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 September 30, 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 5.45% Series F preferred share	ACGLO	NASDAQ	Stock Market
Depositary shares, each representing a 1/1000th interest in a 4.55% Series G preferred share	ACGLN	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 November 1, 2021, there were 386,133,743 common shares, $0.0011 par value per share, of the registrant outstanding.

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	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69
Item 4.	Controls and Procedures	69
	PART II
	Other Information	70
Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	71
Item 4.	Mine Safety Disclosures	71
Item 5.	Other Information	71
Item 6.	Exhibits	72
	Signatures	73

ARCH CAPITAL  1 2021 THIRD 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  2 2021 THIRD 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. 

ARCH CAPITAL  3 2021 THIRD QUARTER FORM 10-Q

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

	Page No.
Report of Independent Registered Public Accounting Firm	5
Consolidated Balance Sheets
September 30, 2021 (unaudited) and December 31, 2020	6
Consolidated Statements of Income
For the three and nine month periods ended September 30, 2021 and 2020 (unaudited)	7
Consolidated Statements of Comprehensive Income
For the three and nine month periods ended September 30, 2021 and 2020 (unaudited)	8
Consolidated Statements of Changes in Shareholders’ Equity
For the three and nine month periods ended September 30, 2021 and 2020 (unaudited)	9
Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2021 and 2020 (unaudited)	10
Notes to Consolidated Financial Statements (unaudited)
Note 1 - Basis of Presentation and Recent Accounting Pronouncements	11
Note 2 - Acquisitions	11
Note 3 - Share Transactions	12
Note 4 - Earnings Per Common Share	13
Note 5 - Segment Information	14
Note 6 - Reserve for Losses and Loss Adjustment Expenses	19
Note 7 - Allowance for Expected Credit Losses	21
Note 8 - Investment Information	23
Note 9 - Fair Value	30
Note 10 - Derivative Instruments	36
Note 11 - Commitments and Contingencies	37
Note 12 - Variable Interest Entities and Noncontrolling Interests	37
Note 13 - Other Comprehensive Income (Loss)	40
Note 14 - Income Taxes	41
Note 15 - Legal Proceedings	41
Note 16 - Transactions with Related Parties	41
Note 17 - Subsequent Event	41

ARCH CAPITAL  4 2021 THIRD 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 September 30, 2021, and the related consolidated statements of income, comprehensive income, and changes in shareholders’ equity for the three-month and nine-month periods ended September 30, 2021 and 2020, and the consolidated statements of cash flows for the nine-month periods ended September 30, 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

November 4, 2021

ARCH CAPITAL  5 2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	(Unaudited)
	September 30, 2021		December 31, 2020
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $16,629,621 and $18,143,305; net of allowance for credit losses: $2,111 and $2,397 )	$	16,768,363	$	18,717,825
Short-term investments available for sale, at fair value (amortized cost: $3,070,120 and $1,924,292; net of allowance for credit losses: $0 and $0)	3,069,965		1,924,922
Collateral received under securities lending, at fair value (amortized cost: $— and $301,089)	—		301,096
Equity securities, at fair value	1,790,640		1,444,830
Other investments (portion measured at fair value: $2,043,970 and $3,824,796)	2,043,970		4,324,796
Investments accounted for using the equity method	2,741,293		2,047,889
Total investments	26,414,231		28,761,358
Cash	1,137,721		906,448
Accrued investment income	75,832		103,299
Securities pledged under securities lending, at fair value (amortized cost: $— and $294,493)	—		294,912
Investment in operating affiliates	1,111,825		129,291
Premiums receivable (net of allowance for credit losses: $38,715 and $37,781)	2,807,720		2,064,586
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $12,831 and $11,636)	5,358,852		4,500,802
Contractholder receivables (net of allowance for credit losses: $3,484 and $8,638)	1,824,990		1,986,924
Ceded unearned premiums	1,824,910		1,234,075
Deferred acquisition costs	893,665		790,708
Receivable for securities sold	84,019		92,743
Goodwill and intangible assets	963,322		692,863
Other assets	2,286,649		1,724,288
Total assets	$	44,783,736	$	43,282,297
Liabilities
Reserve for losses and loss adjustment expenses	$	17,331,047	$	16,513,929
Unearned premiums	6,165,114		4,838,965
Reinsurance balances payable	1,403,929		683,263
Contractholder payables	1,828,474		1,995,562
Collateral held for insured obligations	254,259		215,581
Senior notes	2,724,149		2,861,113
Revolving credit agreement borrowings	—		155,687
Securities lending payable	—		301,089
Payable for securities purchased	357,531		218,779
Other liabilities	1,321,470		1,510,888
Total liabilities	31,385,973		29,294,856
Commitments and Contingencies
Redeemable noncontrolling interests	10,237		58,548
Shareholders' Equity
Non-cumulative preferred shares	830,000		780,000
Common shares ($0.0011 par, shares issued: 582,908,723 and 579,000,841)	648		643
Additional paid-in capital	2,061,906		1,977,794
Retained earnings	13,842,787		12,362,463
Accumulated other comprehensive income (loss), net of deferred income tax	49,184		488,895
Common shares held in treasury, at cost (shares: 195,650,971 and 172,280,199)	(3,396,999)		(2,503,909)
Total shareholders' equity available to Arch	13,387,526		13,105,886
Non-redeemable noncontrolling interests	—		823,007
Total shareholders' equity	13,387,526		13,928,893
Total liabilities, noncontrolling interests and shareholders' equity	$	44,783,736	$	43,282,297

See Notes to Consolidated Financial Statements

ARCH CAPITAL 6 2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	(Unaudited)				(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Revenues
Net premiums earned	$	1,929,337	$	1,771,092	5,998,668		5,180,890
Net investment income	88,195		128,512		298,664		405,150
Net realized gains (losses)	(25,040)		280,499		320,328		470,127
Other underwriting income	7,274		5,413		18,913		18,932
Equity in net income (loss) of investment funds accounted for using the equity method	105,398		126,735		299,270		57,407
Other income (loss)	(3,960)		—		1,151		65
Total revenues	2,101,204		2,312,251		6,936,994		6,132,571
Expenses
Losses and loss adjustment expenses	1,226,019		1,216,273		3,588,950		3,562,214
Acquisition expenses	306,015		247,942		945,639		750,014
Other operating expenses	230,832		215,686		736,808		659,479
Corporate expenses	19,672		17,937		61,007		56,653
Amortization of intangible assets	20,135		16,715		49,823		49,835
Interest expense	33,176		41,343		107,222		105,037
Net foreign exchange (gains) losses	(36,078)		44,885		(38,366)		11,425
Total expenses	1,799,771		1,800,781		5,451,083		5,194,657
Income (loss) before income taxes and income (loss) from operating affiliates	301,433		511,470		1,485,911		937,914
Income tax expense	(4,137)		(23,707)		(94,176)		(77,779)
Income (loss) from operating affiliates	124,119		919		224,052		6,262
Net income (loss)	$	421,415	$	488,682	$	1,615,787	$	866,397
Net (income) loss attributable to noncontrolling interests	(1,473)		(69,643)		(82,203)		(4,420)
Net income (loss) available to Arch	419,942		419,039		1,533,584		861,977
Preferred dividends	(16,090)		(10,403)		(38,159)		(31,209)
<