EX-99.2 3 ex-992supplement93019.htm EX 99.2 SUPPLEMENT Exhibit


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 September 30, 2019
 
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, 2018 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 approximately 11% of Watford Holdings Ltd.’s outstanding common equity and a warrant to purchase additional common equity. In accordance with GAAP, the Company consolidates the results of Watford Holdings Ltd. (“Watford”) in its financial statements, although it only owns approximately 11% of Watford’s outstanding common equity. 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; 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; and other factors identified in the Company’s filings with the U.S. Securities and Exchange Commission.
 
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 
2
 
Arch Capital Group Ltd. and Subsidiaries
Financial Highlights

The following table presents financial highlights (1):
(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Underwriting results:
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
2,043,292

 
$
1,622,532

 
25.9
%
 
$
5,853,574

 
$
4,935,339

 
18.6
 %
Net premiums written
 
1,457,705

 
1,181,876

 
23.3
%
 
4,163,105

 
3,573,178

 
16.5
 %
Net premiums earned
 
1,312,191

 
1,155,255

 
13.6
%
 
3,847,372

 
3,430,651

 
12.1
 %
Underwriting income (2)
 
235,705

 
234,790

 
0.4
%
 
798,958

 
708,130

 
12.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
53.8
%
 
52.1
%
 
1.7

 
51.2
%
 
51.0
 %
 
0.2

Acquisition expense ratio
 
14.3
%
 
14.9
%
 
(0.6
)
 
14.0
%
 
14.6
 %
 
(0.6
)
Other operating expense ratio
 
14.1
%
 
13.1
%
 
1.0

 
14.5
%
 
14.1
 %
 
0.4

Combined ratio
 
82.2
%
 
80.1
%
 
2.1

 
79.7
%
 
79.7
 %
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
$
126,874

 
$
114,328

 
11.0
%
 
$
371,161

 
$
322,332

 
15.1
 %
Per diluted share
 
$
0.31

 
$
0.28

 
10.7
%
 
$
0.90

 
$
0.78

 
15.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Arch common shareholders
 
$
382,050

 
$
217,006

 
76.1
%
 
$
1,278,726

 
$
587,525

 
117.6
 %
Per diluted share
 
$
0.92

 
$
0.53

 
73.6
%
 
$
3.11

 
$
1.42

 
119.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
After-tax operating income available to Arch common shareholders (2)
 
$
260,952

 
$
242,280

 
7.7
%
 
$
854,282

 
$
720,019

 
18.6
 %
Per diluted share
 
$
0.63

 
$
0.59

 
6.8
%
 
$
2.08

 
$
1.74

 
19.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income available to Arch
 
$
397,340

 
$
200,524

 
98.2
%
 
$
1,700,369

 
$
432,186

 
293.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
769,486

 
$
543,205

 
41.7
%
 
$
1,366,762

 
$
947,656

 
44.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding — diluted
 
413,180,201

 
411,721,214

 
0.4
%
 
410,807,402

 
413,993,192

 
(0.8
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial measures:
 
 

 
 

 
 

 
 

 
 

 
 

Change in book value per common share during period
 
3.9
%
 
2.3
%
 
1.6

 
19.0
%
 
4.2
 %
 
14.8

 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity
 
15.0
%
 
10.2
%
 
4.8

 
17.9
%
 
9.3
 %
 
8.6

Annualized operating return on average common equity (2)
 
10.3
%
 
11.4
%
 
(1.1
)
 
12.0
%
 
11.4
 %
 
0.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Total return on investments (3)
 
1.00
%
 
0.31
%
 
69 bps

 
6.20
%
 
(0.19
)%
 
639 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
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Revenues
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net premiums written
 
$
1,613,457

 
$
1,444,898

 
$
1,525,259

 
$
1,301,754

 
$
1,333,553

 
$
4,583,614

 
$
4,044,993

Change in unearned premiums
 
(175,434
)
 
18,829

 
(156,393
)
 
67,681

 
(42,675
)
 
(312,998
)
 
(182,453
)
Net premiums earned
 
1,438,023

 
1,463,727

 
1,368,866

 
1,369,435

 
1,290,878

 
4,270,616

 
3,862,540

Net investment income
 
161,488

 
155,038

 
156,949

 
157,217

 
144,024

 
473,475

 
406,416

Net realized gains (losses)
 
62,518

 
120,806

 
141,565

 
(166,030
)
 
(51,705
)
 
324,889

 
(239,314
)
Net impairment losses recognized in earnings
 
(1,163
)
 
(49
)
 
(1,309
)
 
(1,705
)
 
(492
)
 
(2,521
)
 
(1,124
)
Other underwriting income
 
3,326

 
5,953

 
8,825

 
27

 
5,823

 
18,104

 
15,046

Equity in net income (loss) of investment funds accounted for using the equity method
 
17,130

 
32,536

 
46,867

 
(6,882
)
 
15,982

 
96,533

 
52,523

Other income (loss)
 
1,338

 
1,129

 
1,083

 
(42
)
 
(726
)
 
3,550

 
2,461

Total revenues
 
1,682,660

 
1,779,140

 
1,722,846

 
1,352,020

 
1,403,784

 
5,184,646

 
4,098,548

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
 
(802,455
)
 
(767,543
)
 
(718,532
)
 
(827,673
)
 
(699,420
)
 
(2,288,530
)
 
(2,062,433
)
Acquisition expenses
 
(211,120
)
 
(210,089
)
 
(197,848
)
 
(209,319
)
 
(201,602
)
 
(619,057
)
 
(595,816
)
Other operating expenses
 
(196,512
)
 
(198,914
)
 
(201,163
)
 
(165,515
)
 
(161,098
)
 
(596,589
)
 
(512,294
)
Corporate expenses
 
(17,061
)
 
(18,251
)
 
(17,962
)
 
(26,835
)
 
(14,335
)
 
(53,274
)
 
(52,159
)
Amortization of intangible assets
 
(20,003
)
 
(19,794
)
 
(20,417
)
 
(26,147
)
 
(26,315
)
 
(60,214
)
 
(79,523
)
Interest expense
 
(31,328
)
 
(29,280
)
 
(29,065
)
 
(29,774
)
 
(29,730
)
 
(89,673
)
 
(90,710
)
Net foreign exchange gains (losses)
 
33,124

 
(4,952
)
 
3,525

 
24,579

 
10,838

 
31,697

 
44,823

Total expenses
 
(1,245,355
)
 
(1,248,823
)
 
(1,181,462
)
 
(1,260,684
)
 
(1,121,662
)
 
(3,675,640
)
 
(3,348,112
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
437,305

 
530,317

 
541,384

 
91,336

 
282,122

 
1,509,006

 
750,436

Income tax expense
 
(38,116
)
 
(44,472
)
 
(45,886
)
 
(35,012
)
 
(33,356
)
 
(128,474
)
 
(78,939
)
Net income
 
399,189

 
485,845

 
495,498

 
56,324

 
248,766

 
1,380,532

 
671,497

Net (income) loss attributable to noncontrolling interests
 
(6,736
)
 
(16,891
)
 
(46,970
)
 
80,170

 
(21,358
)
 
(70,597
)
 
(50,020
)
Net income attributable to Arch
 
392,453

 
468,954

 
448,528

 
136,494

 
227,408

 
1,309,935

 
621,477

Preferred dividends
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,402
)
 
(31,209
)
 
(31,242
)
Loss on redemption of preferred shares
 
—

 
—

 
—

 
—

 
—

 
—

 
(2,710
)
Net income available to Arch common shareholders
 
$
382,050

 
$
458,551

 
$
438,125

 
$
126,091

 
$
217,006

 
$
1,278,726

 
$
587,525

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income available to Arch
 
$
397,340

 
$
637,458

 
$
665,571

 
$
178,817

 
$
200,524

 
$
1,700,369

 
$
432,186

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per common share and common share equivalent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.95

 
$
1.14

 
$
1.09

 
$
0.31

 
$
0.54

 
$
3.19

 
$
1.45

Diluted
 
$
0.92

 
$
1.12

 
$
1.07

 
$
0.31

 
$
0.53

 
$
3.11

 
$
1.42

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
402,564,121

 
401,482,784

 
400,184,404

 
402,185,557

 
402,939,092

 
401,419,153

 
405,076,228

Diluted
 
413,180,201

 
410,899,483

 
408,971,029

 
410,112,097

 
411,721,214

 
410,807,402

 
413,993,192





 
4
 
Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets


(U.S. Dollars in thousands, except share data)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
Assets
 
 

 
 

 
 

 
 

 
 

Investments:
 
 

 
 

 
 

 
 

 
 

Fixed maturities available for sale, at fair value
 
$
16,470,523

 
$
15,881,732

 
$
15,177,312

 
$
14,699,010

 
$
14,331,641

Short-term investments available for sale, at fair value
 
751,989

 
821,961

 
706,214

 
955,880

 
961,799

Collateral received under securities lending, at fair value
 
430,263

 
450,320

 
415,056

 
274,133

 
306,893

Equity securities, at fair value
 
550,485

 
670,943

 
495,895

 
338,899

 
444,118

Investments accounted for using the fair value option
 
3,838,243

 
3,721,035

 
3,969,623

 
3,983,571

 
4,097,735

Investments accounted for using the equity method
 
1,575,832

 
1,581,972

 
1,563,779

 
1,493,791

 
1,524,242

Total investments
 
23,617,335

 
23,127,963

 
22,327,879

 
21,745,284

 
21,666,428

Cash
 
880,099

 
605,316

 
633,100

 
646,556

 
651,037

Accrued investment income
 
116,196

 
119,252

 
112,935

 
114,641

 
106,543

Securities pledged under securities lending, at fair value
 
420,415

 
440,510

 
404,262

 
268,395

 
299,409

Premiums receivable
 
1,618,186

 
1,606,040

 
1,584,682

 
1,299,150

 
1,307,466

Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses
 
3,168,195

 
3,171,257

 
3,099,823

 
2,919,372

 
2,749,785

Contractholder receivables
 
2,094,683

 
2,102,544

 
2,087,720

 
2,079,111

 
2,067,268

Ceded unearned premiums
 
1,168,258

 
1,136,728

 
1,099,581

 
975,469

 
1,011,850

Deferred acquisition costs
 
622,028

 
600,740

 
597,526

 
569,574

 
572,987

Receivable for securities sold
 
50,615

 
164,592

 
334,982

 
36,246

 
278,753

Goodwill and intangible assets
 
624,500

 
641,010

 
659,215

 
634,920

 
566,662

Other assets
 
1,192,093

 
1,135,718

 
1,035,332

 
929,611

 
974,346

Total assets
 
$
35,572,603

 
$
34,851,670

 
$
33,977,037

 
$
32,218,329

 
$
32,252,534

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

Reserve for losses and loss adjustment expenses
 
$
12,389,384

 
$
12,230,316

 
$
12,010,041

 
$
11,853,297

 
$
11,554,321

Unearned premiums
 
4,243,372

 
4,056,860

 
4,036,119

 
3,753,636

 
3,868,379

Reinsurance balances payable
 
601,891

 
531,990

 
453,058

 
393,107

 
404,936

Contractholder payables
 
2,094,683

 
2,102,544

 
2,087,720

 
2,079,111

 
2,067,268

Collateral held for insured obligations
 
205,449

 
237,056

 
232,411

 
236,630

 
249,723

Senior notes
 
1,871,386

 
1,733,865

 
1,733,694

 
1,733,528

 
1,733,364

Revolving credit agreement borrowings
 
490,720

 
491,006

 
488,612

 
455,682

 
554,756

Securities lending payable
 
430,255

 
450,312

 
415,048

 
274,125

 
306,886

Payable for securities purchased
 
176,130

 
294,109

 
376,332

 
90,034

 
255,427

Other liabilities
 
1,007,524

 
904,438

 
984,942

 
911,500

 
819,373

Total liabilities
 
23,510,794

 
23,032,496

 
22,817,977

 
21,780,650

 
21,814,433

 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
48,789

 
206,475

 
206,383

 
206,292

 
206,199

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 

 
 

 
 

 
 

 
 

Non-cumulative preferred shares
 
780,000

 
780,000

 
780,000

 
780,000

 
780,000

Common shares
 
638

 
638

 
636

 
634

 
633

Additional paid-in capital
 
1,864,468

 
1,847,949

 
1,819,605

 
1,793,781

 
1,775,499

Retained earnings
 
10,705,025

 
10,322,975

 
9,864,424

 
9,426,299

 
9,300,208

Accumulated other comprehensive income (loss), net of deferred income tax
 
211,714

 
206,827

 
38,323

 
(178,720
)
 
(221,041
)
Common shares held in treasury, at cost
 
(2,403,749
)
 
(2,401,037
)
 
(2,388,392
)
 
(2,382,167
)
 
(2,280,151
)
Total shareholders’ equity available to Arch
 
11,158,096

 
10,757,352

 
10,114,596

 
9,439,827

 
9,355,148

Non-redeemable noncontrolling interests
 
854,924

 
855,347

 
838,081

 
791,560

 
876,754

Total shareholders’ equity
 
12,013,020

 
11,612,699

 
10,952,677

 
10,231,387

 
10,231,902

Total liabilities, noncontrolling interests and shareholders’ equity
 
$
35,572,603

 
$
34,851,670

 
$
33,977,037

 
$
32,218,329

 
$
32,252,534

 
 
 
 
 
 
 
 
 
 
 
Common shares and common share equivalents outstanding, net of treasury shares
 
405,230,531

 
404,887,534

 
403,738,764

 
402,454,834

 
405,524,360

Book value per common share (1)
 
$
25.61

 
$
24.64

 
$
23.12

 
$
21.52

 
$
21.15


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

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


(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Non-cumulative preferred shares
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at beginning of period
 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
$
872,555

Preferred shares redeemed
 
—

 
—

 
—

 
—

 
—

 
—

 
(92,555
)
Balance at end of period
 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
$
780,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible non-voting common equivalent preferred shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
—

 
—

 
—

 
—

 
—

 
—

 
489,627

Preferred shares converted to common shares
 
—

 
—

 
—

 
—

 
—

 
—

 
(489,627
)
Balance at end of period
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
638

