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 March 31, 2020
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 1/1000th interest in a 5.25% Series E preferred share	ACGLP	NASDAQ	Stock Market
Depositary shares, each representing a 1/1000th 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 May 1, 2020, there were 405,649,506 common shares, $0.0011 par value per share, of the registrant outstanding.

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	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.	Controls and Procedures	62
	PART II
	Other Information	63
Item 1.	Legal Proceedings	63
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits	68
	Signatures	69

ARCH CAPITAL  1 2020 FIRST QUARTER FORM 10-Q

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, including those resulting from COVID-19) 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;

• 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;

• the effect of contagious disease (including COVID-19) on the Company’s business;

• 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;

ARCH CAPITAL  2 2020 FIRST QUARTER FORM 10-Q

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

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

• changes in the method for determining the London Inter-bank Offered Rate (“LIBOR”) and the potential replacement of LIBOR;

• 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, 2019, “ITEM 1A—Risk Factors” of this Form 10-Q 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. 

ARCH CAPITAL  3 2020 FIRST QUARTER FORM 10-Q

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

	Page No.
Report of Independent Registered Public Accounting Firm	5
Consolidated Balance Sheets
March 31, 2020 (unaudited) and December 31, 2019	6
Consolidated Statements of Income
For the three month periods ended March 31, 2020 and 2019 (unaudited)	7
Consolidated Statements of Comprehensive Income
For the three month periods ended March 31, 2020 and 2019 (unaudited)	8
Consolidated Statements of Changes in Shareholders’ Equity
For the three month periods ended March 31, 2020 and 2019 (unaudited)	9
Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2020 and 2019 (unaudited)	10
Notes to Consolidated Financial Statements (unaudited)
Note 1 - Basis of Presentation and Recent Accounting Pronouncements	11
Note 2 - Share Transactions	13
Note 3 - Earnings Per Common Share	14
Note 4 - Segment Information	15
Note 5 - Reserve for Losses and Loss Adjustment Expenses	18
Note 6 - Allowance for Expected Credit Losses	20
Note 7 - Investment Information	21
Note 8 - Fair Value	27
Note 9 - Derivative Instruments	33
Note 10 - Commitments and Contingencies	34
Note 11 - Leases	34
Note 12 - Variable Interest Entities and Noncontrolling Interests	34
Note 13 - Other Comprehensive Income (Loss)	37
Note 14 - Income Taxes	38
Note 15 - Legal Proceedings	38
Note 16 - Transactions with Related Parties	38

ARCH CAPITAL  4 2020 FIRST QUARTER FORM 10-Q

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 March 31, 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the three-month periods ended March 31, 2020 and 2019, 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, 2019, 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, 2020, 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, 2019, 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

