EX-99.2 3 ex-992supplement123120.htm EX-99.2 Document

EXHIBIT 99.2
 
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Arch Capital Group Ltd.
Waterloo House, Ground Floor
100 Pitts Bay Road
Pembroke HM 08 Bermuda
 

Financial Supplement

Financial Information
as of December 31, 2020
 
The following financial supplement is provided to assist in your understanding of Arch Capital Group Ltd. (“Arch Capital”) and its subsidiaries (collectively, the “Company”).
 
This report is for informational purposes only.  It should be read in conjunction with documents filed by Arch Capital with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q.  Please refer to the Company’s website at www.archcapgroup.com for further information describing Arch Capital.


Contacts
Arch Capital Group Ltd.Investor Relations
François Morin: (441) 278-9250Donald Watson: (914) 872-3616; dwatson@archcapservices.com



Arch Capital Group Ltd. and Subsidiaries
Table of Contents

  Page
   
I.Financial Highlights
  
II.Consolidated Financial Statements
 a.Consolidated Statements of Income
 b.Consolidated Balance Sheets
 c.Consolidated Statements of Changes in Shareholders’ Equity
 d.Consolidated Statements of Cash Flows
  
III.Segment Information
 a.Overview
 b.Consolidated Results
 c.Insurance Segment Results
 d.Reinsurance Segment Results
e.Mortgage Segment Results
f.Consolidated Results Excluding ‘Other’ Segment
g.Selected Information on Losses and Loss Adjustment Expenses
  
IV.Investment Information
 a.Investable Asset Summary and Investment Portfolio Metrics
b.Composition of Net Investment Income, Yield and Total Return
 c.Composition of Fixed Maturities
d.Credit Quality Distribution and Maturity Profile
e.Analysis of Corporate Exposures
 f.Structured Securities
  
V.Other
 a.Comments on Regulation G
 b.Operating Income Reconciliation and Annualized Operating Return on Average Common Equity
c.Operating Income and Effective Tax Rate Calculations
 d.Capital Structure and Share Repurchase Activity

1

Arch Capital Group Ltd. and Subsidiaries
Basis of Presentation

Basis of Presentation

All financial information contained herein is unaudited, however, certain information relating to the consolidated balance sheet at December 31, 2019 is derived from or agrees to audited financial information. Unless otherwise noted, all data is in thousands, except for share and per share amounts and ratio information.

In March 2014, the Company invested $100.0 million to acquire common equity and a warrant to purchase additional common equity of Watford Holdings Ltd. In accordance with GAAP, the Company consolidates the results of Watford Holdings Ltd. (“Watford”) in its financial statements, although it only owns approximately 13% of Watford’s outstanding common equity at December 31, 2020. Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, 100% of the results of Watford are included in the Company’s consolidated financial statements. The portion of Watford’s earnings owned by third parties is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ In addition, the Company reflects Watford’s redeemable preference shares in the mezzanine section of the Company’s consolidated balance sheets as ‘redeemable noncontrolling interests’ because they have redemption features that are not solely within the control of Watford.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital and its subsidiaries may include forward-looking statements, which reflect the Company’s 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 release are forward-looking statements.
 
Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology. Forward-looking statements involve the Company’s current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and the Company’s ability to maintain and improve the Company’s ratings; investment performance; the loss of key personnel; the adequacy of the Company’s loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; including pandemics such as COVID-19; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; the Company’s ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to the Company of reinsurance to manage gross and net exposures; the failure of others to meet their obligations to the Company; changes in the method for determining the London Inter-bank Offered Rate (“LIBOR”) and the potential replacement of LIBOR and other factors identified in the Company’s filings with the U.S. Securities and Exchange Commission.
 
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. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
2