 
636

 
634

 
633

 
633

 
634

 
611

Common shares issued, net
 
—

 
2

 
2

 
1

 
—

 
4

 
22

Balance at end of period
 
638

 
638

 
636

 
634

 
633

 
638

 
633

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
1,847,949

 
1,819,605

 
1,793,781

 
1,775,499

 
1,760,606

 
1,793,781

 
1,230,617

Preferred shares converted to common shares
 
—

 
—

 
—

 
—

 
—

 
—

 
489,608

Reversal of original issue costs on redeemed preferred shares
 
—

 
—

 
—

 
—

 
—

 
—

 
2,710

All other
 
16,519


28,344


25,824


18,282


14,893


70,687


52,564

Balance at end of period
 
1,864,468

 
1,847,949

 
1,819,605

 
1,793,781

 
1,775,499

 
1,864,468

 
1,775,499

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
10,322,975

 
9,864,424

 
9,426,299

 
9,300,208

 
9,083,202

 
9,426,299

 
8,562,889

Cumulative effect of an accounting change
 
—

 
—

 
—

 
—

 
—

 
—

 
149,794

Balance at beginning of period, as adjusted
 
10,322,975

 
9,864,424

 
9,426,299

 
9,300,208

 
9,083,202

 
9,426,299

 
8,712,683

Net income
 
399,189

 
485,845

 
495,498

 
56,324

 
248,766

 
1,380,532

 
671,497

Amounts attributable to noncontrolling interests
 
(6,736
)
 
(16,891
)
 
(46,970
)
 
80,170

 
(21,358
)
 
(70,597
)
 
(50,020
)
Preferred share dividends
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,402
)
 
(31,209
)
 
(31,242
)
Loss on redemption of preferred shares
 
—

 
—

 
—

 
—

 
—

 
—

 
(2,710
)
Balance at end of period
 
10,705,025

 
10,322,975

 
9,864,424

 
9,426,299

 
9,300,208

 
10,705,025

 
9,300,208

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
206,827

 
38,323

 
(178,720
)
 
(221,041
)
 
(194,157
)
 
(178,720
)
 
118,044

Cumulative effect of an accounting change
 
—

 
—

 
—

 
—

 
—

 
—

 
(149,794
)
Change in unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax
 
21,566

 
164,425

 
211,380

 
58,042

 
(28,867
)
 
397,371

 
(179,826
)
Change in foreign currency translation adjustments
 
(16,679
)
 
4,079

 
5,663

 
(15,721
)
 
1,983

 
(6,937
)
 
(9,465
)
Balance at end of period
 
211,714

 
206,827

 
38,323

 
(178,720
)
 
(221,041
)
 
211,714

 
(221,041
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares held in treasury, at cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
(2,401,037
)
 
(2,388,392
)
 
(2,382,167
)
 
(2,280,151
)
 
(2,266,529
)
 
(2,382,167
)
 
(2,077,741
)
Shares repurchased for treasury
 
(2,712
)
 
(12,645
)
 
(6,225
)
 
(102,016
)
 
(13,622
)
 
(21,582
)
 
(202,410
)
Balance at end of period
 
(2,403,749
)
 
(2,401,037
)
 
(2,388,392
)
 
(2,382,167
)
 
(2,280,151
)
 
(2,403,749
)
 
(2,280,151
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total shareholders’ equity available to Arch
 
11,158,096

 
10,757,352

 
10,114,596

 
9,439,827

 
9,355,148

 
11,158,096

 
9,355,148

Non-redeemable noncontrolling interests
 
854,924

 
855,347

 
838,081

 
791,560

 
876,754

 
854,924

 
876,754

Total shareholders’ equity
 
$
12,013,020

 
$
11,612,699

 
$
10,952,677

 
$
10,231,387

 
$
10,231,902

 
$
12,013,020

 
$
10,231,902



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

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Operating Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
$
399,189

 
$
485,845

 
$
495,498

 
$
56,324

 
$
248,766

 
$
1,380,532

 
$
671,497

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized (gains) losses
 
(64,760
)
 
(118,893
)
 
(145,400
)
 
162,793

 
47,315

 
(329,053
)
 
224,757

Net impairment losses included in earnings
 
1,163

 
49

 
1,309

 
1,705

 
492

 
2,521

 
1,124

Equity in net income or loss of investment funds accounted for using the equity method and other income or loss
 
6,808

 
(15,968
)
 
(29,752
)
 
30,337

 
19,900

 
(38,912
)
 
6,357

Amortization of intangible assets
 
20,003

 
19,794

 
20,417

 
26,147

 
26,315

 
60,214

 
79,523

Share-based compensation
 
12,895

 
15,646

 
25,891

 
9,970

 
10,387

 
54,432

 
45,806

Changes in:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for losses and loss adjustment expenses, net
 
222,678

 
160,401

 
(6,005
)
 
175,489

 
146,136

 
377,074

 
68,245

Unearned premiums, net
 
175,434

 
(18,829
)
 
156,393

 
(67,681
)
 
42,675

 
312,998

 
182,453

Premiums receivable
 
(26,715
)
 
(16,913
)
 
(285,137
)
 
(8,049
)
 
33,703

 
(328,765
)
 
(203,247
)
Deferred acquisition costs
 
(13,816
)
 
(1,622
)
 
(23,168
)
 
(1,773
)
 
(963
)
 
(38,606
)
 
(36,074
)
Reinsurance balances payable
 
75,487

 
76,810

 
62,605

 
(10,258
)
 
(5,265
)
 
214,902

 
83,696

Other items, net
 
22,249

 
(109,194
)
 
(37,253
)
 
63,331

 
54,640

 
(124,198
)
 
(3,150
)
Net cash provided by operating activities
 
830,615

 
477,126

 
235,398

 
438,335

 
624,101

 
1,543,139

 
1,120,987

Investing Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Purchases of fixed maturity investments
 
(7,677,977
)
 
(8,888,176
)
 
(7,444,470
)
 
(8,489,743
)
 
(7,970,347
)
 
(24,010,623
)
 
(24,837,917
)
Purchases of equity securities
 
(92,112
)
 
(228,129
)
 
(203,810
)
 
(181,807
)
 
(139,679
)
 
(524,051
)
 
(819,342
)
Purchases of other investments
 
(337,862
)
 
(352,470
)
 
(324,593
)
 
(471,290
)
 
(526,185
)
 
(1,014,925
)
 
(1,543,332
)
Proceeds from sales of fixed maturity investments
 
7,075,372

 
8,555,892

 
7,076,590

 
8,203,068

 
7,219,660

 
22,707,854

 
23,310,203

Proceeds from sales of equity securities
 
194,429

 
81,684

 
95,017

 
251,526

 
244,851

 
371,130

 
866,919

Proceeds from sales, redemptions and maturities of other investments
 
292,819

 
318,215

 
216,483

 
383,923

 
404,737

 
827,517

 
1,178,035

Proceeds from redemptions and maturities of fixed maturity investments
 
149,770

 
144,525

 
100,424

 
168,734

 
212,573

 
394,719

 
724,021

Net settlements of derivative instruments
 
4,722

 
57,964

 
29,737

 
43,934

 
(3,733
)
 
92,423

 
765

Net (purchases) sales of short-term investments
 
(72,442
)
 
(91,081
)
 
292,601

 
(68,842
)
 
102,414

 
129,078

 
554,315

Change in cash collateral related to securities lending
 
(600
)
 
37,208

 
(29,618
)
 
43,810

 
(39,231
)
 
6,990

 
137,073

Purchases of fixed assets
 
(11,276
)
 
(6,936
)
 
(9,423
)
 
(10,759
)
 
(5,808
)
 
(27,635
)
 
(19,050
)
Other
 
(28,375
)
 
(80,847
)
 
(93,731
)
 
(36,491
)
 
8,266

 
(202,953
)
 
58,227

Net cash provided by (used for) investing activities
 
(503,532
)
 
(452,151
)
 
(294,793
)
 
(163,937
)
 
(492,482
)
 
(1,250,476
)
 
(390,083
)
Financing Activities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Redemption of preferred shares
 
—

 
—

 
—

 
—

 
—

 
—

 
(92,555
)
Purchases of common shares under share repurchase program
 
—

 
—

 
(2,871
)
 
(98,233
)
 
(10,954
)
 
(2,871
)
 
(184,529
)
Proceeds from common shares issued, net
 
1,075

 
1,344

 
(1,901
)
 
4,421

 
1,822

 
518

 
(12,029
)
Proceeds from borrowings
 
137,283

 
3,800

 
59,000

 
51,000

 
36,680

 
200,083

 
167,259

Repayments of borrowings
 
—

 
(1,500
)
 
(26,038
)
 
(149,401
)
 
(54,000
)
 
(27,538
)
 
(427,000
)
Change in cash collateral related to securities lending
 
600

 
(37,208
)
 
29,618

 
(43,810
)
 
39,231

 
(6,990
)
 
(137,073
)
Change in third party investment in redeemable noncontrolling interests
 
(161,874
)
 
—

 
—

 
—

 
—

 
(161,874
)
 
—

Dividends paid to redeemable noncontrolling interests
 
(2,414
)
 
(4,497
)
 
(4,497
)
 
(4,498
)
 
(4,497
)
 
(11,408
)
 
(13,491
)
Other
 
(1,678
)
 
(2,140
)
 
(1,389
)
 
(1,142
)
 
(1,595
)
 
(5,207
)
 
(6,084
)
Preferred dividends paid
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,402
)
 
(31,209
)
 
(31,242
)
Net cash provided by (used for) financing activities
 
(37,411
)
 
(50,604
)
 
41,519

 
(252,066
)
 
(3,715
)
 
(46,496
)
 
(736,744
)
Effects of exchange rate changes on foreign currency cash and restricted cash
 
(10,272
)
 
(1,512
)
 
3,449

 
(7,508
)
 
(1,194
)
 
(8,335
)
 
(11,625
)
Increase (decrease) in cash and restricted cash
 
279,400

 
(27,141
)
 
(14,427
)
 
14,824

 
126,710

 
237,832

 
(17,465
)
Cash and restricted cash, beginning of period
 
683,075

 
710,216

 
724,643

 
709,819

 
583,109

 
724,643

 
727,284

Cash and restricted cash, end of period
 
$
962,475

 
$
683,075

 
$
710,216

 
$
724,643

 
$
709,819

 
$
962,475

 
$
709,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes paid (received)
 
$
3,565

 
$
76,166

 
$
(32,666
)
 
$
33,032

 
$
12,499

 
$
47,065

 
$
(34,012
)
Interest paid
 
$
7,702

 
$
54,612

 
$
6,246

 
$
52,170

 
$
6,748

 
$
68,560

 
$
67,605

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities, excluding the ‘other’ segment
 
$
769,486

 
$
431,865

 
$
165,411

 
$
383,622

 
$
543,205

 
$
1,366,762

 
$
947,656


 
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, net impairment losses included in earnings, 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 11% 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
 
 
September 30, 2019
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
1,005,874

 
$
662,572

 
$
375,092

 
$
2,043,292

 
$
249,960

 
$
2,181,121

Premiums ceded
 
(302,034
)
 
(226,096
)
 
(57,703
)
 
(585,587
)
 
(94,208
)
 
(567,664
)
Net premiums written
 
703,840

 
436,476

 
317,389

 
1,457,705

 
155,752

 
1,613,457

Change in unearned premiums
 
(98,504
)
 
(72,621
)
 
25,611

 
(145,514
)
 
(29,920
)
 
(175,434
)
Net premiums earned
 
605,336

 
363,855

 
343,000

 
1,312,191

 
125,832

 
1,438,023

Other underwriting income
 
—

 
(1,208
)
 
3,955

 
2,747

 
579

 
3,326

Losses and loss adjustment expenses
 
(422,782
)
 
(270,379
)
 
(13,080
)
 
(706,241
)
 
(96,214
)
 
(802,455
)
Acquisition expenses
 
(91,259
)
 
(62,393
)
 
(34,396
)
 
(188,048
)
 
(23,072
)
 
(211,120
)
Other operating expenses
 
(115,408
)
 
(32,533
)
 
(37,003
)
 
(184,944
)
 
(11,568
)
 
(196,512
)
Underwriting income (loss)
 
$
(24,113
)
 
$
(2,658
)
 
$
262,476

 
235,705

 
(4,443
)
 
231,262

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
126,874

 
34,614

 
161,488

Net realized gains
 
 
 
 
 
 
 
81,177

 
(18,659
)
 
62,518

Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(1,163
)
 
—

 
(1,163
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
17,130

 
—

 
17,130

Other income
 
 
 
 
 
 
 
1,338

 
—

 
1,338

Corporate expenses (2)
 
 
 
 
 
 
 
(15,066
)
 
—

 
(15,066
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(1,995
)
 
—

 
(1,995
)
Amortization of intangible assets
 
 
 
 
 
 
 
(20,003
)
 
—

 
(20,003
)
Interest expense
 
 
 
 
 
 
 
(23,237
)
 
(8,091
)
 
(31,328
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
29,794

 
3,330

 
33,124

Income before income taxes
 
 
 
 
 
 
 
430,554

 
6,751

 
437,305

Income tax expense
 
 
 
 
 
 
 
(38,116
)
 
—

 
(38,116
)
Net income
 
 
 
 
 
 
 
392,438

 
6,751

 
399,189

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(6,600
)
 
(6,600
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(136
)
 
(136
)
Net income available to Arch
 
 
 
 
 
 
 
392,438

 
15

 
392,453

Preferred dividends
 
 
 
 
 
 
 
(10,403
)
 
—

 
(10,403
)
Net income available to Arch common shareholders
 
 
 
 
 
 
 
$
382,035

 
$
15

 
$
382,050

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
69.8
%
 
74.3
%
 
3.8
%
 
53.8
%
 
76.5
%
 
55.8
%
Acquisition expense ratio
 
15.1
%
 
17.1
%
 
10.0
%
 
14.3
%
 
18.3
%
 
14.7
%
Other operating expense ratio
 
19.1
%
 
8.9
%
 
10.8
%
 
14.1
%
 
9.2
%
 
13.7
%
Combined ratio
 
104.0
%
 
100.3
%
 
24.6
%
 
82.2
%
 
104.0
%
 
84.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
70.0
%
 
65.9
%
 
84.6
%
 
71.3
%
 
62.3
%
 
74.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
 
$
21,566,088

 
$
2,730,247

 
$
24,296,335

Total assets
 
 
 
 
 
 
 
31,961,107

 
3,611,496

 
35,572,603

Total liabilities
 
 
 
 
 
 
 
20,912,352

 
2,598,442

 
23,510,794

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

 
10
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Three Months Ended
 
 
September 30, 2018
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
836,820

 
$
435,396

 
$
350,559

 
$
1,622,532

 
$
185,033

 
$
1,731,328

Premiums ceded
 
(259,968
)
 
(123,705
)
 
(57,226
)
 
(440,656
)
 
(33,356
)
 