May 8, 2020

ARCH CAPITAL  5 2020 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands, except share data)
	(Unaudited)
	March 31, 2020			December 31, 2019
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $16,757,086 and $16,598,808); net of allowance for credit losses: $9,909 at March 31, 2020)	$	16,841,571		$	16,894,526
Short-term investments available for sale, at fair value (amortized cost: $944,878 and $957,283); net of allowance for credit losses: $29 at March 31, 2020)	944,531			956,546
Collateral received under securities lending, at fair value (amortized cost: $182,274 and $388,366)	182,284			388,376
Equity securities, at fair value	1,181,903			838,925
Investments accounted for using the fair value option	3,310,517			3,663,477
Investments accounted for using the equity method	1,676,055			1,660,396
Total investments	24,136,861			24,402,246
Cash	882,284			726,230
Accrued investment income	118,089			117,937
Securities pledged under securities lending, at fair value (amortized cost: $175,218 and $378,738)	177,442			379,868
Premiums receivable (net of allowance for credit losses: $27,990 and $21,003)	2,155,204			1,778,717
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $13,700 and $1,364)	4,303,135			4,346,816
Contractholder receivables (net of allowance for credit losses: $9,038 and $0)	2,140,724			2,119,460
Ceded unearned premiums	1,357,284			1,234,683
Deferred acquisition costs	708,848			633,400
Receivable for securities sold	221,573			24,133
Goodwill and intangible assets	705,450			738,083
Other assets	1,509,232			1,383,788
Total assets	$	38,416,126		$	37,885,361
Liabilities
Reserve for losses and loss adjustment expenses	$	14,309,580		$	13,891,842
Unearned premiums	4,817,191			4,339,549
Reinsurance balances payable	737,597			667,072
Contractholder payables	2,149,762			2,119,460
Collateral held for insured obligations	211,597			206,698
Senior notes	1,871,869			1,871,626
Revolving credit agreement borrowings	500,587			484,287
Securities lending payable	182,274			388,366
Payable for securities purchased	327,359			87,579
Other liabilities	1,392,905			1,513,330
Total liabilities	26,500,721			25,569,809
Commitments and Contingencies
Redeemable noncontrolling interests	55,376			55,404
Shareholders' Equity
Non-cumulative preferred shares	780,000			780,000
Common shares ($0.0011 par, shares issued: 577,386,799 and 574,617,195)	642			638
Additional paid-in capital	1,921,487			1,889,683
Retained earnings	11,132,268			11,021,006
Accumulated other comprehensive income (loss), net of deferred income tax	21,944			212,091
Common shares held in treasury, at cost (shares: 171,776,932 and 168,997,994)	(2,489,097		)	(2,406,047		)
Total shareholders' equity available to Arch	11,367,244			11,497,371
Non-redeemable noncontrolling interests	492,785			762,777
Total shareholders' equity	11,860,029			12,260,148
Total liabilities, noncontrolling interests and shareholders' equity	$	38,416,126		$	37,885,361

See Notes to Consolidated Financial Statements

ARCH CAPITAL 6 2020 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in thousands, except share data)
	(Unaudited)
	Three Months Ended
	March 31,
	2020			2019
Revenues
Net premiums written	$	2,137,246		$	1,525,259
Change in unearned premiums	(392,802		)	(156,393		)
Net premiums earned	1,744,444			1,368,866
Net investment income	145,153			156,949
Net realized gains (losses)	(366,960		)	140,256
Other underwriting income	6,852			8,825
Equity in net income (loss) of investment funds accounted for using the equity method	(4,209		)	46,867
Other income	8,548			1,083
Total revenues	1,533,828			1,722,846
Expenses
Losses and loss adjustment expenses	1,115,419			718,532
Acquisition expenses	247,283			197,848
Other operating expenses	234,544			201,163
Corporate expenses	20,796			17,962
Amortization of intangible assets	16,631			20,417
Interest expense	32,555			29,065
Net foreign exchange (gains) losses	(72,671		)	(3,525		)
Total expenses	1,594,557			1,181,462
Income (loss) before income taxes	(60,729		)	541,384
Income tax expense	(27,945		)	(45,886		)
Net income (loss)	$	(88,674	)	$	495,498
Net (income) loss attributable to noncontrolling interests	232,791			(46,970		)
Net income available to Arch	144,117			448,528
Preferred dividends	(10,403		)	(10,403		)
Net income available to Arch common shareholders	$	133,714		$	438,125
Net income per common share and common share equivalent
Basic	$	0.33		$	1.09
Diluted	$	0.32		$	1.07
Weighted average common shares and common share equivalents outstanding
Basic	403,892,161			400,184,404
Diluted	414,033,570			408,971,029

See Notes to Consolidated Financial Statements

ARCH CAPITAL 7 2020 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	March 31,
	2020			2019
Comprehensive Income
Net income (loss)	$	(88,674	)	$	495,498
Other comprehensive income (loss), net of deferred income tax
Unrealized appreciation (decline) in value of available-for-sale investments:
Unrealized holding gains (losses) arising during period	(57,287		)	225,887
Reclassification of net realized (gains) losses, included in net income (loss)	(121,229		)	(10,221		)
Foreign currency translation adjustments	(44,689		)	5,516
Comprehensive income (loss)	(311,879		)	716,680
Net (income) loss attributable to noncontrolling interests	232,791			(46,970		)
Other comprehensive (income) loss attributable to noncontrolling interests	33,058			(4,139		)
Comprehensive income (loss) available to Arch	$	(46,030	)	$	665,571

