The following financial supplement is provided to assist in your understanding of Arch Capital Group Ltd. (“Arch”) and its subsidiaries (collectively, the “Company”).
This report is for informational purposes only. It should be read in conjunction with documents filed by Arch 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.archgroup.com for further information describing Arch.
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, 2021 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 Somers Group Holdings Ltd. (formerly Watford Holdings Ltd.), (“Somers”). In accordance with GAAP, the Company consolidated the results of Somers in its financial statements. Somers was considered a variable interest entity and the Company concluded that it was the primary beneficiary of Somers, through June 30, 2021. As such, 100% of the results of Somers were included in the Company’s consolidated financial statements as of and for the periods ended June 30, 2021. The portion of Somers’ earnings owned by third parties was recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ In addition, through June 30, 2021 the Company reflected Somers’ redeemable preference shares in the mezzanine section of the Company’s consolidated balance sheets as ‘redeemable noncontrolling interests’. In July 2021, the Company announced the completion of the previously disclosed acquisition of Somers by Greysbridge. Based on the governing documents of Greysbridge, the Company has concluded that, while it will retain significant influence over Somers, Somers no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Somers in its consolidated financial statements and footnotes.
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 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 and addition 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 replacement of LIBOR with alternative benchmark rates 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
Nine Months Ended
September 30,
September 30,
2022
2021
Change
2022
2021
Change
Underwriting results:
Gross premiums written
$
3,860,683
$
3,207,415
20.4
%
$
11,531,185
$
9,602,213
20.1
%
Net premiums written
2,723,774
2,075,929
31.2
%
8,042,553
6,629,208
21.3
%
Net premiums earned
2,470,750
1,929,337
28.1
%
6,917,158
5,666,700
22.1
%
Underwriting income (loss) (2)
68,797
173,745
(60.4)
%
1,061,768
768,129
38.2
%
Loss ratio
68.1
%
63.5
%
4.6
54.7
%
58.8
%
(4.1)
Acquisition expense ratio
18.1
%
15.9
%
2.2
17.9
%
15.6
%
2.3
Other operating expense ratio
11.1
%
12.0
%
(0.9)
12.2
%
12.4
%
(0.2)
Combined ratio
97.3
%
91.4
%
5.9
84.8
%
86.8
%
(2.0)
Net investment income
$
128,640
$
88,195
45.9
%
$
315,468
$
256,354
23.1
%
Per diluted share
$
0.34
$
0.22
54.5
%
$
0.83
$
0.63
31.7
%
Net income available to Arch common shareholders
$
6,917
$
388,751
(98.2)
%
$
586,693
$
1,480,324
(60.4)
%
Per diluted share
$
0.02
$
0.98
(98.0)
%
$
1.55
$
3.66
(57.7)
%
After-tax operating income available to Arch common shareholders (2)
$
105,972
$
294,688
(64.0)
%
$
1,034,467
$
941,673
9.9
%
Per diluted share
$
0.28
$
0.74
(62.2)
%
$
2.73
$
2.33
17.2
%
Comprehensive income (loss) available to Arch
$
(616,461)
$
239,078
(357.8)
%
$
(1,209,982)
$
1,093,872
(210.6)
%
Net cash provided by operating activities
$
1,379,749
$
1,014,979
35.9
%
$
2,833,717
$
2,580,697
9.8
%
Weighted average common shares and common share equivalents outstanding — diluted
373,727,277
397,903,347
(6.1)
%
378,373,180
404,260,485
(6.4)
%
Financial measures:
Change in book value per common share during period
(5.4)
%
1.3
%
(6.7)
(11.5)
%
7.0
%
(18.5)
Annualized net income return on average common equity
0.2
%
12.3
%
(12.1)
6.6
%
15.9
%
(9.3)
Annualized operating return on average common equity (2)
3.8
%
9.3
%
(5.5)
11.6
%
10.1
%
1.5
Total return on investments (3)
(3.01)
%
0.01
%
-302 bps
(8.83)
%
1.50
%
-1033 bps
(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Somers). 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 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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Revenues
Net premiums earned
$
2,470,750
$
2,325,775
$
2,120,633
$
2,083,630
$
1,929,337
$
6,917,158
$
5,998,668
Net investment income
128,640
106,392
80,436
90,454
88,195
315,468
298,664
Net realized gains (losses)
(183,673)
(266,579)
(292,414)
59,517
(25,040)
(742,666)
320,328
Other underwriting income
3,077
2,970
5,897
3,160
7,274
11,944
18,913
Equity in net income (loss) of investment funds accounted for using the equity method
(18,861)
58,061
36,305
67,132
105,398
75,505
299,270
Other income (loss)
(13,684)
(11,777)
(9,025)
9,093
(3,960)
(34,486)
1,151
Total revenues
2,386,249
2,214,842
1,941,832
2,312,986
2,101,204
6,542,923
6,936,994
Expenses
Losses and loss adjustment expenses
(1,682,696)
(1,102,656)
(1,000,835)
(995,853)
(1,226,019)
(3,786,187)
(3,588,950)
Acquisition expenses
(447,587)
(413,319)
(378,159)
(357,539)
(306,015)
(1,239,065)
(945,639)
Other operating expenses
(274,747)
(277,392)
(289,943)
(261,787)
(230,832)
(842,082)
(736,808)
Corporate expenses
(17,710)
(27,620)
(32,332)
(18,150)
(19,672)
(77,662)
(61,007)
Amortization of intangible assets
(26,104)
(27,207)
(27,167)
(33,132)
(20,135)
(80,478)
(49,823)
Interest expense
(33,063)
(32,795)
(32,708)
(32,248)
(33,176)
(98,566)
(107,222)
Net foreign exchange gains (losses)
90,509
87,775
3,845
3,163
36,078
182,129
38,366
Total expenses
(2,391,398)
(1,793,214)
(1,757,299)
(1,695,546)
(1,799,771)
(5,941,911)
(5,451,083)
Income (loss) before income taxes and income (loss) from operating affiliates
(5,149)
421,628
184,533
617,440
301,433
601,012
1,485,911
Income tax (expense) benefit
14,900
(22,323)
(11,619)
(34,406)
(4,137)
(19,042)
(94,176)
Income (loss) from operating affiliates
8,507
4,640
24,518
40,641
124,119
37,665
224,052
Net income (loss)
18,258
403,945
197,432
623,675
421,415
619,635
1,615,787
Net (income) loss attributable to noncontrolling interests
(1,157)
399
(1,632)
(410)
(1,473)
(2,390)
(82,203)
Net income (loss) attributable to Arch
17,101
404,344
195,800
623,265
419,942
617,245
1,533,584
Preferred dividends
(10,184)
(10,184)
(10,184)
(10,184)
(16,090)
(30,552)
(38,159)
Loss on redemption of preferred shares
—
—
—
—
(15,101)
—
(15,101)
Net income (loss) available to Arch common shareholders
$
6,917
$
394,160
$
185,616
$
613,081
$
388,751
$
586,693
$
1,480,324
Comprehensive income (loss) available to Arch
$
(616,461)
$
(204,476)
$
(389,045)
$
509,482
$
239,078
$
(1,209,982)
$
1,093,872
Net income (loss) per common share and common share equivalent
Basic
$
0.02
$
1.07
$
0.50
$
1.62
$
1.00
$
1.59
$
3.74
Diluted
$
0.02
$
1.04
$
0.48
$
1.58
$
0.98
$
1.55
$
3.66
Weighted average common shares and common share equivalents outstanding
Basic
365,190,527
369,241,193
374,243,812
379,431,442
389,274,220
369,525,348
395,899,591
Diluted
373,727,277
377,952,988
384,194,363
388,869,378
397,903,347
378,373,180
404,260,485
4
Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets
(U.S. Dollars in thousands, except share data)
September 30,
June 30,
March 31,
December 31,
September 30,
2022
2022
2022
2021
2021
Assets
Investments:
Fixed maturities available for sale, at fair value
$
18,120,727
$
17,585,029
$
17,648,853
$
17,998,109
$
16,768,363
Short-term investments available for sale, at fair value
1,940,857
2,227,874
2,332,624
1,734,716
3,069,965
Equity securities, at fair value
809,869
772,689
1,002,572
1,804,170
1,790,640
Other investments
1,578,751
1,634,368
1,686,666
1,973,550
2,043,970
Investments accounted for using the equity method
3,565,946
3,496,341
3,325,543
3,077,611
2,741,293
Total investments
26,016,150
25,716,301
25,996,258
26,588,156
26,414,231
Cash
813,583
813,548
812,917
858,668
1,137,721
Accrued investment income
116,263
116,102
82,607
85,453
75,832
Investment in operating affiliates
891,212
967,603
1,144,255
1,135,655
1,111,825
Premiums receivable
3,579,380
3,634,182
3,223,504
2,633,280
2,807,720
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
6,356,456
5,938,511
5,941,000
5,880,735
5,358,852
Contractholder receivables
1,735,730
1,758,018
1,810,199
1,828,691
1,824,990
Ceded unearned premiums
2,115,539
2,123,915
1,951,960
1,729,455
1,824,910
Deferred acquisition costs
1,122,711
1,069,845
1,001,866
901,841
893,665
Receivable for securities sold
27,042
157,329
116,633
60,179
84,019
Goodwill and intangible assets
806,655
868,014
926,427
944,983
963,322
Other assets
2,756,383
2,555,826
2,670,315
2,453,849
2,286,649
Total assets
$
46,337,104
$
45,719,194
$
45,677,941
$
45,100,945
$
44,783,736
Liabilities
Reserve for losses and loss adjustment expenses
$
19,288,291
$
18,194,324
$
18,109,107
$
17,757,156
$
17,331,047
Unearned premiums
7,271,279
7,145,297
6,737,779
6,011,942
6,165,114
Reinsurance balances payable
1,669,592
1,634,700
1,510,906
1,583,253
1,403,929
Contractholder payables
1,738,089
1,761,023
1,813,930
1,832,127
1,828,474
Collateral held for insured obligations
254,720
251,063
244,502
242,352
254,259
Senior notes
2,725,153
2,724,896
2,724,642
2,724,394
2,724,149
Payable for securities purchased
174,769
292,106
176,452
64,850
357,531
Other liabilities
1,411,193
1,289,760
1,431,271
1,329,742
1,321,470
Total liabilities
34,533,086
33,293,169
32,748,589
31,545,816
31,385,973
Redeemable noncontrolling interests
8,908
8,459
9,763
9,233
10,237
Shareholders’ equity
Non-cumulative preferred shares
830,000
830,000
830,000
830,000
830,000
Common shares
652
652
651
648
648
Additional paid-in capital
2,186,599
2,170,661
2,134,241
2,085,075
2,061,906
Retained earnings
15,042,561
15,035,644
14,641,484
14,455,868
13,842,787
Accumulated other comprehensive income (loss), net of deferred income tax
(1,891,827)
(1,258,265)
(649,445)
(64,600)
49,184
Common shares held in treasury, at cost
(4,372,875)
(4,361,126)
(4,037,342)
(3,761,095)
(3,396,999)
Total shareholders’ equity
11,795,110
12,417,566
12,919,589
13,545,896
13,387,526
Total liabilities, noncontrolling interests and shareholders’ equity
$
46,337,104
$
45,719,194
$
45,677,941
$
45,100,945
$
44,783,736
Common shares and common share equivalents outstanding, net of treasury shares
369,321,990
369,346,815
375,730,891
378,923,894
387,257,752
Book value per common share (1)
$
29.69
$
31.37
$
32.18
$
33.56
$
32.43
(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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Non-cumulative preferred shares
Balance at beginning of period
$
830,000
$
830,000
$
830,000
$
830,000
$
1,280,000
$
830,000
$
780,000
Preferred shares issued
—
—
—
—
—
—
500,000
Preferred shares redeemed
—
—
—
—