(397,775
)
Net premiums written
 
576,852

 
311,691

 
293,333

 
1,181,876

 
151,677

 
1,333,553

Change in unearned premiums
 
(15,794
)
 
(18,418
)
 
7,591

 
(26,621
)
 
(16,054
)
 
(42,675
)
Net premiums earned
 
561,058

 
293,273

 
300,924

 
1,155,255

 
135,623

 
1,290,878

Other underwriting income (loss)
 
—

 
1,387

 
3,733

 
5,120

 
703

 
5,823

Losses and loss adjustment expenses
 
(409,435
)
 
(183,413
)
 
(9,615
)
 
(602,463
)
 
(96,957
)
 
(699,420
)
Acquisition expenses
 
(88,255
)
 
(50,367
)
 
(33,361
)
 
(171,983
)
 
(29,619
)
 
(201,602
)
Other operating expenses
 
(90,081
)
 
(29,936
)
 
(31,122
)
 
(151,139
)
 
(9,959
)
 
(161,098
)
Underwriting income (loss)
 
$
(26,713
)
 
$
30,944

 
$
230,559

 
234,790

 
(209
)
 
234,581

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
114,328

 
29,696

 
144,024

Net realized gains (losses)
 
 
 
 
 
 
 
(47,010
)
 
(4,695
)
 
(51,705
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(492
)
 
—

 
(492
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
15,982

 
—

 
15,982

Other income (loss)
 
 
 
 
 
 
 
(726
)
 
—

 
(726
)
Corporate expenses (2)
 
 
 
 
 
 
 
(13,244
)
 
—

 
(13,244
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(1,091
)
 
—

 
(1,091
)
Amortization of intangible assets
 
 
 
 
 
 
 
(26,315
)
 
—

 
(26,315
)
Interest expense
 
 
 
 
 
 
 
(24,666
)
 
(5,064
)
 
(29,730
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
7,130

 
3,708

 
10,838

Income before income taxes
 
 
 
 
 
 
 
258,686

 
23,436

 
282,122

Income tax expense
 
 
 
 
 
 
 
(33,356
)
 
—

 
(33,356
)
Net income
 
 
 
 
 
 
 
225,330

 
23,436

 
248,766

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(4,599
)
 
(4,599
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(16,759
)
 
(16,759
)
Net income available to Arch
 
 
 
 
 
 
 
225,330

 
2,078

 
227,408

Preferred dividends
 
 
 
 
 
 
 
(10,402
)
 
—

 
(10,402
)
Net income available to Arch common shareholders
 
 
 
 
 
 
 
$
214,928

 
$
2,078

 
$
217,006

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
73.0
%
 
62.5
%
 
3.2
%
 
52.1
%
 
71.5
%
 
54.2
%
Acquisition expense ratio
 
15.7
%
 
17.2
%
 
11.1
%
 
14.9
%
 
21.8
%
 
15.6
%
Other operating expense ratio
 
16.1
%
 
10.2
%
 
10.3
%
 
13.1
%
 
7.3
%
 
12.5
%
Combined ratio
 
104.8
%
 
89.9
%
 
24.6
%
 
80.1
%
 
100.6
%
 
82.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
68.9
%
 
71.6
%
 
83.7
%
 
72.8
%
 
82.0
%
 
77.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investable assets
 
 
 
 
 
 
 
$
19,592,182

 
$
2,732,060

 
$
22,324,242

Total assets
 
 
 
 
 
 
 
28,833,083

 
3,419,451

 
32,252,534

Total liabilities
 
 
 
 
 
 
 
19,601,237

 
2,213,196

 
21,814,433

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

 
11
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Nine Months Ended
 
 
September 30, 2019
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
2,867,753

 
$
1,890,974

 
$
1,095,607

 
$
5,853,574

 
$
598,627

 
$
6,196,809

Premiums ceded
 
(914,751
)
 
(627,120
)
 
(149,358
)
 
(1,690,469
)
 
(178,118
)
 
(1,613,195
)
Net premiums written
 
1,953,002

 
1,263,854

 
946,249

 
4,163,105

 
420,509

 
4,583,614

Change in unearned premiums
 
(201,719
)
 
(186,450
)
 
72,436

 
(315,733
)
 
2,735

 
(312,998
)
Net premiums earned
 
1,751,283

 
1,077,404

 
1,018,685

 
3,847,372

 
423,244

 
4,270,616

Other underwriting income
 
—

 
4,393

 
11,867

 
16,260

 
1,844

 
18,104

Losses and loss adjustment expenses
 
(1,168,677
)
 
(751,147
)
 
(50,226
)
 
(1,970,050
)
 
(318,480
)
 
(2,288,530
)
Acquisition expenses
 
(265,177
)
 
(173,504
)
 
(98,722
)
 
(537,403
)
 
(81,654
)
 
(619,057
)
Other operating expenses
 
(338,327
)
 
(102,197
)
 
(116,697
)
 
(557,221
)
 
(39,368
)
 
(596,589
)
Underwriting income (loss)
 
$
(20,898
)
 
$
54,949

 
$
764,907

 
798,958

 
(14,414
)
 
784,544

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
371,161

 
102,314

 
473,475

Net realized gains (losses)
 
 
 
 
 
 
 
318,722

 
6,167

 
324,889

Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(2,521
)
 
—

 
(2,521
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
96,533

 
—

 
96,533

Other income (loss)
 
 
 
 
 
 
 
3,550

 
—

 
3,550

Corporate expenses (2)
 
 
 
 
 
 
 
(47,911
)
 
—

 
(47,911
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(5,363
)
 
—

 
(5,363
)
Amortization of intangible assets
 
 
 
 
 
 
 
(60,214
)
 
—

 
(60,214
)
Interest expense
 
 
 
 
 
 
 
(70,094
)
 
(19,579
)
 
(89,673
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
28,779

 
2,918

 
31,697

Income before income taxes
 
 
 
 
 
 
 
1,431,600

 
77,406

 
1,509,006

Income tax expense
 
 
 
 
 
 
 
(128,454
)
 
(20
)
 
(128,474
)
Net income
 
 
 
 
 
 
 
1,303,146

 
77,386

 
1,380,532

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(15,778
)
 
(15,778
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(54,819
)
 
(54,819
)
Net income available to Arch
 
 
 
 
 
 
 
1,303,146

 
6,789

 
1,309,935

Preferred dividends
 
 
 
 
 
 
 
(31,209
)
 
—

 
(31,209
)
Net income available to Arch common shareholders
 
 
 
 
 
 
 
$
1,271,937

 
$
6,789

 
$
1,278,726

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
66.7
%
 
69.7
%
 
4.9
%
 
51.2
%
 
75.2
%
 
53.6
%
Acquisition expense ratio
 
15.1
%
 
16.1
%
 
9.7
%
 
14.0
%
 
19.3
%
 
14.5
%
Other operating expense ratio
 
19.3
%
 
9.5
%
 
11.5
%
 
14.5
%
 
9.3
%
 
14.0
%
Combined ratio
 
101.1
%
 
95.3
%
 
26.1
%
 
79.7
%
 
103.8
%
 
82.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
68.1
%
 
66.8
%
 
86.4
%
 
71.1
%
 
70.2
%
 
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.

 
12
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information

(U.S. Dollars in thousands)
 
Nine Months Ended
 
 
September 30, 2018
 
 
Insurance
 
Reinsurance
 
Mortgage
 
Sub-total (Core)
 
Other
 
Total
Gross premiums written (1)
 
$
2,429,570

 
$
1,503,206

 
$
1,002,727

 
$
4,935,339

 
$
574,078

 
$
5,266,086

Premiums ceded
 
(752,413
)
 
(455,682
)
 
(154,230
)
 
(1,362,161
)
 
(102,263
)
 
(1,221,093
)
Net premiums written
 
1,677,157

 
1,047,524

 
848,497

 
3,573,178

 
471,815

 
4,044,993

Change in unearned premiums
 
(30,913
)
 
(134,761
)
 
23,147

 
(142,527
)
 
(39,926
)
 
(182,453
)
Net premiums earned
 
1,646,244

 
912,763

 
871,644

 
3,430,651

 
431,889

 
3,862,540

Other underwriting income (loss)
 
—

 
2,490

 
10,464

 
12,954

 
2,092

 
15,046

Losses and loss adjustment expenses
 
(1,120,630
)
 
(555,044
)
 
(74,672
)
 
(1,750,346
)
 
(312,087
)
 
(2,062,433
)
Acquisition expenses
 
(264,094
)
 
(148,828
)
 
(87,665
)
 
(500,587
)
 
(95,229
)
 
(595,816
)
Other operating expenses
 
(274,735
)
 
(101,185
)
 
(108,622
)
 
(484,542
)
 
(27,752
)
 
(512,294
)
Underwriting income (loss)
 
$
(13,215
)
 
$
110,196

 
$
611,149

 
708,130

 
(1,087
)
 
707,043

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
322,332

 
84,084

 
406,416

Net realized gains (losses)
 
 
 
 
 
 
 
(218,414
)
 
(20,900
)
 
(239,314
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(1,124
)
 
—

 
(1,124
)
Equity in net income (loss) of investment funds accounted for using the equity method
 
 
 
 
 
 
 
52,523

 
—

 
52,523

Other income (loss)
 
 
 
 
 
 
 
2,461

 
—

 
2,461

Corporate expenses (2)
 
 
 
 
 
 
 
(43,330
)
 
—

 
(43,330
)
Transaction costs and other (2)
 
 
 
 
 
 
 
(8,829
)
 
—

 
(8,829
)
Amortization of intangible assets
 
 
 
 
 
 
 
(79,523
)
 
—

 
(79,523
)
Interest expense
 
 
 
 
 
 
 
(76,631
)
 
(14,079
)
 
(90,710
)
Net foreign exchange gains (losses)
 
 
 
 
 
 
 
38,302

 
6,521

 
44,823

Income before income taxes
 
 
 
 
 
 
 
695,897

 
54,539

 
750,436

Income tax expense
 
 
 
 
 
 
 
(78,912
)
 
(27
)
 
(78,939
)
Net income
 
 
 
 
 
 
 
616,985

 
54,512

 
671,497

Dividends attributable to redeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(13,769
)
 
(13,769
)
Amounts attributable to nonredeemable noncontrolling interests
 
 
 
 
 
 
 
—

 
(36,251
)
 
(36,251
)
Net income available to Arch
 
 
 
 
 
 
 
616,985

 
4,492

 
621,477

Preferred dividends
 
 
 
 
 
 
 
(31,242
)
 
—

 
(31,242
)
Loss on redemption of preferred shares
 
 
 
 
 
 
 
(2,710
)
 
—

 
(2,710
)
Net income available to Arch common shareholders
 
 
 
 
 
 
 
$
583,033

 
$
4,492

 
$
587,525

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
68.1
%
 
60.8
%
 
8.6
%
 
51.0
%
 
72.3
%
 
53.4
%
Acquisition expense ratio
 
16.0
%
 
16.3
%
 
10.1
%
 
14.6
%
 
22.0
%
 
15.4
%
Other operating expense ratio
 
16.7
%
 
11.1
%
 
12.5
%
 
14.1
%
 
6.4
%
 
13.3
%
Combined ratio
 
100.8
%
 
88.2
%
 
31.2
%
 
79.7
%
 
100.7
%
 
82.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
69.0
%
 
69.7
%
 
84.6
%
 
72.4
%
 
82.2
%
 
76.8
%
 
(1)
Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)
Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.


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

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Gross premiums written
 
$
1,005,874

 
$
919,925

 
$
941,954

 
$
832,762

 
$
836,820

 
$
2,867,753

 
$
2,429,570

Premiums ceded
 
(302,034
)
 
(292,095
)
 
(320,622
)
 
(297,794
)
 
(259,968
)
 
(914,751
)
 
(752,413
)
Net premiums written
 
703,840

 
627,830

 
621,332

 
534,968

 
576,852

 
1,953,002

 
1,677,157

Change in unearned premiums
 
(98,504
)
 
(35,388
)
 
(67,827
)
 
24,449

 
(15,794
)
 
(201,719
)
 
(30,913
)
Net premiums earned
 
605,336

 
592,442

 
553,505

 
559,417

 
561,058

 
1,751,283

 
1,646,244

Losses and loss adjustment expenses
 
(422,782
)
 
(389,172
)
 
(356,723
)
 
(400,050
)
 
(409,435
)
 
(1,168,677
)
 
(1,120,630
)
Acquisition expenses
 
(91,259
)
 
(91,094
)
 
(82,824
)
 
(85,608
)
 
(88,255
)
 
(265,177
)
 
(264,094
)
Other operating expenses
 
(115,408
)
 
(109,523
)
 
(113,396
)
 
(89,403
)
 
(90,081
)
 
(338,327
)
 
(274,735
)
Underwriting income (loss)
 
$
(24,113
)
 
$
2,653

 
$
562

 
$
(15,644
)
 
$
(26,713
)
 
$
(20,898
)
 
$
(13,215
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
69.8
 %
 
65.7
 %
 
64.4
 %
 
71.5
 %
 
73.0
 %
 
66.7
 %
 
68.1
 %
Acquisition expense ratio
 
15.1
 %
 
15.4
 %
 
15.0
 %
 
15.3
 %
 
15.7
 %
 
15.1
 %
 
16.0
 %
Other operating expense ratio
 
19.1
 %
 
18.5
 %
 
20.5
 %
 
16.0
 %
 
16.1
 %
 
19.3
 %
 
16.7
 %
Combined ratio
 
104.0
 %
 
99.6
 %
 
99.9
 %
 
102.8
 %
 
104.8
 %
 
101.1
 %
 
100.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reinsurance and reinstatement premiums
 
4.3
 %
 
0.4
 %
 
0.0
 %
 
6.0
 %
 
5.8
 %
 
1.6
 %
 
2.5
 %
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(0.6
)%
 
(0.2
)%
 
(0.3
)%
 
(1.5
)%
 
(1.2
)%
 
(0.4
)%
 
(0.8
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
100.3
 %
 
99.4
 %
 
100.2
 %
 
98.3
 %
 
100.2
 %
 
99.9
 %
 
99.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
70.0
 %
 
68.2
 %
 
66.0
 %
 
64.2
 %
 
68.9
 %
 
68.1
 %
 
69.0
 %
 
(1)
See ‘Comments on Regulation G’ for further discussion.


