
(0.3)
%
(0.4)
%
(0.5)
%
(0.3)
%
Reinsurance
(2.8)
%
(4.2)
%
(6.9)
%
(7.6)
%
(8.4)
%
(3.4)
%
(5.1)
%
Mortgage
(12.9)
%
(3.2)
%
(2.4)
%
(1.3)
%
(0.1)
%
(8.1)
%
(0.9)
%
Total
(3.5)
%
(2.3)
%
(3.0)
%
(3.0)
%
(2.8)
%
(2.9)
%
(2.0)
%
Impact on acquisition expense ratio:
Insurance
0.2
%
(0.2)
%
0.1
%
0.1
%
0.1
%
0.0
%
0.1
%
Reinsurance
0.3
%
0.4
%
0.0
%
0.2
%
2.4
%
0.3
%
1.2
%
Mortgage
(0.2)
%
(0.2)
%
0.0
%
0.0
%
0.0
%
(0.2)
%
0.0
%
Total
0.2
%
0.0
%
0.0
%
0.1
%
0.8
%
0.0
%
0.4
%
Estimated net losses incurred from current accident year catastrophic events (2)
Insurance
$
27,999
$
41,876
$
62,398
$
74,365
$
85,929
$
69,875
$
135,412
Reinsurance
18,467
146,379
93,959
128,939
121,263
164,846
190,216
Total
$
46,466
$
188,255
$
156,357
$
203,304
$
207,192
$
234,721
$
325,628
Impact on combined ratio:
Insurance
3.2
%
5.1
%
8.3
%
10.3
%
12.5
%
4.1
%
9.6
%
Reinsurance
2.5
%
22.7
%
16.1
%
23.3
%
25.3
%
11.9
%
18.6
%
Total
2.4
%
10.5
%
9.4
%
12.5
%
13.5
%
6.3
%
10.4
%
Estimated impact of COVID-19 event, net of reinsurance and reinstatement premiums, included in current accident year catastrophic events (3)
Insurance
$
178
$
572
$
(75)
$
3,442
$
78,059
$
750
$
114,005
Reinsurance
703
$
15
446
8,449
95,039
718
145,739
Total
$
881
$
587
$
371
$
11,891
$
173,098
$
1,468
$
259,744
Impact on combined ratio:
Insurance
0.0
%
0.1
%
0.0
%
0.5
%
11.3
%
0.0
%
8.1
%
Reinsurance
0.1
%
0.0
%
0.1
%
1.5
%
19.8
%
0.1
%
14.2
%
Total
0.0
%
0.0
%
0.0
%
0.7
%
11.3
%
0.0
%
8.3
%
(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)Equals estimated losses from catastrophic events occurring in the current accident year (e.g. natural catastrophes, man-made events, pandemic events), net of reinsurance and reinstatement premiums. As regards the natural catastrophe estimates included within, amounts shown for the insurance segment are for named catastrophic events only, while amounts shown for the reinsurance segment include (i) named events with over $5 million of losses incurred by its Bermuda and Europe operations and (ii) all catastrophe losses incurred by its U.S. operations. Amounts not applicable for the mortgage segment.
(3)Equals estimated losses for exposures through June 30, 2021 to the COVID-19 global pandemic, net of reinsurance and reinstatement premiums. The amounts represent a subset of the estimated losses for the current accident year catastrophic events.
