EX-99.2 3 ex-992supplement93021.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 September 30, 2021
 
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@archgroup.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, 2020 is derived from or agrees to audited financial information. During the 2021 first quarter, the Company changed its presentation of ‘income (loss) from operating affiliates’ on its consolidated statements of income for all periods presented to reclass such item from ‘other income (loss)’. The Company also changed its presentation of ‘investment in operating affiliates’ on its consolidated balance sheet for all periods presented to reclass such item from ‘other assets’. 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 consolidated the results of Watford Holdings Ltd. (“Watford”) in its financial statements.Watford was considered a variable interest entity and the Company concluded that it was the primary beneficiary of Watford. As such, 100% of the results of Watford were included in the Company’s consolidated financial statements through June 30, 2021. The portion of Watford’s earnings owned by third parties was recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ In addition, through June 30, 2021 the Company reflected Watford’s redeemable preference shares in the mezzanine section of the Company’s consolidated balance sheets as ‘redeemable noncontrolling interests’. In July 2021, the Company announced the completion of the previously disclosed acquisition of Watford by Greysbridge. Based on the governing documents of Greysbridge, the Company has concluded that, while it will retain significant influence over Watford, Watford no longer constitutes a variable interest entity of which the Company is the primary beneficiary. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Watford in its consolidated financial statements and footnotes.

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 EndedNine Months Ended
September 30,September 30,
20212020Change20212020Change
Underwriting results:
Gross premiums written$3,207,415 $2,556,914 25.4 %$9,602,213 $7,461,860 28.7 %
Net premiums written2,075,929 1,726,828 20.2 %6,629,208 5,239,829 26.5 %
Net premiums earned1,929,337 1,625,061 18.7 %5,666,700 4,763,285 19.0 %
Underwriting income (loss) (2)173,745 104,877 65.7 %768,129 251,527 205.4 %
Loss ratio63.5 %67.7 %(4.2)58.8 %67.8 %(9.0)
Acquisition expense ratio15.9 %13.8 %2.1 15.6 %14.3 %1.3 
Other operating expense ratio12.0 %12.4 %(0.4)12.4 %13.0 %(0.6)
Combined ratio91.4 %93.9 %(2.5)86.8 %95.1 %(8.3)
Net investment income$88,195 $99,857 (11.7)%$256,354 $313,916 (18.3)%
Per diluted share$0.22 $0.24 (8.3)%$0.63 $0.77 (18.2)%
Net income available to Arch common shareholders$388,751 $408,636 (4.9)%$1,480,324 $830,768 78.2 %
Per diluted share$0.98 $1.00 (2.0)%$3.66 $2.02 81.2 %
After-tax operating income available to Arch common shareholders (2)$294,688 $120,321 144.9 %$941,673 $326,691 188.2 %
Per diluted share$0.74 $0.29 155.2 %$2.33 $0.80 191.3 %
Comprehensive income (loss) available to Arch$239,078 $455,907 (47.6)%$1,093,872 $1,036,243 5.6 %
Net cash provided by operating activities$1,014,979 $963,654 5.3 %$2,580,697 $2,198,037 17.4 %
Weighted average common shares and common share equivalents outstanding — diluted397,903,347 409,194,657 (2.8)%404,260,485 410,314,897 (1.5)%
Financial measures:      
Change in book value per common share during period1.3 %4.1 %(2.8)7.0 %8.8 %(1.8)
Annualized net income return on average common equity12.3 %14.3 %(2.0)15.9 %9.9 %6.0 
Annualized operating return on average common equity (2)9.3 %4.2 %5.1 10.1 %3.9 %6.2 
Total return on investments (3)0.01 %2.30 %-229 bps1.50 %5.19 %-369 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 EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2021202120212020202020212020
Revenues       
