UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended | September 30, 20202021 | |
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| Or |
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| ☐ | 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)
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| Bermuda | 98-0374481 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| 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:
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| 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%5.45% Series EF preferred share
| | ACGLPACGLO | | NASDAQ | Stock Market |
Depositary shares, each representing a 1/1000th interest in a 5.45%4.55% Series FG preferred share
| | ACGLOACGLN | | 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 30, 2020,November 1, 2021, there were 406,026,570386,133,743 common shares, $0.0011 par value per share, of the registrant outstanding.
ARCH CAPITAL GROUP LTD.
INDEX TO FORM 10-Q
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| PART I | | |
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| Item 2. | | | |
| Item 3. | | | |
| Item 4. | | | |
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| PART II | | |
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| Item 1. | | | |
| Item 1A. | | | |
| Item 2. | | | |
| Item 3. | | | |
| Item 4. | | | |
| Item 5. | | | |
| Item 6. | | | |
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| ARCH CAPITAL | 1 | 20202021 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;
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| 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;
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ARCH CAPITAL | 2 | 2020 THIRD QUARTER FORM 10-Q |
•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, 2019, “ITEM 1A—Risk Factors” of this Form 10-Q2020, 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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| ARCH CAPITAL | 3 | 20202021 THIRD QUARTER FORM 10-Q |
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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September 30, 20202021 (unaudited) and December 31, 20192020 | | |
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For the three and nine month periods ended September 30, 20202021 and 20192020 (unaudited) | | |
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For the three and nine month periods ended September 30, 20202021 and 20192020 (unaudited) | | |
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For the three and nine month periods ended September 30, 20202021 and 20192020 (unaudited) | | |
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For the nine month periods ended September 30, 20202021 and 20192020 (unaudited) | | |
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| Notes to Consolidated Financial Statements (unaudited) | | |
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| ARCH CAPITAL | 4 | 20202021 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, 2020,2021, 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, 20202021 and 2019,2020, and the consolidated statements of cash flows for the nine-month periods ended September 30, 20202021 and 2019,2020, 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, 2019,2020, 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 28, 2020,26, 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, 2019,2020, 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 5, 20204, 2021
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| ARCH CAPITAL | 5 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
| | | (Unaudited) | | (Unaudited) |
| | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Assets | Assets | | | | Assets | | | |
| Investments: | Investments: | | | | Investments: | | | |
| Fixed maturities available for sale, at fair value (amortized cost: $17,955,515 and $16,598,808; net of allowance for credit losses: $3,933 at September 30, 2020) | $ | 18,452,888 | | | $ | 16,894,526 | | |
| Short-term investments available for sale, at fair value (amortized cost: $2,038,244 and $957,283; net of allowance for credit losses: $0 at September 30, 2020) | 2,039,097 | | | 956,546 | | |
| Collateral received under securities lending, at fair value (amortized cost: $64,251 and $388,366) | 64,259 | | | 388,376 | | |
| 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 ) | | 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) | | 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) | | Collateral received under securities lending, at fair value (amortized cost: $— and $301,089) | — | | | 301,096 | |
| Equity securities, at fair value | Equity securities, at fair value | 1,502,015 | | | 838,925 | | Equity securities, at fair value | 1,790,640 | | | 1,444,830 | |
| | Investments accounted for using the fair value option | 3,749,575 | | | 3,663,477 | | |
| Other investments (portion measured at fair value: $2,043,970 and $3,824,796) | | 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 | Investments accounted for using the equity method | 1,883,702 | | | 1,660,396 | | Investments accounted for using the equity method | 2,741,293 | | | 2,047,889 | |
| Total investments | Total investments | 27,691,536 | | | 24,402,246 | | Total investments | 26,414,231 | | | 28,761,358 | |
| | Cash | Cash | 976,398 | | | 726,230 | | Cash | 1,137,721 | | | 906,448 | |
| Accrued investment income | Accrued investment income | 106,940 | | | 117,937 | | Accrued investment income | 75,832 | | | 103,299 | |
| Securities pledged under securities lending, at fair value (amortized cost: $62,662 and $378,738) | 62,749 | | | 379,868 | | |
| Securities pledged under securities lending, at fair value (amortized cost: $— and $294,493) | | Securities pledged under securities lending, at fair value (amortized cost: $— and $294,493) | — | | | 294,912 | |
| | Premiums receivable (net of allowance for credit losses: $37,100 and $21,003) | 2,225,311 | | | 1,778,717 | | |
| Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $13,994 and $1,364) | 4,621,937 | | | 4,346,816 | | |
| Contractholder receivables (net of allowance for credit losses: $5,902 and $0) | 2,185,614 | | | 2,119,460 | | |
| Investment in operating affiliates | | Investment in operating affiliates | 1,111,825 | | | 129,291 | |
| Premiums receivable (net of allowance for credit losses: $38,715 and $37,781) | | 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) | | 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) | | Contractholder receivables (net of allowance for credit losses: $3,484 and $8,638) | 1,824,990 | | | 1,986,924 | |
| Ceded unearned premiums | Ceded unearned premiums | 1,450,200 | | | 1,234,683 | | Ceded unearned premiums | 1,824,910 | | | 1,234,075 | |
| Deferred acquisition costs | Deferred acquisition costs | 750,901 | | | 633,400 | | Deferred acquisition costs | 893,665 | | | 790,708 | |
| Receivable for securities sold | Receivable for securities sold | 158,674 | | | 24,133 | | Receivable for securities sold | 84,019 | | | 92,743 | |
| Goodwill and intangible assets | Goodwill and intangible assets | 713,777 | | | 738,083 | | Goodwill and intangible assets | 963,322 | | | 692,863 | |
| | Other assets | Other assets | 1,771,998 | | | 1,383,788 | | Other assets | 2,286,649 | | | 1,724,288 | |
| Total assets | Total assets | $ | 42,716,035 | | | $ | 37,885,361 | | Total assets | $ | 44,783,736 | | | $ | 43,282,297 | |
| | Liabilities | Liabilities | | Liabilities | |
| Reserve for losses and loss adjustment expenses | Reserve for losses and loss adjustment expenses | $ | 15,900,526 | | | $ | 13,891,842 | | Reserve for losses and loss adjustment expenses | $ | 17,331,047 | | | $ | 16,513,929 | |
| Unearned premiums | Unearned premiums | 5,062,052 | | | 4,339,549 | | Unearned premiums | 6,165,114 | | | 4,838,965 | |
| Reinsurance balances payable | Reinsurance balances payable | 873,067 | | | 667,072 | | Reinsurance balances payable | 1,403,929 | | | 683,263 | |
| Contractholder payables | Contractholder payables | 2,191,515 | | | 2,119,460 | | Contractholder payables | 1,828,474 | | | 1,995,562 | |
| Collateral held for insured obligations | Collateral held for insured obligations | 221,957 | | | 206,698 | | Collateral held for insured obligations | 254,259 | | | 215,581 | |
| Senior notes | Senior notes | 2,860,811 | | | 1,871,626 | | Senior notes | 2,724,149 | | | 2,861,113 | |
| Revolving credit agreement borrowings | Revolving credit agreement borrowings | 210,687 | | | 484,287 | | Revolving credit agreement borrowings | — | | | 155,687 | |
| Securities lending payable | Securities lending payable | 64,251 | | | 388,366 | | Securities lending payable | — | | | 301,089 | |
| Payable for securities purchased | Payable for securities purchased | 382,236 | | | 87,579 | | Payable for securities purchased | 357,531 | | | 218,779 | |
| Other liabilities | Other liabilities | 1,681,181 | | | 1,513,330 | | Other liabilities | 1,321,470 | | | 1,510,888 | |
| Total liabilities | Total liabilities | 29,448,283 | | | 25,569,809 | | Total liabilities | 31,385,973 | | | 29,294,856 | |
| | Commitments and Contingencies | Commitments and Contingencies | | Commitments and Contingencies | 0 | | 0 |
| Redeemable noncontrolling interests | Redeemable noncontrolling interests | 57,835 | | | 55,404 | | Redeemable noncontrolling interests | 10,237 | | | 58,548 | |
| | Shareholders' Equity | Shareholders' Equity | | Shareholders' Equity | |
| Non-cumulative preferred shares | Non-cumulative preferred shares | 780,000 | | | 780,000 | | Non-cumulative preferred shares | 830,000 | | | 780,000 | |
| | Common shares ($0.0011 par, shares issued: 578,024,671 and 574,617,195) | 642 | | | 638 | | |
| Common shares ($0.0011 par, shares issued: 582,908,723 and 579,000,841) | | Common shares ($0.0011 par, shares issued: 582,908,723 and 579,000,841) | 648 | | | 643 | |
| Additional paid-in capital | Additional paid-in capital | 1,950,782 | | | 1,889,683 | | Additional paid-in capital | 2,061,906 | | | 1,977,794 | |
| Retained earnings | Retained earnings | 11,829,322 | | | 11,021,006 | | Retained earnings | 13,842,787 | | | 12,362,463 | |
| Accumulated other comprehensive income (loss), net of deferred income tax | Accumulated other comprehensive income (loss), net of deferred income tax | 386,357 | | | 212,091 | | Accumulated other comprehensive income (loss), net of deferred income tax | 49,184 | | | 488,895 | |
| Common shares held in treasury, at cost (shares: 172,005,713 and 168,997,994) | (2,495,106) | | | (2,406,047) | | |
| Common shares held in treasury, at cost (shares: 195,650,971 and 172,280,199) | | 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 | Total shareholders' equity available to Arch | 12,451,997 | | | 11,497,371 | | Total shareholders' equity available to Arch | 13,387,526 | | | 13,105,886 | |
| Non-redeemable noncontrolling interests | Non-redeemable noncontrolling interests | 757,920 | | | 762,777 | | Non-redeemable noncontrolling interests | — | | | 823,007 | |
| Total shareholders' equity | Total shareholders' equity | 13,209,917 | | | 12,260,148 | | Total shareholders' equity | 13,387,526 | | | 13,928,893 | |
| Total liabilities, noncontrolling interests and shareholders' equity | Total liabilities, noncontrolling interests and shareholders' equity | $ | 42,716,035 | | | $ | 37,885,361 | | Total liabilities, noncontrolling interests and shareholders' equity | $ | 44,783,736 | | | $ | 43,282,297 | |
See Notes to Consolidated Financial Statements
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| ARCH CAPITAL | 6 | 20202021 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) | | (Unaudited) | | (Unaudited) |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Revenues | Revenues | | | | | | | | Revenues | | | | | | | |
| Net premiums written | $ | 1,874,144 | | | $ | 1,613,457 | | | $ | 5,679,701 | | | $ | 4,583,614 | | |
| Change in unearned premiums | (103,052) | | | (175,434) | | | (498,811) | | | (312,998) | | |
| | Net premiums earned | Net premiums earned | 1,771,092 | | | 1,438,023 | | | 5,180,890 | | | 4,270,616 | | Net premiums earned | $ | 1,929,337 | | | $ | 1,771,092 | | | 5,998,668 | | | 5,180,890 | |
| Net investment income | Net investment income | 128,512 | | | 161,488 | | | 405,150 | | | 473,475 | | Net investment income | 88,195 | | | 128,512 | | | 298,664 | | | 405,150 | |
| Net realized gains (losses) | Net realized gains (losses) | 280,499 | | | 61,355 | | | 470,127 | | | 322,368 | | Net realized gains (losses) | (25,040) | | | 280,499 | | | 320,328 | | | 470,127 | |
| | Other underwriting income | Other underwriting income | 5,413 | | | 3,326 | | | 18,932 | | | 18,104 | | 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 | Equity in net income (loss) of investment funds accounted for using the equity method | 126,735 | | | 17,130 | | | 57,407 | | | 96,533 | | 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) | Other income (loss) | 919 | | | 1,338 | | | 6,327 | | | 3,550 | | Other income (loss) | (3,960) | | | — | | | 1,151 | | | 65 | |
| Total revenues | Total revenues | 2,313,170 | | | 1,682,660 | | | 6,138,833 | | | 5,184,646 | | Total revenues | 2,101,204 | | | 2,312,251 | | | 6,936,994 | | | 6,132,571 | |
| | Expenses | Expenses | | Expenses | |
| Losses and loss adjustment expenses | Losses and loss adjustment expenses | 1,216,273 | | | 802,455 | | | 3,562,214 | | | 2,288,530 | | Losses and loss adjustment expenses | 1,226,019 | | | 1,216,273 | | | 3,588,950 | | | 3,562,214 | |
| Acquisition expenses | Acquisition expenses | 247,942 | | | 211,120 | | | 750,014 | | | 619,057 | | Acquisition expenses | 306,015 | | | 247,942 | | | 945,639 | | | 750,014 | |
| Other operating expenses | Other operating expenses | 215,686 | | | 196,512 | | | 659,479 | | | 596,589 | | Other operating expenses | 230,832 | | | 215,686 | | | 736,808 | | | 659,479 | |
| Corporate expenses | Corporate expenses | 17,937 | | | 17,061 | | | 56,653 | | | 53,274 | | Corporate expenses | 19,672 | | | 17,937 | | | 61,007 | | | 56,653 | |
| Amortization of intangible assets | Amortization of intangible assets | 16,715 | | | 20,003 | | | 49,835 | | | 60,214 | | Amortization of intangible assets | 20,135 | | | 16,715 | | | 49,823 | | | 49,835 | |
| Interest expense | Interest expense | 41,343 | | | 31,328 | | | 105,037 | | | 89,673 | | Interest expense | 33,176 | | | 41,343 | | | 107,222 | | | 105,037 | |
| Net foreign exchange (gains) losses | Net foreign exchange (gains) losses | 44,885 | | | (33,124) | | | 11,425 | | | (31,697) | | Net foreign exchange (gains) losses | (36,078) | | | 44,885 | | | (38,366) | | | 11,425 | |
| Total expenses | Total expenses | 1,800,781 | | | 1,245,355 | | | 5,194,657 | | | 3,675,640 | | Total expenses | 1,799,771 | | | 1,800,781 | | | 5,451,083 | | | 5,194,657 | |
| | Income (loss) before income taxes | 512,389 | | | 437,305 | | | 944,176 | | | 1,509,006 | | |
| Income (loss) before income taxes and income (loss) from operating affiliates | | Income (loss) before income taxes and income (loss) from operating affiliates | 301,433 | | | 511,470 | | | 1,485,911 | | | 937,914 | |
| Income tax expense | Income tax expense | (23,707) | | | (38,116) | | | (77,779) | | | (128,474) | | Income tax expense | (4,137) | | | (23,707) | | | (94,176) | | | (77,779) | |
| Income (loss) from operating affiliates | | Income (loss) from operating affiliates | 124,119 | | | 919 | | | 224,052 | | | 6,262 | |
| Net income (loss) | Net income (loss) | $ | 488,682 | | | $ | 399,189 | | | $ | 866,397 | | | $ | 1,380,532 | | Net income (loss) | $ | 421,415 | | | $ | 488,682 | | | $ | 1,615,787 | | | $ | 866,397 | |
| Net (income) loss attributable to noncontrolling interests | Net (income) loss attributable to noncontrolling interests | (69,643) | | | (6,736) | | | (4,420) | | | (70,597) | | Net (income) loss attributable to noncontrolling interests | (1,473) | | | (69,643) | | | (82,203) | | | (4,420) | |
| Net income (loss) available to Arch | Net income (loss) available to Arch | 419,039 | | | 392,453 | | | 861,977 | | | 1,309,935 | | Net income (loss) available to Arch | 419,942 | | | 419,039 | | | 1,533,584 | | | 861,977 | |
| Preferred dividends | Preferred dividends | (10,403) | | | (10,403) | | | (31,209) | | | (31,209) | | Preferred dividends | (16,090) | | | (10,403) | | | (38,159) | | | (31,209) | |
| | Loss on redemption of preferred shares | | Loss on redemption of preferred shares | (15,101) | | | — | | | (15,101) | | | — | |
| Net income (loss) available to Arch common shareholders | Net income (loss) available to Arch common shareholders | $ | 408,636 | | | $ | 382,050 | | | $ | 830,768 | | | $ | 1,278,726 | | Net income (loss) available to Arch common shareholders | $ | 388,751 | | | $ | 408,636 | | | $ | 1,480,324 | | | $ | 830,768 | |
| | Net income per common share and common share equivalent | Net income per common share and common share equivalent | | | | | | | | Net income per common share and common share equivalent | | | | | | | |
| Basic | Basic | $ | 1.01 | | | $ | 0.95 | | | $ | 2.06 | | | $ | 3.19 | | Basic | $ | 1.00 | | | $ | 1.01 | | | $ | 3.74 | | | $ | 2.06 | |
| Diluted | Diluted | $ | 1.00 | | | $ | 0.92 | | | $ | 2.02 | | | $ | 3.11 | | Diluted | $ | 0.98 | | | $ | 1.00 | | | $ | 3.66 | | | $ | 2.02 | |
| | Weighted average common shares and common share equivalents outstanding | Weighted average common shares and common share equivalents outstanding | | | | | Weighted average common shares and common share equivalents outstanding | | | | |
| Basic | Basic | 402,850,485 | | | 402,564,121 | | | 403,081,266 | | | 401,419,153 | | Basic | 389,274,220 | | | 402,850,485 | | | 395,899,591 | | | 403,081,266 | |
| Diluted | Diluted | 409,194,657 | | | 413,180,201 | | | 410,314,897 | | | 410,807,402 | | Diluted | 397,903,347 | | | 409,194,657 | | | 404,260,485 | | | 410,314,897 | |
See Notes to Consolidated Financial Statements
| | | | | | | | |
| ARCH CAPITAL | 7 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
| | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Comprehensive Income | Comprehensive Income | | | | | | | | Comprehensive Income | | | | | | | |
| Net income (loss) | Net income (loss) | $ | 488,682 | | | $ | 399,189 | | | $ | 866,397 | | | $ | 1,380,532 | | Net income (loss) | $ | 421,415 | | | $ | 488,682 | | | $ | 1,615,787 | | | $ | 866,397 | |
| Other comprehensive income (loss), net of deferred income tax | Other comprehensive income (loss), net of deferred income tax | | Other comprehensive income (loss), net of deferred income tax | |
| Unrealized appreciation (decline) in value of available-for-sale investments: | Unrealized appreciation (decline) in value of available-for-sale investments: | | Unrealized appreciation (decline) in value of available-for-sale investments: | |
| Unrealized holding gains (losses) arising during period | Unrealized holding gains (losses) arising during period | 110,782 | | | 59,290 | | | 546,291 | | | 507,650 | | Unrealized holding gains (losses) arising during period | (95,923) | | | 110,782 | | | (279,102) | | | 546,291 | |
| | Reclassification of net realized (gains) losses, included in net income (loss) | Reclassification of net realized (gains) losses, included in net income (loss) | (79,803) | | | (38,743) | | | (368,423) | | | (104,309) | | Reclassification of net realized (gains) losses, included in net income (loss) | (62,654) | | | (79,803) | | | (120,504) | | | (368,423) | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | 16,709 | | | (16,424) | | | (5,729) | | | (6,641) | | Foreign currency translation adjustments | (31,710) | | | 16,709 | | | (54,089) | | | (5,729) | |
| Comprehensive income (loss) | Comprehensive income (loss) | 536,370 | | | 403,312 | | | 1,038,536 | | | 1,777,232 | | Comprehensive income (loss) | 231,128 | | | 536,370 | | | 1,162,092 | | | 1,038,536 | |
| Net (income) loss attributable to noncontrolling interests | Net (income) loss attributable to noncontrolling interests | (69,643) | | | (6,736) | | | (4,420) | | | (70,597) | | Net (income) loss attributable to noncontrolling interests | (1,473) | | | (69,643) | | | (82,203) | | | (4,420) | |
| Other comprehensive (income) loss attributable to noncontrolling interests | Other comprehensive (income) loss attributable to noncontrolling interests | (10,820) | | | 764 | | | 2,127 | | | (6,266) | | Other comprehensive (income) loss attributable to noncontrolling interests | 9,423 | | | (10,820) | | | 13,983 | | | 2,127 | |
| Comprehensive income (loss) available to Arch | Comprehensive income (loss) available to Arch | $ | 455,907 | | | $ | 397,340 | | | $ | 1,036,243 | | | $ | 1,700,369 | | Comprehensive income (loss) available to Arch | $ | 239,078 | | | $ | 455,907 | | | $ | 1,093,872 | | | $ | 1,036,243 | |
See Notes to Consolidated Financial Statements
| | | | | | | | |
| ARCH CAPITAL | 8 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)
| | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Non-cumulative preferred shares | Non-cumulative preferred shares | | | | | | | | Non-cumulative preferred shares | | | | | | | |
| | Balance at beginning of period | | Balance at beginning of period | $ | 1,280,000 | | | $ | 780,000 | | | $ | 780,000 | | | $ | 780,000 | |
| Preferred shares issued | | Preferred shares issued | — | | | — | | | 500,000 | | | — | |
| Preferred shares redeemed | | Preferred shares redeemed | (450,000) | | | — | | | (450,000) | | | — | |
| Balance at beginning and end of period | Balance at beginning and end of period | $ | 780,000 | | | $ | 780,000 | | | $ | 780,000 | | | $ | 780,000 | | Balance at beginning and end of period | $ | 830,000 | | | $ | 780,000 | | | $ | 830,000 | | | $ | 780,000 | |
| | | Common shares | Common shares | | Common shares | |
| Balance at beginning of period | Balance at beginning of period | 642 | | | 638 | | | 638 | | | 634 | | Balance at beginning of period | 647 | | | 642 | | | 643 | | | 638 | |
| Common shares issued, net | Common shares issued, net | 0 | | | 0 | | | 4 | | | 4 | | Common shares issued, net | 1 | | | — | | | 5 | | | 4 | |
| Balance at end of period | Balance at end of period | 642 | | | 638 | | | 642 | | | 638 | | Balance at end of period | 648 | | | 642 | | | 648 | | | 642 | |
| | Additional paid-in capital | Additional paid-in capital | | | | | Additional paid-in capital | | | | |
| Balance at beginning of period | Balance at beginning of period | 1,935,514 | | | 1,847,949 | | | 1,889,683 | | | 1,793,781 | | Balance at beginning of period | 2,028,919 | | | 1,935,514 | | | 1,977,794 | | | 1,889,683 | |
| | Amortization of share-based compensation | Amortization of share-based compensation | 14,662 | | | 12,775 | | | 55,872 | | | 52,290 | | Amortization of share-based compensation | 14,216 | | | 14,662 | | | 71,279 | | | 55,872 | |
| | Issue costs on preferred shares | | Issue costs on preferred shares | — | | | — | | | (14,179) | | | — | |
| Reversal of issue costs on preferred shares redeemed | | Reversal of issue costs on preferred shares redeemed | 15,101 | | | — | | | 15,101 | | | — | |
| | Other changes | Other changes | 606 | | | 3,744 | | | 5,227 | | | 18,397 | | Other changes | 3,670 | | | 606 | | | 11,911 | | | 5,227 | |
| Balance at end of period | Balance at end of period | 1,950,782 | | | 1,864,468 | | | 1,950,782 | | | 1,864,468 | | Balance at end of period | 2,061,906 | | | 1,950,782 | | | 2,061,906 | | | 1,950,782 | |
| | Retained earnings | Retained earnings | | | | | Retained earnings | | | | |
| Balance at beginning of period | Balance at beginning of period | 11,420,686 | | | 10,322,975 | | | 11,021,006 | | | 9,426,299 | | Balance at beginning of period | 13,454,036 | | | 11,420,686 | | | 12,362,463 | | | 11,021,006 | |
| Cumulative effect of an accounting change (1) | Cumulative effect of an accounting change (1) | 0 | | | 0 | | | (22,452) | | | 0 | | Cumulative effect of an accounting change (1) | — | | | — | | | — | | | (22,452) | |
| Balance at beginning of period, as adjusted | Balance at beginning of period, as adjusted | 11,420,686 | | | 10,322,975 | | | 10,998,554 | | | 9,426,299 | | Balance at beginning of period, as adjusted | 13,454,036 | | | 11,420,686 | | | 12,362,463 | | | 10,998,554 | |
| Net income (loss) | Net income (loss) | 488,682 | | | 399,189 | | | 866,397 | | | 1,380,532 | | Net income (loss) | 421,415 | | | 488,682 | | | 1,615,787 | | | 866,397 | |
| Net (income) loss attributable to noncontrolling interests | Net (income) loss attributable to noncontrolling interests | (69,643) | | | (6,736) | | | (4,420) | | | (70,597) | | Net (income) loss attributable to noncontrolling interests | (1,473) | | | (69,643) | | | (82,203) | | | (4,420) | |
| Preferred share dividends | Preferred share dividends | (10,403) | | | (10,403) | | | (31,209) | | | (31,209) | | Preferred share dividends | (16,090) | | | (10,403) | | | (38,159) | | | (31,209) | |
| | Loss on redemption of preferred shares | | Loss on redemption of preferred shares | (15,101) | | | — | | | (15,101) | | | — | |
| Balance at end of period | Balance at end of period | 11,829,322 | | | 10,705,025 | | | 11,829,322 | | | 10,705,025 | | Balance at end of period | 13,842,787 | | | 11,829,322 | | | 13,842,787 | | | 11,829,322 | |
| | Accumulated other comprehensive income (loss), net of deferred income tax | Accumulated other comprehensive income (loss), net of deferred income tax | | Accumulated other comprehensive income (loss), net of deferred income tax | |
| Balance at beginning of period | Balance at beginning of period | 349,488 | | | 206,827 | | | 212,091 | | | (178,720) | | Balance at beginning of period | 230,048 | | | 349,488 | | | 488,895 | | | 212,091 | |
| Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax: | Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax: | | Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax: | |
| Balance at beginning of period | Balance at beginning of period | 418,487 | | | 261,627 | | | 258,486 | | | (114,178) | | Balance at beginning of period | 264,702 | | | 418,487 | | | 501,295 | | | 258,486 | |
| | Unrealized holding gains (losses) during period, net of reclassification adjustment | Unrealized holding gains (losses) during period, net of reclassification adjustment | 30,979 | | | 20,547 | | | 177,868 | | | 403,341 | | Unrealized holding gains (losses) during period, net of reclassification adjustment | (158,577) | | | 30,979 | | | (399,606) | | | 177,868 | |
| Unrealized holding gains (losses) during period attributable to noncontrolling interests | Unrealized holding gains (losses) during period attributable to noncontrolling interests | (11,179) | | | 1,019 | | | 1,933 | | | (5,970) | | Unrealized holding gains (losses) during period attributable to noncontrolling interests | 10,752 | | | (11,179) | | | 15,188 | | | 1,933 | |
| | Balance at end of period | Balance at end of period | 438,287 | | | 283,193 | | | 438,287 | | | 283,193 | | Balance at end of period | 116,877 | | | 438,287 | | | 116,877 | | | 438,287 | |
| Foreign currency translation adjustments, net of deferred income tax: | Foreign currency translation adjustments, net of deferred income tax: | | | | | | | | Foreign currency translation adjustments, net of deferred income tax: | | | | | | | |
| Balance at beginning of period | Balance at beginning of period | (68,999) | | | (54,800) | | | (46,395) | | | (64,542) | | Balance at beginning of period | (34,654) | | | (68,999) | | | (12,400) | | | (46,395) | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | 16,709 | | | (16,424) | | | (5,729) | | | (6,641) | | Foreign currency translation adjustments | (31,710) | | | 16,709 | | | (54,089) | | | (5,729) | |
| Foreign currency translation adjustments attributable to noncontrolling interests | Foreign currency translation adjustments attributable to noncontrolling interests | 360 | | | (255) | | | 194 | | | (296) | | Foreign currency translation adjustments attributable to noncontrolling interests | (1,329) | | | 360 | | | (1,204) | | | 194 | |
| Balance at end of period | Balance at end of period | (51,930) | | | (71,479) | | | (51,930) | | | (71,479) | | Balance at end of period | (67,693) | | | (51,930) | | | (67,693) | | | (51,930) | |
| Balance at end of period | Balance at end of period | 386,357 | | | 211,714 | | | 386,357 | | | 211,714 | | Balance at end of period | 49,184 | | | 386,357 | | | 49,184 | | | 386,357 | |
| | Common shares held in treasury, at cost | Common shares held in treasury, at cost | | Common shares held in treasury, at cost | |
| Balance at beginning of period | Balance at beginning of period | (2,494,505) | | | (2,401,037) | | | (2,406,047) | | | (2,382,167) | | Balance at beginning of period | (3,007,578) | | | (2,494,505) | | | (2,503,909) | | | (2,406,047) | |
| Shares repurchased for treasury | Shares repurchased for treasury | (601) | | | (2,712) | | | (89,059) | | | (21,582) | | Shares repurchased for treasury | (389,421) | | | (601) | | | (893,090) | | | (89,059) | |
| Balance at end of period | Balance at end of period | (2,495,106) | | | (2,403,749) | | | (2,495,106) | | | (2,403,749) | | Balance at end of period | (3,396,999) | | | (2,495,106) | | | (3,396,999) | | | (2,495,106) | |
| | Total shareholders’ equity available to Arch | Total shareholders’ equity available to Arch | 12,451,997 | | | 11,158,096 | | | 12,451,997 | | | 11,158,096 | | Total shareholders’ equity available to Arch | 13,387,526 | | | 12,451,997 | | | 13,387,526 | | | 12,451,997 | |
| Non-redeemable noncontrolling interests | Non-redeemable noncontrolling interests | 757,920 | | | 854,924 | | | 757,920 | | | 854,924 | | Non-redeemable noncontrolling interests | — | | | 757,920 | | | — | | | 757,920 | |
| Total shareholders’ equity | Total shareholders’ equity | $ | 13,209,917 | | | $ | 12,013,020 | | | $ | 13,209,917 | | | $ | 12,013,020 | | Total shareholders’ equity | $ | 13,387,526 | | | $ | 13,209,917 | | | $ | 13,387,526 | | | $ | 13,209,917 | |
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)” See note 1.