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

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Net premiums written
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional lines (1)
 
$
137,569

 
19.5
 %
 
$
121,679

 
19.4
%
 
$
129,234

 
20.8
%
 
$
109,219

 
20.4
%
 
$
113,100

 
19.6
%
 
$
388,482

 
19.9
%
 
$
341,187

 
20.3
%
Programs
 
120,039

 
17.1
 %
 
108,671

 
17.3
%
 
101,172

 
16.3
%
 
92,601

 
17.3
%
 
103,928

 
18.0
%
 
329,882

 
16.9
%
 
300,662

 
17.9
%
Property, energy, marine and aviation
 
97,966

 
13.9
 %
 
103,819

 
16.5
%
 
70,486

 
11.3
%
 
44,017

 
8.2
%
 
60,909

 
10.6
%
 
272,271

 
13.9
%
 
175,157

 
10.4
%
Construction and national accounts
 
98,522

 
14.0
 %
 
60,888

 
9.7
%
 
95,355

 
15.3
%
 
84,237

 
15.7
%
 
71,888

 
12.5
%
 
254,765

 
13.0
%
 
236,700

 
14.1
%
Travel, accident and health
 
75,192

 
10.7
 %
 
76,537

 
12.2
%
 
88,104

 
14.2
%
 
67,205

 
12.6
%
 
79,450

 
13.8
%
 
239,833

 
12.3
%
 
223,196

 
13.3
%
Excess and surplus casualty (2)
 
62,843

 
8.9
 %
 
58,466

 
9.3
%
 
45,165

 
7.3
%
 
41,674

 
7.8
%
 
44,829

 
7.8
%
 
166,474

 
8.5
%
 
126,793

 
7.6
%
Lenders products
 
31,005

 
4.4
 %
 
22,373

 
3.6
%
 
22,415

 
3.6
%
 
25,825

 
4.8
%
 
25,995

 
4.5
%
 
75,793

 
3.9
%
 
70,269

 
4.2
%
Other (3)
 
80,704

 
11.5
 %
 
75,397

 
12.0
%
 
69,401

 
11.2
%
 
70,190

 
13.1
%
 
76,753

 
13.3
%
 
225,502

 
11.5
%
 
203,193

 
12.1
%
Total
 
$
703,840

 
100.0
 %
 
$
627,830

 
100.0
%
 
$
621,332

 
100.0
%
 
$
534,968

 
100.0
%
 
$
576,852

 
100.0
%
 
$
1,953,002

 
100.0
%
 
$
1,677,157

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
532,808

 
75.7
 %
 
$
471,664

 
75.1
%
 
$
471,811

 
75.9
%
 
$
422,372

 
79.0
%
 
$
448,910

 
77.8
%
 
$
1,476,283

 
75.6
%
 
$
1,314,279

 
78.4
%
Europe
 
145,512

 
20.7
 %
 
129,869

 
20.7
%
 
132,651

 
21.3
%
 
92,658

 
17.3
%
 
110,557

 
19.2
%
 
408,032

 
20.9
%
 
309,316

 
18.4
%
Other
 
25,520

 
3.6
 %
 
26,297

 
4.2
%
 
16,870

 
2.7
%
 
19,938

 
3.7
%
 
17,385

 
3.0
%
 
68,687

 
3.5
%
 
53,562

 
3.2
%
Total
 
$
703,840

 
100.0
 %
 
$
627,830

 
100.0
%
 
$
621,332

 
100.0
%
 
$
534,968

 
100.0
%
 
$
576,852

 
100.0
%
 
$
1,953,002

 
100.0
%
 
$
1,677,157

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Professional lines (1)
 
$
135,343

 
22.4
 %
 
$
115,667

 
19.5
%
 
$
114,791

 
20.7
%
 
$
114,910

 
20.5
%
 
$
115,271

 
20.5
%
 
$
365,801

 
20.9
%
 
$
343,515

 
20.9
%
Programs
 
104,432

 
17.3
 %
 
102,687

 
17.3
%
 
97,486

 
17.6
%
 
100,333

 
17.9
%
 
96,509

 
17.2
%
 
304,605

 
17.4
%
 
288,853

 
17.5
%
Property, energy, marine and aviation
 
80,246

 
13.3
 %
 
68,995

 
11.6
%
 
59,638

 
10.8
%
 
51,769

 
9.3
%
 
53,857

 
9.6
%
 
208,879

 
11.9
%
 
153,300

 
9.3
%
Construction and national accounts
 
81,472

 
13.5
 %
 
76,795

 
13.0
%
 
75,931

 
13.7
%
 
83,063

 
14.8
%
 
80,381

 
14.3
%
 
234,198

 
13.4
%
 
239,377

 
14.5
%
Travel, accident and health
 
81,952

 
13.5
 %
 
83,636

 
14.1
%
 
71,575

 
12.9
%
 
74,153

 
13.3
%
 
81,405

 
14.5
%
 
237,163

 
13.5
%
 
222,994

 
13.5
%
Excess and surplus casualty (2)
 
53,991

 
8.9
 %
 
47,858

 
8.1
%
 
42,369

 
7.7
%
 
42,430

 
7.6
%
 
43,401

 
7.7
%
 
144,218

 
8.2
%
 
129,994

 
7.9
%
Lenders products (4)
 
(5,724
)
 
(0.9
)%
 
23,570

 
4.0
%
 
23,232

 
4.2
%
 
24,017

 
4.3
%
 
24,254

 
4.3
%
 
41,078

 
2.3
%
 
70,231

 
4.3
%
Other (3)
 
73,624

 
12.2
 %
 
73,234

 
12.4
%
 
68,483

 
12.4
%
 
68,742

 
12.3
%
 
65,980

 
11.8
%
 
215,341

 
12.3
%
 
197,980

 
12.0
%
Total
 
$
605,336

 
100.0
 %
 
$
592,442

 
100.0
%
 
$
553,505

 
100.0
%
 
$
559,417

 
100.0
%
 
$
561,058

 
100.0
%
 
$
1,751,283

 
100.0
%
 
$
1,646,244

 
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
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Gross premiums written
 
$
662,572

 
$
545,547

 
$
682,855

 
$
409,316

 
$
435,396

 
$
1,890,974

 
$
1,503,206

Premiums ceded
 
(226,096
)
 
(169,457
)
 
(231,567
)
 
(84,268
)
 
(123,705
)
 
(627,120
)
 
(455,682
)
Net premiums written
 
436,476

 
376,090

 
451,288

 
325,048

 
311,691

 
1,263,854

 
1,047,524

Change in unearned premiums
 
(72,621
)
 
(8,906
)
 
(104,923
)
 
23,405

 
(18,418
)
 
(186,450
)
 
(134,761
)
Net premiums earned
 
363,855

 
367,184

 
346,365

 
348,453

 
293,273

 
1,077,404

 
912,763

Other underwriting income (loss)
 
(1,208
)
 
1,224

 
4,377

 
(3,172
)
 
1,387

 
4,393

 
2,490

Losses and loss adjustment expenses
 
(270,379
)
 
(240,958
)
 
(239,810
)
 
(291,838
)
 
(183,413
)
 
(751,147
)
 
(555,044
)
Acquisition expenses
 
(62,393
)
 
(56,785
)
 
(54,326
)
 
(62,452
)
 
(50,367
)
 
(173,504
)
 
(148,828
)
Other operating expenses
 
(32,533
)
 
(33,960
)
 
(35,704
)
 
(32,165
)
 
(29,936
)
 
(102,197
)
 
(101,185
)
Underwriting income (loss)
 
$
(2,658
)
 
$
36,705

 
$
20,902

 
$
(41,174
)
 
$
30,944

 
$
54,949

 
$
110,196

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
74.3
 %
 
65.6
 %
 
69.2
%
 
83.8
 %
 
62.5
 %
 
69.7
 %
 
60.8
 %
Acquisition expense ratio
 
17.1
 %
 
15.5
 %
 
15.7
%
 
17.9
 %
 
17.2
 %
 
16.1
 %
 
16.3
 %
Other operating expense ratio
 
8.9
 %
 
9.2
 %
 
10.3
%
 
9.2
 %
 
10.2
 %
 
9.5
 %
 
11.1
 %
Combined ratio
 
100.3
 %
 
90.3
 %
 
95.2
%
 
110.9
 %
 
89.9
 %
 
95.3
 %
 
88.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reinsurance and reinstatement premiums
 
11.5
 %
 
1.2
 %
 
2.3
%
 
24.3
 %
 
8.7
 %
 
5.0
 %
 
3.7
 %
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(4.0
)%
 
(3.1
)%
 
0.5
%
 
(9.6
)%
 
(11.3
)%
 
(2.3
)%
 
(11.1
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
92.8
 %
 
92.2
 %
 
92.4
%
 
96.2
 %
 
92.5
 %
 
92.6
 %
 
95.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
65.9
 %
 
68.9
 %
 
66.1
%
 
79.4
 %
 
71.6
 %
 
66.8
 %
 
69.7
 %
 
(1)
See ‘Comments on Regulation G’ for further discussion.





 
16
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment

(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Net premiums written
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Casualty (1)
 
$
178,802

 
41.0
%
 
$
78,025

 
20.7
%
 
$
168,484

 
37.3
%
 
$
103,101

 
31.7
%
 
$
98,788

 
31.7
%
 
$
425,311

 
33.7
%
 
$
297,077

 
28.4
%
Other Specialty (2)
 
94,072

 
21.6
%
 
129,174

 
34.3
%
 
140,477

 
31.1
%
 
108,363

 
33.3
%
 
105,535

 
33.9
%
 
363,723

 
28.8
%
 
399,608

 
38.1
%
Property excluding property catastrophe
 
118,671

 
27.2
%
 
96,050

 
25.5
%
 
102,740

 
22.8
%
 
64,025

 
19.7
%
 
83,222

 
26.7
%
 
317,461

 
25.1
%
 
246,268

 
23.5
%
Property catastrophe
 
23,597

 
5.4
%
 
46,594

 
12.4
%
 
3,383

 
0.7
%
 
27,894

 
8.6
%
 
9,053

 
2.9
%
 
73,574

 
5.8
%
 
51,730

 
4.9
%
Marine and aviation
 
10,181

 
2.3
%
 
15,619

 
4.2
%
 
15,958

 
3.5
%
 
11,929

 
3.7
%
 
6,011

 
1.9
%
 
41,758

 
3.3
%
 
26,084

 
2.5
%
Other (3)
 
11,153

 
2.6
%
 
10,628

 
2.8
%
 
20,246

 
4.5
%
 
9,736

 
3.0
%
 
9,082

 
2.9
%
 
42,027

 
3.3
%
 
26,757

 
2.6
%
Total
 
$
436,476

 
100.0
%
 
$
376,090

 
100.0
%
 
$
451,288

 
100.0
%
 
$
325,048

 
100.0
%
 
$
311,691

 
100.0
%
 
$
1,263,854

 
100.0
%
 
$
1,047,524

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bermuda
 
$
190,998

 
43.8
%
 
$
159,147

 
42.3
%
 
$
111,499

 
24.7
%
 
$
146,013

 
44.9
%
 
$
117,228

 
37.6
%
 
$
461,644

 
36.5
%
 
$
341,510

 
32.6
%
United States
 
145,231

 
33.3
%
 
109,296

 
29.1
%
 
156,413

 
34.7
%
 
94,661

 
29.1
%
 
103,006

 
33.0
%
 
410,940

 
32.5
%
 
318,889

 
30.4
%
Europe and other
 
100,247

 
23.0
%
 
107,647

 
28.6
%
 
183,376

 
40.6
%
 
84,374

 
26.0
%
 
91,457

 
29.3
%
 
391,270

 
31.0
%
 
387,125

 
37.0
%
Total
 
$
436,476

 
100.0
%
 
$
376,090

 
100.0
%
 
$
451,288

 
100.0
%
 
$
325,048

 
100.0
%
 
$
311,691

 
100.0
%
 
$
1,263,854

 
100.0
%
 
$
1,047,524

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Casualty (1)
 
$
116,242

 
31.9
%
 
$
103,164

 
28.1
%
 
$
91,624

 
26.5
%
 
$
115,157

 
33.0
%
 
$
77,496

 
26.4
%
 
$
311,030

 
28.9
%
 
$
231,877

 
25.4
%
Other Specialty (2)
 
112,349

 
30.9
%
 
136,573

 
37.2
%
 
121,521

 
35.1
%
 
112,892

 
32.4
%
 
108,311

 
36.9
%
 
370,443

 
34.4
%
 
361,676

 
39.6
%
Property excluding property catastrophe
 
90,358

 
24.8
%
 
85,479

 
23.3
%
 
83,792

 
24.2
%
 
76,827

 
22.0
%
 
71,358

 
24.3
%
 
259,629

 
24.1
%
 
210,961

 
23.1
%
Property catastrophe
 
22,617

 
6.2
%
 
18,537

 
5.0
%
 
18,732

 
5.4
%
 
22,956

 
6.6
%
 
18,190

 
6.2
%
 
59,886

 
5.6
%
 
52,293

 
5.7
%
Marine and aviation
 
11,798

 
3.2
%
 
12,498

 
3.4
%
 
11,059

 
3.2
%
 
11,088

 
3.2
%
 
8,672

 
3.0
%
 
35,355

 
3.3
%
 
28,150

 
3.1
%
Other (3)
 
10,491

 
2.9
%
 
10,933

 
3.0
%
 
19,637

 
5.7
%
 
9,533

 
2.7
%
 
9,246

 
3.2
%
 
41,061

 
3.8
%
 
27,806

 
3.0
%
Total
 
$
363,855

 
100.0
%
 
$
367,184

 
100.0
%
 
$
346,365

 
100.0
%
 
$
348,453

 
100.0
%
 
$
293,273

 
100.0
%
 
$
1,077,404

 
100.0
%
 
$
912,763

 
100.0
%

(1)      Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.                        
(2)    Includes proportional motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit 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
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Gross premiums written
 
$
375,092

 
$
364,465

 
$
356,050

 
$
357,981

 
$
350,559

 
$
1,095,607

 
$
1,002,727

Premiums ceded
 
(57,703
)
 
(42,857
)
 
(48,798
)
 
(48,603
)
 
(57,226
)
 
(149,358
)
 
(154,230
)
Net premiums written
 
317,389

 
321,608

 
307,252

 
309,378

 
293,333

 
946,249

 
848,497

Change in unearned premiums
 
25,611

 
31,175

 
15,650

 
5,214

 
7,591

 
72,436

 
23,147

Net premiums earned
 
343,000

 
352,783

 
322,902

 
314,592

 
300,924

 
1,018,685

 
871,644

Other underwriting income (1)
 