Net premiums earned$1,929,337 $2,120,909 $1,948,422 $1,811,045 $1,771,092 $5,998,668 $5,180,890 
Net investment income88,195 111,613 98,856 114,458 128,512 298,664 405,150 
Net realized gains (losses)(25,040)202,907 142,461 353,333 280,499 320,328 470,127 
Other underwriting income7,274 5,529 6,110 7,852 5,413 18,913 18,932 
Equity in net income (loss) of investment funds accounted for using the equity method105,398 122,186 71,686 89,286 126,735 299,270 57,407 
Other income (loss)(3,960)6,852 (1,741)(36)— 1,151 65 
Total revenues2,101,204 2,569,996 2,265,794 2,375,938 2,312,251 6,936,994 6,132,571 
Expenses
Losses and loss adjustment expenses(1,226,019)(1,159,831)(1,203,100)(1,127,385)(1,216,273)(3,588,950)(3,562,214)
Acquisition expenses(306,015)(335,143)(304,481)(254,828)(247,942)(945,639)(750,014)
Other operating expenses(230,832)(244,943)(261,033)(215,697)(215,686)(736,808)(659,479)
Corporate expenses(19,672)(15,951)(25,384)(25,335)(17,937)(61,007)(56,653)
Amortization of intangible assets(20,135)(15,286)(14,402)(19,196)(16,715)(49,823)(49,835)
Interest expense(33,176)(35,700)(38,346)(38,419)(41,343)(107,222)(105,037)
Net foreign exchange gains (losses)36,078 (17,775)20,063 (72,209)(44,885)38,366 (11,425)
Total expenses(1,799,771)(1,824,629)(1,826,683)(1,753,069)(1,800,781)(5,451,083)(5,194,657)
Income (loss) before income taxes and income (loss) from operating affiliates301,433 745,367 439,111 622,869 511,470 1,485,911 937,914 
Income tax expense(4,137)(51,179)(38,860)(34,059)(23,707)(94,176)(77,779)
Income (loss) from operating affiliates124,119 24,476 75,457 10,504 919 224,052 6,262 
Net income (loss)421,415 718,664 475,708 599,314 488,682 1,615,787 866,397 
Net (income) loss attributable to noncontrolling interests(1,473)(43,178)(37,552)(55,770)(69,643)(82,203)(4,420)
Net income (loss) attributable to Arch419,942 675,486 438,156 543,544 419,039 1,533,584 861,977 
Preferred dividends(16,090)(11,666)(10,403)(10,403)(10,403)(38,159)(31,209)
Loss on redemption of preferred shares(15,101)— — — — (15,101)— 
Net income (loss) available to Arch common shareholders$388,751 $663,820 $427,753 $533,141 $408,636 $1,480,324 $830,768 
Comprehensive income (loss) available to Arch$239,078 $699,705 $155,089 $646,082 $455,907 $1,093,872 $1,036,243 
Net income (loss) per common share and common share equivalent
Basic$1.00 $1.67 $1.07 $1.32 $1.01 $3.74 $2.06 
Diluted$0.98 $1.63 $1.05 $1.30 $1.00 $3.66 $2.02 
Weighted average common shares and common share equivalents outstanding
Basic389,274,220 397,743,402 400,807,895 403,005,335 402,850,485 395,899,591 403,081,266 
Diluted397,903,347 406,485,994 409,223,253 410,281,852 409,194,657 404,260,485 410,314,897 



4

Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets

(U.S. Dollars in thousands, except share data)September 30,June 30,March 31,December 31,September 30,
20212021202120202020
Assets     
Investments:     
Fixed maturities available for sale, at fair value$16,768,363 $18,073,779 $18,723,035 $18,717,825 $18,452,888 
Short-term investments available for sale, at fair value3,069,965 2,248,613 1,269,631 1,924,922 2,039,097 
Collateral received under securities lending, at fair value— 172,116 143,894 301,096 64,259 
Equity securities, at fair value1,790,640 1,693,552 1,532,906 1,444,830 1,502,015 
Other investments2,043,970 4,571,497 4,435,354 4,324,796 3,749,575 
Investments accounted for using the equity method2,741,293 2,539,124 2,256,327 2,047,889 1,883,702 
Total investments26,414,231 29,298,681 28,361,147 28,761,358 27,691,536 
Cash1,137,721 1,234,059 941,951 906,448 976,398 
Accrued investment income75,832 96,546 101,108 103,299 106,940 
Securities pledged under securities lending, at fair value— 168,548 140,949 294,912 62,749 
Investment in operating affiliates1,111,825 731,810 739,783 129,291 115,411 
Premiums receivable2,807,720 2,866,578 2,618,175 2,064,586 2,225,311 