See Notes to Consolidated Financial Statements
| | | | | | | | |
| ARCH CAPITAL | 9 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
| | | (Unaudited) | | (Unaudited) |
| | Nine Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Operating Activities | Operating Activities | | | | Operating Activities | | | |
| Net income (loss) | Net income (loss) | $ | 866,397 | | | $ | 1,380,532 | | Net income (loss) | $ | 1,615,787 | | | $ | 866,397 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| Net realized (gains) losses | Net realized (gains) losses | (477,683) | | | (326,532) | | Net realized (gains) losses | (367,313) | | | (477,683) | |
| | Equity in net income or loss of investment funds accounted for using the equity method and other income or loss | 30,306 | | | (38,912) | | |
| Equity in net (income) or loss of investment funds accounted for using the equity method and other income or loss | | Equity in net (income) or loss of investment funds accounted for using the equity method and other income or loss | (372,650) | | | 30,306 | |
| Amortization of intangible assets | Amortization of intangible assets | 49,835 | | | 60,214 | | Amortization of intangible assets | 49,823 | | | 49,835 | |
| Share-based compensation | Share-based compensation | 56,433 | | | 54,432 | | Share-based compensation | 72,303 | | | 56,433 | |
| Changes in: | Changes in: | | Changes in: | |
| Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable | Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable | 1,668,069 | | | 377,074 | | Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable | 1,548,211 | | | 1,668,069 | |
| Unearned premiums, net of ceded unearned premiums | Unearned premiums, net of ceded unearned premiums | 498,811 | | | 312,998 | | Unearned premiums, net of ceded unearned premiums | 985,242 | | | 498,811 | |
| Premiums receivable | Premiums receivable | (461,766) | | | (328,765) | | Premiums receivable | (847,098) | | | (461,766) | |
| Deferred acquisition costs | Deferred acquisition costs | (107,238) | | | (38,606) | | Deferred acquisition costs | (247,966) | | | (107,238) | |
| Reinsurance balances payable | Reinsurance balances payable | 205,620 | | | 214,902 | | Reinsurance balances payable | 618,571 | | | 205,620 | |
| Other items, net | Other items, net | 2,666 | | | (124,198) | | Other items, net | (427,359) | | | 2,666 | |
| Net cash provided by (used for) operating activities | Net cash provided by (used for) operating activities | 2,331,450 | | | 1,543,139 | | Net cash provided by (used for) operating activities | 2,627,551 | | | 2,331,450 | |
| Investing Activities | Investing Activities | | | | Investing Activities | | | |
| Purchases of fixed maturity investments | Purchases of fixed maturity investments | (34,050,883) | | | (24,010,623) | | Purchases of fixed maturity investments | (29,870,023) | | | (34,050,883) | |
| Purchases of equity securities | Purchases of equity securities | (1,355,848) | | | (524,051) | | Purchases of equity securities | (978,951) | | | (1,355,848) | |
| Purchases of other investments | Purchases of other investments | (841,886) | | | (1,014,925) | | Purchases of other investments | (1,350,056) | | | (841,886) | |
| Proceeds from sales of fixed maturity investments | Proceeds from sales of fixed maturity investments | 32,544,867 | | | 22,707,854 | | Proceeds from sales of fixed maturity investments | 30,067,792 | | | 32,544,867 | |
| Proceeds from sales of equity securities | Proceeds from sales of equity securities | 731,793 | | | 371,130 | | Proceeds from sales of equity securities | 695,633 | | | 731,793 | |
| Proceeds from sales, redemptions and maturities of other investments | Proceeds from sales, redemptions and maturities of other investments | 791,807 | | | 827,517 | | Proceeds from sales, redemptions and maturities of other investments | 1,487,919 | | | 791,807 | |
| Proceeds from redemptions and maturities of fixed maturity investments | Proceeds from redemptions and maturities of fixed maturity investments | 645,292 | | | 394,719 | | Proceeds from redemptions and maturities of fixed maturity investments | 1,234,412 | | | 645,292 | |
| Net settlements of derivative instruments | Net settlements of derivative instruments | 163,290 | | | 92,423 | | Net settlements of derivative instruments | (67,830) | | | 163,290 | |
| | Net (purchases) sales of short-term investments | Net (purchases) sales of short-term investments | (1,159,351) | | | 129,078 | | Net (purchases) sales of short-term investments | (1,172,798) | | | (1,159,351) | |
| Change in cash collateral related to securities lending | Change in cash collateral related to securities lending | 81,210 | | | 6,990 | | Change in cash collateral related to securities lending | — | | | 81,210 | |
| | Purchase of operating affiliate | | Purchase of operating affiliate | (753,916) | | | — | |
| Impact of the deconsolidation of the variable interest entity | | Impact of the deconsolidation of the variable interest entity | (349,202) | | | — | |
| Purchases of fixed assets | Purchases of fixed assets | (26,717) | | | (27,635) | | Purchases of fixed assets | (34,407) | | | (26,717) | |
| Other | Other | (131,992) | | | (202,953) | | Other | (361,857) | | | (131,992) | |
| Net cash provided by (used for) investing activities | Net cash provided by (used for) investing activities | (2,608,418) | | | (1,250,476) | | Net cash provided by (used for) investing activities | (1,453,284) | | | (2,608,418) | |
| Financing Activities | Financing Activities | | | | Financing Activities | | | |
| | Proceeds from issuance of preferred shares, net | | Proceeds from issuance of preferred shares, net | 485,821 | | | — | |
| Redemption of preferred shares | | Redemption of preferred shares | (450,000) | | | — | |
| Purchases of common shares under share repurchase program | Purchases of common shares under share repurchase program | (75,486) | | | (2,871) | | Purchases of common shares under share repurchase program | (872,197) | | | (75,486) | |
| Proceeds from common shares issued, net | Proceeds from common shares issued, net | (9,656) | | | 518 | | Proceeds from common shares issued, net | 281 | | | (9,656) | |
| Proceeds from borrowings | Proceeds from borrowings | 1,018,793 | | | 200,083 | | Proceeds from borrowings | — | | | 1,018,793 | |
| Repayments of borrowings | Repayments of borrowings | (304,000) | | | (27,538) | | Repayments of borrowings | — | | | (304,000) | |
| Change in cash collateral related to securities lending | Change in cash collateral related to securities lending | (81,210) | | | (6,990) | | Change in cash collateral related to securities lending | — | | | (81,210) | |
| Third party investment in non-redeemable noncontrolling interests | Third party investment in non-redeemable noncontrolling interests | (2,867) | | | 0 | | Third party investment in non-redeemable noncontrolling interests | 15,971 | | | (2,867) | |
| Change in third party investment in redeemable noncontrolling interests | 0 | | | (161,874) | | |
| | Dividends paid to redeemable noncontrolling interests | Dividends paid to redeemable noncontrolling interests | (3,541) | | | (11,408) | | Dividends paid to redeemable noncontrolling interests | (1,907) | | | (3,541) | |
| Other | Other | 55,266 | | | (5,207) | | Other | (21,752) | | | 55,266 | |
| Preferred dividends paid | Preferred dividends paid | (31,209) | | | (31,209) | | Preferred dividends paid | (38,096) | | | (31,209) | |
| Net cash provided by (used for) financing activities | Net cash provided by (used for) financing activities | 566,090 | | | (46,496) | | Net cash provided by (used for) financing activities | (881,879) | | | 566,090 | |
| | Effects of exchange rate changes on foreign currency cash and restricted cash | Effects of exchange rate changes on foreign currency cash and restricted cash | (5,847) | | | (8,335) | | Effects of exchange rate changes on foreign currency cash and restricted cash | (34,023) | | | (5,847) | |
| | Increase (decrease) in cash and restricted cash | Increase (decrease) in cash and restricted cash | 283,275 | | | 237,832 | | Increase (decrease) in cash and restricted cash | 258,365 | | | 283,275 | |
| Cash and restricted cash, beginning of year | Cash and restricted cash, beginning of year | 903,698 | | | 724,643 | | Cash and restricted cash, beginning of year | 1,290,544 | | | 903,698 | |
| Cash and restricted cash, end of period | Cash and restricted cash, end of period | $ | 1,186,973 | | | $ | 962,475 | | Cash and restricted cash, end of period | $ | 1,548,909 | | | $ | 1,186,973 | |
See Notes to Consolidated Financial Statements
| | | | | | | | |
| ARCH CAPITAL | 10 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Recent Accounting Pronouncements
General
Arch Capital Group Ltd. (“Arch Capital”) is a public listed Bermuda public limited liabilityexempted company which provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. As used herein, the “Company” means Arch Capital and its subsidiaries. The Company’s consolidated financial statements includeincluded the results of Watford Holdings Ltd. and its wholly owned subsidiaries (“Watford”). through June 30, 2021. Effective July 1, 2021, Watford is wholly owned by Greysbridge Holdings Ltd., (“Greysbridge”) and Greysbridge is owned 40% by the Company, 30% by certain investment funds managed by Kelso & Company (“Kelso”) and 30% by certain investment funds managed by Warburg Pincus LLC (“Warburg”). Based on the governing documents of Greysbridge, the Company concluded that, while it retains significant influence over Watford, Watford no longer constitutes a multi-line Bermuda reinsurance company. Watford’s own managementvariable interest entity. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Watford in its consolidated financial statements and board of directors are responsible for its results and profitability.footnotes. See note 1112. Basis of Presentation
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (“20192020
(“2020 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation.presentation, including the correct 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’. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. Management views the impact of the prior period misclassification as not material to the financial statements on a quantitative and qualitative basis. See note 8. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted. Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted
The Company adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to2019-12, “Simplifying the Disclosure RequirementsAccounting for Fair Value Measurement.Income Taxes.” This ASU eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod tax allocations and calculating income taxes in interim periods. The ASU modifiesalso clarifies the disclosure requirements on fair value measurement as part of the disclosure framework project with the objective to improve the effectiveness of disclosuresaccounting for transactions that result in a step-up in the notes to the financial statements. The amendments in this update allow for removaltax basis of (1) the amount and reasons for transfer between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for transfers between levels; and (3) the valuation processes for Level 3 fair value measurements.goodwill. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
TheFor information regarding additional accounting standards that the Company has not yet adopted, ASU 2018-15, “Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40).” This ASU aligns the requirements for capitalizing certain implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance provides flexibility in adoption, allowing for either retrospective adjustment or prospective adjustment for all implementation costs incurred after the date of adoption. The Company adopted this guidance prospectively. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In March 2020, the SEC amended Rule 3-10 of Regulation S-X regarding financial disclosure requirements for registered debt offerings involving subsidiaries as either issuers or guarantors and affiliates whose securities are pledged as collateral. This new guidance narrows the circumstances that require separate financial statements of subsidiary issuers and guarantors and streamlines the alternative disclosures required in lieu of those statements. The amendment is effective on January 4, 2021 with early adoption permitted. The Company elected to apply the amended requirements for the quarter ended March 31, 2020, and is no longer providing condensed consolidating financial information that resulted from the registered debt obligations of its subsidiaries, Arch Capital Group (U.S.) Inc. and Arch Capital Finance LLC.see note 3(r), that were disclosed in Note 26“Significant Accounting Policies—Recent Accounting Pronouncements,” of the notes to consolidated financial statements in the Company’s 20192020 Form 10-K.
The
2. Acquisitions
Westpac Lenders Mortgage Insurance Limited (“WLMI”)
On August 31, 2021, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)completed the acquisition of WLMI, an Australian Prudential Regulation Authority authorized captive lenders mortgage insurance (“LMI”) provider to the Westpac Banking Corporation (“Westpac”).” The ASU applies As part of the acquisition, WLMI will retain its existing risk in force and remain Westpac’s exclusive provider of LMI on new mortgage originations for a new credit loss model (current expected credit losses) for determining credit related impairments for financial instruments measured at amortized cost, including reinsurance recoverable, contractholder receivables, and premiums receivable, andperiod of 10 years. Upon completion of this transaction, the Company renamed WLMI to Arch Lenders Mortgage Indemnity Limited (“ALMI”). ALMI will become the Company’s primary provider of LMI to the Australian market.
| | | | | | | | |
| ARCH CAPITAL | 11 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
requiresSomerset Bridge Group Limited, Southern Rock Holdings Limited and affiliates (“Somerset”)
On August 6, 2021, the Company completed the acquisition of Somerset. The acquisition includes Somerset’s motor insurance managing general agent, distribution capabilities through direct and aggregator channels, affiliated insurer and fully integrated claims operation.
In connection with the acquisitions noted above, the Company increased its goodwill and intangible assets by $337.4 million.
3. Share Transactions
Share Repurchases
The board of directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. Since the inception of the share repurchase program, Arch Capital has repurchased 412.0 million common shares for an entityaggregate purchase price of $4.92 billion. For the nine months ended September 30, 2021, Arch Capital repurchased 22.8 million shares under the share repurchase program with an aggregate purchase price of $872.2 million. Arch Capital repurchased 2.6 million shares under the share repurchase program with an aggregate purchase price of $75.5 million during the nine months ended September 30, 2020. At September 30, 2021, $44.3 million of share repurchases were available under the program, which may be effected from time to estimatetime in open market or privately negotiated transactions. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. See note 17. Series G Preferred Shares
In June 2021, Arch Capital completed a $500 million underwritten public offering of 20.0 million depositary shares (the “Depositary Shares”), each of which represents a 1/1,000th interest in a share of its lifetime “expected credit loss”4.550% Non-Cumulative Preferred Shares, Series G, $0.01 par value and record$25,000 liquidation preference per share (equivalent to $25 liquidation preference per Depositary Share) (the “Series G Preferred Shares”). Each Depositary Share, evidenced by a depositary receipt, entitles the holder, through the depositary, to a proportional fractional interest in all rights and preferences of the Series G Preferred Shares represented thereby (including any dividend, liquidation, redemption and voting rights).
Holders of Series G Preferred Shares will be entitled to receive dividend payments only when, as and if declared by
the Company’s board of directors or a duly authorized committee of the board. Any such dividends will be payable from, and including, the date of original issue on a non-cumulative basis, quarterly in arrears on the last day of March, June, September and December of each year, at an allowanceannual rate of 4.550%. Dividends on the Series G Preferred Shares are not cumulative. The Company will be restricted from paying dividends on or repurchasing its common shares unless certain dividend payments are made on the Series G Preferred Shares. The Company may not declare or pay a dividend on the Series G Preferred Shares under certain circumstances, including if the Company is or, after giving effect to such payment, would be in breach of applicable individual or group solvency and liquidity requirements or applicable individual or group enhanced capital requirements ("ECR"). The Series G Preferred Shares may not be redeemed at any time if the ECR would be breached immediately before or after giving effect to such redemption, unless the Company replaces the capital represented by preference shares to be redeemed with capital having equal or better capital treatment.
Except in specified circumstances relating to certain tax or corporate events, the Series G Preferred Shares are not redeemable prior to June 11, 2026. On and after that when deducteddate, the Series G Preferred Shares will be redeemable at the Company’s option, in whole or in part, at a redemption price of $25,000 per share of the Series G Preferred Shares (equivalent to $25 per depositary share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends to, but excluding, the redemption date. The Depositary Shares will be redeemed if and to the extent the related Series G Preferred Shares are redeemed by the Company. Neither the Depositary Shares nor the Series G Preferred Shares have a stated maturity, nor will they be subject to any sinking fund or mandatory redemption. The Series G Preferred Shares are not convertible into any other securities. The Series G Preferred Shares do not have voting rights, except under limited circumstances.
The net proceeds from the amortized cost basisSeries G Preferred Shares offering of approximately $485.8 million were primarily used to redeem the Company’s issued and outstanding 5.25% Series E Non-Cumulative Preferred Shares in September 2021. The preferred shares were redeemed at a redemption price equal to $25 per share, plus all declared and unpaid dividends to (but excluding) the redemption date. In accordance with GAAP, following the redemption, original issuance costs related to such shares have been removed from additional paid-in capital and recorded as a “loss on redemption of preferred shares.” Such adjustment had no impact on total shareholders’ equity or cash flows.
| | | | | | | | |
| ARCH CAPITAL | 12 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Numerator: | | | | | | | |
| Net income (loss) | $ | 421,415 | | | $ | 488,682 | | | $ | 1,615,787 | | | $ | 866,397 | |
| Amounts 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) | |
| Loss on redemption of preferred shares | (15,101) | | | — | | | (15,101) | | | — | |
| Net income (loss) available to Arch common shareholders | $ | 388,751 | | | $ | 408,636 | | | $ | 1,480,324 | | | $ | 830,768 | |
| | | | | | | |
| Denominator: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Weighted average common shares and common share equivalents outstanding — basic | 389,274,220 | | | 402,850,485 | | | 395,899,591 | | | 403,081,266 | |
| Effect of dilutive common share equivalents: | | | | | | | |
| Nonvested restricted shares | 2,131,915 | | | 1,580,791 | | | 1,877,930 | | | 1,690,447 | |
| Stock options (1) | 6,497,212 | | | 4,763,381 | | | 6,482,964 | | | 5,543,184 | |
| Weighted average common shares and common share equivalents outstanding — diluted | 397,903,347 | | | 409,194,657 | | | 404,260,485 | | | 410,314,897 | |
| | | | | | | |
| Earnings per common share: | | | | | | | |
| Basic | $ | 1.00 | | | $ | 1.01 | | | $ | 3.74 | | | $ | 2.06 | |
| Diluted | $ | 0.98 | | | $ | 1.00 | | | $ | 3.66 | | | $ | 2.02 | |
(1) Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the financial asset, presentsstock options exceeded the net amount expectedaverage market price and would have been anti-dilutive or where, when applying the treasury stock method to be collected onin-the-money options, the financial asset. The estimatesum of expected credit losses should consider historical information, current information, as well as reasonablethe proceeds, including unrecognized compensation, exceeded the average market price and supportable forecasts, including estimateswould have been anti-dilutive. For the 2021 third quarter and 2020 third quarter, the number of prepayments.stock options excluded were 1,948,006 and 4,713,241, respectively. For the nine months ended September 30, 2021 and 2020 period, the number of stock options excluded were 2,397,507 and 2,361,413, respectively.
The ASU also amends the previous other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition | | | | | | | | |
| ARCH CAPITAL | 13 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Segment Information
The Company adoptedclassifies its businesses into 3 underwriting segments — insurance, reinsurance and mortgage — and 2 other operating segments — ‘other’ and corporate (non-underwriting). The Company determined its reportable segments using the ASUmanagement 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 quarter ending March 31, 2020 by recognizing an after-tax cumulative effect adjustmentpreparation of $22.5 millionthe Company’s consolidated financial statements. Intersegment business is allocated to the opening balancesegment accountable for the underwriting results.
The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of retained earningstheir 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 3 underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting 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; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).
The mortgage segment includes the Company’s U.S. primary mortgage insurance, U.S. credit-risk transfer (“CRT”) which are predominately with government sponsored enterprises (“GSE’s”) and international mortgage insurance and reinsurance operations. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as of January 1, 2020. eligible mortgage insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE. Arch MI U.S. also includes Arch Mortgage Guaranty Company, which is not a GSE-approved entity.
The cumulative effect adjustment decreased retained earningscorporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and increasedother, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses (which includes changes in the allowance for credit losses.losses on financial assets and net impairment losses recognized in earnings), 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.
Significant Accounting PoliciesThrough June 30, 2021, the ‘other’ segment included the results of Watford. 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. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Watford in its consolidated financial statements. See note 12.
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| ARCH CAPITAL | 14 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following accounting policiestables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to Arch common shareholders:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2021 |
| | Insurance | | Reinsurance | | Mortgage | | Sub-Total | | Other | | Total |
| | | | | | | | | | | |
| 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 written | 1,153,813 | | | 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 earned | 938,670 | | | 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 income | | | | | | | 88,195 | | | — | | | 88,195 | |
| Net realized gains (losses) | | | | | | | (25,040) | | | — | | | (25,040) | |
| | | | | | | | | | | |
| Equity in net income (loss) of investment funds accounted for using the equity method | | | | | | | 105,398 | | | — | | | 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 affiliates | | | | | | | 301,433 | | | — | | | 301,433 | |
| Income tax (expense) benefit | | | | | | | (4,137) | | | — | | | (4,137) | |
| Income (loss) from operating affiliates | | | | | | | 124,119 | | | — | | | 124,119 | |
| Net income (loss) | | | | | | | 421,415 | | | — | | | 421,415 | |
| Amounts attributable to redeemable noncontrolling interests | | | | | | | (1,473) | | | — | | | (1,473) | |
| Amounts attributable to nonredeemable noncontrolling interests | | | | | | | — | | | — | | | — | |
| Net income (loss) available to Arch | | | | | | | 419,942 | | | — | | | 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 ratio | 71.2 | % | | 80.4 | % | | 3.7 | % | | 63.5 | % | | — | % | | 63.5 | % |
| Acquisition expense ratio | 16.2 | % | | 19.1 | % | | 7.7 | % | | 15.9 | % | | — | % | | 15.9 | % |
| Other operating expense ratio | 14.8 | % | | 6.7 | % | | 14.8 | % | | 12.0 | % | | — | % | | 12.0 | % |
| Combined ratio | 102.2 | % | | 106.2 | % | | 26.2 | % | | 91.4 | % | | — | % | | 91.4 | % |
| | | | | | | | | | | |
| Goodwill and intangible assets | $ | 261,103 | | | $ | 176,128 | | | $ | 526,091 | | | $ | 963,322 | | | $ | — | | | $ | 963,322 | |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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 updatedexcluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’
| | | | | | | | |
| ARCH CAPITAL | 15 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2020 |
| | Insurance | | Reinsurance | | Mortgage | | Sub-Total | | Other | | Total |
| | | | | | | | | | | |
| 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 written | 824,161 | | | 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 earned | 719,154 | | | 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 income | | | | | | | 99,857 | | | 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 method | | | | | | | 126,735 | | | — | | | 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 affiliates | | | | | | | 432,896 | | | 78,574 | | | 511,470 | |
| Income tax (expense) benefit | | | | | | | (23,638) | | | (69) | | | (23,707) | |
| Income (loss) from operating affiliates | | | | | | | 919 | | | — | | | 919 | |
| Net income (loss) | | | | | | | 410,177 | | | 78,505 | | | 488,682 | |
| Amounts attributable to redeemable noncontrolling interests | | | | | | | (882) | | | (993) | | | (1,875) | |
| Amounts attributable to nonredeemable noncontrolling interests | | | | | | | — | | | (67,768) | | | (67,768) | |
| Net income (loss) available to Arch | | | | | | | 409,295 | | | 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 ratio | 73.0 | % | | 76.1 | % | | 43.6 | % | | 67.7 | % | | 79.3 | % | | 68.7 | % |
| Acquisition expense ratio | 14.2 | % | | 15.4 | % | | 10.2 | % | | 13.8 | % | | 16.7 | % | | 14.0 | % |
| Other operating expense ratio | 17.0 | % | | 7.5 | % | | 10.4 | % | | 12.4 | % | | 10.0 | % | | 12.2 | % |
| Combined ratio | 104.2 | % | | 99.0 | % | | 64.2 | % | | 93.9 | % | | 106.0 | % | | 94.9 | % |
| | | | | | | | | | | |
| Goodwill and intangible assets | $ | 282,146 | | | $ | 20,319 | | | $ | 403,662 | | | $ | 706,127 | | | $ | 7,650 | | | $ | 713,777 | |
(1) Certain amounts included in the gross premiums written of each segment are related to reflectintersegment transactions. Accordingly, the Company's adoptionsum 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.’
| | | | | | | | |
| ARCH CAPITAL | 16 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2021 |
| | Insurance | | Reinsurance | | Mortgage | | Sub-Total | | Other | | Total |
| | | | | | | | | | | |
| 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 written | 3,112,207 | | | 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 earned | 2,623,571 | | | 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 income | | | | | | | 256,354 | | | 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 method | | | | | | | 299,270 | | | — | | | 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 affiliates | | | | | | | 1,396,476 | | | 89,435 | | | 1,485,911 | |
| Income tax (expense) benefit | | | | | | | (93,942) | | | (234) | | | (94,176) | |
| Income (loss) from operating affiliates | | | | | | | 224,052 | | | — | | | 224,052 | |
| Net income (loss) | | | | | | | 1,526,586 | | | 89,201 | | | 1,615,787 | |
| Amounts 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 Arch | | | | | | | 1,524,650 | | | 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 ratio | 66.7 | % | | 72.5 | % | | 8.7 | % | | 58.8 | % | | 78.0 | % | | 59.8 | % |
| Acquisition expense ratio | 15.9 | % | | 18.5 | % | | 8.6 | % | | 15.6 | % | | 18.9 | % | | 15.8 | % |
| Other operating expense ratio | 15.6 | % | | 7.3 | % | | 14.6 | % | | 12.4 | % | | 9.9 | % | | 12.3 | % |
| Combined ratio | 98.2 | % | | 98.3 | % | | 31.9 | % | | 86.8 | % | | 106.8 | % | | 87.9 | % |
| | | | | | | | | | | |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’
| | | | | | | | |
| ARCH CAPITAL | 17 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2020 |
| | Insurance | | Reinsurance | | Mortgage | | Sub-Total | | Other | | Total |
| | | | | | | | | | | |
| Gross premiums written (1) | $ | 3,444,335 | | | $ | 2,934,174 | | | $ | 1,084,337 | | | $ | 7,461,860 | | | $ | 590,309 | | | $ | 7,831,554 | |
| Premiums ceded | (1,119,165) | | | (967,698) | | | (136,154) | | | (2,222,031) | | | (150,437) | | | (2,151,853) | |
| Net premiums written | 2,325,170 | | | 1,966,476 | | | 948,183 | | | 5,239,829 | | | 439,872 | | | 5,679,701 | |
| Change in unearned premiums | (202,188) | | | (388,321) | | | 113,965 | | | (476,544) | | | (22,267) | | | (498,811) | |
| Net premiums earned | 2,122,982 | | | 1,578,155 | | | 1,062,148 | | | 4,763,285 | | | 417,605 | | | 5,180,890 | |
| Other underwriting income (loss) | (31) | | | 1,767 | | | 15,649 | | | 17,385 | | | 1,547 | | | 18,932 | |
| Losses and loss adjustment expenses | (1,550,632) | | | (1,235,586) | | | (444,721) | | | (3,230,939) | | | (331,275) | | | (3,562,214) | |
| Acquisition expenses | (317,428) | | | (255,516) | | | (108,304) | | | (681,248) | | | (68,766) | | | (750,014) | |
| Other operating expenses | (370,947) | | | (125,831) | | | (120,178) | | | (616,956) | | | (42,523) | | | (659,479) | |
| Underwriting income (loss) | $ | (116,056) | | | $ | (37,011) | | | $ | 404,594 | | | $ | 251,527 | | | $ | (23,412) | | | $ | 228,115 | |
| | | | | | | | | | | |
| Net investment income | | | | | | | 313,916 | | | 91,234 | | | 405,150 | |
| Net realized gains (losses) | | | | | | | 523,964 | | | (53,837) | | | 470,127 | |
| | | | | | | | | | | |
| Equity in net income (loss) of investment funds accounted for using the equity method | | | | | | | 57,407 | | | — | | | 57,407 | |
| Other income (loss) | | | | | | | 65 | | | — | | | 65 | |
| Corporate expenses (2) | | | | | | | (51,407) | | | — | | | (51,407) | |
| Transaction costs and other (2) | | | | | | | (5,246) | | | — | | | (5,246) | |
| Amortization of intangible assets | | | | | | | (49,835) | | | — | | | (49,835) | |
| Interest expense | | | | | | | (86,599) | | | (18,438) | | | (105,037) | |
| Net foreign exchange gains (losses) | | | | | | | (17,812) | | | 6,387 | | | (11,425) | |
| Income (loss) before income taxes and income (loss) from operating affiliates | | | | | | | 935,980 | | | 1,934 | | | 937,914 | |
| Income tax (expense) benefit | | | | | | | (78,112) | | | 333 | | | (77,779) | |
| Income (loss) from operating affiliates | | | | | | | 6,262 | | | — | | | 6,262 | |
| Net income (loss) | | | | | | | 864,130 | | | 2,267 | | | 866,397 | |
| Amounts attributable to redeemable noncontrolling interests | | | | | | | (1,873) | | | (3,125) | | | (4,998) | |
| Amounts attributable to nonredeemable noncontrolling interests | | | | | | | — | | | 578 | | | 578 | |
| Net income (loss) available to Arch | | | | | | | 862,257 | | | (280) | | | 861,977 | |
| Preferred dividends | | | | | | | (31,209) | | | — | | | (31,209) | |
| | | | | | | | | | | |
| Net income (loss) available to Arch common shareholders | | | | | | | $ | 831,048 | | | $ | (280) | | | $ | 830,768 | |
| | | | | | | | | | | |
| Underwriting Ratios | | | | | | | | | | | |
| Loss ratio | 73.0 | % | | 78.3 | % | | 41.9 | % | | 67.8 | % | | 79.3 | % | | 68.8 | % |
| Acquisition expense ratio | 15.0 | % | | 16.2 | % | | 10.2 | % | | 14.3 | % | | 16.5 | % | | 14.5 | % |
| Other operating expense ratio | 17.5 | % | | 8.0 | % | | 11.3 | % | | 13.0 | % | | 10.2 | % | | 12.7 | % |
| Combined ratio | 105.5 | % | | 102.5 | % | | 63.4 | % | | 95.1 | % | | 106.0 | % | | 96.0 | % |
| | | | | | | | | | | |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’
| | | | | | | | |
| ARCH CAPITAL | 18 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. Reserve for Losses and Loss Adjustment Expenses
The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the new accounting guidance on credit losses.beginning and ending reserve for losses and loss adjustment expenses:
Investments | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Reserve for losses and loss adjustment expenses at beginning of period | $ | 17,196,648 | | | $ | 15,044,874 | | | $ | 16,513,929 | | | $ | 13,891,842 | |
| Unpaid losses and loss adjustment expenses recoverable | 4,146,020 | | | 4,156,157 | | | 4,314,855 | | | 4,082,650 | |
| Net reserve for losses and loss adjustment expenses at beginning of period | 13,050,628 | | | 10,888,717 | | | 12,199,074 | | | 9,809,192 | |
| | | | | | | |
| Net incurred losses and loss adjustment expenses relating to losses occurring in: | | | | | | | |
| Current year | 1,348,528 | | | 1,264,315 | | | 3,812,381 | | | 3,673,346 | |
| Prior years | (122,509) | | | (48,042) | | | (223,431) | | | (111,132) | |
| Total net incurred losses and loss adjustment expenses | 1,226,019 | | | 1,216,273 | | | 3,588,950 | | | 3,562,214 | |
| | | | | | | |
| Net losses and loss adjustment expense reserves of acquired business (2) | 104,307 | | | — | | | 104,307 | | | $ | — | |
| | | | | | | |
| Retroactive reinsurance transactions (1) | — | | | — | | | (183,893) | | | 60,635 | |
| | | | | | | |
| Impact of deconsolidation of Watford (3) | (1,460,611) | | | — | | | (1,460,611) | | | — | |
| | | | | | | |
| Net foreign exchange (gains) losses | (78,152) | | | 114,122 | | | 10,818 | | | 22,706 | |
| | | | | | | |
| Net paid losses and loss adjustment expenses relating to losses occurring in: | | | | | | | |
| Current year | (208,923) | | | (189,961) | | | (432,348) | | | (359,395) | |
| Prior years | (417,368) | | | (512,263) | | | (1,610,397) | | | (1,578,464) | |
| Total net paid losses and loss adjustment expenses | (626,291) | | | (702,224) | | | (2,042,745) | | | (1,937,859) | |
| | | | | | | |
| Net reserve for losses and loss adjustment expenses at end of period | 12,215,900 | | | 11,516,888 | | | 12,215,900 | | | 11,516,888 | |
| Unpaid losses and loss adjustment expenses recoverable | 5,115,147 | | | 4,383,638 | | | 5,115,147 | | | 4,383,638 | |
| Reserve for losses and loss adjustment expenses at end of period | $ | 17,331,047 | | | $ | 15,900,526 | | | $ | 17,331,047 | | | $ | 15,900,526 | |
The(1) During the 2021 first quarter, the Company conductsentered into a periodic reviewreinsurance to identifyclose and evaluate credit based impairmentsother related agreements with Premia Managing Agency Limited (“Premia”), in connection with the 2018 and prior years of account related to the acquisition of Barbican Group Holdings Limited (“Barbican”). During the 2020 first quarter, the Company entered into a reinsurance to close agreement of the 2017 and prior years of account previously covered by a third party arrangement.
(2) Represents activity related to the Company’s available for sale investments. acquisitions in the 2021 period. See note 2.
Development on Prior Year Loss Reserves
2021 Third Quarter
During the 2021 third quarter, the Company recorded net favorable development on prior year loss reserves of $122.5 million, which consisted of $5.1 million from the insurance segment, $72.3 million from the reinsurance segment and $45.1 million from the mortgage segment.
The Company derives estimated credit losses by comparing expected future cash flows to be collected to the amortized costinsurance segment’s net favorable development of the security. Estimates of expected future cash flows consider among other things, macroeconomic conditions as well as the financial condition, near-term and long-term prospects$5.1 million, or 0.5 loss ratio points, for the issuer,2021 third quarter consisted of $49.0 million of net favorable development in short-tailed and the likelihoodlong-tailed lines and $43.9 million of the recoverabilitynet adverse development in medium-tailed lines. Net favorable development in short-tailed lines reflected $5.4 million of principal and interest. Effective January 1, 2020, credit losses are recognized through an allowance account subject to reversal, rather than a reduction in amortized cost. Declines in value attributable to factors other than credit are reported in other comprehensive income while the allowance for credit loss is charged to net realized gains (losses).
For available for sale investments that the Company intends to sell or for which it is more likely than not that the Company would be required to sell before an anticipated recovery in value, the full amount of the impairment is included in net realized gains (losses). The new cost basis of the investment is the previous amortized cost basis reduced by the impairment recognized in net realized gains (losses). The new cost basis is not adjusted for any subsequent recoveries in fair value.
The Company reports accrued investment income separatelyfavorable development in lenders products, primarily from investment balancesthe 2020 accident year (i.e., the year in which a loss occurred), $5.4 million of favorable development from property (excluding marine), primarily from the 2020 accident year, and has elected not$5.1 million of favorable development in travel and accident, across most accident years. Net favorable development in long-tailed lines reflected $26.3 million of favorable development related to measure an allowance for credit losses for accrued investment income. Any uncollectible accrued interest income is written offconstruction and national accounts, across most accident years, and $6.7 million of favorable development related to other business, including alternative markets, primarily from the 2015 to 2018 accident years. Net adverse development in the period it is deemed uncollectible.medium-tailed lines included $37.0 million of adverse development in contract binding business, across most accident years, partially offset by favorable development in marine and programs, primarily from more recent accident years.
| | | | | | | | |
| ARCH CAPITAL | 19 | 2021 THIRD QUARTER FORM 10-Q |
Reinsurance RecoverablesARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
InNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The reinsurance segment’s net favorable development of $72.3 million, or 10.7 loss ratio points, for the normal course2021 third quarter consisted of $65.4 million of net favorable development in short-tailed lines and $6.9 million in medium-tailed and long-tailed lines. Net favorable development in short-tailed lines reflected $46.1 million of favorable development related to property catastrophe and property other than property catastrophe business, primarily from the Company’s subsidiaries cede a portion of their premium2017 to 2020 underwriting years (i.e., all premiums and losses through pro rataattributable to contracts having an inception or renewal date within the given twelve-month period) and $18.9 million of favorable development related to other specialty, primarily from the 2012 to 2017 underwriting years. Net favorable development in medium-tailed and long-tailed lines included $4.7 million of favorable development in casualty, primarily from the 2013 and 2014 underwriting years.
The mortgage segment’s net favorable development was $45.1 million, or 14.5 loss ratio points, for the 2021 third quarter, about half of which came from U.S. primary mortgage insurance, from better than expected cure activity in pre-pandemic delinquencies and recoveries on second lien and student loans, and the other half from our CRT portfolio and international mortgage insurance.
2020 Third Quarter
During the 2020 third quarter, the Company recorded net favorable development on prior year loss reserves of $48.0 million, which consisted of $2.3 million from the insurance segment, $42.0 million from the reinsurance segment and $4.5 million from the mortgage segment, partially offset by $0.7 million unfavorable from the ‘other’ segment.
The insurance segment’s net favorable development of $2.3 million, or 0.3 loss ratio points, for the 2020 third quarter consisted of $12.9 million of net favorable development in short-tailed and long-tailed lines and $10.6 million of net adverse development in medium-tailed lines. Net favorable development of $11.8 million in short-tailed lines reflected $8.0 million of favorable development from property (excluding marine), primarily from the 2015 to 2018 accident years and $3.4 million of favorable development in travel and accident, primarily from the 2019 accident year. Net favorable development of $1.1 million in long-tailed lines reflected $8.7 million of favorable development in construction and national accounts, primarily from the 2018 accident year, and $4.2 million of favorable development related to other business, including alternative markets and excess workers’ compensation, primarily from the 2013 to 2017 accident years, partially offset by $11.7 million of adverse development in executive assurance and casualty, primarily from the 2015 and 2019 accident year. Net adverse development in medium-tailed lines included $7.1 million of adverse development in program business, primarily from
2015 to 2018 accident years and $3.7 million of adverse development in contract binding, across all accident years.
The reinsurance segment’s net favorable development of $42.0 million, or 7.6 loss reinsurance agreementsratio points, for the 2020 third quarter consisted of $45.6 million of net favorable development in short-tailed and medium-tailed lines and net adverse development of $3.6 million from long-tailed lines. Net favorable development in short-tailed lines reflected $27.6 million of favorable development related to property catastrophe and property other than property catastrophe business, primarily from the 2016 to 2019 underwriting years and $7.8 million of favorable development from other specialty, primarily from the 2016 to 2019 underwriting years. Net favorable development of $9.4 million in medium-tailed lines reflected favorable development in marine and aviation across most underwriting years. Adverse development of $3.6 million in long-tailed lines reflected an increase in reserves from casualty, primarily from the 2012 to 2019 underwriting years.
The mortgage segment’s net favorable development was $4.5 million, or 1.3 loss ratio points, for the 2020 third quarter, primarily driven by subrogation recoveries on a treaty or facultative basis. Reinsurance recoverables aresecond lien and student loan business.
Nine Months Ended September 30, 2021
During the nine months ended September 30, 2021, the Company recorded as assets, predicatednet favorable development on prior year loss reserves of $223.4 million, which consisted of $13.1 million from the reinsurers’ ability to meet their obligations underinsurance segment, $119.6 million from the reinsurance agreements. In certain instances,segment and $99.1 million from the mortgage segment, partially offset by $8.4 million of adverse development from the ‘other’ segment (activity for the six months ended June 30, 2021 prior to deconsolidation of Watford).