3,955

 
4,056

 
3,856

 
2,569

 
3,733

 
11,867

 
10,464

Losses and loss adjustment expenses
 
(13,080
)
 
(25,997
)
 
(11,149
)
 
(6,617
)
 
(9,615
)
 
(50,226
)
 
(74,672
)
Acquisition expenses
 
(34,396
)
 
(32,654
)
 
(31,672
)
 
(30,930
)
 
(33,361
)
 
(98,722
)
 
(87,665
)
Other operating expenses
 
(37,003
)
 
(39,819
)
 
(39,875
)
 
(33,810
)
 
(31,122
)
 
(116,697
)
 
(108,622
)
Underwriting income
 
$
262,476

 
$
258,369

 
$
244,062

 
$
245,804

 
$
230,559

 
$
764,907

 
$
611,149

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
3.8
 %
 
7.4
 %
 
3.5
 %
 
2.1
 %
 
3.2
 %
 
4.9
 %
 
8.6
 %
Acquisition expense ratio
 
10.0
 %
 
9.3
 %
 
9.8
 %
 
9.8
 %
 
11.1
 %
 
9.7
 %
 
10.1
 %
Other operating expense ratio
 
10.8
 %
 
11.3
 %
 
12.3
 %
 
10.7
 %
 
10.3
 %
 
11.5
 %
 
12.5
 %
Combined ratio
 
24.6
 %
 
28.0
 %
 
25.6
 %
 
22.6
 %
 
24.6
 %
 
26.1
 %
 
31.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(9.6
)%
 
(6.5
)%
 
(11.3
)%
 
(10.4
)%
 
(12.5
)%
 
(9.1
)%
 
(8.5
)%
Combined ratio excluding prior year development (2)
 
34.2
 %
 
34.5
 %
 
36.9
 %
 
33.0
 %
 
37.1
 %
 
35.2
 %
 
39.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
84.6
 %
 
88.2
 %
 
86.3
 %
 
86.4
 %
 
83.7
 %
 
86.4
 %
 
84.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written by underwriting location
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
$
260,202

 
$
258,774

 
$
255,380

 
$
256,472

 
$
240,959

 
$
774,356

 
$
691,851

Other
 
57,187

 
62,834

 
51,872

 
52,906

 
52,374

 
171,893

 
156,646

Total
 
$
317,389

 
$
321,608

 
$
307,252

 
$
309,378

 
$
293,333

 
$
946,249

 
$
848,497

United States %
 
82.0
 %
 
80.5
 %
 
83.1
 %
 
82.9
 %
 
82.1
 %
 
81.8
 %
 
81.5
 %
Other %
 
18.0
 %
 
19.5
 %
 
16.9
 %
 
17.1
 %
 
17.9
 %
 
18.2
 %
 
18.5
 %

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

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

(U.S. Dollars in millions)
 
September 30, 2019
 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
September 30, 2018
Insurance In Force (IIF) (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. primary mortgage insurance
 
$
284,496

 
69.7
%
 
$
279,297

 
69.1
%
 
$
276,699

 
70.9
%
 
$
276,538

 
72.1
%
 
$
272,409

 
73.1
%
Mortgage reinsurance
 
25,440

 
6.2
%
 
26,286

 
6.5
%
 
26,487

 
6.8
%
 
25,975

 
6.8
%
 
26,500

 
7.1
%
Other (2)
 
98,054

 
24.0
%
 
98,335

 
24.3
%
 
87,190

 
22.3
%
 
81,147

 
21.2
%
 
73,903

 
19.8
%
Total
 
$
407,990

 
100.0
%
 
$
403,918

 
100.0
%
 
$
390,376

 
100.0
%
 
$
383,660

 
100.0
%
 
$
372,812

 
100.0
%
Risk In Force (RIF) (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. primary mortgage insurance
 
$
72,916

 
92.0
%
 
$
71,760

 
91.8
%
 
$
71,114

 
92.2
%
 
$
70,995

 
92.3
%
 
$
69,764

 
92.5
%
Mortgage reinsurance
 
2,086

 
2.6
%
 
2,182

 
2.8
%
 
2,204

 
2.9
%
 
2,217

 
2.9
%
 
2,264

 
3.0
%
Other (2)
 
4,216

 
5.3
%
 
4,260

 
5.4
%
 
3,772

 
4.9
%
 
3,728

 
4.8
%
 
3,425

 
4.5
%
Total
 
$
79,218

 
100.0
%
 
$
78,202

 
100.0
%
 
$
77,090

 
100.0
%
 
$
76,940

 
100.0
%
 
$
75,453

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures for U.S. primary mortgage insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by credit quality (FICO score):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
>=740
 
$
41,975

 
57.6
%
 
$
41,333

 
57.6
%
 
$
41,053

 
57.7
%
 
$
41,066

 
57.8
%
 
$
40,466

 
58.0
%
680-739
 
25,013

 
34.3
%
 
24,488

 
34.1
%
 
24,122

 
33.9
%
 
23,954

 
33.7
%
 
23,371

 
33.5
%
620-679
 
5,501

 
7.5
%
 
5,494

 
7.7
%
 
5,476

 
7.7
%
 
5,485

 
7.7
%
 
5,413

 
7.8
%
<620
 
427

 
0.6
%
 
445

 
0.6
%
 
463

 
0.7
%
 
490

 
0.7
%
 
514

 
0.7
%
Total
 
$
72,916

 
100.0
%
 
$
71,760

 
100.0
%
 
$
71,114

 
100.0
%
 
$
70,995

 
100.0
%
 
$
69,764

 
100.0
%
Weighted average FICO score
 
743

 
 
 
743

 
 
 
743

 
 
 
743

 
 
 
743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by Loan-To-Value (LTV):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
95.01% and above
 
$
8,948

 
12.3
%
 
$
8,535

 
11.9
%
 
$
8,175

 
11.5
%
 
$
7,918

 
11.2
%
 
$
7,506

 
10.8
%
90.01% to 95.00%
 
40,086

 
55.0
%
 
39,777

 
55.4
%
 
39,500

 
55.5
%
 
39,370

 
55.5
%
 
38,748

 
55.5
%
85.01% to 90.00%
 
20,708

 
28.4
%
 
20,419

 
28.5
%
 
20,418

 
28.7
%
 
20,643

 
29.1
%
 
20,464

 
29.3
%
85.00% and below
 
3,174

 
4.4
%
 
3,029

 
4.2
%
 
3,021

 
4.2
%
 
3,064

 
4.3
%
 
3,046

 
4.4
%
Total
 
$
72,916

 
100.0
%
 
$
71,760

 
100.0
%
 
$
71,114

 
100.0
%
 
$
70,995

 
100.0
%
 
$
69,764

 
100.0
%
Weighted average LTV
 
93.1
%
 
 
 
93.1
%
 
 
 
93.1
%
 
 
 
93.0
%
 
 
 
93.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RIF by State:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Texas
 
$
5,599

 
7.7
%
 
$
5,509

 
7.7
%
 
$
5,488

 
7.7
%
 
$
5,491

 
7.7
%
 
$
5,406

 
7.7
%
California
 
4,984

 
6.8
%
 
4,736

 
6.6
%
 
4,574

 
6.4
%
 
4,505

 
6.3
%
 
4,310

 
6.2
%
Florida
 
3,821

 
5.2
%
 
3,699

 
5.2
%
 
3,601

 
5.1
%
 
3,541

 
5.0
%
 
3,395

 
4.9
%
Virginia
 
2,907

 
4.0
%
 
2,916

 
4.1
%
 
2,915

 
4.1
%
 
2,931

 
4.1
%
 
2,914

 
4.2
%
Georgia
 
2,667

 
3.7
%
 
2,599

 
3.6
%
 
2,565

 
3.6
%
 
2,573

 
3.6
%
 
2,542

 
3.6
%
Illinois
 
2,602

 
3.6
%
 
2,536

 
3.5
%
 
2,492

 
3.5
%
 
2,482

 
3.5
%
 
2,442

 
3.5
%
Minnesota
 
2,480

 
3.4
%
 
2,434

 
3.4
%
 
2,404

 
3.4
%
 
2,400

 
3.4
%
 
2,365

 
3.4
%
North Carolina
 
2,469

 
3.4
%
 
2,462

 
3.4
%
 
2,477

 
3.5
%
 
2,505

 
3.5
%
 
2,500

 
3.6
%
Washington
 
2,466

 
3.4
%
 
2,421

 
3.4
%
 
2,408

 
3.4
%
 
2,408

 
3.4
%
 
2,370

 
3.4
%
Maryland
 
2,443

 
3.4
%
 
2,420

 
3.4
%
 
2,404

 
3.4
%
 
2,407

 
3.4
%
 
2,369

 
3.4
%
Others
 
40,478

 
55.5
%
 
40,028

 
55.8
%
 
39,786

 
55.9
%
 
39,752

 
56.0
%
 
39,151

 
56.1
%
Total
 
$
72,916

 
100.0
%
 
$
71,760

 
100.0
%
 
$
71,114

 
100.0
%
 
$
70,995

 
100.0
%
 
$
69,764

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average coverage (end of period RIF divided by IIF)
 
25.6
%
 
 
 
25.7
%
 
 
 
25.7
%
 
 
 
25.7
%
 
 
 
25.6
%
 
 
U.S. mortgage insurance total RIF, net of reinsurance (4)
 
$
57,768

 
 
 
$
56,562

 
 
 
$
55,957

 
 
 
$
55,755

 
 
 
$
54,558

 
 
Analysts’ persistency (5)
 
78.6
%
 
 
 
80.9
%
 
 
 
81.3
%
 
 
 
81.5
%
 
 
 
82.0
%
 
 
Risk-to-capital ratio -- Arch MI U.S. (6)
 
12.9:1

 
 
 
11.4:1

 
 
 
12.2:1

 
 
 
13.0:1

 
 
 
11.4:1

 
 
PMIER sufficiency ratio -- Arch MI U.S. (7)
 
154
%
 
 
 
163
%
 
 
 
146
%
 
 
 
141
%
 
 
 
151
%
 
 

(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 total current (non-delinquent) RIF, net of reinsurance, divided by total statutory capital        
by the insurance coverage percentage specified in the policy for insurance policies issued and        (estimate for September 30, 2019).
after contract limits and/or loss ratio caps for risk-sharing or reinsurance transactions.        (7)    Calculated as available assets divided by required assets as defined within PMIERs (estimate for September 30, 2019).

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

(U.S. Dollars in millions, except policy/loan/claim count)
 
Three Months Ended
 
 
September 30, 2019
 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
September 30, 2018
Supplemental disclosures for U.S. primary mortgage insurance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total new insurance written (NIW) (1)
 
$
25,313

 
 
 
$
17,161

 
 
 
$
11,207

 
 
 
$
16,741

 
 
 
$
21,425

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW by credit quality (FICO score):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
>=740
 
$
15,204

 
60.1
%
 
$
9,862

 
57.5
%
 
$
6,350

 
56.7
%
 
$
9,358

 
55.9
%
 
$
12,013

 
56.1
%
680-739
 
8,725

 
34.5
%
 
6,139

 
35.8
%
 
4,041

 
36.1
%
 
6,080

 
36.3
%
 
7,728

 
36.1
%
620-679
 
1,384

 
5.5
%
 
1,160

 
6.8
%
 
816

 
7.3
%
 
1,303

 
7.8
%
 
1,684

 
7.9
%
  Total
 
$
25,313

 
100.0
%
 
$
17,161

 
100.0
%
 
$
11,207

 
100.0
%
 
$
16,741

 
100.0
%
 
$
21,425

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW by LTV:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
95.01% and above
 
$
3,182

 
12.6
%
 
$
2,530

 
14.7
%
 
$
1,808

 
16.1
%
 
$
2,672

 
16.0
%
 
$
3,231

 
15.1
%
90.01% to 95.00%
 
10,409

 
41.1
%
 
7,497

 
43.7
%
 
4,975

 
44.4
%
 
7,452

 
44.5
%
 
9,689

 
45.2
%
85.01% to 90.00%
 
7,762

 
30.7
%
 
5,026

 
29.3
%
 
3,149

 
28.1
%
 
4,841

 
28.9
%
 
6,264

 
29.2
%
85.00% and below
 
3,960

 
15.6
%
 
2,108

 
12.3
%
 
1,275

 
11.4
%
 
1,776

 
10.6
%
 
2,241

 
10.5
%
  Total
 
$
25,313

 
100.0
%
 
$
17,161

 
100.0
%
 
$
11,207

 
100.0
%
 
$
16,741

 
100.0
%
 
$
21,425

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW monthly vs. single:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly
 
$
23,358

 
92.3
%
 
$
15,935

 
92.9
%
 
$
10,263

 
91.6
%
 
$
15,299

 
91.4
%
 
$
19,842

 
92.6
%
Single
 
1,955

 
7.7
%
 
1,226

 
7.1
%
 
944

 
8.4
%
 
1,442

 
8.6
%
 
1,583

 
7.4
%
  Total
 
$
25,313

 
100.0
%
 
$
17,161

 
100.0
%
 
$
11,207

 
100.0
%
 
$
16,741

 
100.0
%
 
$
21,425

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total NIW purchase vs. refinance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
19,068

 
75.3
%
 
$
14,992

 
87.4
%
 
$
10,289

 
91.8
%
 
$
15,868

 
94.8
%
 
$
20,397

 
95.2
%
Refinance
 
6,245

 
24.7
%
 
2,169

 
12.6
%
 
918

 
8.2
%
 
873

 
5.2
%
 
1,028

 
4.8
%
  Total
 
$
25,313

 
100.0
%
 
$
17,161

 
100.0
%
 
$
11,207

 
100.0
%
 
$
16,741

 
100.0
%
 
$
21,425

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending number of policies in force (PIF) (3)
 
1,304,263

 
 
 
1,292,215

 
 
 
1,286,877

 
 
 
1,289,295

 
 
 
1,270,728

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rollforward of insured loans in default:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning delinquent number of loans
 
18,761

 
 
 
19,827

 
 
 
20,665

 
 
 
20,361

 
 
 
21,037

 
 
Plus: new notices
 
10,111

 
 
 
8,906

 
 
 
9,711

 
 
 
10,052

 
 
 
9,466

 
 
Less: cures
 
(8,970
)
 
 
 
(9,201
)
 
 
 
(9,706
)
 
 
 
(8,785
)
 
 
 
(9,246
)
 
 
Less: paid claims
 
(659
)
 
 
 
(771
)
 
 
 
(843
)
 
 
 
(963
)
 
 
 
(896
)
 
 
Ending delinquent number of loans (3)
 
