acgl-20220930

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, 2022



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 October 31, 2022, there were 369,873,027 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	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 4.	Controls and Procedures	67

	PART II
	Other Information	67
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
Item 3.	Defaults Upon Senior Securities	68
Item 4.	Mine Safety Disclosures	68
Item 5.	Other Information	68
Item 6.	Exhibits	69
	Signatures	70


ARCH CAPITAL			1			2022 THIRD QUARTER FORM 10-Q

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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 and addition 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			2022 THIRD QUARTER FORM 10-Q

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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 replacement of LIBOR with alternative benchmark rates;

•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 new guidance implementing the Tax Cuts and Jobs Act of 2017 and the possible implementation of the Organization for Economic Cooperation and Development (“OECD”) Pillar I and Pillar II initiatives; 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, 2021, 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			2022 THIRD QUARTER FORM 10-Q

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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS


						Page No.

Report of Independent Registered Public Accounting Firm						5

Consolidated Balance Sheets
September 30, 2022 and December 31, 2021 (unaudited)						6

Consolidated Statements of Income
For the three and nine month periods ended September 30, 2022 and 2021 (unaudited)						7

Consolidated Statements of Comprehensive Income
For the three and nine month periods ended September 30, 2022 and 2021 (unaudited)						8

Consolidated Statements of Changes in Shareholders’ Equity
For the three and nine month periods ended September 30, 2022 and 2021 (unaudited)						9

Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2022 and 2021 (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						13
Note 4 - Segment Information						14
Note 5 - Reserve for Losses and Loss Adjustment Expenses						19
Note 6 - Allowance for Expected Credit Losses						22
Note 7 - Investment Information						24
Note 8 - Fair Value						30
Note 9 - Derivative Instruments						36
Note 10 - Commitments and Contingencies						37

Note 11 - Variable Interest Entities and Noncontrolling Interests						37
Note 12 - Other Comprehensive Income (Loss)						39

Note 13 - Income Taxes						40
Note 14 - Legal Proceedings						40
Note 15 - Transactions with Related Parties						40


ARCH CAPITAL			4			2022 THIRD QUARTER FORM 10-Q

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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 September 30, 2022, 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, 2022 and 2021, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2022 and 2021, 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, 2021, 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 25, 2022, 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, 2021, 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, New York

November 3, 2022


ARCH CAPITAL			5			2022 THIRD QUARTER FORM 10-Q

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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


	(Unaudited)
	September 30, 2022		December 31, 2021
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $19,913,055 and $17,973,823; net of allowance for credit losses: $45,993 and $2,883)	$	18,120,727	$	17,998,109
Short-term investments available for sale, at fair value (amortized cost: $1,941,071 and $1,734,738; net of allowance for credit losses: $0 and $0)	1,940,857		1,734,716

Equity securities, at fair value	809,869		1,804,170

Other investments, at fair value	1,578,751		1,973,550
Investments accounted for using the equity method	3,565,946		3,077,611
Total investments	26,016,150		26,588,156

Cash	813,583		858,668
Accrued investment income	116,263		85,453


Investment in operating affiliates	891,212		1,135,655
Premiums receivable (net of allowance for credit losses: $38,229 and $39,958)	3,579,380		2,633,280
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $17,366 and $13,230)	6,356,456		5,880,735
Contractholder receivables (net of allowance for credit losses: $2,360 and $3,437)	1,735,730		1,828,691
Ceded unearned premiums	2,115,539		1,729,455
Deferred acquisition costs	1,122,711		901,841
Receivable for securities sold	27,042		60,179
Goodwill and intangible assets	806,655		944,983

Other assets	2,756,383		2,453,849
Total assets	$	46,337,104	$	45,100,945

Liabilities
Reserve for losses and loss adjustment expenses	$	19,288,291	$	17,757,156
Unearned premiums	7,271,279		6,011,942
Reinsurance balances payable	1,669,592		1,583,253
Contractholder payables	1,738,089		1,832,127
Collateral held for insured obligations	254,720		242,352
Senior notes	2,725,153		2,724,394


Payable for securities purchased	174,769		64,850
Other liabilities	1,411,193		1,329,742
Total liabilities	34,533,086		31,545,816

Commitments and Contingencies
Redeemable noncontrolling interests	8,908		9,233

Shareholders' Equity
Non-cumulative preferred shares	830,000		830,000

Common shares ($0.0011 par, shares issued: 587,134,047 and 583,289,850)	652		648
Additional paid-in capital	2,186,599		2,085,075
Retained earnings	15,042,561		14,455,868
Accumulated other comprehensive income (loss), net of deferred income tax	(1,891,827)		(64,600)
Common shares held in treasury, at cost (shares: 217,812,057 and 204,365,956)	(4,372,875)		(3,761,095)
Total shareholders' equity available to Arch	11,795,110		13,545,896


Total liabilities, noncontrolling interests and shareholders' equity	$	46,337,104	$	45,100,945

See Notes to Consolidated Financial Statements


ARCH CAPITAL			6			2022 THIRD QUARTER FORM 10-Q

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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,
	2022		2021		2022		2021
Revenues


Net premiums earned	$	2,470,750	$	1,929,337	6,917,158		5,998,668
Net investment income	128,640		88,195		315,468		298,664
Net realized gains (losses)	(183,673)		(25,040)		(742,666)		320,328