The insurance segment’s net favorable development of $13.1 million, or 0.5 loss ratio points, for the 2021 period consisted of $102.5 million of net favorable development in short-tailed and long-tailed lines, partially offset by $89.4 million of net adverse development in medium-tailed lines. Net favorable development of $65.3 million in short-tailed lines reflected $27.0 million of favorable development from property (excluding marine), primarily from the 2019 and 2020 accident years, $24.0 million of favorable development in lenders products, primarily from the 2020 accident year, and $14.4 million of favorable development in travel and accident, primarily from the 2017 to 2020 accident years. Net favorable development of $37.1 million in long-tailed lines included favorable development primarily related to construction, national accounts and alternative markets, primarily from the 2016 to 2019 accident years. Net adverse development in medium-tailed lines reflected $57.1 million of adverse development in contract binding business, primarily from the 2014 to 2019 accident years, $26.2 million of adverse development in professional liability business,
| | | | | | | | |
| ARCH CAPITAL | 20 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
primarily from the 2019 and 2020 accident years, and $6.9 million of adverse development in programs business, primarily from the 2019 accident year.
The reinsurance segment’s net favorable development of $119.6 million, or 5.8 loss ratio points, for the 2021 period consisted of $139.7 million of net favorable development from short-tailed and medium-tailed lines, partially offset by $20.1 million of net adverse development from long-tailed lines. Net favorable development of $132.6 million in short-tailed lines reflected $97.1 million of favorable development from other specialty lines, primarily from the 2016 to 2019 underwriting years, and $71.7 million of favorable development from property other than property catastrophe business, primarily from the 2017 to 2020 underwriting years. Such amounts were partially offset by adverse development of $36.3 million from property catastrophe, primarily from the 2020 underwriting year. Adverse development in long-tailed lines reflected an increase in reserves from casualty, primarily from the 2018 underwriting year.
The mortgage segment’s net favorable development was $99.1 million, or 10.1 loss ratio points, for the 2021 period, which included reserve releases associated with various vintage credit risk transfer contracts that were called by the GSEs, favorable development on U.S. and international business and subrogation recoveries on second lien and student loan business.
Nine Months Ended September 30, 2020
During the nine months ended September 30, 2020, the Company obtains collateral,recorded net favorable development on prior year loss reserves of $111.1 million, which consisted of $5.9 million from the insurance segment, $93.8 million from the reinsurance segment, $10.8 million from the mortgage segment and $0.6 million from the ‘other’ segment.
The insurance segment’s net favorable development of $5.9 million, or 0.3 loss ratio points, for the 2020 period consisted of $41.6 million of net favorable development in short-tailed and long-tailed lines, partially offset by $35.7 million of net adverse development in medium-tailed lines. Net favorable development of $27.2 million in short-tailed lines reflected $17.5 million of favorable development from property (excluding marine), primarily from the 2015 to 2018 accident years, $6.2 million of favorable development on travel and accident, primarily from 2019 accident year, and $3.5 million of favorable development in lenders products, primarily from the 2018 and 2019 accident years. Net favorable development of $14.4 million in long-tailed lines included $11.7 million of favorable development related to other business, including lettersalternative markets and excess workers’ compensation, primarily from the 2013 to 2017 accident years. Net adverse development in medium-tailed lines reflected $23.0 million of creditadverse development in contract binding business, across all accident years, and trust accounts$13.5 million of adverse development
in program business, primarily from the 2016 to further reduce2018 accident years.
The reinsurance segment’s net favorable development of $93.8 million, or 5.9 loss ratio points, for the credit exposure2020 period consisted of $113.0 million of net favorable development from short-tailed and medium-tailed lines, partially offset by $19.2 million of net adverse development from long-tailed lines. Net favorable development of $101.8 million in short-tailed lines reflected $52.1 million related to property catastrophe and property other than property catastrophe business, primarily from the 2016 to 2019 underwriting years, and $47.1 million from other specialty lines, across most underwriting years. Adverse development in long-tailed lines of $19.2 million reflected an increase in reserves from casualty, primarily from the 2012 to 2015 underwriting years.
The mortgage segment’s net favorable development was $10.8 million, or 1.0 loss ratio points, for the 2020 period, primarily driven by subrogation recoveries on its reinsurance recoverables. second lien and student loan business.
7. Allowance for Expected Credit Losses
Premiums Receivable
The Company reports its reinsurance recoverables netfollowing table provides a roll forward of an allowance for expected credit loss. The allowance is based upon the Company’s ongoing review of amounts outstanding, the financial condition of its reinsurers, amounts and form of collateral obtained and other relevant factors. A ratings based probability-of-default and loss-given-default methodology is used to estimate the allowance for expected credit loss. Anylosses of the Company’s premium receivables:
| | | | | | | | | |
| Premium Receivables, Net of Allowance | Allowance for Expected Credit Losses | |
| Three Months Ended September 30, 2021 | | |
| Balance at beginning of period | $ | 2,866,578 | | $ | 35,979 | | |
| | | |
| Change for provision of expected credit losses (1) | | 2,736 | | |
| | | |
| | | |
| Balance at end of period | $ | 2,807,720 | | $ | 38,715 | | |
| | | |
| Three Months Ended September 30, 2020 | | |
| Balance at beginning of period | $ | 2,203,753 | | $ | 36,054 | | |
| | | |
| Change for provision of expected credit losses (1) | | 1,046 | | |
| Balance at end of period | $ | 2,225,311 | | $ | 37,100 | | |
| | | |
| Nine Months Ended September 30, 2021 | | | |
| Balance at beginning of period | $ | 2,064,586 | | $ | 37,781 | | |
| | | |
| Change for provision of expected credit losses (1) | | 934 | | |
| | | |
| | | |
| Balance at end of period | $ | 2,807,720 | | $ | 38,715 | | |
| | | |
| Nine Months Ended September 30, 2020 | | | |
| Balance at beginning of period | $ | 1,778,717 | | $ | 21,003 | | |
| Cumulative effect of accounting change (2) | | 6,539 | | |
| Change for provision of expected credit losses (1) | | 9,558 | | |
| | | |
| | | |
| Balance at end of period | $ | 2,225,311 | | $ | 37,100 | | |
(1)Amounts deemed uncollectible are written-off in operating expenses. For the 2021 third quarter and 2020 third quarter, amounts written off were $1.2 million and nil, respectively. For the nine months ended September 30, 2021 and 2020 period, amounts written off were were $2.4 million and $2.3 million, respectively.
(2)Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.
| | | | | | | | |
| ARCH CAPITAL | 21 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Reinsurance Recoverables
The following table provides a roll forward of the allowance for credit losses is charged to net realized gains (losses) in the period the recoverable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses of the Company’s reinsurance recoverables:
| | | | | | | | | | | | |
| Reinsurance Recoverables, Net of Allowance | | Allowance for Expected Credit Losses | |
| Three Months Ended September 30, 2021 | | |
| Balance at beginning of period | $ | 4,314,515 | | | $ | 11,029 | | |
| | | | |
| Change for provision of expected credit losses | | | 1,802 | | |
| | | | |
| | | | |
| Balance at end of period | $ | 5,358,852 | | | $ | 12,831 | | |
| | | | |
| Three Months Ended September 30, 2020 | | |
| Balance at beginning of period | $ | 4,363,507 | | | $ | 13,595 | | |
| | | | |
| Change for provision of expected credit losses | | | 399 | | |
| Balance at end of period | $ | 4,621,937 | | | $ | 13,994 | | |
| | | | |
| Nine Months Ended September 30, 2021 | | | | |
| Balance at beginning of period | $ | 4,500,802 | | | $ | 11,636 | | |
| | | | |
| Change for provision of expected credit losses | | | 1,195 | | |
| | | | |
| | | | |
| Balance at end of period | $ | 5,358,852 | | | $ | 12,831 | | |
| | | | |
| Nine Months Ended September 30, 2020 | | | | |
| Balance at beginning of period | $ | 4,346,816 | | | $ | 1,364 | | |
| Cumulative effect of accounting change (1) | | | 12,010 | | |
| Change for provision of expected credit losses | | | 620 | | |
| | | | |
| | | | |
| Balance at end of period | $ | 4,621,937 | | | $ | 13,994 | | |
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.
The following table summarizes the Company’s reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums):
| | | | | | | | | | | |
| September 30, | | December 31 |
| 2021 | | 2020 |
| Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses | $ | 5,358,852 | | $ | 4,500,802 |
| % due from carriers with A.M. Best rating of “A-” or better | 69.1 | % | | 63.9 | % |
| % due from all other carriers with no A.M. Best rating (1) | 30.9 | % | | 36.1 | % |
| Largest balance due from any one carrier as % of total shareholders’ equity | 6.5 | % | | 1.8 | % |
(1) At September 30, 2021 and December 31, 2020 over 93% and 94% of such amount were collateralized through reinsurance trusts, funds withheld arrangements, letters of credit or other, respectively.
Contractholder ReceivablesDevelopment on Prior Year Loss Reserves
Certain
2021 Third Quarter
During the 2021 third quarter, the Company recorded net favorable development on prior year loss reserves of $122.5 million, which consisted of $5.1 million from the insurance policies written bysegment, $72.3 million from the Company’s U.S.reinsurance segment and $45.1 million from the mortgage segment.
The insurance operations feature large deductibles,segment’s net favorable development of $5.1 million, or 0.5 loss ratio points, for the 2021 third quarter consisted of $49.0 million of net favorable development in short-tailed and long-tailed lines and $43.9 million of net adverse development in medium-tailed lines. Net favorable development in short-tailed lines reflected $5.4 million of
favorable development in lenders products, primarily from the 2020 accident year (i.e., the year in itswhich a loss occurred), $5.4 million of favorable development from property (excluding marine), primarily from the 2020 accident year, and $5.1 million of favorable development in travel and accident, across most accident years. Net favorable development in long-tailed lines reflected $26.3 million of favorable development related to construction and national accounts, lineacross most accident years, and $6.7 million of business. Under such contracts, the Company is obligatedfavorable development related to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by the policy holder for the deductible amount. These amounts are included on a gross basis in the consolidated balance sheet as contractholder payables and contractholder receivables. In the event that the Company is unable to collectother business, including alternative markets, primarily from the policyholder, the Company would be liable for such defaulted amounts. Collateral,2015 to 2018 accident years. Net adverse development in medium-tailed lines included $37.0 million of adverse development in contract binding business, across most accident years, partially offset by favorable development in marine and programs, primarily in the form of letters of credit, cash and trusts, is obtained from the policyholder to mitigate the Company’s credit risk.
Contractholder receivables are reported net of an allowance for expected credit losses. The allowance is based upon the Company’s ongoing review of amounts outstanding, changes in policyholder credit standing, amounts and form of collateral obtained, and other relevant factors. A ratings based probability-of-default and loss-given-default methodology is used to estimate the allowance for expected credit losses. Any allowance for credit losses is charged to net realized gains (losses) in the period the receivable ismore recent accident years.
| | | | | | | | |
| ARCH CAPITAL | 1219 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
recordedThe reinsurance segment’s net favorable development of $72.3 million, or 10.7 loss ratio points, for the 2021 third quarter consisted of $65.4 million of net favorable development in short-tailed lines and revised$6.9 million in subsequent periodsmedium-tailed and long-tailed lines. Net favorable development in short-tailed lines reflected $46.1 million of favorable development related to reflect changesproperty catastrophe and property other than property catastrophe business, primarily from the 2017 to 2020 underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period) and $18.9 million of favorable development related to other specialty, primarily from the 2012 to 2017 underwriting years. Net favorable development in medium-tailed and long-tailed lines included $4.7 million of favorable development in casualty, primarily from the Company’s estimate2013 and 2014 underwriting years.
The mortgage segment’s net favorable development was $45.1 million, or 14.5 loss ratio points, for the 2021 third quarter, about half of expected credit losses.
Premiums Receivable
Premiums receivable include amounts receivablewhich came from agents, brokers and insured that are both currently due and amounts not yet due on insurance, reinsurance andU.S. primary mortgage insurance, policies. Premiums receivable balances are reportedfrom better than expected cure activity in pre-pandemic delinquencies and recoveries on second lien and student loans, and the other half from our CRT portfolio and international mortgage insurance.
2020 Third Quarter
During the 2020 third quarter, the Company recorded net favorable development on prior year loss reserves of an allowance$48.0 million, which consisted of $2.3 million from the insurance segment, $42.0 million from the reinsurance segment and $4.5 million from the mortgage segment, partially offset by $0.7 million unfavorable from the ‘other’ segment.
The insurance segment’s net favorable development of $2.3 million, or 0.3 loss ratio points, for expected credit losses. The Company monitors credit risk associated with premiums receivable through its ongoing reviewthe 2020 third quarter consisted of amounts outstanding, aging$12.9 million of net favorable development in short-tailed and long-tailed lines and $10.6 million of net adverse development in medium-tailed lines. Net favorable development of $11.8 million in short-tailed lines reflected $8.0 million of favorable development from property (excluding marine), primarily from the receivable, historical loss data,2015 to 2018 accident years and counterparty financial strength measures. The allowance also includes estimated uncollectible amounts$3.4 million of favorable development in travel and accident, primarily from the 2019 accident year. Net favorable development of $1.1 million in long-tailed lines reflected $8.7 million of favorable development in construction and national accounts, primarily from the 2018 accident year, and $4.2 million of favorable development related to dispute risk. In certain instances, credit risk may be reducedother business, including alternative markets and excess workers’ compensation, primarily from the 2013 to 2017 accident years, partially offset by $11.7 million of adverse development in executive assurance and casualty, primarily from the Company’s right to offset loss obligations or unearned premiums against premiums receivable. Any allowance for credit losses is charged to net realized gains (losses)2015 and 2019 accident year. Net adverse development in the period the receivable is recorded and revisedmedium-tailed lines included $7.1 million of adverse development in subsequent periods to reflect changes in the Company’s estimate of expected credit losses.
Recently Issued Accounting Standards Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This ASU eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod tax allocation and calculating income taxes in interim periods. The ASU also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and does not expect this guidance to have a material effect on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional expedients and exceptions for applying GAAP to investments, derivatives, or other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. Along with the optional expedients, the amendments include a general principle that permits an entity to consider contract modifications due to reference reform to be an event that does not require contract re-measurement at the modification date or reassessment of a previous accounting determination. This standard may be elected over time through December 31, 2022 as reference rate reform activities occur. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and doesprogram business, primarily from
not expect this guidance2015 to have a material effect on the Company’s consolidated financial statements.
For information regarding additional accounting standards that the Company has not yet adopted, see note 3(r), “Significant Accounting Policies—Recent Accounting Pronouncements,”2018 accident years and $3.7 million of the notes to consolidated financial statementsadverse development in the Company’s 2019 Form 10-K.
2. Share Transactions
Share Repurchasescontract binding, across all accident years.
The boardreinsurance segment’s net favorable development of directors$42.0 million, or 7.6 loss ratio points, for the 2020 third quarter consisted of Arch Capital has authorized$45.6 million of net favorable development in short-tailed and medium-tailed lines and net adverse development of $3.6 million from long-tailed lines. Net favorable development in short-tailed lines reflected $27.6 million of favorable development related to property catastrophe and property other than property catastrophe business, primarily from the investment2016 to 2019 underwriting years and $7.8 million of favorable development from other specialty, primarily from the 2016 to 2019 underwriting years. Net favorable development of $9.4 million in Arch Capital’s common shares through a share repurchase program. Sincemedium-tailed lines reflected favorable development in marine and aviation across most underwriting years. Adverse development of $3.6 million in long-tailed lines reflected an increase in reserves from casualty, primarily from the inception of2012 to 2019 underwriting years.
The mortgage segment’s net favorable development was $4.5 million, or 1.3 loss ratio points, for the share repurchase program, Arch Capital has repurchased 388.9 million common shares for an aggregate purchase price of $4.04 billion. For2020 third quarter, primarily driven by subrogation recoveries on second lien and student loan business.
Nine Months Ended September 30, 2021
During the nine months ended September 30, 2020, Arch Capital repurchased 2.62021, the Company recorded net favorable development on prior year loss reserves of $223.4 million, shares underwhich consisted of $13.1 million from the share repurchase program with an aggregate purchase priceinsurance segment, $119.6 million from the reinsurance segment and $99.1 million from the mortgage segment, partially offset by $8.4 million of $75.5 million. Arch Capital repurchased 0.1 million shares underadverse development from the share repurchase program with an aggregate purchase price of $2.9 million during‘other’ segment (activity for the ninesix months ended SeptemberJune 30, 2019. At September 30, 2020, $924.52021 prior to deconsolidation of Watford).
The insurance segment’s net favorable development of $13.1 million, or 0.5 loss ratio points, for the 2021 period consisted of $102.5 million of share repurchases were available under the program, which may be effected from time to timenet favorable development in open market or privately negotiated transactions through December 31, 2021. The timingshort-tailed and amountlong-tailed lines, partially offset by $89.4 million of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. Depending upon results of operations, market conditions and thenet adverse development in medium-tailed lines. Net favorable development of $65.3 million in short-tailed lines reflected $27.0 million of favorable development from property (excluding marine), primarily from the economy, as well as other factors, generally Arch Capital will consider share repurchases on an opportunistic basis2019 and 2020 accident years, $24.0 million of favorable development in lenders products, primarily from time to time. During the 2020 third quarter, Arch Capital has not repurchased any shares under our share repurchase program.
| | | | | | | | |
| ARCH CAPITAL | 1320 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Numerator: | | | | | | | |
| Net income (loss) | $ | 488,682 | | | $ | 399,189 | | | $ | 866,397 | | | $ | 1,380,532 | |
| Amounts attributable to noncontrolling interests | (69,643) | | | (6,736) | | | (4,420) | | | (70,597) | |
| Net income (loss) available to Arch | 419,039 | | | 392,453 | | | 861,977 | | | 1,309,935 | |
| Preferred dividends | (10,403) | | | (10,403) | | | (31,209) | | | (31,209) | |
| | | | | | | |
| Net income (loss) available to Arch common shareholders | $ | 408,636 | | | $ | 382,050 | | | $ | 830,768 | | | $ | 1,278,726 | |
| | | | | | | |
| Denominator: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Weighted average common shares and common share equivalents outstanding — basic | 402,850,485 | | | 402,564,121 | | | 403,081,266 | | | 401,419,153 | |
| Effect of dilutive common share equivalents: | | | | | | | |
| Nonvested restricted shares | 1,580,791 | | | 1,895,972 | | | 1,690,447 | | | 1,637,015 | |
| Stock options (1) | 4,763,381 | | | 8,720,108 | | | 5,543,184 | | | 7,751,234 | |
| Weighted average common shares and common share equivalents outstanding — diluted | 409,194,657 | | | 413,180,201 | | | 410,314,897 | | | 410,807,402 | |
| | | | | | | |
| Earnings per common share: | | | | | | | |
| Basic | $ | 1.01 | | | $ | 0.95 | | | $ | 2.06 | | | $ | 3.19 | |
| Diluted | $ | 1.00 | | | $ | 0.92 | | | $ | 2.02 | | | $ | 3.11 | |
(1) Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2020 third quarter and 2019 third quarter, the number of stock options excluded were 4,713,241 and 37,394, respectively. For the nine months ended September 30, 2020 and 2019 period, the number of stock options excluded were 2,361,413 and 2,198,115, respectively.
| | | | | | | | |
ARCH CAPITAL | 14 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Segment Information
The Company classifies its businesses into 3 underwriting segments — insurance, reinsurance and mortgage — and 2 other operating segments — ‘other’ and corporate (non-underwriting). The Company determined its reportable 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.
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 President and Chief Executive Officer of Arch Capital, and the Chief Financial 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 underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting 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; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).
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 Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE.
The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.
The ‘other’ segment includes the results of Watford (see note 11). For the ‘other’ segment, performance is measured based on net income or loss. | | | | | | | | |
ARCH CAPITAL | 15 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
primarily from the 2019 and 2020 accident years, and $6.9 million of adverse development in programs business, primarily from the 2019 accident year.
The reinsurance segment’s net favorable development of $119.6 million, or 5.8 loss ratio points, for the 2021 period consisted of $139.7 million of net favorable development from short-tailed and medium-tailed lines, partially offset by $20.1 million of net adverse development from long-tailed lines. Net favorable development of $132.6 million in short-tailed lines reflected $97.1 million of favorable development from other specialty lines, primarily from the 2016 to 2019 underwriting years, and $71.7 million of favorable development from property other than property catastrophe business, primarily from the 2017 to 2020 underwriting years. Such amounts were partially offset by adverse development of $36.3 million from property catastrophe, primarily from the 2020 underwriting year. Adverse development in long-tailed lines reflected an increase in reserves from casualty, primarily from the 2018 underwriting year.
The mortgage segment’s net favorable development was $99.1 million, or 10.1 loss ratio points, for the 2021 period, which included reserve releases associated with various vintage credit risk transfer contracts that were called by the GSEs, favorable development on U.S. and international business and subrogation recoveries on second lien and student loan business.
Nine Months Ended September 30, 2020
During the nine months ended September 30, 2020, the Company recorded net favorable development on prior year loss reserves of $111.1 million, which consisted of $5.9 million from the insurance segment, $93.8 million from the reinsurance segment, $10.8 million from the mortgage segment and $0.6 million from the ‘other’ segment.
The insurance segment’s net favorable development of $5.9 million, or 0.3 loss ratio points, for the 2020 period consisted of $41.6 million of net favorable development in short-tailed and long-tailed lines, partially offset by $35.7 million of net adverse development in medium-tailed lines. Net favorable development of $27.2 million in short-tailed lines reflected $17.5 million of favorable development from property (excluding marine), primarily from the 2015 to 2018 accident years, $6.2 million of favorable development on travel and accident, primarily from 2019 accident year, and $3.5 million of favorable development in lenders products, primarily from the 2018 and 2019 accident years. Net favorable development of $14.4 million in long-tailed lines included $11.7 million of favorable development related to other business, including alternative markets and excess workers’ compensation, primarily from the 2013 to 2017 accident years. Net adverse development in medium-tailed lines reflected $23.0 million of adverse development in contract binding business, across all accident years, and $13.5 million of adverse development
in program business, primarily from the 2016 to 2018 accident years.
The reinsurance segment’s net favorable development of $93.8 million, or 5.9 loss ratio points, for the 2020 period consisted of $113.0 million of net favorable development from short-tailed and medium-tailed lines, partially offset by $19.2 million of net adverse development from long-tailed lines. Net favorable development of $101.8 million in short-tailed lines reflected $52.1 million related to property catastrophe and property other than property catastrophe business, primarily from the 2016 to 2019 underwriting years, and $47.1 million from other specialty lines, across most underwriting years. Adverse development in long-tailed lines of $19.2 million reflected an increase in reserves from casualty, primarily from the 2012 to 2015 underwriting years.
The mortgage segment’s net favorable development was $10.8 million, or 1.0 loss ratio points, for the 2020 period, primarily driven by subrogation recoveries on second lien and student loan business.
7. Allowance for Expected Credit Losses
Premiums Receivable
The following tables summarizetable provides a roll forward of the allowance for expected credit losses of the Company’s underwriting income or loss by segment, together with a reconciliationpremium receivables:
| | | | | | | | | |
| Premium Receivables, Net of Allowance | Allowance for Expected Credit Losses | |
| Three Months Ended September 30, 2021 | | |
| Balance at beginning of period | $ | 2,866,578 | | $ | 35,979 | | |
| | | |
| Change for provision of expected credit losses (1) | | 2,736 | | |
| | | |
| | | |
| Balance at end of period | $ | 2,807,720 | | $ | 38,715 | | |
| | | |
| Three Months Ended September 30, 2020 | | |
| Balance at beginning of period | $ | 2,203,753 | | $ | 36,054 | | |
| | | |
| Change for provision of expected credit losses (1) | | 1,046 | | |
| Balance at end of period | $ | 2,225,311 | | $ | 37,100 | | |
| | | |
| Nine Months Ended September 30, 2021 | | | |
| Balance at beginning of period | $ | 2,064,586 | | $ | 37,781 | | |
| | | |
| Change for provision of expected credit losses (1) | | 934 | | |
| | | |
| | | |
| Balance at end of period | $ | 2,807,720 | | $ | 38,715 | | |
| | | |
| Nine Months Ended September 30, 2020 | | | |
| Balance at beginning of period | $ | 1,778,717 | | $ | 21,003 | | |
| Cumulative effect of accounting change (2) | | 6,539 | | |
| Change for provision of expected credit losses (1) | | 9,558 | | |
| | | |
| | | |
| Balance at end of period | $ | 2,225,311 | | $ | 37,100 | | |
(1)Amounts deemed uncollectible are written-off in operating expenses. For the 2021 third quarter and 2020 third quarter, amounts written off were $1.2 million and nil, respectively. For the nine months ended September 30, 2021 and 2020 period, amounts written off were were $2.4 million and $2.3 million, respectively.
(2)Adoption of underwriting income or loss to net income available to Arch common shareholders:ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2020 |
| | Insurance | | Reinsurance | | Mortgage | | Sub-Total | | Other | | Total |
| | | | | | | | | | | |
| 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 written | 824,161 | | | 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 earned | 719,154 | | | 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 income | | | | | | | 99,857 | | | 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 method | | | | | | | 126,735 | | | 0 | | | 126,735 | |
| Other income (loss) | | | | | | | 919 | | | 0 | | | 919 | |
| Corporate expenses (2) | | | | | | | (16,263) | | | 0 | | | (16,263) | |
| Transaction costs and other (2) | | | | | | | (1,674) | | | 0 | | | (1,674) | |
| Amortization of intangible assets | | | | | | | (16,715) | | | 0 | | | (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 | | | | | | | 433,815 | | | 78,574 | | | 512,389 | |
| Income tax (expense) benefit | | | | | | | (23,638) | | | (69) | | | (23,707) | |
| Net income (loss) | | | | | | | 410,177 | | | 78,505 | | | 488,682 | |
| Amounts attributable to redeemable noncontrolling interests | | | | | | | (882) | | | (993) | | | (1,875) | |
| Amounts attributable to nonredeemable noncontrolling interests | | | | | | | 0 | | | (67,768) | | | (67,768) | |
| Net income (loss) available to Arch | | | | | | | 409,295 | | | 9,744 | | | 419,039 | |
| Preferred dividends | | | | | | | (10,403) | | | 0 | | | (10,403) | |
| | | | | | | | | | | |
| Net income (loss) available to Arch common shareholders | | | | | | | $ | 398,892 | | | $ | 9,744 | | | $ | 408,636 | |
| | | | | | | | | | | |
| Underwriting Ratios | | | | | | | | | | | |
| Loss ratio | 73.0 | % | | 76.1 | % | | 43.6 | % | | 67.7 | % | | 79.3 | % | | 68.7 | % |
| Acquisition expense ratio | 14.2 | % | | 15.4 | % | | 10.2 | % | | 13.8 | % | | 16.7 | % | | 14.0 | % |
| Other operating expense ratio | 17.0 | % | | 7.5 | % | | 10.4 | % | | 12.4 | % | | 10.0 | % | | 12.2 | % |
| Combined ratio | 104.2 | % | | 99.0 | % | | 64.2 | % | | 93.9 | % | | 106.0 | % | | 94.9 | % |
| | | | | | | | | | | |
| Goodwill and intangible assets | $ | 282,146 | | | $ | 20,319 | | | $ | 403,662 | | | $ | 706,127 | | | $ | 7,650 | | | $ | 713,777 | |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’
| | | | | | | | |
| ARCH CAPITAL | 1621 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2019 |
| | Insurance | | Reinsurance | | Mortgage | | Sub-Total | | Other | | Total |
| | | | | | | | | | | |
| Gross premiums written (1) | $ | 1,005,874 | | | $ | 662,572 | | | $ | 375,092 | | | $ | 2,043,292 | | | $ | 249,960 | | | $ | 2,181,121 | |
| Premiums ceded | (302,034) | | | (226,096) | | | (57,703) | | | (585,587) | | | (94,208) | | | (567,664) | |
| Net premiums written | 703,840 | | | 436,476 | | | 317,389 | | | 1,457,705 | | | 155,752 | | | 1,613,457 | |
| Change in unearned premiums | (98,504) | | | (72,621) | | | 25,611 | | | (145,514) | | | (29,920) | | | (175,434) | |
| Net premiums earned | 605,336 | | | 363,855 | | | 343,000 | | | 1,312,191 | | | 125,832 | | | 1,438,023 | |
| Other underwriting income (loss) | 0 | | | (1,208) | | | 3,955 | | | 2,747 | | | 579 | | | 3,326 | |
| Losses and loss adjustment expenses | (422,782) | | | (270,379) | | | (13,080) | | | (706,241) | | | (96,214) | | | (802,455) | |
| Acquisition expenses | (91,259) | | | (62,393) | | | (34,396) | | | (188,048) | | | (23,072) | | | (211,120) | |
| Other operating expenses | (115,408) | | | (32,533) | | | (37,003) | | | (184,944) | | | (11,568) | | | (196,512) | |
| Underwriting income (loss) | $ | (24,113) | | | $ | (2,658) | | | $ | 262,476 | | | 235,705 | | | (4,443) | | | 231,262 | |
| | | | | | | | | | | |
| Net investment income | | | | | | | 126,874 | | | 34,614 | | | 161,488 | |
| Net realized gains (losses) | | | | | | | 80,014 | | | (18,659) | | | 61,355 | |
| | | | | | | | | | | |
| Equity in net income (loss) of investment funds accounted for using the equity method | | | | | | | 17,130 | | | 0 | | | 17,130 | |
| Other income (loss) | | | | | | | 1,338 | | | 0 | | | 1,338 | |
| Corporate expenses (2) | | | | | | | (15,066) | | | 0 | | | (15,066) | |
| Transaction costs and other (2) | | | | | | | (1,995) | | | 0 | | | (1,995) | |
| Amortization of intangible assets | | | | | | | (20,003) | | | 0 | | | (20,003) | |
| Interest expense | | | | | | | (23,237) | | | (8,091) | | | (31,328) | |
| Net foreign exchange gains (losses) | | | | | | | 29,794 | | | 3,330 | | | 33,124 | |
| Income (loss) before income taxes | | | | | | | 430,554 | | | 6,751 | | | 437,305 | |
| Income tax (expense) benefit | | | | | | | (38,116) | | | 0 | | | (38,116) | |
| Net income (loss) | | | | | | | 392,438 | | | 6,751 | | | 399,189 | |
| Amounts attributable to redeemable noncontrolling interests | | | | | | | 0 | | | (6,600) | | | (6,600) | |
| Amounts attributable to nonredeemable noncontrolling interests | | | | | | | 0 | | | (136) | | | (136) | |
| Net income (loss) available to Arch | | | | | | | 392,438 | | | 15 | | | 392,453 | |
| Preferred dividends | | | | | | | (10,403) | | | 0 | | | (10,403) | |
| | | | | | | | | | | |
| Net income (loss) available to Arch common shareholders | | | | | | | $ | 382,035 | | | $ | 15 | | | $ | 382,050 | |
| | | | | | | | | | | |
| Underwriting Ratios | | | | | | | | | | | |
| Loss ratio | 69.8 | % | | 74.3 | % | | 3.8 | % | | 53.8 | % | | 76.5 | % | | 55.8 | % |
| Acquisition expense ratio | 15.1 | % | | 17.1 | % | | 10.0 | % | | 14.3 | % | | 18.3 | % | | 14.7 | % |
| Other operating expense ratio | 19.1 | % | | 8.9 | % | | 10.8 | % | | 14.1 | % | | 9.2 | % | | 13.7 | % |
| Combined ratio | 104.0 | % | | 100.3 | % | | 24.6 | % | | 82.2 | % | | 104.0 | % | | 84.2 | % |
| | | | | | | | | | | |
| Goodwill and intangible assets | $ | 158,990 | | | $ | 0 | | | $ | 457,860 | | | $ | 616,850 | | | $ | 7,650 | | | $ | 624,500 | |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’
| | | | | | | | |
ARCH CAPITAL | 17 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2020 |
| | Insurance | | Reinsurance | | Mortgage | | Sub-Total | | Other | | Total |
| | | | | | | | | | | |
| Gross premiums written (1) | $ | 3,444,335 | | | $ | 2,934,174 | | | $ | 1,084,337 | | | $ | 7,461,860 | | | $ | 590,309 | | | $ | 7,831,554 | |
| Premiums ceded | (1,119,165) | | | (967,698) | | | (136,154) | | | (2,222,031) | | | (150,437) | | | (2,151,853) | |
| Net premiums written | 2,325,170 | | | 1,966,476 | | | 948,183 | | | 5,239,829 | | | 439,872 | | | 5,679,701 | |
| Change in unearned premiums | (202,188) | | | (388,321) | | | 113,965 | | | (476,544) | | | (22,267) | | | (498,811) | |
| Net premiums earned | 2,122,982 | | | 1,578,155 | | | 1,062,148 | | | 4,763,285 | | | 417,605 | | | 5,180,890 | |
| Other underwriting income (loss) | (31) | | | 1,767 | | | 15,649 | | | 17,385 | | | 1,547 | | | 18,932 | |
| Losses and loss adjustment expenses | (1,550,632) | | | (1,235,586) | | | (444,721) | | | (3,230,939) | | | (331,275) | | | (3,562,214) | |
| Acquisition expenses | (317,428) | | | (255,516) | | | (108,304) | | | (681,248) | | | (68,766) | | | (750,014) | |
| Other operating expenses | (370,947) | | | (125,831) | | | (120,178) | | | (616,956) | | | (42,523) | | | (659,479) | |
| Underwriting income (loss) | $ | (116,056) | | | $ | (37,011) | | | $ | 404,594 | | | 251,527 | | | (23,412) | | | 228,115 | |
| | | | | | | | | | | |
| Net investment income | | | | | | | 313,916 | | | 91,234 | | | 405,150 | |
| Net realized gains (losses) | | | | | | | 523,964 | | | (53,837) | | | 470,127 | |
| | | | | | | | | | | |
| Equity in net income (loss) of investment funds accounted for using the equity method | | | | | | | 57,407 | | | 0 | | | 57,407 | |
| Other income (loss) | | | | | | | 6,327 | | | 0 | | | 6,327 | |
| Corporate expenses (2) | | | | | | | (51,407) | | | 0 | | | (51,407) | |
| Transaction costs and other (2) | | | | | | | (5,246) | | | 0 | | | (5,246) | |
| Amortization of intangible assets | | | | | | | (49,835) | | | 0 | | | (49,835) | |
| Interest expense | | | | | | | (86,599) | | | (18,438) | | | (105,037) | |
| Net foreign exchange gains (losses) | | | | | | | (17,812) | | | 6,387 | | | (11,425) | |
| Income (loss) before income taxes | | | | | | | 942,242 | | | 1,934 | | | 944,176 | |
| Income tax (expense) benefit | | | | | | | (78,112) | | | 333 | | | (77,779) | |
| Net income (loss) | | | | | | | 864,130 | | | 2,267 | | | 866,397 | |
| Dividends attributable to redeemable noncontrolling interests | | | | | | | (1,873) | | | (3,125) | | | (4,998) | |
| Amounts attributable to nonredeemable noncontrolling interests | | | | | | | 0 | | | 578 | | | 578 | |
| Net income (loss) available to Arch | | | | | | | 862,257 | | | (280) | | | 861,977 | |
| Preferred dividends | | | | | | | (31,209) | | | 0 | | | (31,209) | |
| | | | | | | | | | | |
| Net income (loss) available to Arch common shareholders | | | | | | | $ | 831,048 | | | $ | (280) | | | $ | 830,768 | |
| | | | | | | | | | | |
| Underwriting Ratios | | | | | | | | | | | |
| Loss ratio | 73.0 | % | | 78.3 | % | | 41.9 | % | | 67.8 | % | | 79.3 | % | | 68.8 | % |
| Acquisition expense ratio | 15.0 | % | | 16.2 | % | | 10.2 | % | | 14.3 | % | | 16.5 | % | | 14.5 | % |
| Other operating expense ratio | 17.5 | % | | 8.0 | % | | 11.3 | % | | 13.0 | % | | 10.2 | % | | 12.7 | % |
| Combined ratio | 105.5 | % | | 102.5 | % | | 63.4 | % | | 95.1 | % | | 106.0 | % | | 96.0 | % |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’
| | | | | | | | |
ARCH CAPITAL | 18 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2019 |
| | Insurance | | Reinsurance | | Mortgage | | Sub-Total | | Other | | Total |
| | | | | | | | | | | |
| Gross premiums written (1) | $ | 2,867,753 | | | $ | 1,890,974 | | | $ | 1,095,607 | | | $ | 5,853,574 | | | $ | 598,627 | | | $ | 6,196,809 | |
| Premiums ceded | (914,751) | | | (627,120) | | | (149,358) | | | (1,690,469) | | | (178,118) | | | (1,613,195) | |
| Net premiums written | 1,953,002 | | | 1,263,854 | | | 946,249 | | | 4,163,105 | | | 420,509 | | | 4,583,614 | |
| Change in unearned premiums | (201,719) | | | (186,450) | | | 72,436 | | | (315,733) | | | 2,735 | | | (312,998) | |
| Net premiums earned | 1,751,283 | | | 1,077,404 | | | 1,018,685 | | | 3,847,372 | | | 423,244 | | | 4,270,616 | |
| Other underwriting income (loss) | 0 | | | 4,393 | | | 11,867 | | | 16,260 | | | 1,844 | | | 18,104 | |
| Losses and loss adjustment expenses | (1,168,677) | | | (751,147) | | | (50,226) | | | (1,970,050) | | | (318,480) | | | (2,288,530) | |
| Acquisition expenses | (265,177) | | | (173,504) | | | (98,722) | | | (537,403) | | | (81,654) | | | (619,057) | |
| Other operating expenses | (338,327) | | | (102,197) | | | (116,697) | | | (557,221) | | | (39,368) | | | (596,589) | |
| Underwriting income (loss) | $ | (20,898) | | | $ | 54,949 | | | $ | 764,907 | | | 798,958 | | | (14,414) | | | 784,544 | |
| | | | | | | | | | | |
| Net investment income | | | | | | | 371,161 | | | 102,314 | | | 473,475 | |
| Net realized gains (losses) | | | | | | | 316,201 | | | 6,167 | | | 322,368 | |
| | | | | | | | | | | |
| Equity in net income (loss) of investment funds accounted for using the equity method | | | | | | | 96,533 | | | 0 | | | 96,533 | |
| Other income (loss) | | | | | | | 3,550 | | | 0 | | | 3,550 | |
| Corporate expenses (2) | | | | | | | (47,911) | | | 0 | | | (47,911) | |
| Transaction costs and other (2) | | | | | | | (5,363) | | | 0 | | | (5,363) | |
| Amortization of intangible assets | | | | | | | (60,214) | | | 0 | | | (60,214) | |
| Interest expense | | | | | | | (70,094) | | | (19,579) | | | (89,673) | |
| Net foreign exchange gains (losses) | | | | | | | 28,779 | | | 2,918 | | | 31,697 | |
| Income (loss) before income taxes | | | | | | | 1,431,600 | | | 77,406 | | | 1,509,006 | |
| Income tax (expense) benefit | | | | | | | (128,454) | | | (20) | | | (128,474) | |
| Net income (loss) | | | | | | | 1,303,146 | | | 77,386 | | | 1,380,532 | |
| Dividends attributable to redeemable noncontrolling interests | | | | | | | 0 | | | (15,778) | | | (15,778) | |
| Amounts attributable to nonredeemable noncontrolling interests | | | | | | | 0 | | | (54,819) | | | (54,819) | |
| Net income (loss) available to Arch | | | | | | | 1,303,146 | | | 6,789 | | | 1,309,935 | |
| Preferred dividends | | | | | | | (31,209) | | | 0 | | | (31,209) | |
| | | | | | | | | | | |
| Net income (loss) available to Arch common shareholders | | | | | | | $ | 1,271,937 | | | $ | 6,789 | | | $ | 1,278,726 | |
| | | | | | | | | | | |
| Underwriting Ratios | | | | | | | | | | | |
| Loss ratio | 66.7 | % | | 69.7 | % | | 4.9 | % | | 51.2 | % | | 75.2 | % | | 53.6 | % |
| Acquisition expense ratio | 15.1 | % | | 16.1 | % | | 9.7 | % | | 14.0 | % | | 19.3 | % | | 14.5 | % |
| Other operating expense ratio | 19.3 | % | | 9.5 | % | | 11.5 | % | | 14.5 | % | | 9.3 | % | | 14.0 | % |
| Combined ratio | 101.1 | % | | 95.3 | % | | 26.1 | % | | 79.7 | % | | 103.8 | % | | 82.1 | % |
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. 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.’
