acgl-20210331

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

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 April 30, 2021, there were 403,619,081 common shares, $0.0011 par value per share, of the registrant outstanding.

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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	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 4.	Controls and Procedures	61

	PART II
	Other Information	62
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64
	Signatures	65


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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;


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•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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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS


						Page No.

Report of Independent Registered Public Accounting Firm						5

Consolidated Balance Sheets
March 31, 2021 (unaudited) and December 31, 2020						6

Consolidated Statements of Income
For the three month periods ended March 31, 2021 and 2020 (unaudited)						7

Consolidated Statements of Comprehensive Income
For the three month periods ended March 31, 2021 and 2020 (unaudited)						8

Consolidated Statements of Changes in Shareholders’ Equity
For the three month periods ended March 31, 2021 and 2020 (unaudited)						9

Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2021 and 2020 (unaudited)						10

Notes to Consolidated Financial Statements (unaudited)
Note 1 - Basis of Presentation and Recent Accounting Pronouncements						11

Note 2 - Share Transactions						11
Note 3 - Earnings Per Common Share						12
Note 4 - Segment Information						13
Note 5 - Reserve for Losses and Loss Adjustment Expenses						16
Note 6 - Allowance for Expected Credit Losses						17
Note 7 - Investment Information						19
Note 8 - Fair Value						25
Note 9 - Derivative Instruments						30
Note 10 - Commitments and Contingencies						31

Note 11 - Variable Interest Entities and Noncontrolling Interests						31
Note 12 - Other Comprehensive Income (Loss)						35

Note 13 - Income Taxes						36
Note 14 - Legal Proceedings						36
Note 15 - Transactions with Related Parties						36


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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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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 value	1,532,906		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 method	2,256,327		2,047,889
Total investments	28,361,147		28,761,358

Cash	941,951		906,448
Accrued investment income	101,108		103,299
Securities pledged under securities lending, at fair value (amortized cost: $142,129 and $294,493)	140,949		294,912

Investment in operating affiliates	739,783		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 premiums	1,406,489		1,234,075
Deferred acquisition costs	919,740		790,708
Receivable for securities sold	199,424		92,743
Goodwill and intangible assets	679,509		692,863

Other assets	2,135,261		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 premiums	5,549,127		4,838,965
Reinsurance balances payable	919,125		683,263
Contractholder payables	1,925,508		1,995,562
Collateral held for insured obligations	222,245		215,581
Senior notes	2,861,417		2,861,113
Revolving credit agreement borrowings	155,687		155,687
Securities lending payable	143,886		301,089
Payable for securities purchased	386,453		218,779
Other liabilities	1,565,861		1,510,888
Total liabilities	30,173,261		29,294,856

Commitments and Contingencies
Redeemable noncontrolling interests	57,670		58,548

Shareholders' Equity
Non-cumulative preferred shares	780,000		780,000

Common shares ($0.0011 par, shares issued: 581,226,408 and 579,000,841)	645		643
Additional paid-in capital	2,014,741		1,977,794
Retained earnings	12,790,216		12,362,463
Accumulated other comprehensive income (loss), net of deferred income tax	205,827		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 Arch	13,096,472		13,105,886
Non-redeemable noncontrolling interests	876,864		823,007
Total shareholders' equity	13,973,336		13,928,893
Total liabilities, noncontrolling interests and shareholders' equity	$	44,204,267	$	43,282,297

See Notes to Consolidated Financial Statements


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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(U.S. dollars in thousands, except share data)


	(Unaudited)
	Three Months Ended
	March 31,
	2021		2020
Revenues


Net premiums earned	$	1,948,422	$	1,744,444
Net investment income	98,856		145,153
Net realized gains (losses)	142,461		(366,960)





Other underwriting income	6,110		6,852
Equity in net income (loss) of investment funds accounted for using the equity method	71,686		(4,209)
Other income (loss)	(1,741)		32
Total revenues	2,265,794		1,525,312

Expenses
Losses and loss adjustment expenses	1,203,100		1,115,419
Acquisition expenses	304,481		247,283
Other operating expenses	261,033		234,544
Corporate expenses	25,384		20,796
Amortization of intangible assets	14,402		16,631
Interest expense	38,346		32,555
Net foreign exchange (gains) losses	(20,063)		(72,671)
Total expenses	1,826,683		1,594,557

Income (loss) before income taxes and income (loss) from operating affiliates	439,111		(69,245)
Income tax expense	(38,860)		(27,945)
Income (loss) from operating affiliates	75,457		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 Arch	438,156		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
Basic	400,807,895		403,892,161
Diluted	409,223,253		414,033,570

See Notes to Consolidated Financial Statements


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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)


	(Unaudited)
	Three Months Ended
	March 31,
	2021		2020
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 interests	4,570		33,058
Comprehensive income (loss) available to Arch	$	155,089	$	(46,030)

See Notes to Consolidated Financial Statements


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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)


	(Unaudited)
	Three Months Ended
	March 31,
	2021		2020
Non-cumulative preferred shares



Balance at beginning and end of period	$	780,000	$	780,000







Common shares
Balance at beginning of period	643		638
Common shares issued, net	2		4
Balance at end of period	645		642

Additional paid-in capital
Balance at beginning of period	1,977,794		1,889,683



Amortization of share-based compensation	40,573		28,050



Other changes	(3,626)		3,754
Balance at end of period	2,014,741		1,921,487

Retained earnings
Balance at beginning of period	12,362,463		11,021,006
Cumulative effect of an accounting change (1)	—		(22,452)
Balance at beginning of period, as adjusted	12,362,463		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 period	12,790,216		11,132,268

Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period	488,895		212,091
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
Balance at beginning of period	501,295		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 interests	4,469		33,179

Balance at end of period	246,711		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 interests	100		(121)
Balance at end of period	(40,884)		(91,205)
Balance at end of period	205,827		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 Arch	13,096,472		11,367,244
Non-redeemable noncontrolling interests	876,864		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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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)


	(Unaudited)
	Three Months Ended
	March 31,
	2021		2020
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 assets	14,402		16,631
Share-based compensation	40,812		28,549
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	560,153		506,057
Unearned premiums, net of ceded unearned premiums	560,035		392,802
Premiums receivable	(608,250)		(418,457)
Deferred acquisition costs	(126,701)		(75,135)
Reinsurance balances payable	240,206		79,807
Other items, net	(96,574)		(223,124)
Net cash provided by (used for) operating activities	762,845		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 investments	10,917,134		11,723,123
Proceeds from sales of equity securities	284,986		266,301
Proceeds from sales, redemptions and maturities of other investments	323,591		216,131
Proceeds from redemptions and maturities of fixed maturity investments	421,042		198,356
Net settlements of derivative instruments	47,660		195,488

Net (purchases) sales of short-term investments	589,175		(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	(246,590)