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses5,358,852 4,314,515 4,041,076 4,500,802 4,621,937 
Contractholder receivables1,824,990 1,882,948 1,919,655 1,986,924 2,185,614 
Ceded unearned premiums1,824,910 1,541,093 1,406,489 1,234,075 1,450,200 
Deferred acquisition costs893,665 1,013,657 919,740 790,708 750,901 
Receivable for securities sold84,019 309,234 199,424 92,743 158,674 
Goodwill and intangible assets963,322 667,153 679,509 692,863 713,777 
Other assets2,286,649 2,357,064 2,135,261 1,724,288 1,656,587 
Total assets$44,783,736 $46,481,886 $44,204,267 $43,282,297 $42,716,035 
Liabilities     
Reserve for losses and loss adjustment expenses$17,331,047 $17,196,648 $16,443,952 $16,513,929 $15,900,526 
Unearned premiums6,165,114 6,011,369 5,549,127 4,838,965 5,062,052 
Reinsurance balances payable1,403,929 1,079,106 919,125 683,263 873,067 
Contractholder payables1,828,474 1,887,418 1,925,508 1,995,562 2,191,515 
Collateral held for insured obligations254,259 235,618 222,245 215,581 221,957 
Senior notes2,724,149 2,861,728 2,861,417 2,861,113 2,860,811 
Revolving credit agreement borrowings— 155,687 155,687 155,687 210,687 
Securities lending payable— 172,109 143,886 301,089 64,251 
Payable for securities purchased357,531 586,881 386,453 218,779 382,236 
Other liabilities1,321,470 1,332,843 1,565,861 1,510,888 1,681,181 
Total liabilities31,385,973 31,519,407 30,173,261 29,294,856 29,448,283 
Redeemable noncontrolling interests10,237 57,533 57,670 58,548 57,835 
Shareholders’ equity     
Non-cumulative preferred shares830,000 1,280,000 780,000 780,000 780,000 
Common shares648 647 645 643 642 
Additional paid-in capital2,061,906 2,028,919 2,014,741 1,977,794 1,950,782 
Retained earnings13,842,787 13,454,036 12,790,216 12,362,463 11,829,322 
Accumulated other comprehensive income (loss), net of deferred income tax49,184 230,048 205,827 488,895 386,357 
Common shares held in treasury, at cost(3,396,999)(3,007,578)(2,694,957)(2,503,909)(2,495,106)
Total shareholders’ equity available to Arch13,387,526 13,986,072 13,096,472 13,105,886 12,451,997 
Non-redeemable noncontrolling interests— 918,874 876,864 823,007 757,920 
Total shareholders’ equity13,387,526 14,904,946 13,973,336 13,928,893 13,209,917 
Total liabilities, noncontrolling interests and shareholders’ equity$44,783,736 $46,481,886 $44,204,267 $43,282,297 $42,716,035 
Common shares and common share equivalents outstanding, net of treasury shares387,257,752 396,771,251 403,313,377 406,720,642 406,018,958 
Book value per common share (1)$32.43 $32.02 $30.54 $30.31 $28.75 
(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 EndedNine Months Ended
 September 30,June 30,March 31,December 31,September 30,September 30,September 30,
 2021202120212020202020212020
Non-cumulative preferred shares       
Balance at beginning of period$1,280,000 $780,000 $780,000 $780,000 $780,000 $780,000 $780,000 
Preferred shares issued— 500,000 — — — 500,000 — 
Preferred shares redeemed(450,000)— — — — (450,000)— 
Balance at beginning and end of period$830,000 $1,280,000 $780,000 $780,000 $780,000 $830,000 $780,000 
Common shares
Balance at beginning of period647 645 643 642 642 643 638 
Common shares issued, net— 
Balance at end of period648 647 645 643 642 648 642 
Additional paid-in capital
Balance at beginning of period2,028,919 2,014,741 1,977,794 1,950,782 1,935,514 1,977,794 1,889,683 
Issue costs on preferred shares— (14,179)— — — (14,179)— 
Reversal of original issue costs on redeemed preferred shares15,101 — — — — 15,101 — 
Amortization of share-based compensation14,216 16,490 40,573 14,663 14,662 71,279 55,872 
All other3,670 11,867 (3,626)12,349 606 11,911 5,227 
Balance at end of period2,061,906 2,028,919 2,014,741 1,977,794 1,950,782 2,061,906 1,950,782 
Retained earnings