| | | | | | | | |
ARCH CAPITAL | 19 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Reserve for Losses and Loss Adjustment Expenses
The following table represents an analysis of losses and loss adjustment expenses andprovides a reconciliationroll forward of the beginningallowance for expected credit losses of the Company’s reinsurance recoverables:
| | | | | | | | | | | | |
| Reinsurance Recoverables, Net of Allowance | | Allowance for Expected Credit Losses | |
| Three Months Ended September 30, 2021 | | |
| Balance at beginning of period | $ | 4,314,515 | | | $ | 11,029 | | |
| | | | |
| Change for provision of expected credit losses | | | 1,802 | | |
| | | | |
| | | | |
| Balance at end of period | $ | 5,358,852 | | | $ | 12,831 | | |
| | | | |
| Three Months Ended September 30, 2020 | | |
| Balance at beginning of period | $ | 4,363,507 | | | $ | 13,595 | | |
| | | | |
| Change for provision of expected credit losses | | | 399 | | |
| Balance at end of period | $ | 4,621,937 | | | $ | 13,994 | | |
| | | | |
| Nine Months Ended September 30, 2021 | | | | |
| Balance at beginning of period | $ | 4,500,802 | | | $ | 11,636 | | |
| | | | |
| Change for provision of expected credit losses | | | 1,195 | | |
| | | | |
| | | | |
| Balance at end of period | $ | 5,358,852 | | | $ | 12,831 | | |
| | | | |
| Nine Months Ended September 30, 2020 | | | | |
| Balance at beginning of period | $ | 4,346,816 | | | $ | 1,364 | | |
| Cumulative effect of accounting change (1) | | | 12,010 | | |
| Change for provision of expected credit losses | | | 620 | | |
| | | | |
| | | | |
| Balance at end of period | $ | 4,621,937 | | | $ | 13,994 | | |
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.
The following table summarizes the Company’s reinsurance recoverables on paid and ending reserve forunpaid losses and loss adjustment expenses:(not including ceded unearned premiums):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Reserve for losses and loss adjustment expenses at beginning of period | $ | 15,044,874 | | | $ | 12,230,316 | | | $ | 13,891,842 | | | $ | 11,853,297 | |
| Unpaid losses and loss adjustment expenses recoverable | 4,156,157 | | | 3,024,797 | | | 4,082,650 | | | 2,814,291 | |
| Net reserve for losses and loss adjustment expenses at beginning of period | 10,888,717 | | | 9,205,519 | | | 9,809,192 | | | 9,039,006 | |
| | | | | | | |
| Net incurred losses and loss adjustment expenses relating to losses occurring in: | | | | | | | |
| Current year | 1,264,315 | | | 855,352 | | | 3,673,346 | | | 2,419,044 | |
| Prior years | (48,042) | | | (52,897) | | | (111,132) | | | (130,514) | |
| Total net incurred losses and loss adjustment expenses | 1,216,273 | | | 802,455 | | | 3,562,214 | | | 2,288,530 | |
| | | | | | | |
| Retroactive reinsurance transactions (1) | 0 | | | 0 | | | 60,635 | | | (225,500) | |
| | | | | | | |
| Net foreign exchange (gains) losses | 114,122 | | | (73,200) | | | 22,706 | | | (74,981) | |
| | | | | | | |
| Net paid losses and loss adjustment expenses relating to losses occurring in: | | | | | | | |
| Current year | (189,961) | | | (175,611) | | | (359,395) | | | (301,099) | |
| Prior years | (512,263) | | | (399,948) | | | (1,578,464) | | | (1,366,741) | |
| Total net paid losses and loss adjustment expenses | (702,224) | | | (575,559) | | | (1,937,859) | | | (1,667,840) | |
| | | | | | | |
| Net reserve for losses and loss adjustment expenses at end of period | 11,516,888 | | | 9,359,215 | | | 11,516,888 | | | 9,359,215 | |
| Unpaid losses and loss adjustment expenses recoverable | 4,383,638 | | | 3,030,169 | | | 4,383,638 | | | 3,030,169 | |
| Reserve for losses and loss adjustment expenses at end of period | $ | 15,900,526 | | | $ | 12,389,384 | | | $ | 15,900,526 | | | $ | 12,389,384 | |
| | | | | | | | | | | |
| September 30, | | December 31 |
| 2021 | | 2020 |
| Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses | $ | 5,358,852 | | $ | 4,500,802 |
| % due from carriers with A.M. Best rating of “A-” or better | 69.1 | % | | 63.9 | % |
| % due from all other carriers with no A.M. Best rating (1) | 30.9 | % | | 36.1 | % |
| Largest balance due from any one carrier as % of total shareholders’ equity | 6.5 | % | | 1.8 | % |
(1) DuringAt September 30, 2021 and December 31, 2020 first quarter, a subsidiaryover 93% and 94% of the Company entered into asuch amount were collateralized through reinsurance to close agreementtrusts, funds withheld arrangements, letters of the 2017 and prior years of account previously covered by a third party arrangement, while in the 2019 first quarter, a subsidiary of the Company entered into a retroactive reinsurance transaction with third party reinsurer to reinsure run-off liabilities associated with certain U.S. insurance exposures.credit or other, respectively.
Development on Prior Year Loss Reserves
20202021 Third Quarter
During the 2021 third quarter, the Company recorded net favorable development on prior year loss reserves of $122.5 million, which consisted of $5.1 million from the insurance segment, $72.3 million from the reinsurance segment and $45.1 million from the mortgage segment.
The insurance segment’s net favorable development of $5.1 million, or 0.5 loss ratio points, for the 2021 third quarter consisted of $49.0 million of net favorable development in short-tailed and long-tailed lines and $43.9 million of net adverse development in medium-tailed lines. Net favorable development in short-tailed lines reflected $5.4 million of
favorable development in lenders products, primarily from the 2020 accident year (i.e., the year in which a loss occurred), $5.4 million of favorable development from property (excluding marine), primarily from the 2020 accident year, and $5.1 million of favorable development in travel and accident, across most accident years. Net favorable development in long-tailed lines reflected $26.3 million of favorable development related to construction and national accounts, across most accident years, and $6.7 million of favorable development related to other business, including alternative markets, primarily from the 2015 to 2018 accident years. Net adverse development in medium-tailed lines included $37.0 million of adverse development in contract binding business, across most accident years, partially offset by favorable development in marine and programs, primarily from more recent accident years.
| | | | | | | | |
| ARCH CAPITAL | 19 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The reinsurance segment’s net favorable development of $72.3 million, or 10.7 loss ratio points, for the 2021 third quarter consisted of $65.4 million of net favorable development in short-tailed lines and $6.9 million in medium-tailed and long-tailed lines. Net favorable development in short-tailed lines reflected $46.1 million of favorable development related to property catastrophe and property other than property catastrophe business, primarily from the 2017 to 2020 underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period) and $18.9 million of favorable development related to other specialty, primarily from the 2012 to 2017 underwriting years. Net favorable development in medium-tailed and long-tailed lines included $4.7 million of favorable development in casualty, primarily from the 2013 and 2014 underwriting years.
The mortgage segment’s net favorable development was $45.1 million, or 14.5 loss ratio points, for the 2021 third quarter, about half of which came from U.S. primary mortgage insurance, from better than expected cure activity in pre-pandemic delinquencies and recoveries on second lien and student loans, and the other half from our CRT portfolio and international mortgage insurance.
2020 Third Quarter
During the 2020 third quarter, the Company recorded net favorable development on prior year loss reserves of $48.0 million, which consisted of $2.3 million from the insurance segment, $42.0 million from the reinsurance segment and $4.5 million from the mortgage segment, partially offset by $0.7 million unfavorable from the ‘other’ segment.
The insurance segment’s net favorable development of $2.3 million, or 0.3 loss ratio points, for the 2020 third quarter consisted of $12.9 million of net favorable development in short-tailed and long-tailed lines and $10.6 million of net adverse development in medium-tailed lines. Net favorable development of $11.8 million in short-tailed lines reflected $8.0 million of favorable development from property (excluding marine), primarily from the 2015 to 2018 accident years (i.e., the year in which a loss occurred) and $3.4 million of favorable development in travel and accident, primarily from the 2019 accident year. Net favorable development of $1.1 million in long-tailed lines reflected $8.7 million of
favorable development in construction and national accounts, primarily from the 2018 accident year, and $4.2 million of favorable development related to other business, including alternative markets and excess workers’ compensation, primarily from the 2013 to 2017 accident years, partially offset by $11.7 million of adverse development in executive assurance and casualty, primarily from the 2015 and 2019 accident year. Net adverse development in medium-tailed lines included $7.1 million of adverse development in program business, primarily from
2015 to 2018 accident years and $3.7 million of adverse development in contract binding, across all accident years.
The reinsurance segment’s net favorable development of $42.0 million, or 7.6 loss ratio points, for the 2020 third quarter consisted of $45.6 million of net favorable development in short-tailed and medium-tailed lines and net adverse development of $3.6 million from long-tailed lines. Net favorable development in short-tailed lines reflected $27.6 million of favorable development related to property catastrophe and property other than property catastrophe business, primarily from the 2016 to 2019 underwriting years
| | | | | | | | |
ARCH CAPITAL | 20 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period), and $7.8 million of favorable development from other specialty, primarily from the 2016 to 2019 underwriting years. Net favorable development of $9.4 million in medium-tailed lines reflected favorable development in marine and aviation across most underwriting years. Adverse development of $3.6 million in long-tailed lines reflected an increase in reserves from casualty, primarily from the 2012 to 2019 underwriting years.
The mortgage segment’s net favorable development was $4.5 million, or 1.3 loss ratio points, for the 2020 third quarter, primarily driven by subrogation recoveries on second lien business and student loan business.
2019 Third QuarterNine Months Ended September 30, 2021
During the 2019 third quarter,nine months ended September 30, 2021, the Company recorded net favorable development on prior year loss reserves of $52.9$223.4 million, which consisted of $4.4$13.1 million from the insurance segment, $15.3$119.6 million from the reinsurance segment $33.0and $99.1 million from the mortgage segment, and $0.2partially offset by $8.4 million of adverse development from the ‘other’ segment.segment (activity for the six months ended June 30, 2021 prior to deconsolidation of Watford).
The insurance segment’s net favorable development of $4.4$13.1 million, or 0.70.5 loss ratio points, for the 2019 third quarter2021 period consisted of $24.8$102.5 million of net favorable development in short-tailed and long-tailed lines, and $20.4partially offset by $89.4 million of net adverse development in medium-tailed and long-tailed lines. Net favorable development of $65.3 million in short-tailed lines reflected $27.0 million of favorable development from property (excluding marine), primarily resulted from the 2019 and 2020 accident years, $24.0 million of favorable development in lenders products, primarily from the 2020 accident year, and property (including special risk other than marine) reserves across all$14.4 million of favorable development in travel and accident, years (i.e.,primarily from the year2017 to 2020 accident years. Net favorable development of $37.1 million in which a loss occurred).long-tailed lines included favorable development primarily related to construction, national accounts and alternative markets, primarily from the 2016 to 2019 accident years. Net adverse development in medium-tailed and long-tailed lines included $6.3reflected $57.1 million of adverse development in executive assurance reserves,contract binding business, primarily from the 20162014 to 20182019 accident years, $4.9$26.2 million of adverse development in casualty reserves, professional liability business,
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| ARCH CAPITAL | 20 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
primarily related to contract binding business across mostfrom the 2019 and 2020 accident years, $4.2and $6.9 million of adverse development in programprograms business, primarily from the 20182019 accident year, and $3.8 million in healthcare reserves, primarily from the 2016 to 2018 accident years.year.
The reinsurance segment’s net favorable development of $15.3$119.6 million, or 4.25.8 loss ratio points, for the 2019 third quarter2021 period consisted of $35.2$139.7 million of net favorable development from short-tailed and medium-tailed lines, andpartially offset by $20.1 million of net adverse development of $19.9 million from long-tailed lines. Net favorable development of $132.6 million in short-tailed and medium lines reflected $26.5$97.1 million of favorable development from other specialty lines, primarily from the 2016 to 2019 underwriting years, and $71.7 million of favorable development from property catastrophe and property other than property catastrophe reserves,business, primarily relatedfrom the 2017 to 2017 and 2018 catastrophic events, and favorable2020 underwriting years. Such amounts were partially offset by adverse development in marine and aviation and other reserves across mostof $36.3 million from property catastrophe, primarily from the 2020 underwriting years (i.e., all premiums and losses attributable to contracts having
an inception or renewal date within the given twelve-month period).year. Adverse development in long-tailed lines reflected an increase in reserves from casualty, primarily from variousthe 2018 underwriting years.year.
The mortgage segment’s net favorable development was $33.0$99.1 million, or 9.610.1 loss ratio points, for the 2019 third quarter. The 2019 third quarter2021 period, which included reserve releases associated with various vintage credit risk transfer contracts that were called by the GSEs, favorable development was primarily driven by favorable claim rates on first lienU.S. and international business and subrogation recoveries on second lien and student loan business.
Nine Months Ended September 30, 2020
During the nine months ended September 30, 2020, the Company recorded net favorable development on prior year loss reserves of $111.1 million, which consisted of $5.9 million from the insurance segment, $93.8 million from the reinsurance segment, $10.8 million from the mortgage segment and $0.6 million from the ‘other’ segment.
The insurance segment’s net favorable development of $5.9 million, or 0.3 loss ratio points, for the 2020 period consisted of $41.6 million of net favorable development in short-tailed and long-tailed lines, partially offset by $35.7 million of net adverse development in medium-tailed lines. Net favorable development of $27.2 million in short-tailed lines reflected $17.5 million of favorable development from property (excluding marine), primarily from the 2015 to 2018 accident years, $6.2 million of favorable development on travel and accident, primarily from 2019 accident year, and $3.5 million of favorable development in lenders products, primarily from the 2018 and 2019 accident years. Net favorable development of $14.4 million in long-tailed lines included $11.7 million of favorable development related to other business, including alternative markets and excess workers’ compensation, primarily from the 2013 to 2017 accident years. Net adverse development in medium-tailed lines reflected $23.0 million of adverse development in contract binding business, across all accident years, and $13.5 million of adverse development
in program business, primarily from the 2016 to 2018 accident years.
The reinsurance segment’s net favorable development of $93.8 million, or 5.9 loss ratio points, for the 2020 period consisted of $113.0 million of net favorable development from short-tailed and medium-tailed lines, partially offset by $19.2 million of net adverse development from long-tailed lines. Net favorable development of $101.8 million in short-tailed lines reflected $52.1 million related to property catastrophe and property other than property catastrophe business, primarily from the 2016 to 2019 underwriting years, and $47.1 million from other specialty lines, across most underwriting years. Adverse development in long-tailed lines of $19.2 million reflected an increase in reserves from casualty, primarily from the 2012 to 2015 underwriting years.
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ARCH CAPITAL | 21 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The mortgage segment’s net favorable development was $10.8 million, or 1.0 loss ratio points, for the 2020 period, primarily driven by subrogation recoveries on second lien business and student loan business.
Nine Months Ended September 30, 2019
During the nine months ended September 30, 2019, the Company recorded net favorable development on prior year loss reserves of $130.5 million, which consisted of $11.4 million from the insurance segment, $26.3 million from the reinsurance segment, $92.5 million from the mortgage segment and $0.3 million from the ‘other’ segment.
The insurance segment’s net favorable development of $11.4 million, or 0.7 loss ratio points, for the 2019 period consisted of $42.6 million of net favorable development in short-tailed lines, partially offset by $31.2 million of net adverse development in medium-tailed and long-tailed lines. Net favorable development in short-tailed lines primarily resulted from lenders products and property (including special risk other than marine) reserves across all accident years, partially offset by net adverse development in travel business, primarily from the 2018 accident year. Net adverse development in medium-tailed and long-tailed lines reflected $27.4 million of adverse development in program business, primarily from the 2018 accident year, and $12.8 million of adverse development in casualty business, primarily from contract binding business across most accident years. Such amounts were partially offset by $9.0 million of net favorable development in other medium-tailed and long-tailed lines, including professional liability, marine and surety business, across most accident years.
The reinsurance segment’s net favorable development of $26.3 million, or 2.4 loss ratio points, for the 2019 period consisted of $37.1 million of net favorable development from short-tailed and medium-tailed lines, offset by $10.8 million of net adverse development from long-tailed lines. Net favorable development in short-tailed lines reflected $22.6 million from other specialty lines and $9.5 million from property catastrophe reserves. Favorable development in medium-tailed lines reflected reductions in marine and aviation reserves of $10.4 million across most underwriting years.
The mortgage segment’s net favorable development was $92.5 million, or 9.1 loss ratio points, for the 2019 period. The 2019 development was primarily driven by lower than expected claim rates on first lien business and subrogation recoveries on second lien and student loan business.
6.7. Allowance for Expected Credit Losses
Premiums Receivable
The following table provides a roll forward of the allowance for expected credit losses of the Company’s premium receivables:
| | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Premium Receivables, Net of Allowance | | Allowance for Expected Credit Losses | |
| Three Months Ended | | | | | |
| Balance at beginning of period | | $ | 2,203,753 | | | $ | 36,054 | | |
| Cumulative effect of accounting change (1) | | | | 0 | | |
| Change for provision of expected credit losses (2) | | | | 1,046 | | |
| | | | | |
| | | | | |
| Balance at end of period | | $ | 2,225,311 | | | $ | 37,100 | | |
| | | | | |
| Nine Months Ended | | | | | |
| Balance at beginning of period | | $ | 1,778,717 | | | $ | 21,003 | | |
| Cumulative effect of accounting change (1) | | | | 6,539 | | |
| Change for provision of expected credit losses (2) | | | | 9,558 | | |
| | | | | |
| | | | | |
| Balance at end of period | | $ | 2,225,311 | | | $ | 37,100 | | |
| | | | | | | | | |
| Premium Receivables, Net of Allowance | Allowance for Expected Credit Losses | |
| Three Months Ended September 30, 2021 | | |
| Balance at beginning of period | $ | 2,866,578 | | $ | 35,979 | | |
| | | |
| Change for provision of expected credit losses (1) | | 2,736 | | |
| | | |
| | | |
| Balance at end of period | $ | 2,807,720 | | $ | 38,715 | | |
| | | |
| Three Months Ended September 30, 2020 | | |
| Balance at beginning of period | $ | 2,203,753 | | $ | 36,054 | | |
| | | |
| Change for provision of expected credit losses (1) | | 1,046 | | |
| Balance at end of period | $ | 2,225,311 | | $ | 37,100 | | |
| | | |
| Nine Months Ended September 30, 2021 | | | |
| Balance at beginning of period | $ | 2,064,586 | | $ | 37,781 | | |
| | | |
| Change for provision of expected credit losses (1) | | 934 | | |
| | | |
| | | |
| Balance at end of period | $ | 2,807,720 | | $ | 38,715 | | |
| | | |
| Nine Months Ended September 30, 2020 | | | |
| Balance at beginning of period | $ | 1,778,717 | | $ | 21,003 | | |
| Cumulative effect of accounting change (2) | | 6,539 | | |
| Change for provision of expected credit losses (1) | | 9,558 | | |
| | | |
| | | |
| Balance at end of period | $ | 2,225,311 | | $ | 37,100 | | |
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)” See note 1. (2) Amounts deemed uncollectible are written-off in operating expenses. For the 2021 third quarter and 2020 third quarter, amounts written off were $1.2 million and nil, respectively. For the nine months ended September 30, 2021 and 2020 period, amounts written off totaled NaNwere were $2.4 million and $2.3 million, respectively.
(2)Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.
| | | | | | | | |
| ARCH CAPITAL | 2221 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Reinsurance Recoverables
The following table provides a roll forward of the allowance for expected credit losses of the Company’s reinsurance recoverables:
| | | September 30, 2020 | | Reinsurance Recoverables, Net of Allowance | | Allowance for Expected Credit Losses | |
| Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2021 | | |
| Balance at beginning of period | | Balance at beginning of period | $ | 4,314,515 | | | $ | 11,029 | | |
| | Reinsurance Recoverables, Net of Allowance | | Allowance for Expected Credit Losses | | |
| Three Months Ended | | | | | | |
| Change for provision of expected credit losses | | Change for provision of expected credit losses | | 1,802 | | |
| | Balance at end of period | | Balance at end of period | $ | 5,358,852 | | | $ | 12,831 | | |
| | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2020 | | |
| Balance at beginning of period | | Balance at beginning of period | $ | 4,363,507 | | | $ | 13,595 | | |
| | Change for provision of expected credit losses | | Change for provision of expected credit losses | | 399 | | |
| Balance at end of period | | Balance at end of period | $ | 4,621,937 | | | $ | 13,994 | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | |
| Balance at beginning of period | | Balance at beginning of period | $ | 4,500,802 | | | $ | 11,636 | | |
| | Change for provision of expected credit losses | | Change for provision of expected credit losses | | 1,195 | | |
| | Balance at end of period | | Balance at end of period | $ | 5,358,852 | | | $ | 12,831 | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | |
| Balance at beginning of period | Balance at beginning of period | | $ | 4,363,507 | | | $ | 13,595 | | | Balance at beginning of period | $ | 4,346,816 | | | $ | 1,364 | | |
| Cumulative effect of accounting change (1) | Cumulative effect of accounting change (1) | | 0 | | | Cumulative effect of accounting change (1) | | 12,010 | | |
| Change for provision of expected credit losses | Change for provision of expected credit losses | | 399 | | | Change for provision of expected credit losses | | 620 | | |
| | Balance at end of period | Balance at end of period | | $ | 4,621,937 | | | $ | 13,994 | | | Balance at end of period | $ | 4,621,937 | | | $ | 13,994 | | |
| | Nine Months Ended | | | |
| Balance at beginning of period | | $ | 4,346,816 | | | $ | 1,364 | | | |
| Cumulative effect of accounting change (1) | | 12,010 | | | |
| Change for provision of expected credit losses | | 620 | | | |
| | Balance at end of period | | $ | 4,621,937 | | | $ | 13,994 | | | |
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)” See note 1. At September 30, 2020 and December 31, 2019, approximately 63.2% and 61.2% ofThe following table summarizes the Company’s reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums) of $4.64 billion:
| | | | | | | | | | | |
| September 30, | | December 31 |
| 2021 | | 2020 |
| Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses | $ | 5,358,852 | | $ | 4,500,802 |
| % due from carriers with A.M. Best rating of “A-” or better | 69.1 | % | | 63.9 | % |
| % due from all other carriers with no A.M. Best rating (1) | 30.9 | % | | 36.1 | % |
| Largest balance due from any one carrier as % of total shareholders’ equity | 6.5 | % | | 1.8 | % |
(1) At September 30, 2021 and $4.35 billion, respectively, were due from carriers which had an A.M. Best rating of “A-” or better while 36.6%December 31, 2020 over 93% and 38.8%, respectively, were from companies not rated. For items not rated, over 90%94% of such amount waswere collateralized through reinsurance trusts, orfunds withheld arrangements, letters of credit at September 30, 2020 and December 31, 2019. The largest reinsurance recoverables from any one carrier were approximately 1.8% and 1.7%, of total shareholders’ equity available to Arch at September 30, 2020 and December 31, 2019,or other, respectively.
Contractholder Receivables
The following table provides a roll forward of the allowance for expected credit losses of the Company’s contractholder receivables:
| | | September 30, 2020 | |
| | Contractholder Receivables, Net of Allowance | | Allowance for Expected Credit Losses | | | Contract-holder Receivables, Net of Allowance | | Allowance for Expected Credit Losses | |
| Three Months Ended | | | | | | |
| Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2021 | | |
| Balance at beginning of period | | Balance at beginning of period | $ | 1,882,948 | | | $ | 4,471 | | |
| | Change for provision of expected credit losses | | Change for provision of expected credit losses | | (987) | | |
| | Balance at end of period | | Balance at end of period | $ | 1,824,990 | | | $ | 3,484 | | |
| | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2020 | | |
| Balance at beginning of period | | Balance at beginning of period | $ | 2,179,124 | | | $ | 6,290 | | |
| | Change for provision of expected credit losses | | Change for provision of expected credit losses | | (389) | | |
| | Balance at end of period | | Balance at end of period | 2,185,614 | | | $ | 5,901 | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | |
| Balance at beginning of period | | Balance at beginning of period | $ | 1,986,924 | | | $ | 8,638 | | |
| | Change for provision of expected credit losses | | Change for provision of expected credit losses | | (5,154) | | |
| | Balance at end of period | | Balance at end of period | $ | 1,824,990 | | | $ | 3,484 | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | |
| Balance at beginning of period | Balance at beginning of period | | $ | 2,179,124 | | | $ | 6,290 | | | Balance at beginning of period | $ | 2,119,460 | | | $ | — | | |
| Cumulative effect of accounting change (1) | Cumulative effect of accounting change (1) | | 0 | | | Cumulative effect of accounting change (1) | | 6,663 | | |
| Change for provision of expected credit losses | Change for provision of expected credit losses | | (389) | | | Change for provision of expected credit losses | | (762) | | |
| | Balance at end of period | Balance at end of period | | $ | 2,185,614 | | | $ | 5,901 | | | Balance at end of period | $ | 2,185,614 | | | $ | 5,901 | | |
| | Nine Months Ended | | | |
| Balance at beginning of period | | $ | 2,119,460 | | | $ | 0 | | | |
| Cumulative effect of accounting change (1) | | 6,663 | | | |
| Change for provision of expected credit losses | | (762) | | | |
| | Balance at end of period | | $ | 2,185,614 | | | $ | 5,901 | | | |
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)” See note 1.
| | | | | | | | |
| ARCH CAPITAL | 2322 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7.8. Investment Information
At September 30, 2020, total investable assets of $28.42 billion included $25.72 billion held by the Company and $2.69 billion attributable to Watford.