23
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Investable Asset Summary and Investment Portfolio Metrics
The following table summarizes the Company’s investable assets and portfolio metrics (1):
(U.S. Dollars in thousands)
June 30,
March 31,
December 31,
September 30,
June 30,
2021
2021
2020
2020
2020
Investable assets (1) (2):
Fixed maturities available for sale, at fair value
$
17,448,357
63.9
%
$
18,136,604
68.9
%
$
18,104,322
67.4
%
$
17,844,866
69.4
%
$
16,557,966
67.5
%
Fixed maturities—fair value option (3)
417,700
1.5
%
360,616
1.4
%
388,191
1.4
%
386,865
1.5
%
375,793
1.5
%
Fixed maturities pledged under securities lending agreements, at fair value
156,056
0.6
%
130,152
0.5
%
278,783
1.0
%
62,749
0.2
%
457,906
1.9
%
Total fixed maturities
18,022,113
66.0
%
18,627,372
70.7
%
18,771,296
69.9
%
18,294,480
71.1
%
17,391,665
70.9
%
Equity securities, at fair value
1,595,929
5.8
%
1,470,592
5.6
%
1,392,420
5.2
%
1,449,208
5.6
%
1,194,874
4.9
%
Equity securities—fair value option (3)
25,158
0.1
%
25,640
0.1
%
27,555
0.1
%
30,494
0.1
%
31,197
0.1
%
Equity securities pledged under securities lending agreements, at fair value
12,492
0.0
%
10,797
0.0
%
16,129
0.1
%
—
0.0
%
6,597
0.0
%
Total equity securities
1,633,579
6.0
%
1,507,029
5.7
%
1,436,104
5.3
%
1,479,702
5.8
%
1,232,668
5.0
%
Other investments—fair value option (3)
1,512,317
5.5
%
1,527,999
5.8
%
1,480,347
5.5
%
1,276,867
5.0
%
1,212,788
4.9
%
Other investable assets (3)
500,000
1.8
%
500,000
1.9
%
500,000
1.9
%
—
0.0
%
—
0.0
%
Total other investments
2,012,317
7.4
%
2,027,999
7.7
%
1,980,347
7.4
%
1,276,867
5.0
%
1,212,788
4.9
%
Investments accounted for using the equity method (4)
2,539,124
9.3
%
2,256,327
8.6
%
2,047,889
7.6
%
1,883,702
7.3
%
1,727,302
7.0
%
Short-term investments available for sale, at fair value
2,248,613
8.2
%
1,269,631
4.8
%
1,924,922
7.2
%
2,039,097
7.9
%
2,277,866
9.3
%
Short-term investments—fair value option (3)
131,403
0.5
%
140,329
0.5
%
138,318
0.5
%
118,313
0.5
%
14,317
0.1
%
Total short-term investments
2,380,016
8.7
%
1,409,960
5.4
%
2,063,240
7.7
%
2,157,410
8.4
%
2,292,183
9.3
%
Cash
884,857
3.2
%
705,787
2.7
%
694,997
2.6
%
781,065
3.0
%
746,606
3.0
%
Securities transactions entered into but not settled at the balance sheet date
(180,592)
(0.7)
%
(195,875)
(0.7)
%
(137,578)
(0.5)
%
(148,725)
(0.6)
%
(72,018)
(0.3)
%
Total investable assets held by the Company
$
27,291,414
100.0
%
$
26,338,599
100.0
%
$
26,856,295
100.0
%
$
25,724,501
100.0
%
$
24,531,194
100.0
%
Average effective duration (in years)
2.31
2.71
3.01
3.21
3.18
Average S&P/Moody’s credit ratings (5)
AA/Aa2
AA-/Aa3
AA/Aa2
AA/Aa2
AA/Aa2
Embedded book yield (before investment expenses)
1.45
%
1.59
%
1.56
%
1.71
%
1.85
%
(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results. Such amounts are summarized as follows:
Investable assets in ‘other’ segment:
Cash
$
349,202
$
236,164
$
211,451
$
195,333
$
107,653
Investments accounted for using the fair value option
1,984,919
1,880,770
1,790,385
1,937,036
1,886,676
Fixed maturities available for sale, at fair value
625,422
586,431
613,503
608,022
649,765
Equity securities, at fair value
97,623
62,314
52,410
52,807
62,443
Securities sold but not yet purchased
(28,068)
(34,097)
(21,679)
(24,909)
(29,289)
Securities transactions entered into but not settled at the balance sheet date
(97,055)
8,846
11,542
(74,837)
(35,958)
Total investable assets included in ‘other’ segment
$
2,932,043
$
2,740,428
$
2,657,612
$
2,693,452
$
2,641,290
(2) This table excludes the collateral received and reinvested and includes the securities pledged under securities lending agreements, at fair value.
(3) Included in “other investments” on the balance sheet.
(4) Changes in the carrying value of investment funds accounted for using the equity method are recorded as “equity in net income (loss) of investment funds accounted for using the equity method” rather than as an unrealized gain or loss component of accumulated other comprehensive income.
(5) Average credit ratings on the Company’s investment portfolio on securities with ratings assigned by Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”).
