EXHIBIT 99.2
 
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Arch Capital Group Ltd.
Waterloo House, Ground Floor
100 Pitts Bay Road
Pembroke HM 08 Bermuda
 
 
 
 
 
 

Financial Supplement

Financial Information
as of June 30, 2020
 
The following financial supplement is provided to assist in your understanding of Arch Capital Group Ltd. (“Arch Capital”) and its subsidiaries (collectively, the “Company”).
 
This report is for informational purposes only.  It should be read in conjunction with documents filed by Arch Capital with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q.  Please refer to the Company’s website at www.archcapgroup.com for further information describing Arch Capital.


Contacts
 
Arch Capital Group Ltd.
Investor Relations
François Morin: (441) 278-9250
Donald Watson: (914) 872-3616; dwatson@archcapservices.com



Arch Capital Group Ltd. and Subsidiaries
Table of Contents


 
 
Page
 
 
 
I.
Financial Highlights
 
 
 
II.
Consolidated Financial Statements
 
 
a.
Consolidated Statements of Income
 
b.
Consolidated Balance Sheets
 
c.
Consolidated Statements of Changes in Shareholders’ Equity
 
d.
Consolidated Statements of Cash Flows
 
 
 
III.
Segment Information
 
 
a.
Overview
 
b.
Consolidated Results
 
c.
Insurance Segment Results
 
d.
Reinsurance Segment Results
 
e.
Mortgage Segment Results
 
f.
Consolidated Results Excluding ‘Other’ Segment
 
g.
Selected Information on Losses and Loss Adjustment Expenses
 
 
 
IV.
Investment Information
 
 
a.
Investable Asset Summary and Investment Portfolio Metrics
 
b.
Composition of Net Investment Income, Yield and Total Return
 
c.
Composition of Fixed Maturities
 
d.
Credit Quality Distribution and Maturity Profile
 
e.
Analysis of Corporate Exposures
 
f.
Structured Securities
 
 
 
V.
Other
 
 
a.
Comments on Regulation G
 
b.
Operating Income Reconciliation and Annualized Operating Return on Average Common Equity
 
c.
Operating Income and Effective Tax Rate Calculations
 
d.
Capital Structure and Share Repurchase Activity


 
1
 
Arch Capital Group Ltd. and Subsidiaries
Basis of Presentation


Basis of Presentation

All financial information contained herein is unaudited, however, certain information relating to the consolidated balance sheet at December 31, 2019 is derived from or agrees to audited financial information. Unless otherwise noted, all data is in thousands, except for share and per share amounts and ratio information.

In March 2014, the Company invested $100.0 million to acquire common equity and a warrant to purchase additional common equity of Watford Holdings Ltd. In accordance with GAAP, the Company consolidates the results of Watford Holdings Ltd. (“Watford”) in its financial statements, although it only owns approximately 13% of Watford’s outstanding common equity at June 30, 2020. Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, 100% of the results of Watford are included in the Company’s consolidated financial statements. The portion of Watford’s earnings owned by third parties is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ In addition, the Company reflects Watford’s redeemable preference shares in the mezzanine section of the Company’s consolidated balance sheets as ‘redeemable noncontrolling interests’ because they have redemption features that are not solely within the control of Watford.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital and its subsidiaries may include forward-looking statements, which reflect the Company’s current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements.
 
Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology. Forward-looking statements involve the Company’s current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and the Company’s ability to maintain and improve the Company’s ratings; investment performance; the loss of key personnel; the adequacy of the Company’s loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; including pandemics such as COVID-19; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; the Company’s ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to the Company of reinsurance to manage gross and net exposures; the failure of others to meet their obligations to the Company; changes in the method for determining the London Inter-bank Offered Rate (“LIBOR”) and the potential replacement of LIBOR and other factors identified in the Company’s filings with the U.S. Securities and Exchange Commission.
 
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 
2
 
Arch Capital Group Ltd. and Subsidiaries
Financial Highlights

The following table presents financial highlights (1):
(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2020
 
2019
 
Change
 
2020
 
2019
 
Change
Underwriting results:
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
2,206,410

 
$
1,829,829

 
20.6
 %
 
$
4,904,947

 
$
3,810,282

 
28.7
 %
Net premiums written
 
1,562,455

 
1,325,528

 
17.9
 %
 
3,513,001

 
2,705,400

 
29.9
 %
Net premiums earned
 
1,533,819

 
1,312,409

 
16.9
 %
 
3,138,224

 
2,535,181

 
23.8
 %
Underwriting income (loss) (2)
 
(13,410
)
 
297,727

 
(104.5
)%
 
146,650

 
563,253

 
(74.0
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
73.4
%
 
50.0
%
 
23.4

 
67.9
%
 
49.9
%
 
18.0

Acquisition expense ratio
 
15.1
%
 
13.8
%
 
1.3

 
14.6
%
 
13.8
%
 
0.8

Other operating expense ratio
 
12.7
%
 
14.0
%
 
(1.3
)
 
13.3
%
 
14.7
%
 
(1.4
)
Combined ratio
 
101.2
%
 
77.8
%
 
23.4

 
95.8
%
 
78.4
%
 
17.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
$
101,031

 
$
123,038

 
(17.9
)%
 
$
214,059

 
$
244,287

 
(12.4
)%
Per diluted share
 
$
0.25

 
$
0.30

 
(16.7
)%
 
$
0.52

 
$
0.60

 
(13.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Arch common shareholders
 
$
288,418

 
$
458,551

 
(37.1
)%
 
$
422,132

 
$
896,676

 
(52.9
)%
Per diluted share
 
$
0.71

 
$
1.12

 
(36.6
)%
 
$
1.03

 
$
2.19

 
(53.0
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
After-tax operating income available to Arch common shareholders (2)
 
$
16,614

 
$
317,433

 
(94.8
)%
 
$
206,370

 
$
593,330

 
(65.2
)%
Per diluted share
 
$
0.04

 
$
0.77

 
(94.8
)%
 
$
0.50

 
$
1.45

 
(65.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) available to Arch
 
$
626,366

 
$
637,458

 
(1.7
)%
 
$
580,336

 
$
1,303,029

 
(55.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
648,427

 
$
431,865

 
50.1
 %
 
$
1,234,383

 
$
597,276

 
106.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding — diluted
 
408,119,681

 
410,899,483

 
(0.7
)%
 
411,005,591

 
409,755,250

 
0.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial measures:
 
 

 
 

 
 

 
 

 
 

 
 

Change in book value per common share during period
 
5.8
%
 
6.6
%
 
(0.8
)
 
4.5
%
 
14.5
%
 
(10.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity
 
10.6
%
 
19.0
%
 
(8.4
)
 
7.7
%
 
19.2
%
 
(11.5
)
Annualized operating return on average common equity (2)
 
0.6
%
 
13.1
%
 
(12.5
)
 
3.8
%
 
12.7
%
 
(8.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total return on investments (3)
 
3.72
%
 
2.37
%
 
135 bps

 
2.82
%
 
5.14
%
 
-232 bps

 
(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
See ‘Comments on Regulation G’ for a further discussion of consolidated underwriting income or loss, after-tax operating income or loss available to Arch common shareholders and annualized operating return on average common equity.
(3)
Total return on investments includes net investment income, equity in net income (loss) of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses and is calculated on a pre-tax basis and before investment expenses. See ‘Comments on Regulation G’ for a further discussion of the presentation of total return on investments.

 
3
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Income

(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Revenues
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net premiums written
 
$
1,668,311

 
$
2,137,246

 
$
1,455,453

 
$
1,613,457

 
$
1,444,898

 
$
3,805,557

 
$
2,970,157

Change in unearned premiums
 
(2,957
)
 
(392,802
)
 
60,429

 
(175,434
)
 
18,829

 
(395,759
)
 
(137,564
)
Net premiums earned
 
1,665,354

 
1,744,444

 
1,515,882

 
1,438,023

 
1,463,727

 
3,409,798

 
2,832,593

Net investment income
 
131,485

 
145,153

 
154,263

 
161,488

 
155,038

 
276,638

 
311,987

Net realized gains (losses)
 
556,588

 
(366,960
)
 
40,830

 
61,355

 
120,757

 
189,628

 
261,013

Other underwriting income
 
6,667

 
6,852

 
6,757

 
3,326

 
5,953

 
13,519

 
14,778

Equity in net income (loss) of investment funds accounted for using the equity method
 
(65,119
)
 
(4,209
)
 
27,139

 
17,130

 
32,536

 
(69,328
)
 
79,403

Other income (loss)
 
(3,140
)
 
8,548

 
(1,317
)
 
1,338

 
1,129

 
5,408

 
2,212

Total revenues
 
2,291,835

 
1,533,828

 
1,743,554

 
1,682,660

 
1,779,140

 
3,825,663

 
3,501,986

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
 
(1,230,522
)
 
(1,115,419
)
 
(844,922
)
 
(802,455
)
 
(767,543
)
 
(2,345,941
)
 
(1,486,075
)
Acquisition expenses
 
(254,789
)
 
(247,283
)
 
(221,888
)
 
(211,120
)
 
(210,089
)
 
(502,072
)
 
(407,937
)
Other operating expenses
 
(209,249
)
 
(234,544
)
 
(204,408
)
 
(196,512
)
 
(198,914
)
 
(443,793
)
 
(400,077
)
Corporate expenses
 
(17,920
)
 
(20,796
)
 
(26,837
)
 
(17,061
)
 
(18,251
)
 
(38,716
)
 
(36,213
)
Amortization of intangible assets
 
(16,489
)
 
(16,631
)
 
(21,890
)
 
(20,003
)
 
(19,794
)
 
(33,120
)
 
(40,211
)
Interest expense
 
(31,139
)
 
(32,555
)
 
(31,199
)
 
(31,328
)
 
(29,280
)
 
(63,694
)
 
(58,345
)
Net foreign exchange gains (losses)
 
(39,211
)
 
72,671

 
(52,306
)
 
33,124

 
(4,952
)
 
33,460

 
(1,427
)
Total expenses
 
(1,799,319
)
 
(1,594,557
)
 
(1,403,450
)
 
(1,245,355
)
 
(1,248,823
)
 
(3,393,876
)
 
(2,430,285
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
492,516

 
(60,729
)
 
340,104

 
437,305

 
530,317

 
431,787

 
1,071,701

Income tax expense
 
(26,127
)
 
(27,945
)
 
(27,336
)
 
(38,116
)
 
(44,472
)
 
(54,072
)
 
(90,358
)
Net income (loss)
 
466,389

 
(88,674
)
 
312,768

 
399,189

 
485,845

 
377,715

 
981,343

Net (income) loss attributable to noncontrolling interests
 
(167,568
)
 
232,791

 
13,616

 
(6,736
)
 
(16,891
)
 
65,223

 
(63,861
)
Net income attributable to Arch
 
298,821

 
144,117

 
326,384

 
392,453

 
468,954

 
442,938

 
917,482

Preferred dividends
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(20,806
)
 
(20,806
)
Net income available to Arch common shareholders
 
$
288,418

 
$
133,714

 
$
315,981

 
$
382,050

 
$
458,551

 
$
422,132

 
$
896,676

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) available to Arch
 
$
626,366

 
$
(46,030
)
 
$
326,760

 
$
397,340

 
$
637,458

 
$
580,336

 
$
1,303,029

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per common share and common share equivalent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.72

 
$
0.33

 
$
0.78

 
$
0.95

 
$
1.14

 
$
1.05

 
$
2.24

Diluted
 
$
0.71

 
$
0.32

 
$
0.76

 
$
0.92

 
$
1.12

 
$
1.03

 
$
2.19

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
402,503,687

 
403,892,161

 
402,941,290

 
402,564,121

 
401,482,784

 
403,197,924

 
400,837,181

Diluted
 
408,119,681

 
414,033,570

 
414,124,920

 
413,180,201

 
410,899,483

 
411,005,591

 
409,755,250





 
4
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets


(U.S. Dollars in thousands, except share data)
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
Assets
 
 

 
 

 
 

 
 

 
 

Investments:
 
 

 
 

 
 

 
 

 
 

Fixed maturities available for sale, at fair value
 
$
17,207,731

 
$
16,841,571

 
$
16,894,526

 
$
16,470,523

 
$
15,881,732

Short-term investments available for sale, at fair value
 
2,277,866

 
944,531

 
956,546

 
751,989

 
821,961

Collateral received under securities lending, at fair value
 
473,790

 
182,284

 
388,376

 
430,263

 
450,320

Equity securities, at fair value
 
1,257,317

 
1,181,903

 
838,925

 
550,485

 
670,943

Investments accounted for using the fair value option
 
3,520,771

 
3,310,517

 
3,663,477

 
3,838,243

 
3,721,035

Investments accounted for using the equity method
 
1,727,302

 
1,676,055

 
1,660,396

 
1,575,832

 
1,581,972

Total investments
 
26,464,777

 
24,136,861

 
24,402,246

 
23,617,335

 
23,127,963

Cash
 
854,259

 
882,284

 
726,230

 
880,099

 
605,316

Accrued investment income
 
102,064

 
118,089

 
117,937

 
116,196

 
119,252

Securities pledged under securities lending, at fair value
 
464,503

 
177,442

 
379,868

 
420,415

 
440,510

Premiums receivable
 
2,203,753

 
2,155,204

 
1,778,717

 
1,618,186

 
1,606,040

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
 
4,363,507

 
4,303,135

 
4,346,816

 
3,168,195

 
3,171,257

Contractholder receivables
 
2,179,124

 
2,140,724

 
2,119,460

 
2,094,683

 
2,102,544

Ceded unearned premiums
 
1,364,603

 
1,357,284

 
1,234,683

 
1,168,258

 
1,136,728

Deferred acquisition costs
 
714,531

 
708,848

 
633,400

 
622,028

 
600,740

Receivable for securities sold
 
167,281

 
221,573

 
24,133

 
50,615

 
164,592

Goodwill and intangible assets
 
688,490

 
705,450

 
738,083

 
624,500

 
641,010

Other assets
 
1,632,756

 
1,509,232

 
1,383,788

 
1,192,093

 
1,135,718

Total assets
 
$
41,199,648

 
$
38,416,126

 
$
37,885,361

 
$
35,572,603

 
$
34,851,670

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

Reserve for losses and loss adjustment expenses
 
$
15,044,874

 
$
14,309,580

 
$
13,891,842

 
$
12,389,384

 
$
12,230,316

Unearned premiums
 
4,827,445

 
4,817,191

 
4,339,549

 
4,243,372

 
4,056,860

Reinsurance balances payable
 
793,467

 
737,597

 
667,072

 
601,891

 
531,990

Contractholder payables
 
2,185,414

 
2,149,762

 
2,119,460

 
2,094,683

 
2,102,544

Collateral held for insured obligations
 
208,449

 
211,597

 
206,698

 
205,449

 
237,056

Senior notes
 
2,860,733

 
1,871,869

 
1,871,626

 
1,871,386

 
1,733,865

Revolving credit agreement borrowings
 
335,587

 
500,587

 
484,287

 
490,720

 
491,006

Securities lending payable
 
473,783

 
182,274

 
388,366

 
430,255

 
450,312

Payable for securities purchased
 
275,257

 
327,359

 
87,579

 
176,130

 
294,109

Other liabilities
 
1,467,739

 
1,392,905

 
1,513,330

 
1,007,524

 
904,438

Total liabilities
 
28,472,748

 
26,500,721

 
25,569,809

 
23,510,794

 
23,032,496

 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
55,986

 
55,376

 
55,404

 
48,789

 
206,475

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 

 
 

 
 

 
 

 
 

Non-cumulative preferred shares
 
780,000

 
780,000

 
780,000

 
780,000

 
780,000

Common shares
 
642

 
642

 
638

 
638

 
638

Additional paid-in capital
 
1,935,514

 
1,921,487

 
1,889,683

 
1,864,468

 
1,847,949

Retained earnings
 
11,420,686

 
11,132,268

 
11,021,006

 
10,705,025

 
10,322,975

Accumulated other comprehensive income (loss), net of deferred income tax
 
349,488

 
21,944

 
212,091

 
211,714

 
206,827

Common shares held in treasury, at cost
 
(2,494,505
)
 
(2,489,097
)
 
(2,406,047
)
 
(2,403,749
)
 
(2,401,037
)
Total shareholders’ equity available to Arch
 
11,991,825

 
11,367,244

 
11,497,371

 
11,158,096

 
10,757,352

Non-redeemable noncontrolling interests
 
679,089

 
492,785

 
762,777

 
854,924

 
855,347

Total shareholders’ equity
 
12,670,914

 
11,860,029

 
12,260,148

 
12,013,020

 
11,612,699

Total liabilities, noncontrolling interests and shareholders’ equity
 
$
41,199,648

 
$
38,416,126

 
$
37,885,361

 
$
35,572,603

 
$
34,851,670

 
 
 
 
 
 
 
 
 
 
 
Common shares and common share equivalents outstanding, net of treasury shares
 
405,970,251

 
405,609,867

 
405,619,201

 
405,230,531

 
404,887,534

Book value per common share (1)
 
$
27.62

 
$
26.10

 
$
26.42

 
$
25.61

 
$
24.64


(1)
Excludes the effects of stock options and restricted stock units outstanding.

