Segment Information

9 Months Ended

Sep. 30, 2019

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 determined its reportable 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.

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 underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting 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; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).

The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).

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 Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE.

The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, 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.

The ‘other’ segment includes the results of Watford (see note 11). For the ‘other’ segment, performance is measured based on net income or loss.

The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to Arch common shareholders:



	Three Months Ended
	September 30, 2019
	Insurance			Reinsurance			Mortgage			Sub-Total			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 (loss)	—			(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 (losses)										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 (loss)										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		%

Goodwill and intangible assets	$	158,990		$	—		$	457,860		$	616,850		$	7,650		$	624,500


(1)	Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’



	Three Months Ended
	September 30, 2018
	Insurance			Reinsurance			Mortgage			Sub-Total			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		%

Goodwill and intangible assets	$	20,141		$	—		$	538,871		$	559,012		$	7,650		$	566,662


(1)	Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’



	Nine Months Ended
	September 30, 2019
	Insurance			Reinsurance			Mortgage			Sub-Total			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 (loss)	—			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		%


(1)	Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’



	Nine Months Ended
	September 30, 2018
	Insurance			Reinsurance			Mortgage			Sub-Total			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		%


(1)	Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’