24
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Composition of Net Investment Income, Yield and Total Return
The following table summarizes the Company’s net investment income, yield and total return (1):
(U.S. Dollars in thousands, except share data)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Composition of net investment income (1):
Fixed maturities
$
77,709
$
79,017
$
80,942
$
84,608
$
91,491
$
156,726
$
193,254
Equity securities (dividends)
8,282
5,650
9,695
6,659
6,023
13,932
11,653
Short-term investments
972
644
1,129
1,162
897
1,616
4,282
Other (2)
21,026
15,559
15,053
24,594
17,825
36,585
38,304
Gross investment income
107,989
100,870
106,819
117,023
116,236
208,859
247,493
Investment expenses
(18,559)
(22,141)
(18,827)
(17,166)
(15,205)
(40,700)
(33,434)
Net investment income
$
89,430
$
78,729
$
87,992
$
99,857
$
101,031
$
168,159
$
214,059
Per share
$
0.22
$
0.19
$
0.21
$
0.24
$
0.25
$
0.41
$
0.52
Investment income yield, at amortized cost (1) (3):
Pre-tax
1.47
%
1.31
%
1.45
%
1.76
%
1.92
%
1.40
%
2.08
%
After-tax
1.30
%
1.14
%
1.26
%
1.57
%
1.68
%
1.23
%
1.81
%
Total return on investments (1) (4)
1.58
%
(0.18)
%
2.46
%
2.30
%
3.72
%
1.39
%
2.82
%
(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)Amounts include dividends and other distributions on investment funds, term loan investments, funds held balances, cash balances and other.
(3)Presented on an annualized basis and excluding the impact of investments for which returns are not included within investment income, such as investments accounted for using the equity method and certain equities.
(4)Total return on investments includes net investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in allowance for credit loses on non-investment related financial assets) and the change in unrealized gains or losses and is calculated on a pre-tax basis and before investment expenses. See ‘Comments on Regulation G’ for a further discussion of the presentation of total return on investments.
25
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Composition of Fixed Maturities
The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):
(U.S. Dollars in thousands)
Fair Value
Gross Unrealized Gains
Gross Unrealized Losses
Net Unrealized Gains (Losses)
Allowance for Credit Losses
Amortized Cost
Fair Value / Amortized Cost
Fair Value % of Total
At June 30, 2021
Corporates
$
7,375,350
$
213,421
$
(34,448)
$
178,973
$
(1,100)
$
7,197,477
102.5
%
40.9
%
U.S. government and government agencies
4,855,595
14,030
(13,703)
327
—
4,855,268
100.0
%
26.9
%
Municipal bonds
413,709
23,066
(1,660)
21,406
(6)
392,309
105.5
%
2.3
%
Non-U.S. government securities
2,308,403
99,686
(17,637)
82,049
(47)
2,226,401
103.7
%
12.8
%
Asset-backed securities
2,426,917
15,864
(3,330)
12,534
(486)
2,414,869
100.5
%
13.5
%
Commercial mortgage-backed securities
267,574
4,017
(611)
3,406
(3)
264,171
101.3
%
1.5
%
Residential mortgage-backed securities
374,565
4,474
(3,349)
1,125
(229)
373,669
100.2
%
2.1
%
Total
$
18,022,113
$
374,558
$
(74,738)
$
299,820
$
(1,871)
$
17,724,164
101.7
%
100.0
%
At December 31, 2020
Corporates
$
8,039,745
$
405,071
$
(30,666)
$
374,405
$
(700)
$
7,666,040
104.9
%
42.8
%
U.S. government and government agencies
5,354,863
21,490
(12,587)
8,903
—
5,345,960
100.2
%
28.5
%
Municipal bonds
492,734
27,189
(3,835)