 
5
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity


(U.S. Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Non-cumulative preferred shares
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at beginning and end of period
 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
642

 
638

 
638

 
638

 
636

 
638

 
634

Common shares issued, net
 
—

 
4

 
—

 
—

 
2

 
4

 
4

Balance at end of period
 
642

 
642

 
638

 
638

 
638

 
642

 
638

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
1,921,487

 
1,889,683

 
1,864,468

 
1,847,949

 
1,819,605

 
1,889,683

 
1,793,781

Amortization of share-based compensation
 
13,160

 
28,050

 
11,862

 
12,775

 
13,607

 
41,210

 
39,515

All other
 
867


3,754


13,353


3,744


14,737


4,621


14,653

Balance at end of period
 
1,935,514

 
1,921,487

 
1,889,683

 
1,864,468

 
1,847,949

 
1,935,514

 
1,847,949

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
11,132,268

 
11,021,006

 
10,705,025

 
10,322,975

 
9,864,424

 
11,021,006

 
9,426,299

Cumulative effect of an accounting change (1)
 
—

 
(22,452
)
 
—

 
—

 
—

 
(22,452
)
 
—

Balance at beginning of period, as adjusted
 
11,132,268

 
10,998,554

 
10,705,025

 
10,322,975

 
9,864,424

 
10,998,554

 
9,426,299

Net income
 
466,389

 
(88,674
)
 
312,768

 
399,189

 
485,845

 
377,715

 
981,343

Amounts attributable to noncontrolling interests
 
(167,568
)
 
232,791

 
13,616

 
(6,736
)
 
(16,891
)
 
65,223

 
(63,861
)
Preferred share dividends
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(20,806
)
 
(20,806
)
Balance at end of period
 
11,420,686

 
11,132,268

 
11,021,006

 
10,705,025

 
10,322,975

 
11,420,686

 
10,322,975

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss), net of deferred income tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
21,944

 
212,091

 
211,714

 
206,827

 
38,323

 
212,091

 
(178,720
)
Change in unrealized appreciation (decline) in value of available-for-sale investments
 
305,338

 
(145,337
)
 
(24,707
)
 
21,566

 
164,425

 
160,001

 
375,805

Change in foreign currency translation adjustments
 
22,206

 
(44,810
)
 
25,084

 
(16,679
)
 
4,079

 
(22,604
)
 
9,742

Balance at end of period
 
349,488

 
21,944

 
212,091

 
211,714

 
206,827

 
349,488

 
206,827

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares held in treasury, at cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
(2,489,097
)
 
(2,406,047
)
 
(2,403,749
)
 
(2,401,037
)
 
(2,388,392
)
 
(2,406,047
)
 
(2,382,167
)
Shares repurchased for treasury
 
(5,408
)
 
(83,050
)
 
(2,298
)
 
(2,712
)
 
(12,645
)
 
(88,458
)
 
(18,870
)
Balance at end of period
 
(2,494,505
)
 
(2,489,097
)
 
(2,406,047
)
 
(2,403,749
)
 
(2,401,037
)
 
(2,494,505
)
 
(2,401,037
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total shareholders’ equity available to Arch
 
11,991,825

 
11,367,244

 
11,497,371

 
11,158,096

 
10,757,352

 
11,991,825

 
10,757,352

Non-redeemable noncontrolling interests
 
679,089

 
492,785

 
762,777

 
854,924

 
855,347

 
679,089

 
855,347

Total shareholders’ equity
 
$
12,670,914

 
$
11,860,029

 
$
12,260,148

 
$
12,013,020

 
$
11,612,699

 
$
12,670,914

 
$
11,612,699


(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).”

 
6
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows

(U.S. Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Operating Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)
 
$
466,389

 
$
(88,674
)
 
$
312,768

 
$
399,189

 
$
485,845

 
$
377,715

 
$
981,343

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized (gains) losses
 
(557,740
)
 
362,964

 
(51,435
)
 
(63,597
)
 
(118,844
)
 
(194,776
)
 
(262,935
)
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss
 
96,350

 
29,034

 
24,899

 
6,808

 
(15,968
)
 
125,384

 
(45,720
)
Amortization of intangible assets
 
16,489

 
16,631

 
21,890

 
20,003

 
19,794

 
33,120

 
40,211

Share-based compensation
 
13,363

 
28,549

 
11,985

 
12,895

 
15,646

 
41,912

 
41,537

Changes in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for losses and loss adjustment expenses, net
 
652,389

 
506,057

 
112,907

 
222,678

 
160,401

 
1,158,446

 
154,396

Unearned premiums, net
 
2,957

 
392,802

 
(60,429
)
 
175,434

 
(18,829
)
 
395,759

 
137,564

Premiums receivable
 
(45,181
)
 
(418,457
)
 
91,013

 
(26,715
)
 
(16,913
)
 
(463,638
)
 
(302,050
)
Deferred acquisition costs
 
(17,302
)
 
(75,135
)
 
(8,654
)
 
(13,816
)
 
(1,622
)
 
(92,437
)
 
(24,790
)
Reinsurance balances payable
 
52,354

 
79,807

 
(32,770
)
 
75,487

 
76,810

 
132,161

 
139,415

Other items, net
 
31,058

 
(223,124
)
 
83,146

 
22,249

 
(109,194
)
 
(192,066
)
 
(146,447
)
Net cash provided by operating activities
 
711,126

 
610,454

 
505,320

 
830,615

 
477,126

 
1,321,580

 
712,524

Investing Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Purchases of fixed maturity investments
 
(13,444,854
)
 
(11,965,995
)
 
(6,043,154
)
 
(7,677,977
)
 
(8,888,176
)
 
(25,410,849
)
 
(16,332,646
)
Purchases of equity securities
 
(264,466
)
 
(760,683
)
 
(287,916
)
 
(92,112
)
 
(228,129
)
 
(1,025,149
)
 
(431,939
)
Purchases of other investments
 
(273,221
)
 
(228,471
)
 
(455,620
)
 
(337,862
)
 
(352,470
)
 
(501,692
)
 
(677,063
)
Proceeds from sales of fixed maturity investments
 
13,109,907

 
11,723,123

 
5,888,011

 
7,075,372

 
8,555,892

 
24,833,030

 
15,632,482

Proceeds from sales of equity securities
 
314,045

 
266,301

 
58,688

 
194,429

 
81,684

 
580,346

 
176,701

Proceeds from sales, redemptions and maturities of other investments
 
256,057

 
216,131

 
382,042

 
292,819

 
318,215

 
472,188

 
534,698

Proceeds from redemptions and maturities of fixed maturity investments
 
170,884

 
198,356

 
248,546

 
149,770

 
144,525

 
369,240

 
244,949

Net settlements of derivative instruments
 
(45,017
)
 
195,488

 
(32,441
)
 
4,722

 
57,964

 
150,471

 
87,701

Net (purchases) sales of short-term investments
 
(1,311,586
)
 
(11,777
)
 
(89,245
)
 
(72,442
)
 
(91,081
)
 
(1,323,363
)
 
201,520

Change in cash collateral related to securities lending
 
(405
)
 
55,001

 
(69,183
)
 
(600
)
 
37,208

 
54,596

 
7,590

Purchases of fixed assets
 
(9,217
)
 
(8,470
)
 
(10,202
)
 
(11,276
)
 
(6,936
)
 
(17,687
)
 
(16,359
)
Other
 
(33,821
)
 
42,500

 
(145,533
)
 
(28,375
)
 
(80,847
)
 
8,679

 
(174,578
)
Net cash provided by (used for) investing activities
 
(1,531,694
)
 
(278,496
)
 
(556,007
)
 
(503,532
)
 
(452,151
)
 
(1,810,190
)
 
(746,944
)
Financing Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Purchases of common shares under share repurchase program
 
—

 
(75,486
)
 
—

 
—

 
—

 
(75,486
)
 
(2,871
)
Proceeds from common shares issued, net
 
(5,134
)
 
(4,527
)
 
5,685

 
1,075

 
1,344

 
(9,661
)
 
(557
)
Proceeds from borrowings
 
988,618

 
16,300

 
—

 
137,283

 
3,800

 
1,004,918

 
62,800

Repayments of borrowings
 
(165,000
)
 
—

 
(21,644
)
 
—

 
(1,500
)
 
(165,000
)
 
(27,538
)
Change in cash collateral related to securities lending
 
405

 
(55,001
)
 
69,183

 
600

 
(37,208
)
 
(54,596
)
 
(7,590
)
Change in third party investment in non-redeemable noncontrolling interests
 
—

 
(2,867
)
 
(75,056
)
 
—

 
—

 
(2,867
)
 
—

Change in third party investment in redeemable noncontrolling interests
 
—

 
—

 
(8
)
 
(161,874
)
 
—

 
—

 
—

Dividends paid to redeemable noncontrolling interests
 
(1,359
)
 
(1,181
)
 
(1,107
)
 
(2,414
)
 
(4,497
)
 
(2,540
)
 
(8,994
)
Other
 
(1,294
)
 
(1,331
)
 
(816
)
 
(1,678
)
 
(2,140
)
 
(2,625
)
 
(3,529
)
Preferred dividends paid
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(20,806
)
 
(20,806
)
Net cash provided by (used for) financing activities
 
805,833

 
(134,496
)
 
(34,166
)
 
(37,411
)
 
(50,604
)
 
671,337

 
(9,085
)
Effects of exchange rate changes on foreign currency cash and restricted cash
 
8,981

 
(30,723
)
 
26,076

 
(10,272
)
 
(1,512
)
 
(21,742
)
 
1,937

Increase (decrease) in cash and restricted cash
 
(5,754
)
 
166,739

 
(58,777
)
 
279,400

 
(27,141
)
 
160,985

 
(41,568
)
Cash and restricted cash, beginning of period
 
1,070,437

 
903,698

 
962,475

 
683,075

 
710,216

 
903,698

 
724,643

Cash and restricted cash, end of period
 
$
1,064,683

 
$
1,070,437

 
$
903,698

 
$
962,475

 
$
683,075

 
$
1,064,683

 
$
683,075

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes paid (received)
 
$
3,023

 
$
7,387

 
$
62,398

 
$
3,565

 
$
76,166

 
$
10,410

 
$
43,500

Interest paid
 
$
50,767

 
$
6,647

 
$
58,385

 
$
7,702

 
$
54,612

 
$
57,414

 
$
60,858

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities, excluding the ‘other’ segment
 
$
648,427

 
$
585,956

 
$
443,298

 
$
769,486

 
$
431,865

 
$
1,234,383

 
$
597,276


 
7
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview



The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — ‘other’ and corporate (non-underwriting). The Company’s Insurance, Reinsurance and Mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the President and Chief Executive Officer of Arch Capital and the Chief Financial Officer of Arch Capital. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for its three core underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment and, accordingly, investment income is not allocated to each underwriting segment.

The Company determined its reportable operating segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.

Insurance Segment

The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:

•
Construction and national accounts: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).
•
Excess and surplus casualty: primary and excess casualty insurance coverages, including middle market energy business, and contract binding, which primarily provides casualty coverage through a network of appointed agents to small and medium risks.
•
Lenders products: collateral protection, debt cancellation and service contract reimbursement products to banks, credit unions, automotive dealerships and original equipment manufacturers and other specialty programs that pertain to automotive lending and leasing.
•
Professional lines: directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity and other financial related coverages for corporate, private equity, venture capital, real estate investment trust, limited partnership, financial institution and not-for-profit clients of all sizes and medical professional and general liability insurance coverages for the healthcare industry. The business is predominately written on a claims-made basis.
•
Programs: primarily package policies, underwriting workers’ compensation and umbrella liability business in support of desirable package programs, targeting program managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.
•
Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, war, specie and liability. Aviation and stand alone terrorism are also offered.
•
Travel, accident and health: specialty travel and accident and related insurance products for individual, group travelers, travel agents and suppliers, as well as accident and health, which provides accident, disability and medical plan insurance coverages for employer groups, medical plan members, students and other participant groups.
•
Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract and commercial surety coverages, including contract bonds (payment and performance bonds) primarily for medium and large contractors and commercial surety bonds for Fortune 1,000 companies and smaller transaction business programs.

 
8
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview


Reinsurance Segment
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:

•
Casualty: provides coverage to ceding company clients on third party liability and workers’ compensation exposures from ceding company clients, primarily on a treaty basis. Exposures include, among others, executive assurance, professional liability, workers’ compensation, excess and umbrella liability, excess motor and healthcare business.
•
Marine and aviation: provides coverage for energy, hull, cargo, specie, liability and transit, and aviation business, including airline and general aviation risks. Business written may also include space business, which includes coverages for satellite assembly, launch and operation for commercial space programs.
•
Other specialty: provides coverage to ceding company clients for proportional motor and other lines including surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk.
•
Property catastrophe: provides protection for most catastrophic losses that are covered in the underlying policies written by reinsureds, including hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expense from a single occurrence of a covered peril exceed the retention specified in the contract.
•
Property excluding property catastrophe: provides coverage for both personal lines and commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on both a proportional and excess of loss basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.
•
Other. includes life reinsurance business on both a proportional and non-proportional basis, casualty clash business and, in limited instances, non-traditional business which is intended to provide insurers with risk management solutions that complement traditional reinsurance.
Mortgage Segment

The mortgage segment includes the Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Fannie Mae and Freddie Mac.

Corporate (Non-Underwriting) Segment

The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.

Other Segment

The ‘other’ segment includes the results of Watford. Subsidiaries of the Company act as Watford’s reinsurance and insurance underwriting managers while HPS Investment Partners, LLC manages Watford’s non-investment grade credit portfolios and the Company manages Watford’s investment grade portfolios, all under long term services agreements. Pursuant to generally accepted accounting principles, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, the Company consolidates the results of Watford in its consolidated financial statements, although it only owns approximately 13% of Watford’s common equity (listed on the Nasdaq Select Global Market under the ticker symbol “WTRE”). Watford has its own management and board of directors that is responsible for its own results and profitability. The portion of Watford’s earnings attributable to third party investors is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ Management measures segment performance for the ‘other’ segment based on net income or loss.