Balance at beginning of period13,454,036 12,790,216 12,362,463 11,829,322 11,420,686 12,362,463 11,021,006 
Cumulative effect of an accounting change (1)— — — — — — (22,452)
Balance at beginning of period, as adjusted13,454,036 12,790,216 12,362,463 11,829,322 11,420,686 12,362,463 10,998,554 
Net income421,415 718,664 475,708 599,314 488,682 1,615,787 866,397 
Amounts attributable to noncontrolling interests(1,473)(43,178)(37,552)(55,770)(69,643)(82,203)(4,420)
Preferred share dividends(16,090)(11,666)(10,403)(10,403)(10,403)(38,159)(31,209)
Loss on redemption of preferred shares(15,101)— — — — (15,101)— 
Balance at end of period13,842,787 13,454,036 12,790,216 12,362,463 11,829,322 13,842,787 11,829,322 
Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period230,048 205,827 488,895 386,357 349,488 488,895 212,091 
Change in unrealized appreciation (decline) in value of available-for-sale investments(147,825)17,991 (254,584)63,008 19,800 (384,418)179,801 
Change in foreign currency translation adjustments(33,039)6,230 (28,484)39,530 17,069 (55,293)(5,535)
Balance at end of period49,184 230,048 205,827 488,895 386,357 49,184 386,357 
Common shares held in treasury, at cost
Balance at beginning of period(3,007,578)(2,694,957)(2,503,909)(2,495,106)(2,494,505)(2,503,909)(2,406,047)
Shares repurchased for treasury(389,421)(312,621)(191,048)(8,803)(601)(893,090)(89,059)
Balance at end of period(3,396,999)(3,007,578)(2,694,957)(2,503,909)(2,495,106)(3,396,999)(2,495,106)
Total shareholders’ equity available to Arch13,387,526 13,986,072 13,096,472 13,105,886 12,451,997 13,387,526 12,451,997 
Non-redeemable noncontrolling interests— 918,874 876,864 823,007 757,920 — 757,920 
Total shareholders’ equity$13,387,526 $14,904,946 $13,973,336 $13,928,893 $13,209,917 $13,387,526 $13,209,917 

(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 EndedNine Months Ended
September 30,June 30,March 31,December 31,September 30,September 30,September 30,
2021202120212020202020212020
Operating Activities       
Net income (loss)$421,415 $718,664 $475,708 $599,314 $488,682 $1,615,787 $866,397 
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses11,736 (218,042)(161,007)(366,942)(282,907)(367,313)(477,683)
Equity in net (income) or loss of investment. funds accounted for using the equity method and other income or loss(191,622)(45,089)(135,939)(78,257)(95,078)(372,650)30,306 
Amortization of intangible assets20,135 15,286 14,402 19,196 16,715 49,823 49,835 
Share-based compensation14,739 16,752 40,812 14,829 14,521 72,303 56,433 
Changes in:
Reserve for losses and loss adjustment expenses, net599,706 388,352 560,153 445,758 509,623 1,548,211 1,668,069 
Unearned premiums, net146,592 278,615 560,035 (53,030)103,052 985,242 498,811 
Premiums receivable(65,707)(173,141)(608,250)143,123 1,872 (847,098)(461,766)
Deferred acquisition costs(33,073)(88,192)(126,701)(36,710)(14,801)(247,966)(107,238)
Reinsurance balances payable287,110 91,255 240,206 (139,670)73,459 618,571 205,620 
Other items, net(196,052)(134,733)(96,574)7,444 194,732 (427,359)2,666 
Net cash provided by operating activities1,014,979 849,727 762,845 555,055 1,009,870 2,627,551 2,331,450 
Investing Activities       
Purchases of fixed maturity investments(6,315,639)(12,023,416)(11,530,968)(5,714,394)(8,640,034)(29,870,023)(34,050,883)
Purchases of equity securities(358,177)(311,355)(309,419)(239,162)(330,699)(978,951)(1,355,848)
Purchases of other investments(316,922)(602,173)(430,961)(966,841)(340,194)(1,350,056)(841,886)
Proceeds from sales of fixed maturity investments6,937,404 12,213,254 10,917,134 5,404,479 7,711,837 30,067,792 32,544,867 
Proceeds from sales of equity securities153,343 257,304 284,986 415,471 151,447 695,633 731,793 
Proceeds from sales, redemptions and maturities of other investments715,370 448,958 323,591 237,771 319,619 1,487,919 791,807 