23,354
(11)
469,391
105.0
%
2.6
%
Non-U.S. government securities
2,310,157
143,054
(7,958)
135,096
—
2,175,061
106.2
%
12.3
%
Asset-backed securities
1,566,188
18,689
(7,635)
11,054
(1,090)
1,556,224
100.6
%
8.3
%
Commercial mortgage-backed securities
390,990
8,722
(2,954)
5,768
(122)
385,344
101.5
%
2.1
%
Residential mortgage-backed securities
616,619
8,934
(4,280)
4,654
(278)
612,243
100.7
%
3.3
%
Total
$
18,771,296
$
633,149
$
(69,915)
$
563,234
$
(2,201)
$
18,210,263
103.1
%
100.0
%
(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
26
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Credit Quality Distribution and Maturity Profile
The following table summarizes the credit quality distribution and maturity profile of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):
(U.S. Dollars in thousands)
June 30,
March 31,
December 31,
September 30,
June 30,
2021
2021
2020
2020
2020
Credit quality distribution of total fixed maturities (2) (3):
U.S. government and government agencies (4)
$
5,221,296
29.0
%
$
5,432,191
29.2
%
$
5,963,758
31.8
%
$
5,360,798
29.3
%
$
5,566,339
32.0
%
AAA
3,432,285
19.0
%
3,145,642
16.9
%
3,117,046
16.6
%
3,352,902
18.3
%
3,035,513
17.5
%
AA
2,004,442
11.1
%
2,069,764
11.1
%
2,063,738
11.0
%
2,087,245
11.4
%
1,818,693
10.5
%
A
3,268,661
18.1
%
3,878,113
20.8
%
3,760,280
20.0
%
3,895,053
21.3
%
4,232,245
24.3
%
BBB
2,896,453
16.1
%
2,829,202
15.2
%
2,699,201
14.4
%
2,542,233
13.9
%
1,874,332
10.8
%
BB
544,730
3.0
%
622,448
3.3
%
574,189
3.1
%
504,570
2.8
%
406,342
2.3
%
B
330,639
1.8
%
331,144
1.8
%
268,095
1.4
%
231,774
1.3
%
211,638
1.2
%
Lower than B
48,230
0.3
%
57,659
0.3
%
54,795
0.3
%
54,118
0.3
%
51,273
0.3
%
Not rated
275,377
1.5
%
261,209
1.4
%
270,194
1.4
%
265,787
1.5
%
195,290
1.1
%
Total fixed maturities, at fair value
$
18,022,113
100.0
%
$
18,627,372
100.0
%
$
18,771,296
100.0
%
$
18,294,480
100.0
%
$
17,391,665
100.0
%
Maturity profile of total fixed maturities (2):
Due in one year or less
$
442,507
2.5
%
$
376,026
2.0
%
$
327,899
1.7
%
$
314,243
1.7
%
$
350,520
2.0
%
Due after one year through five years
9,873,037
54.8
%
10,913,524
58.6
%
10,424,114
55.5
%
9,744,246
53.3
%
9,730,262
55.9
%
Due after five years through ten years
4,185,053
23.2
%
4,054,083
21.8
%
4,901,382
26.1
%
4,861,677
26.6
%
4,342,055
25.0
%
Due after 10 years
452,460
2.5
%
510,405
2.7
%
544,104
2.9
%
602,120
3.3
%
467,099
2.7
%
14,953,057
83.0
%
15,854,038
85.1
%
16,197,499
86.3
%
15,522,286
84.8
%
14,889,936
85.6
%
Mortgage-backed securities
374,565
2.1
%
558,584
3.0
%
616,619
3.3
%
703,393
3.8
%
593,799
3.4
%
Commercial mortgage-backed securities
267,574
1.5
%
256,598
1.4
%
390,990
2.1
%
375,510
2.1
%
396,813
2.3
%
Asset-backed securities
2,426,917
13.5
%
1,958,152
10.5
%
1,566,188
8.3
%
1,693,291
9.3
%
1,511,117
8.7
%
Total fixed maturities, at fair value
$
18,022,113
100.0
%
$
18,627,372
100.0
%
$
18,771,296
100.0
%
$
18,294,480
100.0
%
$
17,391,665
100.0
%
(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2) This table excludes the collateral received and reinvested and includes the fixed maturities pledged under securities lending agreements, at fair value.
(3) For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings.
(4) Includes U.S. government-sponsored agency mortgage backed securities and agency commercial mortgage backed securities.