(450,000)
—
(450,000)
Balance at beginning and end of period
$
830,000
$
830,000
$
830,000
$
830,000
$
830,000
$
830,000
$
830,000
Common shares
Balance at beginning of period
652
651
648
648
647
648
643
Common shares issued, net
—
1
3
—
1
4
5
Balance at end of period
652
652
651
648
648
652
648
Additional paid-in capital
Balance at beginning of period
2,170,661
2,134,241
2,085,075
2,061,906
2,028,919
2,085,075
1,977,794
Issue costs on preferred shares
—
—
—
—
—
—
(14,179)
Reversal of original issue costs on redeemed preferred shares
—
—
—
—
15,101
—
15,101
Amortization of share-based compensation
13,518
21,137
45,368
14,774
14,216
80,023
71,279
All other
2,420
15,283
3,798
8,395
3,670
21,501
11,911
Balance at end of period
2,186,599
2,170,661
2,134,241
2,085,075
2,061,906
2,186,599
2,061,906
Retained earnings
Balance at beginning of period
15,035,644
14,641,484
14,455,868
13,842,787
13,454,036
14,455,868
12,362,463
Net income
18,258
403,945
197,432
623,675
421,415
619,635
1,615,787
Amounts attributable to noncontrolling interests
(1,157)
399
(1,632)
(410)
(1,473)
(2,390)
(82,203)
Preferred share dividends
(10,184)
(10,184)
(10,184)
(10,184)
(16,090)
(30,552)
(38,159)
Loss on redemption of preferred shares
—
—
—
—
(15,101)
—
(15,101)
Balance at end of period
15,042,561
15,035,644
14,641,484
14,455,868
13,842,787
15,042,561
13,842,787
Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period
(1,258,265)
(649,445)
(64,600)
49,184
230,048
(64,600)
488,895
Change in unrealized appreciation (decline) in value of available-for-sale investments
(563,174)
(540,295)
(582,077)
(103,391)
(147,825)
(1,685,546)
(384,418)
Change in foreign currency translation adjustments
(70,388)
(68,525)
(2,768)
(10,393)
(33,039)
(141,681)
(55,293)
Balance at end of period
(1,891,827)
(1,258,265)
(649,445)
(64,600)
49,184
(1,891,827)
49,184
Common shares held in treasury, at cost
Balance at beginning of period
(4,361,126)
(4,037,342)
(3,761,095)
(3,396,999)
(3,007,578)
(3,761,095)
(2,503,909)
Shares repurchased for treasury
(11,749)
(323,784)
(276,247)
(364,096)
(389,421)
(611,780)
(893,090)
Balance at end of period
(4,372,875)
(4,361,126)
(4,037,342)
(3,761,095)
(3,396,999)
(4,372,875)
(3,396,999)
Total shareholders’ equity
$
11,795,110
$
12,417,566
$
12,919,589
$
13,545,896
$
13,387,526
$
11,795,110
$
13,387,526
6
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
(U.S. Dollars in thousands)
Three Months Ended
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Operating Activities
Net income (loss)
$
18,258
$
403,945
$
197,432
$
623,675
$
421,415
$
619,635
$
1,615,787
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses
187,407
266,060
289,213
(60,054)
11,736
742,680
(367,313)
Equity in net (income) or loss of investment. funds accounted for using the equity method and other income or loss
62,590
55,235
(11,420)
(91,400)
(191,622)
106,405
(372,650)
Amortization of intangible assets
26,104
27,207
27,167
33,132
20,135
80,478
49,823
Share-based compensation
13,511
21,139
45,379
14,791
14,739
80,029
72,303
Changes in:
Reserve for losses and loss adjustment expenses, net
918,602
358,528
275,954
213,979
599,706
1,553,084
1,548,211
Unearned premiums, net
253,024
358,864
513,507
(49,203)
146,592
1,125,395
985,242
Premiums receivable
(9,951)
(485,099)
(600,691)
161,884
(65,707)
(1,095,741)
(847,098)
Deferred acquisition costs
(68,466)
(76,912)
(96,999)
(15,277)
(33,073)
(242,377)
(247,966)
Reinsurance balances payable
56,323
146,117
(74,022)
(118,506)
287,110
128,418
618,571
Other items, net
(77,653)
(172,679)
(13,957)
86,983
(196,052)
(264,289)
(427,359)
Net cash provided by operating activities
1,379,749
902,405
551,563
800,004
1,014,979
2,833,717
2,627,551
Investing Activities
Purchases of fixed maturity investments
(3,359,345)
(2,978,292)
(6,727,665)
(5,581,835)
(6,315,639)
(13,065,302)
(29,870,023)
Purchases of equity securities
(131,160)
(246,958)
(408,615)
(196,529)
(358,177)
(786,733)
(978,951)
Purchases of other investments
(349,715)
(303,725)
(616,659)
(509,040)
(316,922)
(1,270,099)
(1,350,056)
Proceeds from sales of fixed maturity investments
1,911,450
2,025,616
6,053,352
3,509,653
6,937,404
9,990,418
30,067,792
Proceeds from sales of equity securities
49,596
389,956
1,100,256
222,512
153,343
1,539,808
695,633
Proceeds from sales, redemptions and maturities of other investments
212,346
292,992
570,341
277,614
715,370
1,075,679
1,487,919
Proceeds from redemptions and maturities of fixed maturity investments
133,791
203,320
240,753
394,343
428,576
577,864
1,234,412
Net settlements of derivative instruments
(61,509)
(42,328)
(2,510)
27,758
(85,116)
(106,347)
(67,830)
Net (purchases) sales of short-term investments
288,012
70,760
(510,752)
1,338,070
(794,712)
(151,980)
(1,172,798)
Change in cash collateral related to securities lending
—
—
—
—
826
—
—
Purchase of operating affiliate, net
—
—
—
—
(207,567)
—
(753,916)
Impact of the deconsolidation of a variable interest entity
—
—
—
—
(349,202)
—
(349,202)
Purchases of fixed assets
(14,553)
(12,060)
(11,770)
(6,987)
(10,822)
(38,383)
(34,407)
Other
29,968
97,836
550
(162,007)
(156,968)
128,354
(361,857)
Net cash provided by (used for) investing activities
(1,291,119)
(502,883)
(312,719)
(686,448)
(359,606)
(2,106,721)
(1,453,284)
Financing Activities
Proceeds from issuance of preferred shares, net
—
—
—
—
—
—
485,821
Redemption of preferred shares
—
—
—
—
(450,000)
—
(450,000)
Purchases of common shares under share repurchase program
(10,147)
(320,688)
(254,988)
(362,097)
(386,882)
(585,823)
(872,197)
Proceeds from common shares issued, net
1,202
13,195
(17,260)
6,137
96
(2,863)
281
Change in cash collateral related to securities lending
—
—
—
—
(826)
—
—
Change in third party investment in non-redeemable noncontrolling interests
—
—
—
—
—
—
15,971
Dividends paid to redeemable noncontrolling interests
—
—
—
—
—
—
(1,907)
Other
(2,632)
(130,866)
48,859
18,474
(49,391)
(84,639)
(21,752)
Preferred dividends paid
(10,184)
(10,184)
(10,184)
(10,184)
(17,291)
(30,552)
(38,096)
Net cash provided by (used for) financing activities
(21,761)
(448,543)
(233,573)
(347,670)
(904,294)
(703,877)
(881,879)
Effects of exchange rate changes on foreign currency cash and restricted cash
(36,776)
(38,866)
(3,924)
(24)
(20,633)
(79,566)
(34,023)
Increase (decrease) in cash and restricted cash
30,093
(87,887)
1,347
(234,138)
(269,554)
(56,447)
258,365
Cash and restricted cash, beginning of period
1,228,231
1,316,118
1,314,771
1,548,909
1,818,463
1,314,771
1,290,544
Cash and restricted cash, end of period
$
1,258,324
$
1,228,231
$
1,316,118
$
1,314,771
$
1,548,909
$
1,258,324
$
1,548,909
Income taxes paid (received)
$
72,930
$
119,616
$
9,005
$
84,371
$
61,343
$
201,551
$
202,439
Interest paid
$
416
$
63,948
$
648
$
63,498
$
1,104
$
65,012
$
75,803
Net cash provided by operating activities, excluding the ‘other’ segment
$
1,379,749
$
902,405
$
551,563
$
800,004
$
1,014,979
$
2,833,717
$
2,580,697
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 segment. 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, the Chief Financial Officer and Treasurer of Arch and the President and Chief Underwriting Officer of Arch. 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, cyber insurance, 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. Reinsurance agreements are typically offered on a proportional and/or excess of loss basis and provide coverage to ceding company clients for specific underlying written policies. Product lines include:
•Casualty: provides coverage on third party liability exposures including, among others, executive assurance, professional liability, excess and umbrella liability, excess motor and healthcare business, and workers’ compensation. Business is assumed primarily on a treaty basis, with some facultative coverages also offered.
•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 for proportional motor reinsurance, whole account multi-line treaties, cyber, trade credit and surety, accident and health, workers’ compensation catastrophe, agriculture and political risk, among others.
•Property catastrophe: provides protection for most types of catastrophic losses, including hurricane, earthquake, flood, tornado, hail and fire, and for other perils on a case-by-case basis. Excess of loss coverages are triggered 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 personal lines and/or 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 either a treaty or facultative basis.
•Other: includes life reinsurance business, 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 underwriting units which offer mortgage insurance and reinsurance products on a worldwide basis. Underwriting units include:
•U.S. primary mortgage insurance: offers private mortgage insurance through Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”), both approved eligible mortgage insurers by Fannie Mae and Freddie Mac. Arch MI U.S. also includes Arch Mortgage Guaranty Company, which is not a government sponsored enterprise (“GSE”) approved entity.
•U.S. credit risk transfer (“CRT”) and other: underwrites CRT transactions, which are predominantly with GSEs, and other U.S. reinsurance transactions.
•International mortgage insurance/reinsurance: underwrites mortgage insurance and reinsurance outside of the U.S.
Corporate Segment
The corporate segment results include net investment income, 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, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, net foreign exchange gains or losses, income taxes items, income or loss from operating affiliates and items related to the Company’s non-cumulative preferred shares. Such amounts exclude the results of the ‘other’ segment.
Other Segment
Through June 30, 2021, the ‘other’ segment included the results of Somers. Pursuant to GAAP, Somers was considered a variable interest entity and the Company concluded that it was the primary beneficiary of Somers. As such, the Company consolidated the results of Somers in its consolidated financial statements through June 30, 2021. The portion of Somers’ earnings attributable to third party investors was 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. In July 2021, the Company announced the completion of the previously disclosed acquisition of Somers by Greysbridge. Based on the governing documents of Greysbridge, the Company has concluded that, while it retains significant influence over Somers, Somers no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Somers in its consolidated financial statements.