Other underwriting income	3,077		7,274		11,944		18,913
Equity in net income (loss) of investment funds accounted for using the equity method	(18,861)		105,398		75,505		299,270
Other income (loss)	(13,684)		(3,960)		(34,486)		1,151
Total revenues	2,386,249		2,101,204		6,542,923		6,936,994

Expenses
Losses and loss adjustment expenses	1,682,696		1,226,019		3,786,187		3,588,950
Acquisition expenses	447,587		306,015		1,239,065		945,639
Other operating expenses	274,747		230,832		842,082		736,808
Corporate expenses	17,710		19,672		77,662		61,007
Amortization of intangible assets	26,104		20,135		80,478		49,823
Interest expense	33,063		33,176		98,566		107,222
Net foreign exchange (gains) losses	(90,509)		(36,078)		(182,129)		(38,366)
Total expenses	2,391,398		1,799,771		5,941,911		5,451,083

Income (loss) before income taxes and income (loss) from operating affiliates	(5,149)		301,433		601,012		1,485,911
Income tax (expense) benefit	14,900		(4,137)		(19,042)		(94,176)
Income (loss) from operating affiliates	8,507		124,119		37,665		224,052
Net income (loss)	$	18,258	$	421,415	$	619,635	$	1,615,787
Net (income) loss attributable to noncontrolling interests	(1,157)		(1,473)		(2,390)		(82,203)
Net income (loss) available to Arch	17,101		419,942		617,245		1,533,584
Preferred dividends	(10,184)		(16,090)		(30,552)		(38,159)
Loss on redemption of preferred shares	—		(15,101)		—		(15,101)
Net income (loss) available to Arch common shareholders	$	6,917	$	388,751	$	586,693	$	1,480,324

Net income per common share and common share equivalent
Basic	$	0.02	$	1.00	$	1.59	$	3.74
Diluted	$	0.02	$	0.98	$	1.55	$	3.66

Weighted average common shares and common share equivalents outstanding
Basic	365,190,527		389,274,220		369,525,348		395,899,591
Diluted	373,727,277		397,903,347		378,373,180		404,260,485

See Notes to Consolidated Financial Statements


ARCH CAPITAL			7			2022 THIRD QUARTER FORM 10-Q

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)


	(Unaudited)				(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Comprehensive Income
Net income (loss)	$	18,258	$	421,415	$	619,635	$	1,615,787
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	(609,759)		(95,923)		(1,892,119)		(279,102)

Reclassification of net realized (gains) losses, included in net income (loss)	46,585		(62,654)		206,573		(120,504)
Foreign currency translation adjustments	(70,388)		(31,710)		(141,681)		(54,089)
Comprehensive income (loss)	(615,304)		231,128		(1,207,592)		1,162,092
Net (income) loss attributable to noncontrolling interests	(1,157)		(1,473)		(2,390)		(82,203)
Other comprehensive (income) loss attributable to noncontrolling interests	—		9,423		—		13,983
Comprehensive income (loss) available to Arch	$	(616,461)	$	239,078	$	(1,209,982)	$	1,093,872

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)				(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Non-cumulative preferred shares
Balance at beginning of period	$	830,000	$	1,280,000	$	830,000	$	780,000
Preferred shares issued	—		—		—		500,000
Preferred shares redeemed	—		(450,000)		—		(450,000)
Balance at beginning and end of period	$	830,000	$	830,000	$	830,000	$	830,000







Common shares
Balance at beginning of period	652		647		648		643
Common shares issued, net	—		1		4		5
Balance at end of period	652		648		652		648

Additional paid-in capital
Balance at beginning of period	2,170,661		2,028,919		2,085,075		1,977,794



Amortization of share-based compensation	13,518		14,216		80,023		71,279
Issue costs on preferred shares	—		—		—		(14,179)
Reversal of issue costs on preferred shares redeemed	—		15,101		—		15,101

Other changes	2,420		3,670		21,501		11,911
Balance at end of period	2,186,599		2,061,906		2,186,599		2,061,906

Retained earnings
Balance at beginning of period	15,035,644		13,454,036		14,455,868		12,362,463


Net income (loss)	18,258		421,415		619,635		1,615,787
Net (income) loss attributable to noncontrolling interests	(1,157)		(1,473)		(2,390)		(82,203)
Preferred share dividends	(10,184)		(16,090)		(30,552)		(38,159)
Loss on redemption of preferred shares	—		(15,101)		—		(15,101)
Balance at end of period	15,042,561		13,842,787		15,042,561		13,842,787

Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period	(1,258,265)		230,048		(64,600)		488,895
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
Balance at beginning of period	(1,108,886)		264,702		13,486		501,295


Unrealized holding gains (losses) during period, net of reclassification adjustment	(563,174)		(158,577)		(1,685,546)		(399,606)
Unrealized holding gains (losses) during period attributable to noncontrolling interests	—		10,752		—		15,188

Balance at end of period	(1,672,060)		116,877		(1,672,060)		116,877
Foreign currency translation adjustments, net of deferred income tax:
Balance at beginning of period	(149,379)		(34,654)		(78,086)		(12,400)
Foreign currency translation adjustments	(70,388)		(31,710)		(141,681)		(54,089)
Foreign currency translation adjustments attributable to noncontrolling interests	—		(1,329)		—		(1,204)
Balance at end of period	(219,767)		(67,693)		(219,767)		(67,693)
Balance at end of period	(1,891,827)