Available For Sale Investments
The following table summarizes the fair value and cost or amortized cost of the Company’s securities classified as available for sale:
| | | Estimated
Fair
Value | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Allowance for Expected Credit Losses (2) | | Cost or
Amortized
Cost | | | Estimated
Fair
Value | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Allowance for Expected Credit Losses (2) | | Cost or
Amortized
Cost | |
| September 30, 2020 | | | | | | | | | | | |
| September 30, 2021 | | September 30, 2021 | | | | | | | | | | |
| Fixed maturities (1): | Fixed maturities (1): | | | Fixed maturities (1): | | |
| Corporate bonds | Corporate bonds | $ | 7,965,599 | | | $ | 390,839 | | | $ | (40,448) | | | $ | (1,742) | | | $ | 7,616,950 | | | Corporate bonds | $ | 6,403,617 | | | $ | 155,246 | | | $ | (40,649) | | | $ | (1,440) | | | $ | 6,290,460 | | |
| Mortgage backed securities | Mortgage backed securities | 717,081 | | | 12,456 | | | (3,373) | | | (336) | | | 708,334 | | | Mortgage backed securities | 405,797 | | | 3,384 | | | (3,966) | | | (24) | | | 406,403 | | |
| Municipal bonds | Municipal bonds | 527,410 | | | 26,980 | | | (877) | | | (62) | | | 501,369 | | | Municipal bonds | 382,722 | | | 20,096 | | | (1,206) | | | (2) | | | 363,834 | | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | 374,360 | | | 8,523 | | | (4,660) | | | (256) | | | 370,753 | | | Commercial mortgage backed securities | 579,424 | | | 3,598 | | | (548) | | | (3) | | | 576,377 | | |
| U.S. government and government agencies | U.S. government and government agencies | 4,861,349 | | | 39,350 | | | (4,396) | | | 0 | | | 4,826,395 | | | U.S. government and government agencies | 4,460,515 | | | 12,912 | | | (30,320) | | | — | | | 4,477,923 | | |
| Non-U.S. government securities | Non-U.S. government securities | 2,302,646 | | | 86,996 | | | (18,294) | | | 0 | | | 2,233,944 | | | Non-U.S. government securities | 1,863,734 | | | 46,378 | | | (28,948) | | | (82) | | | 1,846,386 | | |
| Asset backed securities | Asset backed securities | 1,767,192 | | | 30,026 | | | (21,729) | | | (1,537) | | | 1,760,432 | | | Asset backed securities | 2,672,554 | | | 12,576 | | | (7,700) | | | (560) | | | 2,668,238 | | |
| Total | Total | 18,515,637 | | | 595,170 | | | (93,777) | | | (3,933) | | | 18,018,177 | | | Total | 16,768,363 | | | 254,190 | | | (113,337) | | | (2,111) | | | 16,629,621 | | |
| | Short-term investments | Short-term investments | 2,039,097 | | | 1,807 | | | (954) | | | 0 | | | 2,038,244 | | | Short-term investments | 3,069,965 | | | 1,625 | | | (1,780) | | | — | | | 3,070,120 | | |
| Total | Total | $ | 20,554,734 | | | $ | 596,977 | | | $ | (94,731) | | | $ | (3,933) | | | $ | 20,056,421 | | | Total | $ | 19,838,328 | | | $ | 255,815 | | | $ | (115,117) | | | $ | (2,111) | | | $ | 19,699,741 | | |
| | December 31, 2019 | | | |
| December 31, 2020 | | December 31, 2020 | | |
| Fixed maturities (1): | Fixed maturities (1): | | | Fixed maturities (1): | | |
| Corporate bonds | Corporate bonds | $ | 6,406,591 | | | $ | 191,889 | | | $ | (12,793) | | | $ | 6,227,495 | | | Corporate bonds | $ | 7,856,571 | | | $ | 414,247 | | | $ | (34,388) | | | $ | (896) | | | $ | 7,477,608 | | |
| Mortgage backed securities | Mortgage backed securities | 562,309 | | | 9,669 | | | (931) | | | 553,571 | | | Mortgage backed securities | 630,001 | | | 8,939 | | | (5,028) | | | (278) | | | 626,368 | | |
| Municipal bonds | Municipal bonds | 881,926 | | | 24,628 | | | (2,213) | | | 859,511 | | | Municipal bonds | 494,522 | | | 27,291 | | | (3,835) | | | (11) | | | 471,077 | | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | 733,108 | | | 14,951 | | | (2,330) | | | 720,487 | | | Commercial mortgage backed securities | 389,900 | | | 8,722 | | | (2,954) | | | (122) | | | 384,254 | | |
| U.S. government and government agencies | U.S. government and government agencies | 4,916,592 | | | 36,600 | | | (10,134) | | | 4,890,126 | | | U.S. government and government agencies | 5,557,077 | | | 22,612 | | | (12,611) | | | — | | | 5,547,076 | | |
| Non-U.S. government securities | Non-U.S. government securities | 2,078,757 | | | 48,549 | | | (20,330) | | | 2,050,538 | | | Non-U.S. government securities | 2,433,733 | | | 153,891 | | | (8,060) | | | — | | | 2,287,902 | | |
| Asset backed securities | Asset backed securities | 1,683,753 | | | 24,017 | | | (4,724) | | | 1,664,460 | | | Asset backed securities | 1,634,804 | | | 19,225 | | | (10,715) | | | (1,090) | | | 1,627,384 | | |
| Total | Total | 17,263,036 | | | 350,303 | | | (53,455) | | | 16,966,188 | | | Total | 18,996,608 | | | 654,927 | | | (77,591) | | | (2,397) | | | 18,421,669 | | |
| | Short-term investments | Short-term investments | 956,546 | | | 811 | | | (1,548) | | | 957,283 | | | Short-term investments | 1,924,922 | | | 2,693 | | | (2,063) | | | — | | | 1,924,292 | | |
| Total | Total | $ | 18,219,582 | | | $ | 351,114 | | | $ | (55,003) | | | $ | 17,923,471 | | | Total | $ | 20,921,530 | | | $ | 657,620 | | | $ | (79,654) | | | $ | (2,397) | | | $ | 20,345,961 | | |
(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.” In September 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions.
(2) Effective January 1, 2020, the Company adopted ASU 2016-13 and as a result any credit impairment losses on the Company’s available-for-sale investments are recorded as an allowance, subject to reversal. See
| | | | | | | | |
| ARCH CAPITAL | 2423 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:
| | | | Less than 12 Months | | 12 Months or More | | Total | | Less than 12 Months | | 12 Months or More | | Total |
| | Estimated
Fair
Value | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Gross
Unrealized
Losses | | Estimated
Fair
Value | | Gross
Unrealized
Losses |
| September 30, 2020 | | | | | | | | | | | | |
| September 30, 2021 | | September 30, 2021 | | | | | | | | | | | |
| Fixed maturities (1): | Fixed maturities (1): | | Fixed maturities (1): | |
| Corporate bonds | Corporate bonds | $ | 1,414,931 | | | $ | (38,353) | | | $ | 4,169 | | | $ | (2,095) | | | $ | 1,419,100 | | | $ | (40,448) | | Corporate bonds | $ | 2,744,615 | | | $ | (36,595) | | | $ | 68,450 | | | $ | (4,054) | | | $ | 2,813,065 | | | $ | (40,649) | |
| Mortgage backed securities | Mortgage backed securities | 186,860 | | | (3,262) | | | 690 | | | (111) | | | 187,550 | | | (3,373) | | Mortgage backed securities | 257,789 | | | (3,113) | | | 22,769 | | | (853) | | | 280,558 | | | (3,966) | |
| Municipal bonds | Municipal bonds | 36,469 | | | (877) | | | 0 | | | 0 | | | 36,469 | | | (877) | | Municipal bonds | 46,450 | | | (731) | | | 7,148 | | | (475) | | | 53,598 | | | (1,206) | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | 179,780 | | | (4,601) | | | 2,850 | | | (59) | | | 182,630 | | | (4,660) | | Commercial mortgage backed securities | 76,518 | | | (256) | | | 6,578 | | | (292) | | | 83,096 | | | (548) | |
| U.S. government and government agencies | U.S. government and government agencies | 1,386,590 | | | (4,396) | | | 0 | | | 0 | | | 1,386,590 | | | (4,396) | | U.S. government and government agencies | 3,621,719 | | | (29,797) | | | 9,755 | | | (523) | | | 3,631,474 | | | (30,320) | |
| Non-U.S. government securities | Non-U.S. government securities | 921,890 | | | (18,294) | | | 0 | | | 0 | | | 921,890 | | | (18,294) | | Non-U.S. government securities | 1,283,266 | | | (27,523) | | | 22,304 | | | (1,425) | | | 1,305,570 | | | (28,948) | |
| Asset backed securities | Asset backed securities | 636,373 | | | (20,166) | | | 39,368 | | | (1,563) | | | 675,741 | | | (21,729) | | Asset backed securities | 1,119,638 | | | (6,524) | | | 37,078 | | | (1,176) | | | 1,156,716 | | | (7,700) | |
| Total | Total | 4,762,893 | | | (89,949) | | | 47,077 | | | (3,828) | | | 4,809,970 | | | (93,777) | | Total | 9,149,995 | | | (104,539) | | | 174,082 | | | (8,798) | | | 9,324,077 | | | (113,337) | |
| | Short-term investments | Short-term investments | 81,964 | | | (954) | | | 0 | | | 0 | | | 81,964 | | | (954) | | Short-term investments | 265,011 | | | (1,780) | | | — | | | — | | | 265,011 | | | (1,780) | |
| Total | Total | $ | 4,844,857 | | | $ | (90,903) | | | $ | 47,077 | | | $ | (3,828) | | | $ | 4,891,934 | | | $ | (94,731) | | Total | $ | 9,415,006 | | | $ | (106,319) | | | $ | 174,082 | | | $ | (8,798) | | | $ | 9,589,088 | | | $ | (115,117) | |
| | December 31, 2019 | | |
| December 31, 2020 | | December 31, 2020 | |
| Fixed maturities (1): | Fixed maturities (1): | | Fixed maturities (1): | |
| Corporate bonds | Corporate bonds | $ | 675,131 | | | $ | (12,350) | | | $ | 37,671 | | | $ | (443) | | | $ | 712,802 | | | $ | (12,793) | | Corporate bonds | $ | 747,442 | | | $ | (33,086) | | | $ | 3,934 | | | $ | (1,302) | | | $ | 751,376 | | | $ | (34,388) | |
| Mortgage backed securities | Mortgage backed securities | 102,887 | | | (927) | | | 203 | | | (4) | | | 103,090 | | | (931) | | Mortgage backed securities | 284,619 | | | (4,788) | | | 3,637 | | | (240) | | | 288,256 | | | (5,028) | |
| Municipal bonds | Municipal bonds | 220,296 | | | (2,213) | | | 0 | | | 0 | | | 220,296 | | | (2,213) | | Municipal bonds | 67,937 | | | (3,835) | | | — | | | — | | | 67,937 | | | (3,835) | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | 147,290 | | | (2,302) | | | 2,683 | | | (28) | | | 149,973 | | | (2,330) | | Commercial mortgage backed securities | 126,624 | | | (2,916) | | | 2,655 | | | (38) | | | 129,279 | | | (2,954) | |
| U.S. government and government agencies | U.S. government and government agencies | 1,373,127 | | | (10,089) | | | 32,058 | | | (45) | | | 1,405,185 | | | (10,134) | | U.S. government and government agencies | 1,285,907 | | | (12,611) | | | — | | | — | | | 1,285,907 | | | (12,611) | |
| Non-U.S. government securities | Non-U.S. government securities | 1,224,243 | | | (20,163) | | | 37,610 | | | (167) | | | 1,261,853 | | | (20,330) | | Non-U.S. government securities | 543,844 | | | (7,658) | | | 2,441 | | | (402) | | | 546,285 | | | (8,060) | |
| Asset backed securities | Asset backed securities | 441,522 | | | (3,334) | | | 48,313 | | | (1,390) | | | 489,835 | | | (4,724) | | Asset backed securities | 634,470 | | | (9,110) | | | 57,737 | | | (1,605) | | | 692,207 | | | (10,715) | |
| Total | Total | 4,184,496 | | | (51,378) | | | 158,538 | | | (2,077) | | | 4,343,034 | | | (53,455) | | Total | 3,690,843 | | | (74,004) | | | 70,404 | | | (3,587) | | | 3,761,247 | | | (77,591) | |
| | Short-term investments | Short-term investments | 95,777 | | | (1,548) | | | 0 | | | 0 | | | 95,777 | | | (1,548) | | Short-term investments | 97,920 | | | (2,063) | | | — | | | — | | | 97,920 | | | (2,063) | |
| Total | Total | $ | 4,280,273 | | | $ | (52,926) | | | $ | 158,538 | | | $ | (2,077) | | | $ | 4,438,811 | | | $ | (55,003) | | Total | $ | 3,788,763 | | | $ | (76,067) | | | $ | 70,404 | | | $ | (3,587) | | | $ | 3,859,167 | | | $ | (79,654) | |
(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.” In September 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions.
At September 30, 2020,2021, on a lot level basis, approximately 3,2703,910 security lots out of a total of approximately 11,09010,020 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $0.9$2.5 million. At December 31, 2019,2020, on a lot level basis, approximately 2,2302,320 security lots out of a total of approximately 9,59011,180 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $0.9 million.
| | | | | | | | |
| ARCH CAPITAL | 2524 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
| Maturity | Maturity | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost | Maturity | | Estimated
Fair
Value | | Amortized
Cost | | Estimated
Fair
Value | | Amortized
Cost |
| Due in one year or less | Due in one year or less | | $ | 318,767 | | | $ | 312,569 | | | $ | 428,659 | | | $ | 423,617 | | Due in one year or less | | $ | 416,601 | | | $ | 410,373 | | | $ | 348,200 | | | $ | 339,951 | |
| Due after one year through five years | Due after one year through five years | | 9,937,129 | | | 9,698,743 | | | 10,126,403 | | | 9,996,206 | | Due after one year through five years | | 7,862,472 | | | 7,772,773 | | | 10,629,959 | | | 10,340,819 | |
| Due after five years through 10 years | Due after five years through 10 years | | 4,849,248 | | | 4,641,483 | | | 3,317,535 | | | 3,219,567 | | Due after five years through 10 years | | 4,483,025 | | | 4,453,526 | | | 4,881,564 | | | 4,654,754 | |
| Due after 10 years | Due after 10 years | | 551,860 | | | 525,863 | | | 411,269 | | | 388,280 | | Due after 10 years | | 348,490 | | | 341,931 | | | 482,180 | | | 448,139 | |
| | | | 15,657,004 | | | 15,178,658 | | | 14,283,866 | | | 14,027,670 | | | | 13,110,588 | | | 12,978,603 | | | 16,341,903 | | | 15,783,663 | |
| Mortgage backed securities | Mortgage backed securities | | 717,081 | | | 708,334 | | | 562,309 | | | 553,571 | | Mortgage backed securities | | 405,797 | | | 406,403 | | | 630,001 | | | 626,368 | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | | 374,360 | | | 370,753 | | | 733,108 | | | 720,487 | | Commercial mortgage backed securities | | 579,424 | | | 576,377 | | | 389,900 | | | 384,254 | |
| Asset backed securities | Asset backed securities | | 1,767,192 | | | 1,760,432 | | | 1,683,753 | | | 1,664,460 | | Asset backed securities | | 2,672,554 | | | 2,668,238 | | | 1,634,804 | | | 1,627,384 | |
| Total (1) | Total (1) | | $ | 18,515,637 | | | $ | 18,018,177 | | | $ | 17,263,036 | | | $ | 16,966,188 | | Total (1) | | $ | 16,768,363 | | | $ | 16,629,621 | | | $ | 18,996,608 | | | $ | 18,421,669 | |
(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.” In September 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions.
Securities Lending Agreements
TheIn September 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions to enhance investment income whereby it loansincome. Prior to the termination of this program, the Company loaned certain of its securities to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintainsmaintained legal control over the securities it lendslent (shown as ‘Securities pledged under securities lending, at fair value’ on the Company’s balance sheet), retainsretained the earnings and cash flows associated with the loaned securities and receivesreceived a fee from the borrower for the temporary use of the securities. An indemnification agreement with the lending agent protectsprotected the Company in the event a borrower becomesbecame insolvent or failsfailed to return any of the securities on loan from the Company.
The Company receivesreceived collateral (shown as ‘Collateral received under securities lending, at fair value’ on the Company’s balance sheet) in the form of cash or U.S. government and government agency securities. At September 30, 2021, the Company had no cash collateral or security collateral due to the termination of the program. At December 31, 2020, the fair value of the cash collateral received on securities lending was NaN, and the fair value of security collateral received was $64.3 million. At December 31, 2019, the fair value of the cash collateral received on securities lending was $81.2 million, and the fair value of security collateral received was $307.2$301.1 million.
The carrying value of collateral held under the Company’s securities lending transactions by significant investment category and remaining contractual maturity of the underlying agreements iswas as follows:follows at December 31, 2020 (no balances at September 30, 2021 due to the termination of the program):
| | | Remaining Contractual Maturity of the Agreements | | Remaining Contractual Maturity of the Agreements |
| | Overnight and Continuous | | Less than 30 Days | | 30-90 Days | | 90 Days or More | | Total | | Overnight and Continuous | | Less than 30 Days | | 30-90 Days | | 90 Days or More | | Total |
| September 30, 2020 | | | | | | | | | | | |
| | | | December 31, 2020 | | December 31, 2020 | | | | | | | | | | |
| U.S. government and government agencies | U.S. government and government agencies | | $ | 64,251 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 64,251 | | U.S. government and government agencies | | $ | 142,317 | | | $ | — | | | $ | 139,290 | | | $ | — | | | $ | 281,607 | |
| Corporate bonds | Corporate bonds | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Corporate bonds | | 3,021 | | | — | | | — | | | — | | | 3,021 | |
| Equity securities | Equity securities | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Equity securities | | 16,461 | | | — | | | — | | | — | | | 16,461 | |
| Total | Total | | $ | 64,251 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 64,251 | | Total | | $ | 161,799 | | | $ | — | | | $ | 139,290 | | | $ | — | | | $ | 301,089 | |
| Gross amount of recognized liabilities for securities lending in offsetting disclosure in note 9 | | $ | 0 | | |
| Amounts related to securities lending not included in offsetting disclosure in note 9 | | $ | 64,251 | | |
| | December 31, 2019 | | |
| U.S. government and government agencies | | $ | 240,332 | | | $ | 0 | | | $ | 115,973 | | | $ | 0 | | | $ | 356,305 | | |
| Corporate bonds | | 2,570 | | | 0 | | | 0 | | | 0 | | | 2,570 | | |
| Equity securities | | 29,491 | | | 0 | | | 0 | | | 0 | | | 29,491 | | |
| Total | | $ | 272,393 | | | $ | 0 | | | $ | 115,973 | | | $ | 0 | | | $ | 388,366 | | |
Gross amount of recognized liabilities for securities lending in offsetting disclosure in note 9 | | $ | 0 | | |
Amounts related to securities lending not included in offsetting disclosure in note 9 | | $ | 388,366 | | |
Gross amount of recognized liabilities for securities lending in offsetting disclosure in note 10 | | Gross amount of recognized liabilities for securities lending in offsetting disclosure in note 10 | | $ | — | |
Amounts related to securities lending not included in offsetting disclosure in note 10 | | Amounts related to securities lending not included in offsetting disclosure in note 10 | | $ | 301,089 | |
Equity Securities, at Fair Value
At September 30, 2021, the Company held $1.8 billion of equity securities, at fair value, compared to $1.4 billion at
December 31, 2020. Such holdings include publicly traded common stocks primarily in the consumer cyclical and non-cyclical, technology, communication and financial sectors
| | | | | | | | |
| ARCH CAPITAL | 2625 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Equity Securities, at Fair Value
At September 30, 2020, the Company held $1.50 billion of equity securities, at fair value, compared to $838.9 million at December 31, 2019. Such holdings include publicly traded common stocks primarily in the consumer cyclical and non-cyclical, technology, communication and financial sectors and exchange-traded funds in fixed income, equity and other sectors.
Other Investments
The following table summarizes the Company’s other investments which are includedand other investable assets:
| | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| Fixed maturities | $ | 414,007 | | | $ | 843,354 | |
| Other investments | 1,489,759 | | | 2,331,885 | |
| Short-term investments | 115,681 | | | 557,008 | |
| Equity securities | 24,523 | | | 92,549 | |
| Investments accounted for using the fair value option | $ | 2,043,970 | | | $ | 3,824,796 | |
| | | |
| Other investable assets (1) | — | | | 500,000 | |
| Total other investments | $ | 2,043,970 | | | $ | 4,324,796 | |
(1) Participation interests in a receivable of a reverse repurchase agreement.
The following table summarizes the Company’s other investments, accounted for usingas detailed in the fair value option,previous table, by strategy:
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Term loan investments | Term loan investments | $ | 1,202,526 | | | $ | 1,326,018 | | Term loan investments | $ | 528,585 | | | $ | 1,231,731 | |
| Lending | Lending | 575,623 | | | 602,841 | | Lending | 579,563 | | | 572,636 | |
| Credit related funds | Credit related funds | 98,121 | | | 123,020 | | Credit related funds | 56,997 | | | 90,780 | |
| Energy | Energy | 65,330 | | | 97,402 | | Energy | 84,880 | | | 65,813 | |
| Investment grade fixed income | Investment grade fixed income | 114,784 | | | 151,594 | | Investment grade fixed income | 131,910 | | | 138,646 | |
| Infrastructure | Infrastructure | 60,579 | | | 61,786 | | Infrastructure | 26,359 | | | 165,516 | |
| Private equity | Private equity | 34,983 | | | 49,376 | | Private equity | 81,465 | | | 48,750 | |
| Real estate | Real estate | 17,951 | | | 17,279 | | Real estate | — | | | 18,013 | |
| Total | Total | $ | 2,169,897 | | | $ | 2,429,316 | | Total | $ | 1,489,759 | | | $ | 2,331,885 | |
Investments Accounted For Using the Equity Method
The following table summarizes the Company’s investments accounted for using the equity method, by strategy:
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Credit related funds | Credit related funds | $ | 687,178 | | | $ | 428,437 | | Credit related funds | $ | 952,794 | | | $ | 740,060 | |
| Equities | Equities | 323,670 | | | 293,686 | | Equities | 414,322 | | | 343,058 | |
| Real estate | Real estate | 246,998 | | | 246,851 | | Real estate | 340,510 | | | 258,518 | |
| Lending | Lending | 141,305 | | | 202,690 | | Lending | 330,368 | | | 179,629 | |
| Private equity | Private equity | 214,357 | | | 144,983 | | Private equity | 365,840 | | | 235,289 | |
| Infrastructure | Infrastructure | 156,029 | | | 235,033 | | Infrastructure | 222,484 | | | 175,882 | |
| Energy | Energy | 114,165 | | | 108,716 | | Energy | 114,975 | | | 115,453 | |
| Total | Total | $ | 1,883,702 | | | $ | 1,660,396 | | Total | $ | 2,741,293 | | | $ | 2,047,889 | |
Certain of the Company’s other investments are in investment funds for which the Company has the option to redeem at agreed upon values as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investments in investment funds may be redeemed daily, monthly, quarterly or on other terms. Two common redemption restrictions
which may impact the Company’s ability to redeem these investment funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a
predetermined percentage of the investment fund’s net assets which may otherwise hinder the general partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. If the investment funds are eligible to be redeemed, the time to redeem such fund can take weeks or months following the notification.
Fair Value Option
The following table summarizes the Company’s assets which are accounted for using the fair value option:
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Fixed maturities | $ | 1,019,529 | | | $ | 754,452 | |
| Other investments | 2,169,897 | | | 2,429,316 | |
| Short-term investments | 468,704 | | | 377,014 | |
| Equity securities | 91,445 | | | 102,695 | |
| Investments accounted for using the fair value option | $ | 3,749,575 | | | $ | 3,663,477 | |
| | | |
| | | |
Limited Partnership Interests
In the normal course of its activities, the Company invests in limited partnerships as part of its overall investment strategy. Such amounts are included in ‘investments accounted for using the equity method’ and ‘investments accounted for using the fair value option.’ The Company has determined that it is not required to consolidate these investments because it is not the primary beneficiary of the funds. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment.
The following table summarizes investments in limited partnership interests where the Company has a variable interest by balance sheet line item:
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Investments accounted for using the equity method (1) | Investments accounted for using the equity method (1) | 1,883,702 | | | 1,660,396 | | Investments accounted for using the equity method (1) | 2,741,293 | | | 2,047,889 | |
| Investments accounted for using the fair value option (2) | Investments accounted for using the fair value option (2) | 180,409 | | | 188,283 | | Investments accounted for using the fair value option (2) | 176,884 | | | 184,720 | |
| Total | Total | $ | 2,064,111 | | | $ | 1,848,679 | | Total | $ | 2,918,177 | | | $ | 2,232,609 | |
(1) Aggregate unfunded commitments were $1.59$2.3 billion at September 30, 2020,2021, compared to $1.36$1.8 billion at December 31, 2019.2020.
(2) Aggregate unfunded commitments were $36.7$22.9 million at September 30, 2020,2021, compared to $41.7$35.6 million at December 31, 2019.2020.
| | | | | | | | |
| ARCH CAPITAL | 2726 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net Investment Income
The components of net investment income were derived from the following sources:
| | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Three Months Ended | Three Months Ended | | | | Three Months Ended | | | |
| Fixed maturities | Fixed maturities | $ | 98,344 | | | $ | 126,889 | | Fixed maturities | $ | 75,964 | | | $ | 98,344 | |
| Term loans | Term loans | 22,459 | | | 24,236 | | Term loans | 1,736 | | | 22,459 | |
| Equity securities | Equity securities | 6,659 | | | 3,992 | | Equity securities | 9,867 | | | 6,659 | |
| Short-term investments | Short-term investments | 1,332 | | | 3,834 | | Short-term investments | 1,858 | | | 1,332 | |
| Other (1) | Other (1) | 22,060 | | | 22,704 | | Other (1) | 17,378 | | | 22,060 | |
| Gross investment income | Gross investment income | 150,854 | | | 181,655 | | Gross investment income | 106,803 | | | 150,854 | |
| Investment expenses | Investment expenses | (22,342) | | | (20,167) | | Investment expenses | (18,608) | | | (22,342) | |
| Net investment income | Net investment income | $ | 128,512 | | | $ | 161,488 | | Net investment income | $ | 88,195 | | | $ | 128,512 | |
| | Nine Months Ended | Nine Months Ended | | Nine Months Ended | |
| Fixed maturities | Fixed maturities | $ | 318,582 | | | $ | 381,706 | | Fixed maturities | $ | 255,215 | | | $ | 318,582 | |
| Term loans | Term loans | 66,141 | | | 73,582 | | Term loans | 33,343 | | | 66,141 | |
| Equity securities | Equity securities | 18,885 | | | 11,348 | | Equity securities | 24,101 | | | 18,885 | |
| Short-term investments | Short-term investments | 9,611 | | | 11,872 | | Short-term investments | 3,603 | | | 9,611 | |
| Other (1) | Other (1) | 57,926 | | | 62,423 | | Other (1) | 51,683 | | | 57,926 | |
| Gross investment income | Gross investment income | 471,145 | | | 540,931 | | Gross investment income | 367,945 | | | 471,145 | |
| Investment expenses | Investment expenses | (65,995) | | | (67,456) | | Investment expenses | (69,281) | | | (65,995) | |
| Net investment income | Net investment income | $ | 405,150 | | | $ | 473,475 | | Net investment income | $ | 298,664 | | | $ | 405,150 | |
(1) Includes income distributions from investment funds and other items.
Net Realized Gains (Losses)
Net realized gains (losses), which include changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings were as follows:
| | | | | | | | | | | |
| September 30, |
| | 2020 | | 2019 |
| Three Months Ended | | | |
| Available for sale securities: | | | |
| Gross gains on investment sales | $ | 104,733 | | | $ | 73,685 | |
| Gross losses on investment sales | (16,862) | | | (30,561) | |
| Change in fair value of assets and liabilities accounted for using the fair value option: | | | |
| Fixed maturities | 34,115 | | | (3,895) | |
| Other investments | 61,622 | | | (21,778) | |
| Equity securities | 4,048 | | | (1,231) | |
| Short-term investments | 3,377 | | | (1,941) | |
| Equity securities, at fair value: | | | |
| Net realized gains (losses) on sales during the period | 26,549 | | | 5,217 | |
| Net unrealized gains (losses) on equity securities still held at reporting date | 33,562 | | | (1,206) | |
| Allowance for credit losses: | | | |
| Investments related | 1,332 | | | 0 | |
| Underwriting related | 351 | | | 0 | |
| Net impairment losses | 0 | | | (1,163) | |
| Derivative instruments (1) | 20,369 | | | 42,893 | |
| Other | 7,303 | | | 1,335 | |
| Net realized gains (losses) | $ | 280,499 | | | $ | 61,355 | |
| | | |
| Nine Months Ended | | | |
| Available for sale securities: | | | |
| Gross gains on investment sales | $ | 515,086 | | | $ | 192,140 | |
| Gross losses on investment sales | (98,654) | | | (77,498) | |
| Change in fair value of assets and liabilities accounted for using the fair value option: | | | |
| Fixed maturities | (25,370) | | | 38,682 | |
| Other investments | (67,608) | | | (37,363) | |
| Equity securities | 5,803 | | | 9,449 | |
| Short-term investments | (1,936) | | | (2,613) | |
| Equity securities, at fair value: | | | |
| Net realized gains (losses) on sales during the period | 7,760 | | | 9,503 | |
| Net unrealized gains (losses) on equity securities still held at reporting date | 3,682 | | | 58,562 | |
| Allowance for credit losses: | | | |
| Investments related | (4,763) | | | 0 | |
| Underwriting related | (8,753) | | | 0 | |
| Net impairments losses | (533) | | | (2,521) | |
| Derivative instruments (1) | 146,722 | | | 142,730 | |
| Other | (1,309) | | | (8,703) | |
| Net realized gains (losses) | $ | 470,127 | | | $ | 322,368 | |
| | | | | | | | | | | |
| September 30, |
| | 2021 | | 2020 |
| Three Months Ended | | | |
| Available for sale securities: | | | |
| Gross gains on investment sales | $ | 86,819 | | | $ | 104,733 | |
| Gross losses on investment sales | (18,446) | | | (16,862) | |
| Change in fair value of assets and liabilities accounted for using the fair value option: | | | |
| Fixed maturities | (7,492) | | | 34,115 | |
| Other investments | 3,811 | | | 61,622 | |
| Equity securities | 3,042 | | | 4,048 | |
| Short-term investments | 16 | | | 3,377 | |
| Equity securities, at fair value: | | | |
| Net realized gains (losses) on sales during the period | 14,736 | | | 26,549 | |
| Net unrealized gains (losses) on equity securities still held at reporting date | (40,155) | | | 33,562 | |
| Allowance for credit losses: | | | |
| Investments related | (456) | | | 1,332 | |
| Underwriting related | (3,985) | | | 351 | |
| | | |
| Derivative instruments (1) | (21,435) | | | 20,369 | |
| Other (2) | (41,495) | | | 7,303 | |
| Net realized gains (losses) | $ | (25,040) | | | $ | 280,499 | |
| | | |
| Nine Months Ended | | | |
| Available for sale securities: | | | |
| Gross gains on investment sales | $ | 267,362 | | | $ | 515,086 | |
| Gross losses on investment sales | (132,071) | | | (98,654) | |
| Change in fair value of assets and liabilities accounted for using the fair value option: | | | |
| Fixed maturities | 19,973 | | | (25,370) | |
| Other investments | 111,550 | | | (67,608) | |
| Equity securities | 10,599 | | | 5,803 | |
| Short-term investments | 648 | | | (1,936) | |
| Equity securities, at fair value: | | | |
| Net realized gains (losses) on sales during the period | 86,155 | | | 7,760 | |
| Net unrealized gains (losses) on equity securities still held at reporting date | 45,400 | | | 3,682 | |
| Allowance for credit losses: | | | |
| Investments related | (1,208) | | | (4,763) | |
| Underwriting related | 2,664 | | | (8,753) | |
| Net impairments losses | — | | | (533) | |
| Derivative instruments (1) | (36,428) | | | 146,722 | |
| Other (2) | (54,316) | | | (1,309) | |
| Net realized gains (losses) | $ | 320,328 | | | $ | 470,127 | |
(1) See note 910 for information on the Company’s derivative instruments. (2) 2021 periods reflected $33.1 million of losses related to the Company’s deconsolidation of Watford.
| | | | | | | | |
| ARCH CAPITAL | 2827 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method
The Company recorded $126.7$105.4 million of equity in net income related to investment funds accounted for using the equity method in the 20202021 third quarter, compared to income of $17.1$126.7 million for the 20192020 third quarter, and $57.4an income of $299.3 million for the nine months ended September 30, 2020,2021, compared to
$96.5 income of $57.4 million for the nine months ended September 30, 2019.2020. In applying the equity method, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds.
Investments in Operating Affiliates
Investments in which the Company has significant influence over the operating and financial policies are classified as ‘investments in operating affiliates’ on the Company’s balance sheets and are accounted for under the equity method. Such investments primarily include the Company’s investment in Coface, Greysbridge and Premia. Investments in Coface and Premia are generally recorded on a three month lag, while the Company’s investment in Greysbridge is not recorded on a lag.
In 2021, the Company completed the share purchase agreement with Natixis to purchase 29.5% of the common equity of Coface, a France-based leader in the global trade credit insurance market. The consideration paid was €9.95 per share, or an aggregate €453 million (approximately $546 million) including related fees. Income (loss) from
operating affiliates reflected a one-time gain of $74.5 million realized from the acquisition. As a result of equity method accounting rules, approximately $36 million of additional gain was deferred and will generally be recognized over the next five years. As of September 30, 2021, the Company owned approximately 29.86% of the issued shares of Coface, or 30.10% excluding treasury shares, with a carrying value of $615.9 million.
In July 2021, the Company announced the completion of the previously disclosed acquisition of Watford by Greysbridge for a cash purchase price of $35.00 per common share. Effective July 1, 2021, Watford is wholly owned by Greysbridge, and Greysbridge is owned 40% by the Company, 30% by certain investment funds managed by Kelso and 30% by certain investment funds managed by Warburg. At September 30, 2021 the Company’s carrying value in Greysbridge was $363.3 million, which reflected the Company’s aggregate purchase price of $278.9 million along with income (loss) from operating affiliates, which included a one-time gain of $95.7 million recognized from the acquisition. In addition, the ‘net realized gains (losses)’ line on the Company’s consolidated statements of income included a $33.1 million loss as a result of deconsolidation of Watford in the Company’s financial statements following the close of the transaction. Seenote 12. Income from operating affiliates for the 2021 third quarter was $124.1 million, compared to an income of $0.9 million, for the 2020 third quarter, and income of $224.1 million for the nine months ended September 30, 2021, compared to an income of $6.3 million for the nine months ended September 30, 2020. The income from operating affiliates for the 2021 period, primarily related to the Company’s recent acquisitions of Coface and Greysbridge.
| | | | | | | | |
| ARCH CAPITAL | 28 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Allowance for Expected Credit Losses
The following table provides a roll forward of the allowance for expected credit losses of the Company’s securities classified as available for sale:
| | | September 30, 2020 | | Structured Securities (1) | | Municipal
Bonds | | Corporate
Bonds | | | Total |
| Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2021 | | | | | | | |
| Balance at beginning of period | | Balance at beginning of period | | $ | 759 | | | $ | 6 | | | $ | 1,359 | | | | $ | 2,124 | |
| | Structured Securities (1) | | Municipal
Bonds | | Corporate
Bonds | | Short Term Investments | | Total | |
| Three Months Ended | | | | | | | | | |
| Additions for current-period provision for expected credit losses | | Additions for current-period provision for expected credit losses | | 48 | | | — | | | — | | | | 48 | |
| Additions (reductions) for previously recognized expected credit losses | | Additions (reductions) for previously recognized expected credit losses | | 14 | | | (4) | | | 395 | | | | 405 | |
| Reductions due to disposals (3) | | Reductions due to disposals (3) | | (234) | | | — | | | (232) | | | | (466) | |
| | Balance at end of period | | Balance at end of period | | $ | 587 | | | $ | 2 | | | $ | 1,522 | | | | $ | 2,111 | |
| | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2020 | | | |
| Balance at beginning of period | Balance at beginning of period | | $ | 1,726 | | | $ | 28 | | | $ | 4,115 | | | $ | 0 | | | $ | 5,869 | | Balance at beginning of period | | $ | 1,726 | | | $ | 28 | | | $ | 4,115 | | | | $ | 5,869 | |
| Cumulative effect of accounting change | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
| | Additions for current-period provision for expected credit losses | Additions for current-period provision for expected credit losses | | 27 | | | 0 | | | 202 | | | 0 | | | 229 | | Additions for current-period provision for expected credit losses | | 27 | | | — | | | 202 | | | | 229 | |
| Additions (reductions) for previously recognized expected credit losses | Additions (reductions) for previously recognized expected credit losses | | 403 | | | 33 | | | (1,996) | | | 0 | | | (1,560) | | Additions (reductions) for previously recognized expected credit losses | | 403 | | | 33 | | | (1,996) | | | | (1,560) | |
| Reductions due to disposals | Reductions due to disposals | | (28) | | | 0 | | | (577) | | | 0 | | | (605) | | Reductions due to disposals | | (28) | | | — | | | (577) | | | | (605) | |
| Write-offs charged against the allowance | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
| | Balance at end of period | Balance at end of period | | $ | 2,128 | | | $ | 61 | | | $ | 1,744 | | | $ | 0 | | | $ | 3,933 | | Balance at end of period | | $ | 2,128 | | | $ | 61 | | | $ | 1,744 | | | | $ | 3,933 | |
| | Nine Months Ended | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | | |
| Balance at beginning of period | Balance at beginning of period | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | Balance at beginning of period | | $ | 1,490 | | | $ | 11 | | | $ | 896 | | | | $ | 2,397 | |
| Cumulative effect of accounting change | | 517 | | | 0 | | | 117 | | | 0 | | | 634 | | |
| | Additions for current-period provision for expected credit losses | | Additions for current-period provision for expected credit losses | | 282 | | | — | | | 2,428 | | | | 2,710 | |
| Additions (reductions) for previously recognized expected credit losses | | Additions (reductions) for previously recognized expected credit losses | | (751) | | | (9) | | | (557) | | | | (1,317) | |
| Reductions due to disposals (3) | | Reductions due to disposals (3) | | (434) | | | — | | | (1,245) | | | | (1,679) | |
| | Balance at end of period | | Balance at end of period | | $ | 587 | | | $ | 2 | | | $ | 1,522 | | | | $ | 2,111 | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | | |
| Balance at beginning of period | | Balance at beginning of period | | $ | — | | | $ | — | | | $ | — | | | | $ | — | |
| Cumulative effect of accounting change (2) | | Cumulative effect of accounting change (2) | | 517 | | | — | | | 117 | | | | 634 | |
| Additions for current-period provision for expected credit losses | Additions for current-period provision for expected credit losses | | 2,868 | | | 67 | | | 7,643 | | | 0 | | | 10,578 | | Additions for current-period provision for expected credit losses | | 2,868 | | | 67 | | | 7,643 | | | | 10,578 | |
| Additions (reductions) for previously recognized expected credit losses | Additions (reductions) for previously recognized expected credit losses | | (903) | | | 8 | | | (4,920) | | | 0 | | | (5,815) | | Additions (reductions) for previously recognized expected credit losses | | (903) | | | 8 | | | (4,920) | | | | (5,815) | |
| Reductions due to disposals | Reductions due to disposals | | (354) | | | (14) | | | (1,096) | | | 0 | | | (1,464) | | Reductions due to disposals | | (354) | | | (14) | | | (1,096) | | | | (1,464) | |
| Write-offs charged against the allowance | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
| | Balance at end of period | Balance at end of period | | $ | 2,128 | | | $ | 61 | | | $ | 1,744 | | | $ | 0 | | | $ | 3,933 | | Balance at end of period | | $ | 2,128 | | | $ | 61 | | | $ | 1,744 | | | | $ | 3,933 | |
(1) Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
(2) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.
