Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

Or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-16209

ARCH CAPITAL GROUP LTD.

(Exact name of registrant as specified in its charter)



Bermuda				98-0374481
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

Waterloo House, Ground Floor
100 Pitts Bay Road,	Pembroke	HM 08,	Bermuda	(441)	278-9250
(Address of principal executive offices)				(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading Symbol (s)	Name of each exchange on which registered
Common shares, $0.0011 par value per share	ACGL	NASDAQ	Stock Market
Depositary shares, each representing a 1/100^th interest in a 5.25% Series E preferred share	ACGLP	NASDAQ	Stock Market
Depositary shares, each representing a 1/100^th interest in a 5.45% Series F preferred share	ACGLO	NASDAQ	Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☑ Accelerated Filer ☐ Non-accelerated Filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of November 1, 2019, there were 405,308,162 common shares, $0.0011 par value per share, of the registrant outstanding.

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ARCH CAPITAL GROUP LTD.

INDEX TO FORM 10-Q



		Page No.
	PART I
	Financial Information	2
Item 1.	Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73
Item 4.	Controls and Procedures	74

	PART II
	Other Information	75
Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3.	Defaults Upon Senior Securities	76
Item 4.	Mine Safety Disclosures	76
Item 5.	Other Information	76
Item 6.	Exhibits	77
	Signatures	78



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PART I. FINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. This report or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect our 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 report are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology.

Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below and elsewhere in this report and in our periodic reports filed with the Securities and Exchange Commission (the “SEC”), and include:


•	our ability to successfully implement our business strategy during “soft” as well as “hard” markets;


•	acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and our insureds and reinsureds;


•	the integration of any businesses we have acquired or may acquire into our existing operations;


•	our ability to maintain or improve our ratings, which may be affected by our ability to raise additional equity or debt financings, by ratings agencies’ existing or new policies and practices, as well as other factors described herein;


•	general economic and market conditions (including inflation, interest rates, unemployment, housing prices, foreign currency exchange rates, prevailing credit terms and the depth and duration of a recession) and conditions specific to the reinsurance and insurance markets (including the length and magnitude of the current “soft” market) in which we operate;


•	competition, including increased competition, on the basis of pricing, capacity (including alternative sources of capital), coverage terms, or other factors;


•	developments in the world’s financial and capital markets and our access to such markets;


•	our ability to successfully enhance, integrate and maintain operating procedures (including information technology) to effectively support our current and new business;


•	the loss of key personnel;

•

accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like our company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to us through September 30, 2019;


•	greater than expected loss ratios on business written by us and adverse development on claim and/or claim expense liabilities related to business written by our insurance and reinsurance subsidiaries;


•	severity and/or frequency of losses;


•	claims for natural or man-made catastrophic events or severe economic events in our insurance, reinsurance and mortgage businesses could cause large losses and substantial volatility in our results of operations;


•	the effect of climate change on our business;


•	acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;


•	availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance;


•	the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to us;


•	the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;



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•	our investment performance, including legislative or regulatory developments that may adversely affect the fair value of our investments;


•	changes in general economic conditions, including new or continued sovereign debt concerns in Eurozone countries or downgrades of U.S. securities by credit rating agencies, which could affect our business, financial condition and results of operations;


•	the volatility of our shareholders’ equity from foreign currency fluctuations, which could increase due to us not matching portions of our projected liabilities in foreign currencies with investments in the same currencies;


•	changes in accounting principles or policies or in our application of such accounting principles or policies;


•	changes in the political environment of certain countries in which we operate or underwrite business;


•	a disruption caused by cyber-attacks or other technology breaches or failures on us or our business partners and service providers, which could negatively impact our business and/or expose us to litigation;


•	statutory or regulatory developments, including as to tax matters and insurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers, including the Tax Cuts and Jobs Act of 2017; and

•

the other matters set forth under Item 1A “Risk Factors”, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of our Annual Report on Form 10-K for the year ended December 31, 2018, as well as the other factors set forth in our other documents on file with the SEC, and management’s response to any of the aforementioned factors.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. 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. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.



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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



		Page No.

Report of Independent Registered Public Accounting Firm		5

Consolidated Balance Sheets
September 30, 2019 (unaudited) and December 31, 2018		6

Consolidated Statements of Income
For the three and nine month periods ended September 30, 2019 and 2018 (unaudited)		7

Consolidated Statements of Comprehensive Income
For the three and nine month periods ended September 30, 2019 and 2018 (unaudited)		8

Consolidated Statements of Changes in Shareholders’ Equity
For the three and nine month periods ended September 30, 2019 and 2018 (unaudited)		9

Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2019 and 2018 (unaudited)		10

Notes to Consolidated Financial Statements (unaudited)
Note 1 - Basis of Presentation and Recent Accounting Pronouncements		11
Note 2 - Share Transactions		12
Note 3 - Earnings Per Common Share		13
Note 4 - Segment Information		14
Note 5 - Reserve for Losses and Loss Adjustment Expenses		19
Note 6 - Investment Information		22
Note 7 - Fair Value		28
Note 8 - Derivative Instruments		34
Note 9 - Commitments and Contingencies		35
Note 10 - Leases		35
Note 11 - Variable Interest Entities and Noncontrolling Interests		36
Note 12 - Other Comprehensive Income (Loss)		39
Note 13 - Guarantor Financial Information		40
Note 14 - Income Taxes		48
Note 15 - Legal Proceedings		48
Note 16 - Subsequent Events		48



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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Arch Capital Group Ltd.

