Segment Information

6 Months Ended

Jun. 30, 2020

Segment Reporting [Abstract]

Segment Information

Segment Information

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
	June 30, 2020
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total
Gross premiums written (1)	$	1,030,362		$	807,065		$	369,144		$	2,206,410		$	157,927		$	2,317,692
Premiums ceded	(358,101		)	(241,971		)	(44,044		)	(643,955		)	(52,071		)	(649,381		)
Net premiums written	672,261			565,094			325,100			1,562,455			105,856			1,668,311
Change in unearned premiums	15,648			(84,897		)	40,613			(28,636		)	25,679			(2,957		)
Net premiums earned	687,909			480,197			365,713			1,533,819			131,535			1,665,354
Other underwriting income (loss)	—			(651		)	6,450			5,799			868			6,667
Losses and loss adjustment expenses	(518,203		)	(383,433		)	(224,100		)	(1,125,736		)	(104,786		)	(1,230,522		)
Acquisition expenses	(107,671		)	(90,522		)	(34,052		)	(232,245		)	(22,544		)	(254,789		)
Other operating expenses	(118,757		)	(38,716		)	(37,574		)	(195,047		)	(14,202		)	(209,249		)
Underwriting income (loss)	$	(56,722	)	$	(33,125	)	$	76,437		(13,410		)	(9,129		)	(22,539		)
Net investment income										101,031			30,454			131,485
Net realized gains (losses)										385,089			171,499			556,588
Equity in net income (loss) of investment funds accounted for using the equity method										(65,119		)	—			(65,119		)
Other income (loss)										(3,140		)	—			(3,140		)
Corporate expenses (2)										(16,943		)	—			(16,943		)
Transaction costs and other (2)										(977		)	—			(977		)
Amortization of intangible assets										(16,489		)	—			(16,489		)
Interest expense										(25,130		)	(6,009		)	(31,139		)
Net foreign exchange gains (losses)										(42,438		)	3,227			(39,211		)
Income (loss) before income taxes										302,474			190,042			492,516
Income tax (expense) benefit										(26,529		)	402			(26,127		)
Net income (loss)										275,945			190,444			466,389
Amounts attributable to redeemable noncontrolling interests										(934		)	(1,036		)	(1,970		)
Amounts attributable to nonredeemable noncontrolling interests										—			(165,598		)	(165,598		)
Net income (loss) available to Arch										275,011			23,810			298,821
Preferred dividends										(10,403		)	—			(10,403		)
Net income (loss) available to Arch common shareholders										$	264,608		$	23,810		$	288,418
Underwriting Ratios
Loss ratio	75.3		%	79.8		%	61.3		%	73.4		%	79.7		%	73.9		%
Acquisition expense ratio	15.7		%	18.9		%	9.3		%	15.1		%	17.1		%	15.3		%
Other operating expense ratio	17.3		%	8.1		%	10.3		%	12.7		%	10.8		%	12.6		%
Combined ratio	108.3		%	106.8		%	80.9		%	101.2		%	107.6		%	101.8		%
Goodwill and intangible assets	$	263,086		$	2,516		$	415,238		$	680,840		$	7,650		$	688,490