Arch Capital Group Ltd. and Subsidiaries
Financial Highlights
The following table presents financial highlights (1):
(U.S. Dollars in thousands, except share data)Three Months EndedYear Ended
December 31,December 31,
20202019Change20202019Change
Underwriting results:
Gross premiums written$2,170,831 $1,842,071 17.8 %$9,632,691 $7,695,645 25.2 %
Net premiums written1,660,298 1,343,100 23.6 %6,900,127 5,506,205 25.3 %
Net premiums earned1,668,299 1,382,437 20.7 %6,431,584 5,229,809 23.0 %
Underwriting income (loss) (2)229,542 288,672 (20.5)%481,069 1,087,630 (55.8)%
Loss ratio61.0 %51.4 %9.6 66.1 %51.3 %14.8 
Acquisition expense ratio13.5 %14.3 %(0.8)14.1 %14.1 %— 
Other operating expense ratio12.1 %13.9 %(1.8)12.7 %14.3 %(1.6)
Combined ratio86.6 %79.6 %7.0 92.9 %79.7 %13.2 
Net investment income$87,992 $119,906 (26.6)%$401,908 $491,067 (18.2)%
Per diluted share$0.21 $0.29 (27.6)%$0.98 $1.19 (17.6)%
Net income available to Arch common shareholders$533,141 $315,981 68.7 %$1,363,909 $1,594,707 (14.5)%
Per diluted share$1.30 $0.76 71.1 %$3.32 $3.87 (14.2)%
After-tax operating income available to Arch common shareholders (2)$230,417 $308,357 (25.3)%$557,108 $1,162,639 (52.1)%
Per diluted share$0.56 $0.74 (24.3)%$1.36 $2.82 (51.8)%
Comprehensive income (loss) available to Arch$646,082 $326,760 97.7 %$1,682,325 $2,027,129 (17.0)%
Net cash provided by operating activities$507,017 $443,298 14.4 %$2,705,054 $1,810,060 49.4 %
Weighted average common shares and common share equivalents outstanding — diluted410,281,852 414,124,920 (0.9)%410,259,455 411,609,478 (0.3)%
Financial measures:      
Change in book value per common share during period5.4 %3.2 %2.2 14.7 %22.8 %(8.1)
Annualized return on average common equity17.8 %12.0 %5.8 11.8 %16.5 %(4.7)
Annualized operating return on average common equity (2)7.7 %11.7 %(4.0)4.8 %12.0 %(7.2)
Total return on investments (3)2.46 %1.07 %140 bps7.77 %7.30 %47 bps
 
(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)See ‘Comments on Regulation G’ for a further discussion of consolidated underwriting income or loss, after-tax operating income or loss available to Arch common shareholders and annualized operating return on average common equity.
(3)Total return on investments includes net investment income, equity in net income (loss) of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses and is calculated on a pre-tax basis and before investment expenses. See ‘Comments on Regulation G’ for a further discussion of the presentation of total return on investments.
3

Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Income
(U.S. Dollars in thousands, except share data)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Revenues       
Net premiums earned$1,811,045 $1,771,092 $1,665,354 $1,744,444 $1,515,882 $6,991,935 $5,786,498 
Net investment income114,458 128,512 131,485 145,153 154,263 519,608 627,738 
Net realized gains (losses)353,333 280,499 556,588 (366,960)40,830 823,460 363,198 
Other underwriting income7,852 5,413 6,667 6,852 6,757 26,784 24,861 
Equity in net income (loss) of investment funds accounted for using the equity method89,286 126,735 (65,119)(4,209)27,139 146,693 123,672 
Other income (loss)10,468 919 (3,140)8,548 (1,317)16,795 2,233 
Total revenues2,386,442 2,313,170 2,291,835 1,533,828 1,743,554 8,525,275 6,928,200 
Expenses
Losses and loss adjustment expenses(1,127,385)(1,216,273)(1,230,522)(1,115,419)(844,922)(4,689,599)(3,133,452)
Acquisition expenses(254,828)(247,942)(254,789)(247,283)(221,888)(1,004,842)(840,945)
Other operating expenses(215,697)(215,686)(209,249)(234,544)(204,408)(875,176)(800,997)
Corporate expenses(25,335)(17,937)(17,920)(20,796)(26,837)(81,988)(80,111)
Amortization of intangible assets(19,196)(16,715)(16,489)(16,631)(21,890)(69,031)(82,104)
Interest expense(38,419)(41,343)(31,139)(32,555)(31,199)(143,456)(120,872)
Net foreign exchange gains (losses)(72,209)(44,885)(39,211)72,671 (52,306)(83,634)(20,609)
Total expenses(1,753,069)(1,800,781)(1,799,319)(1,594,557)(1,403,450)(6,947,726)(5,079,090)
Income (loss) before income taxes633,373 512,389 492,516 (60,729)340,104 1,577,549 1,849,110 
Income tax expense(34,059)(23,707)(26,127)(27,945)(27,336)(111,838)(155,810)
Net income (loss)599,314 488,682 466,389 (88,674)312,768 1,465,711 1,693,300 
Net (income) loss attributable to noncontrolling interests(55,770)(69,643)(167,568)232,791 13,616 (60,190)(56,981)
Net income (loss) attributable to Arch543,544 419,039 298,821 144,117 326,384 1,405,521 1,636,319 
Preferred dividends(10,403)(10,403)(10,403)(10,403)(10,403)(41,612)(41,612)
Net income (loss) available to Arch common shareholders$533,141 $408,636 $288,418 $133,714 $315,981 $1,363,909 $1,594,707 
Comprehensive income (loss) available to Arch$646,082 $455,907 $626,366 $(46,030)$326,760 $1,682,325 $2,027,129 
Net income (loss) per common share and common share equivalent
Basic$1.32 $1.01 $0.72 $0.33 $0.78 $3.38 $3.97 
Diluted$1.30 $1.00 $0.71 $0.32 $0.76 $3.32 $3.87 
Weighted average common shares and common share equivalents outstanding
Basic403,005,335 402,850,485 402,503,687 403,892,161 402,941,290 403,062,179 401,802,815 
Diluted410,281,852 409,194,657 408,119,681 414,033,570 414,124,920 410,259,455 411,609,478 