9
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)
Three Months Ended
September 30, 2022
Insurance
Reinsurance
Mortgage
Sub-total (Core)
Other
Total
Gross premiums written (1)
$
1,862,026
$
1,639,061
$
362,409
$
3,860,683
$
—
$
3,860,683
Premiums ceded
(493,267)
(560,225)
(86,230)
(1,136,909)
—
(1,136,909)
Net premiums written
1,368,759
1,078,836
276,179
2,723,774
—
2,723,774
Change in unearned premiums
(181,851)
(77,062)
5,889
(253,024)
—
(253,024)
Net premiums earned
1,186,908
1,001,774
282,068
2,470,750
—
2,470,750
Other underwriting income (loss)
—
452
2,625
3,077
—
3,077
Losses and loss adjustment expenses
(822,663)
(927,911)
67,878
(1,682,696)
—
(1,682,696)
Acquisition expenses
(232,469)
(208,425)
(6,693)
(447,587)
—
(447,587)
Other operating expenses
(165,499)
(62,777)
(46,471)
(274,747)
—
(274,747)
Underwriting income (loss)
$
(33,723)
$
(196,887)
$
299,407
68,797
—
68,797
Net investment income
128,640
—
128,640
Net realized gains (losses)
(183,673)
—
(183,673)
Equity in net income (loss) of investment funds accounted for using the equity method
(18,861)
—
(18,861)
Other income (loss)
(13,684)
—
(13,684)
Corporate expenses (2)
(17,634)
—
(17,634)
Transaction costs and other (2)
(76)
—
(76)
Amortization of intangible assets
(26,104)
—
(26,104)
Interest expense
(33,063)
—
(33,063)
Net foreign exchange gains (losses)
90,509
—
90,509
Income (loss) before income taxes and income (loss) from operating affiliates
(5,149)
—
(5,149)
Income tax (expense) benefit
14,900
—
14,900
Income (loss) from operating affiliates
8,507
—
8,507
Net income (loss)
18,258
—
18,258
Dividends attributable to redeemable noncontrolling interests
(1,157)
—
(1,157)
Net income (loss) available to Arch
17,101
—
17,101
Preferred dividends
(10,184)
—
(10,184)
Net income (loss) available to Arch common shareholders
$
6,917
$
—
$
6,917
Underwriting Ratios
Loss ratio
69.3
%
92.6
%
(24.1)
%
68.1
%
—
%
68.1
%
Acquisition expense ratio
19.6
%
20.8
%
2.4
%
18.1
%
—
%
18.1
%
Other operating expense ratio
13.9
%
6.3
%
16.5
%
11.1
%
—
%
11.1
%
Combined ratio
102.8
%
119.7
%
(5.2)
%
97.3
%
—
%
97.3
%
Net premiums written to gross premiums written
73.5
%
65.8
%
76.2
%
70.6
%
—
%
70.6
%
Total investable assets
$
26,682,006
$
—
$
26,682,006
Total assets
46,337,104
—
46,337,104
Total liabilities
34,533,086
—
34,533,086
(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
September 30, 2021
Insurance
Reinsurance
Mortgage
Sub-total (Core)
Other
Total
Gross premiums written (1)
$
1,596,619
$
1,251,760
$
360,934
$
3,207,415
$
—
$
3,207,415
Premiums ceded
(442,806)
(630,371)
(60,207)
(1,131,486)
—
(1,131,486)
Net premiums written
1,153,813
621,389
300,727
2,075,929
—
2,075,929
Change in unearned premiums
(215,143)
57,313
11,238
(146,592)
—
(146,592)
Net premiums earned
938,670
678,702
311,965
1,929,337
—
1,929,337
Other underwriting income (loss)
—
3,293
3,981
7,274
—
7,274
Losses and loss adjustment expenses
(668,630)
(545,846)
(11,543)
(1,226,019)
—
(1,226,019)
Acquisition expenses
(152,467)
(129,450)
(24,098)
(306,015)
—
(306,015)
Other operating expenses
(138,931)
(45,647)
(46,254)
(230,832)
—
(230,832)
Underwriting income (loss)
$
(21,358)
$
(38,948)
$
234,051
173,745
—
173,745
Net investment income
88,195
—
88,195
Net realized gains (losses)
(25,040)
—
(25,040)
Equity in net income (loss) of investment funds accounted for using the equity method
105,398
—
105,398
Other income (loss)
(3,960)
—
(3,960)
Corporate expenses (2)
(18,636)
—
(18,636)
Transaction costs and other (2)
(1,036)
—
(1,036)
Amortization of intangible assets
(20,135)
—
(20,135)
Interest expense
(33,176)
—
(33,176)
Net foreign exchange gains (losses)
36,078
—
36,078
Income (loss) before income taxes and income (loss) from operating affiliates
301,433
—
301,433
Income tax (expense) benefit
(4,137)
—
(4,137)
Income (loss) from operating affiliates
124,119
—
124,119
Net income (loss)
421,415
—
421,415
Dividends attributable to redeemable noncontrolling interests
(1,473)
—
(1,473)
Net income (loss) available to Arch
419,942
—
419,942
Preferred dividends
(16,090)
—
(16,090)
Net income (loss) available to Arch common shareholders
$
388,751
$
—
$
388,751
Underwriting Ratios
Loss ratio
71.2
%
80.4
%
3.7
%
63.5
%
—
%
63.5
%
Acquisition expense ratio
16.2
%
19.1
%
7.7
%
15.9
%
—
%
15.9
%
Other operating expense ratio
14.8
%
6.7
%
14.8
%
12.0
%
—
%
12.0
%
Combined ratio
102.2
%
106.2
%
26.2
%
91.4
%
—
%
91.4
%
Net premiums written to gross premiums written
72.3
%
49.6
%
83.3
%
64.7
%
—
%
64.7
%
Total investable assets
$
27,278,440
$
—
$
27,278,440
Total assets
44,783,736
—
44,783,736
Total liabilities
31,385,973
—
31,385,973
(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)
Nine Months Ended
September 30, 2022
Insurance
Reinsurance
Mortgage
Sub-total (Core)
Other
Total
Gross premiums written (1)
$
5,286,798
$
5,151,401
$
1,099,144
$
11,531,185
$
—
$
11,531,185
Premiums ceded
(1,482,886)
(1,770,807)
(241,097)
(3,488,632)
—
(3,488,632)
Net premiums written
3,803,912
3,380,594
858,047
8,042,553
—
8,042,553
Change in unearned premiums
(488,164)
(646,421)
9,190
(1,125,395)
—
(1,125,395)
Net premiums earned
3,315,748
2,734,173
867,237
6,917,158
—
6,917,158
Other underwriting income (loss)
—
5,814
6,130
11,944
—
11,944
Losses and loss adjustment expenses
(2,053,161)
(1,920,189)
187,163
(3,786,187)
—
(3,786,187)
Acquisition expenses
(641,807)
(569,915)
(27,343)
(1,239,065)
—
(1,239,065)
Other operating expenses
(493,412)
(198,606)
(150,064)
(842,082)
—
(842,082)
Underwriting income (loss)
$
127,368
$
51,277
$
883,123
1,061,768
—
1,061,768
Net investment income
315,468
—
315,468
Net realized gains (losses)
(742,666)
—
(742,666)
Equity in net income (loss) of investment funds accounted for using the equity method
75,505
—
75,505
Other income (loss)
(34,486)
—
(34,486)
Corporate expenses (2)
(76,928)
—
(76,928)
Transaction costs and other (2)
(734)
—
(734)
Amortization of intangible assets
(80,478)
—
(80,478)
Interest expense
(98,566)
—
(98,566)
Net foreign exchange gains (losses)
182,129
—
182,129
Income (loss) before income taxes and income (loss) from operating affiliates
601,012
—
601,012
Income tax (expense) benefit
(19,042)
—
(19,042)
Income (loss) from operating affiliates
37,665
—
37,665
Net income (loss)
619,635
—
619,635
Dividends attributable to redeemable noncontrolling interests
(2,390)
—
(2,390)
Net income (loss) available to Arch
617,245
—
617,245
Preferred dividends
(30,552)
—
(30,552)
Net income (loss) available to Arch common shareholders
$
586,693
$
—
$
586,693
Underwriting Ratios
Loss ratio
61.9
%
70.2
%
(21.6)
%
54.7
%
—
%
54.7
%
Acquisition expense ratio
19.4
%
20.8
%
3.2
%
17.9
%
—
%
17.9
%
Other operating expense ratio
14.9
%
7.3
%
17.3
%
12.2
%
—
%
12.2
%
Combined ratio
96.2
%
98.3
%
(1.1)
%
84.8
%
—
%
84.8
%
Net premiums written to gross premiums written
72.0
%
65.6
%
78.1
%
69.7
%
—
%
69.7
%
(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)
Nine Months Ended
September 30, 2021
Insurance
Reinsurance
Mortgage
Sub-total (Core)
Other
Total
Gross premiums written (1)
$
4,381,372
$
4,080,840
$
1,143,691
$
9,602,213
$
457,465
$
9,890,912
Premiums ceded
(1,269,165)
(1,535,607)
(171,923)
(2,973,005)
(102,763)
(2,907,002)
Net premiums written
3,112,207
2,545,233
971,768
6,629,208
354,702
6,983,910
Change in unearned premiums
(488,636)
(484,607)
10,735
(962,508)
(22,734)
(985,242)
Net premiums earned
2,623,571
2,060,626
982,503
5,666,700
331,968
5,998,668
Other underwriting income (loss)
—
3,148
15,026
18,174
739
18,913
Losses and loss adjustment expenses
(1,750,257)
(1,494,539)
(85,112)
(3,329,908)
(259,042)
(3,588,950)
Acquisition expenses
(417,541)
(381,060)
(84,297)
(882,898)
(62,741)
(945,639)
Other operating expenses
(409,386)
(150,856)
(143,697)
(703,939)
(32,869)
(736,808)
Underwriting income (loss)
$
46,387
$
37,319
$
684,423
768,129
(21,945)
746,184
Net investment income
256,354
42,310
298,664
Net realized gains (losses)
239,690
80,638
320,328
Equity in net income (loss) of investment funds accounted for using the equity method
299,270
—
299,270
Other income (loss)
1,151
—
1,151
Corporate expenses (2)
(59,279)
—
(59,279)
Transaction costs and other (2)
(793)
(935)
(1,728)
Amortization of intangible assets