See Notes to Consolidated Financial Statements

ARCH CAPITAL 8 2020 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	March 31,
	2020			2019
Non-cumulative preferred shares
Balance at beginning and end of period	780,000			780,000
Common shares
Balance at beginning of period	638			634
Common shares issued, net	4			2
Balance at end of period	642			636
Additional paid-in capital
Balance at beginning of period	1,889,683			1,793,781
Amortization of share-based compensation	28,602			25,908
Other changes	3,202			(84		)
Balance at end of period	1,921,487			1,819,605
Retained earnings
Balance at beginning of period	11,021,006			9,426,299
Cumulative effect of an accounting change (1)	(22,452		)	—
Balance at beginning of period, as adjusted	10,998,554			9,426,299
Net income (loss)	(88,674		)	495,498
Net (income) loss attributable to noncontrolling interests	232,791			(46,970		)
Preferred share dividends	(10,403		)	(10,403		)
Balance at end of period	11,132,268			9,864,424
Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period	212,091			(178,720		)
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
Balance at beginning of period	258,486			(114,178		)
Unrealized holding gains (losses) during period, net of reclassification adjustment	(178,516		)	215,666
Unrealized holding gains (losses) during period attributable to noncontrolling interests	33,179			(4,286		)
Balance at end of period	113,149			97,202
Foreign currency translation adjustments, net of deferred income tax:
Balance at beginning of period	(46,395		)	(64,542		)
Foreign currency translation adjustments	(44,689		)	5,516
Foreign currency translation adjustments attributable to noncontrolling interests	(121		)	147
Balance at end of period	(91,205		)	(58,879		)
Balance at end of period	21,944			38,323
Common shares held in treasury, at cost
Balance at beginning of period	(2,406,047		)	(2,382,167		)
Shares repurchased for treasury	(83,050		)	(6,225		)
Balance at end of period	(2,489,097		)	(2,388,392		)
Total shareholders’ equity available to Arch	11,367,244			10,114,596
Non-redeemable noncontrolling interests	492,785			838,081
Total shareholders’ equity	$	11,860,029		$	10,952,677

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

See Notes to Consolidated Financial Statements

ARCH CAPITAL 9 2020 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	March 31,
	2020			2019
Operating Activities
Net income (loss)	$	(88,674	)	$	495,498
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized (gains) losses	362,964			(144,091		)
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss	29,034			(29,752		)
Amortization of intangible assets	16,631			20,417
Share-based compensation	28,549			25,891
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	506,057			(6,005		)
Unearned premiums, net of ceded unearned premiums	392,802			156,393
Premiums receivable	(418,457		)	(285,137		)
Deferred acquisition costs	(75,135		)	(23,168		)
Reinsurance balances payable	79,807			62,605
Other items, net	(223,124		)	(37,253		)
Net cash provided by (used for) operating activities	610,454			235,398
Investing Activities
Purchases of fixed maturity investments	(11,965,995		)	(7,444,470		)
Purchases of equity securities	(760,683		)	(203,810		)
Purchases of other investments	(228,471		)	(324,593		)
Proceeds from sales of fixed maturity investments	11,723,123			7,076,590
Proceeds from sales of equity securities	266,301			95,017
Proceeds from sales, redemptions and maturities of other investments	216,131			216,483
Proceeds from redemptions and maturities of fixed maturity investments	198,356			100,424
Net settlements of derivative instruments	195,488			29,737
Net (purchases) sales of short-term investments	(11,777		)	292,601
Change in cash collateral related to securities lending	55,001			(29,618		)
Purchases of fixed assets	(8,470		)	(9,423		)
Other	42,500			(93,731		)
Net cash provided by (used for) investing activities	(278,496		)	(294,793		)
Financing Activities
Purchases of common shares under share repurchase program	(75,486		)	(2,871		)
Proceeds from common shares issued, net	(4,527		)	(1,901		)
Proceeds from borrowings	16,300			59,000
Repayments of borrowings	—			(26,038		)
Change in cash collateral related to securities lending	(55,001		)