4

Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets

(U.S. Dollars in thousands, except share data)December 31,September 30,June 30,March 31,December 31,
20202020202020202019
Assets     
Investments:     
Fixed maturities available for sale, at fair value$18,717,825 $18,452,888 $17,207,731 $16,841,571 $16,894,526 
Short-term investments available for sale, at fair value1,924,922 2,039,097 2,277,866 944,531 956,546 
Collateral received under securities lending, at fair value301,096 64,259 473,790 182,284 388,376 
Equity securities, at fair value1,444,830 1,502,015 1,257,317 1,181,903 838,925 
Other investments4,324,796 3,749,575 3,520,771 3,310,517 3,663,477 
Investments accounted for using the equity method2,047,889 1,883,702 1,727,302 1,676,055 1,660,396 
Total investments28,761,358 27,691,536 26,464,777 24,136,861 24,402,246 
Cash906,448 976,398 854,259 882,284 726,230 
Accrued investment income103,299 106,940 102,064 118,089 117,937 
Securities pledged under securities lending, at fair value294,912 62,749 464,503 177,442 379,868 
Premiums receivable2,064,586 2,225,311 2,203,753 2,155,204 1,778,717 
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses4,500,802 4,621,937 4,363,507 4,303,135 4,346,816 
Contractholder receivables1,986,924 2,185,614 2,179,124 2,140,724 2,119,460 
Ceded unearned premiums1,234,075 1,450,200 1,364,603 1,357,284 1,234,683 
Deferred acquisition costs790,708 750,901 714,531 708,848 633,400 
Receivable for securities sold92,743 158,674 167,281 221,573 24,133 
Goodwill and intangible assets692,863 713,777 688,490 705,450 738,083 
Other assets1,853,579 1,771,998 1,632,756 1,509,232 1,383,788 
Total assets$43,282,297 $42,716,035 $41,199,648 $38,416,126 $37,885,361 
Liabilities     
Reserve for losses and loss adjustment expenses$16,513,929 $15,900,526 $15,044,874 $14,309,580 $13,891,842 
Unearned premiums4,838,965 5,062,052 4,827,445 4,817,191 4,339,549 
Reinsurance balances payable683,263 873,067 793,467 737,597 667,072 
Contractholder payables1,995,562 2,191,515 2,185,414 2,149,762 2,119,460 
Collateral held for insured obligations215,581 221,957 208,449 211,597 206,698 
Senior notes2,861,113 2,860,811 2,860,733 1,871,869 1,871,626 
Revolving credit agreement borrowings155,687 210,687 335,587 500,587 484,287 
Securities lending payable301,089 64,251 473,783 182,274 388,366 
Payable for securities purchased218,779 382,236 275,257 327,359 87,579 
Other liabilities1,510,888 1,681,181 1,467,739 1,392,905 1,513,330 
Total liabilities29,294,856 29,448,283 28,472,748 26,500,721 25,569,809 
Redeemable noncontrolling interests58,548 57,835 55,986 55,376 55,404 
Shareholders’ equity     
Non-cumulative preferred shares780,000 780,000 780,000 780,000 780,000 
Common shares643 642 642 642 638 
Additional paid-in capital1,977,794 1,950,782 1,935,514 1,921,487 1,889,683 
Retained earnings12,362,463 11,829,322 11,420,686 11,132,268 11,021,006 
Accumulated other comprehensive income (loss), net of deferred income tax488,895 386,357 349,488 21,944 212,091 
Common shares held in treasury, at cost(2,503,909)(2,495,106)(2,494,505)(2,489,097)(2,406,047)
Total shareholders’ equity available to Arch13,105,886 12,451,997 11,991,825 11,367,244 11,497,371 
Non-redeemable noncontrolling interests823,007 757,920 679,089 492,785 762,777 
Total shareholders’ equity13,928,893 13,209,917 12,670,914 11,860,029 12,260,148 
Total liabilities, noncontrolling interests and shareholders’ equity$43,282,297 $42,716,035 $41,199,648 $38,416,126 $37,885,361 
Common shares and common share equivalents outstanding, net of treasury shares406,720,642 406,018,958 405,970,251 405,609,867 405,619,201 
Book value per common share (1)$30.31 $28.75 $27.62 $26.10 $26.42 