(48,925)
(898)
(49,823)
Interest expense
(98,812)
(8,410)
(107,222)
Net foreign exchange gains (losses)
39,691
(1,325)
38,366
Income (loss) before income taxes and income (loss) from operating affiliates
1,396,476
89,435
1,485,911
Income tax (expense) benefit
(93,942)
(234)
(94,176)
Income (loss) from operating affiliates
224,052
—
224,052
Net income (loss)
1,526,586
89,201
1,615,787
Dividends attributable to redeemable noncontrolling interests
(1,936)
(1,953)
(3,889)
Amounts attributable to nonredeemable noncontrolling interests
—
(78,314)
(78,314)
Net income (loss) available to Arch
1,524,650
8,934
1,533,584
Preferred dividends
(38,159)
—
(38,159)
Loss on redemption of preferred shares
(15,101)
—
(15,101)
Net income (loss) available to Arch common shareholders
$
1,471,390
$
8,934
$
1,480,324
Underwriting Ratios
Loss ratio
66.7
%
72.5
%
8.7
%
58.8
%
78.0
%
59.8
%
Acquisition expense ratio
15.9
%
18.5
%
8.6
%
15.6
%
18.9
%
15.8
%
Other operating expense ratio
15.6
%
7.3
%
14.6
%
12.4
%
9.9
%
12.3
%
Combined ratio
98.2
%
98.3
%
31.9
%
86.8
%
106.8
%
87.9
%
Net premiums written to gross premiums written
71.0
%
62.4
%
85.0
%
69.0
%
77.5
%
70.6
%
(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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Gross premiums written
$
1,862,026
$
1,705,167
$
1,719,605
$
1,486,362
$
1,596,619
$
5,286,798
$
4,381,372
Premiums ceded
(493,267)
(476,910)
(512,709)
(450,376)
(442,806)
(1,482,886)
(1,269,165)
Net premiums written
1,368,759
1,228,257
1,206,896
1,035,986
1,153,813
3,803,912
3,112,207
Change in unearned premiums
(181,851)
(126,113)
(180,200)
(33,089)
(215,143)
(488,164)
(488,636)
Net premiums earned
1,186,908
1,102,144
1,026,696
1,002,897
938,670
3,315,748
2,623,571
Losses and loss adjustment expenses
(822,663)
(629,759)
(600,739)
(594,108)
(668,630)
(2,053,161)
(1,750,257)
Acquisition expenses
(232,469)
(213,688)
(195,650)
(188,724)
(152,467)
(641,807)
(417,541)
Other operating expenses
(165,499)
(161,088)
(166,825)
(149,520)
(138,931)
(493,412)
(409,386)
Underwriting income (loss)
$
(33,723)
$
97,609
$
63,482
$
70,545
$
(21,358)
$
127,368
$
46,387
Underwriting Ratios
Loss ratio
69.3
%
57.1
%
58.5
%
59.2
%
71.2
%
61.9
%
66.7
%
Acquisition expense ratio
19.6
%
19.4
%
19.1
%
18.8
%
16.2
%
19.4
%
15.9
%
Other operating expense ratio
13.9
%
14.6
%
16.2
%
14.9
%
14.8
%
14.9
%
15.6
%
Combined ratio
102.8
%
91.1
%
93.8
%
92.9
%
102.2
%
96.2
%
98.2
%
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums
13.4
%
1.5
%
3.1
%
2.0
%
12.2
%
6.2
%
7.0
%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
(0.1)
%
(0.4)
%
(0.1)
%
(0.3)
%
(0.5)
%
(0.2)
%
(0.5)
%
Combined ratio excluding catastrophic activity and prior year development (1)
89.5
%
90.0
%
90.8
%
91.2
%
90.5
%
90.2
%
91.7
%
Net premiums written to gross premiums written
73.5
%
72.0
%
70.2
%
69.7
%
72.3
%
72.0
%
71.0
%
(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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Net premiums written
Professional Lines
$
412,173
30.1
%
$
349,402
28.4
%
$
347,841
28.8
%
$
373,752
36.1
%
$
310,185
26.9
%
$
1,109,416
29.2
%
$
803,392
25.8
%
Property, energy, marine and aviation
241,357
17.6
%
245,724
20.0
%
200,661
16.6
%
158,120
15.3
%
205,021
17.8
%
687,742
18.1
%
564,462
18.1
%
Programs
189,263
13.8
%
163,339
13.3
%
129,401
10.7
%
92,002
8.9
%
196,048
17.0
%
482,003
12.7
%
503,822
16.2
%
Excess and surplus casualty
110,917
8.1
%
120,509
9.8
%
100,289
8.3
%
101,199
9.8
%
98,320
8.5
%
331,715
8.7
%
258,259
8.3
%
Travel, accident and health
107,434
7.8
%
105,970
8.6
%
165,332
13.7
%
79,176
7.6
%
62,837
5.4
%
378,736
10.0
%
226,214
7.3
%
Construction and national accounts
98,381
7.2
%
100,656
8.2
%
135,683
11.2
%
98,468
9.5
%
102,294
8.9
%
334,720
8.8
%
333,484
10.7
%
Lenders products
41,889
3.1
%
36,042
2.9
%
25,232
2.1
%
32,833
3.2
%
38,905
3.4
%
103,163
2.7
%
114,151
3.7
%
Other
167,345
12.2
%
106,615
8.7
%
102,457
8.5
%
100,436
9.7
%
140,203
12.2
%
376,417
9.9
%
308,423
9.9
%
Total
$
1,368,759
100.0
%
$
1,228,257
100.0
%
$
1,206,896
100.0
%
$
1,035,986
100.0
%
$
1,153,813
100.0
%
$
3,803,912
100.0
%
$
3,112,207
100.0
%
Underwriting location
United States
$
915,833
66.9
%
$
842,851
68.6
%
$
794,662
65.8
%
$
680,840
65.7
%
$
797,395
69.1
%
$
2,553,346
67.1
%
$
2,132,199
68.5
%
Europe
380,063
27.8
%
316,363
25.8
%
357,897
29.7
%
292,591
28.2
%
301,877
26.2
%
1,054,323
27.7
%
832,601
26.8
%
Other
72,863
5.3
%
69,043
5.6
%
54,337
4.5
%
62,555
6.0
%
54,541
4.7
%
196,243
5.2
%
147,407
4.7
%
Total
$
1,368,759
100.0
%
$
1,228,257
100.0
%
$
1,206,896
100.0
%
$
1,035,986
100.0
%
$
1,153,813
100.0
%
$
3,803,912
100.0
%
$
3,112,207
100.0
%
Net premiums earned
Professional Lines
$
341,833
28.8
%
$
314,115
28.5
%
$
289,813
28.2
%
$
280,041
27.9
%
$
249,007
26.5
%
$
945,761
28.5
%
$
662,776
25.3
%
Property, energy, marine and aviation
202,483
17.1
%
180,663
16.4
%
174,335
17.0
%
179,566
17.9
%
178,167
19.0
%
557,481
16.8
%
488,326
18.6
%
Programs
150,453
12.7
%
148,681
13.5
%
139,809
13.6
%
137,754
13.7
%
137,299
14.6
%
438,943
13.2
%
369,113
14.1
%
Excess and surplus casualty
100,175
8.4
%
98,369
8.9
%
90,761
8.8
%
85,713
8.5
%
84,048
9.0
%
289,305
8.7
%
232,314
8.9
%
Travel, accident and health
133,445
11.2
%
130,185
11.8
%
104,630
10.2
%
87,212
8.7
%
56,102
6.0
%
368,260
11.1
%
168,378
6.4
%
Construction and national accounts
109,905
9.3
%
98,831
9.0
%
97,468
9.5
%
98,510
9.8
%
104,261
11.1
%
306,204
9.2
%
317,597
12.1
%
Lenders products
33,253
2.8
%
27,594
2.5
%
30,588
3.0
%
34,451
3.4
%
33,030
3.5
%
91,435
2.8
%
119,507
4.6
%
Other
115,361
9.7
%
103,706
9.4
%
99,292
9.7
%
99,650
9.9
%
96,756
10.3
%
318,359
9.6
%
265,560
10.1
%
Total
$
1,186,908
100.0
%
$
1,102,144
100.0
%
$
1,026,696
100.0
%
$
1,002,897
100.0
%
$
938,670
100.0
%
$
3,315,748
100.0
%
$
2,623,571
100.0
%
15
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment
(U.S. Dollars in thousands)
Three Months Ended
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Gross premiums written
$
1,639,061
$
1,793,398
$
1,718,942
$
1,013,090
$
1,251,760
$
5,151,401
$
4,080,840
Premiums ceded
(560,225)
(630,764)
(579,818)
(303,949)
(630,371)
(1,770,807)
(1,535,607)
Net premiums written
1,078,836
1,162,634
1,139,124
709,141
621,389
3,380,594
2,545,233
Change in unearned premiums
(77,062)
(234,635)
(334,724)
70,676
57,313
(646,421)
(484,607)
Net premiums earned
1,001,774
927,999
804,400
779,817
678,702
2,734,173
2,060,626
Other underwriting income (loss)
452
4,526
836
521
3,293
5,814
3,148
Losses and loss adjustment expenses
(927,911)
(537,578)
(454,700)
(430,180)
(545,846)
(1,920,189)
(1,494,539)
Acquisition expenses
(208,425)
(189,494)
(171,996)
(155,694)
(129,450)
(569,915)
(381,060)
Other operating expenses
(62,777)
(66,053)
(69,776)
(61,954)
(45,647)
(198,606)
(150,856)
Underwriting income (loss)
$
(196,887)
$
139,400
$
108,764
$
132,510
$
(38,948)
$
51,277
$
37,319
Underwriting Ratios
Loss ratio
92.6
%
57.9
%
56.5
%
55.2
%
80.4
%
70.2
%
72.5
%
Acquisition expense ratio
20.8
%
20.4
%
21.4
%
20.0
%
19.1
%
20.8
%
18.5
%
Other operating expense ratio
6.3
%
7.1
%
8.7
%
7.9
%
6.7
%
7.3
%
7.3
%
Combined ratio
119.7
%
85.4
%
86.6
%
83.1
%
106.2
%
98.3
%
98.3
%
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums
39.1
%
7.1
%
6.7
%
6.7
%
32.6
%
18.7
%
18.7
%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
(4.9)
%
(4.5)
%
(2.8)
%
(6.4)
%
(9.6)
%
(4.2)
%
(5.3)
%
Combined ratio excluding catastrophic activity and prior year development (1)
85.5
%
82.8
%
82.7
%
82.8
%
83.2
%
83.8
%
84.9
%
Net premiums written to gross premiums written
65.8
%
64.8
%
66.3
%
70.0
%
49.6
%
65.6
%
62.4
%
(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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Net premiums written
Other Specialty
$
381,004
35.3
%
$
434,710
37.4
%
$
363,834
31.9
%
$
207,812
29.3
%
$
167,006
26.9
%
$
1,179,548
34.9
%
$
747,662
29.4
%
Property excluding property catastrophe
341,809
31.7
%
299,042
25.7
%
295,419
25.9
%
225,127
31.7
%
237,025
38.1
%
936,270
27.7
%
778,959
30.6
%
Casualty
230,308
21.3
%
212,724
18.3
%
266,455
23.4
%
176,952
25.0
%
187,066
30.1
%
709,487
21.0
%
631,212
24.8
%
Property catastrophe
77,606
7.2
%
154,451
13.3
%