19,243

 
 
 
18,761

 
 
 
19,827

 
 
 
20,665

 
 
 
20,361

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending percentage of loans in default (3)
 
1.48
%
 
 
 
1.45
%
 
 
 
1.54
%
 
 
 
1.60
%
 
 
 
1.60
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of claims paid
 
659

 
 
 
771

 
 
 
843

 
 
 
963

 
 
 
896

 
 
Total paid claims (in thousands)
 
$
26,082

 
 
 
$
32,025

 
 
 
$
33,494

 
 
 
$
40,982

 
 
 
$
34,958

 
 
Average per claim (in thousands)
 
$
39.6

 
 
 
$
41.5

 
 
 
$
39.7

 
 
 
$
42.6

 
 
 
$
39.0

 
 
Severity (2)
 
95.6
%
 
 
 
95.1
%
 
 
 
98.9
%
 
 
 
101.9
%
 
 
 
102.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average reserve per default (in thousands)
 
$
14.7

 
 
 
$
16.1

 
 
 
$
16.6

 
 
 
$
17.4

 
 
 
$
18.1

 
 

(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)
 
September 30, 2019
 
December 31, 2018
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2009 and prior
 
61.8
%
 
$
17,943

 
6.3
%
 
4,156

 
5.7
%
 
8.48
%
 
73.4
%
 
$
21,210

 
7.7
%
 
4,900

 
6.9
%
 
8.90
%
2010
 
0.5
%
 
442

 
0.2
%
 
117

 
0.2
%
 
3.21
%
 
0.5
%
 
646

 
0.2
%
 
175

 
0.2
%
 
2.62
%
2011
 
0.7
%
 
1,919

 
0.7
%
 
533

 
0.7
%
 
1.46
%
 
0.9
%
 
2,530

 
0.9
%
 
701

 
1.0
%
 
1.57
%
2012
 
1.3
%
 
6,919

 
2.4
%
 
1,929

 
2.6
%
 
0.81
%
 
1.5
%
 
9,650

 
3.5
%
 
2,664

 
3.8
%
 
0.78
%
2013
 
3.2
%
 
13,552

 
4.8
%
 
3,782

 
5.2
%
 
0.94
%
 
3.5
%
 
16,823

 
6.1
%
 
4,676

 
6.6
%
 
0.89
%
2014
 
2.5
%
 
14,950

 
5.3
%
 
4,111

 
5.6
%
 
1.04
%
 
2.6
%
 
18,274

 
6.6
%
 
4,947

 
7.0
%
 
0.97
%
2015
 
3.4
%
 
27,984

 
9.8
%
 
7,431

 
10.2
%
 
0.79
%
 
3.3
%
 
33,781

 
12.2
%
 
8,849

 
12.5
%
 
0.69
%
2016
 
7.1
%
 
44,091

 
15.5
%
 
11,445

 
15.7
%
 
0.88
%
 
7.0
%
 
52,324

 
18.9
%
 
13,407

 
18.9
%
 
0.77
%
2017
 
8.9
%
 
47,430

 
16.7
%
 
12,136

 
16.6
%
 
0.82
%
 
6.0
%
 
54,287

 
19.6
%
 
13,793

 
19.4
%
 
0.55
%
2018
 
9.5
%
 
57,472

 
20.2
%
 
14,511

 
19.9
%
 
0.62
%
 
1.1
%
 
67,013

 
24.2
%
 
16,883

 
23.8
%
 
0.15
%
2019
 
1.1
%
 
51,794

 
18.2
%
 
12,765

 
17.5
%
 
0.09
%
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
100.0
%
 
$
284,496

 
100.0
%
 
$
72,916

 
100.0
%
 
1.48
%
 
100.0
%
 
$
276,538

 
100.0
%
 
$
70,995

 
100.0
%
 
1.60
%

(1)
Total reserves for losses and loss adjustment expenses, net of recoverables, was $309.9 million at September 30, 2019, compared to $375.8 million at December 31, 2018.
(2)
The aggregate dollar amount of each insured mortgage loan’s current principal balance.
(3)
The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied by the insurance coverage percentage specified in the policy for insurance policies issued and after contract limits and/or loss ratio caps for risk-sharing transactions.

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


(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Gross premiums written
 
$
2,043,292

 
$
1,829,829

 
$
1,980,453

 
$
1,599,085

 
$
1,622,532

 
$
5,853,574

 
$
4,935,339

Premiums ceded
 
(585,587
)
 
(504,301
)
 
(600,581
)
 
(429,691
)
 
(440,656
)
 
(1,690,469
)
 
(1,362,161
)
Net premiums written
 
1,457,705

 
1,325,528

 
1,379,872

 
1,169,394

 
1,181,876

 
4,163,105

 
3,573,178

Change in unearned premiums
 
(145,514
)
 
(13,119
)
 
(157,100
)
 
53,068

 
(26,621
)
 
(315,733
)
 
(142,527
)
Net premiums earned
 
1,312,191

 
1,312,409

 
1,222,772

 
1,222,462

 
1,155,255

 
3,847,372

 
3,430,651

Other underwriting income (loss)
 
2,747

 
5,280

 
8,233

 
(603
)
 
5,120

 
16,260

 
12,954

Losses and loss adjustment expenses
 
(706,241
)
 
(656,127
)
 
(607,682
)
 
(698,505
)
 
(602,463
)
 
(1,970,050
)
 
(1,750,346
)
Acquisition expenses
 
(188,048
)
 
(180,533
)
 
(168,822
)
 
(178,990
)
 
(171,983
)
 
(537,403
)
 
(500,587
)
Other operating expenses
 
(184,944
)
 
(183,302
)
 
(188,975
)
 
(155,378
)
 
(151,139
)
 
(557,221
)
 
(484,542
)
Underwriting income
 
$
235,705

 
$
297,727

 
$
265,526

 
$
188,986

 
$
234,790

 
$
798,958

 
$
708,130

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
 
53.8
 %
 
50.0
 %
 
49.7
 %
 
57.1
 %
 
52.1
 %
 
51.2
 %
 
51.0
 %
Acquisition expense ratio
 
14.3
 %
 
13.8
 %
 
13.8
 %
 
14.6
 %
 
14.9
 %
 
14.0
 %
 
14.6
 %
Other operating expense ratio
 
14.1
 %
 
14.0
 %
 
15.5
 %
 
12.7
 %
 
13.1
 %
 
14.5
 %
 
14.1
 %
Combined ratio
 
82.2
 %
 
77.8
 %
 
79.0
 %
 
84.4
 %
 
80.1
 %
 
79.7
 %
 
79.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophic activity and prior year development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year catastrophic events, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reinsurance and reinstatement premiums
 
5.2
 %
 
0.5
 %
 
0.6
 %
 
9.7
 %
 
5.0
 %
 
2.2
 %
 
2.2
 %
Net (favorable) adverse development in prior year loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
reserves, net of related adjustments
 
(3.9
)%
 
(2.7
)%
 
(3.0
)%
 
(6.1
)%
 
(6.7
)%
 
(3.2
)%
 
(5.5
)%
Combined ratio excluding catastrophic activity and prior year development (1)
 
80.9
 %
 
80.0
 %
 
81.4
 %
 
80.8
 %
 
81.8
 %
 
80.7
 %
 
83.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written to gross premiums written
 
71.3
 %
 
72.4
 %
 
69.7
 %
 
73.1
 %
 
72.8
 %
 
71.1
 %
 
72.4
 %
 
(1)
See ‘Comments on Regulation G’ for further discussion.


 
22
 
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Selected Information on Losses and Loss Adjustment Expenses


(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Components of losses and loss adjustment expenses incurred (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid losses and loss adjustment expenses
 
$
508,364

 
$
494,368

 
$
430,724

 
$
579,106

 
$
503,245

 
$
1,433,456

 
$
1,402,851

Change in unpaid losses and loss adjustment expenses
 
197,877

 
161,759

 
176,958

 
119,399

 
99,218

 
536,594

 
347,495

Total losses and loss adjustment expenses
 
$
706,241

 
$
656,127

 
$
607,682

 
$
698,505

 
$
602,463

 
$
1,970,050

 
$
1,750,346

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net impact on underwriting results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
(3,934
)
 
$
(1,469
)
 
$
(1,651
)
 
$
(8,303
)
 
$
(6,830
)
 
$
(7,054
)
 
$
(13,440
)
Reinsurance
 
(14,716
)
 
(11,251
)
 
1,580

 
(33,479
)
 
(33,162
)
 
(24,387
)
 
(101,202
)
Mortgage
 
(33,031
)
 
(22,797
)
 
(36,622
)
 
(32,667
)
 
(37,631
)
 
(92,450
)
 
(73,922
)
Total
 
$
(51,681
)
 
$
(35,517
)
 
$
(36,693
)
 
$
(74,449
)
 
$
(77,623
)
 
$
(123,891
)
 
$
(188,564
)
Impact on losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
(4,354
)
 
$
(2,607
)
 
$
(4,426
)
 
$
(10,278
)
 
$
(5,949
)
 
$
(11,387
)
 
$
(14,117
)
Reinsurance
 
(15,309
)
 
(12,697
)
 
1,668

 
(34,596
)
 
(34,315
)
 
(26,338
)
 
(103,878
)
Mortgage
 
(33,031
)
 
(22,803
)
 
(36,622
)
 
(32,667
)
 
(38,638
)
 
(92,456
)
 
(74,948
)
Total
 
$
(52,694
)
 
$
(38,107
)
 
$
(39,380
)
 
$
(77,541
)
 
$
(78,902
)
 
$
(130,181
)
 
$
(192,943
)
Impact on acquisition expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
420

 
$
1,138

 
$
2,775

 
$
1,975

 
$
(881
)
 
$
4,333

 
$
677

Reinsurance
 
593

 
1,446

 
(88
)
 
1,117

 
1,153

 
1,951

 
2,676

Mortgage
 
—

 
6

 
—

 
—

 
1,007

 
6

 
1,026

Total
 
$
1,013

 
$
2,590

 
$
2,687

 
$
3,092

 
$
1,279

 
$
6,290

 
$
4,379

Impact on combined ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
(0.6
)%
 
(0.2
)%
 
(0.3
)%
 
(1.5
)%
 
(1.2
)%
 
(0.4
)%
 
(0.8
)%
Reinsurance
 
(4.0
)%
 
(3.1
)%
 
0.5
 %
 
(9.6
)%
 
(11.3
)%
 
(2.3
)%
 
(11.1
)%
Mortgage
 
(9.6
)%
 
(6.5
)%
 
(11.3
)%
 
(10.4
)%
 
(12.5
)%
 
(9.1
)%
 
(8.5
)%
Total
 
(3.9
)%
 
(2.7
)%
 
(3.0
)%
 
(6.1
)%
 
(6.7
)%
 
(3.2
)%
 
(5.5
)%
Impact on loss ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
(0.7
)%
 
(0.4
)%
 
(0.8
)%
 
(1.8
)%
 
(1.1
)%
 
(0.7
)%
 
(0.9
)%
Reinsurance
 
(4.2
)%
 
(3.5
)%
 
0.5
 %
 
(9.9
)%
 
(11.7
)%
 
(2.4
)%
 
(11.4
)%
Mortgage
 
(9.6
)%
 
(6.5
)%
 
(11.3
)%
 
(10.4
)%
 
(12.8
)%
 
(9.1
)%
 
(8.6
)%
Total
 
(4.0
)%
 
(2.9
)%
 
(3.2
)%
 
(6.3
)%
 
(6.8
)%
 
(3.4
)%
 
(5.6
)%
Impact on acquisition expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
0.1
 %
 
0.2
 %
 
0.5
 %
 
0.3
 %
 
(0.1
)%
 
0.3
 %
 
0.1
 %
Reinsurance
 
0.2
 %
 
0.4
 %
 
0.0
 %
 
0.3
 %
 
0.4
 %
 
0.1
 %
 
0.3
 %
Mortgage
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.3
 %
 
0.0
 %
 
0.1
 %
Total
 
0.1
 %
 
0.2
 %
 
0.2
 %
 
0.2
 %
 
0.1
 %
 
0.2
 %
 
0.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated net losses incurred from current accident year catastrophic events (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
$
26,085

 
$
2,565

 
$
54

 
$
33,320

 
$
32,691

 
$
28,704

 
$
41,278

Reinsurance
 
41,948

 
4,589

 
7,824

 
84,846

 
25,469

 
54,361

 
33,832

Total
 
$
68,033

 
$
7,154

 
$
7,878

 
$
118,166

 
$
58,160

 
$
83,065

 
$
75,110

Impact on combined ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
 
4.3
 %
 
0.4
 %
 
0.0
 %
 
6.0
 %
 
5.8
 %
 
1.6
 %
 
2.5
 %
Reinsurance
 
11.5
 %
 
1.2
 %
 
2.3
 %
 
24.3
 %
 
8.7
 %
 
5.0
 %
 
3.7
 %
Total
 
5.2
 %
 
0.5
 %
 
0.6
 %
 
9.7
 %
 
5.0
 %
 
2.2
 %
 
2.2
 %
 
(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, net of reinsurance and reinstatement premiums. Amounts shown for the insurance segment are for named catastrophic events only. Amounts shown for the reinsurance segment include (i) named events with over $5 million of losses incurred by its Bermuda and Europe operations and (ii) all catastrophe losses incurred by its U.S. operations. Amounts not applicable for the mortgage segment.