27
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Analysis of Corporate Exposures
The following table summarizes the Company’s corporate bonds by sector (1):
(U.S. Dollars in thousands)
June 30,
March 31,
December 31,
September 30,
June 30,
2021
2021
2020
2020
2020
Sector:
Industrials
$
3,873,768
52.5
%
$
4,744,615
57.6
%
$
4,940,996
61.5
%
$
5,303,089
65.2
%
$
4,650,615
63.6
%
Financials
2,974,254
40.3
%
2,868,957
34.8
%
2,432,719
30.3
%
2,156,871
26.5
%
2,164,859
29.6
%
Utilities
474,845
6.4
%
521,551
6.3
%
584,869
7.3
%
562,939
6.9
%
409,778
5.6
%
Covered bonds
3,022
0.0
%
2,029
0.0
%
2,013
0.0
%
2,072
0.0
%
1,974
0.0
%
All other (2)
49,461
0.7
%
96,619
1.2
%
79,148
1.0
%
112,611
1.4
%
82,190
1.1
%
Total
$
7,375,350
100.0
%
$
8,233,771
100.0
%
$
8,039,745
100.0
%
$
8,137,582
100.0
%
$
7,309,416
100.0
%
Credit quality distribution (3):
AAA
$
141,983
1.9
%
$
151,195
1.8
%
$
220,584
2.7
%
$
291,154
3.6
%
$
76,923
1.1
%
AA
890,624
12.1
%
961,880
11.7
%
995,742
12.4
%
1,068,945
13.1
%
894,495
12.2
%
A
2,742,121
37.2
%
3,431,522
41.7
%
3,313,349
41.2
%
3,478,591
42.7
%
3,834,480
52.5
%
BBB
2,687,944
36.4
%
2,684,300
32.6
%
2,574,823
32.0
%
2,427,829
29.8
%
1,773,620
24.3
%
BB
499,327
6.8
%
582,086
7.1
%
540,397
6.7
%
478,445
5.9
%
388,112
5.3
%
B
311,611
4.2
%
312,362
3.8
%
258,035
3.2
%
224,644
2.8
%
205,342
2.8
%
Lower than B
31,600
0.4
%
33,667
0.4
%
30,625
0.4
%
30,423
0.4
%
27,865
0.4
%
Not rated
70,140
1.0
%
76,759
0.9
%
106,190
1.3
%
137,551
1.7
%
108,579
1.5
%
Total
$
7,375,350
100.0
%
$
8,233,771
100.0
%
$
8,039,745
100.0
%
$
8,137,582
100.0
%
$
7,309,416
100.0
%
(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2) Includes sovereign securities, supranational securities and other.
(3) For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings.
The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at June 30, 2021 (1):
(U.S. Dollars in thousands)
Fair Value
% of Asset Class
% of Investable Assets
Credit Quality (2)
Issuer:
Bank of America Corporation
$
373,742
5.1
%
1.4
%
A-/A2
JPMorgan Chase & Co.
372,381
5.0
%
1.4
%
A-/A2
Citigroup Inc.
288,574
3.9
%
1.1
%
BBB+/A3
Morgan Stanley
253,549
3.4
%
0.9
%
BBB+/A1
Wells Fargo & Company
247,222
3.4
%
0.9
%
BBB+/A2
The Goldman Sachs Group, Inc.
185,647
2.5
%
0.7
%
BBB+/A2
Nestlé S.A.
129,191
1.8
%
0.5
%
AA-/Aa3
Amazon.com, Inc.
118,047
1.6
%
0.4
%
AA/A1
Nippon Telegraph and Telephone Corporation
95,958
1.3
%
0.4
%
A/A1
AT&T Inc.
92,795
1.3
%
0.3
%
BBB/Baa2
Total
$
2,157,106
29.2
%
7.9
%
(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2) Average credit ratings assigned by S&P and Moody’s, respectively.
28
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Structured Securities
The following table provides the composition of the Company’s structured securities at June 30, 2021 (1):
(U.S. Dollars in thousands)
Agencies
AAA
AA
A
BBB
Non-Investment Grade
Total
Residential mortgage-backed securities
$
336,784
$
14,367
$
294
$
—
$
55
$
23,065
$
374,565
Commercial mortgage-backed securities
28,917
183,754
2,840
16,231
10,830
25,002
267,574
Asset-backed securities
—
1,509,382
198,570
390,602
107,899
220,464
2,426,917
Total
$
365,701
$
1,707,503
$
201,704
$
406,833
$
118,784
$
268,531
$
3,069,056
(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
29
Arch Capital Group Ltd. and Subsidiaries
Comments on Regulation G
Throughout this financial supplement, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company. This presentation includes the use of after-tax operating income available to Arch common shareholders, which is defined as net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, and transaction costs and other, net of income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized return on average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included on the following page.
The Company believes that net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, changes in the allowance for credit losses and net impairment losses recognized in earnings on the Company’s investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of the Company’s investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Transaction costs and other include advisory, financing, legal, severance, incentive compensation and other transaction costs related to acquisitions and Watford’s non-recurring listing expenses. The Company believes that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other from the calculation of after-tax operating income or loss available to Arch common shareholders.