(3) Reduction for the 2021 periods primarily related to the Company’s deconsolidation of Watford.
| | | | | | | | |
| ARCH CAPITAL | 29 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Restricted Assets
The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its underwriting operations. The Company’s subsidiaries maintain assets in trust accounts as collateral for transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See note 17,18, “Commitments and Contingencies,” of the notes to consolidated financial statements in the Company’s 20192020 Form 10-K.
The following table details the value of the Company’s restricted assets:
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Assets used for collateral or guarantees: | Assets used for collateral or guarantees: | | | | Assets used for collateral or guarantees: | | | |
| Affiliated transactions | Affiliated transactions | $ | 4,829,252 | | | $ | 4,526,761 | | Affiliated transactions | $ | 4,271,208 | | | $ | 4,643,334 | |
| Third party agreements | Third party agreements | 2,636,097 | | | 2,278,248 | | Third party agreements | 2,594,053 | | | 3,083,324 | |
| Deposits with U.S. regulatory authorities | Deposits with U.S. regulatory authorities | 942,480 | | | 797,371 | | Deposits with U.S. regulatory authorities | 803,878 | | | 827,552 | |
| Deposits with non-U.S. regulatory authorities | Deposits with non-U.S. regulatory authorities | 179,726 | | | 119,238 | | Deposits with non-U.S. regulatory authorities | 469,497 | | | 179,099 | |
| | Total restricted assets | Total restricted assets | $ | 8,587,555 | | | $ | 7,721,618 | | Total restricted assets | $ | 8,138,636 | | | $ | 8,733,309 | |
In addition, Watford maintains secured credit facilities to provide borrowing capacity for investment purposes and a total return swap agreement and maintains assets pledged as collateral for such purposes. The Company does not guarantee or provide credit support for Watford, and the Company’s financial exposure to Watford is limited to its investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions. As of September 30, 2020 and December 31, 2019, Watford held $1.19 billion and $1.0 billion, respectively, in pledged assets to collateralize the credit facility mentioned above.
Reconciliation of Cash and Restricted Cash
The following table details reconciliation of cash and restricted cash within the Consolidated Balance Sheets:
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Cash | Cash | $ | 976,398 | | | $ | 726,230 | | Cash | $ | 1,137,721 | | | $ | 906,448 | |
| Restricted cash (included in ‘other assets’) | Restricted cash (included in ‘other assets’) | $ | 210,575 | | | $ | 177,468 | | Restricted cash (included in ‘other assets’) | $ | 411,188 | | | $ | 384,096 | |
| Cash and restricted cash | Cash and restricted cash | $ | 1,186,973 | | | $ | 903,698 | | Cash and restricted cash | $ | 1,548,909 | | | $ | 1,290,544 | |
| | | | | | | | |
ARCH CAPITAL | 30 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8.9. Fair Value
Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).
The levels in the hierarchy are defined as follows:
Level 1: Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument
Level 3: | | | | | | | | |
| Level 1: | | Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets |
| | |
| Level 2: | | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument |
| | |
| Level 3: | | Inputs to the valuation methodology are unobservable and significant to the fair value measurement |
Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.
The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but
is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above
| | | | | | | | |
| ARCH CAPITAL | 30 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. The Company did not adjust any of the prices obtained from the independent pricing sources at September 30, 2020.2021.
In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Where quotes are unavailable, fair value is determined by the Investment Manager using quantitative and qualitative assessments such as internally modeled values. Of the $26.04$23.8 billion of financial assets and liabilities measured at fair value at September 30, 2020,2021, approximately $120.0$9.0 million, or 0.5%0.0%, were priced using non-binding broker-dealer quotes or modeled valuations. Of the $22.90$26.5 billion of financial assets and liabilities measured at fair value at December 31, 2019,2020, approximately $179.6$150.1 million, or 0.8%0.6%, were priced using non-binding broker-dealer quotes or modeled valuations.
Fixed maturities
The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs
| | | | | | | | |
ARCH CAPITAL | 31 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.
The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:
•U.S. government and government agencies — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the
fair values of U.S. government agency securities are classified within Level 2.
•Corporate bonds — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
•Mortgage-backed securities — valuations provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
•Municipal bonds — valuations provided by independent pricing services, with all prices provided
through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.
•Commercial mortgage-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for commercial
| | | | | | | | |
| ARCH CAPITAL | 31 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.
•Non-U.S. government securities — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.
•Asset-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
| | | | | | | | |
ARCH CAPITAL | 32 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Equity securities
The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Certain equity securities are included in Level 2 of the valuation hierarchy as the significant inputs used in the pricing process for such securities are observable market inputs. Other equity securities are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these securities are unobservable, the fair value of such securities are classified as Level 3.
Other investments
The Company determined that exchange-tradedCompany’s other investments in mutual funds would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other investments also include term loan investments for which fair values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. The fair values for certain of the Company’s other investments are determined using net asset values as advised by external fund managers. The net asset value is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. In accordance with applicable
accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities.
Derivative instruments
The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.
Short-term investments
The Company determined that certain of its short-term investments held in highly liquid money market-type funds, Treasury bills and commercial paper would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of other short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2.
Residential mortgage loans
The Company’s residential mortgage loans (included in ‘other assets’ in the consolidated balance sheets) include amounts related to the Company’s whole mortgage loan purchase and sell program. Fair values of residential mortgage loans are generally determined based on market prices. As significant inputs used in pricing process for these residential mortgage loans are observable market inputs, the fair value of these securities are classified within Level 2.
Contingent consideration liabilities
Contingent consideration liabilities (included in ‘other liabilities’ in the consolidated balance sheets) include amounts related to various Company’s acquisitions. Such amounts are remeasured at fair value at each balance sheet date with changes in fair value recognized in ‘net realized gains (losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates future payments using an income approach based on modeled inputs which include a weighted average cost of capital. The Company determined that contingent consideration liabilities would be included within Level 3.
| | | | | | | | |
| ARCH CAPITAL | 3332 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the Company’s financial assets and liabilities measured at fair value by level at September 30, 2020:2021:
| | | | | | Estimated Fair Value Measurements Using: | | | | Estimated Fair Value Measurements Using: |
| | | Estimated
Fair
Value | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Estimated
Fair
Value | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets measured at fair value (1): | Assets measured at fair value (1): | | | | | | | | Assets measured at fair value (1): | | | | | | | |
| Available for sale securities: | Available for sale securities: | | | | | | | | Available for sale securities: | | | | | | | |
| Fixed maturities: | Fixed maturities: | | | | | | | | Fixed maturities: | | | | | | | |
| Corporate bonds | Corporate bonds | $ | 7,965,599 | | | $ | 0 | | | $ | 7,965,586 | | | $ | 13 | | Corporate bonds | $ | 6,403,617 | | | $ | — | | | $ | 6,403,604 | | | $ | 13 | |
| Mortgage backed securities | Mortgage backed securities | 717,081 | | | 0 | | | 716,873 | | | 208 | | Mortgage backed securities | 405,797 | | | — | | | 405,797 | | | — | |
| Municipal bonds | Municipal bonds | 527,410 | | | 0 | | | 527,410 | | | 0 | | Municipal bonds | 382,722 | | | — | | | 382,722 | | | — | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | 374,360 | | | 0 | | | 374,360 | | | 0 | | Commercial mortgage backed securities | 579,424 | | | — | | | 579,424 | | | — | |
| U.S. government and government agencies | U.S. government and government agencies | 4,861,349 | | | 4,715,551 | | | 145,798 | | | 0 | | U.S. government and government agencies | 4,460,515 | | | 4,431,935 | | | 28,580 | | | — | |
| Non-U.S. government securities | Non-U.S. government securities | 2,302,646 | | | 0 | | | 2,302,646 | | | 0 | | Non-U.S. government securities | 1,863,734 | | | — | | | 1,863,734 | | | — | |
| Asset backed securities | Asset backed securities | 1,767,192 | | | 0 | | | 1,763,845 | | | 3,347 | | Asset backed securities | 2,672,554 | | | — | | | 2,669,110 | | | 3,444 | |
| Total | Total | 18,515,637 | | | 4,715,551 | | | 13,796,518 | | | 3,568 | | Total | 16,768,363 | | | 4,431,935 | | | 12,332,971 | | | 3,457 | |
| | Short-term investments | Short-term investments | 2,039,097 | | | 2,013,582 | | | 25,515 | | | 0 | | Short-term investments | 3,069,965 | | | 2,046,391 | | | 1,023,574 | | | — | |
| | Equity securities, at fair value | Equity securities, at fair value | 1,502,015 | | | 1,452,713 | | | 6,616 | | | 42,686 | | Equity securities, at fair value | 1,790,640 | | | 1,756,462 | | | 31,596 | | | 2,582 | |
| | | Derivative instruments (4) | Derivative instruments (4) | 130,494 | | | 0 | | | 130,494 | | | 0 | | Derivative instruments (4) | 89,958 | | | — | | | 89,958 | | | — | |
| | Residential mortgage loans | | Residential mortgage loans | 7,701 | | | — | | | 7,701 | | | — | |
| | Fair value option: | Fair value option: | | Fair value option: | |
| Corporate bonds | Corporate bonds | 780,237 | | | 0 | | | 779,273 | | | 964 | | Corporate bonds | 374,326 | | | — | | | 374,326 | | | — | |
| Non-U.S. government bonds | Non-U.S. government bonds | 44,963 | | | 0 | | | 44,963 | | | 0 | | Non-U.S. government bonds | 19,829 | | | — | | | 19,829 | | | — | |
| Mortgage backed securities | Mortgage backed securities | 13,026 | | | 0 | | | 13,026 | | | 0 | | Mortgage backed securities | — | | | — | | | — | | | — | |
| Municipal bonds | 0 | | | 0 | | | 0 | | | 0 | | |
| | Commercial mortgage backed securities | Commercial mortgage backed securities | 1,150 | | | 0 | | | 1,150 | | | 0 | | Commercial mortgage backed securities | — | | | — | | | — | | | — | |
| Asset backed securities | Asset backed securities | 175,790 | | | 0 | | | 175,790 | | | 0 | | Asset backed securities | 19,852 | | | — | | | 19,852 | | | — | |
| U.S. government and government agencies | U.S. government and government agencies | 4,363 | | | 4,252 | | | 111 | | | 0 | | U.S. government and government agencies | — | | | — | | | — | | | — | |
| Short-term investments | Short-term investments | 468,704 | | | 360,883 | | | 107,821 | | | 0 | | Short-term investments | 115,681 | | | 1,190 | | | 114,491 | | | — | |
| Equity securities | Equity securities | 91,445 | | | 27,766 | | | 156 | | | 63,523 | | Equity securities | 24,522 | | | 19,987 | | | — | | | 4,535 | |
| Other investments | Other investments | 1,152,517 | | | 52,080 | | | 1,034,251 | | | 66,186 | | Other investments | 359,011 | | | 17,861 | | | 311,393 | | | 29,757 | |
| Other investments measured at net asset value (2) | Other investments measured at net asset value (2) | 1,017,380 | | | Other investments measured at net asset value (2) | 1,130,748 | | |
| Total | Total | 3,749,575 | | | 444,981 | | | 2,156,541 | | | 130,673 | | Total | 2,043,969 | | | 39,038 | | | 839,891 | | | 34,292 | |
| | Total assets measured at fair value | Total assets measured at fair value | $ | 25,936,818 | | | $ | 8,626,827 | | | $ | 16,115,684 | | | $ | 176,927 | | Total assets measured at fair value | $ | 23,770,596 | | | $ | 8,273,826 | | | $ | 14,325,691 | | | $ | 40,331 | |
| | Liabilities measured at fair value: | Liabilities measured at fair value: | | | | | | | | Liabilities measured at fair value: | | | | | | | |
| Contingent consideration liabilities | Contingent consideration liabilities | $ | (630) | | | $ | 0 | | | $ | 0 | | | $ | (630) | | Contingent consideration liabilities | $ | (17,811) | | | $ | — | | | $ | — | | | $ | (17,811) | |
| Securities sold but not yet purchased (3) | Securities sold but not yet purchased (3) | (24,909) | | | 0 | | | (24,909) | | | 0 | | Securities sold but not yet purchased (3) | — | | | — | | | — | | | — | |
| Derivative instruments (4) | Derivative instruments (4) | (82,457) | | | 0 | | | (82,457) | | | 0 | | Derivative instruments (4) | (43,526) | | | — | | | (43,526) | | | — | |
| Total liabilities measured at fair value | Total liabilities measured at fair value | $ | (107,996) | | | $ | 0 | | | $ | (107,366) | | | $ | (630) | | Total liabilities measured at fair value | $ | (61,337) | | | $ | — | | | $ | (43,526) | | | $ | (17,811) | |
(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See note 78, “—Securities Lending Agreements.” In September 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions. (2) In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
(3) Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.
| | | | | | | | |
| ARCH CAPITAL | 3433 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2019:2020:
| | | | | | Estimated Fair Value Measurements Using: | | | | Estimated Fair Value Measurements Using: |
| | | Estimated
Fair
Value | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Estimated
Fair
Value | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Assets measured at fair value (1): | Assets measured at fair value (1): | | | | | | | | Assets measured at fair value (1): | | | | | | | |
| Available for sale securities: | Available for sale securities: | | Available for sale securities: | |
| Fixed maturities: | Fixed maturities: | | Fixed maturities: | |
| Corporate bonds | Corporate bonds | $ | 6,406,591 | | | $ | 0 | | | $ | 6,397,740 | | | $ | 8,851 | | Corporate bonds | $ | 7,856,571 | | | $ | — | | | $ | 7,856,558 | | | $ | 13 | |
| Mortgage backed securities | Mortgage backed securities | 562,309 | | | 0 | | | 562,055 | | | 254 | | Mortgage backed securities | 630,001 | | | — | | | 630,001 | | | — | |
| Municipal bonds | Municipal bonds | 881,926 | | | 0 | | | 881,926 | | | 0 | | Municipal bonds | 494,522 | | | — | | | 494,522 | | | — | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | 733,108 | | | 0 | | | 733,108 | | | 0 | | Commercial mortgage backed securities | 389,900 | | | — | | | 389,900 | | | — | |
| U.S. government and government agencies | U.S. government and government agencies | 4,916,592 | | | 4,805,581 | | | 111,011 | | | 0 | | U.S. government and government agencies | 5,557,077 | | | 5,463,356 | | | 93,721 | | | — | |
| Non-U.S. government securities | Non-U.S. government securities | 2,078,757 | | | 0 | | | 2,078,757 | | | 0 | | Non-U.S. government securities | 2,433,733 | | | — | | | 2,433,733 | | | — | |
| Asset backed securities | Asset backed securities | 1,683,753 | | | 0 | | | 1,678,791 | | | 4,962 | | Asset backed securities | 1,634,804 | | | — | | | 1,631,378 | | | 3,426 | |
| Total | Total | 17,263,036 | | | 4,805,581 | | | 12,443,388 | | | 14,067 | | Total | 18,996,608 | | | 5,463,356 | | | 13,529,813 | | | 3,439 | |
| | Short-term investments | Short-term investments | 956,546 | | | 904,804 | | | 51,742 | | | 0 | | Short-term investments | 1,924,922 | | | 1,920,565 | | | 4,357 | | | — | |
| | Equity securities, at fair value | Equity securities, at fair value | 850,283 | | | 789,596 | | | 4,798 | | | 55,889 | | Equity securities, at fair value | 1,460,959 | | | 1,401,653 | | | 17,291 | | | 42,015 | |
| | | Derivative instruments (4) | Derivative instruments (4) | 48,946 | | | 0 | | | 48,946 | | | 0 | | Derivative instruments (4) | 177,383 | | | — | | | 177,383 | | | — | |
| | Fair value option: | Fair value option: | | Fair value option: | |
| Corporate bonds | Corporate bonds | 488,402 | | | 0 | | | 487,470 | | | 932 | | Corporate bonds | 651,294 | | | — | | | 650,309 | | | 985 | |
| Non-U.S. government bonds | Non-U.S. government bonds | 50,465 | | | 0 | | | 50,465 | | | 0 | | Non-U.S. government bonds | 35,263 | | | — | | | 35,263 | | | — | |
| Mortgage backed securities | Mortgage backed securities | 11,947 | | | 0 | | | 11,947 | | | 0 | | Mortgage backed securities | 3,282 | | | — | | | 3,282 | | | — | |
| Municipal bonds | 377 | | | 0 | | | 377 | | | 0 | | |
| | Commercial mortgage backed securities | Commercial mortgage backed securities | 1,134 | | | 0 | | | 1,134 | | | 0 | | Commercial mortgage backed securities | 1,090 | | | — | | | 1,090 | | | — | |
| Asset backed securities | Asset backed securities | 200,163 | | | 0 | | | 200,163 | | | 0 | | Asset backed securities | 152,151 | | | — | | | 152,151 | | | — | |
| U.S. government and government agencies | U.S. government and government agencies | 1,962 | | | 1,852 | | | 110 | | | 0 | | U.S. government and government agencies | 274 | | | 164 | | | 110 | | | — | |
| Short-term investments | Short-term investments | 377,014 | | | 333,320 | | | 43,694 | | | 0 | | Short-term investments | 557,008 | | | 420,131 | | | 136,877 | | | — | |
| Equity securities | Equity securities | 102,697 | | | 43,962 | | | 641 | | | 58,094 | | Equity securities | 92,549 | | | 23,373 | | | 188 | | | 68,988 | |
| Other investments | Other investments | 1,418,273 | | | 53,287 | | | 1,296,169 | | | 68,817 | | Other investments | 1,134,229 | | | 51,149 | | | 1,015,977 | | | 67,103 | |
| Other investments measured at net asset value (2) | Other investments measured at net asset value (2) | 1,011,043 | | | Other investments measured at net asset value (2) | 1,197,656 | | |
| Total | Total | 3,663,477 | | | 432,421 | | | 2,092,170 | | | 127,843 | | Total | 3,824,796 | | | 494,817 | | | 1,995,247 | | | 137,076 | |
| | Total assets measured at fair value | Total assets measured at fair value | $ | 22,782,288 | | | $ | 6,932,402 | | | $ | 14,641,044 | | | $ | 197,799 | | Total assets measured at fair value | $ | 26,384,668 | | | $ | 9,280,391 | | | $ | 15,724,091 | | | $ | 182,530 | |
| | Liabilities measured at fair value: | Liabilities measured at fair value: | | Liabilities measured at fair value: | |
| Contingent consideration liabilities | Contingent consideration liabilities | $ | (7,998) | | | $ | 0 | | | $ | 0 | | | $ | (7,998) | | Contingent consideration liabilities | $ | (461) | | | $ | — | | | $ | — | | | $ | (461) | |
| Securities sold but not yet purchased (3) | Securities sold but not yet purchased (3) | (66,257) | | | 0 | | | (66,257) | | | 0 | | Securities sold but not yet purchased (3) | (21,679) | | | — | | | (21,679) | | | — | |
| Derivative instruments (4) | Derivative instruments (4) | (39,750) | | | 0 | | | (39,750) | | | 0 | | Derivative instruments (4) | (108,705) | | | — | | | (108,705) | | | — | |
| Total liabilities measured at fair value | Total liabilities measured at fair value | $ | (114,005) | | | $ | 0 | | | $ | (106,007) | | | $ | (7,998) | | Total liabilities measured at fair value | $ | (130,845) | | | $ | — | | | $ | (130,384) | | | $ | (461) | |
(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See note 78, “—Securities Lending Agreements.” In September 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions. (2) In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
(3) Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.
| | | | | | | | |
| ARCH CAPITAL | 3534 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs:
| | | Assets | Liabilities | | Assets | Liabilities |
| s | s | Available For Sale | | Fair Value Option | | Fair Value | | | s | Available For Sale | | Fair Value Option | | Fair Value | | |
| | | | Structured Securities (1) | | Corporate
Bonds | | Corporate
Bonds | | Other
Investments | | Equity
Securities | | Equity
Securities | | Contingent Consideration Liabilities |
| Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2021 | | | | | | | | | | | | | |
| Balance at beginning of period | | Balance at beginning of period | $ | 3,424 | | | $ | 13 | | | $ | 998 | | | $ | 73,900 | | | $ | 73,678 | | | $ | 49,136 | | | $ | (466) | |
| Total gains or (losses) (realized/unrealized) | | Total gains or (losses) (realized/unrealized) | |
| Included in earnings (2) | | Included in earnings (2) | 10 | | | — | | | — | | | — | | | 38 | | | 11 | | | — | |
| Included in other comprehensive income | | Included in other comprehensive income | 10 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Purchases, issuances, sales and settlements | | Purchases, issuances, sales and settlements | |
| Purchases | | Purchases | — | | | — | | | — | | | — | | | — | | | 208 | | | (17,345) | |
| Issuances | | Issuances | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Sales (3) | | Sales (3) | — | | | — | | | (998) | | | (44,143) | | | (69,181) | | | (46,773) | | | — | |
| Settlements | | Settlements | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Transfers in and/or out of Level 3 | | Transfers in and/or out of Level 3 | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Balance at end of period | | Balance at end of period | $ | 3,444 | | | $ | 13 | | | $ | — | | | $ | 29,757 | | | $ | 4,535 | | | $ | 2,582 | | | $ | (17,811) | |
| | | Structured Securities (1) | | Corporate
Bonds | | Corporate
Bonds | | Other
Investments | | Equity
Securities | | Equity
Securities | | Contingent Consideration Liabilities | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2020 | | | | | | | | | | | | | | Three Months Ended September 30, 2020 | | | | | |
| Balance at beginning of period | Balance at beginning of period | $ | 3,450 | | | $ | 857 | | | $ | 998 | | | $ | 46,453 | | | $ | 61,447 | | | $ | 51,981 | | | $ | (1,250) | | Balance at beginning of period | $ | 3,450 | | | $ | 857 | | | $ | 998 | | | $ | 46,453 | | | $ | 61,447 | | | $ | 51,981 | | | $ | (1,250) | |
| Total gains or (losses) (realized/unrealized) | Total gains or (losses) (realized/unrealized) | | Total gains or (losses) (realized/unrealized) | |
| Included in earnings (2) | Included in earnings (2) | (75) | | | (5,872) | | | (34) | | | 885 | | | 2,076 | | | (946) | | | 0 | | Included in earnings (2) | (75) | | | (5,872) | | | (34) | | | 885 | | | 2,076 | | | (946) | | | — | |
| Included in other comprehensive income | Included in other comprehensive income | 191 | | | 6,936 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Included in other comprehensive income | 191 | | | 6,936 | | | — | | | — | | | — | | | — | | | — | |
| Purchases, issuances, sales and settlements | Purchases, issuances, sales and settlements | | Purchases, issuances, sales and settlements | |
| Purchases | Purchases | 0 | | | 0 | | | 0 | | | 22,436 | | | 0 | | | 0 | | | 0 | | Purchases | — | | | — | | | — | | | 22,436 | | | — | | | — | | | — | |
| Issuances | Issuances | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Issuances | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Sales | Sales | 0 | | | 0 | | | 0 | | | (3,588) | | | 0 | | | (8,349) | | | 0 | | Sales | — | | | — | | | — | | | (3,588) | | | — | | | (8,349) | | | — | |
| Settlements | Settlements | (11) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 620 | | Settlements | (11) | | | — | | | — | | | — | | | — | | | — | | | 620 | |
| Transfers in and/or out of Level 3 | Transfers in and/or out of Level 3 | 0 | | | (1,908) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Transfers in and/or out of Level 3 | — | | | (1,908) | | | — | | | — | | | — | | | — | | | — | |
| Balance at end of period | Balance at end of period | $ | 3,555 | | | $ | 13 | | | $ | 964 | | | $ | 66,186 | | | $ | 63,523 | | | $ | 42,686 | | | $ | (630) | | Balance at end of period | $ | 3,555 | | | $ | 13 | | | $ | 964 | | | $ | 66,186 | | | $ | 63,523 | | | $ | 42,686 | | | $ | (630) | |
| | Three Months Ended September 30, 2019 | | | | | | |
| Balance at beginning of period | $ | 290 | | | $ | 7,642 | | | $ | 26,103 | | | $ | 95,273 | | | $ | 56,145 | | | $ | 51,212 | | | $ | (7,825) | | |
| Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | | | | |
| Balance at beginning of year | | Balance at beginning of year | $ | 3,426 | | | $ | 13 | | | $ | 985 | | | $ | 67,103 | | | $ | 68,988 | | | $ | 42,015 | | | $ | (461) | |
| Total gains or (losses) (realized/unrealized) | Total gains or (losses) (realized/unrealized) | | Total gains or (losses) (realized/unrealized) | |
| Included in earnings (2) | Included in earnings (2) | 0 | | | 0 | | | (1,227) | | | (411) | | | 127 | | | (26) | | | (79) | | Included in earnings (2) | (46) | | | — | | | 13 | | | 881 | | | 4,728 | | | 1,837 | | | — | |
| Included in other comprehensive income | Included in other comprehensive income | 0 | | | (301) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Included in other comprehensive income | 67 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Purchases, issuances, sales and settlements | Purchases, issuances, sales and settlements | | Purchases, issuances, sales and settlements | |
| Purchases | Purchases | 0 | | | 0 | | | 0 | | | 3,713 | | | 0 | | | 12,119 | | | 0 | | Purchases | — | | | — | | | — | | | 13,003 | | | — | | | 5,503 | | | (17,345) | |
| Issuances | Issuances | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Issuances | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Sales | 0 | | | 0 | | | (2,097) | | | (80) | | | 0 | | | (27,982) | | | 0 | | |
| Sales (3) | | Sales (3) | — | | | — | | | (998) | | | (51,230) | | | (69,181) | | | (46,773) | | | — | |
| Settlements | Settlements | (18) | | | (456) | | | 0 | | | 0 | | | 0 | | | 0 | | | 560 | | Settlements | (3) | | | — | | | — | | | — | | | — | | | — | | | (5) | |
| Transfers in and/or out of Level 3 | Transfers in and/or out of Level 3 | 5,449 | | | 1,860 | | | 0 | | | (13,052) | | | 0 | | | 0 | | | 0 | | Transfers in and/or out of Level 3 | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Balance at end of period | Balance at end of period | $ | 5,721 | | | $ | 8,745 | | | $ | 22,779 | | | $ | 85,443 | | | $ | 56,272 | | | $ | 35,323 | | | $ | (7,344) | | Balance at end of period | $ | 3,444 | | | $ | 13 | | | $ | — | | | $ | 29,757 | | | $ | 4,535 | | | $ | 2,582 | | | $ | (17,811) | |
| | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | | | | | | Nine Months Ended September 30, 2020 | | | | | |
| Balance at beginning of year | Balance at beginning of year | $ | 5,216 | | | $ | 8,851 | | | $ | 932 | | | $ | 68,817 | | | $ | 58,094 | | | $ | 55,889 | | | $ | (7,998) | | Balance at beginning of year | $ | 5,216 | | | $ | 8,851 | | | $ | 932 | | | $ | 68,817 | | | $ | 58,094 | | | $ | 55,889 | | | $ | (7,998) | |
| Total gains or (losses) (realized/unrealized) | Total gains or (losses) (realized/unrealized) | | Total gains or (losses) (realized/unrealized) | |
| Included in earnings (2) | Included in earnings (2) | (130) | | | (5,865) | | | (34) | | | (129) | | | 5,429 | | | 7,132 | | | (72) | | Included in earnings (2) | (130) | | | (5,865) | | | (34) | | | (129) | | | 5,429 | | | 7,132 | | | (72) | |
| Included in other comprehensive income | Included in other comprehensive income | (118) | | | 397 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Included in other comprehensive income | (118) | | | 397 | | | — | | | — | | | — | | | — | | | — | |
| Purchases, issuances, sales and settlements | Purchases, issuances, sales and settlements | | Purchases, issuances, sales and settlements | |
| Purchases | Purchases | 0 | | | 0 | | | 66 | | | 22,460 | | | 0 | | | 3,464 | | | 0 | | Purchases | — | | | — | | | 66 | | | 22,460 | | | — | | | 3,464 | | | — | |
| Issuances | Issuances | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | Issuances | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Sales | Sales | 0 | | | 0 | | | 0 | | | (27,946) | | | 0 | | | (23,799) | | | 0 | | Sales | — | | | — | | | — | | | (27,946) | | | — | | | (23,799) | | | — | |
| Settlements | Settlements | (1,413) | | | (1,462) | | | 0 | | | 0 | | | 0 | | | 0 | | | 7,440 | | Settlements | (1,413) | | | (1,462) | | | — | | | — | | | — | | | — | | | 7,440 | |
| Transfers in and/or out of Level 3 | Transfers in and/or out of Level 3 | 0 | | | (1,908) | | | 0 | | | 2,984 | | | 0 | | | 0 | | | 0 | | Transfers in and/or out of Level 3 | — | | | (1,908) | | | — | | | 2,984 | | | — | | | — | | | — | |
| Balance at end of period | Balance at end of period | $ | 3,555 | | | $ | 13 | | | $ | 964 | | | $ | 66,186 | | | $ | 63,523 | | | $ | 42,686 | | | $ | (630) | | Balance at end of period | $ | 3,555 | | | $ | 13 | | | $ | 964 | | | $ | 66,186 | | | $ | 63,523 | | | $ | 42,686 | | | $ | (630) | |
| | Nine Months Ended September 30, 2019 | | | | | | |
| Balance at beginning of year | $ | 313 | | | $ | 8,141 | | | $ | 5,758 | | | $ | 62,705 | | | $ | 0 | | | $ | 0 | | | $ | (66,665) | | |
| Total gains or (losses) (realized/unrealized) | | |
| Included in earnings (2) | 1,757 | | | 0 | | | (1,566) | | | (11,727) | | | 127 | | | (26) | | | (1,410) | | |
| Included in other comprehensive income | 5 | | | (317) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
| Purchases, issuances, sales and settlements | | |
| Purchases | 0 | | | 429 | | | 0 | | | 3,713 | | | 0 | | | 12,119 | | | 0 | | |
| Issuances | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (548) | | |
| Sales | (1,757) | | | 0 | | | (5,332) | | | (228) | | | 0 | | | (27,982) | | | 0 | | |
| Settlements | (46) | | | (1,368) | | | 0 | | | (600) | | | 0 | | | 0 | | | 61,279 | | |
| Transfers in and/or out of Level 3 | 5,449 | | | 1,860 | | | 23,919 | | | 31,580 | | | 56,145 | | | 51,212 | | | 0 | | |
| Balance at end of period | $ | 5,721 | | | $ | 8,745 | | | $ | 22,779 | | | $ | 85,443 | | | $ | 56,272 | | | $ | 35,323 | | | $ | (7,344) | | |
(1) Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
(2) Gains or losses were included in net realized gains (losses).
(3) Sales for the 2021 periods primarily related to the Company’s deconsolidation of Watford.
| | | | | | | | |
| ARCH CAPITAL | 3635 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Financial Instruments Disclosed, But Not Carried, At Fair Value
The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at September 30, 2020,2021, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
At September 30, 2021, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.7 billion and had a fair value of $3.3 billion. At December 31, 2020, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.86$2.9 billion and had a fair value of $3.51 billion. At December 31, 2019, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $1.87 billion and had a fair value of $2.34$3.7 billion. The fair values of the senior notes were obtained from a third party pricing service and are based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.