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


The following table summarizes the Company’s investable assets and portfolio metrics (1):
(U.S. Dollars in thousands)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
Investable assets (1) (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities available for sale, at fair value
 
$
15,831,411

 
73.4
 %
 
$
15,184,279

 
73.1
 %
 
$
14,627,478

 
72.9
%
 
$
14,305,659

 
73.1
 %
 
$
14,026,253

 
71.6
%
Fixed maturities—fair value option (3)
 
345,588

 
1.6
 %
 
348,298

 
1.7
 %
 
366,470

 
1.8
%
 
322,743

 
1.6
 %
 
353,321

 
1.8
%
Fixed maturities pledged under securities lending agreements, at fair value
 
409,795

 
1.9
 %
 
427,217

 
2.1
 %
 
388,732

 
1.9
%
 
253,500

 
1.3
 %
 
286,691

 
1.5
%
Total fixed maturities
 
16,586,794

 
76.9
 %
 
15,959,794

 
76.8
 %
 
15,382,680

 
76.7
%
 
14,881,902

 
76.1
 %
 
14,666,265

 
74.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities, at fair value
 
506,998

 
2.4
 %
 
606,240

 
2.9
 %
 
430,885

 
2.1
%
 
306,693

 
1.6
 %
 
397,537

 
2.0
%
Equity securities—fair value option (3)
 
41,436

 
0.2
 %
 
47,367

 
0.2
 %
 
48,587

 
0.2
%
 
47,255

 
0.2
 %
 
62,816

 
0.3
%
Equity securities pledged under securities lending agreements, at fair value
 
10,620

 
0.0
 %
 
13,293

 
0.1
 %
 
15,530

 
0.1
%
 
14,895

 
0.1
 %
 
12,718

 
0.1
%
Total equity securities
 
559,054

 
2.6
 %
 
666,900

 
3.2
 %
 
495,002

 
2.5
%
 
368,843

 
1.9
 %
 
473,071

 
2.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments—fair value option (3)
 
1,369,554

 
6.4
 %
 
1,327,134

 
6.4
 %
 
1,313,816

 
6.6
%
 
1,261,525

 
6.4
 %
 
1,233,280

 
6.3
%
Total other investments
 
1,369,554

 
6.4
 %
 
1,327,134

 
6.4
 %
 
1,313,816

 
6.6
%
 
1,261,525

 
6.4
 %
 
1,233,280

 
6.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments accounted for using the equity method (4)
 
1,575,832

 
7.3
 %
 
1,581,972

 
7.6
 %
 
1,563,779

 
7.8
%
 
1,493,791

 
7.6
 %
 
1,524,242

 
7.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments available for sale, at fair value
 
751,989

 
3.5
 %
 
821,961

 
4.0
 %
 
706,214

 
3.5
%
 
955,880

 
4.9
 %
 
961,799

 
4.9
%
Short-term investments—fair value option (3)
 
33,369

 
0.2
 %
 
25,289

 
0.1
 %
 
25,429

 
0.1
%
 
40,046

 
0.2
 %
 
24,309

 
0.1
%
Total short-term investments
 
785,358

 
3.6
 %
 
847,250

 
4.1
 %
 
731,643

 
3.6
%
 
995,926

 
5.1
 %
 
986,108

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
799,709

 
3.7
 %
 
536,339

 
2.6
 %
 
576,799

 
2.9
%
 
583,027

 
3.0
 %
 
586,353

 
3.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities transactions entered into but not settled at the balance sheet date
 
(110,213
)
 
(0.5
)%
 
(142,726
)
 
(0.7
)%
 
(8,339
)
 
0.0
%
 
(18,153
)
 
(0.1
)%
 
122,863

 
0.6
%
Total investable assets held by the Company
 
$
21,566,088

 
100.0
 %
 
$
20,776,663

 
100.0
 %
 
$
20,055,380

 
100.0
%
 
$
19,566,861

 
100.0
 %
 
$
19,592,182

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average effective duration (in years)
 
3.64

 
 
 
3.52

 
 
 
3.47

 
 
 
3.38

 
 
 
2.94

 
 

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

 
 
 
 AA/Aa2

 
 
 
 AA/Aa2

 
 
 
 AA/Aa2

 
 
 
 AA/Aa2

 
 

Embedded book yield (before investment expenses)
 
2.70
%
 
 
 
2.87
%
 
 
 
2.95
%
 
 
 
2.89
%
 
 
 
2.78
%
 
 


(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
 
$
80,390

 
 
 
$
68,977

 
 
 
$
56,301

 
 
 
$
63,529

 
 
 
$
64,684

 
 
Investments accounted for using the fair value option
 
2,048,296

 
 
 
1,972,947

 
 
 
2,215,321

 
 
 
2,312,002

 
 
 
2,424,009

 
 
Fixed maturities available for sale, at fair value
 
639,112

 
 
 
697,453

 
 
 
549,834

 
 
 
393,351

 
 
 
305,388

 
 
Equity securities, at fair value
 
43,487

 
 
 
64,703

 
 
 
65,010

 
 
 
32,206

 
 
 
46,581

 
 
Securities sold but not yet purchased
 
(65,736
)
 
 
 
(48,823
)
 
 
 
(28,737
)
 
 
 
(7,790
)
 
 
 
(9,065
)
 
 
Securities transactions entered into but not settled at the balance sheet date
 
(15,302
)
 
 
 
13,209

 
 
 
(33,011
)
 
 
 
(35,635
)
 
 
 
(99,537
)
 
 
Total investable assets included in ‘other’ segment
 
$
2,730,247

 
 
 
$
2,768,466

 
 
 
$
2,824,718

 
 
 
$
2,757,663

 
 
 
$
2,732,060

 
 

(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
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Composition of net investment income (1):
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed maturities
 
$
109,955

 
$
111,335

 
$
110,651

 
$
108,791

 
$
103,252

 
$
331,941

 
$
294,658

Equity securities (dividends)
 
3,581

 
3,494

 
2,246

 
2,242

 
3,426

 
9,321

 
10,408

Short-term investments
 
3,432

 
3,448

 
4,298

 
5,211

 
4,417

 
11,178

 
12,591

Other (2)
 
24,170

 
20,115

 
22,944

 
14,445

 
18,030

 
67,229

 
56,501

Gross investment income
 
141,138

 
138,392

 
140,139

 
130,689

 
129,125

 
419,669

 
374,158

Investment expenses
 
(14,262
)
 
(15,354
)
 
(18,890
)
 
(15,063
)
 
(14,797
)
 
(48,506
)
 
(51,826
)
Net investment income
 
$
126,876

 
$
123,038

 
$
121,249

 
$
115,626

 
$
114,328

 
$
371,163

 
$
322,332

Per share
 
$
0.31

 
$
0.30

 
$
0.30

 
$
0.28

 
$
0.28

 
$
0.90

 
$
0.78

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment income yield, at amortized cost (1) (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax
 
2.58
%
 
2.62
%
 
2.67
%
 
2.49
%
 
2.45
%
 
2.62
%
 
2.31
 %
After-tax
 
2.31
%
 
2.37
%
 
2.41
%
 
2.21
%
 
2.22
%
 
2.35
%
 
2.10
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total return on investments (1) (4)
 
1.00
%
 
2.37
%
 
2.70
%
 
0.51
%
 
0.31
%
 
6.20
%
 
(0.19
)%

(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 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)
 
Amortized
Cost
 
Fair Value /
Amortized Cost
 
Fair Value
% of Total
At September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporates
 
$
6,494,654

 
$
197,123

 
$
(18,396
)
 
$
178,727

 
$
6,315,927

 
102.8
%
 
39.2
%
U.S. government and government agencies
 
4,830,839

 
63,953

 
(6,643
)
 
57,310

 
4,773,529

 
101.2
%
 
29.1
%
Municipal bonds
 
652,296

 
27,053

 
(379
)
 
26,674

 
625,622

 
104.3
%
 
3.9
%
Non-U.S. government securities
 
1,800,032

 
44,175

 
(46,387
)
 
(2,212
)
 
1,802,244

 
99.9
%
 
10.9
%
Asset-backed securities
 
1,526,440

 
29,471

 
(4,377
)
 
25,094

 
1,501,346

 
101.7
%
 
9.2
%
Commercial mortgage-backed securities
 
754,306

 
27,523

 
(158
)
 
27,365

 
726,941

 
103.8
%
 
4.5
%
Residential mortgage-backed securities
 
528,227

 
11,141

 
(891
)
 
10,250

 
517,977

 
102.0
%
 
3.2
%
Total
 
$
16,586,794

 
$
400,439

 
$
(77,231
)
 
$
323,208

 
$
16,263,586

 
102.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporates
 
$
5,735,526

 
$
14,457

 
$
(104,223
)
 
$
(89,766
)
 
$
5,825,292

 
98.5
%
 
38.5
%
U.S. government and government agencies
 
3,601,269

 
26,517

 
(8,347
)
 
18,170

 
3,583,099

 
100.5
%
 
24.2
%
Municipal bonds
 
1,012,308

 
5,366

 
(11,891
)
 
(6,525
)
 
1,018,833

 
99.4
%
 
6.8
%
Non-U.S. government securities
 
1,713,891

 
13,807

 
(48,089
)
 
(34,282
)
 
1,748,173

 
98.0
%
 
11.5
%
Asset-backed securities
 
1,553,703

 
7,988

 
(13,447
)
 
(5,459
)
 
1,559,162

 
99.6
%
 
10.4
%
Commercial mortgage-backed securities
 
729,442

 
2,650

 
(10,751
)
 
(8,101
)
 
737,543

 
98.9
%
 
4.9
%
Residential mortgage-backed securities
 
535,763

 
3,974

 
(3,134
)
 
840

 
534,923

 
100.2
%
 
3.6
%
Total
 
$
14,881,902

 
$
74,759

 
$
(199,882
)
 
$
(125,123
)
 
$
15,007,025

 
99.2
%
 
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)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
Credit quality distribution of total fixed maturities (2) (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies (4)
 
$
5,403,271

 
32.6
%
 
$
5,030,769

 
31.5
%
 
$
4,895,315

 
31.8
%
 
$
4,194,676

 
28.2
%
 
$
3,672,429

 
25.0
%
AAA
 
3,240,708

 
19.5
%
 
3,325,260

 
20.8
%
 
3,096,530

 
20.1
%
 
3,551,039

 
23.9
%
 
3,691,522

 
25.2
%
AA
 
1,879,728

 
11.3
%
 
1,831,265

 
11.5
%
 
1,886,690

 
12.3
%
 
2,129,336

 
14.3
%
 
2,047,332

 
14.0
%
A
 
3,648,581

 
22.0
%
 
3,439,690

 
21.6
%
 
3,213,166

 
20.9
%
 
3,069,656

 
20.6
%
 
3,163,536

 
21.6
%
BBB
 
1,576,052

 
9.5
%
 
1,465,219

 
9.2
%
 
1,437,907

 
9.3
%
 
1,251,205

 
8.4
%
 
1,317,999

 
9.0
%
BB
 
362,117

 
2.2
%
 
361,389

 
2.3
%
 
363,887

 
2.4
%
 
275,201

 
1.8
%
 
288,178

 
2.0
%
B
 
210,824

 
1.3
%
 
226,885

 
1.4
%
 
231,544

 
1.5
%
 
183,614

 
1.2
%
 
219,667

 
1.5
%
Lower than B
 
61,205

 
0.4
%
 
60,858

 
0.4
%
 
60,577

 
0.4
%
 
61,271

 
0.4
%
 
61,001

 
0.4
%
Not rated
 
204,308

 
1.2
%
 
218,459

 
1.4
%
 
197,064

 
1.3
%
 
165,904

 
1.1
%
 
204,601

 
1.4
%
Total fixed maturities, at fair value
 
$
16,586,794

 
100.0
%
 
$
15,959,794

 
100.0
%
 
$
15,382,680

 
100.0
%
 
$
14,881,902

 
100.0
%
 
$
14,666,265

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maturity profile of total fixed maturities (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
571,738

 
3.4
%
 
$
457,207

 
2.9
%
 
$
465,467

 
3.0
%
 
$
328,296

 
2.2
%
 
$
374,027

 
2.6
%
Due after one year through five years
 
9,924,224

 
59.8
%
 
9,559,981

 
59.9
%
 
9,261,391

 
60.2
%
 
8,553,446

 
57.5
%
 
8,287,813

 
56.5
%
Due after five years through ten years
 
3,052,774

 
18.4
%
 
2,992,411

 
18.7
%
 
2,932,045

 
19.1
%
 
2,937,729

 
19.7
%
 
2,929,793

 
20.0
%
Due after 10 years
 
229,085

 
1.4
%
 
245,868

 
1.5
%
 
202,377

 
1.3
%
 
243,523

 
1.6
%
 
307,655

 
2.1
%
 
 
13,777,821

 
83.1
%
 
13,255,467

 
83.1
%
 
12,861,280

 
83.6
%
 
12,062,994

 
81.1
%
 
11,899,288

 
81.1
%
Mortgage-backed securities
 
528,227

 
3.2
%
 
513,760

 
3.2
%
 
492,255

 
3.2
%
 
535,763

 
3.6
%
 
477,547

 
3.3
%
Commercial mortgage-backed securities
 
754,306

 
4.5
%
 
686,707

 
4.3
%
 
610,754

 
4.0
%
 
729,442

 
4.9
%
 
682,516

 
4.7
%
Asset-backed securities
 
1,526,440

 
9.2
%
 
1,503,860

 
9.4
%
 
1,418,391

 
9.2
%
 
1,553,703

 
10.4
%
 
1,606,914

 
11.0
%
Total fixed maturities, at fair value
 
$
16,586,794

 
100.0
%
 
$
15,959,794

 
100.0
%
 
$
15,382,680

 
100.0
%
 
$
14,881,902

 
100.0
%
 
$
14,666,265

 
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)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
Sector:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials
 
$
3,588,041

 
55.2
%
 
$
3,311,161

 
52.7
%
 
$
3,212,269

 
53.1
%
 
$
3,125,524

 
54.5
%
 
$
3,137,412

 
53.6
%
Financials
 
2,612,883

 
40.2
%
 
2,671,207

 
42.5
%
 
2,543,207

 
42.0
%
 
2,269,651

 
39.6
%
 
2,312,600

 
39.5
%
Utilities
 
237,042

 
3.6
%
 
245,068

 
3.9
%
 
223,399

 
3.7
%
 
228,676

 
4.0
%
 
274,062

 
4.7
%
Covered bonds
 
2,543

 
0.0
%
 
2,461

 
0.0
%
 
7,713

 
0.1
%
 
21,301

 
0.4
%
 
24,662

 
0.4
%
All other (2)
 
54,145

 
0.8
%
 
52,000

 
0.8
%
 
67,526

 
1.1
%
 
90,374

 
1.6
%
 
104,376

 
1.8
%
Total fixed maturities, at fair value
 
$
6,494,654

 
100.0
%
 
$
6,281,897

 
100.0
%
 
$
6,054,114

 
100.0
%
 
$
5,735,526

 
100.0
%
 
$
5,853,112

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit quality distribution (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AAA
 
$
95,340

 
1.5
%
 
$
91,266

 
1.5
%
 
$
135,630

 
2.2
%
 
$
166,052

 
2.9
%
 
$
194,408

 
3.3
%
AA
 
1,021,056

 
15.7
%
 
1,053,860

 
16.8
%
 
1,083,024

 
17.9
%
 
1,248,479

 
21.8
%
 
1,197,710

 
20.5
%
A
 
3,240,957

 
49.9
%
 
3,089,233

 
49.2
%
 
2,874,706

 
47.5
%
 
2,685,973

 
46.8
%
 
2,696,128

 
46.1
%
BBB
 
1,450,372

 
22.3
%
 
1,344,247

 
21.4
%
 
1,286,351

 
21.2
%
 
1,101,579

 
19.2
%
 
1,163,210

 
19.9
%
BB
 
339,952

 
5.2
%
 
334,068

 
5.3
%
 
336,354

 
5.6
%
 
253,253

 
4.4
%
 
257,785

 
4.4
%
B
 
201,352

 
3.1
%
 
217,324

 
3.5
%
 
217,043

 
3.6
%
 
167,205

 
2.9
%
 
200,116

 
3.4
%
Lower than B
 
26,969

 
0.4
%
 
22,758

 
0.4
%
 
25,901

 
0.4
%
 
26,645

 
0.5
%
 
22,578

 
0.4
%
Not rated
 
118,656

 
1.8
%
 
129,141

 
2.1
%
 
95,105

 
1.6
%
 
86,340

 
1.5
%
 
121,177

 
2.1
%
Total fixed maturities, at fair value
 
$
6,494,654

 
100.0
%
 
$
6,281,897

 
100.0
%
 
$
6,054,114

 
100.0
%
 
$
5,735,526

 
100.0
%
 
$
5,853,112

 
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 September 30, 2019 (1):
(U.S. Dollars in thousands)
 
Fair
Value
 
% of Asset Class
 
% of Investable Assets
 
Credit Quality (2)
Issuer:
 
 
 
 
 
 
 
 
Bank of America Corporation
 
$
241,428

 
3.7
%
 
1.1
%
 
A-/A2
Apple Inc.
 