Proceeds from redemptions and maturities of fixed maturity investments428,576 384,794 421,042 225,842 276,052 1,234,412 645,292 
Net settlements of derivative instruments(85,116)(30,374)47,660 15,716 12,819 (67,830)163,290 
Net (purchases) sales of short-term investments(794,712)(967,261)589,175 129,670 164,012 (1,172,798)(1,159,351)
Change in cash collateral related to securities lending826 (826)— — 26,614 — 81,210 
Purchase of operating affiliate, net(207,567)— (546,349)— — (753,916)— 
Impact of the deconsolidation of a variable interest entity(349,202)— — — — (349,202)— 
Purchases of fixed assets(10,822)(11,095)(12,490)(13,155)(9,030)(34,407)(26,717)
Other(156,968)41,701 (246,590)69,795 (140,671)(361,857)(131,992)
Net cash provided by (used for) investing activities(359,606)(600,489)(493,189)(434,808)(798,228)(1,453,284)(2,608,418)
Financing Activities       
Proceeds from issuance of preferred shares, net— 485,821 — — — 485,821 — 
Redemption of preferred shares(450,000)— — — — (450,000)— 
Purchases of common shares under share repurchase program(386,882)(306,049)(179,266)(7,986)— (872,197)(75,486)
Proceeds from common shares issued, net96 10,193 (10,008)11,532 281 (9,656)
Proceeds from borrowings— — — — 13,875 — 1,018,793 
Repayments of borrowings— — — (55,000)(139,000)— (304,000)
Change in cash collateral related to securities lending(826)826 — — (26,614)— (81,210)
Change in third party investment in non-redeemable noncontrolling interests— — 15,971 — — 15,971 (2,867)
Dividends paid to redeemable noncontrolling interests— (959)(948)(1,404)(1,001)(1,907)(3,541)
Other(49,391)29,587 (1,948)18,449 57,891 (21,752)55,266 
Preferred dividends paid(17,291)(10,402)(10,403)(10,403)(10,403)(38,096)(31,209)
Net cash provided by (used for) financing activities(904,294)209,017 (186,602)(44,812)(105,247)(881,879)566,090 
Effects of exchange rate changes on foreign currency cash and restricted cash(20,633)(7,306)(6,084)28,136 15,895 (34,023)(5,847)
Increase (decrease) in cash and restricted cash(269,554)450,949 76,970 103,571 122,290 258,365 283,275 
Cash and restricted cash, beginning of period1,818,463 1,367,514 1,290,544 1,186,973 1,064,683 1,290,544 903,698 
Cash and restricted cash, end of period$1,548,909 $1,818,463 $1,367,514 $1,290,544 $1,186,973 $1,548,909 $1,186,973 
Income taxes paid (received)$61,343 $133,997 $7,099 $56,126 $136,404 $202,439 $146,814 
Interest paid$1,104 $73,711 $988 $72,936 $3,141 $75,803 $60,555 
Net cash provided by operating activities, excluding the ‘other’ segment$1,014,979 $809,790 $755,928 $507,017 $963,654 $2,580,697 $2,198,037 
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 Chief Executive Officer of Arch Capital, the Chief Financial Officer and Treasurer of Arch Capital and the President and Chief Underwriting 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, income or loss from operating affiliates and income taxes. Such amounts exclude the results of the ‘other’ segment.

Other Segment

Through June 30, 2021, the ‘other’ segment included the results of Watford. Pursuant to GAAP, Watford was considered a variable interest entity and the Company concluded that it was the primary beneficiary of Watford. As such, the Company consolidated the results of Watford in its consolidated financial statements through June 30, 2021. The portion of Watford’s earnings attributable to third party investors was 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. In July 2021, the Company announced the completion of the previously disclosed acquisition of Watford by Greysbridge. Based on the governing documents of Greysbridge, the Company has concluded that, while it retains significant influence over Watford, Watford no longer constitutes a variable interest entity of which the Company is the primary beneficiary. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Watford in its consolidated financial statements.

