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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, 2021
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:  001-16209

 acgl-20210331_g1.jpg
ARCH CAPITAL GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda98-0374481
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
Waterloo House, Ground Floor
100 Pitts Bay Road, PembrokeHM 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 classTrading Symbol (s)Name of each exchange on which registered
Common shares, $0.0011 par value per shareACGLNASDAQ 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 April 30, 2021, there were 403,619,081 common shares, $0.0011 par value per share, of the registrant outstanding.


ARCH CAPITAL GROUP LTD.
 
INDEX TO FORM 10-Q
 
ARCH CAPITAL
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2021 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;
our ability to consummate acquisitions and integrate the business 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 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;
material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;
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;
the adequacy of the Company’s loss reserves;
severity and/or frequency of losses;
greater frequency or severity of unpredictable natural and man-made catastrophic events;
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;
the effect of contagious disease (including COVID-19) on our business;
acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;
ARCH CAPITAL
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2021 FIRST QUARTER FORM 10-Q

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;
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, 2020, as well as the other factors set forth in our other documents on file with the SEC, and management’s response to any of the aforementioned factors.
 
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 

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2021 FIRST QUARTER FORM 10-Q

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 Page No.
  
  
 
March 31, 2021 (unaudited) and December 31, 2020
  
For the three month periods ended March 31, 2021 and 2020 (unaudited)
 
For the three month periods ended March 31, 2021 and 2020 (unaudited)
  
 
For the three month periods ended March 31, 2021 and 2020 (unaudited)
  
 
For the three month periods ended March 31, 2021 and 2020 (unaudited)
  
Notes to Consolidated Financial Statements (unaudited)

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2021 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, 2021, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and the consolidated statements of cash flows for the three-month periods ended March 31, 2021 and 2020, 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) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, 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 26, 2021, 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, 2020, 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 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 6, 2021
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2021 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,
2021
December 31,
2020
Assets  
Investments:  
Fixed maturities available for sale, at fair value (amortized cost: $18,447,720 and $18,143,305; net of allowance for credit losses: $3,830 and $2,397 )
$18,723,035 $18,717,825 
Short-term investments available for sale, at fair value (amortized cost: $1,269,312 and $1,924,292; net of allowance for credit losses: $0 and $0)
1,269,631 1,924,922 
Collateral received under securities lending, at fair value (amortized cost: $143,886 and $301,089)
143,894 301,096 
Equity securities, at fair value1,532,906 1,444,830 
Other investments (portion measured at fair value: $3,935,354 and $3,824,796)
4,435,354 4,324,796 
Investments accounted for using the equity method2,256,327 2,047,889 
Total investments28,361,147 28,761,358 
Cash941,951 906,448 
Accrued investment income101,108 103,299 
Securities pledged under securities lending, at fair value (amortized cost: $142,129 and $294,493)
140,949 294,912 
Investment in operating affiliates739,783 129,291 
Premiums receivable (net of allowance for credit losses: $36,111 and $37,781)
2,618,175 2,064,586 
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $10,872 and $11,636)
4,041,076 4,500,802 
Contractholder receivables (net of allowance for credit losses: $5,853 and $8,638)
1,919,655 1,986,924 
Ceded unearned premiums1,406,489 1,234,075 
Deferred acquisition costs919,740 790,708 
Receivable for securities sold199,424 92,743 
Goodwill and intangible assets679,509 692,863 
Other assets2,135,261 1,724,288 
Total assets$44,204,267 $43,282,297 
Liabilities
Reserve for losses and loss adjustment expenses$16,443,952 $16,513,929 
Unearned premiums5,549,127 4,838,965 
Reinsurance balances payable919,125 683,263 
Contractholder payables1,925,508 1,995,562 
Collateral held for insured obligations222,245 215,581 
Senior notes2,861,417 2,861,113 
Revolving credit agreement borrowings155,687 155,687 
Securities lending payable143,886 301,089 
Payable for securities purchased386,453 218,779 
Other liabilities1,565,861 1,510,888 
Total liabilities30,173,261 29,294,856 
Commitments and Contingencies
Redeemable noncontrolling interests57,670 58,548 
Shareholders' Equity
Non-cumulative preferred shares780,000 780,000 
Common shares ($0.0011 par, shares issued: 581,226,408 and 579,000,841)
645 643 
Additional paid-in capital2,014,741 1,977,794 
Retained earnings12,790,216 12,362,463 
Accumulated other comprehensive income (loss), net of deferred income tax205,827 488,895 
Common shares held in treasury, at cost (shares: 177,913,031 and 172,280,199)
(2,694,957)(2,503,909)
Total shareholders' equity available to Arch13,096,472 13,105,886 
Non-redeemable noncontrolling interests876,864 823,007 
Total shareholders' equity13,973,336 13,928,893 
Total liabilities, noncontrolling interests and shareholders' equity$44,204,267 $43,282,297 
See Notes to Consolidated Financial Statements