 
9
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Three Months Ended
 
 
June 30, 2020
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
1,030,362

 
$
807,065

 
$
369,144

 
$
2,206,410

 
$
157,927

 
$
2,317,692

Premiums ceded
 
(358,101
)
 
(241,971
)
 
(44,044
)
 
(643,955
)
 
(52,071
)
 
(649,381
)
Net premiums written
 
672,261

 
565,094

 
325,100

 
1,562,455

 
105,856

 
1,668,311

Change in unearned premiums
 
15,648

 
(84,897
)
 
40,613

 
(28,636
)
 
25,679

 
(2,957
)
Net premiums earned
 
687,909

 
480,197

 
365,713

 
1,533,819

 
131,535

 
1,665,354

Other underwriting income (loss)
 
—

 
(651
)
 
6,450

 
5,799

 
868

 
6,667

Losses and loss adjustment expenses
 
(518,203
)
 
(383,433
)
 
(224,100
)
 
(1,125,736
)
 
(104,786
)
 
(1,230,522
)
Acquisition expenses
 
(107,671
)
 
(90,522
)
 
(34,052
)
 
(232,245
)
 
(22,544
)
 
(254,789
)
Other operating expenses
 
(118,757
)
 
(38,716
)
 
(37,574
)
 
(195,047
)
 
(14,202
)
 
(209,249
)
Underwriting income (loss)
 
$
(56,722
)
 
$
(33,125
)
 
$
76,437

 
(13,410
)
 
(9,129
)
 
(22,539
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
101,031

 
30,454

 
131,485

Net realized gains (losses)
 
 
 
 
 
 
 
385,089

 
171,499

 
556,588

Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
(65,119
)
 
—

 
(65,119
)
Other income
 
 
 
 
 
 
 
(3,140
)
 
—

 
(3,140
)
Corporate expenses (2)
 
 
 
 
 
 
 
(16,943
)
 
—

 
(16,943
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(977
)
 
—

 
(977
)
Amortization of intangible assets
 
 
 
 
 
 
 
(16,489
)
 
—

 
(16,489
)
Interest expense
 
 
 
 
 
 
 
(25,130
)
 
(6,009
)
 
(31,139
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
(42,438
)
 
3,227

 
(39,211
)
Income (loss) before income taxes
 
 
 
 
 
 
 
302,474

 
190,042

 
492,516

Income tax (expense) benefit
 
 
 
 
 
 
 
(26,529
)
 
402

 
(26,127
)
Net income (loss)
 
 
 
 
 
 
 
275,945

 
190,444

 
466,389

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
(934
)
 
(1,036
)
 
(1,970
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(165,598
)
 
(165,598
)
Net income (loss) available to Arch
 
 
 
 
 
 
 
275,011

 
23,810

 
298,821

Preferred dividends
 
 
 
 
 
 
 
(10,403
)
 
—

 
(10,403
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
 
$
264,608

 
$
23,810

 
$
288,418

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
75.3
%
 
79.8
%
 
61.3
%
 
73.4
%
 
79.7
%
 
73.9
%
Acquisition expense ratio
 
15.7
%
 
18.9
%
 
9.3
%
 
15.1
%
 
17.1
%
 
15.3
%
Other operating expense ratio
 
17.3
%
 
8.1
%
 
10.3
%
 
12.7
%
 
10.8
%
 
12.6
%
Combined ratio
 
108.3
%
 
106.8
%
 
80.9
%
 
101.2
%
 
107.6
%
 
101.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
65.2
%
 
70.0
%
 
88.1
%
 
70.8
%
 
67.0
%
 
72.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
 
$
24,531,194

 
$
2,641,290

 
$
27,172,484

Total assets
 
 
 
 
 
 
 
37,693,482

 
3,506,166

 
41,199,648

Total liabilities
 
 
 
 
 
 
 
25,787,697

 
2,685,051

 
28,472,748

 
(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.

 
10
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Three Months Ended
 
 
June 30, 2019
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
919,925

 
$
545,547

 
$
364,465

 
$
1,829,829

 
$
161,978

 
$
1,937,809

Premiums ceded
 
(292,095
)
 
(169,457
)
 
(42,857
)
 
(504,301
)
 
(42,608
)
 
(492,911
)
Net premiums written
 
627,830

 
376,090

 
321,608

 
1,325,528

 
119,370

 
1,444,898

Change in unearned premiums
 
(35,388
)
 
(8,906
)
 
31,175

 
(13,119
)
 
31,948

 
18,829

Net premiums earned
 
592,442

 
367,184

 
352,783

 
1,312,409

 
151,318

 
1,463,727

Other underwriting income (loss)
 
—

 
1,224

 
4,056

 
5,280

 
673

 
5,953

Losses and loss adjustment expenses
 
(389,172
)
 
(240,958
)
 
(25,997
)
 
(656,127
)
 
(111,416
)
 
(767,543
)
Acquisition expenses
 
(91,094
)
 
(56,785
)
 
(32,654
)
 
(180,533
)
 
(29,556
)
 
(210,089
)
Other operating expenses
 
(109,523
)
 
(33,960
)
 
(39,819
)
 
(183,302
)
 
(15,612
)
 
(198,914
)
Underwriting income (loss)
 
$
2,653

 
$
36,705

 
$
258,369

 
297,727

 
(4,593
)
 
293,134

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
123,038

 
32,000

 
155,038

Net realized gains (losses)
 
 
 
 
 
 
 
125,063

 
(4,306
)
 
120,757

Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
32,536

 
—

 
32,536

Other income (loss)
 
 
 
 
 
 
 
1,129

 
—

 
1,129

Corporate expenses (2)
 
 
 
 
 
 
 
(16,073
)
 
—

 
(16,073
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(2,178
)
 
—

 
(2,178
)
Amortization of intangible assets
 
 
 
 
 
 
 
(19,794
)
 
—

 
(19,794
)
Interest expense
 
 
 
 
 
 
 
(23,375
)
 
(5,905
)
 
(29,280
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
(6,190
)
 
1,238

 
(4,952
)
Income (loss) before income taxes
 
 
 
 
 
 
 
511,883

 
18,434

 
530,317

Income tax (expense) benefit
 
 
 
 
 
 
 
(44,452
)
 
(20
)
 
(44,472
)
Net income (loss)
 
 
 
 
 
 
 
467,431

 
18,414

 
485,845

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(4,590
)
 
(4,590
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(12,301
)
 
(12,301
)
Net income (loss) available to Arch
 
 
 
 
 
 
 
467,431

 
1,523

 
468,954

Preferred dividends
 
 
 
 
 
 
 
(10,403
)
 
—

 
(10,403
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
 
$
457,028

 
$
1,523

 
$
458,551

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
65.7
%
 
65.6
%
 
7.4
%
 
50.0
%
 
73.6
%
 
52.4
%
Acquisition expense ratio
 
15.4
%
 
15.5
%
 
9.3
%
 
13.8
%
 
19.5
%
 
14.4
%
Other operating expense ratio
 
18.5
%
 
9.2
%
 
11.3
%
 
14.0
%
 
10.3
%
 
13.6
%
Combined ratio
 
99.6
%
 
90.3
%
 
28.0
%
 
77.8
%
 
103.4
%
 
80.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
68.2
%
 
68.9
%
 
88.2
%
 
72.4
%
 
73.7
%
 
74.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
 
$
20,776,663

 
$
2,768,466

 
$
23,545,129

Total assets
 
 
 
 
 
 
 
31,418,142

 
3,433,528

 
34,851,670

Total liabilities
 
 
 
 
 
 
 
20,781,438

 
2,251,058

 
23,032,496

 
(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.

 
11
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Six Months Ended
 
 
June 30, 2020
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
2,238,007

 
$
1,929,584

 
$
738,089

 
$
4,904,947

 
$
392,829

 
$
5,150,522

Premiums ceded
 
(736,998
)
 
(567,310
)
 
(88,371
)
 
(1,391,946
)
 
(100,273
)
 
(1,344,965
)
Net premiums written
 
1,501,009

 
1,362,274

 
649,718

 
3,513,001

 
292,556

 
3,805,557

Change in unearned premiums
 
(97,181
)
 
(338,617
)
 
61,021

 
(374,777
)
 
(20,982
)
 
(395,759
)
Net premiums earned
 
1,403,828

 
1,023,657

 
710,739

 
3,138,224

 
271,574

 
3,409,798

Other underwriting income (loss)
 
—

 
1,469

 
11,049

 
12,518

 
1,001

 
13,519

Losses and loss adjustment expenses
 
(1,025,311
)
 
(813,502
)
 
(291,666
)
 
(2,130,479
)
 
(215,462
)
 
(2,345,941
)
Acquisition expenses
 
(215,008
)
 
(170,128
)
 
(72,588
)
 
(457,724
)
 
(44,348
)
 
(502,072
)
Other operating expenses
 
(248,406
)
 
(84,013
)
 
(83,470
)
 
(415,889
)
 
(27,904
)
 
(443,793
)
Underwriting income (loss)
 
$
(84,897
)
 
$
(42,517
)
 
$
274,064

 
146,650

 
(15,139
)
 
131,511

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
214,059

 
62,579

 
276,638

Net realized gains (losses)
 
 
 
 
 
 
 
312,980

 
(123,352
)
 
189,628

Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
(69,328
)
 
—

 
(69,328
)
Other income (loss)
 
 
 
 
 
 
 
5,408

 
—

 
5,408

Corporate expenses (2)
 
 
 
 
 
 
 
(35,144
)
 
—

 
(35,144
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(3,572
)
 
—

 
(3,572
)
Amortization of intangible assets
 
 
 
 
 
 
 
(33,120
)
 
—

 
(33,120
)
Interest expense
 
 
 
 
 
 
 
(50,375
)
 
(13,319
)
 
(63,694
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
20,869

 
12,591

 
33,460

Income (loss) before income taxes
 
 
 
 
 
 
 
508,427

 
(76,640
)
 
431,787

Income tax (expense) benefit
 
 
 
 
 
 
 
(54,474
)
 
402

 
(54,072
)
Net income (loss)
 
 
 
 
 
 
 
453,953

 
(76,238
)
 
377,715

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
(991
)
 
(2,132
)
 
(3,123
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
68,346

 
68,346

Net income (loss) available to Arch
 
 
 
 
 
 
 
452,962

 
(10,024
)
 
442,938

Preferred dividends
 
 
 
 
 
 
 
(20,806
)
 
—

 
(20,806
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
 
$
432,156

 
$
(10,024
)
 
$
422,132

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
73.0
%
 
79.5
%
 
41.0
%
 
67.9
%
 
79.3
%
 
68.8
%
Acquisition expense ratio
 
15.3
%
 
16.6
%
 
10.2
%
 
14.6
%
 
16.3
%
 
14.7
%
Other operating expense ratio
 
17.7
%
 
8.2
%
 
11.7
%
 
13.3
%
 
10.3
%
 
13.0
%
Combined ratio
 
106.0
%
 
104.3
%
 
62.9
%
 
95.8
%
 
105.9
%
 
96.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
67.1
%
 
70.6
%
 
88.0
%
 
71.6
%
 
74.5
%
 
73.9
%
 
(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.

 
12
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Six Months Ended
 
 
June 30, 2019
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
1,861,879

 
$
1,228,402

 
$
720,515

 
$
3,810,282

 
$
348,667

 
$
4,015,688

Premiums ceded
 
(612,717
)
 
(401,024
)
 
(91,655
)
 
(1,104,882
)
 
(83,910
)
 
(1,045,531
)
Net premiums written
 
1,249,162

 
827,378

 
628,860

 
2,705,400

 
264,757

 
2,970,157

Change in unearned premiums
 
(103,215
)
 
(113,829
)
 
46,825

 
(170,219
)
 
32,655

 
(137,564
)
Net premiums earned
 
1,145,947

 
713,549

 
675,685

 
2,535,181

 
297,412

 
2,832,593

Other underwriting income (loss)
 
—

 
5,601

 
7,912

 
13,513

 
1,265

 
14,778

Losses and loss adjustment expenses
 
(745,895
)
 
(480,768
)
 
(37,146
)
 
(1,263,809
)
 
(222,266
)
 
(1,486,075
)
Acquisition expenses
 
(173,918
)
 
(111,111
)
 
(64,326
)
 
(349,355
)
 
(58,582
)
 
(407,937
)
Other operating expenses
 
(222,919
)
 
(69,664
)
 
(79,694
)
 
(372,277
)
 
(27,800
)
 
(400,077
)
Underwriting income (loss)
 
$
3,215

 
$
57,607

 
$
502,431

 
563,253

 
(9,971
)
 
553,282

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
244,287

 
67,700

 
311,987

Net realized gains (losses)
 
 
 
 
 
 
 
236,187

 
24,826

 
261,013

Net impairment losses recognized in earnings
 
 
 
 
 
 
 
—

 
—

 
—

Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
79,403

 
—

 
79,403

Other income (loss)
 
 
 
 
 
 
 
2,212

 
—

 
2,212

Corporate expenses (2)
 
 
 
 
 
 
 
(32,845
)
 
—

 
(32,845
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(3,368
)
 
—

 
(3,368
)
Amortization of intangible assets
 
 
 
 
 
 
 
(40,211
)
 
—

 
(40,211
)
Interest expense
 
 
 
 
 
 
 
(46,857
)
 
(11,488
)
 
(58,345
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
(1,015
)
 
(412
)
 
(1,427
)
Income (loss) before income taxes
 
 
 
 
 
 
 
1,001,046

 
70,655

 
1,071,701

Income tax (expense) benefit
 
 
 
 
 
 
 
(90,338
)
 
(20
)
 
(90,358
)
Net income (loss)
 
 
 
 
 
 
 
910,708

 
70,635

 
981,343

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(9,178
)
 
(9,178
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(54,683
)
 
(54,683
)
Net income (loss) available to Arch
 
 
 
 
 
 
 
910,708

 
6,774

 
917,482

Preferred dividends
 
 
 
 
 
 
 
(20,806
)
 
—

 
(20,806
)
Net income (loss) available to Arch common shareholders
 
 
 
 
 
 
 
$
889,902

 
$
6,774

 
$
896,676

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
65.1
%
 
67.4
%
 
5.5
%
 
49.9
%
 
74.7
%
 
52.5
%
Acquisition expense ratio
 
15.2
%
 
15.6
%
 
9.5
%
 
13.8
%
 
19.7
%
 
14.4
%
Other operating expense ratio
 
19.5
%
 
9.8
%
 
11.8
%
 
14.7
%
 
9.3
%
 
14.1
%
Combined ratio
 
99.8
%
 
92.8
%
 
26.8
%
 
78.4
%
 
103.7
%
 
81.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
67.1
%
 
67.4
%
 
87.3
%
 
71.0
%
 
75.9
%
 
74.0
%
 
(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.


 
13
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Gross premiums written
 
$
1,030,362

 
$
1,207,645

 
$
1,040,240

 
$
1,005,874

 
$
919,925

 
$
2,238,007

 
$
1,861,879

Premiums ceded
 
(358,101
)
 
(378,897
)
 
(351,516
)
 
(302,034
)
 
(292,095
)
 
(736,998
)
 
(612,717
)
Net premiums written
 
672,261

 
828,748

 
688,724

 
703,840

 
627,830

 
1,501,009

 
1,249,162

Change in unearned premiums
 
15,648

 
(112,829
)
 
(42,927
)
 
(98,504
)
 
(35,388
)
 
(97,181
)
 
(103,215
)
Net premiums earned
 
687,909

 
715,919

 
645,797

 
605,336

 
592,442

 
1,403,828

 
1,145,947

Losses and loss adjustment expenses
 
(518,203
)
 
(507,108
)
 
(446,798
)
 
(422,782
)
 
(389,172
)
 
(1,025,311
)
 
(745,895
)
Acquisition expenses
 
(107,671
)
 
(107,337
)
 
(96,437
)
 
(91,259
)
 
(91,094
)
 
(215,008
)
 
(173,918
)
Other operating expenses
 
(118,757
)
 
(129,649
)
 
(116,443
)
 
(115,408
)
 
(109,523
)
 
(248,406
)
 
(222,919
)
Underwriting income (loss)
 
$
(56,722
)
 
$
(28,175
)
 
$
(13,881
)
 
$
(24,113
)
 
$
2,653

 
$
(84,897
)
 
$
3,215

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
75.3
 %
 
70.8
 %
 
69.2
 %
 
69.8
 %
 
65.7
 %
 
73.0
 %
 
65.1
 %
Acquisition expense ratio
 
15.7
 %
 
15.0
 %
 
14.9
 %
 
15.1
 %
 
15.4
 %
 
15.3
 %
 
15.2
 %
Other operating expense ratio
 
17.3
 %
 
18.1
 %
 
18.0
 %
 
19.1
 %
 
18.5
 %
 
17.7
 %
 
19.5
 %
Combined ratio
 
108.3
 %
 
103.9
 %
 
102.1
 %
 
104.0
 %
 
99.6
 %
 
106.0
 %
 
99.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of reinsurance and reinstatement premiums
 
12.5
 %
 
6.9
 %
 
0.9
 %
 
4.3
 %
 
0.4
 %
 
9.6
 %
 
0.2
 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
 
(0.3
)%
 
(0.1
)%
 
(0.4
)%
 
(0.6
)%
 
(0.2
)%
 
(0.2
)%
 
(0.3
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
96.1
 %
 
97.1
 %
 
101.6
 %
 
100.3
 %
 
99.4
 %
 
96.6
 %
 
99.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
65.2
 %
 
68.6
 %
 
66.2
 %
 
70.0
 %
 
68.2
 %
 
67.1
 %
 
67.1
 %
 
(1)
See ‘Comments on Regulation G’ for further discussion.