9

Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Three Months Ended
September 30, 2021
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$1,596,619 $1,251,760 $360,934 $3,207,415 $— $3,207,415 
Premiums ceded(442,806)(630,371)(60,207)(1,131,486)— (1,131,486)
Net premiums written1,153,813 621,389 300,727 2,075,929 — 2,075,929 
Change in unearned premiums(215,143)57,313 11,238 (146,592)— (146,592)
Net premiums earned938,670 678,702 311,965 1,929,337 — 1,929,337 
Other underwriting income (loss)— 3,293 3,981 7,274 — 7,274 
Losses and loss adjustment expenses(668,630)(545,846)(11,543)(1,226,019)— (1,226,019)
Acquisition expenses(152,467)(129,450)(24,098)(306,015)— (306,015)
Other operating expenses(138,931)(45,647)(46,254)(230,832)— (230,832)
Underwriting income (loss)$(21,358)$(38,948)$234,051 173,745 — 173,745 
Net investment income88,195 — 88,195 
Net realized gains (losses)(25,040)— (25,040)
Equity in net income (loss) of investment funds accounted for using the equity method105,398 — 105,398 
Other income (loss)(3,960)— (3,960)
Corporate expenses (2)(18,636)— (18,636)
Transaction costs and other (2)(1,036)— (1,036)
Amortization of intangible assets(20,135)— (20,135)
Interest expense(33,176)— (33,176)
Net foreign exchange gains (losses)36,078 — 36,078 
Income (loss) before income taxes and income (loss) from operating affiliates301,433 — 301,433 
Income tax (expense) benefit(4,137)— (4,137)
Income (loss) from operating affiliates124,119 — 124,119 
Net income (loss)421,415 — 421,415 
Dividends attributable to redeemable noncontrolling interests(1,473)— (1,473)
Net income (loss) available to Arch419,942 — 419,942 
Preferred dividends(16,090)— (16,090)
Loss on redemption of preferred shares(15,101)— (15,101)
Net income (loss) available to Arch common shareholders$388,751 $— $388,751 
Underwriting Ratios
Loss ratio71.2 %80.4 %3.7 %63.5 %— %63.5 %
Acquisition expense ratio16.2 %19.1 %7.7 %15.9 %— %15.9 %
Other operating expense ratio14.8 %6.7 %14.8 %12.0 %— %12.0 %
Combined ratio102.2 %106.2 %26.2 %91.4 %— %91.4 %
Net premiums written to gross premiums written72.3 %49.6 %83.3 %64.7 %— %64.7 %
Total investable assets$27,278,440 $— $27,278,440 
Total assets44,783,736 — 44,783,736 
Total liabilities31,385,973 — 31,385,973 
(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
September 30, 2020
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$1,206,328 $1,004,590 $346,248 $2,556,914 $197,480 $2,681,032 
Premiums ceded(382,167)(400,388)(47,783)(830,086)(50,164)(806,888)
Net premiums written824,161 604,202 298,465 1,726,828 147,316 1,874,144 
Change in unearned premiums(105,007)(49,704)52,944 (101,767)(1,285)(103,052)
Net premiums earned719,154 554,498 351,409 1,625,061 146,031 1,771,092 
Other underwriting income (loss)(31)298 4,600 4,867 546 5,413 
Losses and loss adjustment expenses(525,321)(422,084)(153,055)(1,100,460)(115,813)(1,216,273)
Acquisition expenses(102,420)(85,388)(35,716)(223,524)(24,418)(247,942)
Other operating expenses(122,541)(41,818)(36,708)(201,067)(14,619)(215,686)
Underwriting income (loss)$(31,159)$5,506 $130,530 104,877 (8,273)96,604 
Net investment income99,857 28,655 128,512 
Net realized gains (losses)210,984 69,515 280,499 
Equity in net income (loss) of investment funds accounted for using the equity method126,735 — 126,735 
Other income (loss)— — — 
Corporate expenses (2)(16,263)— (16,263)
Transaction costs and other (2)(1,674)— (1,674)
Amortization of intangible assets(16,715)— (16,715)