Results of Review of Interim Financial Statements

We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of September 30, 2019, and the related consolidated statements of income, comprehensive income, and changes in shareholders’ equity for the three-month and nine-month periods ended September 30, 2019 and 2018, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2019 and 2018, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated February 28, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ PricewaterhouseCoopers LLP

New York, NY

November 8, 2019



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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands, except share data)

	(Unaudited)
	September 30, 2019			December 31, 2018
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $16,146,333 and $14,829,902)	$	16,470,523		$	14,699,010
Short-term investments available for sale, at fair value (amortized cost: $752,207 and $956,238)	751,989			955,880
Collateral received under securities lending, at fair value (amortized cost: $430,255 and $274,125)	430,263			274,133
Equity securities, at fair value	550,485			338,899
Investments accounted for using the fair value option	3,838,243			3,983,571
Investments accounted for using the equity method	1,575,832			1,493,791
Total investments	23,617,335			21,745,284

Cash	880,099			646,556
Accrued investment income	116,196			114,641
Securities pledged under securities lending, at fair value (amortized cost: $419,297 and $266,786)	420,415			268,395
Premiums receivable	1,618,186			1,299,150
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	3,168,195			2,919,372
Contractholder receivables	2,094,683			2,079,111
Ceded unearned premiums	1,168,258			975,469
Deferred acquisition costs	622,028			569,574
Receivable for securities sold	50,615			36,246
Goodwill and intangible assets	624,500			634,920
Other assets	1,192,093			929,611
Total assets	$	35,572,603		$	32,218,329

Liabilities
Reserve for losses and loss adjustment expenses	$	12,389,384		$	11,853,297
Unearned premiums	4,243,372			3,753,636
Reinsurance balances payable	601,891			393,107
Contractholder payables	2,094,683			2,079,111
Collateral held for insured obligations	205,449			236,630
Senior notes	1,871,386			1,733,528
Revolving credit agreement borrowings	490,720			455,682
Securities lending payable	430,255			274,125
Payable for securities purchased	176,130			90,034
Other liabilities	1,007,524			911,500
Total liabilities	23,510,794			21,780,650

Commitments and Contingencies
Redeemable noncontrolling interests	48,789			206,292

Shareholders' Equity
Non-cumulative preferred shares	780,000			780,000
Common shares ($0.0011 par, shares issued: 574,173,205 and 570,737,283)	638			634
Additional paid-in capital	1,864,468			1,793,781
Retained earnings	10,705,025			9,426,299
Accumulated other comprehensive income (loss), net of deferred income tax	211,714			(178,720		)
Common shares held in treasury, at cost (shares: 168,942,674 and 168,282,449)	(2,403,749		)	(2,382,167		)
Total shareholders' equity available to Arch	11,158,096			9,439,827
Non-redeemable noncontrolling interests	854,924			791,560
Total shareholders' equity	12,013,020			10,231,387
Total liabilities, noncontrolling interests and shareholders' equity	$	35,572,603		$	32,218,329

See Notes to Consolidated Financial Statements



ARCH CAPITAL	6	2019 THIRD QUARTER FORM 10-Q

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in thousands, except share data)

	(Unaudited)						(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Revenues
Net premiums written	$	1,613,457		$	1,333,553		$	4,583,614		$	4,044,993
Change in unearned premiums	(175,434		)	(42,675		)	(312,998		)	(182,453		)
Net premiums earned	1,438,023			1,290,878			4,270,616			3,862,540
Net investment income	161,488			144,024			473,475			406,416
Net realized gains (losses)	62,518			(51,705		)	324,889			(239,314		)

Other-than-temporary impairment losses	(1,163		)	(492		)	(2,521		)	(1,124		)
Less investment impairments recognized in other comprehensive income, before taxes	—			—			—			—
Net impairment losses recognized in earnings	(1,163		)	(492		)	(2,521		)	(1,124		)

Other underwriting income	3,326			5,823			18,104			15,046
Equity in net income of investment funds accounted for using the equity method	17,130			15,982			96,533			52,523
Other income	1,338			(726		)	3,550			2,461
Total revenues	1,682,660			1,403,784			5,184,646			4,098,548

Expenses
Losses and loss adjustment expenses	802,455			699,420			2,288,530			2,062,433
Acquisition expenses	211,120			201,602			619,057			595,816
Other operating expenses	196,512			161,098			596,589			512,294
Corporate expenses	17,061			14,335			53,274			52,159
Amortization of intangible assets	20,003			26,315			60,214			79,523
Interest expense	31,328			29,730			89,673			90,710
Net foreign exchange (gains) losses	(33,124		)	(10,838		)	(31,697		)	(44,823		)
Total expenses	1,245,355			1,121,662			3,675,640			3,348,112

Income before income taxes	437,305			282,122			1,509,006