(1)    Excludes the effects of stock options and restricted stock units outstanding.
5

Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity

(U.S. Dollars in thousands)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Non-cumulative preferred shares       
Balance at beginning and end of period$780,000 $780,000 $780,000 $780,000 $780,000 $780,000 $780,000 
Common shares
Balance at beginning of period642 642 642 638 638 638 634 
Common shares issued, net— — — 
Balance at end of period643 642 642 642 638 643 638 
Additional paid-in capital
Balance at beginning of period1,950,782 1,935,514 1,921,487 1,889,683 1,864,468 1,889,683 1,793,781 
Amortization of share-based compensation14,663 14,662 13,160 28,050 11,862 70,535 64,152 
All other12,349 606 867 3,754 13,353 17,576 31,750 
Balance at end of period1,977,794 1,950,782 1,935,514 1,921,487 1,889,683 1,977,794 1,889,683 
Retained earnings
Balance at beginning of period11,829,322 11,420,686 11,132,268 11,021,006 10,705,025 11,021,006 9,426,299 
Cumulative effect of an accounting change (1)— — — (22,452)— (22,452)— 
Balance at beginning of period, as adjusted11,829,322 11,420,686 11,132,268 10,998,554 10,705,025 10,998,554 9,426,299 
Net income599,314 488,682 466,389 (88,674)312,768 1,465,711 1,693,300 
Amounts attributable to noncontrolling interests(55,770)(69,643)(167,568)232,791 13,616 (60,190)(56,981)
Preferred share dividends(10,403)(10,403)(10,403)(10,403)(10,403)(41,612)(41,612)
Balance at end of period12,362,463 11,829,322 11,420,686 11,132,268 11,021,006 12,362,463 11,021,006 
Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period386,357 349,488 21,944 212,091 211,714 212,091 (178,720)
Change in unrealized appreciation (decline) in value of available-for-sale investments63,008 19,800 305,338 (145,337)(24,707)242,809 372,664 
Change in foreign currency translation adjustments39,530 17,069 22,206 (44,810)25,084 33,995 18,147 
Balance at end of period488,895 386,357 349,488 21,944 212,091 488,895 212,091 
Common shares held in treasury, at cost
Balance at beginning of period(2,495,106)(2,494,505)(2,489,097)(2,406,047)(2,403,749)(2,406,047)(2,382,167)
Shares repurchased for treasury(8,803)(601)(5,408)(83,050)(2,298)(97,862)(23,880)
Balance at end of period(2,503,909)(2,495,106)(2,494,505)(2,489,097)(2,406,047)(2,503,909)(2,406,047)
Total shareholders’ equity available to Arch13,105,886 12,451,997 11,991,825 11,367,244 11,497,371 13,105,886 11,497,371 
Non-redeemable noncontrolling interests823,007 757,920 679,089 492,785 762,777 823,007 762,777 
Total shareholders’ equity$13,928,893 $13,209,917 $12,670,914 $11,860,029 $12,260,148 $13,928,893 $12,260,148 