The Company believes that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, the Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies which follow the Company and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.
In addition, the Company’s presentation includes the use of information prepared on a ‘core’ basis, which excludes amounts related to the ‘other’ segment (i.e., results of Watford). Information provided on a ‘core’ basis are non-GAAP financial measures as defined in Regulation G. Pursuant to generally accepted accounting principles, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, the Company consolidates the results of Watford in its consolidated financial statements, although it only owns approximately 10% of Watford’s outstanding common equity. Watford has its own management and board of directors that is responsible for its own results and profitability. In addition, the Company does not guarantee or provide credit support for Watford. Because Watford is an independent company, the assets of Watford can be used only to settle obligations of Watford and Watford is solely responsible for its own liabilities and commitments. The Company’s financial exposure to Watford is limited to its investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions. The Company believes that presenting information on a ‘core’ basis enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. See ‘Segment Information’ for a further discussion of segment results and a reconciliation of core and consolidated results.
The Company’s segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss on a ‘core’ basis. Such measures represent the pre-tax profitability of the Company’s underwriting operations and include net premiums earned plus other underwriting income, less losses and loss adjustment expenses, acquisition expenses and other operating expenses. Other operating expenses include those operating expenses that are incremental and/or directly attributable to the Company’s individual underwriting operations. Underwriting income or loss does not incorporate items included in the Company’s corporate (non-underwriting) segment. While these measures are presented in the Segment Information footnote to the Company’s Consolidated Financial Statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. The reconciliations of underwriting income or loss to income before income taxes (the most directly comparable GAAP financial measure) on a consolidated basis and a ‘core’ basis, in accordance with Regulation G, is shown on pages 10 to 13.
In addition, the Company’s segment information includes the use of a combined ratio excluding catastrophic activity and prior year development, for the insurance and reinsurance segments, and a combined ratio excluding prior year development, for the mortgage segment. These ratios are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to the combined ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G are shown on the individual segment pages. The Company’s management utilizes the adjusted combined ratios excluding current accident year catastrophic events and favorable or adverse development in prior year loss reserves in its analysis of the underwriting performance of each of its underwriting segments.
Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, excludes amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. Management uses total return on investments as a key measure of the return generated to Arch common shareholders, and compares the return generated by the Company’s investment portfolio against benchmark returns during the periods presented.
30
Arch Capital Group Ltd. and Subsidiaries
Operating Income Reconciliation and Annualized Operating Return on Average Common Equity
The following table summarizes the Company’s consolidated financial data, including a reconciliation of net income (loss) available to Arch common shareholders to after-tax operating income (loss) available to Arch common shareholders and related diluted per share results. Each line item reflects the impact of the Company’s ownership of Watford’s outstanding common equity:
(U.S. Dollars in thousands, except share data)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Net income available to Arch common shareholders
$
663,820
$
427,753
$
533,141
$
408,636
$
288,418
$
1,091,573
$
422,132
Net realized (gains) losses
(167,438)
(105,551)
(297,801)
(219,726)
(406,645)
(272,989)
(297,281)
Equity in net (income) loss of investment funds accounted for using the equity method
(122,186)
(71,686)
(89,286)
(126,735)
65,119
(193,872)
69,328
Net foreign exchange (gains) losses
17,888
(21,332)
63,588
39,462
42,032
(3,444)
(22,459)
Transaction costs and other
(1,421)
1,274
4,718
1,674
977