 
14
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Net premiums written
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property, energy, marine and aviation
 
$
159,801

 
23.8
%
 
$
127,585

 
15.4
%
 
$
95,849

 
13.9
%
 
$
97,966

 
13.9
 %
 
$
103,819

 
16.5
%
 
$
287,386

 
19.1
%
 
$
174,305

 
14.0
%
Professional lines (1)
 
157,899

 
23.5
%
 
169,118

 
20.4
%
 
145,841

 
21.2
%
 
137,569

 
19.5
 %
 
121,679

 
19.4
%
 
327,017

 
21.8
%
 
250,913

 
20.1
%
Programs
 
104,930

 
15.6
%
 
112,532

 
13.6
%
 
96,653

 
14.0
%
 
120,039

 
17.1
 %
 
108,671

 
17.3
%
 
217,462

 
14.5
%
 
209,843

 
16.8
%
Construction and national accounts
 
57,144

 
8.5
%
 
115,999

 
14.0
%
 
114,437

 
16.6
%
 
98,522

 
14.0
 %
 
60,888

 
9.7
%
 
173,143

 
11.5
%
 
156,243

 
12.5
%
Excess and surplus casualty (2)
 
64,703

 
9.6
%
 
65,419

 
7.9
%
 
61,549

 
8.9
%
 
62,843

 
8.9
 %
 
58,466

 
9.3
%
 
130,122

 
8.7
%
 
103,631

 
8.3
%
Travel, accident and health
 
27,997

 
4.2
%
 
126,046

 
15.2
%
 
65,337

 
9.5
%
 
75,192

 
10.7
 %
 
76,537

 
12.2
%
 
154,043

 
10.3
%
 
164,641

 
13.2
%
Lenders products
 
23,690

 
3.5
%
 
33,292

 
4.0
%
 
35,915

 
5.2
%
 
31,005

 
4.4
 %
 
22,373

 
3.6
%
 
56,982

 
3.8
%
 
44,788

 
3.6
%
Other (3)
 
76,097

 
11.3
%
 
78,757

 
9.5
%
 
73,143

 
10.6
%
 
80,704

 
11.5
 %
 
75,397

 
12.0
%
 
154,854

 
10.3
%
 
144,798

 
11.6
%
Total
 
$
672,261

 
100.0
%
 
$
828,748

 
100.0
%
 
$
688,724

 
100.0
%
 
$
703,840

 
100.0
 %
 
$
627,830

 
100.0
%
 
$
1,501,009

 
100.0
%
 
$
1,249,162

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
453,215

 
67.4
%
 
$
602,677

 
72.7
%
 
$
507,193

 
73.6
%
 
$
532,808

 
75.7
 %
 
$
471,664

 
75.1
%
 
$
1,055,892

 
70.3
%
 
$
943,475

 
75.5
%
Europe
 
181,566

 
27.0
%
 
196,042

 
23.7
%
 
151,182

 
22.0
%
 
145,512

 
20.7
 %
 
129,869

 
20.7
%
 
377,608

 
25.2
%
 
262,520

 
21.0
%
Other
 
37,480

 
5.6
%
 
30,029

 
3.6
%
 
30,349

 
4.4
%
 
25,520

 
3.6
 %
 
26,297

 
4.2
%
 
67,509

 
4.5
%
 
43,167

 
3.5
%
Total
 
$
672,261

 
100.0
%
 
$
828,748

 
100.0
%
 
$
688,724

 
100.0
%
 
$
703,840

 
100.0
 %
 
$
627,830

 
100.0
%
 
$
1,501,009

 
100.0
%
 
$
1,249,162

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property, energy, marine and aviation
 
$
120,781

 
17.6
%
 
$
111,183

 
15.5
%
 
$
90,087

 
13.9
%
 
$
80,246

 
13.3
 %
 
$
68,995

 
11.6
%
 
$
231,964

 
16.5
%
 
$
128,633

 
11.2
%
Professional lines (1)
 
154,812

 
22.5
%
 
151,700

 
21.2
%
 
133,423

 
20.7
%
 
135,343

 
22.4
 %
 
115,667

 
19.5
%
 
306,512

 
21.8
%
 
230,458

 
20.1
%
Programs
 
108,464

 
15.8
%
 
108,878

 
15.2
%
 
109,498

 
17.0
%
 
104,432

 
17.3
 %
 
102,687

 
17.3
%
 
217,342

 
15.5
%
 
200,173

 
17.5
%
Construction and national accounts
 
91,605

 
13.3
%
 
99,700

 
13.9
%
 
91,489

 
14.2
%
 
81,472

 
13.5
 %
 
76,795

 
13.0
%
 
191,305

 
13.6
%
 
152,726

 
13.3
%
Excess and surplus casualty (2)
 
60,966

 
8.9
%
 
65,097

 
9.1
%
 
56,397

 
8.7
%
 
53,991

 
8.9
 %
 
47,858

 
8.1
%
 
126,063

 
9.0
%
 
90,227

 
7.9
%
Travel, accident and health
 
52,117

 
7.6
%
 
77,375

 
10.8
%
 
67,922

 
10.5
%
 
81,952

 
13.5
 %
 
83,636

 
14.1
%
 
129,492

 
9.2
%
 
155,211

 
13.5
%
Lenders products (4)
 
23,111

 
3.4
%
 
25,343

 
3.5
%
 
25,001

 
3.9
%
 
(5,724
)
 
(0.9
)%
 
23,570

 
4.0
%
 
48,454

 
3.5
%
 
46,802

 
4.1
%
Other (3)
 
76,053

 
11.1
%
 
76,643

 
10.7
%
 
71,980

 
11.1
%
 
73,624

 
12.2
 %
 
73,234

 
12.4
%
 
152,696

 
10.9
%
 
141,717

 
12.4
%
Total
 
$
687,909

 
100.0
%
 
$
715,919

 
100.0
%
 
$
645,797

 
100.0
%
 
$
605,336

 
100.0
 %
 
$
592,442

 
100.0
%
 
$
1,403,828

 
100.0
%
 
$
1,145,947

 
100.0
%

(1)    Includes professional liability, executive assurance and healthcare business.
(2)    Includes casualty and contract binding business.
(3)    Includes alternative markets, excess workers’ compensation and surety business.
(4)    Reflects a change in earning patterns on certain business in the 2019 third quarter.

 
15
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Gross premiums written
 
$
807,065

 
$
1,122,519

 
$
432,249

 
$
662,572

 
$
545,547

 
$
1,929,584

 
$
1,228,402

Premiums ceded
 
(241,971
)
 
(325,339
)
 
(93,380
)
 
(226,096
)
 
(169,457
)
 
(567,310
)
 
(401,024
)
Net premiums written
 
565,094

 
797,180

 
338,869

 
436,476

 
376,090

 
1,362,274

 
827,378

Change in unearned premiums
 
(84,897
)
 
(253,720
)
 
50,116

 
(72,621
)
 
(8,906
)
 
(338,617
)
 
(113,829
)
Net premiums earned
 
480,197

 
543,460

 
388,985

 
363,855

 
367,184

 
1,023,657

 
713,549

Other underwriting income (loss)
 
(651
)
 
2,120

 
2,051

 
(1,208
)
 
1,224

 
1,469

 
5,601

Losses and loss adjustment expenses
 
(383,433
)
 
(430,069
)
 
(260,182
)
 
(270,379
)
 
(240,958
)
 
(813,502
)
 
(480,768
)
Acquisition expenses
 
(90,522
)
 
(79,606
)
 
(65,528
)
 
(62,393
)
 
(56,785
)
 
(170,128
)
 
(111,111
)
Other operating expenses
 
(38,716
)
 
(45,297
)
 
(39,287
)
 
(32,533
)
 
(33,960
)
 
(84,013
)
 
(69,664
)
Underwriting income (loss)
 
$
(33,125
)
 
$
(9,392
)
 
$
26,039

 
$
(2,658
)
 
$
36,705

 
$
(42,517
)
 
$
57,607

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
79.8
 %
 
79.1
 %
 
66.9
 %
 
74.3
 %
 
65.6
 %
 
79.5
 %
 
67.4
 %
Acquisition expense ratio
 
18.9
 %
 
14.6
 %
 
16.8
 %
 
17.1
 %
 
15.5
 %
 
16.6
 %
 
15.6
 %
Other operating expense ratio
 
8.1
 %
 
8.3
 %
 
10.1
 %
 
8.9
 %
 
9.2
 %
 
8.2
 %
 
9.8
 %
Combined ratio
 
106.8
 %
 
102.0
 %
 
93.8
 %
 
100.3
 %
 
90.3
 %
 
104.3
 %
 
92.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of reinsurance and reinstatement premiums
 
25.3
 %
 
12.7
 %
 
6.4
 %
 
11.5
 %
 
1.2
 %
 
18.6
 %
 
1.7
 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
 
(6.0
)%
 
(2.0
)%
 
(4.9
)%
 
(4.0
)%
 
(3.1
)%
 
(3.9
)%
 
(1.4
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
87.5
 %
 
91.3
 %
 
92.3
 %
 
92.8
 %
 
92.2
 %
 
89.6
 %
 
92.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
70.0
 %
 
71.0
 %
 
78.4
 %
 
65.9
 %
 
68.9
 %
 
70.6
 %
 
67.4
 %
 
(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
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Net premiums written
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property excluding property catastrophe
 
$
163,639

 
29.0
%
 
$
158,924

 
19.9
%
 
$
85,859

 
25.3
%
 
$
118,671

 
27.2
%
 
$
96,050

 
25.5
%
 
$
322,563

 
23.7
%
 
$
198,790

 
24.0
%
Property catastrophe
 
117,676

 
20.8
%
 
89,092

 
11.2
%
 
37,069

 
10.9
%
 
23,597

 
5.4
%
 
46,594

 
12.4
%
 
206,768

 
15.2
%
 
49,977

 
6.0
%
Other specialty (1)
 
117,375

 
20.8
%
 
284,952

 
35.7
%
 
103,254

 
30.5
%
 
94,072

 
21.6
%
 
129,174

 
34.3
%
 
402,327

 
29.5
%
 
269,651

 
32.6
%
Casualty (2)
 
105,049

 
18.6
%
 
190,880

 
23.9
%
 
85,063

 
25.1
%
 
178,802

 
41.0
%
 
78,025

 
20.7
%
 
295,929

 
21.7
%
 
246,509

 
29.8
%
Marine and aviation
 
32,372

 
5.7
%
 
49,785

 
6.2
%
 
11,921

 
3.5
%
 
10,181

 
2.3
%
 
15,619

 
4.2
%
 
82,157

 
6.0
%
 
31,577

 
3.8
%
Other (3)
 
28,983

 
5.1
%
 
23,547

 
3.0
%
 
15,703

 
4.6
%
 
11,153

 
2.6
%
 
10,628

 
2.8
%
 
52,530

 
3.9
%
 
30,874

 
3.7
%
Total
 
$
565,094

 
100.0
%
 
$
797,180

 
100.0
%
 
$
338,869

 
100.0
%
 
$
436,476

 
100.0
%
 
$
376,090

 
100.0
%
 
$
1,362,274

 
100.0
%
 
$
827,378

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bermuda
 
$
240,451

 
42.6
%
 
$
333,619

 
41.8
%
 
$
116,974

 
34.5
%
 
$
190,998

 
43.8
%
 
$
159,147

 
42.3
%
 
$
574,070

 
42.1
%
 
$
270,646

 
32.7
%
United States
 
162,027

 
28.7
%
 
187,466

 
23.5
%
 
119,003

 
35.1
%
 
145,231

 
33.3
%
 
109,296

 
29.1
%
 
349,493

 
25.7
%
 
265,709

 
32.1
%
Europe and other
 
162,616

 
28.8
%
 
276,095

 
34.6
%
 
102,892

 
30.4
%
 
100,247

 
23.0
%
 
107,647

 
28.6
%
 
438,711

 
32.2
%
 
291,023

 
35.2
%
Total
 
$
565,094

 
100.0
%
 
$
797,180

 
100.0
%
 
$
338,869

 
100.0
%
 
$
436,476

 
100.0
%
 
$
376,090

 
100.0
%
 
$
1,362,274

 
100.0
%
 
$
827,378

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property excluding property catastrophe
 
$
124,019

 
25.8
%
 
$
112,652

 
20.7
%
 
$
103,212

 
26.5
%
 
$
90,358

 
24.8
%
 
$
85,479

 
23.3
%
 
$
236,671

 
23.1
%
 
$
169,271

 
23.7
%
Property catastrophe
 
55,226

 
11.5
%
 
53,000

 
9.8
%
 
31,048

 
8.0
%
 
22,617

 
6.2
%
 
18,537

 
5.0
%
 
108,226

 
10.6
%
 
37,269

 
5.2
%
Other specialty (1)
 
123,006

 
25.6
%
 
203,385

 
37.4
%
 
108,074

 
27.8
%
 
112,349

 
30.9
%
 
136,573

 
37.2
%
 
326,391

 
31.9
%
 
258,094

 
36.2
%
Casualty (2)
 
132,756

 
27.6
%
 
135,071

 
24.9
%
 
118,258

 
30.4
%
 
116,242

 
31.9
%
 
103,164

 
28.1
%
 
267,827

 
26.2
%
 
194,788

 
27.3
%
Marine and aviation
 
24,960

 
5.2
%
 
24,858

 
4.6
%
 
12,919

 
3.3
%
 
11,798

 
3.2
%
 
12,498

 
3.4
%
 
49,818

 
4.9
%
 
23,557

 
3.3
%
Other (3)
 
20,230

 
4.2
%
 
14,494

 
2.7
%
 
15,474

 
4.0
%
 
10,491

 
2.9
%
 
10,933

 
3.0
%
 
34,724

 
3.4
%
 
30,570

 
4.3
%
Total
 
$
480,197

 
100.0
%
 
$
543,460

 
100.0
%
 
$
388,985

 
100.0
%
 
$
363,855

 
100.0
%
 
$
367,184

 
100.0
%
 
$
1,023,657

 
100.0
%
 
$
713,549

 
100.0
%
                        
(1)    Includes proportional motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.
(2)      Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.    
(3)     Includes life, casualty clash and other.    

 
17
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Gross premiums written
 
$
369,144

 
$
368,945

 
$
370,658

 
$
375,092

 
$
364,465

 
$
738,089

 
$
720,515

Premiums ceded
 
(44,044
)
 
(44,327
)
 
(55,151
)
 
(57,703
)
 
(42,857
)
 
(88,371
)
 
(91,655
)
Net premiums written
 
325,100

 
324,618

 
315,507

 
317,389

 
321,608

 
649,718

 
628,860

Change in unearned premiums
 
40,613

 
20,408

 
32,148

 
25,611

 
31,175

 
61,021

 
46,825

Net premiums earned
 
365,713

 
345,026

 
347,655

 
343,000

 
352,783

 
710,739

 
675,685

Other underwriting income (1)
 
6,450

 
4,599

 
4,138

 
3,955

 
4,056

 
11,049

 
7,912

Losses and loss adjustment expenses
 
(224,100
)
 
(67,566
)
 
(3,287
)
 
(13,080
)
 
(25,997
)
 
(291,666
)
 
(37,146
)
Acquisition expenses
 
(34,052
)
 
(38,536
)
 
(35,597
)
 
(34,396
)
 
(32,654
)
 
(72,588
)
 
(64,326
)
Other operating expenses
 
(37,574
)
 
(45,896
)
 
(36,395
)
 
(37,003
)
 
(39,819
)
 
(83,470
)
 
(79,694
)
Underwriting income
 
$
76,437

 
$
197,627

 
$
276,514

 
$
262,476

 
$
258,369

 
$
274,064

 
$
502,431

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
61.3
 %
 
19.6
 %
 
0.9
 %
 
3.8
 %
 
7.4
 %
 
41.0
 %
 
5.5
 %
Acquisition expense ratio
 
9.3
 %
 
11.2
 %
 
10.2
 %
 
10.0
 %
 
9.3
 %
 
10.2
 %
 
9.5
 %
Other operating expense ratio
 
10.3
 %
 
13.3
 %
 
10.5
 %
 
10.8
 %
 
11.3
 %
 
11.7
 %
 
11.8
 %
Combined ratio
 
80.9
 %
 
44.1
 %
 
21.6
 %
 
24.6
 %
 
28.0
 %
 
62.9
 %
 
26.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (favorable) adverse development in prior year loss reserves, net of related adjustments
 
(0.1
)%
 
(1.8
)%
 
(9.4
)%
 
(9.6
)%
 
(6.5
)%
 
(0.9
)%
 
(8.8
)%
Combined ratio excluding prior year development (2)
 
81.0
 %
 
45.9
 %
 
31.0
 %
 
34.2
 %
 
34.5
 %
 
63.8
 %
 
35.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
88.1
 %
 
88.0
 %
 
85.1
 %
 
84.6
 %
 
88.2
 %
 
88.0
 %
 
87.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written by underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
261,124

 
$
264,108

 
$
258,512

 
$
260,202

 
$
258,774

 
$
525,232

 
$
514,154

Other
 
63,976

 
60,510

 
56,995

 
57,187

 
62,834

 
124,486

 
114,706

Total
 
$
325,100

 
$
324,618

 
$
315,507

 
$
317,389

 
$
321,608

 
$
649,718

 
$
628,860

United States %
 
80.3
 %
 
81.4
 %
 
81.9
 %
 
82.0
 %
 
80.5
 %
 
80.8
 %
 
81.8
 %
Other %
 
19.7
 %
 
18.6
 %
 
18.1
 %
 
18.0
 %
 
19.5
 %
 
19.2
 %
 
18.2
 %

(1)     Primarily related to income earned on various risk-sharing products offered to government sponsored enterprises and mortgage lenders.
(2)    See ‘Comments on Regulation G’ for further discussion.