(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
	June 30, 2019
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total
Gross premiums written (1)	$	919,925		$	545,547		$	364,465		$	1,829,829		$	161,978		$	1,937,809
Premiums ceded	(292,095		)	(169,457		)	(42,857		)	(504,301		)	(42,608		)	(492,911		)
Net premiums written	627,830			376,090			321,608			1,325,528			119,370			1,444,898
Change in unearned premiums	(35,388		)	(8,906		)	31,175			(13,119		)	31,948			18,829
Net premiums earned	592,442			367,184			352,783			1,312,409			151,318			1,463,727
Other underwriting income (loss)	—			1,224			4,056			5,280			673			5,953
Losses and loss adjustment expenses	(389,172		)	(240,958		)	(25,997		)	(656,127		)	(111,416		)	(767,543		)
Acquisition expenses	(91,094		)	(56,785		)	(32,654		)	(180,533		)	(29,556		)	(210,089		)
Other operating expenses	(109,523		)	(33,960		)	(39,819		)	(183,302		)	(15,612		)	(198,914		)
Underwriting income (loss)	$	2,653		$	36,705		$	258,369		297,727			(4,593		)	293,134
Net investment income										123,038			32,000			155,038
Net realized gains (losses)										125,063			(4,306		)	120,757
Equity in net income (loss) of investment funds accounted for using the equity method										32,536			—			32,536
Other income (loss)										1,129			—			1,129
Corporate expenses (2)										(16,073		)	—			(16,073		)
Transaction costs and other (2)										(2,178		)	—			(2,178		)
Amortization of intangible assets										(19,794		)	—			(19,794		)
Interest expense										(23,375		)	(5,905		)	(29,280		)
Net foreign exchange gains (losses)										(6,190		)	1,238			(4,952		)
Income (loss) before income taxes										511,883			18,434			530,317
Income tax (expense) benefit										(44,452		)	(20		)	(44,472		)
Net income (loss)										467,431			18,414			485,845
Amounts attributable to redeemable noncontrolling interests										—			(4,590		)	(4,590		)
Amounts attributable to nonredeemable noncontrolling interests										—			(12,301		)	(12,301		)
Net income (loss) available to Arch										467,431			1,523			468,954
Preferred dividends										(10,403		)	—			(10,403		)
Net income (loss) available to Arch common shareholders										$	457,028		$	1,523		$	458,551
Underwriting Ratios
Loss ratio	65.7		%	65.6		%	7.4		%	50.0		%	73.6		%	52.4		%
Acquisition expense ratio	15.4		%	15.5		%	9.3		%	13.8		%	19.5		%	14.4		%
Other operating expense ratio	18.5		%	9.2		%	11.3		%	14.0		%	10.3		%	13.6		%
Combined ratio	99.6		%	90.3		%	28.0		%	77.8		%	103.4		%	80.4		%
Goodwill and intangible assets	$	157,440		$	—		$	475,920		$	633,360		$	7,650		$	641,010

(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.’

	Six Months Ended
	June 30, 2020
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total
Gross premiums written (1)	$	2,238,007		$	1,929,584		$	738,089		$	4,904,947		$	392,829		$	5,150,522
Premiums ceded	(736,998		)	(567,310		)	(88,371		)	(1,391,946		)	(100,273		)	(1,344,965		)
Net premiums written	1,501,009			1,362,274			649,718			3,513,001			292,556			3,805,557
Change in unearned premiums	(97,181		)	(338,617		)	61,021			(374,777		)	(20,982		)	(395,759		)
Net premiums earned	1,403,828			1,023,657			710,739			3,138,224			271,574			3,409,798
Other underwriting income (loss)	—			1,469			11,049			12,518			1,001			13,519
Losses and loss adjustment expenses	(1,025,311		)	(813,502		)	(291,666		)	(2,130,479		)	(215,462		)	(2,345,941		)
Acquisition expenses	(215,008		)	(170,128		)	(72,588		)	(457,724		)	(44,348		)	(502,072		)
Other operating expenses	(248,406		)	(84,013		)	(83,470		)	(415,889		)	(27,904		)	(443,793		)
Underwriting income (loss)	$	(84,897	)	$	(42,517	)	$	274,064		146,650			(15,139		)	131,511
Net investment income										214,059			62,579			276,638
Net realized gains (losses)										312,980			(123,352		)	189,628
Equity in net income (loss) of investment funds accounted for using the equity method										(69,328		)	—			(69,328		)
Other income (loss)										5,408			—			5,408
Corporate expenses (2)										(35,144		)	—			(35,144		)
Transaction costs and other (2)										(3,572		)	—			(3,572		)
Amortization of intangible assets										(33,120		)	—			(33,120		)
Interest expense										(50,375		)	(13,319		)	(63,694		)
Net foreign exchange gains (losses)										20,869			12,591			33,460
Income (loss) before income taxes										508,427			(76,640		)	431,787
Income tax (expense) benefit										(54,474		)	402			(54,072		)
Net income (loss)										453,953			(76,238		)	377,715
Dividends attributable to redeemable noncontrolling interests										(991		)	(2,132		)	(3,123		)
Amounts attributable to nonredeemable noncontrolling interests										—			68,346			68,346
Net income (loss) available to Arch										452,962			(10,024		)	442,938
Preferred dividends										(20,806		)	—			(20,806		)
Net income (loss) available to Arch common shareholders										$	432,156		$	(10,024	)	$	422,132
Underwriting Ratios
Loss ratio	73.0		%	79.5		%	41.0		%	67.9		%	79.3		%	68.8		%
Acquisition expense ratio	15.3		%	16.6		%	10.2		%	14.6		%	16.3		%	14.7		%
Other operating expense ratio	17.7		%	8.2		%	11.7		%	13.3		%	10.3		%	13.0		%
Combined ratio	106.0		%	104.3		%	62.9		%	95.8		%	105.9		%	96.5		%

