Segment Information

3 Months Ended

Mar. 31, 2020

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 (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.

The ‘other’ segment includes the results of Watford (see note 12). 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
	March 31, 2020
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	1,207,645		$	1,122,519		$	368,945		$	2,698,537		$	234,902		$	2,832,830
Premiums ceded	(378,897		)	(325,339		)	(44,327		)	(747,991		)	(48,202		)	(695,584		)
Net premiums written	828,748			797,180			324,618			1,950,546			186,700			2,137,246
Change in unearned premiums	(112,829		)	(253,720		)	20,408			(346,141		)	(46,661		)	(392,802		)
Net premiums earned	715,919			543,460			345,026			1,604,405			140,039			1,744,444
Other underwriting income (loss)	—			2,120			4,599			6,719			133			6,852
Losses and loss adjustment expenses	(507,108		)	(430,069		)	(67,566		)	(1,004,743		)	(110,676		)	(1,115,419		)
Acquisition expenses	(107,337		)	(79,606		)	(38,536		)	(225,479		)	(21,804		)	(247,283		)
Other operating expenses	(129,649		)	(45,297		)	(45,896		)	(220,842		)	(13,702		)	(234,544		)
Underwriting income (loss)	$	(28,175	)	$	(9,392	)	$	197,627		160,060			(6,010		)	154,050

Net investment income										113,028			32,125			145,153
Net realized gains (losses)										(72,109		)	(294,851		)	(366,960		)
Equity in net income (loss) of investment funds accounted for using the equity method										(4,209		)	—			(4,209		)
Other income (loss)										8,548			—			8,548
Corporate expenses (2)										(18,201		)	—			(18,201		)
Transaction costs and other (2)										(2,595		)	—			(2,595		)
Amortization of intangible assets										(16,631		)	—			(16,631		)
Interest expense										(25,245		)	(7,310		)	(32,555		)
Net foreign exchange gains (losses)										63,307			9,364			72,671
Income (loss) before income taxes										205,953			(266,682		)	(60,729		)
Income tax expense										(27,945		)	—			(27,945		)
Net income (loss)										178,008			(266,682		)	(88,674		)
Amounts attributable to redeemable noncontrolling interests										(57		)	(1,096		)	(1,153		)
Amounts attributable to nonredeemable noncontrolling interests										—			233,944			233,944
Net income (loss) available to Arch										177,951			(33,834		)	144,117
Preferred dividends										(10,403		)	—			(10,403		)
Net income (loss) available to Arch common shareholders										$	167,548		$	(33,834	)	$	133,714

Underwriting Ratios
Loss ratio	70.8		%	79.1		%	19.6		%	62.6		%	79.0		%	63.9		%
Acquisition expense ratio	15.0		%	14.6		%	11.2		%	14.1		%	15.6		%	14.2		%
Other operating expense ratio	18.1		%	8.3		%	13.3		%	13.8		%	9.8		%	13.4		%
Combined ratio	103.9		%	102.0		%	44.1		%	90.5		%	104.4		%	91.5		%

Goodwill and intangible assets	$	268,296		$	2,516		$	426,988		$	697,800		$	7,650		$	705,450


(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
	March 31, 2019
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	941,954		$	682,855		$	356,050		$	1,980,453		$	186,689		$	2,077,879
Premiums ceded	(320,622		)	(231,567		)	(48,798		)	(600,581		)	(41,302		)	(552,620		)
Net premiums written	621,332			451,288			307,252			1,379,872			145,387			1,525,259
Change in unearned premiums	(67,827		)	(104,923		)	15,650			(157,100		)	707			(156,393		)
Net premiums earned	553,505			346,365			322,902			1,222,772			146,094			1,368,866
Other underwriting income (loss)	—			4,377			3,856			8,233			592			8,825
Losses and loss adjustment expenses	(356,723		)	(239,810		)	(11,149		)	(607,682		)	(110,850		)	(718,532		)
Acquisition expenses	(82,824		)	(54,326		)	(31,672		)	(168,822		)	(29,026		)	(197,848		)
Other operating expenses	(113,396		)	(35,704		)	(39,875		)	(188,975		)	(12,188		)	(201,163		)
Underwriting income (loss)	$	562		$	20,902		$	244,062		265,526			(5,378		)	260,148

Net investment income										121,249			35,700			156,949
Net realized gains (losses)										111,124			29,132			140,256
Equity in net income (loss) of investment funds accounted for using the equity method										46,867			—			46,867
Other income (loss)										1,083			—			1,083
Corporate expenses (2)										(16,772		)	—			(16,772		)
Transaction costs and other (2)										(1,190		)	—			(1,190		)
Amortization of intangible assets										(20,417		)	—			(20,417		)
Interest expense										(23,482		)	(5,583		)	(29,065		)
Net foreign exchange gains (losses)										5,175			(1,650		)	3,525
Income before income taxes										489,163			52,221			541,384
Income tax expense										(45,886		)	—			(45,886		)
Net income										443,277			52,221			495,498
Amounts attributable to redeemable noncontrolling interests										—			(4,588		)	(4,588		)
Amounts attributable to nonredeemable noncontrolling interests										—			(42,382		)	(42,382		)
Net income available to Arch										443,277			5,251			448,528
Preferred dividends										(10,403		)	—			(10,403		)
Net income available to Arch common shareholders										$	432,874		$	5,251		$	438,125

Underwriting Ratios
Loss ratio	64.4		%	69.2		%	3.5		%	49.7		%	75.9		%	52.5		%
Acquisition expense ratio	15.0		%	15.7		%	9.8		%	13.8		%	19.9		%	14.5		%
Other operating expense ratio	20.5		%	10.3		%	12.3		%	15.5		%	8.3		%	14.7		%
Combined ratio	99.9		%	95.2		%	25.6		%	79.0		%	104.1		%	81.7		%

Goodwill and intangible assets	$	156,735		$	—		$	494,830		$	651,565		$	7,650		$	659,215


(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.’