 
18
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment

(U.S. Dollars in millions)
 
June 30, 2020
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
June 30, 2019
Insurance In Force (IIF) (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. primary mortgage insurance
 
$
276,643

 
65.9
%
 
$
284,203

 
68.9
%
 
$
287,150

 
68.7
%
 
$
284,496

 
69.7
%
 
$
279,297

 
69.1
%
Mortgage reinsurance
 
27,457

 
6.5
%
 
24,335

 
5.9
%
 
26,768

 
6.4
%
 
25,440

 
6.2
%
 
26,286

 
6.5
%
Other (2)
 
115,803

 
27.6
%
 
103,731

 
25.2
%
 
104,346

 
24.9
%
 
98,054

 
24.0
%
 
98,335

 
24.3
%
Total
 
$
419,903

 
100.0
%
 
$
412,269

 
100.0
%
 
$
418,264

 
100.0
%
 
$
407,990

 
100.0
%
 
$
403,918

 
100.0
%
Risk In Force (RIF) (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. primary mortgage insurance
 
$
70,200

 
91.0
%
 
$
72,566

 
92.0
%
 
$
73,388

 
91.9
%
 
$
72,916

 
92.0
%
 
$
71,760

 
91.8
%
Mortgage reinsurance
 
2,116

 
2.7
%
 
1,961

 
2.5
%
 
2,129

 
2.7
%
 
2,086

 
2.6
%
 
2,182

 
2.8
%
Other (2)
 
4,795

 
6.2
%
 
4,387

 
5.6
%
 
4,380

 
5.5
%
 
4,216

 
5.3
%
 
4,260

 
5.4
%
Total
 
$
77,111

 
100.0
%
 
$
78,914

 
100.0
%
 
$
79,897

 
100.0
%
 
$
79,218

 
100.0
%
 
$
78,202

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures for U.S. primary mortgage insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by credit quality (FICO score):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
>=740
 
$
40,297

 
57.4
%
 
$
41,738

 
57.5
%
 
$
42,301

 
57.6
%
 
$
41,975

 
57.6
%
 
$
41,333

 
57.6
%
680-739
 
24,346

 
34.7
%
 
25,078

 
34.6
%
 
25,240

 
34.4
%
 
25,013

 
34.3
%
 
24,488

 
34.1
%
620-679
 
5,188

 
7.4
%
 
5,368

 
7.4
%
 
5,444

 
7.4
%
 
5,501

 
7.5
%
 
5,494

 
7.7
%
<620
 
369

 
0.5
%
 
382

 
0.5
%
 
403

 
0.5
%
 
427

 
0.6
%
 
445

 
0.6
%
Total
 
$
70,200

 
100.0
%
 
$
72,566

 
100.0
%
 
$
73,388

 
100.0
%
 
$
72,916

 
100.0
%
 
$
71,760

 
100.0
%
Weighted average FICO score
 
743

 
 
 
743

 
 
 
743

 
 
 
743

 
 
 
743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by Loan-To-Value (LTV):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
95.01% and above
 
$
8,859

 
12.6
%
 
$
9,060

 
12.5
%
 
$
9,064

 
12.4
%
 
$
8,948

 
12.3
%
 
$
8,535

 
11.9
%
90.01% to 95.00%
 
37,830

 
53.9
%
 
39,594

 
54.6
%
 
40,136

 
54.7
%
 
40,086

 
55.0
%
 
39,777

 
55.4
%
85.01% to 90.00%
 
20,071

 
28.6
%
 
20,619

 
28.4
%
 
20,890

 
28.5
%
 
20,708

 
28.4
%
 
20,419

 
28.5
%
85.00% and below
 
3,440

 
4.9
%
 
3,293

 
4.5
%
 
3,298

 
4.5
%
 
3,174

 
4.4
%
 
3,029

 
4.2
%
Total
 
$
70,200

 
100.0
%
 
$
72,566

 
100.0
%
 
$
73,388

 
100.0
%
 
$
72,916

 
100.0
%
 
$
71,760

 
100.0
%
Weighted average LTV
 
92.9
%
 
 
 
93.0
%
 
 
 
93.0
%
 
 
 
93.1
%
 
 
 
93.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by State:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Texas
 
$
5,560

 
7.9
%
 
$
5,683

 
7.8
%
 
$
5,678

 
7.7
%
 
$
5,599

 
7.7
%
 
$
5,509

 
7.7
%
California
 
4,948

 
7.0
%
 
5,106

 
7.0
%
 
5,187

 
7.1
%
 
4,984

 
6.8
%
 
4,736

 
6.6
%
Florida
 
3,737

 
5.3
%
 
3,863

 
5.3
%
 
3,887

 
5.3
%
 
3,821

 
5.2
%
 
3,699

 
5.2
%
Georgia
 
2,861

 
4.1
%
 
2,819

 
3.9
%
 
2,753

 
3.8
%
 
2,667

 
3.7
%
 
2,599

 
3.6
%
Virginia
 
2,656

 
3.8
%
 
2,814

 
3.9
%
 
2,881

 
3.9
%
 
2,907

 
4.0
%
 
2,916

 
4.1
%
Illinois
 
2,643

 
3.8
%
 
2,621

 
3.6
%
 
2,616

 
3.6
%
 
2,602

 
3.6
%
 
2,536

 
3.5
%
Minnesota
 
2,473

 
3.5
%
 
2,509

 
3.5
%
 
2,514

 
3.4
%
 
2,480

 
3.4
%
 
2,434

 
3.4
%
North Carolina
 
2,459

 
3.5
%
 
2,475

 
3.4
%
 
2,470

 
3.4
%
 
2,469

 
3.4
%
 
2,462

 
3.4
%
Washington
 
2,291

 
3.3
%
 
2,426

 
3.3
%
 
2,474

 
3.4
%
 
2,466

 
3.4
%
 
2,421

 
3.4
%
Maryland
 
2,248

 
3.2
%
 
2,376

 
3.3
%
 
2,437

 
3.3
%
 
2,443

 
3.4
%
 
2,420

 
3.4
%
Other
 
38,324

 
54.6
%
 
39,874

 
54.9
%
 
40,491

 
55.2
%
 
40,478

 
55.5
%
 
40,028

 
55.8
%
Total
 
$
70,200

 
100.0
%
 
$
72,566

 
100.0
%
 
$
73,388

 
100.0
%
 
$
72,916

 
100.0
%
 
$
71,760

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average coverage (end of period RIF divided by IIF)
 
25.4
%
 
 
 
25.5
%
 
 
 
25.6
%
 
 
 
25.6
%
 
 
 
25.7
%
 
 
U.S. mortgage insurance total RIF, net of reinsurance (4)
 
$
57,258

 
 
 
$
58,693

 
 
 
$
58,512

 
 
 
$
57,768

 
 
 
$
56,562

 
 
Analysts’ persistency (5)
 
66.6
%
 
 
 
72.6
%
 
 
 
75.7
%
 
 
 
78.6
%
 
 
 
80.9
%
 
 
Risk-to-capital ratio -- Arch MI U.S. (6)
 
10.2:1

 
 
 
11.3:1

 
 
 
12.0:1

 
 
 
12.9:1

 
 
 
11.4:1

 
 
PMIER sufficiency ratio -- Arch MI U.S. (7)
 
161
%
 
 
 
165
%
 
 
 
161
%
 
 
 
154
%
 
 
 
163
%
 
 

(1)    The aggregate dollar amount of each insured mortgage loan’s current principal balance.         (4)    Total RIF for the U.S. mortgage insurance operations (see note 3) after external reinsurance.
(2)
Includes GSE credit risk-sharing transactions and international insurance business.        (5)    Represents the % of IIF at the beginning of a 12-month period that remained in force at the end of the period.
(3)
The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied    (6)    Represents current (non-delinquent) RIF, net of reinsurance, divided by statutory capital (estimate for June 30, 2020).
by the insurance coverage percentage specified in the policy for insurance policies issued and    (7)    Calculated as available assets divided by required assets as defined within PMIERs (estimate for June 30, 2020).
after contract limits and/or loss ratio caps for risk-sharing or reinsurance transactions.            There was approximately $1.35 billion of excess available assets at June 30, 2020.

 
19
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment

(U.S. Dollars in millions, except policy/loan/claim count)
 
Three Months Ended
 
 
June 30, 2020
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
June 30, 2019
Supplemental disclosures for U.S. primary mortgage insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total new insurance written (NIW) (1)
 
$
24,551

 
 
 
$
16,778

 
 
 
$
24,051

 
 
 
$
25,313

 
 
 
$
17,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW by credit quality (FICO score):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
>=740
 
$
15,851

 
64.6
%
 
$
10,069

 
60.0
%
 
$
14,793

 
61.5
%
 
$
15,204

 
60.1
%
 
$
9,862

 
57.5
%
680-739
 
7,781

 
31.7
%
 
5,787

 
34.5
%
 
8,092

 
33.6
%
 
8,725

 
34.5
%
 
6,139

 
35.8
%
620-679
 
919

 
3.7
%
 
922

 
5.5
%
 
1,166

 
4.8
%
 
1,384

 
5.5
%
 
1,160

 
6.8
%
  Total
 
$
24,551

 
100.0
%
 
$
16,778

 
100.0
%
 
$
24,051

 
100.0
%
 
$
25,313

 
100.0
%
 
$
17,161

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW by LTV:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
95.01% and above
 
$
1,948

 
7.9
%
 
$
1,668

 
9.9
%
 
$
2,260

 
9.4
%
 
$
3,182

 
12.6
%
 
$
2,530

 
14.7
%
90.01% to 95.00%
 
9,403

 
38.3
%
 
7,199

 
42.9
%
 
10,059

 
41.8
%
 
10,409

 
41.1
%
 
7,497

 
43.7
%
85.01% to 90.00%
 
8,140

 
33.2
%
 
5,329

 
31.8
%
 
7,839

 
32.6
%
 
7,762

 
30.7
%
 
5,026

 
29.3
%
85.00% and below
 
5,060

 
20.6
%
 
2,582

 
15.4
%
 
3,893

 
16.2
%
 
3,960

 
15.6
%
 
2,108

 
12.3
%
  Total
 
$
24,551

 
100.0
%
 
$
16,778

 
100.0
%
 
$
24,051

 
100.0
%
 
$
25,313

 
100.0
%
 
$
17,161

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW monthly vs. single:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly
 
$
23,391

 
95.3
%
 
$
15,692

 
93.5
%
 
$
22,707

 
94.4
%
 
$
23,358

 
92.3
%
 
$
15,935

 
92.9
%
Single
 
1,160

 
4.7
%
 
1,086

 
6.5
%
 
1,344

 
5.6
%
 
1,955

 
7.7
%
 
1,226

 
7.1
%
  Total
 
$
24,551

 
100.0
%
 
$
16,778

 
100.0
%
 
$
24,051

 
100.0
%
 
$
25,313

 
100.0
%
 
$
17,161

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW purchase vs. refinance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
14,956

 
60.9
%
 
$
12,299

 
73.3
%
 
$
16,476

 
68.5
%
 
$
19,068

 
75.3
%
 
$
14,992

 
87.4
%
Refinance
 
9,595

 
39.1
%
 
4,479

 
26.7
%
 
7,575

 
31.5
%
 
6,245

 
24.7
%
 
2,169

 
12.6
%
  Total
 
$
24,551

 
100.0
%
 
$
16,778

 
100.0
%
 
$
24,051

 
100.0
%
 
$
25,313

 
100.0
%
 
$
17,161

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending number of policies in force (PIF) (3)
 
1,259,328

 
 
 
1,293,799

 
 
 
1,307,884

 
 
 
1,304,263

 
 
 
1,292,215

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rollforward of insured loans in default:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning delinquent number of loans
 
18,414

 
 
 
20,163

 
 
 
19,243

 
 
 
18,761

 
 
 
19,827

 
 
Plus: new notices
 
58,374

 
 
 
9,419

 
 
 
10,289

 
 
 
10,111

 
 
 
8,906

 
 
Less: cures
 
(11,664
)
 
 
 
(10,541
)
 
 
 
(8,724
)
 
 
 
(8,970
)
 
 
 
(9,201
)
 
 
Less: paid claims
 
(457
)
 
 
 
(627
)
 
 
 
(645
)
 
 
 
(659
)
 
 
 
(771
)
 
 
Ending delinquent number of loans (3)
 
64,667

 
 
 
18,414

 
 
 
20,163

 
 
 
19,243

 
 
 
18,761

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending percentage of loans in default (3)
 
5.14
%
 
 
 
1.42
%
 
 
 
1.54
%
 
 
 
1.48
%
 
 
 
1.45
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of claims paid
 
457

 
 
 
627

 
 
 
645

 
 
 
659

 
 
 
771

 
 
Total paid claims (in thousands)
 
$
20,101

 
 
 
$
26,038

 
 
 
$
25,253

 
 
 
$
26,082

 
 
 
$
32,025

 
 
Average per claim (in thousands)
 
$
44.0

 
 
 
$
41.5

 
 
 
$
39.2

 
 
 
$
39.6

 
 
 
$
41.5

 
 
Severity (2)
 
96.3
%
 
 
 
92.8
%
 
 
 
94.0
%
 
 
 
95.6
%
 
 
 
95.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average case reserve per default (in thousands)
 
$
6.9

 
 
 
$
14.4

 
 
 
$
13.3

 
 
 
$
14.7

 
 
 
$
16.1

 
 

(1)    The original principal balance of all loans that received coverage during the period.        
(2)    Represents total paid claims divided by RIF of loans for which claims were paid.
(3)    Includes first lien primary and pool policies.