128,971
11.3
%
35,536
5.0
%
(7,125)
(1.1)
%
361,028
10.7
%
197,724
7.8
%
Marine and aviation
28,633
2.7
%
35,129
3.0
%
51,817
4.5
%
40,708
5.7
%
19,159
3.1
%
115,579
3.4
%
131,045
5.1
%
Other
19,476
1.8
%
26,578
2.3
%
32,628
2.9
%
23,006
3.2
%
18,258
2.9
%
78,682
2.3
%
58,631
2.3
%
Total
$
1,078,836
100.0
%
$
1,162,634
100.0
%
$
1,139,124
100.0
%
$
709,141
100.0
%
$
621,389
100.0
%
$
3,380,594
100.0
%
$
2,545,233
100.0
%
Underwriting location
Bermuda
$
520,594
48.3
%
$
589,169
50.7
%
$
541,312
47.5
%
$
340,108
48.0
%
$
221,336
35.6
%
$
1,651,075
48.8
%
$
1,217,186
47.8
%
United States
312,179
28.9
%
286,925
24.7
%
270,667
23.8
%
201,079
28.4
%
207,815
33.4
%
869,771
25.7
%
627,425
24.7
%
Europe and other
246,063
22.8
%
286,540
24.6
%
327,145
28.7
%
167,954
23.7
%
192,238
30.9
%
859,748
25.4
%
700,622
27.5
%
Total
$
1,078,836
100.0
%
$
1,162,634
100.0
%
$
1,139,124
100.0
%
$
709,141
100.0
%
$
621,389
100.0
%
$
3,380,594
100.0
%
$
2,545,233
100.0
%
Net premiums earned
Other Specialty
$
330,142
33.0
%
$
284,321
30.6
%
$
231,618
28.8
%
$
247,437
31.7
%
$
195,649
28.8
%
$
846,081
30.9
%
$
571,364
27.7
%
Property excluding property catastrophe
282,488
28.2
%
266,545
28.7
%
232,529
28.9
%
235,731
30.2
%
210,280
31.0
%
781,562
28.6
%
600,842
29.2
%
Casualty
221,636
22.1
%
214,714
23.1
%
197,858
24.6
%
174,180
22.3
%
159,697
23.5
%
634,208
23.2
%
492,574
23.9
%
Property catastrophe
117,820
11.8
%
94,679
10.2
%
77,076
9.6
%
55,453
7.1
%
61,107
9.0
%
289,575
10.6
%
225,285
10.9
%
Marine and aviation
25,182
2.5
%
41,768
4.5
%
42,192
5.2
%
40,256
5.2
%
29,818
4.4
%
109,142
4.0
%
112,699
5.5
%
Other
24,506
2.4
%
25,972
2.8
%
23,127
2.9
%
26,760
3.4
%
22,151
3.3
%
73,605
2.7
%
57,862
2.8
%
Total
$
1,001,774
100.0
%
$
927,999
100.0
%
$
804,400
100.0
%
$
779,817
100.0
%
$
678,702
100.0
%
$
2,734,173
100.0
%
$
2,060,626
100.0
%
17
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in thousands)
Three Months Ended
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Gross premiums written
$
362,409
$
371,896
$
364,839
$
364,134
$
360,934
$
1,099,144
$
1,143,691
Premiums ceded
(86,230)
(78,148)
(76,719)
(74,834)
(60,207)
(241,097)
(171,923)
Net premiums written
276,179
293,748
288,120
289,300
300,727
858,047
971,768
Change in unearned premiums
5,889
1,884
1,417
11,616
11,238
9,190
10,735
Net premiums earned
282,068
295,632
289,537
300,916
311,965
867,237
982,503
Other underwriting income (1)
2,625
(1,556)
5,061
2,639
3,981
6,130
15,026
Losses and loss adjustment expenses
67,878
64,681
54,604
28,435
(11,543)
187,163
(85,112)
Acquisition expenses
(6,693)
(10,137)
(10,513)
(13,121)
(24,098)
(27,343)
(84,297)
Other operating expenses
(46,471)
(50,251)
(53,342)
(50,313)
(46,254)
(150,064)
(143,697)
Underwriting income
$
299,407
$
298,369
$
285,347
$
268,556
$
234,051
$
883,123
$
684,423
Underwriting Ratios
Loss ratio
(24.1)
%
(21.9)
%
(18.9)
%
(9.4)
%
3.7
%
(21.6)
%
8.7
%
Acquisition expense ratio
2.4
%
3.4
%
3.6
%
4.4
%
7.7
%
3.2
%
8.6
%
Other operating expense ratio
16.5
%
17.0
%
18.4
%
16.7
%
14.8
%
17.3
%
14.6
%
Combined ratio
(5.2)
%
(1.5)
%
3.1
%
11.7
%
26.2
%
(1.1)
%
31.9
%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
(45.1)
%
(40.7)
%
(36.5)
%
(24.2)
%
(15.5)
%
(40.7)
%
(10.6)
%
Combined ratio excluding prior year development (2)
39.9
%
39.2
%
39.6
%
35.9
%
41.7
%
39.6
%
42.5
%
Net premiums written to gross premiums written
76.2
%
79.0
%
79.0
%
79.4
%
83.3
%
78.1
%
85.0
%
Net premiums written by underwriting location
United States
$
188,290
$
201,166
$
201,150
$
210,988
$
221,315
$
590,606
$
703,489
Other
87,889
92,582
86,970
78,312
79,412
267,441
268,279
Total
$
276,179
$
293,748
$
288,120
$
289,300
$
300,727
$
858,047
$
971,768
United States %
68.2
%
68.5
%
69.8
%
72.9
%
73.6
%
68.8
%
72.4
%
Other %
31.8
%
31.5
%
30.2
%
27.1
%
26.4
%
31.2
%
27.6
%
(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)
September 30, 2022
June 30, 2022
March 31, 2022
December 31, 2021
September 30, 2021
Insurance In Force (IIF) (1)
U.S. primary mortgage insurance
$
294,857
58.8
%
$
291,952
59.8
%
$
283,484
59.7
%
$
280,945
61.0
%
$
280,379
61.3
%
U.S. credit risk transfer (CRT) and other (2)
143,897
28.7
%
129,203
26.5
%
122,189
25.8
%
110,018
23.9
%
108,203
23.6
%
International mortgage insurance/reinsurance (3)
63,068
12.6
%
67,082
13.7
%
68,800
14.5
%
69,655
15.1
%
69,127
15.1
%
Total
$
501,822
100.0
%
$
488,237
100.0
%
$
474,473
100.0
%
$
460,618
100.0
%
$
457,709
100.0
%
Risk In Force (RIF) (4)
U.S. primary mortgage insurance
$
75,343
85.1
%
$
74,258
85.0
%
$
71,699
84.3
%
$
70,619
84.3
%
$
70,320
84.8
%
U.S. credit risk transfer and other (2)
6,473
7.3
%
6,037
6.9
%
5,670
6.7
%
5,120
6.1
%
4,817
5.8
%
International mortgage insurance/reinsurance (3)
6,727
7.6
%
7,103
8.1
%
7,709
9.1
%
7,983
9.5
%
7,803
9.4
%
Total
$
88,543
100.0
%
$
87,398
100.0
%
$
85,078
100.0
%
$
83,722
100.0
%
$
82,940
100.0
%
Supplemental disclosures for U.S. primary mortgage insurance:
Total RIF by credit quality (FICO score):
>=740
$
46,538
61.8
%
$
45,612
61.4
%
$
43,509
60.7
%
$
42,451
60.1
%
$
41,927
59.6
%
680-739
24,671
32.7
%
24,409
32.9
%
23,827
33.2
%
23,646
33.5
%
23,732
33.7
%
620-679
3,850
5.1
%
3,942
5.3
%
4,052
5.7
%
4,196
5.9
%
4,323
6.1
%
<620
284
0.4
%
295
0.4
%
311
0.4
%
326
0.5
%
338
0.5
%
Total
$
75,343
100.0
%
$
74,258
100.0
%
$
71,699
100.0
%
$
70,619
100.0
%
$
70,320
100.0
%
Weighted average FICO score
748
747
747
746
745
Total RIF by Loan-To-Value (LTV):
95.01% and above
$
7,334
9.7
%
$
7,400
10.0
%
$
7,421
10.4
%
$
7,538
10.7
%
$
7,708
11.0
%
90.01% to 95.00%
43,049
57.1
%
41,951
56.5
%
39,882
55.6
%
38,829
55.0
%
38,378
54.6
%
85.01% to 90.00%
20,876
27.7
%
20,718
27.9
%
20,183
28.1
%
20,006
28.3
%
19,980
28.4
%
85.00% and below
4,084
5.4
%
4,189
5.6
%
4,213
5.9
%
4,246
6.0
%
4,254
6.0
%
Total
$
75,343
100.0
%
$
74,258
100.0
%
$
71,699
100.0
%
$
70,619
100.0
%
$
70,320
100.0
%
Weighted average LTV
92.9
%
92.8
%
92.8
%
92.8
%
92.8
%
Total RIF by State:
California
$
6,219
8.3
%
$
6,077
8.2
%
$
5,781
8.1
%
$
5,559
7.9
%
$
5,451
7.8
%
Texas
6,080
8.1
%
5,971
8.0
%
5,733
8.0
%
5,594
7.9
%
5,590
7.9
%
Florida
3,275
4.3
%
3,301
4.4
%
3,272
4.6
%
3,303
4.7
%
3,344
4.8
%
Georgia
3,150
4.2
%
3,109
4.2
%
2,978
4.2
%
2,902
4.1
%
2,908
4.1
%
North Carolina
3,139
4.2
%
3,075
4.1
%
2,964
4.1
%
2,921
4.1
%
2,921
4.2
%
Illinois
3,087
4.1
%
3,054
4.1
%
2,955
4.1
%
2,933
4.2
%
2,920
4.2
%
Minnesota
2,996
4.0
%
2,980
4.0
%
2,913
4.1
%
2,916
4.1
%
2,936
4.2
%
Massachusetts
2,771
3.7
%
2,684
3.6
%
2,566
3.6
%
2,537
3.6
%
2,519
3.6
%
Virginia
2,647
3.5
%
2,634
3.5
%
2,504
3.5
%
2,446
3.5
%
2,412
3.4
%
Michigan
2,587
3.4
%
2,558
3.4
%
2,509
3.5
%
2,492
3.5
%
2,500
3.6
%
Other
39,392
52.3
%
38,815
52.3
%
37,524
52.3
%
37,016
52.4
%
36,819
52.4
%
Total
$
75,343
100.0
%
$
74,258
100.0
%
$
71,699
100.0
%
$
70,619
100.0
%
$
70,320
100.0
%
Weighted average coverage (end of period RIF divided by IIF)
25.6
%
25.4
%
25.3
%
25.1
%
25.1
%
U.S. mortgage insurance total RIF, net of reinsurance (5)
$
56,890
$
56,529
$
54,792
$
54,574
$
54,847
Analysts’ persistency (6)
75.4
%
71.3
%
66.9
%
62.4
%
57.7
%
Risk-to-capital ratio -- Arch MI U.S. (7)
7.6:1
7.8:1
7.8:1
8.0:1
8.6:1
PMIER sufficiency ratio -- Arch MI U.S. (8)
237
%
219
%
205
%
197
%
195
%
(1) The aggregate dollar amount of each insured mortgage loan’s current principal balance.
(5) Total RIF for the U.S. mortgage insurance operations (see note 4) after external reinsurance.
(2) Includes all CRT transactions, which are predominantly with GSEs, and other U.S. reinsurance transactions.
(6) Represents the % of IIF at the beginning of a 12-mo. period that remained in force at the end of the period.
(3) International mortgage insurance and reinsurance with risk primarily located in Australia and to lesser extent Europe and Asia.
(7) Represents current (non-delinquent) RIF, net of reinsurance, divided by statutory capital (estimate for September 30, 2022).
(4) 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 or reinsurance transactions
(8) Calculated as available assets divided by required assets as defined within PMIERs (estimate for September 30, 2022). There was approximately $2.18 billion of excess available assets at September 30, 2022.