(147)
3,572
Income tax expense (benefit) (1)
16,553
9,311
16,057
17,010
26,713
25,864
31,078
After-tax operating income available to Arch common shareholders
$
407,216
$
239,769
$
230,417
$
120,321
$
16,614
$
646,985
$
206,370
Diluted per common share results:
Net income available to Arch common shareholders
$
1.63
$
1.05
$
1.30
$
1.00
$
0.71
$
2.68
$
1.03
Net realized (gains) losses
(0.41)
(0.25)
(0.72)
(0.54)
(1.00)
(0.66)
(0.72)
Equity in net (income) loss of investment funds accounted for using the equity method
(0.30)
(0.18)
(0.22)
(0.31)
0.16
(0.48)
0.17
Net foreign exchange (gains) losses
0.04
(0.05)
0.15
0.10
0.10
(0.01)
(0.06)
Transaction costs and other
0.00
0.00
0.01
0.00
0.00
0.00
0.01
Income tax expense (benefit) (1)
0.04
0.02
0.04
0.04
0.07
0.06
0.07
After-tax operating income available to Arch common shareholders
$
1.00
$
0.59
$
0.56
$
0.29
$
0.04
$
1.59
$
0.50
Weighted average common shares and common share equivalents outstanding - diluted
406,485,994
409,223,253
410,281,852
409,194,657
408,119,681
407,687,680
411,005,591
Beginning common shareholders’ equity
$
12,316,472
$
12,325,886
$
11,671,997
$
11,211,825
$
10,587,244
$
12,325,886
$
10,717,371
Ending common shareholders’ equity
12,706,072
12,316,472
12,325,886
11,671,997
11,211,825
12,706,072
11,211,825
Average common shareholders’ equity
$
12,511,272
$
12,321,179
$
11,998,942
$
11,441,911
$
10,899,535
$
12,515,979
$
10,964,598
Annualized return on average common equity
21.2
%
13.9
%
17.8
%
14.3
%
10.6
%
17.4
%
7.7
%
Annualized operating return on average common equity
13.0
%
7.8
%
7.7
%
4.2
%
0.6
%
10.3
%
3.8
%
(1)Income tax expense on net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction.
31
Arch Capital Group Ltd. and Subsidiaries
Operating Income and Effective Tax Rate Calculations
The following table provides a reconciliation of income (loss) before income taxes to after-tax operating income (loss) available to Arch common shareholders and an analysis of the effective tax rate on pre-tax operating income (loss) available to Arch common shareholders:
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Arch Operating Income Components (1):
Income (loss) before income taxes and income (loss) from operating affiliates
$
697,799
$
397,244
$
560,146
$
432,896
$
305,647
$
1,095,043
$
503,084
Net realized (gains) losses
(163,394)
(101,336)
(289,817)
(210,984)
(385,089)
(264,730)
(312,980)
Equity in net (income) loss of investment funds accounted for using the equity method
(122,186)
(71,686)
(89,286)
(126,735)
65,119
(193,872)
69,328
Net foreign exchange (gains) losses
17,892
(21,505)
62,349
38,681
42,438
(3,613)
(20,869)
Transaction costs and other
(2,018)
1,390
3,086
792
43
(628)
2,581
Income (loss) from operating affiliates
24,476
75,457
10,504
919
(3,173)
99,933
5,343
Pre-tax operating income
452,569
279,564
256,982
135,569
24,985
732,133
246,487
Arch share of ‘other’ segment operating income (loss) (2)
733
198
1,526
1,792
1,798
931
4,035
Pre-tax operating income available to Arch (b)
453,302
279,762
258,508
137,361
26,783
733,064
250,522
Income tax expense (a)
(34,420)
(29,590)
(17,688)
(6,637)
234
(64,010)
(23,346)
After-tax operating income available to Arch
418,882
250,172
240,820
130,724
27,017
669,054
227,176
Preferred dividends
(11,666)
(10,403)
(10,403)
(10,403)
(10,403)
(22,069)
(20,806)
After-tax operating income available to Arch common shareholders
$
407,216
$
239,769
$
230,417
$
120,321
$
16,614
$
646,985
$
206,370
Effective tax rate on pre-tax operating income (loss) available to Arch (a)/(b)
7.6
%
10.6
%
6.8
%
4.8
%
(0.9)
%
8.7
%
9.3
%
(1) Line items are presented on a ‘core’ basis, excluding amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2) Balances in the ‘other’ segment and a calculation of Arch’s share of the ‘other’ segment operating income (loss) is as follows:
(U.S. Dollars in thousands)
Three Months Ended
Six Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
2020
Balances in ‘other’ segment:
Underwriting income (loss)
$
(8,866)
$
(13,079)
$
(8,555)
$
(8,273)
$
(9,129)
$
(21,945)
$
(15,139)
Net investment income
22,183
20,127
26,466
28,655
30,454
42,310
62,579
Interest expense
(4,261)
(4,149)
(4,804)
(5,119)
(6,009)
(8,410)
(13,319)
Amortization of intangible assets
(898)
—
—
—
—
(898)
—
Preferred dividends
(981)
(972)
(992)
(993)
(1,036)
(1,953)
(2,132)
Pre-tax operating income (loss) available to common shareholders
7,177
1,927
12,115
14,270
14,280
9,104
31,989
Arch ownership
10
%
10
%
13
%
13
%
13
%
10
%
13
%
Arch share of ‘Other’ segment operating income (loss) (3)
$
733
$
198
$
1,526
$
1,792
$
1,798
$
931
$
4,035
(3) Excludes amounts attributable to net realized gains or losses and net foreign exchange gains or losses in the ‘other’ segment (see ‘Segment Information’).