 
20
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment

Supplemental disclosures for U.S. primary mortgage insurance:
(U.S. Dollars in millions)
 
June 30, 2020
 
December 31, 2019
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2010 and prior
 
25.5
%
 
$
15,538

 
5.6
%
 
3,555

 
5.1
%
 
11.62
%
 
58.2
%
 
$
17,251

 
6.0
%
 
3,990

 
5.4
%
 
8.79
%
2011
 
0.5
%
 
1,350

 
0.5
%
 
369

 
0.5
%
 
3.85
%
 
0.7
%
 
1,678

 
0.6
%
 
464

 
0.6
%
 
1.59
%
2012
 
1.5
%
 
5,131

 
1.9
%
 
1,418

 
2.0
%
 
3.23
%
 
1.3
%
 
6,293

 
2.2
%
 
1,753

 
2.4
%
 
0.89
%
2013
 
3.1
%
 
10,009

 
3.6
%
 
2,803

 
4.0
%
 
3.47
%
 
3.0
%
 
12,276

 
4.3
%
 
3,433

 
4.7
%
 
0.99
%
2014
 
2.7
%
 
11,133

 
4.0
%
 
3,068

 
4.4
%
 
3.98
%
 
2.4
%
 
13,714

 
4.8
%
 
3,778

 
5.1
%
 
1.16
%
2015
 
4.6
%
 
20,749

 
7.5
%
 
5,578

 
7.9
%
 
3.79
%
 
3.2
%
 
25,788

 
9.0
%
 
6,880

 
9.4
%
 
0.87
%
2016
 
10.5
%
 
34,024

 
12.3
%
 
8,950

 
12.7
%
 
5.03
%
 
7.6
%
 
40,898

 
14.2
%
 
10,670

 
14.5
%
 
1.03
%
2017
 
13.6
%
 
35,019

 
12.7
%
 
9,031

 
12.9
%
 
5.62
%
 
9.9
%
 
43,896

 
15.3
%
 
11,262

 
15.3
%
 
1.00
%
2018
 
15.2
%
 
39,385

 
14.2
%
 
9,969

 
14.2
%
 
6.33
%
 
11.2
%
 
51,776

 
18.0
%
 
13,086

 
17.8
%
 
0.86
%
2019
 
18.3
%
 
63,647

 
23.0
%
 
15,683

 
22.3
%
 
4.63
%
 
2.4
%
 
73,580

 
25.6
%
 
18,072

 
24.6
%
 
0.14
%
2020
 
4.5
%
 
40,658

 
14.7
%
 
9,776

 
13.9
%
 
1.58
%
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
100.0
%
 
$
276,643

 
100.0
%
 
$
70,200

 
100.0
%
 
5.14
%
 
100.0
%
 
$
287,150

 
100.0
%
 
$
73,388

 
100.0
%
 
1.54
%

(1)
Total reserves for losses and loss adjustment expenses, net of recoverables, was $466.3 million at June 30, 2020, compared to $278.7 million at December 31, 2019.
(2)
The aggregate dollar amount of each insured mortgage loan’s current principal balance.
(3)
The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied by the insurance coverage percentage specified in the policy for insurance policies issued and after contract limits and/or loss ratio caps for risk-sharing transactions.

 
21
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information - Consolidated Excluding the 'Other' Segment (Sub-Total (Core))


(U.S. Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Gross premiums written
 
$
2,206,410

 
$
2,698,537

 
$
1,842,071

 
$
2,043,292

 
$
1,829,829

 
$
4,904,947

 
$
3,810,282

Premiums ceded
 
(643,955
)
 
(747,991
)
 
(498,971
)
 
(585,587
)
 
(504,301
)
 
(1,391,946
)
 
(1,104,882
)
Net premiums written
 
1,562,455

 
1,950,546

 
1,343,100

 
1,457,705

 
1,325,528

 
3,513,001

 
2,705,400

Change in unearned premiums
 
(28,636
)
 
(346,141
)
 
39,337

 
(145,514
)
 
(13,119
)
 
(374,777
)
 
(170,219
)
Net premiums earned
 
1,533,819

 
1,604,405

 
1,382,437

 
1,312,191

 
1,312,409

 
3,138,224

 
2,535,181

Other underwriting income (loss)
 
5,799

 
6,719

 
6,189

 
2,747

 
5,280

 
12,518

 
13,513

Losses and loss adjustment expenses
 
(1,125,736
)
 
(1,004,743
)
 
(710,267
)
 
(706,241
)
 
(656,127
)
 
(2,130,479
)
 
(1,263,809
)
Acquisition expenses
 
(232,245
)
 
(225,479
)
 
(197,562
)
 
(188,048
)
 
(180,533
)
 
(457,724
)
 
(349,355
)
Other operating expenses
 
(195,047
)
 
(220,842
)
 
(192,125
)
 
(184,944
)
 
(183,302
)
 
(415,889
)
 
(372,277
)
Underwriting income (loss)
 
$
(13,410
)
 
$
160,060

 
$
288,672

 
$
235,705

 
$
297,727

 
$
146,650

 
$
563,253

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
73.4
 %
 
62.6
 %
 
51.4
 %
 
53.8
 %
 
50.0
 %
 
67.9
 %
 
49.9
 %
Acquisition expense ratio
 
15.1
 %
 
14.1
 %
 
14.3
 %
 
14.3
 %
 
13.8
 %
 
14.6
 %
 
13.8
 %
Other operating expense ratio
 
12.7
 %
 
13.8
 %
 
13.9
 %
 
14.1
 %
 
14.0
 %
 
13.3
 %
 
14.7
 %
Combined ratio
 
101.2
 %
 
90.5
 %
 
79.6
 %
 
82.2
 %
 
77.8
 %
 
95.8
 %
 
78.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of reinsurance and reinstatement premiums

 
13.5
 %
 
7.4
 %
 
2.2
 %
 
5.2
 %
 
0.5
 %
 
10.4
 %
 
0.6
 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments

 
(2.0
)%
 
(1.1
)%
 
(4.0
)%
 
(3.9
)%
 
(2.7
)%
 
(1.6
)%
 
(2.8
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
89.7
 %
 
84.2
 %
 
81.4
 %
 
80.9
 %
 
80.0
 %
 
87.0
 %
 
80.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Components of losses and loss adjustment expenses incurred (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid losses and loss adjustment expenses
 
$
550,481

 
$
530,012

 
$
627,929

 
$
508,364

 
$
494,368

 
$
1,080,493

 
$
925,092

Change in unpaid losses and loss adjustment expenses
 
575,255

 
474,731

 
82,338

 
197,877

 
161,759

 
1,049,986

 
338,717

Total losses and loss adjustment expenses
 
$
1,125,736

 
$
1,004,743

 
$
710,267

 
$
706,241

 
$
656,127

 
$
2,130,479

 
$
1,263,809

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
70.8
 %
 
72.3
 %
 
72.9
 %
 
71.3
 %
 
72.4
 %
 
71.6
 %
 
71.0
 %
 
(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
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
 
 
 
 
 
 
 
 
 
 
 
Net impact on underwriting results:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
(2,148
)
 
$
(776
)
 
$
(2,839
)
 
$
(3,934
)
 
$
(1,469
)
 
$
(2,924
)
 
$
(3,120
)
Reinsurance
 
(28,933
)
 
(10,960
)
 
(19,081
)
 
(14,716
)
 
(11,251
)
 
(39,893
)
 
(9,671
)
Mortgage
 
(306
)
 
(6,101
)
 
(32,763
)
 
(33,031
)
 
(22,797
)
 
(6,407
)
 
(59,419
)
Total
 
$
(31,387
)
 
$
(17,837
)
 
$
(54,683
)
 
$
(51,681
)
 
$
(35,517
)
 
$
(49,224
)
 
$
(72,210
)
Impact on losses and loss adjustment expenses:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
(2,518
)
 
$
(1,115
)
 
$
(4,403
)
 
$
(4,354
)
 
$
(2,607
)
 
$
(3,633
)
 
$
(7,033
)
Reinsurance
 
(40,211
)
 
(11,627
)
 
(20,058
)
 
(15,309
)
 
(12,697
)
 
(51,838
)
 
(11,029
)
Mortgage
 
(208
)
 
(6,101
)
 
(32,763
)
 
(33,031
)
 
(22,803
)
 
(6,309
)
 
(59,425
)
Total
 
$
(42,937
)
 
$
(18,843
)
 
$
(57,224
)
 
$
(52,694
)
 
$
(38,107
)
 
$
(61,780
)
 
$
(77,487
)
Impact on acquisition expenses:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
370

 
$
339

 
$
1,564

 
$
420

 
$
1,138

 
$
709

 
$
3,913

Reinsurance
 
11,278

 
667

 
977

 
593

 
1,446

 
11,945

 
1,358

Mortgage
 
(98
)
 
—

 
—

 
—

 
6

 
(98
)
 
6

Total
 
$
11,550

 
$
1,006

 
$
2,541

 
$
1,013

 
$
2,590

 
$
12,556

 
$
5,277

Impact on combined ratio:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
(0.3
)%
 
(0.1
)%
 
(0.4
)%
 
(0.6
)%
 
(0.2
)%
 
(0.2
)%
 
(0.3
)%
Reinsurance
 
(6.0
)%
 
(2.0
)%
 
(4.9
)%
 
(4.0
)%
 
(3.1
)%
 
(3.9
)%
 
(1.4
)%
Mortgage
 
(0.1
)%
 
(1.8
)%
 
(9.4
)%
 
(9.6
)%
 
(6.5
)%
 
(0.9
)%
 
(8.8
)%
Total
 
(2.0
)%
 
(1.1
)%
 
(4.0
)%
 
(3.9
)%
 
(2.7
)%
 
(1.6
)%
 
(2.8
)%
Impact on loss ratio:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
(0.4
)%
 
(0.2
)%
 
(0.7
)%
 
(0.7
)%
 
(0.4
)%
 
(0.3
)%
 
(0.6
)%
Reinsurance
 
(8.4
)%
 
(2.1
)%
 
(5.2
)%
 
(4.2
)%
 
(3.5
)%
 
(5.1
)%
 
(1.5
)%
Mortgage
 
(0.1
)%
 
(1.8
)%
 
(9.4
)%
 
(9.6
)%
 
(6.5
)%
 
(0.9
)%
 
(8.8
)%
Total
 
(2.8
)%
 
(1.2
)%
 
(4.1
)%
 
(4.0
)%
 
(2.9
)%
 
(2.0
)%
 
(3.1
)%
Impact on acquisition expense ratio:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
0.1
 %
 
0.1
 %
 
0.3
 %
 
0.1
 %
 
0.2
 %
 
0.1
 %
 
0.3
 %
Reinsurance
 
2.4
 %
 
0.1
 %
 
0.3
 %
 
0.2
 %
 
0.4
 %
 
1.2
 %
 
0.1
 %
Mortgage
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
Total
 
0.8
 %
 
0.1
 %
 
0.1
 %
 
0.1
 %
 
0.2
 %
 
0.4
 %
 
0.3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated net losses incurred from current accident year catastrophic events (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
85,929

 
$
49,483

 
$
5,531

 
$
26,085

 
$
2,565

 
$
135,412

 
$
2,619

Reinsurance
 
121,263

 
68,953

 
24,831

 
41,948

 
4,589

 
190,216

 
12,413

Total
 
$
207,192

 
$
118,436

 
$
30,362

 
$
68,033

 
$
7,154

 
$
325,628

 
$
15,032

Impact on combined ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
12.5
 %
 
6.9
 %
 
0.9
 %
 
4.3
 %
 
0.4
 %
 
9.6
 %
 
0.2
 %
Reinsurance
 
25.3
 %
 
12.7
 %
 
6.4
 %
 
11.5
 %
 
1.2
 %
 
18.6
 %
 
1.7
 %
Total
 
13.5
 %
 
7.4
 %
 
2.2
 %
 
5.2
 %
 
0.5
 %
 
10.4
 %
 
0.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated impact of COVID-19 event, net of reinsurance and reinstatement premiums, included in current accident year catastrophic events (3)
 
 
 
 
 
 
Insurance
 
$
78,059

 
$
35,946

 
$
—

 
$
—

 
$
—

 
$
114,005

 
$
—

Reinsurance
 
95,039

 
$
50,700

 
—

 
—

 
—

 
145,739

 
—

Total
 
$
173,098

 
$
86,646

 
$
—

 
$
—

 
$
—

 
$
259,744

 
$
—

Impact on combined ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
11.3
 %
 
5.0
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
8.1
 %
 
0.0
 %
Reinsurance
 
19.8
 %
 
9.3
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
14.2
 %
 
0.0
 %
Total
 
11.3
 %
 
5.4
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
8.3
 %
 
0.0
 %
 
(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
Equals estimated losses from catastrophic events occurring in the current accident year (e.g. natural catastrophes, man-made events, pandemic events), net of reinsurance and reinstatement premiums. As regards the natural catastrophe estimates included within, amounts shown for the insurance segment are for named catastrophic events only, while amounts shown for the reinsurance segment include (i) named events with over $5 million of losses incurred by its Bermuda and Europe operations and (ii) all catastrophe losses incurred by its U.S. operations. Amounts not applicable for the mortgage segment.
(3)
Equals estimated losses for exposures through June 30, 2020 to the COVID-19 global pandemic, net of reinsurance and reinstatement premiums. The amounts represent a subset of the estimated losses for the current accident year catastrophic events.

 
23
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Investable Asset Summary and Investment Portfolio Metrics

The following table summarizes the Company’s investable assets and portfolio metrics (1):
(U.S. Dollars in thousands)
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
Investable assets (1) (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities available for sale, at fair value
 
$
16,557,966

 
67.5
 %
 
$
16,163,702

 
72.2
 %
 
$
16,187,651

 
72.6
 %
 
$
15,831,411

 
73.4
 %
 
$
15,184,279

 
73.1
 %
Fixed maturities—fair value option (3)
 
375,793

 
1.5
 %
 
342,241

 
1.5
 %
 
337,860

 
1.5
 %
 
345,588

 
1.6
 %
 
348,298

 
1.7
 %
Fixed maturities pledged under securities lending agreements, at fair value
 
457,906

 
1.9
 %
 
177,442

 
0.8
 %
 
368,510

 
1.7
 %
 
409,795

 
1.9
 %
 
427,217

 
2.1
 %
Total fixed maturities
 
17,391,665

 
70.9
 %
 
16,683,385

 
74.6
 %
 
16,894,021

 
75.8
 %
 
16,586,794

 
76.9
 %
 
15,959,794

 
76.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities, at fair value
 
1,194,874

 
4.9
 %
 
1,118,734

 
5.0
 %
 
773,588

 
3.5
 %
 
506,998

 
2.4
 %
 
606,240

 
2.9
 %
Equity securities—fair value option (3)
 
31,197

 
0.1
 %
 
29,905

 
0.1
 %
 
42,896

 
0.2
 %
 
41,436

 
0.2
 %
 
47,367

 
0.2
 %
Equity securities pledged under securities lending agreements, at fair value
 
6,597

 
0.0
 %
 
—

 
0.0
 %
 
11,358

 
0.1
 %
 
10,620

 
0.0
 %
 
13,293

 
0.1
 %
Total equity securities
 
1,232,668

 
5.0
 %
 
1,148,639

 
5.1
 %
 
827,842

 
3.7
 %
 
559,054

 
2.6
 %
 
666,900

 
3.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments—fair value option (3)
 
1,212,788

 
4.9
 %
 
1,153,737

 
5.2
 %
 
1,336,920

 
6.0
 %
 
1,369,554

 
6.4
 %
 
1,327,134

 
6.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments accounted for using the equity method (4)
 
1,727,302

 
7.0
 %
 
1,676,055

 
7.5
 %
 
1,660,396

 
7.5
 %
 
1,575,832

 
7.3
 %
 
1,581,972

 
7.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments available for sale, at fair value
 
2,277,866

 
9.3
 %
 
944,531

 
4.2
 %
 
956,546

 
4.3
 %
 
751,989

 
3.5
 %
 
821,961

 
4.0
 %
Short-term investments—fair value option (3)
 
14,317

 
0.1
 %
 
52,548

 
0.2
 %
 
47,711

 
0.2
 %
 
33,369

 
0.2
 %
 
25,289

 
0.1
 %
Total short-term investments
 
2,292,183

 
9.3
 %
 
997,079

 
4.5
 %
 
1,004,257

 
4.5
 %
 
785,358

 
3.6
 %
 
847,250

 
4.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
746,606

 
3.0
 %
 
785,704

 
3.5
 %
 
623,793

 
2.8
 %
 
799,709

 
3.7
 %
 
536,339

 
2.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities transactions entered into but not settled at the balance sheet date
 
(72,018
)
 
(0.3
)%
 
(68,747
)
 
(0.3
)%
 
(61,553
)
 
(0.3
)%
 
(110,213
)
 
(0.5
)%
 
(142,726
)
 
(0.7
)%
Total investable assets held by the Company
 
$
24,531,194

 
100.0
 %
 
$
22,375,852

 
100.0
 %
 
$
22,285,676

 
100.0
 %
 
$
21,566,088

 
100.0
 %
 
$
20,776,663

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average effective duration (in years)
 
3.18

 
 
 
3.19

 
 
 
3.40

 
 
 
3.64

 
 
 
3.52

 
 

Average S&P/Moody’s credit ratings (5)
 
 AA/Aa2

 
 
 
 AA/Aa2

 
 
 
 AA/Aa2

 
 
 
 AA/Aa2

 
 
 
 AA/Aa2

 
 

Embedded book yield (before investment expenses)
 
1.85
%
 
 
 
2.34
%
 
 
 
2.55
%
 
 
 
2.70
%
 
 
 
2.87
%
 
 


(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results. Such amounts are summarized as follows:
Investable assets in ‘other’ segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
107,653

 
 
 
$
96,580

 
 
 
$
102,437

 
 
 
$
80,390

 
 
 
$
68,977

 
 
Investments accounted for using the fair value option
 
1,886,676

 
 
 
1,732,086

 
 
 
1,898,090

 
 
 
2,048,296

 
 
 
1,972,947

 
 
Fixed maturities available for sale, at fair value
 
649,765

 
 
 
677,869

 
 
 
706,875

 
 
 
639,112

 
 
 
697,453

 
 
Equity securities, at fair value
 
62,443

 
 
 
63,169

 
 
 
65,337

 
 
 
43,487

 
 
 
64,703

 
 
Securities sold but not yet purchased
 
(29,289
)
 
 
 
(30,076
)
 
 
 
(66,257
)
 
 
 
(65,736
)
 
 
 
(48,823
)
 
 
Securities transactions entered into but not settled at the balance sheet date
 
(35,958
)
 
 
 
(37,039
)
 
 
 
(1,893
)
 
 
 
(15,302
)
 
 
 
13,209

 
 
Total investable assets included in ‘other’ segment
 
$
2,641,290

 
 
 
$
2,502,589

 
 
 
$
2,704,589

 
 
 
$
2,730,247

 
 
 
$
2,768,466

 
 

(2)    This table excludes the collateral received and reinvested and includes the securities pledged under securities lending agreements, at fair value.
(3)    Represents investments which are carried at fair value under the fair value option and reflected as “investments accounted for using the fair value option” on the balance sheet.
(4)
Changes in the carrying value of investment funds accounted for using the equity method are recorded as “equity in net income (loss) of investment funds accounted for using the equity method” rather than as an unrealized gain or loss component of accumulated other comprehensive income.
(5)    Average credit ratings on the Company’s investment portfolio on securities with ratings assigned by Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”).