19
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in millions, except policy/loan/claim count)
Three Months Ended
September 30, 2022
June 30, 2022
March 31, 2022
December 31, 2021
September 30, 2021
Supplemental disclosures for U.S. primary mortgage insurance:
Total new insurance written (NIW) (1)
$
17,425
$
23,499
$
20,015
$
22,544
$
27,841
Total NIW by credit quality (FICO score):
>=740
$
11,615
66.7
%
$
16,121
68.6
%
$
13,152
65.7
%
$
14,349
63.6
%
$
17,514
62.9
%
680-739
5,322
30.5
%
6,800
28.9
%
6,254
31.2
%
7,238
32.1
%
9,012
32.4
%
620-679
485
2.8
%
576
2.5
%
606
3.0
%
957
4.2
%
1,315
4.7
%
<620
3
—
%
2
—
%
3
—
%
—
—
%
—
—
%
Total
$
17,425
100.0
%
$
23,499
100.0
%
$
20,015
100.0
%
$
22,544
100.0
%
$
27,841
100.0
%
Total NIW by LTV:
95.01% and above
$
973
5.6
%
$
1,195
5.1
%
$
1,096
5.5
%
$
1,475
6.5
%
$
1,554
5.6
%
90.01% to 95.00%
9,916
56.9
%
13,290
56.6
%
10,778
53.8
%
11,382
50.5
%
14,240
51.1
%
85.01% to 90.00%
4,839
27.8
%
6,591
28.0
%
5,733
28.6
%
6,677
29.6
%
8,394
30.1
%
85.00% and below
1,697
9.7
%
2,423
10.3
%
2,408
12.0
%
3,010
13.4
%
3,653
13.1
%
Total
$
17,425
100.0
%
$
23,499
100.0
%
$
20,015
100.0
%
$
22,544
100.0
%
$
27,841
100.0
%
Total NIW monthly vs. single:
Monthly
$
16,911
97.1
%
$
22,872
97.3
%
$
19,201
95.9
%
$
21,623
95.9
%
$
26,515
95.2
%
Single
514
2.9
%
627
2.7
%
814
4.1
%
921
4.1
%
1,326
4.8
%
Total
$
17,425
100.0
%
$
23,499
100.0
%
$
20,015
100.0
%
$
22,544
100.0
%
$
27,841
100.0
%
Total NIW purchase vs. refinance:
Purchase
$
17,159
98.5
%
$
23,059
98.1
%
$
19,157
95.7
%
$
21,174
93.9
%
$
25,711
92.3
%
Refinance
266
1.5
%
440
1.9
%
858
4.3
%
1,370
6.1
%
2,130
7.7
%
Total
$
17,425
100.0
%
$
23,499
100.0
%
$
20,015
100.0
%
$
22,544
100.0
%
$
27,841
100.0
%
Ending number of policies in force (PIF) (2)
1,168,735
1,168,147
1,159,020
1,171,835
1,188,768
Rollforward of insured loans in default:
Beginning delinquent number of loans
20,692
24,270
27,645
31,770
37,319
Plus: new notices
9,515
7,978
8,835
9,071
8,068
Less: cures
(9,832)
(11,363)
(12,030)
(13,038)
(13,410)
Less: paid claims
(161)
(193)
(180)
(158)
(207)
Ending delinquent number of loans (2)
20,214
20,692
24,270
27,645
31,770
Ending percentage of loans in default (2)
1.73
%
1.77
%
2.09
%
2.36
%
2.67
%
Losses:
Number of claims paid
161
193
180
158
207
Total paid claims (in thousands)
$
5,223
$
5,626
$
6,016
$
8,131
$
7,551
Average per claim (in thousands)
$
32.4
$
29.2
$
33.4
$
51.5
$
36.5
Severity (3)
72.3
%
72.3
%
78.1
%
83.0
%
78.7
%
Average case reserve per default (in thousands)
$
27.7
$
30.3
$
28.4
$
26.7
$
23.5
(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)
September 30, 2022
December 31, 2021
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:
2012 and prior
34.9
%
$
10,362
3.5
%
$
2,509
3.3
%
8.22
%
27.9
%
$
13,030
4.6
%
$
2,960
4.2
%
8.48
%
2013
2.4
%
3,196
1.1
%
855
1.1
%
2.12
%
2.6
%
4,206
1.5
%
1,148
1.6
%
2.63
%
2014
1.9
%
3,903
1.3
%
1,071
1.4
%
2.61
%
1.9
%
4,822
1.7
%
1,328
1.9
%
3.14
%
2015
2.6
%
6,607
2.2
%
1,780
2.4
%
2.11
%
3.0
%
8,703
3.1
%
2,340
3.3
%
2.67
%
2016
6.3
%
11,021
3.7
%
2,953
3.9
%
2.47
%
7.6
%
14,344
5.1
%
3,841
5.4
%
3.29
%
2017
9.8
%
10,017
3.4
%
2,654
3.5
%
3.27
%
10.9
%
13,128
4.7
%
3,436
4.9
%
4.09
%
2018
12.8
%
10,744
3.6
%
2,742
3.6
%
3.95
%
15.2
%
14,046
5.0
%
3,562
5.0
%
5.28
%
2019
11.2
%
19,961
6.8
%
5,038
6.7
%
2.24
%
15.2
%
25,841
9.2
%
6,467
9.2
%
3.13
%
2020
11.3
%
68,974
23.4
%
17,294
23.0
%
0.87
%
12.5
%
82,502
29.4
%
20,341
28.8
%
0.97
%
2021
6.4
%
91,486
31.0
%
23,152
30.7
%
0.66
%
3.2
%
100,323
35.7
%
25,196
35.7
%
0.29
%
2022
0.5
%
58,586
19.9
%
15,295
20.3
%
0.17
%
Total
100.0
%
$
294,857
100.0
%
$
75,343
100.0
%
1.73
%
100.0
%
$
280,945
100.0
%
$
70,619
100.0
%
2.36
%
(1) Total reserves for losses and loss adjustment expenses, net of recoverables, was $545.6 million at September 30, 2022, compared to $710.7 million at December 31, 2021.
(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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Gross premiums written
$
3,860,683
$
3,869,727
$
3,800,775
$
2,861,575
$
3,207,415
$
11,531,185
$
9,602,213
Premiums ceded
(1,136,909)
(1,185,088)
(1,166,635)
(827,148)
(1,131,486)
(3,488,632)
(2,973,005)
Net premiums written
2,723,774
2,684,639
2,634,140
2,034,427
2,075,929
8,042,553
6,629,208
Change in unearned premiums
(253,024)
(358,864)
(513,507)
49,203
(146,592)
(1,125,395)
(962,508)
Net premiums earned
2,470,750
2,325,775
2,120,633
2,083,630
1,929,337
6,917,158
5,666,700
Other underwriting income (loss)
3,077
2,970
5,897
3,160
7,274
11,944
18,174
Losses and loss adjustment expenses
(1,682,696)
(1,102,656)
(1,000,835)
(995,853)
(1,226,019)
(3,786,187)
(3,329,908)
Acquisition expenses
(447,587)
(413,319)
(378,159)
(357,539)
(306,015)
(1,239,065)
(882,898)
Other operating expenses
(274,747)
(277,392)
(289,943)
(261,787)
(230,832)
(842,082)
(703,939)
Underwriting income (loss)
$
68,797
$
535,378
$
457,593
$
471,611
$
173,745
$
1,061,768
$
768,129
Underwriting Ratios
Loss ratio
68.1
%
47.4
%
47.2
%
47.8
%
63.5
%
54.7
%
58.8
%
Acquisition expense ratio
18.1
%
17.8
%
17.8
%
17.2
%
15.9
%
17.9
%
15.6
%
Other operating expense ratio
11.1
%
11.9
%
13.7
%
12.6
%
12.0
%
12.2
%
12.4
%
Combined ratio
97.3
%
77.1
%
78.7
%
77.6
%
91.4
%
84.8
%
86.8
%
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums
22.3
%
3.5
%
4.0
%
3.5
%
17.4
%
10.4
%
10.1
%
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
(7.2)
%
(7.2)
%
(6.1)
%
(6.0)
%
(6.1)
%
(6.9)
%
(4.0)
%
Combined ratio excluding catastrophic activity and prior year development (1)
82.2
%
80.8
%
80.8
%
80.1
%
80.1
%
81.3
%
80.7
%
Components of losses and loss adjustment expenses incurred (1)
Paid losses and loss adjustment expenses
$
765,542
$
745,134
$
727,011
$
783,806
$
626,291
$
2,237,687
$
1,882,967
Change in unpaid losses and loss adjustment expenses
917,154
357,522
273,824
212,047
599,728
1,548,500
1,446,941
Total losses and loss adjustment expenses
$
1,682,696
$
1,102,656
$
1,000,835
$
995,853
$
1,226,019
$
3,786,187
$
3,329,908
Net premiums written to gross premiums written
70.6
%
69.4
%
69.3
%
71.1
%
64.7
%
69.7
%
69.0
%
(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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
Net impact on underwriting results:
Insurance
$
(1,171)
$
(4,469)
$
(1,406)
$
(2,990)
$
(4,439)
$
(7,046)
$
(12,553)
Reinsurance
(49,516)
(41,907)
(22,383)
(49,762)
(65,439)
(113,806)
(108,513)
Mortgage
(127,290)
(120,201)
(105,619)
(72,865)
(48,416)
(353,110)
(103,791)
Total
$
(177,977)
$
(166,577)
$
(129,408)
$
(125,617)
$
(118,294)
$
(473,962)
$
(224,857)
Impact on losses and loss adjustment expenses:
Insurance
$
(5,411)
$
(6,711)
$
(7,271)
$
(3,115)
$
(5,066)
$
(19,393)
$
(13,121)
Reinsurance
(49,194)
(46,422)
(32,473)
(59,219)
(72,319)
(128,089)
(119,604)
Mortgage
(126,218)
(118,093)
(102,068)
(70,419)
(45,124)
(346,379)
(99,139)
Total
$
(180,823)
$
(171,226)
$
(141,812)
$
(132,753)
$
(122,509)
$
(493,861)
$
(231,864)
Impact on acquisition expenses:
Insurance
$
4,240
$
2,242
$
5,865
$
125
$
627
$
12,347
$
568
Reinsurance
(322)
4,515
10,090
9,457
6,880
14,283
11,091
Mortgage
(1,072)
(2,108)
(3,551)
(2,446)
(3,292)
(6,731)
(4,652)
Total
$
2,846
$
4,649
$
12,404
$
7,136
$
4,215
$
19,899
$
7,007
Impact on combined ratio:
Insurance
(0.1)
%
(0.4)
%
(0.1)
%
(0.3)
%
(0.5)
%
(0.2)
%
(0.5)
%
Reinsurance
(4.9)
%
(4.5)
%
(2.8)
%
(6.4)
%
(9.6)
%
(4.2)
%
(5.3)
%
Mortgage
(45.1)
%
(40.7)
%
(36.5)
%
(24.2)
%
(15.5)
%
(40.7)
%
(10.6)
%
Total
(7.2)
%
(7.2)
%
(6.1)
%
(6.0)
%
(6.1)
%
(6.9)
%
(4.0)
%
Impact on loss ratio:
Insurance
(0.5)
%
(0.6)
%
(0.7)
%
(0.3)
%
(0.5)
%
(0.6)
%
(0.5)
%
Reinsurance
(4.9)
%
(5.0)
%
(4.0)
%
(7.6)
%
(10.7)
%
(4.7)
%
(5.8)
%
Mortgage
(44.7)
%
(39.9)
%
(35.3)
%
(23.4)
%
(14.5)
%
(39.9)
%
(10.1)
%
Total
(7.3)
%
(7.4)
%
(6.7)
%
(6.4)
%
(6.3)
%
(7.1)
%
(4.1)
%
Impact on acquisition expense ratio:
Insurance
0.4
%
0.2
%
0.6
%
0.0
%
0.0
%
0.4
%
0.0
%
Reinsurance
0.0
%
0.5
%
1.2
%
1.2
%
1.1
%
0.5
%
0.5
%
Mortgage
(0.4)
%
(0.8)
%
(1.2)
%
(0.8)
%
(1.0)
%
(0.8)
%
(0.5)
%
Total
0.1
%
0.2
%
0.6
%
0.4
%
0.2
%
0.2
%
0.1
%
Estimated net losses incurred from current accident year catastrophic events (2)
Insurance
$
158,973
$
16,360
$
31,855
$
20,312
$
114,433
$
207,188
$
184,308
Reinsurance
391,843
66,021
53,977
51,966
221,431
511,841
386,277
Total
$
550,816
$
82,381
$
85,832
$
72,278
$
335,864
$
719,029
$
570,585
Impact on combined ratio:
Insurance
13.4
%
1.5
%
3.1
%
2.0
%
12.2
%
6.2
%
7.0
%
Reinsurance
39.1
%
7.1
%
6.7
%
6.7
%
32.6
%
18.7
%
18.7
%
Total
22.3
%
3.5
%
4.0
%
3.5
%
17.4
%
10.4
%
10.1
%
(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Somers). 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.