(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.’

	Six Months Ended
	June 30, 2019
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total
Gross premiums written (1)	$	1,861,879		$	1,228,402		$	720,515		$	3,810,282		$	348,667		$	4,015,688
Premiums ceded	(612,717		)	(401,024		)	(91,655		)	(1,104,882		)	(83,910		)	(1,045,531		)
Net premiums written	1,249,162			827,378			628,860			2,705,400			264,757			2,970,157
Change in unearned premiums	(103,215		)	(113,829		)	46,825			(170,219		)	32,655			(137,564		)
Net premiums earned	1,145,947			713,549			675,685			2,535,181			297,412			2,832,593
Other underwriting income (loss)	—			5,601			7,912			13,513			1,265			14,778
Losses and loss adjustment expenses	(745,895		)	(480,768		)	(37,146		)	(1,263,809		)	(222,266		)	(1,486,075		)
Acquisition expenses	(173,918		)	(111,111		)	(64,326		)	(349,355		)	(58,582		)	(407,937		)
Other operating expenses	(222,919		)	(69,664		)	(79,694		)	(372,277		)	(27,800		)	(400,077		)
Underwriting income (loss)	$	3,215		$	57,607		$	502,431		563,253			(9,971		)	553,282
Net investment income										244,287			67,700			311,987
Net realized gains (losses)										236,187			24,826			261,013
Equity in net income (loss) of investment funds accounted for using the equity method										79,403			—			79,403
Other income (loss)										2,212			—			2,212
Corporate expenses (2)										(32,845		)	—			(32,845		)
Transaction costs and other (2)										(3,368		)	—			(3,368		)
Amortization of intangible assets										(40,211		)	—			(40,211		)
Interest expense										(46,857		)	(11,488		)	(58,345		)
Net foreign exchange gains (losses)										(1,015		)	(412		)	(1,427		)
Income (loss) before income taxes										1,001,046			70,655			1,071,701
Income tax (expense) benefit										(90,338		)	(20		)	(90,358		)
Net income (loss)										910,708			70,635			981,343
Dividends attributable to redeemable noncontrolling interests										—			(9,178		)	(9,178		)
Amounts attributable to nonredeemable noncontrolling interests										—			(54,683		)	(54,683		)
Net income (loss) available to Arch										910,708			6,774			917,482
Preferred dividends										(20,806		)	—			(20,806		)
Net income (loss) available to Arch common shareholders										$	889,902		$	6,774		$	896,676
Underwriting Ratios
Loss ratio	65.1		%	67.4		%	5.5		%	49.9		%	74.7		%	52.5		%
Acquisition expense ratio	15.2		%	15.6		%	9.5		%	13.8		%	19.7		%	14.4		%
Other operating expense ratio	19.5		%	9.8		%	11.8		%	14.7		%	9.3		%	14.1		%
Combined ratio	99.8		%	92.8		%	26.8		%	78.4		%	103.7		%	81.0		%

(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.’