32
Arch Capital Group Ltd. and Subsidiaries
Capital Structure and Share Repurchase Activity
The following table provides an analysis of the Company’s capital structure (1):
(U.S. Dollars in thousands, except share data)
June 30,
March 31,
December 31,
September 30,
June 30,
2021
2021
2020
2020
2020
Debt:
Arch Capital senior notes, due May 1, 2034 ($300,000 principal, 7.35%)
Arch Finance senior notes, due December 15, 2026 ($500,000 principal, 4.011%) (3)
500,000
500,000
500,000
500,000
500,000
Arch Finance senior notes, due December 15, 2046 ($450,000 principal, 5.031%) (3)
450,000
450,000
450,000
450,000
450,000
Arch Capital senior notes, due June 30, 2050 ($1,000,000 principal, 3.635%)
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
Deferred debt costs on senior notes
(26,097)
(26,340)
(26,577)
(26,811)
(26,820)
Revolving credit agreement borrowings, due October 26, 2021 (variable)
—
—
—
—
—
Total debt
$
2,723,903
$
2,723,660
$
2,723,423
$
2,723,189
$
2,723,180
Shareholders’ equity available to Arch:
Series E non-cumulative preferred shares (5.25%)
450,000
450,000
450,000
450,000
450,000
Series F non-cumulative preferred shares (5.45%)
330,000
330,000
330,000
330,000
330,000
Series G non-cumulative preferred shares (4.55%)
500,000
—
—
—
—
Common shareholders’ equity (a)
12,706,072
12,316,472
12,325,886
11,671,997
11,211,825
Total shareholders’ equity available to Arch
$
13,986,072
$
13,096,472
$
13,105,886
$
12,451,997
$
11,991,825
Total capital available to Arch
$
16,709,975
$
15,820,132
$
15,829,309
$
15,175,186
$
14,715,005
Common shares outstanding, net of treasury shares (b)
396,771,251
403,313,377
406,720,642
406,018,958
405,970,251
Book value per common share (4) (a)/(b)
$
32.02
$
30.54
$
30.31
$
28.75
$
27.62
Leverage ratios:
Senior notes/total capital available to Arch
16.3
%
17.2
%
17.2
%
17.9
%
18.5
%
Revolving credit agreement borrowings/total capital available to Arch
—
%
—
%
—
%
—
%
—
%
Debt/total capital available to Arch
16.3
%
17.2
%
17.2
%
17.9
%
18.5
%
Preferred/total capital available to Arch
7.7
%
4.9
%
4.9
%
5.1
%
5.3
%
Debt and preferred/total capital available to Arch
24.0
%
22.1
%
22.1
%
23.1
%
23.8
%
(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2) Issued by Arch Capital Group (U.S.) Inc. (“Arch-U.S.”), a wholly owned subsidiary of Arch Capital, and fully and unconditionally guaranteed by Arch Capital.
(3) Issued by Arch Capital Finance LLC (“Arch Finance”), a wholly owned subsidiary of Arch U.S. MI Holdings Inc., and fully and unconditionally guaranteed by Arch Capital.
(4) Excludes the effects of stock options, restricted and performance stock units outstanding.
The following table provides the impact of share repurchases under the Company’s share repurchase program:
(U.S. Dollars in thousands except share data)
Three Months Ended
Cumulative
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
2021
2021
2020
2020
2020
2021
Effect of share repurchases:
Aggregate cost of shares repurchased
$
306,049
$
179,266
$
7,986
$
—
$
—
$
4,537,081
Shares repurchased
7,805,455
5,308,319
250,714
—
—
402,305,856
Average price per share repurchased
$
39.21
$
33.77
$
31.85
$
—
$
—
$
11.28
Remaining share repurchase authorization (1)
$
431,213
(1) Repurchases under the share repurchase authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2021.