(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).”
6

Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
(U.S. Dollars in thousands)Three Months EndedYear Ended
December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Operating Activities       
Net income (loss)$599,314 $488,682 $466,389 $(88,674)$312,768 $1,465,711 $1,693,300 
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses(366,942)(282,907)(557,740)362,964 (51,435)(844,625)(377,967)
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss(78,257)(95,078)96,350 29,034 24,899 (47,951)(14,013)
Amortization of intangible assets19,196 16,715 16,489 16,631 21,890 69,031 82,104 
Share-based compensation14,829 14,521 13,363 28,549 11,985 71,262 66,417 
Changes in:
Reserve for losses and loss adjustment expenses, net445,758 509,623 652,389 506,057 112,907 2,113,827 489,981 
Unearned premiums, net(53,030)103,052 2,957 392,802 (60,429)445,781 252,569 
Premiums receivable143,123 1,872 (45,181)(418,457)91,013 (318,643)(237,752)
Deferred acquisition costs(36,710)(14,801)(17,302)(75,135)(8,654)(143,948)(47,260)
Reinsurance balances payable(139,670)73,459 52,354 79,807 (32,770)65,950 182,132 
Other items, net7,444 194,732 31,058 (223,124)83,146 10,110 (41,052)
Net cash provided by operating activities555,055 1,009,870 711,126 610,454 505,320 2,886,505 2,048,459 
Investing Activities       
Purchases of fixed maturity investments(5,714,394)(8,640,034)(13,444,854)(11,965,995)(6,043,154)(39,765,277)(30,053,777)
Purchases of equity securities(239,162)(330,699)(264,466)(760,683)(287,916)(1,595,010)(811,967)
Purchases of other investments(966,841)(340,194)(273,221)(228,471)(455,620)(1,808,727)(1,470,545)
Proceeds from sales of fixed maturity investments5,404,479 7,711,837 13,109,907 11,723,123 5,888,011 37,949,346 28,595,865 
Proceeds from sales of equity securities415,471 151,447 314,045 266,301 58,688 1,147,264 429,818 
Proceeds from sales, redemptions and maturities of other investments237,771 319,619 256,057 216,131 382,042 1,029,578 1,209,559 
Proceeds from redemptions and maturities of fixed maturity investments225,842 276,052 170,884 198,356 248,546 871,134 643,265 
Net settlements of derivative instruments15,716 12,819 (45,017)195,488 (32,441)179,006 59,982 
Net (purchases) sales of short-term investments129,670 164,012 (1,311,586)(11,777)(89,245)(1,029,681)39,833 
Change in cash collateral related to securities lending— 26,614 (405)55,001 (69,183)81,210 (62,193)
Purchases of fixed assets(13,155)(9,030)(9,217)(8,470)(10,202)(39,872)(37,837)
Other69,795 (140,671)(33,821)42,500 (145,533)(62,197)(348,486)
Net cash provided by (used for) investing activities(434,808)(798,228)(1,531,694)(278,496)(556,007)(3,043,226)(1,806,483)
Financing Activities       
Purchases of common shares under share repurchase program(7,986)— — (75,486)— (83,472)(2,871)
Proceeds from common shares issued, net11,532 (5,134)(4,527)5,685 1,876 6,203 
Proceeds from borrowings— 13,875 988,618 16,300 — 1,018,793 200,083 
Repayments of borrowings(55,000)(139,000)(165,000)— (21,644)(359,000)(49,182)
Change in cash collateral related to securities lending— (26,614)405 (55,001)69,183 (81,210)62,193 
Change in third party investment in non-redeemable noncontrolling interests— — — (2,867)(75,056)(2,867)(75,056)
Change in third party investment in redeemable noncontrolling interests — — — — (8)— (161,882)
Dividends paid to redeemable noncontrolling interests(1,404)(1,001)(1,359)(1,181)(1,107)(4,945)(12,515)
Other18,449 57,891 (1,294)(1,331)(816)73,715 (6,023)
Preferred dividends paid(10,403)(10,403)(10,403)(10,403)(10,403)(41,612)(41,612)
Net cash provided by (used for) financing activities(44,812)(105,247)805,833 (134,496)(34,166)521,278 (80,662)
Effects of exchange rate changes on foreign currency cash and restricted cash28,136 15,895 8,981 (30,723)26,076 22,289 17,741 
Increase (decrease) in cash and restricted cash103,571 122,290 (5,754)166,739 (58,777)386,846 179,055 
Cash and restricted cash, beginning of period1,186,973 1,064,683 1,070,437 903,698 962,475 903,698 724,643 
Cash and restricted cash, end of period$1,290,544 $1,186,973 $1,064,683 $1,070,437 $903,698 $1,290,544 $903,698 
Income taxes paid (received)$56,126 $136,404 $3,023 $7,387 $62,398 $202,940 $109,463 
Interest paid$72,936 $3,141 $50,767 $6,647 $58,385 $133,491 $126,945 
Net cash provided by operating activities, excluding the ‘other’ segment$507,017 $963,654 $648,427 $585,956 $443,298 $2,705,054 $1,810,060 

7

Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview


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’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 core underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment and, accordingly, investment income is not allocated to each underwriting segment.