Interest expense(36,224)(5,119)(41,343)
Net foreign exchange gains (losses)(38,681)(6,204)(44,885)
Income (loss) before income taxes and income (loss) from operating affiliates432,896 78,574 511,470 
Income tax (expense) benefit(23,638)(69)(23,707)
Income (loss) from operating affiliates919 — 919 
Net income (loss)410,177 78,505 488,682 
Dividends attributable to redeemable noncontrolling interests(882)(993)(1,875)
Amounts attributable to nonredeemable noncontrolling interests— (67,768)(67,768)
Net income (loss) available to Arch409,295 9,744 419,039 
Preferred dividends(10,403)— (10,403)
Net income (loss) available to Arch common shareholders$398,892 $9,744 $408,636 
Underwriting Ratios
Loss ratio73.0 %76.1 %43.6 %67.7 %79.3 %68.7 %
Acquisition expense ratio14.2 %15.4 %10.2 %13.8 %16.7 %14.0 %
Other operating expense ratio17.0 %7.5 %10.4 %12.4 %10.0 %12.2 %
Combined ratio104.2 %99.0 %64.2 %93.9 %106.0 %94.9 %
Net premiums written to gross premiums written68.3 %60.1 %86.2 %67.5 %74.6 %69.9 %
Total investable assets$25,724,501 $2,693,452 $28,417,953 
Total assets39,105,137 3,610,898 42,716,035 
Total liabilities26,747,061 2,701,222 29,448,283 
 
(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)Nine Months Ended
September 30, 2021
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$4,381,372 $4,080,840 $1,143,691 $9,602,213 $457,465 $9,890,912 
Premiums ceded(1,269,165)(1,535,607)(171,923)(2,973,005)(102,763)(2,907,002)
Net premiums written3,112,207 2,545,233 971,768 6,629,208 354,702 6,983,910 
Change in unearned premiums(488,636)(484,607)10,735 (962,508)(22,734)(985,242)
Net premiums earned2,623,571 2,060,626 982,503 5,666,700 331,968 5,998,668 
Other underwriting income (loss)— 3,148 15,026 18,174 739 18,913 
Losses and loss adjustment expenses(1,750,257)(1,494,539)(85,112)(3,329,908)(259,042)(3,588,950)
Acquisition expenses(417,541)(381,060)(84,297)(882,898)(62,741)(945,639)
Other operating expenses(409,386)(150,856)(143,697)(703,939)(32,869)(736,808)
Underwriting income (loss)$46,387 $37,319 $684,423 768,129 (21,945)746,184 
Net investment income256,354 42,310 298,664 
Net realized gains (losses)239,690 80,638 320,328 
Equity in net income (loss) of investment funds accounted for using the equity method299,270 — 299,270 
Other income (loss)1,151 — 1,151 
Corporate expenses (2)(59,279)— (59,279)
Transaction costs and other (2)(793)(935)(1,728)
Amortization of intangible assets(48,925)(898)(49,823)
Interest expense(98,812)(8,410)(107,222)
Net foreign exchange gains (losses)39,691 (1,325)38,366 
Income (loss) before income taxes and income (loss) from operating affiliates1,396,476 89,435 1,485,911 
Income tax (expense) benefit(93,942)(234)(94,176)
Income (loss) from operating affiliates224,052 — 224,052 
Net income (loss)1,526,586 89,201 1,615,787 
Dividends attributable to redeemable noncontrolling interests(1,936)(1,953)(3,889)
Amounts attributable to nonredeemable noncontrolling interests— (78,314)(78,314)
Net income (loss) available to Arch1,524,650 8,934 1,533,584 
Preferred dividends(38,159)— (38,159)
Loss on redemption of preferred shares(15,101)— (15,101)
Net income (loss) available to Arch common shareholders$1,471,390 $8,934 $1,480,324 
Underwriting Ratios
Loss ratio66.7 %72.5 %8.7 %58.8 %78.0 %59.8 %
Acquisition expense ratio15.9 %18.5 %8.6 %15.6 %18.9 %15.8 %
Other operating expense ratio15.6 %7.3 %14.6 %12.4 %9.9 %12.3 %
Combined ratio98.2 %98.3 %31.9 %86.8 %106.8 %87.9 %