 
24
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Composition of Net Investment Income, Yield and Total Return


The following table summarizes the Company’s net investment income, yield and total return (1):
(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Composition of net investment income (1):
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturities
 
$
91,491

 
$
101,763

 
$
108,885

 
$
109,953

 
$
111,335

 
$
193,254

 
$
221,986

Equity securities (dividends)
 
6,023

 
5,630

 
4,134

 
3,581

 
3,494

 
11,653

 
5,740

Short-term investments
 
897

 
3,385

 
3,464

 
3,432

 
3,448

 
4,282

 
7,746

Other (2)
 
17,825

 
20,479

 
19,211

 
24,170

 
20,115

 
38,304

 
43,059

Gross investment income
 
116,236

 
131,257

 
135,694

 
141,136

 
138,392

 
247,493

 
278,531

Investment expenses
 
(15,205
)
 
(18,229
)
 
(15,788
)
 
(14,262
)
 
(15,354
)
 
(33,434
)
 
(34,244
)
Net investment income
 
$
101,031

 
$
113,028

 
$
119,906

 
$
126,874

 
$
123,038

 
$
214,059

 
$
244,287

Per share
 
$
0.25

 
$
0.27

 
$
0.29

 
$
0.31

 
$
0.30

 
$
0.52

 
$
0.60

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment income yield, at amortized cost (1) (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax
 
1.92
%
 
2.20
 %
 
2.36
%
 
2.58
%
 
2.62
%
 
2.08
%
 
2.64
%
After-tax
 
1.68
%
 
1.91
 %
 
2.07
%
 
2.31
%
 
2.37
%
 
1.81
%
 
2.38
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total return on investments (1) (4)
 
3.72
%
 
(0.86
)%
 
1.07
%
 
1.00
%
 
2.37
%
 
2.82
%
 
5.14
%

(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
Amounts include dividends and other distributions on investment funds, term loan investments funds held balances, cash balances and other.
(3)
Presented on an annualized basis and excluding the impact of investments for which returns are not included within investment income, such as investments accounted for using the equity method and certain equities.
(4)
Total return on investments includes net investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in allowance for credit loses on non-investment related financial assets) and the change in unrealized gains or losses and is calculated on a pre-tax basis and before investment expenses. See ‘Comments on Regulation G’ for a further discussion of the presentation of total return on investments.


 
25
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Composition of Fixed Maturities

 
The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):
(U.S. Dollars in thousands)

 
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gains (Losses)
 
Allowance
for Credit Losses
 
Amortized
Cost
 
Fair Value /
Amortized Cost
 
Fair Value
% of Total
At June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporates
 
$
7,309,416

 
$
398,355

 
$
(30,804
)
 
$
367,551

 
$
(3,786
)
 
$
6,945,651

 
105.2
%
 
42.0
%
U.S. government and government agencies
 
4,976,127

 
62,761

 
(2,704
)
 
60,057

 
—

 
4,916,070

 
101.2
%
 
28.6
%
Municipal bonds
 
515,222

 
25,117

 
(542
)
 
24,575

 
(28
)
 
490,675

 
105.0
%
 
3.0
%
Non-U.S. government securities
 
2,089,171

 
66,668

 
(37,337
)
 
29,331

 
—

 
2,059,840

 
101.4
%
 
12.0
%
Asset-backed securities
 
1,511,117

 
31,276

 
(27,854
)
 
3,422

 
(1,394
)
 
1,509,089

 
100.1
%
 
8.7
%
Commercial mortgage-backed securities
 
396,813

 
7,603

 
(8,005
)
 
(402
)
 
(109
)
 
397,324

 
99.9
%
 
2.3
%
Residential mortgage-backed securities
 
593,799

 
12,400

 
(2,769
)
 
9,631

 
(201
)
 
584,369

 
101.6
%
 
3.4
%
Total
 
$
17,391,665

 
$
604,180

 
$
(110,015
)
 
$
494,165

 
$
(5,518
)
 
$
16,903,018

 
102.9
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporates
 
$
6,561,354

 
$
189,917

 
$
(12,752
)
 
$
177,165

 
$
—

 
$
6,384,189

 
102.8
%
 
38.8
%
U.S. government and government agencies
 
4,632,947

 
34,892

 
(9,997
)
 
24,895

 
—

 
4,608,052

 
100.5
%
 
27.4
%
Municipal bonds
 
880,119

 
24,582

 
(2,213
)
 
22,369

 
—

 
857,750

 
102.6
%
 
5.2
%
Non-U.S. government securities
 
1,995,813

 
45,019

 
(19,297
)
 
25,722

 
—

 
1,970,091

 
101.3
%
 
11.8
%
Asset-backed securities
 
1,547,744

 
23,403

 
(4,028
)
 
19,375

 
—

 
1,528,369

 
101.3
%
 
9.2
%
Commercial mortgage-backed securities
 
734,244

 
14,951

 
(2,330
)
 
12,621

 
—

 
721,623

 
101.7
%
 
4.3
%
Residential mortgage-backed securities
 
541,800

 
9,651

 
(887
)
 
8,764

 
—

 
533,036

 
101.6
%
 
3.2
%
Total
 
$
16,894,021

 
$
342,415

 
$
(51,504
)
 
$
290,911

 
$
—

 
$
16,603,110

 
101.8
%
 
100.0
%
 
(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.



 
26
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Credit Quality Distribution and Maturity Profile


The following table summarizes the credit quality distribution and maturity profile of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):
(U.S. Dollars in thousands)
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
Credit quality distribution of total fixed maturities (2) (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies (4)
 
$
5,566,339

 
32.0
%
 
$
4,804,048

 
28.8
%
 
$
5,215,489

 
30.9
%
 
$
5,403,271

 
32.6
%
 
$
5,030,769

 
31.5
%
AAA
 
3,035,513

 
17.5
%
 
3,486,700

 
20.9
%
 
3,392,341

 
20.1
%
 
3,240,708

 
19.5
%
 
3,325,260

 
20.8
%
AA
 
1,818,693

 
10.5
%
 
1,994,127

 
12.0
%
 
2,115,828

 
12.5
%
 
1,879,728

 
11.3
%
 
1,831,265

 
11.5
%
A
 
4,232,245

 
24.3
%
 
3,937,053

 
23.6
%
 
3,849,458

 
22.8
%
 
3,648,581

 
22.0
%
 
3,439,690

 
21.6
%
BBB
 
1,874,332

 
10.8
%
 
1,565,912

 
9.4
%
 
1,495,467

 
8.9
%
 
1,576,052

 
9.5
%
 
1,465,219

 
9.2
%
BB
 
406,342

 
2.3
%
 
366,759

 
2.2
%
 
355,803

 
2.1
%
 
362,117

 
2.2
%
 
361,389

 
2.3
%
B
 
211,638

 
1.2
%
 
205,181

 
1.2
%
 
216,663

 
1.3
%
 
210,824

 
1.3
%
 
226,885

 
1.4
%
Lower than B
 
51,273

 
0.3
%
 
51,712

 
0.3
%
 
56,865

 
0.3
%
 
61,205

 
0.4
%
 
60,858

 
0.4
%
Not rated
 
195,290

 
1.1
%
 
271,893

 
1.6
%
 
196,107

 
1.2
%
 
204,308

 
1.2
%
 
218,459

 
1.4
%
Total fixed maturities, at fair value
 
$
17,391,665

 
100.0
%
 
$
16,683,385

 
100.0
%
 
$
16,894,021

 
100.0
%
 
$
16,586,794

 
100.0
%
 
$
15,959,794

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity profile of total fixed maturities (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
350,520

 
2.0
%
 
$
459,191

 
2.8
%
 
$
443,914

 
2.6
%
 
$
571,738

 
3.4
%
 
$
457,207

 
2.9
%
Due after one year through five years
 
9,730,262

 
55.9
%
 
9,381,924

 
56.2
%
 
9,875,925

 
58.5
%
 
9,924,224

 
59.8
%
 
9,559,981

 
59.9
%
Due after five years through ten years
 
4,342,055

 
25.0
%
 
3,416,637

 
20.5
%
 
3,296,839

 
19.5
%
 
3,052,774

 
18.4
%
 
2,992,411

 
18.7
%
Due after 10 years
 
467,099

 
2.7
%
 
555,462

 
3.3
%
 
453,555

 
2.7
%
 
229,085

 
1.4
%
 
245,868

 
1.5
%
 
 
14,889,936

 
85.6
%
 
13,813,214

 
82.8
%
 
14,070,233

 
83.3
%
 
13,777,821

 
83.1
%
 
13,255,467

 
83.1
%
Mortgage-backed securities
 
593,799

 
3.4
%
 
449,024

 
2.7
%
 
541,800

 
3.2
%
 
528,227

 
3.2
%
 
513,760

 
3.2
%
Commercial mortgage-backed securities
 
396,813

 
2.3
%
 
781,417

 
4.7
%
 
734,244

 
4.3
%
 
754,306

 
4.5
%
 
686,707

 
4.3
%
Asset-backed securities
 
1,511,117

 
8.7
%
 
1,639,730

 
9.8
%
 
1,547,744

 
9.2
%
 
1,526,440

 
9.2
%
 
1,503,860

 
9.4
%
Total fixed maturities, at fair value
 
$
17,391,665

 
100.0
%
 
$
16,683,385

 
100.0
%
 
$
16,894,021

 
100.0
%
 
$
16,586,794

 
100.0
%
 
$
15,959,794

 
100.0
%

(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
This table excludes the collateral received and reinvested and includes the fixed maturities pledged under securities lending agreements, at fair value.
(3)     For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings.
(4)     Includes U.S. government-sponsored agency mortgage backed securities and agency commercial mortgage backed securities.



 
27
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Analysis of Corporate Exposures


The following table summarizes the Company’s corporate bonds by sector (1):
(U.S. Dollars in thousands)
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
Sector:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials
 
$
4,650,615

 
63.6
%
 
$
3,903,927

 
58.5
%
 
$
3,639,891

 
55.5
%
 
$
3,588,041

 
55.2
%
 
$
3,311,161

 
52.7
%
Financials
 
2,164,859

 
29.6
%
 
2,400,415

 
35.9
%
 
2,645,393

 
40.3
%
 
2,612,883

 
40.2
%
 
2,671,207

 
42.5
%
Utilities
 
409,778

 
5.6
%
 
321,022

 
4.8
%
 
224,615

 
3.4
%
 
237,042

 
3.6
%
 
245,068

 
3.9
%
Covered bonds
 
1,974

 
0.0
%
 
2,662

 
0.0
%
 
3,520

 
0.1
%
 
2,543

 
0.0
%
 
2,461

 
0.0
%
All other (2)
 
82,190

 
1.1
%
 
49,981

 
0.7
%
 
47,935

 
0.7
%
 
54,145

 
0.8
%
 
52,000

 
0.8
%
Total fixed maturities, at fair value
 
$
7,309,416

 
100.0
%
 
$
6,678,007

 
100.0
%
 
$
6,561,354

 
100.0
%
 
$
6,494,654

 
100.0
%
 
$
6,281,897

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit quality distribution (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AAA
 
$
76,923

 
1.1
%
 
$
86,420

 
1.3
%
 
$
95,559

 
1.5
%
 
$
95,340

 
1.5
%
 
$
91,266

 
1.5
%
AA
 
894,495

 
12.2
%
 
982,202

 
14.7
%
 
1,035,817

 
15.8
%
 
1,021,056

 
15.7
%
 
1,053,860

 
16.8
%
A
 
3,834,480

 
52.5
%
 
3,480,871

 
52.1
%
 
3,392,134

 
51.7
%
 
3,240,957

 
49.9
%
 
3,089,233

 
49.2
%
BBB
 
1,773,620

 
24.3
%
 
1,451,807

 
21.7
%
 
1,355,868

 
20.7
%
 
1,450,372

 
22.3
%
 
1,344,247

 
21.4
%
BB
 
388,112

 
5.3
%
 
348,848

 
5.2
%
 
334,264

 
5.1
%
 
339,952

 
5.2
%
 
334,068

 
5.3
%
B
 
205,342

 
2.8
%
 
198,828

 
3.0
%
 
207,713

 
3.2
%
 
201,352

 
3.1
%
 
217,324

 
3.5
%
Lower than B
 
27,865

 
0.4
%
 
22,869

 
0.3
%
 
22,233

 
0.3
%
 
26,969

 
0.4
%
 
22,758

 
0.4
%
Not rated
 
108,579

 
1.5
%
 
106,162

 
1.6
%
 
117,766

 
1.8
%
 
118,656

 
1.8
%
 
129,141

 
2.1
%
Total fixed maturities, at fair value
 
$
7,309,416

 
100.0
%
 
$
6,678,007

 
100.0
%
 
$
6,561,354

 
100.0
%
 
$
6,494,654

 
100.0
%
 
$
6,281,897

 
100.0
%

(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)    Includes sovereign securities, supranational securities and other.
(3)    For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings.

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at June 30, 2020 (1):
(U.S. Dollars in thousands)
 
Fair
Value
 
% of Asset Class
 
% of Investable Assets
 
Credit Quality (2)
Issuer:
 
 
 
 
 
 
 
 
Bank of America Corporation
 
$
295,236

 
4.0
%
 
1.2
%
 
A-/A2
Wells Fargo & Company
 
262,510

 
3.6
%
 
1.1
%
 
A-/A2
JPMorgan Chase & Co.
 
226,876

 
3.1
%
 
0.9
%
 
A-/A2
Apple Inc.
 
180,336

 
2.5
%
 
0.7
%
 
AA+/Aa1
Citigroup Inc.
 
150,811

 
2.1
%
 
0.6
%
 
BBB+/A3
Morgan Stanley
 
136,897

 
1.9
%
 
0.6
%
 
BBB+/A3
Comcast Corporation
 
115,873

 
1.6
%
 
0.5
%
 
A-/A3
International Business Machines Corporation
 
114,080

 
1.6
%
 
0.5
%
 
A/A2
Oracle Corporation
 
109,003

 
1.5
%
 
0.4
%
 
A/A3
The Goldman Sachs Group, Inc.
 
108,248

 
1.5
%
 
0.4
%
 
BBB+/A3
Total
 
$
1,699,870

 
23.3
%
 
6.9
%
 
 
 
(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)    Average credit ratings assigned by S&P and Moody’s, respectively.