The Company determined its reportable operating 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.

Insurance 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: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).
•    Excess and surplus casualty: primary and excess casualty insurance coverages, including middle market energy business, and contract binding, which primarily provides casualty coverage through a network of appointed agents to small and medium risks.
•    Lenders products: collateral protection, debt cancellation and service contract reimbursement products to banks, credit unions, automotive dealerships and original equipment manufacturers and other specialty programs that pertain to automotive lending and leasing.
•    Professional lines: directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity and other financial related coverages for corporate, private equity, venture capital, real estate investment trust, limited partnership, financial institution and not-for-profit clients of all sizes and medical professional and general liability insurance coverages for the healthcare industry. The business is predominately written on a claims-made basis.
•    Programs: primarily package policies, underwriting workers’ compensation and umbrella liability business in support of desirable package programs, targeting program managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.
•    Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, war, specie and liability. Aviation and stand alone terrorism are also offered.
•    Travel, accident and health: specialty travel and accident and related insurance products for individual, group travelers, travel agents and suppliers, as well as accident and health, which provides accident, disability and medical plan insurance coverages for employer groups, medical plan members, students and other participant groups.
•    Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract and commercial surety coverages, including contract bonds (payment and performance bonds) primarily for medium and large contractors and commercial surety bonds for Fortune 1,000 companies and smaller transaction business programs.
8

Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview

Reinsurance Segment
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:

Casualty: provides coverage to ceding company clients on third party liability and workers’ compensation exposures from ceding company clients, primarily on a treaty basis. Exposures include, among others, executive assurance, professional liability, workers’ compensation, excess and umbrella liability, excess motor and healthcare business.
Marine and aviation: provides coverage for energy, hull, cargo, specie, liability and transit, and aviation business, including airline and general aviation risks. Business written may also include space business, which includes coverages for satellite assembly, launch and operation for commercial space programs.
Other specialty: provides coverage to ceding company clients for proportional motor and other lines including surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk.
Property catastrophe: provides protection for most catastrophic losses that are covered in the underlying policies written by reinsureds, including hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expense from a single occurrence of a covered peril exceed the retention specified in the contract.
Property excluding property catastrophe: provides coverage for both personal lines and commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on both a proportional and excess of loss basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.
Other. includes life reinsurance business on both a proportional and non-proportional basis, casualty clash business and, in limited instances, non-traditional business which is intended to provide insurers with risk management solutions that complement traditional reinsurance.
Mortgage Segment

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 Fannie Mae and Freddie Mac.

Corporate (Non-Underwriting) Segment

The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses, 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.

Other Segment

The ‘other’ segment includes the results of Watford. Subsidiaries of the Company act as Watford’s reinsurance and insurance underwriting managers while HPS Investment Partners, LLC manages Watford’s non-investment grade credit portfolios and the Company manages Watford’s investment grade portfolios, all under long term services agreements. Pursuant to generally accepted accounting principles, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, the Company consolidates the results of Watford in its consolidated financial statements, although it only owns approximately 13% of Watford’s common equity (listed on the Nasdaq Select Global Market under the ticker symbol “WTRE”). Watford has its own management and board of directors that is responsible for its own results and profitability. The portion of Watford’s earnings attributable to third party investors is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ Management measures segment performance for the ‘other’ segment based on net income or loss.