213,331

 
3.3
%
 
1.0
%
 
AA+/Aa1
JPMorgan Chase & Co.
 
209,254

 
3.2
%
 
1.0
%
 
A-/A2
Wells Fargo & Company
 
201,534

 
3.1
%
 
0.9
%
 
A-/A1
Citigroup Inc.
 
184,850

 
2.8
%
 
0.9
%
 
A/A1
Morgan Stanley
 
141,891

 
2.2
%
 
0.7
%
 
BBB+/A3
Nestlé S.A.
 
113,597

 
1.7
%
 
0.5
%
 
AA-/Aa2
BP p.l.c.
 
110,616

 
1.7
%
 
0.5
%
 
A-/A1
The Goldman Sachs Group, Inc.
 
109,147

 
1.7
%
 
0.5
%
 
BBB+/A3
Deere & Company
 
105,217

 
1.6
%
 
0.5
%
 
A/A2
Total
 
$
1,630,865

 
25.1
%
 
7.6
%
 
 
 
(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 September 30, 2019 (1):

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

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
478,427

 
$
11,260

 
$
1,572

 
$
1,449

 
$
1,156

 
$
34,363

 
$
528,227

Commercial mortgage-backed securities
 
94,004

 
603,706

 
4,863

 
9,264

 
18,551

 
23,918

 
754,306

Asset-backed securities
 
—

 
1,122,680

 
91,747

 
206,993

 
36,957

 
68,063

 
1,526,440

Total
 
$
572,431

 
$
1,737,646

 
$
98,182

 
$
217,706

 
$
56,664

 
$
126,344

 
$
2,808,973


(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, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares, net of income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized 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, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, Transaction costs and other and loss on redemption of preferred shares 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, net impairment losses recognized in earnings, 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 net impairment 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, 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. The loss on redemption of preferred shares related to the redemption of the Company's Series C preferred shares in January 2018 and had no impact on shareholders' equity or cash flows. Due to these reasons, the Company excludes net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares 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 11% 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.
The Company’s segment information includes the use of a combined ratio excluding catastrophic activity (if applicable for the segment) and prior year development. 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 ratio excluding current accident year catastrophic events and favorable or adverse development in prior year loss reserves in its analysis of the core 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 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 on the capital held in its business, and compares the return generated by the Company’s investment portfolio against benchmark returns which it measures portfolio returns against 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 approximate 11% ownership of Watford’s outstanding common equity:
(U.S. Dollars in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Net income available to Arch common shareholders
 
$
382,050

 
$
458,551

 
$
438,125

 
$
126,091

 
$
217,006

 
$
1,278,726

 
$
587,525

Net realized (gains) losses
 
(79,122
)
 
(124,637
)
 
(115,644
)
 
77,037

 
47,528

 
(319,403
)
 
220,718

Net impairment losses recognized in earnings
 
1,163

 
49

 
1,309

 
1,705

 
492

 
2,521

 
1,124

Equity in net (income) loss of investment funds accounted for using the equity method
 
(17,130
)
 
(32,536
)
 
(46,867
)
 
6,882

 
(15,982
)
 
(96,533
)
 
(52,523
)
Net foreign exchange (gains) losses
 
(30,160
)
 
6,054

 
(4,994
)
 
(20,869
)
 
(7,539
)
 
(29,100
)
 
(39,021
)
Transaction costs and other
 
1,995

 
2,178

 
1,190

 
3,548

 
1,091

 
5,363

 
8,829

Loss on redemption of preferred shares
 
—

 
—

 
—

 
—

 
—

 
—

 
2,710

Income tax expense (benefit) (1)
 
2,156

 
7,774

 
2,778

 
(5,223
)
 
(316
)
 
12,708

 
(9,343
)
After-tax operating income available to Arch common shareholders
 
$
260,952

 
$
317,433

 
$
275,897

 
$
189,171

 
$
242,280

 
$
854,282

 
$
720,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted per common share results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Arch common shareholders
 
$
0.92

 
$
1.12

 
$
1.07

 
$
0.31

 
$
0.53

 
$
3.11

 
$
1.42

Net realized (gains) losses
 
(0.19
)
 
(0.31
)
 
(0.29
)
 
0.18

 
0.12

 
(0.78
)
 
0.53

Net impairment losses recognized in earnings
 
0.00

 
0.00

 
0.00

 
0.00

 
0.00

 
0.01

 
0.00

Equity in net (income) loss of investment funds accounted for using the equity method
 
(0.04
)
 
(0.08
)
 
(0.11
)
 
0.02

 
(0.04
)
 
(0.23
)
 
(0.13
)
Net foreign exchange (gains) losses
 
(0.07
)
 
0.01

 
(0.01
)
 
(0.05
)
 
(0.02
)
 
(0.07
)
 
(0.09
)
Transaction costs and other
 
0.00

 
0.01

 
0.00

 
0.01

 
0.00

 
0.01

 
0.02

Loss on redemption of preferred shares
 
—

 
—

 
—

 
—

 
—

 
—

 
0.01

Income tax expense (benefit) (1)
 
0.01

 
0.02

 
0.01

 
(0.01
)
 
0.00

 
0.03

 
(0.02
)
After-tax operating income available to Arch common shareholders
 
$
0.63

 
$
0.77

 
$
0.67

 
$
0.46

 
$
0.59

 
$
2.08

 
$
1.74

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares and common share equivalents outstanding - diluted
 
413,180,201

 
410,899,483

 
408,971,029

 
410,112,097

 
411,721,214

 
410,807,402

 
413,993,192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning common shareholders’ equity
 
$
9,977,352

 
$
9,334,596

 
$
8,659,827

 
$
8,575,148

 
$
8,383,755

 
$
8,659,827

 
$
8,324,047

Ending common shareholders’ equity
 
10,378,096

 
9,977,352

 
9,334,596

 
8,659,827

 
8,575,148

 
10,378,096

 
8,575,148

Average common shareholders’ equity
 
$
10,177,724

 
$
9,655,974

 
$
8,997,212

 
$
8,617,488

 
$
8,479,452

 
$
9,518,962

 
$
8,449,598

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity
 
15.0
%
 
19.0
%
 
19.5
%
 
5.9
%
 
10.2
%
 
17.9
%
 
9.3
%
Annualized operating return on average common equity
 
10.3
%
 
13.1
%
 
12.3
%
 
8.8
%
 
11.4
%
 
12.0
%
 
11.4
%

(1)
Income tax expense on net realized gains or losses, 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, transaction costs and other and loss on redemption of preferred shares reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction.



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

The following table provides a reconciliation of income (loss) before income taxes to after-tax operating income (loss) available to Arch common shareholders and an analysis of the effective tax rate on pre-tax operating income (loss) available to Arch common shareholders:
(U.S. Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Arch Operating Income Components (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
$
430,554

 
$
511,883

 
$
489,163

 
$
182,007

 
$
258,686

 
$
1,431,600

 
$
695,897

Net realized (gains) losses
 
(81,177
)
 
(125,112
)
 
(112,433
)
 
66,015

 
47,010

 
(318,722
)
 
218,414

Net impairment losses recognized in earnings
 
1,163

 
49

 
1,309

 
1,705

 
492

 
2,521

 
1,124

Equity in net (income) loss of investment funds accounted for using the equity method
 
(17,130
)
 
(32,536
)
 
(46,867
)
 
6,882

 
(15,982
)
 
(96,533
)
 
(52,523
)
Net foreign exchange (gains) losses
 
(29,794
)
 
6,190

 
(5,175
)
 
(20,409
)
 
(7,130
)
 
(28,779
)
 
(38,302
)
Transaction costs and other
 
1,995

 
2,178

 
1,190

 
2,557

 
1,091

 
5,363

 
8,829

Pre-tax operating income
 
305,611

 
362,652

 
327,187

 
238,757

 
284,167

 
995,450

 
833,439

Arch share of ‘other’ segment operating income (loss) (2)
 
1,704

 
1,863

 
2,222

 
1,053

 
2,187

 
5,789

 
6,080

Pre-tax operating income available to Arch (b)
 
307,315

 
364,515

 
329,409

 
239,810

 
286,354

 
1,001,239

 
839,519

Income tax expense (a)
 
(35,960
)
 
(36,679
)
 
(43,109
)
 
(40,236
)
 
(33,672
)
 
(115,748
)
 
(88,258
)
After-tax operating income available to Arch
 
271,355

 
327,836

 
286,300

 
199,574

 
252,682

 
885,491

 
751,261

Preferred dividends
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,403
)
 
(10,402
)
 
(31,209
)
 
(31,242
)
After-tax operating income available to Arch common shareholders
 
$
260,952

 
$
317,433

 
$
275,897

 
$
189,171

 
$
242,280

 
$
854,282

 
$
720,019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate on pre-tax operating income (loss) available to Arch (a)/(b)
 
11.7
%
 
10.1
%
 
13.1
%
 
16.8
%
 
11.8
%
 
11.6
%
 
10.5
%

(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
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Balances in ‘other’ segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
(4,443
)
 
$
(4,593
)
 
$
(5,378
)
 
$
(22,031
)
 
$
(209
)
 
$
(14,414
)
 
$
(1,087
)
Net investment income
 
34,614

 
32,000

 
35,700

 
41,591

 
29,696

 
102,314

 
84,084

Interest expense
 
(8,091
)
 
(5,905
)
 
(5,583
)
 
(5,386
)
 
(5,064
)
 
(19,579
)
 
(14,079
)
Preferred dividends
 
(6,600
)
 
(4,590
)
 
(4,588
)
 
(4,588
)
 
(4,599
)
 
(15,778
)
 
(13,769
)
Pre-tax operating income (loss) available to common shareholders
 
15,480

 
16,912

 
20,151

 
9,586

 
19,824

 
52,543

 
55,149

Arch ownership
 
11
%
 
11
%
 
11
%
 
11
%
 
11
%
 
11
%
 
11
%
Arch share of ‘Other’ segment operating income (loss) (3)
 
$
1,704

 
$
1,863

 
$
2,222

 
$
1,053

 
$
2,187

 
$
5,789

 
$
6,080


(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)
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
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

Deferred debt costs on senior notes
 
(15,963
)
 
(16,135
)
 
(16,306
)
 
(16,472
)
 
(16,636
)
Revolving credit agreement borrowings, due October 26, 2021 (variable)
 
—

 
—

 
—

 
—

 
125,000

Total debt
 
$
1,734,037

 
$
1,733,865

 
$
1,733,694

 
$
1,733,528

 
$
1,858,364

 
 
 
 
 
 
 
 
 
 
 
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)
 
10,378,096

 
9,977,352

 
9,334,596

 
8,659,827

 
8,575,148

Total shareholders’ equity available to Arch
 
$
11,158,096

 
$
10,757,352

 
$
10,114,596

 
$
9,439,827

 
$
9,355,148

 
 
 
 
 
 
 
 
 
 
 
Total capital available to Arch
 
$
12,892,133

 
$
12,491,217

 
$
11,848,290

 
$
11,173,355

 
$
11,213,512

 
 
 
 
 
 
 
 
 
 
 
Common shares outstanding, net of treasury shares (b)
 
405,230,531

 
404,887,534

 
403,738,764

 
402,454,834

 
405,524,360

 
 
 
 
 
 
 
 
 
 
 
Book value per common share (4) (a)/(b)
 
$
25.61

 
$
24.64

 
$
23.12

 
$
21.52

 
$
21.15

 
 
 
 
 
 
 
 
 
 
 
Leverage ratios:
 
 
 
 
 
 
 
 
 
 
Senior notes/total capital available to Arch
 
13.5
%
 
13.9
%
 
14.6
%
 
15.5
%
 
15.5
%
Revolving credit agreement borrowings/total capital available to Arch
 
—
%
 
—
%
 
—
%
 
—
%
 
1.1
%
Debt/total capital available to Arch
 
13.5
%
 
13.9
%
 
14.6
%
 
15.5
%
 
16.6
%
Preferred/total capital available to Arch
 
6.1
%
 
6.2
%
 
6.6
%
 
7.0
%
 
7.0
%
Debt and preferred/total capital available to Arch
 
19.5
%
 
20.1
%
 
21.2
%
 
22.5
%
 
23.5
%

(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
 
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
September 30,
 
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
Effect of share repurchases:
 
 
 
 
 
 
 
 
 
 
 
 
Aggregate cost of shares repurchased
 
$
—

 
$
—

 
$
2,871

 
$
98,233

 
$
10,954

 
$
3,968,294

Shares repurchased
 
—

 
—

 
110,598

 
3,623,534

 
413,671

 
386,341,980

Average price per share repurchased
 
$
—

 
$
—

 
$
25.96

 
$
27.11

 
$
26.48

 
$
10.27

 
 
 
 
 
 
 
 
 
 
 
 
 
Remaining share repurchase authorization (1)
 
 
 
 
 
 
 
 
 
 
 
$
160,867

 
(1)
Repurchases under the share repurchase authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2019.

 
33