 
28
 
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Structured Securities


The following table provides the composition of the Company’s structured securities at June 30, 2020 (1):

(U.S. Dollars in thousands)
 
Agencies
 
AAA
 
AA
 
A
 
BBB
 
Non-Investment Grade
 
Total
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
560,870

 
$
4,191

 
$
324

 
$
—

 
$
—

 
$
28,414

 
$
593,799

Commercial mortgage-backed securities
 
29,342

 
291,169

 
29,621

 
10,227

 
15,376

 
21,078

 
396,813

Asset-backed securities
 
—

 
1,110,965

 
75,444

 
218,892

 
45,816

 
60,000

 
1,511,117

Total
 
$
590,212

 
$
1,406,325

 
$
105,389

 
$
229,119

 
$
61,192

 
$
109,492

 
$
2,501,729


(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.



 
29
 
Arch Capital Group Ltd. and Subsidiaries
Comments on Regulation G

Throughout this financial supplement, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the Company. This presentation includes the use of after-tax operating income available to Arch common shareholders, which is defined as net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, and transaction costs and other, net of income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized return on average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included on the following page.
The Company believes that net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of the Company’s operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of the Company’s financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, changes in the allowance for credit losses and net impairment losses recognized in earnings on the Company’s investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of the Company’s investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Transaction costs and other include advisory, financing, legal, severance, incentive compensation and other transaction costs related to acquisitions and Watford’s non-recurring listing expenses. The Company believes that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other from the calculation of after-tax operating income or loss available to Arch common shareholders.
The Company believes that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, the Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies which follow the Company and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.
In addition, the Company’s presentation includes the use of information prepared on a ‘core’ basis, which excludes amounts related to the ‘other’ segment (i.e., results of Watford). Information provided on a ‘core’ basis are non-GAAP financial measures as defined in Regulation G. Pursuant to generally accepted accounting principles, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, the Company consolidates the results of Watford in its consolidated financial statements, although it only owns approximately 13% of Watford’s outstanding common equity. Watford has its own management and board of directors that is responsible for its own results and profitability. In addition, the Company does not guarantee or provide credit support for Watford. Because Watford is an independent company, the assets of Watford can be used only to settle obligations of Watford and Watford is solely responsible for its own liabilities and commitments. The Company’s financial exposure to Watford is limited to its investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions. The Company believes that presenting information on a ‘core’ basis enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. See ‘Segment Information’ for a further discussion of segment results and a reconciliation of core and consolidated results.
The Company’s segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss on a ‘core’ basis. Such measures represent the pre-tax profitability of the Company’s underwriting operations and include net premiums earned plus other underwriting income, less losses and loss adjustment expenses, acquisition expenses and other operating expenses. Other operating expenses include those operating expenses that are incremental and/or directly attributable to the Company’s individual underwriting operations. Underwriting income or loss does not incorporate items included in the Company’s corporate (non-underwriting) segment. While these measures are presented in the Segment Information footnote to the Company’s Consolidated Financial Statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. The reconciliations of underwriting income or loss to income before income taxes (the most directly comparable GAAP financial measure) on a consolidated basis and a ‘core’ basis, in accordance with Regulation G, is shown on pages 10 to 13.
In addition, the Company’s segment information includes the use of a combined ratio excluding catastrophic activity and prior year development, for the insurance and reinsurance segments, and a combined ratio excluding prior year development, for the mortgage segment. These ratios are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to the combined ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G are shown on the individual segment pages. The Company’s management utilizes the adjusted combined ratios excluding current accident year catastrophic events and favorable or adverse development in prior year loss reserves in its analysis of the underwriting performance of each of its underwriting segments.
Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, excludes amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. Management uses total return on investments as a key measure of the return generated to Arch common shareholders, and compares the return generated by the Company’s investment portfolio against benchmark returns during the periods presented.

 
30
 
Arch Capital Group Ltd. and Subsidiaries
Operating Income Reconciliation and Annualized Operating Return on Average Common Equity

The following table summarizes the Company’s consolidated financial data, including a reconciliation of net income (loss) available to Arch common shareholders to after-tax operating income (loss) available to Arch common shareholders and related diluted per share results. Each line item reflects the impact of the Company’s ownership of Watford’s outstanding common equity:
(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Net income available to Arch common shareholders
 
$
288,418

 
$
133,714

 
$
315,981

 
$
382,050

 
$
458,551

 
$
422,132

 
$
896,676

Net realized (gains) losses
 
(406,645
)
 
109,364

 
(32,966
)
 
(77,959
)
 
(124,588
)
 
(297,281
)
 
(238,923
)
Equity in net (income) loss of investment funds accounted for using the equity method
 
65,119

 
4,209

 
(27,139
)
 
(17,130
)
 
(32,536
)
 
69,328

 
(79,403
)
Net foreign exchange (gains) losses
 
42,032

 
(64,491
)
 
39,832

 
(30,160
)
 
6,054

 
(22,459
)
 
1,060

Transaction costs and other
 
977

 
2,595

 
9,081

 
1,995

 
2,178

 
3,572

 
3,368

Income tax expense (benefit) (1)
 
26,713

 
4,365

 
3,568

 
2,156

 
7,774

 
31,078

 
10,552

After-tax operating income available to Arch common shareholders
 
$
16,614

 
$
189,756

 
$
308,357

 
$
260,952

 
$
317,433

 
$
206,370

 
$
593,330

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted per common share results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Arch common shareholders
 
$
0.71

 
$
0.32

 
$
0.76

 
$
0.92

 
$
1.12

 
$
1.03

 
$
2.19

Net realized (gains) losses
 
(1.00
)
 
0.27

 
(0.08
)
 
(0.19
)
 
(0.31
)
 
(0.72
)
 
(0.59
)
Equity in net (income) loss of investment funds accounted for using the equity method
 
0.16

 
0.01

 
(0.07
)
 
(0.04
)
 
(0.08
)
 
0.17

 
(0.19
)
Net foreign exchange (gains) losses
 
0.10

 
(0.16
)
 
0.10

 
(0.07
)
 
0.01

 
(0.06
)
 
0.00

Transaction costs and other
 
0.00

 
0.01

 
0.02

 
0.00

 
0.01

 
0.01

 
0.01

Income tax expense (benefit) (1)
 
0.07

 
0.01

 
0.01

 
0.01

 
0.02

 
0.07

 
0.03

After-tax operating income available to Arch common shareholders
 
$
0.04

 
$
0.46

 
$
0.74

 
$
0.63

 
$
0.77

 
$
0.50

 
$
1.45

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding - diluted
 
408,119,681

 
414,033,570

 
414,124,920

 
413,180,201

 
410,899,483

 
411,005,591

 
409,755,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning common shareholders’ equity
 
$
10,587,244

 
$
10,717,371

 
$
10,378,096

 
$
9,977,352

 
$
9,334,596

 
$
10,717,371

 
$
8,659,827

Ending common shareholders’ equity
 
11,211,825

 
10,587,244

 
10,717,371

 
10,378,096

 
9,977,352

 
11,211,825

 
9,977,352

Average common shareholders’ equity
 
$
10,899,535

 
$
10,652,308

 
$
10,547,734

 
$
10,177,724

 
$
9,655,974

 
$
10,964,598

 
$
9,318,590

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity
 
10.6
%
 
5.0
%
 
12.0
%
 
15.0
%
 
19.0
%
 
7.7
%
 
19.2
%
Annualized operating return on average common equity
 
0.6
%
 
7.1
%
 
11.7
%
 
10.3
%
 
13.1
%
 
3.8
%
 
12.7
%

(1)
Income tax expense on net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income (loss) of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction.



 
31
 
Arch Capital Group Ltd. and Subsidiaries
Operating Income and Effective Tax Rate Calculations

The following table provides a reconciliation of income (loss) before income taxes to after-tax operating income (loss) available to Arch common shareholders and an analysis of the effective tax rate on pre-tax operating income (loss) available to Arch common shareholders:
(U.S. Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Arch Operating Income Components (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
$
302,474

 
$
205,953

 
$
355,837

 
$
430,554

 
$
511,883

 
$
508,427

 
$
1,001,046

Net realized (gains) losses
 
(385,089
)
 
72,109

 
(31,836
)
 
(80,014
)
 
(125,063
)
 
(312,980
)
 
(236,187
)
Equity in net (income) loss of investment funds accounted for using the equity method
 
65,119

 
4,209

 
(27,139
)
 
(17,130
)
 
(32,536
)
 
69,328

 
(79,403
)
Net foreign exchange (gains) losses
 
42,438

 
(63,307
)
 
38,031

 
(29,794
)
 
6,190

 
(20,869
)
 
1,015

Transaction costs and other
 
43

 
2,538

 
9,081

 
1,995

 
2,178

 
2,581

 
3,368

Pre-tax operating income
 
24,985

 
221,502

 
343,974

 
305,611

 
362,652

 
246,487

 
689,839

Arch share of ‘other’ segment operating income (loss) (2)
 
1,798

 
2,237

 
(1,450
)
 
1,704

 
1,863

 
4,035

 
4,085

Pre-tax operating income available to Arch (b)
 
26,783

 
223,739

 
342,524

 
307,315

 
364,515

 
250,522

 
693,924

Income tax expense (a)
 
234

 
(23,580
)
 
(23,764
)
 
(35,960
)
 
(36,679
)
 
(23,346
)
 
(79,788
)
After-tax operating income available to Arch
 
27,017

 
200,159

 
318,760

 
271,355

 
327,836

 
227,176

 
614,136

Preferred dividends
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(20,806
)
 
(20,806
)
After-tax operating income available to Arch common shareholders
 
$
16,614

 
$
189,756

 
$
308,357

 
$
260,952

 
$
317,433

 
$
206,370

 
$
593,330

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate on pre-tax operating income (loss) available to Arch (a)/(b)
 
(0.9
)%
 
10.5
%
 
6.9
%
 
11.7
%
 
10.1
%
 
9.3
%
 
11.5
%

(1)
Line items are presented on a ‘core’ basis, excluding amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
Balances in the ‘other’ segment and a calculation of Arch’s share of the ‘other’ segment operating income (loss) is as follows:
(U.S. Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
 
2019
Balances in ‘other’ segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
(9,129
)
 
$
(6,010
)
 
$
(37,251
)
 
$
(4,443
)
 
$
(4,593
)
 
$
(15,139
)
 
$
(9,971
)
Net investment income
 
30,454

 
32,125

 
34,357

 
34,614

 
32,000

 
62,579

 
67,700

Interest expense
 
(6,009
)
 
(7,310
)
 
(7,558
)
 
(8,091
)
 
(5,905
)
 
(13,319
)
 
(11,488
)
Preferred dividends
 
(1,036
)
 
(1,096
)
 
(1,131
)
 
(6,600
)
 
(4,590
)
 
(2,132
)
 
(9,178
)
Pre-tax operating income (loss) available to common shareholders
 
14,280

 
17,709

 
(11,583
)
 
15,480

 
16,912

 
31,989

 
37,063

Arch ownership
 
13
%
 
13
%
 
13
%
 
11
%
 
11
%
 
13
%
 
11
%
Arch share of ‘Other’ segment operating income (loss) (3)
 
$
1,798

 
$
2,237

 
$
(1,450
)
 
$
1,704

 
$
1,863

 
$
4,035

 
$
4,085


(3) Excludes amounts attributable to net realized gains or losses and net foreign exchange gains or losses in the ‘other’ segment (see ‘Segment Information’).

 
32
 
Arch Capital Group Ltd. and Subsidiaries
Capital Structure and Share Repurchase Activity

The following table provides an analysis of the Company’s capital structure (1):
(U.S. Dollars in thousands, except share data)
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
Debt:
 
 
 
 
 
 
 
 
 
 
Arch Capital senior notes, due May 1, 2034 ($300,000 principal, 7.35%)
 
$
300,000

 
$
300,000

 
$
300,000

 
$
300,000

 
$
300,000

Arch-U.S. senior notes, due Nov. 1, 2043 ($500,000 principal, 5.144%) (2)
 
500,000

 
500,000

 
500,000

 
500,000

 
500,000

Arch Finance senior notes, due December 15, 2026 ($500,000 principal, 4.011%) (3)
 
500,000

 
500,000

 
500,000

 
500,000

 
500,000

Arch Finance senior notes, due December 15, 2046 ($450,000 principal, 5.031%) (3)
 
450,000

 
450,000

 
450,000

 
450,000

 
450,000

Arch Capital senior notes, due June 30, 2050 ($1,000,000 principal, 3.635%)
 
1,000,000

 
—

 
—

 
—

 
—

Deferred debt costs on senior notes
 
(26,820
)
 
(15,616
)
 
(15,791
)
 
(15,963
)
 
(16,135
)
Revolving credit agreement borrowings, due October 26, 2021 (variable)
 
—

 
—

 
—

 
—

 
—

Total debt
 
$
2,723,180

 
$
1,734,384

 
$
1,734,209

 
$
1,734,037

 
$
1,733,865

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity available to Arch:
 
 
 
 
 
 
 
 
 
 
Series E non-cumulative preferred shares (5.25%)
 
450,000

 
450,000

 
450,000

 
450,000

 
450,000

Series F non-cumulative preferred shares (5.45%)
 
330,000

 
330,000

 
330,000

 
330,000

 
330,000

Common shareholders’ equity (a)
 
11,211,825

 
10,587,244

 
10,717,371

 
10,378,096

 
9,977,352

Total shareholders’ equity available to Arch
 
$
11,991,825

 
$
11,367,244

 
$
11,497,371

 
$
11,158,096

 
$
10,757,352

 
 
 
 
 
 
 
 
 
 
 
Total capital available to Arch
 
$
14,715,005

 
$
13,101,628

 
$
13,231,580

 
$
12,892,133

 
$
12,491,217

 
 
 
 
 
 
 
 
 
 
 
Common shares outstanding, net of treasury shares (b)
 
405,970,251

 
405,609,867

 
405,619,201

 
405,230,531

 
404,887,534

 
 
 
 
 
 
 
 
 
 
 
Book value per common share (4) (a)/(b)
 
$
27.62

 
$
26.10

 
$
26.42

 
$
25.61

 
$
24.64

 
 
 
 
 
 
 
 
 
 
 
Leverage ratios:
 
 
 
 
 
 
 
 
 
 
Senior notes/total capital available to Arch
 
18.5
%
 
13.2
%
 
13.1
%
 
13.5
%
 
13.9
%
Revolving credit agreement borrowings/total capital available to Arch
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
Debt/total capital available to Arch
 
18.5
%
 
13.2
%
 
13.1
%
 
13.5
%
 
13.9
%
Preferred/total capital available to Arch
 
5.3
%
 
6.0
%
 
5.9
%
 
6.1
%
 
6.2
%
Debt and preferred/total capital available to Arch
 
23.8
%
 
19.2
%
 
19.0
%
 
19.5
%
 
20.1
%

(1)
Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)
Issued by Arch Capital Group (U.S.) Inc. (“Arch-U.S.”), a wholly owned subsidiary of Arch Capital, and fully and unconditionally guaranteed by Arch Capital.
(3)
Issued by Arch Capital Finance LLC (“Arch Finance”), a wholly owned subsidiary of Arch U.S. MI Holdings Inc., and fully and unconditionally guaranteed by Arch Capital.
(4)
Excludes the effects of stock options, restricted and performance stock units outstanding.

The following table provides the impact of share repurchases under the Company’s share repurchase program:
(U.S. Dollars in thousands except share data)
 
Three Months Ended
 
Cumulative
 
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
June 30,
 
 
2020
 
2020
 
2019
 
2019
 
2019
 
2020
Effect of share repurchases:
 
 
 
 
 
 
 
 
 
 
 
 
Aggregate cost of shares repurchased
 
$
—

 
$
75,486

 
$
—

 
$
—

 
$
—

 
$
4,043,780

Shares repurchased
 
—

 
2,599,388

 
—

 
—

 
—

 
388,941,368

Average price per share repurchased
 
$
—

 
$
29.04

 
$
—

 
$
—

 
$
—

 
$
10.40

 
 
 
 
 
 
 
 
 
 
 
 
 
Remaining share repurchase authorization (1)
 
 
 
 
 
 
 
 
 
 
 
$
924,514

 
(1)
Repurchases under the share repurchase authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2021.

 
33