9

Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Three Months Ended
December 31, 2020
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$1,244,227 $537,912 $389,662 $2,170,831 $138,237 $2,256,514 
Premiums ceded(406,490)(47,018)(57,995)(510,533)(40,520)(498,499)
Net premiums written837,737 490,894 331,667 1,660,298 97,717 1,758,015 
Change in unearned premiums(89,299)93,180 4,120 8,001 45,029 53,030 
Net premiums earned748,438 584,074 335,787 1,668,299 142,746 1,811,045 
Other underwriting income (loss)— 2,687 4,667 7,354 498 7,852 
Losses and loss adjustment expenses(541,821)(392,734)(83,623)(1,018,178)(109,207)(1,127,385)
Acquisition expenses(101,055)(98,532)(25,936)(225,523)(29,305)(254,828)
Other operating expenses(118,206)(42,180)(42,024)(202,410)(13,287)(215,697)
Underwriting income (loss)$(12,644)$53,315 $188,871 229,542 (8,555)220,987 
Net investment income87,992 26,466 114,458 
Net realized gains (losses)289,817 63,516 353,333 
Equity in net income (loss) of investment funds accounted for using the equity method89,286 — 89,286 
Other income10,468 — 10,468 
Corporate expenses (2)(17,085)— (17,085)
Transaction costs and other (2)(4,210)(4,040)(8,250)
Amortization of intangible assets(19,196)— (19,196)
Interest expense(33,615)(4,804)(38,419)
Net foreign exchange gains (losses)(62,349)(9,860)(72,209)
Income (loss) before income taxes570,650 62,723 633,373 
Income tax (expense) benefit(33,700)(359)(34,059)
Net income (loss)536,950 62,364 599,314 
Dividends attributable to redeemable noncontrolling interests(1,124)(992)(2,116)
Amounts attributable to nonredeemable noncontrolling interests— (53,654)(53,654)
Net income (loss) available to Arch535,826 7,718 543,544 
Preferred dividends(10,403)— (10,403)
Net income (loss) available to Arch common shareholders$525,423 $7,718 $533,141 
Underwriting Ratios
Loss ratio72.4 %67.2 %24.9 %61.0 %76.5 %62.3 %
Acquisition expense ratio13.5 %16.9 %7.7 %13.5 %20.5 %14.1 %
Other operating expense ratio15.8 %7.2 %12.5 %12.1 %9.3 %11.9 %
Combined ratio101.7 %91.3 %45.1 %86.6 %106.3 %88.3 %
Net premiums written to gross premiums written67.3 %91.3 %85.1 %76.5 %70.7 %77.9 %
Total investable assets$26,856,295 $2,657,612 $29,513,907 
Total assets39,791,983 3,490,314 43,282,297 
Total liabilities26,789,149 2,505,707 29,294,856 
 
(1)    Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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.’ See ‘Comments on Regulation G’ for a further discussion of such items.
10

Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Three Months Ended
December 31, 2019
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$1,040,240 $432,249 $370,658 $1,842,071 $156,254 $1,942,151 
Premiums ceded(351,516)(93,380)(55,151)(498,971)(43,901)(486,698)
Net premiums written688,724 338,869 315,507 1,343,100 112,353 1,455,453 
Change in unearned premiums(42,927)50,116 32,148 39,337 21,092 60,429 
Net premiums earned645,797 388,985 347,655 1,382,437 133,445 1,515,882 
Other underwriting income (loss)— 2,051 4,138 6,189 568 6,757 
Losses and loss adjustment expenses(446,798)(260,182)(3,287)(710,267)(134,655)(844,922)
Acquisition expenses(96,437)(65,528)(35,597)(197,562)(24,326)(221,888)
Other operating expenses(116,443)(39,287)(36,395)(192,125)(12,283)(204,408)
Underwriting income (loss)$(13,881)$26,039 $276,514 288,672 (37,251)251,421 
Net investment income119,906 34,357 154,263 
Net realized gains (losses)31,836 8,994 40,830 
Equity in net income (loss) of investment funds accounted for using the equity method27,139 — 27,139 
Other income (loss)(1,317)— (1,317)
Corporate expenses (2)(17,756)— (17,756)
Transaction costs and other (2)(9,081)— (9,081)
Amortization of intangible assets(21,890)— (21,890)
Interest expense(23,641)(7,558)(31,199)
Net foreign exchange gains (losses)(38,031)(14,275)(52,306)
Income (loss) before income taxes355,837 (15,733)340,104 
Income tax (expense) benefit(27,336)— (27,336)
Net income (loss)328,501 (15,733)312,768 
Dividends attributable to redeemable noncontrolling interests— (1,131)(1,131)
Amounts attributable to nonredeemable noncontrolling interests— 14,747 14,747 
Net income (loss) available to Arch328,501 (2,117)326,384 
Preferred dividends(10,403)— (10,403)
Net income (loss) available to Arch common shareholders$318,098 $(2,117)$315,981 
Underwriting Ratios
Loss ratio69.2 %66.9 %0.9 %51.4 %100.9 %55.7 %
Acquisition expense ratio14.9 %16.8 %10.2 %14.3 %18.2 %14.6 %
Other operating expense ratio18.0 %10.1 %10.5 %13.9 %9.2 %13.5 %
Combined ratio102.1 %93.8 %21.6 %79.6 %128.3 %83.8 %
Net premiums written to gross premiums written66.2 %78.4 %85.1 %72.9 %71.9 %74.9 %
Total investable assets$22,285,676 $2,704,589 $24,990,265 
Total assets34,374,468 3,510,893 37,885,361 
Total liabilities22,977,636 2,592,173 25,569,809 
 