9.10. Derivative Instruments
The Company’s investment strategy allows for the use of derivative instruments. The Company’s derivative instruments are recorded on its consolidated balance sheets at fair value. The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other futures contracts and commodity futures to manage portfolio duration or replicate investment positions in its portfolios and the Company routinely utilizes foreign currency forward contracts, currency options, index futures contracts and other derivatives as part of its total return objective. In addition, certain of the Company’s investments are managed in portfolios which incorporate the use of foreign currency forward contracts which are intended to provide an economic hedge against foreign currency movements.
In addition, the Company purchases to-be-announced mortgage backed securities (“TBAs”) as part of its investment strategy. TBAs represent commitments to purchase a future issuance of agency mortgage backed securities. For the period between purchase of a TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative. The Company purchases TBAs in both long and short positions to enhance investment performance and as part of its overall investment strategy.
The following table summarizes information on the fair values and notional values of the Company’s derivative instruments:
| | | | Estimated Fair Value | | | Estimated Fair Value | |
| | | Asset Derivatives | | Liability Derivatives | | Notional
Value (1) | | Asset Derivatives | | Liability Derivatives | | Notional
Value (1) |
| September 30, 2020 | | | | | | |
| September 30, 2021 | | September 30, 2021 | | | | | |
| Futures contracts (2) | Futures contracts (2) | $ | 23,605 | | | $ | (9,357) | | | $ | 2,804,901 | | Futures contracts (2) | $ | 36,010 | | | $ | (17,562) | | | $ | 2,796,442 | |
| Foreign currency forward contracts (2) | Foreign currency forward contracts (2) | 11,428 | | | (3,256) | | | 990,726 | | Foreign currency forward contracts (2) | 7,380 | | | (13,914) | | | 1,234,665 | |
| TBAs (3) | TBAs (3) | 0 | | | 0 | | | 0 | | TBAs (3) | 49,227 | | | — | | | 47,603 | |
| Other (2) | Other (2) | 95,461 | | | (69,844) | | | 6,231,827 | | Other (2) | 46,568 | | | (12,050) | | | 4,184,225 | |
| Total | Total | $ | 130,494 | | | $ | (82,457) | | | Total | $ | 139,185 | | | $ | (43,526) | | |
| | December 31, 2019 | | |
| December 31, 2020 | | December 31, 2020 | |
| Futures contracts (2) | Futures contracts (2) | $ | 10,065 | | | $ | (13,722) | | | $ | 4,104,559 | | Futures contracts (2) | $ | 11,046 | | | $ | (4,496) | | | $ | 3,099,796 | |
| Foreign currency forward contracts (2) | Foreign currency forward contracts (2) | 5,352 | | | (5,327) | | | 686,878 | | Foreign currency forward contracts (2) | 52,716 | | | (6,202) | | | 1,656,729 | |
| TBAs (3) | TBAs (3) | 55,010 | | | 0 | | | 53,229 | | TBAs (3) | — | | | — | | | — | |
| Other (2) | Other (2) | 33,529 | | | (20,701) | | | 4,356,300 | | Other (2) | 113,621 | | | (98,007) | | | 5,763,919 | |
| Total | Total | $ | 103,956 | | | $ | (39,750) | | | Total | $ | 177,383 | | | $ | (108,705) | | |
(1) Represents the absolute notional value of all outstanding contracts, consisting of long and short positions.
(2) The fair value of asset derivatives are included in ‘other assets’ and the fair value of liability derivatives are included in ‘other liabilities.’
(3) The fair value of TBAs are included in ‘fixed maturities available for
sale, at fair value.’
The Company did not hold any derivatives which were designated as hedging instruments at September 30, 20202021 or December 31, 2019.2020.
The Company’s derivative instruments can be traded under master netting agreements, which establish terms that apply to all derivative transactions with a counterparty. In the event of a bankruptcy or other stipulated event of default, such agreements provide that the non-defaulting party may elect to terminate all outstanding derivative transactions, in which case all individual derivative positions (loss or gain) with a counterparty are closed out and netted and replaced with a single amount, usually referred to as the termination amount, which is expressed in a single currency. The resulting single net amount, where positive, is payable to the party “in-the-money” regardless of whether or not it is the defaulting party, unless the parties have agreed that only the non-defaulting party is entitled to receive a termination payment where the net amount is positive and is in its favor. Contractual close-out netting reduces derivatives credit exposure from gross to net exposure.
At September 30, 2020,2021, asset derivatives and liability derivatives of $109.7$133.1 million and $74.6$42.2 million, respectively, were subject to a master netting agreement, compared to $97.8$138.8 million and $37.8$93.0 million, respectively, at December 31, 2019.2020. The remaining derivatives included in the preceding table were not subject to a master netting agreement.
| | | | | | | | |
| ARCH CAPITAL | 3736 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Realized and unrealized contract gains and losses on the Company’s derivative instruments are reflected in ‘net realized gains (losses)’ in the consolidated statements of income, as summarized in the following table:
| | Derivatives not designated as | Derivatives not designated as | | September 30, | Derivatives not designated as | | September 30, |
| hedging instruments: | hedging instruments: | | 2020 | | 2019 | hedging instruments: | | 2021 | | 2020 |
| | Three Months Ended | Three Months Ended | | Three Months Ended | |
| Net realized gains (losses): | Net realized gains (losses): | | Net realized gains (losses): | |
| Futures contracts | Futures contracts | | $ | 10,945 | | | $ | 46,194 | | Futures contracts | | $ | (10,073) | | | $ | 10,945 | |
| Foreign currency forward contracts | Foreign currency forward contracts | | 10,813 | | | 2,044 | | Foreign currency forward contracts | | (16,146) | | | 10,813 | |
| TBAs | TBAs | | 120 | | | 269 | | TBAs | | (46) | | | 120 | |
| Other | | (1,509) | | | (5,614) | | |
| Other (1) | | Other (1) | | 4,830 | | | (1,509) | |
| Total | Total | | $ | 20,369 | | | $ | 42,893 | | Total | | $ | (21,435) | | | $ | 20,369 | |
| | Nine Months Ended | Nine Months Ended | | Nine Months Ended | |
| Net realized gains (losses): | Net realized gains (losses): | | Net realized gains (losses): | |
| Futures contracts | Futures contracts | | $ | 105,282 | | | $ | 140,503 | | Futures contracts | | $ | (17,394) | | | $ | 105,282 | |
| Foreign currency forward contracts | Foreign currency forward contracts | | 3,466 | | | (17,030) | | Foreign currency forward contracts | | (36,922) | | | 3,466 | |
| TBAs | TBAs | | 1,129 | | | 507 | | TBAs | | (46) | | | 1,129 | |
| Other | | 36,845 | | | 18,750 | | |
| Other (1) | | Other (1) | | 17,934 | | | 36,845 | |
| Total | Total | | $ | 146,722 | | | $ | 142,730 | | Total | | $ | (36,428) | | | $ | 146,722 | |
(1) Includes realized gains and losses on swaps, options and other derivatives contracts.
10.11. Commitments and Contingencies
Senior Notes
On June 30, 2020, Arch Capital completed a public offering of $1.0 billion aggregate principal amount of its 3.635% senior notes with a scheduled maturity of June 30, 2050 (the “2050 notes”). The 2050 notes are Arch Capital’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the 2050 notes are due semi-annually in arrears on June 30 and December 30, beginning on December 30, 2020, to holders of record on the preceding June 15 or December 15, as the case may be. Interest will be calculated on the basis of a 360-day year of twelve 30-day months. Subject to conditions of redemption, Arch Capital may redeem the 2050 notes at any time and from time to time prior to December 30, 2049, in whole or in part, at a redemption price equal to the “make-whole” redemption price, plus accrued and unpaid interest thereon to, but excluding, the redemption date. Arch Capital is planning to use the net proceeds for general corporate purposes.
Investment Commitments
The Company’s investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately $1.91$2.6 billion at September 30, 2020,2021, compared to $1.69$2.1 billion at December 31, 2019.2020.
Interest Paid
Interest paid on the Company’s senior notes and other borrowings were $60.6$75.8 million for the nine months ended September 30, 2020, consistent with $68.62021, compared to $60.6 million for the 20192020 period.
11.12. Variable Interest Entities and Noncontrolling Interests
Watford
In March 2014, the Company invested $100.0 million and acquired 2,500,000 common shares, approximately 11% of Watford’s outstanding common equity. Watford’s common shares are listed on the Nasdaq Select Global Market under the ticker symbol “WTRE”. As of September 30, 2020, the Company owns approximately 13% of Watford’s outstanding common equity.
In July 2019, Watford completed an offering of $175.0 million in aggregate principal amount of its 6.5% senior notes, due July 2, 2029 (“Watford Senior Notes”). Interest on the Watford Senior Notes is payable semi-annually in arrears on each January 2 and July 2 commencing on January 2, 2020. The $172.4 million net proceeds from the offering were used to redeem a portion of Watford’s outstanding preference shares (“Watford Preference Shares”). The Company purchased $35.0 million in aggregate principal amount of the Watford Senior Notes.
Watford iswas considered a VIE and the Company concluded that it iswas the primary beneficiary of Watford.Watford, through June 30, 2021. As such, the results of Watford arewere included in the Company’s consolidated
financial statements.statements as of and for the periods ended June 30, 2021.
In the 2020 fourth quarter, Arch Capital, Watford and Greysbridge, a wholly-owned subsidiary of Arch Capital, entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”). The merger and the related Greysbridge equity financing closed on July 1, 2021. Effective July 1, 2021, Watford is wholly owned by Greysbridge, and Greysbridge is owned 40% by the Company, 30% by certain investment funds managed by Kelso and 30% by certain investment funds managed by Warburg. Based on the governing documents of Greysbridge, the Company concluded that, while it retains significant influence over Watford, Watford no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, the Company no longer consolidates the results of Watford in its consolidated financial statements and footnotes. Beginning in the 2021 third quarter, the Company classifies its investment as ‘investments in operating affiliates’ on the Company’s balance sheets and is accounted for under the equity method.
The Company does not guarantee or provide credit support forfollowing table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford were reported at December 31, 2020:
| | | | | | | | | |
| | | December 31, |
| | | 2020 |
| Assets | | | |
| Investments accounted for using the fair value option (1) | | | $ | 1,790,385 | |
| Fixed maturities available for sale, at fair value | | | 655,249 | |
| Equity securities, at fair value | | | 52,410 | |
| Cash | | | 211,451 | |
| Accrued investment income | | | 14,679 | |
| Premiums receivable | | | 224,377 | |
| Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses | | | 286,590 | |
| Ceded unearned premiums | | | 122,339 | |
| Deferred acquisition costs | | | 53,705 | |
| Receivable for securities sold | | | 37,423 | |
| Goodwill and intangible assets | | | 7,650 | |
| Other assets | | | 75,801 | |
| Total assets of consolidated VIE | | | $ | 3,532,059 | |
| | | |
| Liabilities | | | |
| Reserve for losses and loss adjustment expenses | | | $ | 1,519,583 | |
| Unearned premiums | | | 407,714 | |
| Reinsurance balances payable | | | 63,269 | |
| Revolving credit agreement borrowings | | | 155,687 | |
| Senior notes | | | 172,689 | |
| Payable for securities purchased | | | 25,881 | |
| Other liabilities | | | 193,494 | |
| Total liabilities of consolidated VIE | | | $ | 2,538,317 | |
| | | |
| Redeemable noncontrolling interests | | | $ | 52,398 | |
(1) Included in “other investments” on the Company’s financial exposure to Watford is limited to its investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions.balance sheet.
| | | | | | | | |
| ARCH CAPITAL | 3837 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table provides the carrying amountThrough June 30, 2021, Watford generated $47.0 million of cash provided by operating activities, $96.3 million of cash provided by investing activities and balance sheet caption in which the assets and liabilities$2.0 million of Watford are reported:
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2020 | | 2019 |
| Assets | | | |
| Investments accounted for using the fair value option | $ | 1,937,037 | | | $ | 1,898,091 | |
| Fixed maturities available for sale, at fair value | 649,781 | | | 745,708 | |
| Equity securities, at fair value | 52,807 | | | 65,338 | |
| Cash | 195,333 | | | 102,437 | |
| Accrued investment income | 16,234 | | | 14,025 | |
| Premiums receivable | 263,748 | | | 273,657 | |
| Reinsurance recoverable on unpaid and paid losses and LAE | 263,293 | | | 170,973 | |
| Ceded unearned premiums | 131,885 | | | 132,577 | |
| Deferred acquisition costs | 58,583 | | | 64,044 | |
| Receivable for securities sold | 1,730 | | | 16,287 | |
| Goodwill and intangible assets | 7,650 | | | 7,650 | |
| Other assets | 75,139 | | | 60,070 | |
| Total assets of consolidated VIE | $ | 3,653,220 | | | $ | 3,550,857 | |
| | | |
| Liabilities | | | |
| Reserve for losses and loss adjustment expenses | $ | 1,429,656 | | | $ | 1,263,628 | |
| Unearned premiums | 459,476 | | | 438,907 | |
| Reinsurance balances payable | 68,339 | | | 77,066 | |
| Revolving credit agreement borrowings | 210,687 | | | 484,287 | |
| Senior notes | 172,621 | | | 172,418 | |
| Payable for securities purchased | 76,567 | | | 18,180 | |
| Other liabilities (1) | 316,599 | | | 171,714 | |
| Total liabilities of consolidated VIE | $ | 2,733,945 | | | $ | 2,626,200 | |
| | | |
| Redeemable noncontrolling interests | $ | 52,375 | | | $ | 52,305 | |
(1) Includes certain borrowings relatedcash used for financing activities, compared to investing activities.
For the nine months ended September 30, 2020, Watford generated $133.6 million of cash provided by operating activities, $242.0 million of cash provided by investing activities and $279.7 million of cash used for financing activities compared to $177.2 million of cash provided by operating activities, $181.2 million of cash used for investing activities and $22.2 million of cash provided by financing activities for the nine months ended September 30, 2019.2020.
Non-redeemable noncontrolling interests
TheThrough June 30, 2021, the Company accountsaccounted for the portion of Watford’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The noncontrolling ownership in Watford’s common shares was approximately 87% at September 30, 2020. The portion of Watford’s income or loss attributable to third party investors iswas recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’
The following table sets forth activity in the non-redeemable noncontrolling interests:
| | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Three Months Ended | Three Months Ended | | | | Three Months Ended | | | |
| Balance, beginning of period | Balance, beginning of period | $ | 679,089 | | | $ | 855,347 | | Balance, beginning of period | $ | 918,874 | | | $ | 679,089 | |
| Impact of deconsolidation of Watford | | Impact of deconsolidation of Watford | (918,874) | | | — | |
| Additional paid in capital attributable to noncontrolling interests | Additional paid in capital attributable to noncontrolling interests | 243 | | | 205 | | Additional paid in capital attributable to noncontrolling interests | — | | | 243 | |
| Amounts attributable to noncontrolling interests | Amounts attributable to noncontrolling interests | 67,768 | | | 136 | | Amounts attributable to noncontrolling interests | — | | | 67,768 | |
| Other comprehensive income (loss) attributable to noncontrolling interests | Other comprehensive income (loss) attributable to noncontrolling interests | 10,820 | | | (764) | | Other comprehensive income (loss) attributable to noncontrolling interests | — | | | 10,820 | |
| Balance, end of period | Balance, end of period | $ | 757,920 | | | $ | 854,924 | | Balance, end of period | $ | — | | | $ | 757,920 | |
| | Nine Months Ended | Nine Months Ended | | Nine Months Ended | |
| Balance, beginning of year | Balance, beginning of year | $ | 762,777 | | | $ | 791,560 | | Balance, beginning of year | $ | 823,007 | | | $ | 762,777 | |
| Impact of deconsolidation of Watford | | Impact of deconsolidation of Watford | (918,874) | | |
| Additional paid in capital attributable to noncontrolling interests | Additional paid in capital attributable to noncontrolling interests | 715 | | | 2,279 | | Additional paid in capital attributable to noncontrolling interests | 22,113 | | | 715 | |
Repurchases attributable to non-redeemable noncontrolling interests (1) | Repurchases attributable to non-redeemable noncontrolling interests (1) | (2,867) | | | 0 | | Repurchases attributable to non-redeemable noncontrolling interests (1) | — | | | (2,867) | |
| Amounts attributable to noncontrolling interests | Amounts attributable to noncontrolling interests | (578) | | | 54,819 | | Amounts attributable to noncontrolling interests | 78,314 | | | (578) | |
| Other comprehensive income (loss) attributable to noncontrolling interests | Other comprehensive income (loss) attributable to noncontrolling interests | (2,127) | | | 6,266 | | Other comprehensive income (loss) attributable to noncontrolling interests | (4,560) | | | (2,127) | |
| Balance, end of period | Balance, end of period | $ | 757,920 | | | $ | 854,924 | | Balance, end of period | $ | — | | | $ | 757,920 | |
(1) During 2020, Watford’s board of directors authorized the investment in Watford’s common shares through a share repurchase program.
Redeemable noncontrolling interests
TheThrough June 30, 2021, the Company accountsaccounted for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheets in accordance with applicable accounting guidance. Such redeemable noncontrolling interests primarily relaterelated to the Watford Preference Shares issued in late March 2014 with a par value of $0.01 per share and a liquidation preference of $25.00 per
share. The Watford Preference Shares were issued at a discounted amount of $24.50 per share. PreferredThrough June 30, 2021 preferred dividends, including the accretion of the discount and issuance costs, arewere included in ‘net (income) loss attributable to noncontrolling interests’ in the Company’s consolidated statements of income.
In August 2019, Watford redeemed 6,919,998 of its 9,065,200 issued and outstanding Watford Preference Shares. The Watford Preference Shares were redeemed at a total redemption price of $25.19748 per share, inclusive of all declared and unpaid dividends, with accumulation of any undeclared dividends on or after June 30, 2019. In addition, the Company received $11.5 million pursuant to the redemption of Watford Preference Shares.
| | | | | | | | |
ARCH CAPITAL | 39 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table sets forth activity in the redeemable non-controlling interests:
| | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Three Months Ended | Three Months Ended | | | | Three Months Ended | | | |
| Balance, beginning of period | Balance, beginning of period | $ | 55,986 | | | $ | 206,475 | | Balance, beginning of period | $ | 57,533 | | | $ | 55,986 | |
| Redemption of noncontrolling interests | 0 | | | (157,709) | | |
| | Impact of deconsolidation of Watford | | Impact of deconsolidation of Watford | (48,919) | | | — | |
| Accretion of preference share issuance costs | Accretion of preference share issuance costs | 23 | | | 23 | | Accretion of preference share issuance costs | — | | | 23 | |
| Other | Other | 1,826 | | | 0 | | Other | 1,623 | | | 1,826 | |
| Balance, end of period | Balance, end of period | $ | 57,835 | | | $ | 48,789 | | Balance, end of period | $ | 10,237 | | | $ | 57,835 | |
| | Nine Months Ended | Nine Months Ended | | Nine Months Ended | |
| Balance, beginning of year | Balance, beginning of year | $ | 55,404 | | | $ | 206,292 | | Balance, beginning of year | $ | 58,548 | | | $ | 55,404 | |
| Redemption of noncontrolling interests | 0 | | | (157,709) | | |
| | Impact of deconsolidation of Watford | | Impact of deconsolidation of Watford | (48,919) | | | — | |
| Accretion of preference share issuance costs | Accretion of preference share issuance costs | 70 | | | 206 | | Accretion of preference share issuance costs | — | | | 70 | |
| Other | Other | 2,361 | | | 0 | | Other | 608 | | | 2,361 | |
| Balance, end of period | Balance, end of period | $ | 57,835 | | | $ | 48,789 | | Balance, end of period | $ | 10,237 | | | $ | 57,835 | |
The portion of income or loss attributable to third party investors, recorded in the Company’s consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests,’ are summarized in the table below:
| | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Three Months Ended | Three Months Ended | | | | Three Months Ended | | | |
| Amounts attributable to non-redeemable noncontrolling interests | Amounts attributable to non-redeemable noncontrolling interests | $ | (67,768) | | | $ | (136) | | Amounts attributable to non-redeemable noncontrolling interests | $ | — | | | $ | (67,768) | |
| Amounts attributable to redeemable noncontrolling interests | Amounts attributable to redeemable noncontrolling interests | (1,875) | | | (6,600) | | Amounts attributable to redeemable noncontrolling interests | (1,473) | | | (1,875) | |
| Net (income) loss attributable to noncontrolling interests | Net (income) loss attributable to noncontrolling interests | $ | (69,643) | | | $ | (6,736) | | Net (income) loss attributable to noncontrolling interests | $ | (1,473) | | | $ | (69,643) | |
| | Nine Months Ended | Nine Months Ended | | Nine Months Ended | |
| Amounts attributable to non-redeemable noncontrolling interests | Amounts attributable to non-redeemable noncontrolling interests | $ | 578 | | | $ | (54,819) | | Amounts attributable to non-redeemable noncontrolling interests | $ | (78,314) | | | $ | 578 | |
| Amounts attributable to redeemable noncontrolling interests | Amounts attributable to redeemable noncontrolling interests | (4,998) | | | (15,778) | | Amounts attributable to redeemable noncontrolling interests | (3,889) | | | (4,998) | |
| Net (income) loss attributable to noncontrolling interests | Net (income) loss attributable to noncontrolling interests | $ | (4,420) | | | $ | (70,597) | | Net (income) loss attributable to noncontrolling interests | $ | (82,203) | | | $ | (4,420) | |
| | | | | | | | |
| ARCH CAPITAL | 38 | 2021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Bellemeade Re
The Company has entered into various aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). At the time the Bellemeade Agreements were entered into, the applicability of the accounting guidance that addresses VIEs was evaluated. As a result of the evaluation of the Bellemeade Agreements, the Company concluded that these entities are VIEs. However, given that the ceding insurers do not have the unilateral power to direct those activities that are significant to their economic performance, the Company does not consolidate such entities in its consolidated financial statements.
The following table presents the total assets of the Bellemeade entities, as well as the Company’s maximum exposure to loss associated with these VIEs, calculated as the maximum historical observable spread between the one month LIBOR, the basisbenchmark index for the contractual payments to bond holders,each respective transaction and short term invested trust asset yields. The benchmark index for agreements effective prior to 2021 is based on one-month LIBOR, while the 2021 agreements benchmark index is based on the Secured Overnight Financing Rate (“SOFR”). SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.
| | | | | | | | | | | | | | | | | | | | | | | September 30, 2021 | | December 31, 2020 |
| | Maximum Exposure to Loss | | Maximum Exposure to Loss | | Maximum Exposure to Loss |
| Bellemeade Entities (Issue Date) | Bellemeade Entities (Issue Date) | Total VIE Assets | | On-Balance Sheet (Asset) Liability | | Off-Balance Sheet | | Total | Bellemeade Entities (Issue Date) | Total VIE Assets | | On-Balance Sheet (Asset) Liability | | Off-Balance Sheet | | Total | | Total VIE Assets | | On-Balance Sheet (Asset) Liability | | Off-Balance Sheet | | Total |
| Sep 30, 2020 | | | | | | | | |
| | Bellemeade 2017-1 Ltd. (Oct-17) | Bellemeade 2017-1 Ltd. (Oct-17) | $ | 145,573 | | | $ | (432) | | | $ | 2,104 | | | $ | 1,672 | | Bellemeade 2017-1 Ltd. (Oct-17) | $ | 145,573 | | | $ | (214) | | | $ | 585 | | | $ | 371 | | | $ | 145,573 | | | $ | (245) | | | $ | 844 | | | $ | 599 | |
| Bellemeade 2018-1 Ltd. (Apr-18) | Bellemeade 2018-1 Ltd. (Apr-18) | 250,095 | | | (1,592) | | | 4,821 | | | 3,229 | | Bellemeade 2018-1 Ltd. (Apr-18) | 228,938 | | | (764) | | | 1,683 | | | 919 | | | 250,095 | | | (903) | | | 2,245 | | | 1,342 | |
| Bellemeade 2018-2 Ltd. (Aug-18) | Bellemeade 2018-2 Ltd. (Aug-18) | 187,362 | | | (641) | | | 1,695 | | | 1,054 | | Bellemeade 2018-2 Ltd. (Aug-18) | — | | | — | | | — | | | — | | | 108,395 | | | (138) | | | 280 | | | 142 | |
| Bellemeade 2018-3 Ltd. (Oct-18) | Bellemeade 2018-3 Ltd. (Oct-18) | 302,563 | | | (2,477) | | | 7,261 | | | 4,784 | | Bellemeade 2018-3 Ltd. (Oct-18) | 302,563 | | | (1,049) | | | 2,328 | | | 1,279 | | | 302,563 | | | (1,320) | | | 3,262 | | | 1,942 | |
| Bellemeade 2019-1 Ltd. (Mar-19) | Bellemeade 2019-1 Ltd. (Mar-19) | 219,256 | | | (1,062) | | | 8,944 | | | 7,882 | | Bellemeade 2019-1 Ltd. (Mar-19) | 210,529 | | | (931) | | | 8,142 | | | 7,211 | | | 219,256 | | | (1,361) | | | 8,461 | | | 7,100 | |
| Bellemeade 2019-2 Ltd. (Apr-19) | Bellemeade 2019-2 Ltd. (Apr-19) | 398,316 | | | (1,090) | | | 11,369 | | | 10,279 | | Bellemeade 2019-2 Ltd. (Apr-19) | 398,316 | | | (787) | | | 5,658 | | | 4,871 | | | 398,316 | | | (730) | | | 5,201 | | | 4,471 | |
| Bellemeade 2019-3 Ltd. (Jul-19) | Bellemeade 2019-3 Ltd. (Jul-19) | 528,084 | | | (975) | | | 9,156 | | | 8,181 | | Bellemeade 2019-3 Ltd. (Jul-19) | 491,634 | | | (826) | | | 3,971 | | | 3,145 | | | 528,084 | | | (861) | | | 5,079 | | | 4,218 | |
| Bellemeade 2019-4 Ltd. (Oct-19) | Bellemeade 2019-4 Ltd. (Oct-19) | 468,737 | | | (1,179) | | | 12,722 | | | 11,543 | | Bellemeade 2019-4 Ltd. (Oct-19) | 468,737 | | | (682) | | | 4,761 | | | 4,079 | | | 468,737 | | | (890) | | | 6,676 | | | 5,786 | |
| Bellemeade 2020-1 Ltd. (Jun-20) (1) | Bellemeade 2020-1 Ltd. (Jun-20) (1) | 406,534 | | | (701) | | | 7,590 | | | 6,889 | | Bellemeade 2020-1 Ltd. (Jun-20) (1) | — | | | — | | | — | | | — | | | 275,068 | | | (178) | | | 1,012 | | | 834 | |
| Bellemeade 2020-2 Ltd. (Sep-20) (2) | Bellemeade 2020-2 Ltd. (Sep-20) (2) | 423,420 | | | (322) | | | 9,081 | | | 8,759 | | Bellemeade 2020-2 Ltd. (Sep-20) (2) | 266,704 | | | (279) | | | 2,629 | | | 2,350 | | | 423,420 | | | (556) | | | 6,839 | | | 6,283 | |
| Bellemeade 2020-3 Ltd. (Nov-20) (3) | | Bellemeade 2020-3 Ltd. (Nov-20) (3) | 381,410 | | | (395) | | | 6,646 | | | 6,251 | | | 418,158 | | | (631) | | | 9,605 | | | 8,974 | |
| Bellemeade 2020-4 Ltd. (Dec-20) (4) | | Bellemeade 2020-4 Ltd. (Dec-20) (4) | 226,916 | | | (100) | | | 2,190 | | | 2,090 | | | 321,393 | | | (156) | | | 6,816 | | | 6,660 | |
| Bellemeade 2021-1 Ltd. (Mar-21) (5) | | Bellemeade 2021-1 Ltd. (Mar-21) (5) | 579,717 | | | 229 | | | 4,217 | | | 4,446 | | | — | | | — | | | — | | | — | |
| Bellemeade 2021-2 Ltd. (Jun-21) (6) | | Bellemeade 2021-2 Ltd. (Jun-21) (6) | 522,807 | | | 906 | | | 5,090 | | | 5,996 | | | — | | | — | | | — | | | — | |
| Bellemeade 2021-3 Ltd. (Sep-21) (7) | | Bellemeade 2021-3 Ltd. (Sep-21) (7) | 507,873 | | | 182 | | | 4,561 | | | 4,743 | | | — | | | — | | | — | | | — | |
| Total | Total | $ | 3,329,940 | | | $ | (10,471) | | | $ | 74,743 | | | $ | 64,272 | | Total | $ | 4,731,717 | | | $ | (4,710) | | | $ | 52,461 | | | $ | 47,751 | | | $ | 3,859,058 | | | $ | (7,969) | | | $ | 56,320 | | | $ | 48,351 | |
| Dec 31, 2019 | | | | | | | | |
| Bellemeade 2017-1 Ltd. (Oct-17) | $ | 216,429 | | | $ | (442) | | | $ | 2,794 | | | $ | 2,352 | | |
| Bellemeade 2018-1 Ltd. (Apr-18) | 328,482 | | | (1,574) | | | 5,757 | | | 4,183 | | |
| Bellemeade 2018-2 Ltd. (Aug-18) | 437,009 | | | (877) | | | 2,524 | | | 1,647 | | |
| Bellemeade 2018-3 Ltd. (Oct-18) | 426,806 | | | (1,113) | | | 3,937 | | | 2,824 | | |
| Bellemeade 2019-1 Ltd. (Mar-19) | 257,358 | | | (226) | | | 3,027 | | | 2,801 | | |
| Bellemeade 2019-2 Ltd. (Apr-19) | 525,959 | | | (78) | | | 2,579 | | | 2,501 | | |
| Bellemeade 2019-3 Ltd. (Jul-19) | 656,523 | | | (585) | | | 9,273 | | | 8,688 | | |
| Bellemeade 2019-4 Ltd. (Oct-19) | 577,267 | | | (302) | | | 12,193 | | | 11,891 | | |
| Total | $ | 3,425,833 | | | $ | (5,197) | | | $ | 42,084 | | | $ | 36,887 | | |
|
(1) An additional $79 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.
(2) An additional $26 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.
(3) An additional $34 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.
(4) An additional $16 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.
(5) An additional $64 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.
(6) An additional $93 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.
(7) An additional $131 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.
| | | | | | | | |
| ARCH CAPITAL | 4039 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12.13. Other Comprehensive Income (Loss)
The following tables present details about amounts reclassified from accumulated other comprehensive income and the tax effects allocated to each component of other comprehensive income (loss):
| | | Amounts Reclassified from AOCI | | Amounts Reclassified from AOCI |
| | Consolidated Statement of Income | | Three Months Ended | | Nine Months Ended | | Consolidated Statement of Income | | Three Months Ended | | Nine Months Ended |
| Details About | Details About | | Line Item That Includes | | September 30, | | September 30, | Details About | | Line Item That Includes | | September 30, | | September 30, |
| AOCI Components | AOCI Components | | Reclassification | | 2020 | | 2019 | | 2020 | | 2019 | AOCI Components | | Reclassification | | 2021 | | 2020 | | 2021 | | 2020 |
| | Unrealized appreciation on available-for-sale investments | Unrealized appreciation on available-for-sale investments | | Unrealized appreciation on available-for-sale investments | |
| | Net realized gains (losses) | | $ | 87,871 | | | $ | 43,124 | | | $ | 416,432 | | | $ | 114,642 | | | Net realized gains (losses) | | $ | 68,373 | | | $ | 87,871 | | | $ | 135,291 | | | $ | 416,432 | |
| | Provision for credit losses | | 1,333 | | | (4,762) | | | | Provision for credit losses | | (457) | | | 1,333 | | | (1,208) | | | (4,762) | |
| | Other-than-temporary impairment losses | | 0 | | | (1,163) | | | (533) | | | (2,521) | | | Other-than-temporary impairment losses | | — | | | — | | | — | | | (533) | |
| | Total before tax | | 89,204 | | | 41,961 | | | 411,137 | | | 112,121 | | | Total before tax | | 67,916 | | | 89,204 | | | 134,083 | | | 411,137 | |
| | Income tax (expense) benefit | | (9,401) | | | (3,218) | | | (42,714) | | | (7,812) | | | Income tax (expense) benefit | | (5,262) | | | (9,401) | | | (13,579) | | | (42,714) | |
| | Net of tax | | $ | 79,803 | | | $ | 38,743 | | | $ | 368,423 | | | $ | 104,309 | | | Net of tax | | $ | 62,654 | | | $ | 79,803 | | | $ | 120,504 | | | $ | 368,423 | |
| | | | Before Tax Amount | | Tax Expense (Benefit) | | Net of Tax Amount |
| Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2021 | | | | | |
| Unrealized appreciation (decline) in value of investments: | | Unrealized appreciation (decline) in value of investments: | |
| Unrealized holding gains (losses) arising during period | | Unrealized holding gains (losses) arising during period | $ | (104,607) | | | $ | (8,684) | | | $ | (95,923) | |
| | Less reclassification of net realized gains (losses) included in net income | | Less reclassification of net realized gains (losses) included in net income | 67,916 | | | 5,262 | | | 62,654 | |
| Foreign currency translation adjustments | | Foreign currency translation adjustments | (32,060) | | | (350) | | | (31,710) | |
| Other comprehensive income (loss) | | Other comprehensive income (loss) | $ | (204,583) | | | $ | (14,296) | | | $ | (190,287) | |
| | Before Tax Amount | | Tax Expense (Benefit) | | Net of Tax Amount | | | | | | |
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2020 | | | | | | Three Months Ended September 30, 2020 | |
| Unrealized appreciation (decline) in value of investments: | Unrealized appreciation (decline) in value of investments: | | Unrealized appreciation (decline) in value of investments: | |
| Unrealized holding gains (losses) arising during period | Unrealized holding gains (losses) arising during period | $ | 119,265 | | | $ | 8,483 | | | $ | 110,782 | | Unrealized holding gains (losses) arising during period | $ | 119,265 | | | $ | 8,483 | | | $ | 110,782 | |
| | Less reclassification of net realized gains (losses) included in net income | Less reclassification of net realized gains (losses) included in net income | 89,204 | | | 9,401 | | | 79,803 | | Less reclassification of net realized gains (losses) included in net income | 89,204 | | | 9,401 | | | 79,803 | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | 16,918 | | | 209 | | | 16,709 | | Foreign currency translation adjustments | 16,918 | | | 209 | | | 16,709 | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | $ | 46,979 | | | $ | (709) | | | $ | 47,688 | | Other comprehensive income (loss) | $ | 46,979 | | | $ | (709) | | | $ | 47,688 | |
| | Three Months Ended September 30, 2019 | | |
| Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | |
| Unrealized appreciation (decline) in value of investments: | Unrealized appreciation (decline) in value of investments: | | Unrealized appreciation (decline) in value of investments: | |
| Unrealized holding gains (losses) arising during period | Unrealized holding gains (losses) arising during period | $ | 70,449 | | | $ | 11,159 | | | $ | 59,290 | | Unrealized holding gains (losses) arising during period | $ | (307,910) | | | $ | (28,808) | | | $ | (279,102) | |
| | Less reclassification of net realized gains (losses) included in net income | Less reclassification of net realized gains (losses) included in net income | 41,961 | | | 3,218 | | | 38,743 | | Less reclassification of net realized gains (losses) included in net income | 134,083 | | | 13,579 | | | 120,504 | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | (16,507) | | | (83) | | | (16,424) | | Foreign currency translation adjustments | (54,083) | | | 6 | | | (54,089) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | $ | 11,981 | | | $ | 7,858 | | | $ | 4,123 | | Other comprehensive income (loss) | $ | (496,076) | | | $ | (42,381) | | | $ | (453,695) | |
| | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | |
| Unrealized appreciation (decline) in value of investments: | Unrealized appreciation (decline) in value of investments: | | Unrealized appreciation (decline) in value of investments: | |
| Unrealized holding gains (losses) arising during period | Unrealized holding gains (losses) arising during period | $ | 611,390 | | | $ | 65,099 | | | $ | 546,291 | | Unrealized holding gains (losses) arising during period | $ | 611,390 | | | $ | 65,099 | | | $ | 546,291 | |
| | Less reclassification of net realized gains (losses) included in net income | Less reclassification of net realized gains (losses) included in net income | 411,137 | | | 42,714 | | | 368,423 | | Less reclassification of net realized gains (losses) included in net income | 411,137 | | | 42,714 | | | 368,423 | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | (5,911) | | | (182) | | | (5,729) | | Foreign currency translation adjustments | (5,911) | | | (182) | | | (5,729) | |
| Other comprehensive income (loss) | Other comprehensive income (loss) | $ | 194,342 | | | $ | 22,203 | | | $ | 172,139 | | Other comprehensive income (loss) | $ | 194,342 | | | $ | 22,203 | | | $ | 172,139 | |
| | Nine Months Ended September 30, 2019 | | |
| Unrealized appreciation (decline) in value of investments: | | |
| Unrealized holding gains (losses) arising during period | $ | 573,513 | | | $ | 65,863 | | | $ | 507,650 | | |
| | Less reclassification of net realized gains (losses) included in net income | 112,121 | | | 7,812 | | | 104,309 | | |
| Foreign currency translation adjustments | (6,454) | | | 187 | | | (6,641) | | |
| Other comprehensive income (loss) | $ | 454,938 | | | $ | 58,238 | | | $ | 396,700 | | |
| | | | | | | | |
| ARCH CAPITAL | 4140 | 20202021 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13.14. Income Taxes
The Company’s income tax provision on income before income taxes, including income (loss) from operating affiliates, resulted in an effective tax rate of 5.5% for the nine months ended September 30, 2021, compared to 8.2% for the nine months ended September 30, 2020, compared to 8.5%2020. The effective tax rate for the 2019 period.2021 period included discrete income tax benefits of $28.7 million which had the effect of decreasing the effective tax rate on net income available to Arch common shareholders by 1.7%. The discrete tax items in the 2021 period primarily related to the partial release of a valuation allowance on certain U.K. deferred tax assets.