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:
(U.S. Dollars in thousands)
September 30,
June 30,
March 31,
December 31,
September 30,
2022
2022
2022
2021
2021
Investable assets:
Fixed maturities available for sale, at fair value
$
18,120,727
67.9
%
$
17,585,029
66.6
%
$
17,648,853
66.0
%
$
17,998,109
65.6
%
$
16,768,363
61.5
%
Fixed maturities—fair value option (1)
530,303
2.0
%
525,451
2.0
%
426,187
1.6
%
416,698
1.5
%
414,007
1.5
%
Total fixed maturities
18,651,030
69.9
%
18,110,480
68.6
%
18,075,040
67.6
%
18,414,807
67.1
%
17,182,370
63.0
%
Equity securities, at fair value
809,869
3.0
%
772,689
2.9
%
1,002,572
3.7
%
1,804,170
6.6
%
1,790,640
6.6
%
Equity securities—fair value option (1)
13,905
0.1
%
14,489
0.1
%
21,300
0.1
%
26,493
0.1
%
24,523
0.1
%
Total equity securities
823,774
3.1
%
787,178
3.0
%
1,023,872
3.8
%
1,830,663
6.7
%
1,815,163
6.7
%
Other investments—fair value option (1)
1,005,929
3.8
%
1,054,771
4.0
%
1,226,808
4.6
%
1,432,553
5.2
%
1,489,759
5.5
%
Investments accounted for using the equity method (2)
3,565,946
13.4
%
3,496,341
13.2
%
3,325,543
12.4
%
3,077,611
11.2
%
2,741,293
10.0
%
Short-term investments available for sale, at fair value
1,940,857
7.3
%
2,227,874
8.4
%
2,332,624
8.7
%
1,734,716
6.3
%
3,069,965
11.3
%
Short-term investments—fair value option (1)
28,614
0.1
%
39,657
0.2
%
12,371
0.0
%
97,806
0.4
%
115,681
0.4
%
Total short-term investments
1,969,471
7.4
%
2,267,531
8.6
%
2,344,995
8.8
%
1,832,522
6.7
%
3,185,646
11.7
%
Cash
813,583
3.0
%
813,548
3.1
%
812,917
3.0
%
858,668
3.1
%
1,137,721
4.2
%
Securities transactions entered into but not settled at the balance sheet date
(147,727)
(0.6)
%
(134,777)
(0.5)
%
(59,819)
(0.2)
%
(4,671)
0.0
%
(273,512)
(1.0)
%
Total investable assets held by the Company
$
26,682,006
100.0
%
$
26,395,072
100.0
%
$
26,749,356
100.0
%
$
27,442,153
100.0
%
$
27,278,440
100.0
%
Average effective duration (in years)
2.84
2.94
2.93
2.70
2.68
Average S&P/Moody’s credit ratings (3)
AA/Aa2
AA-/Aa3
AA-/Aa3
AA-/Aa3
AA-/Aa3
(1) Included in “other investments” on the balance sheet.
(2) 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.
(3) 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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Composition of net investment income (1):
Fixed maturities
$
123,568
$
105,342
$
82,053
$
74,846
$
75,964
$
310,963
$
232,690
Equity securities (dividends)
4,261
6,121
6,238
18,295
9,867
16,620
23,799
Short-term investments
9,304
4,120
2,575
3,325
1,858
15,999
3,474
Other (2)
8,644
7,984
12,076
12,712
19,114
28,704
55,699
Gross investment income
145,777
123,567
102,942
109,178
106,803
372,286
315,662
Investment expenses
(17,137)
(17,175)
(22,506)
(18,724)
(18,608)
(56,818)
(59,308)
Net investment income
$
128,640
$
106,392
$
80,436
$
90,454
$
88,195
$
315,468
$
256,354
Per share
$
0.34
$
0.28
$
0.21
$
0.23
$
0.22
$
0.83
$
0.63
Equity in net income (loss) of investment funds accounted for using the equity method
(18,861)
58,061
36,305
67,132
105,398
75,505
299,270
Per share
$
(0.05)
$
0.15
$
0.09
$
0.17
$
0.26
$
0.20
$
0.74
Investment income yield, at amortized cost (1) (3):
Pre-tax
2.06
%
1.76
%
1.34
%
1.46
%
1.41
%
1.72
%
1.40
%
After-tax
1.77
%
1.49
%
1.13
%
1.27
%
1.24
%
1.46
%
1.23
%
Total return on investments (1) (4)
(3.01)
%
(3.02)
%
(3.07)
%
0.39
%
0.01
%
(8.83)
%
1.50
%
(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Somers). 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 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 losses 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:
(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 September 30, 2022
Corporates
$
7,620,446
$
51,777
$
(895,365)
$
(843,588)
$
(35,657)
$
8,499,691
89.7
%
40.9
%
U.S. government and government agencies
5,126,407
36,074
(400,784)
(364,710)
—
5,491,117
93.4
%
27.5
%
Municipal bonds
407,724
5,437
(37,692)
(32,255)
(99)
440,078
92.6
%
2.2
%
Non-U.S. government securities
2,077,202
9,315
(287,583)
(278,268)
(1,720)
2,357,190
88.1
%
11.1
%
Asset-backed securities
1,591,642
1,076
(105,037)
(103,961)
(6,936)
1,702,539
93.5
%
8.5
%
Commercial mortgage-backed securities
1,064,238
3,079
(50,010)
(46,931)
(1,583)
1,112,752
95.6
%
5.7
%
Residential mortgage-backed securities
763,371
7,561
(84,183)
(76,622)
2
839,991
90.9
%
4.1
%
Total
$
18,651,030
$
114,319
$
(1,860,654)
$
(1,746,335)
$
(45,993)
$
20,443,358
91.2
%
100.0
%
At December 31, 2021
Corporates
$
6,941,879
$
104,170
$
(69,194)
$
34,976
$
(2,037)
$
6,908,940
100.5
%
37.7
%
U.S. government and government agencies
4,772,764
10,076
(45,967)
(35,891)
—
4,808,655
99.3
%
25.9
%
Municipal bonds
404,666
18,724
(1,409)
17,315
(2)
387,353
104.5
%
2.2
%
Non-U.S. government securities
2,144,079
54,048
(34,749)
19,299
(82)
2,124,862
100.9
%
11.6
%
Asset-backed securities
2,696,458
6,540
(11,108)
(4,568)
(708)
2,701,734
99.8
%
14.6
%
Commercial mortgage-backed securities
1,046,484
1,740
(3,117)
(1,377)
(6)
1,047,867
99.9
%
5.7
%
Residential mortgage-backed securities
408,477
2,825
(5,410)
(2,585)
(48)
411,110
99.4
%
2.2
%
Total
$
18,414,807
$
198,123
$
(170,954)
$
27,169
$
(2,883)
$
18,390,521
100.1
%
100.0
%
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:
(U.S. Dollars in thousands)
September 30,
June 30,
March 31,
December 31,
September 30,
2022
2022
2022
2021
2021
Credit quality distribution of total fixed maturities (1):
U.S. government and government agencies (2)
$
5,746,853
30.8
%
$
4,892,483
27.0
%
$
4,981,102
27.6
%
$
5,063,191
27.5
%
$
4,830,467
28.1
%
AAA
3,344,746
17.9
%
3,352,551
18.5
%
3,171,975
17.5
%
3,783,386
20.5
%
3,257,679
19.0
%
AA
2,030,730
10.9
%
2,064,313
11.4
%
2,222,236
12.3
%
2,459,413
13.4
%
2,217,452
12.9
%
A
3,382,545
18.1
%
3,464,240
19.1
%
3,227,560
17.9
%
2,943,594
16.0
%
2,773,104
16.1
%
BBB
3,001,304
16.1
%
3,114,961
17.2
%
3,181,195
17.6
%
2,936,398
15.9
%
2,807,788
16.3
%
BB
532,162
2.9
%
551,876
3.0
%
564,762
3.1
%
501,588
2.7
%
522,357
3.0
%
B
357,543
1.9
%
367,275
2.0
%
364,181
2.0
%
371,747
2.0
%
348,036
2.0
%
Lower than B
12,417
0.1
%
4,742
—
%
7,057
—
%
43,756
0.2
%
43,751
0.3
%
Not rated
242,730
1.3
%
298,039
1.6
%
354,972
2.0
%
311,734
1.7
%
381,736
2.2
%
Total fixed maturities, at fair value
$
18,651,030
100.0
%
$
18,110,480
100.0
%
$
18,075,040
100.0
%
$
18,414,807
100.0
%
$
17,182,370
100.0
%
Maturity profile of total fixed maturities:
Due in one year or less
$
602,340
3.2
%
$
434,779
2.4
%
$
323,999
1.8
%
$
318,572
1.7
%
$
430,048
2.5
%
Due after one year through five years
10,285,415
55.1
%
9,661,066
53.3
%
9,756,481
54.0
%
8,536,801
46.4
%
8,035,751
46.8
%
Due after five years through ten years
4,031,643
21.6
%
4,261,397
23.5
%
4,296,537
23.8
%
4,807,858
26.1
%
4,601,049
26.8
%
Due after 10 years
312,381
1.7
%
422,104
2.3
%
535,301
3.0
%
600,157
3.3
%
437,895
2.5
%
15,231,779
81.7
%
14,779,346
81.6
%
14,912,318
82.5
%
14,263,388
77.5
%
13,504,743
78.6
%
Residential mortgage-backed securities
763,371
4.1
%
698,168
3.9
%
416,138
2.3
%
408,477
2.2
%
405,797
2.4
%
Commercial mortgage-backed securities
1,064,238
5.7
%
1,023,088
5.6
%
1,066,365
5.9
%
1,046,484
5.7
%
579,424
3.4
%
Asset-backed securities
1,591,642
8.5
%
1,609,878
8.9
%
1,680,219
9.3
%
2,696,458
14.6
%
2,692,406
15.7
%
Total fixed maturities, at fair value
$
18,651,030
100.0
%
$
18,110,480
100.0
%
$
18,075,040
100.0
%
$
18,414,807
100.0
%
$
17,182,370
100.0
%
(1) 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.
(2) 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:
(U.S. Dollars in thousands)
September 30,
June 30,
March 31,
December 31,
September 30,
2022
2022
2022
2021
2021
Sector:
Industrials
$
2,926,134
38.4
%
$
2,928,443
37.5
%
$
2,990,553
39.1
%
$
3,082,440
44.4
%
$
3,227,049
47.6
%
Financials
4,094,264
53.7
%
4,191,142
53.7
%
4,054,531
53.0
%
3,397,199
48.9
%
3,132,330
46.2
%
Utilities
483,490
6.3
%
559,150
7.2
%
460,793
6.0
%
363,468
5.2
%
381,737
5.6
%
Covered bonds
3,848
0.1
%
1,720
0.0
%
1,870
0.0
%
4,511
0.1
%
2,661
0.0
%
All other (1)
112,710
1.5
%
130,807
1.7
%
145,934
1.9
%
94,261
1.4
%
34,166
0.5
%
Total
$
7,620,446
100.0
%
$
7,811,262
100.0
%
$
7,653,681
100.0
%
$
6,941,879
100.0
%
$
6,777,943
100.0
%
Credit quality distribution (2):
AAA
$
162,906
2.1
%
$
160,327
2.1
%
$
144,047
1.9
%
$
122,008
1.8
%
$
114,395
1.7
%
AA
823,931
10.8
%
784,206
10.0
%
835,869
10.9
%
1,006,360
14.5
%
946,277
14.0
%
A
2,945,719
38.7
%
2,973,180
38.1
%
2,691,615
35.2
%
2,414,764
34.8
%
2,293,741
33.8
%
BBB
2,834,413
37.2
%
2,931,983
37.5
%
2,968,760
38.8
%
2,453,904
35.3
%
2,530,014
37.3
%
BB
516,986
6.8
%
522,904
6.7
%
550,960
7.2
%
463,072
6.7
%
477,833
7.0
%
B
351,360
4.6
%
353,134
4.5
%
360,902
4.7
%
355,993
5.1
%
329,581
4.9
%
Lower than B
11,390
0.1
%
4,260
0.1
%
6,210
0.1
%
30,878
0.4
%
30,365
0.4
%
Not rated
(26,259)
(0.3)
%
81,268
1.0
%
95,318
1.2
%
94,900
1.4
%
55,737
0.8
%
Total
$
7,620,446
100.0
%
$
7,811,262
100.0
%
$
7,653,681
100.0
%
$
6,941,879
100.0
%
$
6,777,943
100.0
%
(1) Includes sovereign securities, supranational securities and other.
(2) 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 September 30, 2022:
(U.S. Dollars in thousands)
Fair Value
% of Asset Class
% of Investable Assets
Credit Quality (1)
Issuer:
Bank of America Corporation
$
430,809
5.7
%
1.6
%
A-/A2
JPMorgan Chase & Co.
297,868
3.9
%
1.1
%
A-/A1
Morgan Stanley
268,742
3.5
%
1.0
%
A-/A1
Citigroup Inc.