(1)    Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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.’ See ‘Comments on Regulation G’ for a further discussion of such items.
11

Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Year Ended
December 31, 2020
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$4,688,562 $3,472,086 $1,473,999 $9,632,691 $728,546 $10,088,068 
Premiums ceded(1,525,655)(1,014,716)(194,149)(2,732,564)(190,957)(2,650,352)
Net premiums written3,162,907 2,457,370 1,279,850 6,900,127 537,589 7,437,716 
Change in unearned premiums(291,487)(295,141)118,085 (468,543)22,762 (445,781)
Net premiums earned2,871,420 2,162,229 1,397,935 6,431,584 560,351 6,991,935 
Other underwriting income (loss)(31)4,454 20,316 24,739 2,045 26,784 
Losses and loss adjustment expenses(2,092,453)(1,628,320)(528,344)(4,249,117)(440,482)(4,689,599)
Acquisition expenses(418,483)(354,048)(134,240)(906,771)(98,071)(1,004,842)
Other operating expenses(489,153)(168,011)(162,202)(819,366)(55,810)(875,176)
Underwriting income (loss)$(128,700)$16,304 $593,465 481,069 (31,967)449,102 
Net investment income401,908 117,700 519,608 
Net realized gains (losses)813,781 9,679 823,460 
Equity in net income (loss) of investment funds accounted for using the equity method146,693 — 146,693 
Other income (loss)16,795 — 16,795 
Corporate expenses (2)(68,492)— (68,492)
Transaction costs and other (2)(9,456)(4,040)(13,496)
Amortization of intangible assets(69,031)— (69,031)
Interest expense(120,214)(23,242)(143,456)
Net foreign exchange gains (losses)(80,161)(3,473)(83,634)
Income (loss) before income taxes 1,512,892 64,657 1,577,549 
Income tax (expense) benefit(111,812)(26)(111,838)
Net income (loss)1,401,080 64,631 1,465,711 
Dividends attributable to redeemable noncontrolling interests(2,997)(4,117)(7,114)
Amounts attributable to nonredeemable noncontrolling interests— (53,076)(53,076)
Net income (loss) available to Arch1,398,083 7,438 1,405,521 
Preferred dividends(41,612)— (41,612)
Net income (loss) available to Arch common shareholders$1,356,471 $7,438 $1,363,909 
Underwriting Ratios
Loss ratio72.9 %75.3 %37.8 %66.1 %78.6 %67.1 %
Acquisition expense ratio14.6 %16.4 %9.6 %14.1 %17.5 %14.4 %
Other operating expense ratio17.0 %7.8 %11.6 %12.7 %10.0 %12.5 %
Combined ratio104.5 %99.5 %59.0 %92.9 %106.1 %94.0 %
Net premiums written to gross premiums written67.5 %70.8 %86.8 %71.6 %73.8 %73.7 %
 
(1)    Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. 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.’ See ‘Comments on Regulation G’ for a further discussion of such items.
12

Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Year Ended
December 31, 2019
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$3,907,993 $2,323,223 $1,466,265 $7,695,645 $754,881 $8,138,960 
Premiums ceded(1,266,267)(720,500)(204,509)(2,189,440)(222,019)(2,099,893)
Net premiums written2,641,726 1,602,723 1,261,756 5,506,205 532,862 6,039,067 
Change in unearned premiums(244,646)(136,334)104,584 (276,396)23,827 (252,569)
Net premiums earned2,397,080 1,466,389 1,366,340 5,229,809 556,689 5,786,498 
Other underwriting income (loss)— 6,444 16,005 22,449 2,412 24,861 
Losses and loss adjustment expenses(1,615,475)(1,011,329)(53,513)(2,680,317)(453,135)(3,133,452)
Acquisition expenses(361,614)(239,032)(134,319)(734,965)(105,980)(840,945)
Other operating expenses(454,770)(141,484)(153,092)(749,346)(51,651)(800,997)
Underwriting income (loss)$(34,779)$80,988 $1,041,421 1,087,630 (51,665)1,035,965