ARCH CAPITAL
6
2021 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,
 20212020
Revenues  
Net premiums earned$1,948,422 $1,744,444 
Net investment income98,856 145,153 
Net realized gains (losses)142,461 (366,960)
Other underwriting income6,110 6,852 
Equity in net income (loss) of investment funds accounted for using the equity method71,686 (4,209)
Other income (loss)(1,741)32 
Total revenues2,265,794 1,525,312 
Expenses
Losses and loss adjustment expenses1,203,100 1,115,419 
Acquisition expenses304,481 247,283 
Other operating expenses261,033 234,544 
Corporate expenses25,384 20,796 
Amortization of intangible assets14,402 16,631 
Interest expense38,346 32,555 
Net foreign exchange (gains) losses(20,063)(72,671)
Total expenses1,826,683 1,594,557 
Income (loss) before income taxes and income (loss) from operating affiliates439,111 (69,245)
Income tax expense(38,860)(27,945)
Income (loss) from operating affiliates75,457 8,516 
Net income (loss)$475,708 $(88,674)
Net (income) loss attributable to noncontrolling interests(37,552)232,791 
Net income (loss) available to Arch438,156 144,117 
Preferred dividends(10,403)(10,403)
Net income (loss) available to Arch common shareholders$427,753 $133,714 
Net income per common share and common share equivalent  
Basic$1.07 $0.33 
Diluted$1.05 $0.32 
Weighted average common shares and common share equivalents outstanding
Basic400,807,895 403,892,161 
Diluted409,223,253 414,033,570 



See Notes to Consolidated Financial Statements

ARCH CAPITAL
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2021 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,
 20212020
Comprehensive Income
Net income (loss)$475,708 $(88,674)
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(261,750)(57,287)
Reclassification of net realized (gains) losses, included in net income (loss)2,697 (121,229)
Foreign currency translation adjustments(28,584)(44,689)
Comprehensive income (loss)188,071 (311,879)
Net (income) loss attributable to noncontrolling interests(37,552)232,791 
Other comprehensive (income) loss attributable to noncontrolling interests4,570 33,058 
Comprehensive income (loss) available to Arch$155,089 $(46,030)



See Notes to Consolidated Financial Statements

ARCH CAPITAL
8
2021 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,
 20212020
Non-cumulative preferred shares
Balance at beginning and end of period$780,000 $780,000 
Common shares
Balance at beginning of period643 638 
Common shares issued, net2 4 
Balance at end of period645 642 
Additional paid-in capital
Balance at beginning of period1,977,794 1,889,683 
Amortization of share-based compensation40,573 28,050 
Other changes(3,626)3,754 
Balance at end of period2,014,741 1,921,487 
Retained earnings
Balance at beginning of period12,362,463 11,021,006 
Cumulative effect of an accounting change (1) (22,452)
Balance at beginning of period, as adjusted12,362,463 10,998,554 
Net income (loss)475,708 (88,674)
Net (income) loss attributable to noncontrolling interests(37,552)232,791 
Preferred share dividends(10,403)(10,403)
Balance at end of period12,790,216 11,132,268 
Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period488,895 212,091 
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
Balance at beginning of period501,295 258,486 
Unrealized holding gains (losses) during period, net of reclassification adjustment(259,053)(178,516)
Unrealized holding gains (losses) during period attributable to noncontrolling interests4,469 33,179 
Balance at end of period246,711 113,149 
Foreign currency translation adjustments, net of deferred income tax:
Balance at beginning of period(12,400)(46,395)
Foreign currency translation adjustments(28,584)(44,689)
Foreign currency translation adjustments attributable to noncontrolling interests100 (121)
Balance at end of period(40,884)(91,205)
Balance at end of period205,827 21,944 
Common shares held in treasury, at cost
Balance at beginning of period(2,503,909)(2,406,047)
Shares repurchased for treasury(191,048)(83,050)
Balance at end of period(2,694,957)(2,489,097)
Total shareholders’ equity available to Arch13,096,472 11,367,244 
Non-redeemable noncontrolling interests876,864 492,785 
Total shareholders’ equity$13,973,336 $11,860,029 

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

See Notes to Consolidated Financial Statements

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2021 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,
 20212020
Operating Activities  
Net income (loss)$475,708 $(88,674)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized (gains) losses(161,007)362,964 
Equity in net (income) or loss of investment funds accounted for using the equity method and other income or loss(135,939)29,034 
Amortization of intangible assets14,402 16,631 
Share-based compensation40,812 28,549 
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable560,153 506,057 
Unearned premiums, net of ceded unearned premiums560,035 392,802 
Premiums receivable(608,250)(418,457)
Deferred acquisition costs(126,701)(75,135)
Reinsurance balances payable240,206 79,807 
Other items, net(96,574)(223,124)
Net cash provided by (used for) operating activities762,845 610,454 
Investing Activities  
Purchases of fixed maturity investments(11,530,968)(11,965,995)
Purchases of equity securities(309,419)(760,683)
Purchases of other investments(430,961)(228,471)
Proceeds from sales of fixed maturity investments10,917,134 11,723,123 
Proceeds from sales of equity securities284,986 266,301 
Proceeds from sales, redemptions and maturities of other investments323,591 216,131 
Proceeds from redemptions and maturities of fixed maturity investments421,042 198,356 
Net settlements of derivative instruments47,660 195,488 
Net (purchases) sales of short-term investments589,175 (11,777)
Change in cash collateral related to securities lending 55,001 
Purchase of operating affiliate(546,349) 
Purchases of fixed assets(12,490)(8,470)
Other