260,312
3.4
%
1.0
%
BBB+/A3
The Goldman Sachs Group, Inc.
243,516
3.2
%
0.9
%
BBB+/A2
Wells Fargo & Company
237,947
3.1
%
0.9
%
BBB+/A1
Blackstone Inc.
165,585
2.2
%
0.6
%
BBB/Baa3
Blue Owl Capital Inc.
157,904
2.1
%
0.6
%
BBB-/Baa3
UBS Group AG
125,810
1.7
%
0.5
%
A/Aa3
Dai-ichi Life Holdings, Inc.
106,357
1.4
%
0.4
%
AA-/A1
Total
$
2,294,850
30.1
%
8.6
%
(1) 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:
(U.S. Dollars in thousands)
Agencies
AAA
AA
A
BBB
Non-Investment Grade
Total
At September 30, 2022
Residential mortgage-backed securities
$
602,423
$
113,613
$
29,575
$
—
$
—
$
17,760
$
763,371
Commercial mortgage-backed securities
18,022
693,681
154,401
22,601
86,644
88,889
1,064,238
Asset-backed securities
—
904,469
150,542
310,567
45,094
180,970
1,591,642
Total
$
620,445
$
1,711,763
$
334,518
$
333,168
$
131,738
$
287,619
$
3,419,251
At December 31, 2021
Residential mortgage-backed securities
$
268,229
$
86,344
$
40,502
$
2,444
$
6
$
10,952
$
408,477
Commercial mortgage-backed securities
22,198
710,692
141,065
6,990
67,555
97,984
1,046,484
Asset-backed securities
—
1,548,239
230,922
397,242
367,504
152,551
2,696,458
Total
$
290,427
$
2,345,275
$
412,489
$
406,676
$
435,065
$
261,487
$
4,151,419
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, transaction costs and other and loss on redemption of preferred shares, 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 net income 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, transaction costs and other and loss on redemption of preferred shares 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. 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. The loss on redemption of preferred shares related to the redemption of the Company's Series E preferred shares in September 2021 had no impact on shareholders' equity or cash flows. 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, transaction costs and other and loss on redemption of preferred shares 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, through June 30, 2021, the Company’s presentation included the use of information prepared on a ‘core’ basis, which excluded amounts related to the ‘other’ segment (i.e., results of Somers). Information provided on a ‘core’ basis represent non-GAAP financial measures as defined in Regulation G. Pursuant to GAAP, Somers was considered a variable interest entity and the Company concluded that it was the primary beneficiary of Somers through June 30, 2021. As such, the Company consolidated the results of Somers in its consolidated financial statements. The Company’s presentation of information on a ‘core’ basis enabled 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 analyzed performance. See ‘Segment Information’ for a further discussion of segment results and a reconciliation of core and consolidated results. In the 2020 fourth quarter, Arch, Somers, and Greysbridge Ltd., a wholly-owned subsidiary of Arch, entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”). Arch assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Greysbridge”). The merger and the related Greysbridge equity financing closed on July 1, 2021. Effective July 1, 2021, Somers is wholly owned by Greysbridge, and Greysbridge is owned 40% by Arch and 30% by certain funds managed by Kelso & Company and 30% by certain funds managed by Warburg Pincus LLC. Based on the governing documents of Greysbridge, we concluded that, while we retain significant influence over Greysbridge, Greysbridge does not constitute a variable interest entity. Accordingly, effective July 1, 2021, we no longer consolidate the results of Somers in our consolidated financial statements and footnotes.
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 (for periods prior to July 1, 2021). 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 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 (for periods prior to July 1, 2021), 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 Somers’ outstanding common equity through June 30, 2021:
(U.S. Dollars in thousands, except share data)
Three Months Ended
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Net income available to Arch common shareholders
$
6,917
$
394,160
$
185,616
$
613,081
$
388,751
$
586,693
$
1,480,324
Net realized (gains) losses
183,674
266,579
292,414
(59,517)
25,040
742,667
(247,949)
Equity in net (income) loss of investment funds accounted for using the equity method
18,861
(58,061)
(36,305)
(67,132)
(105,398)
(75,505)
(299,270)
Net foreign exchange (gains) losses
(90,537)
(87,797)
(3,855)
(3,221)
(36,078)
(182,189)
(39,522)
Transaction costs and other
76
261
397
310
1,036
734
889
Loss on redemption of preferred shares
—
—
—
—
15,101
—
15,101
Income tax expense (benefit) (1)
(13,019)
(8,646)
(16,268)
9,736
6,236
(37,933)
32,100
After-tax operating income available to Arch common shareholders
$
105,972
$
506,496
$
421,999
$
493,257
$
294,688
$
1,034,467
$
941,673
Diluted per common share results:
Net income available to Arch common shareholders
$
0.02
$
1.04
$
0.48
$
1.58
$
0.98
$
1.55
$
3.66
Net realized (gains) losses
0.48
0.70
0.76
(0.16)
0.05
1.96
(0.61)
Equity in net (income) loss of investment funds accounted for using the equity method
0.05
(0.15)
(0.09)
(0.17)
(0.26)
(0.20)
(0.74)
Net foreign exchange (gains) losses
(0.24)
(0.23)
(0.01)
(0.01)
(0.09)
(0.48)
(0.10)
Transaction costs and other
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Loss on redemption of preferred shares
—
—
—
—
0.04
—
0.04
Income tax expense (benefit) (1)
(0.03)
(0.02)
(0.04)
0.03
0.02
(0.10)
0.08
After-tax operating income available to Arch common shareholders
$
0.28
$
1.34
$
1.10
$
1.27
$
0.74
$
2.73
$
2.33
Weighted average common shares and common share equivalents outstanding - diluted
373,727,277
377,952,988
384,194,363
388,869,378
397,903,347
378,373,180
404,260,485
Beginning common shareholders’ equity
$
11,587,566
$
12,089,589
$
12,715,896
$
12,557,526
$
12,706,072
$
12,715,896
$
12,325,886
Ending common shareholders’ equity
10,965,110
11,587,566
12,089,589
12,715,896
12,557,526
10,965,110
12,557,526
Average common shareholders’ equity
$
11,276,338
$
11,838,578
$
12,402,743
$
12,636,711
$
12,631,799
$
11,840,503
$
12,441,706
Annualized net income return on average common equity
0.2
%
13.3
%
6.0
%
19.4
%
12.3
%
6.6
%
15.9
%
Annualized operating return on average common equity
3.8
%
17.1
%
13.6
%
15.6
%
9.3
%
11.6
%
10.1
%
(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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Arch Operating Income Components (1):
Income (loss) before income taxes and income (loss) from operating affiliates
$
(5,149)
$
421,628
$
184,533
$
617,440
$
301,433
$
601,012
$
1,396,476
Net realized (gains) losses
183,673
266,579
292,414
(59,517)
25,040
742,666
(239,690)
Equity in net (income) loss of investment funds accounted for using the equity method
18,861
(58,061)
(36,305)
(67,132)
(105,398)
(75,505)
(299,270)
Net foreign exchange (gains) losses
(90,509)
(87,775)
(3,845)
(3,163)
(36,078)
(182,129)
(39,691)
Transaction costs and other
(1,108)
658
(170)
(171)
(437)
(620)
(1,065)
Income (loss) from operating affiliates
8,507
4,640
24,518
40,641
124,119
37,665
224,052
Pre-tax operating income
114,275
547,669
461,145
528,098
308,679
1,123,089
1,040,812
Arch share of ‘other’ segment operating income (loss) (2)
—
—
—
—
—
—
931
Pre-tax operating income available to Arch (b)
114,275
547,669
461,145
528,098
308,679
1,123,089
1,041,743
Income tax (expense) benefit (a)
1,881
(30,989)
(28,962)
(24,657)
2,099
(58,070)
(61,911)
After-tax operating income available to Arch
116,156
516,680
432,183
503,441
310,778
1,065,019
979,832
Preferred dividends
(10,184)
(10,184)
(10,184)
(10,184)
(16,090)
(30,552)
(38,159)
After-tax operating income available to Arch common shareholders
$
105,972
$
506,496
$
421,999
$
493,257
$
294,688
$
1,034,467
$
941,673
Effective tax rate on pre-tax operating income (loss) available to Arch (a)/(b)
(1.6)
%
5.7
%
6.3
%
4.7
%
(0.7)
%
5.2
%
5.9
%
(1) Line items are presented on a ‘core’ basis, excluding amounts related to the ‘other’ segment (i.e., results of Somers). 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
Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Balances in ‘other’ segment:
Underwriting income (loss)
$
—
$
—
$
—
$
—
$
—
$
—
$
(21,945)
Net investment income
—
—
—
—
—
—
42,310
Interest expense
—
—
—
—
—
—
(8,410)
Amortization of intangible assets
—
—
—
—
—
—
(898)
Preferred dividends
—
—
—
—
—
—
(1,953)
Pre-tax operating income (loss) available to common shareholders
—
—
—
—
—
—
9,104
Arch ownership (4)
n/a
n/a
n/a
n/a
—
%
n/a
n/a
Arch share of ‘Other’ segment operating income (loss) (3)
$
—
$
—
$
—
$
—
$
—
$
—
$
931
(3) Excludes amounts attributable to net realized gains or losses and net foreign exchange gains or losses in the ‘other’ segment (see ‘Segment Information’).
(4) Effective July 1, 2021, Somers is wholly owned by Greysbridge and Greysbridge is owned 40% by the Company, accordingly, the Company no longer consolidates the results of Somers in its consolidated financial statements. See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
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)
September 30,
June 30,
March 31,
December 31,
September 30,
2022
2022
2022
2021
2021
Debt:
Arch 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 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
(24,847)
(25,104)
(25,358)
(25,606)
(25,851)
Revolving credit agreement borrowings, due December 17, 2024 (variable)
—
—
—
—
—
Total debt
$
2,725,153
$
2,724,896
$
2,724,642
$
2,724,394
$
2,724,149
Shareholders’ equity available to Arch:
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
500,000
500,000
500,000
500,000
Common shareholders’ equity (a)
10,965,110
11,587,566
12,089,589
12,715,896
12,557,526
Total shareholders’ equity available to Arch
$
11,795,110
$
12,417,566
$
12,919,589
$
13,545,896
$
13,387,526
Total capital available to Arch
$
14,520,263
$
15,142,462
$
15,644,231
$
16,270,290
$
16,111,675
Common shares outstanding, net of treasury shares (b)
369,321,990
369,346,815
375,730,891
378,923,894
387,257,752
Book value per common share (4) (a)/(b)
$
29.69
$
31.37
$
32.18
$
33.56
$
32.43
Leverage ratios:
Senior notes/total capital available to Arch
18.8
%
18.0
%
17.4
%
16.7
%
16.9
%
Revolving credit agreement borrowings/total capital available to Arch
—
%
—
%
—
%
—
%
—
%
Debt/total capital available to Arch
18.8
%
18.0
%
17.4
%
16.7
%
16.9
%
Preferred/total capital available to Arch
5.7
%
5.5
%
5.3
%
5.1
%
5.2
%
Debt and preferred/total capital available to Arch
24.5
%
23.5
%
22.7
%
21.8
%
22.1
%
(1) Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Somers). 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, and fully and unconditionally guaranteed by Arch.
(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.
(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
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
Effect of share repurchases:
Aggregate cost of shares repurchased
$
10,147
$
320,688
$
254,988
$
362,097
$
386,882
$
5,871,883
Shares repurchased
236,194
7,090,447
5,564,764
8,668,100
9,704,956
433,570,317
Average price per share repurchased
$
42.96
$
45.23
$
45.82
$
41.77
$
39.86
$
13.54
Remaining share repurchase authorization (1)
$
596,411
(1) Repurchases under the share repurchase authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2022.