The Company’s effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction.
The Company had a net deferred tax asset of $29.7$162.5 million at September 30, 2020,2021, compared to a net deferred tax liabilityasset of $53.5$15.7 million at December 31, 2019.2020. The change is primarily a result of mortgage contingency reserves activity, fixed asset capitalization and market value fluctuations in the contingency reserve.investment portfolio. In addition, the Company paid $146.8$202.4 million and $47.1$146.8 million of income taxes for the nine months ended September 30, 20202021 and 2019,2020, respectively.
14.15. Legal Proceedings
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of September 30, 2020,2021, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.
15.16. Transactions with Related Parties
In 2017, the Company acquired approximately 25% of Premia Holdings Ltd. Premia Holdings Ltd. is the parent of Premia Reinsurance Ltd., a multi-line Bermuda reinsurance company (together with Premia Holdings Ltd., “Premia”). Premia’s strategy is to reinsure or acquire companies or reserve portfolios in the non-life property and casualty insurance and reinsurance run-off market. Arch Re Bermuda and certain Arch co-investors invested $100.0 million and acquired approximately 25% of Premia as well as warrants to purchase additional common equity. Arch has appointed 2 directors to serve on the 7 person board of directors of Premia. Arch Re Bermuda is providing a 25% quota share reinsurance treaty on certain business written by Premia.
In the 2019 fourth2021 first quarter, as part of the Company’s acquisition of Barbican, Group Holdings Limited (“Barbican”), a wholly owned subsidiary of the Company entered into certain reinsurance and related transactionsan agreement with Premia pursuantManaging Agency Limited for the reinsurance to whichclose of Syndicate 1955’s 2018 underwriting year of account into Premia assumed a transferSyndicate 1884’s 2021 underwriting year of liability foraccount. The reinsurance to close covers legacy business underwritten by Syndicate 1955 on the underwriting 2018 and prior years of account and under the agreement, approximately $380 million of net liabilities was transferred to Syndicate 1884, with an effective date of January 1, 2021. Barbican as of July 1, 2019. Barbicanrecorded reinsurance recoverable on unpaid and paid losses and funds held liability of $175.8 millionnil and $150.2$8.8 million, respectively, at September 30, 2020,2021, compared to $177.7
$199.8 million and $180.0$149.6 million, respectively, at December 31, 2019. Certain directors and executive officers2020.
In July 2021, following consummation of the Merger Agreement and the related Greysbridge equity financing, pursuant to which Watford is wholly owned by Greysbridge, and Greysbridge is owned 40% by the Company, own common30% by certain funds managed by Kelso and preference shares30% by certain funds managed by Warburg, the Company entered into certain reinsurance transactions with Watford. For the three months ended September 30, 2021, the Company ceded premiums written related to such transactions of Watford.$316.2 million (which includes reinsurance transactions in force as well as those entered into in conjunction with the Merger Agreement). In addition, Watford paid certain acquisition costs and administrative fees to the Company. At September 30, 2021, the Company recorded a reinsurance recoverable on unpaid and paid losses from Watford of $874.9 million and a reinsurance balance payable to Watford of $281.2 million. See note 11,12, “Variable Interest EntityEntities and Noncontrolling Interests,” for information about Watford. The Company has a put/call option that was entered into in connection with the Greysbridge equity financing, whereby beginning January 1, 2024 the Company will have a call right (but not the obligation) and Warburg and Kelso will each have a put right (but not the obligation) to buy/sell one third of their initial shares annually at the tangible book value per share of Greysbridge for the most recently ended fiscal quarter.
17. Subsequent Event
Share Repurchases
In October 2021, the Company announced that its Board of Directors has increased its share repurchase program to an aggregate of up to $1.5 billion, which may be effected from time to time in open market or privately negotiated transactions through December 31, 2022. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.
From October 1 to October 13, 2021, the Company repurchased approximately 1.2 million common shares for an aggregate purchase price of $45.5 million. At October 27, 2021 approximately $1.5 billion of repurchases were available under the share repurchase program.
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| ARCH CAPITAL | 4241 | 2020 THIRD QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
16. Subsequent Events
Bellemeade Re 2020-3 Ltd.
In November 2020, the Company’s first-lien U.S. mortgage insurance subsidiaries entered into an aggregate excess of loss reinsurance agreement with Bellemeade Re 2020-3 Ltd. (“Bellemeade 2020-3”), a special purpose reinsurance company domiciled in Bermuda. The Bellemeade 2020-3 agreement provides for up to $451.8 million of aggregate excess of loss reinsurance coverage at inception in excess of $173.8 million of aggregate losses for new delinquencies on a portfolio of in-force policies primarily issued from June 1 through August 31, 2020. The coverage amount decreases over a ten-year period as the underlying covered mortgages amortize.
Bellemeade 2020-3 financed the coverage through the issuance of mortgage insurance-linked notes in an aggregate amount of approximately $418.2 million to unrelated investors (the “Notes”) and an additional $33.7 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers. The maturity date of the Notes is October 25, 2030. The Notes will be redeemed prior to maturity upon the occurrence of a mandatory termination event or if the ceding insurers trigger a termination of the reinsurance agreement following the occurrence of an optional termination event. All of the proceeds paid to Bellemeade 2020-3 from the sale of the Notes were deposited into a reinsurance trust as security for Bellemeade 2020-3’s obligations. At all times, funds in the reinsurance trust account are required to be invested in high credit quality money market funds.
Watford
In November 2020, the Company announced a revised definitive agreement under which it will acquire, in partnership with funds managed by Warburg Pincus LLC (“Warburg Pincus”) and Kelso & Company (“Kelso”), all of the common shares of Watford for $35.00 per share or approximately $700 million. The transaction is expected to close in the first quarter of 2021 and remains subject to customary closing conditions, including regulatory and shareholder approvals. Under the merger agreement, the Company assigned its current interests and obligations in Watford to a newly formed subsidiary which will acquire the outstanding shares of Watford. At closing, the Company will own approximately 40% of Watford, Warburg Pincus and Kelso will each own approximately 30%.
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ARCH CAPITAL | 43 | 2020 THIRD QUARTER FORM 10-Q |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with our consolidated financial statements included in Item 1 of this report and also our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 20192020 (“20192020 Form 10-K”). In addition, readers should review “Risk Factors” set forth in Item 1A of Part I of our 20192020 Form 10-K and “ITEM 1A—Risk Factors” of this Form 10-Q. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted. Arch Capital Group Ltd. (“Arch Capital” and, together with its subsidiaries, “Arch”, “we” or “us”) is a publicly listed Bermuda public limited liabilityexempted company with approximately $15.2$16.1 billion in capital at September 30, 20202021 and, through operations in Bermuda, the United States, Europe, Canada, Australia and Hong Kong, writes insurance, reinsurance and mortgage insurance on a worldwide basis.
CURRENT OUTLOOK
As we approach the end of 2021, our three areas of focus during the year have remained constant. In keeping with our longstandingproperty and casualty segments of insurance and reinsurance, we continue our growth in the sectors where rates allow for returns that are substantially higher than our cost of capital. Our mortgage insurance segment has transitioned, for the most part, from forbearance to recovery and is producing results that made a significant contribution to our underwriting approach we look for acceptable books of businessincome in the third quarter. We have also been keenly focused on actively managing our investments and capital to underwrite without sacrificing discipline and continue to write a portion ofenhance our overall book in catastrophe-exposed business which hasreturns over the potential to increase the volatility of our operating results. From an operating perspective, the 2020long run.
The 2021 third quarter reflected the benefits of rate improvements asattractive pricing in almost all three of our insurance markets. As a result, we currently expect the next several quarters to continue to show improved underwriting segments are seeing attractive opportunitiesmargins, partially due to the compounding of rate-on-rate increases and the rebalancing of our mix of business. We believe that this time-tested strategy of protecting capital through soft markets and increasing our writings in hard markets gives us the best chance to generate superior risk adjusted returns over time. As long as rate increases support returns above our required thresholds, we expect to continue to grow at acceptable ratesour writings.
The trajectory and market acceptance of return.rate increases reinforce why we remain optimistic that improved economics in the property casualty market will be sustainable for some time. The property casualty industry is facing many degrees
Consequently, these rate
of uncertainty, including heightened catastrophe activity, rising inflation, COVID’s ongoing influence on the global economy and perennially low interest rates.
Rate improvements have enabled us to continue to expand writings in our property casualty segments as risk adjusted returnswe have been for two years now. Rate increases remain well above the long-term loss cost trends and have spread to more lines than last year. Overall, 2021 rates are increasingly achieved. We know from experienceup around 10% compared to 2020 and we currently expect that this is an opportune time to significantly expand our participationthe benefit of higher premium levels will be reflected well into this hardening market. In the insurance segment, our2022 and beyond. Positive rate increases forhave accelerated in lower limit accounts which, until now, had lagged the third quarter averaged over 11%increases in larger accounts. Our early focus on Lloyd’s and we believe that this trend of increasing rates will continue through 2021. To support this growth, we raised an additional $1.0 billion of capitalbusiness in the formUK has improved our scale and our economics in this market. Some of long-term senior notes at the end of June 2020 and continue to deploy capital to thoseour business lines that provide the best expected returns.
COVID-19 has continued to significantly impact social and economic activity in the U.S. and global markets. Wewere most impacted by COVID, like travel, are committed to the safety of our employees, including restricting travel and instituting an extensive work from home
policy. These actions have helped prevent a major disruption to our clients and operations. The impactrecapturing some of the spread of COVID-19, a developing recession and related levels of unemployment has changed some of our outlook for 2020, but we are navigating this period with a strong capital base. The extent to which COVID-19 impacts our business, results of operations and financial results depends on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact macroeconomic conditions, the speed of the anticipated recovery and governmental,lost volume as both business and individual reactions to the pandemic. Given the continuing evolutionconsumer travel increases.
In reinsurance, strong growth was observed across most of the COVID-19 outbreak and the response to curb its spread, currently we are not able to estimate the future effects of the COVID-19 outbreak to our results of operations, financial condition, or liquidity.
For the 2020 third quarter and nine months ended September 30, 2020, we recorded $11.9 million and $271.6 million, respectively, for COVID-19 losses across our property casualty segments. We continue to have limited information to accurately quantify our potential exposure to the pandemic in certain areas but have established IBNR reserves for occurrences based on policy terms and conditions including limits, sub-limits, and deductibles. These reserves were recorded across a number of lines of business, such as trade credit, travel, workers compensationbut especially in our casualty and other specialty lines where strong rates increases and growth in new accounts helped increase the top line. At less than 6% of our tangible equity, we remained underweight in property wherecatastrophe exposure and we have limited exposurewill deploy more capital to policies that do not contain a specific pandemic exclusion and/or explicitly afford business interruption coverage under a pandemic. Given the unusual circumstances and breadth ofline if expected returns improve meaningfully above our target. Consistent with our insurance segment, we expect the pandemic, we have classified COVID-19 losses as a catastrophe.ongoing rate improvements to be reflected in our underwriting results over the next several quarters.
For our U.S. primary mortgage operations, reported delinquencies were 4.69% at September 30, 2020, compared to 5.14% at June 30, 2020. Delinquencies continue to be better than our expectations at the beginning of the COVID-19 pandemic. We believepandemic, as notices of default have declined to pre-pandemic levels at September 30, 2021, which is another indicator of improved conditions. Additionally, loans in forbearance continue to decline as federal programs conclude and we remain optimistic that most of these loans will ultimately cure.
In the 2021 third quarter, insurance in force for our U.S. primary mortgage operations remained steady at $280.4 billion, while insurance industry is benefiting from solidin force for the total mortgage segment was $457.7 billion. Overall, the market remains competitive but rational and our mortgage business continues to generate returns on capital in the mid teens. Mortgage originations continue at a pace similar to last year’s record origination volume and credit quality of loan originations in the years after the 2008 Great Financial Crisis, a favorable supply and demand imbalance in housing and government intervention. However, delinquency rates remain at elevated levels, reflecting the impactremains excellent. Outside of the recessionU.S., we increased our writings in Australia as a result of the housing market remaining strong and forbearance programs under the CARES Actdue to borrowers experiencing a hardship during COVID-19. Forbearance allows for mortgage payments to be suspended for up to 360 days along with a suspensionour acquisition of foreclosures and evictions. See “Results of Operations—Mortgage Segment” for further details on our mortgage operations.Westpac’s LMI business.
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| ARCH CAPITAL | 4442 | 20202021 THIRD QUARTER FORM 10-Q |
Record mortgage originations fueled by low mortgage rates are continuing to create surges in both purchase and refinancing activity. There remains significant uncertainty on the economy’s health and the lack of a full understanding on how COVID-19 may impact individual borrowers and, as such, caution is warranted on predicting how this will ultimately affect our results of operations.
We believe that delinquency rates could increase in the future from the current level, as additional borrowers may request forbearance on their mortgage loans under the CARES Act. We would record loss reserves on these delinquencies which would result in elevated levels of incurred losses over the coming quarters. Over time, we would expect many of these delinquencies to cure and revert back to performing loans as the economy returns to a less-stressed state. At this time, we do not have enough visibility to predictably forecast the rate at which forbearance delinquencies will be reported to us, cure or ultimately turn into claims on an annual, let alone a quarterly basis. That said, based on our current analysis which tells us that the pandemic will represent an earnings event for our mortgage segment and not a capital event, our current expectation continues to be that our pre-tax underwriting income for the entire mortgage segment will be significantly lower than in 2019. However, there is likely to be variability in underwriting income between quarters based on the timing of receipt of notice of defaults. For further discussion of the potential impacts of COVID-19, see “ITEM 1A—Risk Factors”. Arch remainsremain committed to providing solutions across many offerings as the marketplace evolves, including the mortgage credit risk transfer programs initiated by government sponsored enterprises, or “GSEs.” Such programs have continued to generate business. In addition, we completed Bellemeade risk transfersenter into aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in June, SeptemberBermuda and November 2020,issue mortgage insurance linked notes, increasing our protection for mortgage tail risk. The Bellemeade structures provide approximately $3.9$5.1 billion of aggregate reinsurance coverage.
FINANCIAL MEASURES
Management uses the following three key financial indicators in evaluating our performance and measuring the overall growth in value generated for Arch Capital’s common shareholders:
Book Value per Share
Book value per share represents total common shareholders’ equity available to Arch divided by the number of common shares outstanding. Management uses growth in book value per share as a key measure of the value generated for our common shareholders each period and believes that book value per share is the key driver of Arch Capital’s share price
over time. Book value per share is impacted by, among other factors, our underwriting results, investment returns and share repurchase activity, which has an accretive or dilutive impact on book value per share depending on the purchase price.
Book value per share was $32.43 at September 30, 2021, compared to $32.02 at June 30, 2021 and $28.75 at September 30, 2020, compared to $27.62 at June 30, 2020 and $25.61 at September 30, 2019.2020. The 4.1%1.3% increase in book value per share for the 20202021 third quarter reflected the impactstrong underwriting returns, which were impacted by a high level of losses from catastrophic events, along with flat total return on investments partially offset byfor the impact of catastrophic events including COVID-19 on underwriting results, while the 12.2%period. The 12.8% increase in book value per share over the trailing twelve months primarily reflected strong underwriting results and investment returns.results.
Operating Return on Average Common Equity
Operating return on average common equity (“Operating ROAE”) represents annualized after-tax operating income available to Arch common shareholders divided by the average of beginning and ending common shareholders’ equity available to Arch during the period. After-tax operating income available to Arch common shareholders, a non-GAAP financial measure as defined in Regulation G, represents net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings) equity in net income or loss of investment funds
accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other, loss on redemption of preferred shares and income taxes. Management uses Operating ROAE as a key measure of the return generated to common shareholders. See “Comment on Non-GAAP Financial Measures.”
Our Operating ROAE was 9.3% for the 2021 third quarter, compared to 4.2% for the 2020 third quarter, compared to 10.3%and 10.1% for the 2019 third quarter, and 3.9% for nine months ended September 30, 2020,2021, compared to 12.0%3.9% for the 20192020 period. The lowerResults for the 2021 third quarter reflected a one-time gain of $95.7 million recognized from the Company’s previously disclosed acquisition of a 40% share of Greysbridge. Returns for the 2021 periods reflected strong underwriting returns and income from operating affiliates, while the 2020 returnsperiod reflected the impact of elevated catastrophic activity including COVID-19 on underwriting results and lower investment income than in the 2019 periods.results.
Total Return on Investments
Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses excludes amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the periods. The following table summarizes
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ARCH CAPITAL | 45 | 2020 THIRD QUARTER FORM 10-Q |
our total return compared to the benchmark return against which we measured our portfolio during the periods. See “Comment on Non-GAAP Financial Measures.”
| | | Arch
Portfolio | | Benchmark
Return | | Arch
Portfolio | | Benchmark
Return |
| Pre-tax total return (before investment expenses): | Pre-tax total return (before investment expenses): | | | | Pre-tax total return (before investment expenses): |
| 2021 Third Quarter | | 2021 Third Quarter | 0.01 | % | | (0.40) | % |
| 2020 Third Quarter | 2020 Third Quarter | 2.30 | % | | 2.41 | % | 2020 Third Quarter | 2.30 | % | | 2.41 | % |
| 2019 Third Quarter | 1.00 | % | | 0.70 | % | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | 1.50 | % | | 0.87 | % |
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | 5.19 | % | | 3.67 | % | Nine Months Ended September 30, 2020 | 5.19 | % | | 3.67 | % |
| Nine Months Ended September 30, 2019 | 6.20 | % | | 5.79 | % | |
Total return for the 20202021 third quarter reflected the impact of lowermovements in interest rates and credit spreads on our fixed income portfolio. In addition, returns fromWe continue to maintain a short duration on our equity and alternative investments contributed approximately 40%portfolio of the total return for the quarter. The total return for the nine months ended2.68 years at September 30, 2020 outperformed our benchmark return index.2021.
The benchmark return index is a customized combination of indices intended to approximate a target portfolio by asset mix and average credit quality while also matching the approximate estimated duration and currency mix of our insurance and reinsurance liabilities. Although the estimated duration and average credit quality of this index will move as the duration and rating of its constituent securities change,
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| ARCH CAPITAL | 43 | 2021 THIRD QUARTER FORM 10-Q |
generally we do not adjust the composition of the benchmark return index except to incorporate changes to the mix of liability currencies and durations noted above. The benchmark return index should not be interpreted as expressing a preference for or aversion to any particular sector or sector weight. The index is intended solely to provide, unlike many master indices that change based on the size of their constituent indices, a relatively stable basket of investable indices. At September 30, 2020,2021, the benchmark return index had an average credit quality of “Aa3”“Aa2” by Moody’s Investors Service (“Moody’s”), and an estimated duration of 3.063.18 years.
The benchmark return index included weightings to the following indices:
| | | | | |
| % |
ICE BoAML 1-101-5 Year A - AAA U.S. Corporate Index | 21.0013.00 | % |
| ICE BoAML 5-10 Year A - AAA U.S. Corporate Index | 11.00 | |
| ICE BoAML 1-5 Year U.S. Treasury Index | 15.0011.00 | |
| MSCI ACWI Net Total Return USD Index | 8.60 | |
ICE BoAML 3-5 Year Fixed Rate Asset Backed Securities Index | 7.00 | |
S&P Leveraged Loan Total Return Index | 5.20 | |
Bloomberg Barclays CMBS Invest Grade Aaa Total Return Index | 5.009.30 | |
| ICE BoAML 1-10 Year BBB U.S. Corporate Index | 4.005.00 | |
| JPM CLOIE Investment Grade | 5.00 | |
| S&P/LSTA Leveraged Loan Total Return Index | 4.965 | |
| ICE BoAML U.S. Mortgage Backed Securities Index | 4.00 | |
| ICE BoAML AAA US Fixed Rate CMBS | 4.00 | |
| ICE BoAML 1-5 Year U.K. Gilt Index | 4.00 | |
| ICE BoAML German Government 1-10 Year Index | 3.50 | |
ICE BoAML 0-3 MonthYear U.S. Treasury Bill Index | 3.25 | |
| ICE BoAML 5-10 Year U.S. Treasury Index | 3.00 | |
| ICE BoAML 1-10 Year U.S. Municipal Securities Index | 3.00 | |
ICE BoAML 5-10 Year U.S. TreasuryBloomberg Barclays ABS Aaa Index | 3.00 | |
| ICE BoAML 1-5 Year Australia Government Index | 2.75 | |
| ICE BoAML U.S. High Yield Constrained Index | 2.50 | |
| ICE BoAML 1-5 Year Canada Government Index | 2.00 | |
| ICE BofA CCC and Lower US High Yield Constrained Index | 1.38 | |
Bloomberg Barclays Global High Yield Total Return Index | 1.501.38 | |
Hedge Fund Research HFRX ED Distressed Restructuring Index (Flagship Funds) | 1.50 | |
Dow JonesS&P DJ Global ex-US Select Real Estate Securities Total Return Net Index | 0.900.825 | |
| FTSE Nareit All Mortgage Capped Index Total Return USD | 0.900.825 | |
| Bloomberg Barclays CMBS: Erisa Eligible Unhedged USD | 0.900.825 | |
ICE BoAML 20+15+ Year Canada Government Index | 0.50 | |
| Total | 100.00 | % |
COMMENT ON NON-GAAP FINANCIAL MEASURES
Throughout this filing, we present our operations in the way we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use our financial information in evaluating the performance of our company. This presentation includes the use of after-tax operating income available to Arch common shareholders, which is defined as net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other, loss on redemption of preferred shares and income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized net income return on
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ARCH CAPITAL | 46 | 2020 THIRD QUARTER FORM 10-Q |
average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included under “Results of Operations” below.
We believe that 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, and transaction costs and other and loss on redemption of preferred shares in any particular period are not indicative of the performance of, or trends in, our business. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of net impairment losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of our financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, changes in the allowance for credit losses and net impairment losses recognized in earnings on the Company’s investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of our investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either
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| ARCH CAPITAL | 44 | 2021 THIRD QUARTER FORM 10-Q |
(either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way we account for our other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Transaction costs and other include advisory, financing, legal, severance, incentive compensation and other transaction costs related to acquisitions. We believe that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, our business performance. The loss on redemption of preferred shares related to the redemption of the Company's Series E preferred shares in September 2021 and had no impact on shareholders' equity or cash flows. Due to these reasons, we exclude 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, and transaction costs and other and loss on redemption of preferred shares from the calculation of after-tax operating income available to Arch common shareholders.
We believe that showing net income available to Arch common shareholders exclusive of the items referred to
above reflects the underlying fundamentals of our business since we evaluate the performance of and manage our business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, we believe that this presentation enables investors and other users of our financial information to analyze our performance in a manner similar to how management analyzes performance. We also believe that this measure follows industry practice and, therefore, allows the users of financial information to compare our performance with our industry peer group. We believe that the equity analysts and certain rating agencies which follow us and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.
Our segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss before the contribution from the ‘other’ segment.segment, through June 30, 2021. Such measures represent the pre-tax profitability of our underwriting operations and include net premiums earned plus other underwriting income, less losses and loss adjustment expenses, acquisition expenses and other operating expenses. Other operating expenses include those operating expenses that are incremental and/or directly attributable to our individual underwriting operations. Underwriting income or loss does not incorporate items included in our corporate
(non-underwriting) segment. While these measures are presented in note 4,5, “Segment Information,” of the notes accompanying our consolidated financial statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. The reconciliations of underwriting income or loss to income before income taxes (the most directly comparable GAAP financial measure) on a consolidated basis and a subtotal before the contribution from the ‘other’ segment through June 30, 2021, in accordance with Regulation G, is shown in note 4,5, “Segment Information” to our consolidated financial statements.
We measure segment performance for our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment, with the exception of goodwill and intangibles and, accordingly, investment income and other non-underwriting related items are not allocated to each underwriting segment. For theThe ‘other’ segment performance is measured based on net income or loss.includes the results of Watford through June 30, 2021.
Along with consolidated underwriting income, we provide a subtotal of underwriting income or loss before the contribution from the ‘other’ segment. TheThrough June 30, 2021, the ‘other’ segment includesincluded the results of Watford Holdings Ltd. Watford Holdings Ltd. is the parent of Watford Re Ltd., a multi-line Bermuda reinsurance company (together with Watford Holdings Ltd., “Watford”). Pursuant to generally accepted
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ARCH CAPITAL | 47 | 2020 THIRD QUARTER FORM 10-Q |
accounting principles,GAAP, Watford
iswas considered a variable interest entity and we concluded that we
arewere the primary beneficiary of Watford. As such, we
consolidated the results of Watford in our consolidated financial statements through June 30, 2021. In the 2020 fourth quarter, Arch Capital, Watford, and Greysbridge Ltd., a wholly-owned subsidiary of Arch Capital, entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”). Arch Capital assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Greysbridge”). The merger and the related Greysbridge equity financing closed on July 1, 2021. Effective July 1, 2021, Watford is wholly owned by Greysbridge, and Greysbridge is owned 40% by Arch and 30% by certain funds managed by Kelso and 30% by certain funds managed by Warburg. Based on the governing documents of Greysbridge, we concluded that, while we retain significant influence over Greysbridge, Greysbridge does not constitute a variable interest entity. Accordingly, effective July 1, 2021, we no longer consolidate the results of Watford in our consolidated financial statements
although we only own approximately 13% of Watford’s common equity. Watford’s own management and
board of directors are responsible for its resultsfootnotes. See note 12, “Variable Interest Entities and profitability. In addition, we do not guarantee or provide credit support for Watford. Since Watford is an independent company, the assets of Watford can be used only to settle obligations of WatfordNoncontrolling Interests” and Watford is solely responsible for its own liabilities and commitments. Our financial exposure to Watford is limitednote 5, “Segment Information,” to our investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions. We believe that presenting certainconsolidated financial statements for additional information excluding the ‘other’ segment enables investors and other users of our financial information to analyze our performance in a manner similar to how our management analyzes performance.on Watford.
Our presentation of segment information includes the use of a current year loss ratio which excludes favorable or adverse
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| ARCH CAPITAL | 45 | 2021 THIRD QUARTER FORM 10-Q |
development in prior year loss reserves. This ratio is a non-GAAP financial measure as defined in Regulation G. The reconciliation of such measure to the loss ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G is shown on the individual segment pages. Management utilizes the current year loss ratio in its analysis of the underwriting performance of each of our underwriting segments.
Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, excludes amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the periods. There is no directly comparable GAAP financial measure for total return. Management uses total return on investments as a key measure of the return generated to Arch common shareholders, and compares the return generated by our investment portfolio against benchmark returns during the periods.
RESULTS OF OPERATIONS
The following table summarizes our consolidated financial data, including a reconciliation of net income or loss available to Arch common shareholders to after-tax operating income or loss available to Arch common shareholders. Each line item reflects the impact of our percentage ownership of Watford’s common equity during such period.
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Net income available to Arch common shareholders | Net income available to Arch common shareholders | $ | 408,636 | | | $ | 382,050 | | | $ | 830,768 | | | $ | 1,278,726 | | Net income available to Arch common shareholders | $ | 388,751 | | | $ | 408,636 | | | $ | 1,480,324 | | | $ | 830,768 | |
| Net realized (gains) losses | Net realized (gains) losses | (219,726) | | | (77,959) | | | (517,007) | | | (316,882) | | Net realized (gains) losses | 25,040 | | | (219,726) | | | (247,949) | | | (517,007) | |
| | Equity in net (income) loss of investment funds accounted for using the equity method | Equity in net (income) loss of investment funds accounted for using the equity method | (126,735) | | | (17,130) | | | (57,407) | | | (96,533) | | Equity in net (income) loss of investment funds accounted for using the equity method | (105,398) | | | (126,735) | | | (299,270) | | | (57,407) | |
| Net foreign exchange (gains) losses | Net foreign exchange (gains) losses | 39,462 | | | (30,160) | | | 17,003 | | | (29,100) | | Net foreign exchange (gains) losses | (36,078) | | | 39,462 | | | (39,522) | | | 17,003 | |
| Transaction costs and other | Transaction costs and other | 1,674 | | | 1,995 | | | 5,246 | | | 5,363 | | Transaction costs and other | 1,036 | | | 1,674 | | | 889 | | | 5,246 | |
| | Loss on redemption of preferred shares | | Loss on redemption of preferred shares | 15,101 | | | — | | | 15,101 | | | — | |
Income tax
expense (1) | Income tax
expense (1) | 17,010 | | | 2,156 | | | 48,088 | | | 12,708 | | Income tax expense (1) | 6,236 | | | 17,010 | | | 32,100 | | | 48,088 | |
| After-tax operating income available to Arch common shareholders | After-tax operating income available to Arch common shareholders | $ | 120,321 | | | $ | 260,952 | | | $ | 326,691 | | | $ | 854,282 | | After-tax operating income available to Arch common shareholders | $ | 294,688 | | | $ | 120,321 | | | $ | 941,673 | | | $ | 326,691 | |
| | Beginning common shareholders’ equity | Beginning common shareholders’ equity | $ | 11,211,825 | | | $ | 9,977,352 | | | $ | 10,717,371 | | | $ | 8,659,827 | | Beginning common shareholders’ equity | $ | 12,706,072 | | | $ | 11,211,825 | | | $ | 12,325,886 | | | $ | 10,717,371 | |
| Ending common shareholders’ equity | Ending common shareholders’ equity | 11,671,997 | | | 10,378,096 | | | 11,671,997 | | | 10,378,096 | | Ending common shareholders’ equity | $ | 12,557,526 | | | $ | 11,671,997 | | | $ | 12,557,526 | | | $ | 11,671,997 | |
| Average common shareholders’ equity | Average common shareholders’ equity | $ | 11,441,911 | | | $ | 10,177,724 | | | $ | 11,194,684 | | | $ | 9,518,962 | | Average common shareholders’ equity | $ | 12,631,799 | | | $ | 11,441,911 | | | $ | 12,441,706 | | | $ | 11,194,684 | |
| | Annualized return on average common equity % | 14.3 | | | 15.0 | | | 9.9 | | | 17.9 | | |
| Annualized net income return on average common equity % | | Annualized net income return on average common equity % | 12.3 | | | 14.3 | | | 15.9 | | | 9.9 | |
Annualized operating return on average
common equity % | Annualized operating return on average
common equity % | 4.2 | | | 10.3 | | | 3.9 | | | 12.0 | | Annualized operating return on average
common equity % | 9.3 | | | 4.2 | | | 10.1 | | | 3.9 | |
(1) Income tax expense on 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 and transaction costs and other reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction.
| | | | | | | | |
| ARCH CAPITAL | 4846 | 20202021 THIRD QUARTER FORM 10-Q |
Segment Information
We classify our businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — corporate (non-underwriting) and ‘other.’ Our 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 our chief operating decision makers, the President and Chief Executive Officer of Arch Capital, and 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 our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.
We determined our reportable 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 our consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
Insurance Segment
The following tables set forth our insurance segment’s underwriting results:
| | | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | | 2020 | | 2019 | | %
Change | | 2021 | | 2020 | | %
Change |
| Gross premiums written | Gross premiums written | $ | 1,206,328 | | | $ | 1,005,874 | | | 19.9 | | Gross premiums written | $ | 1,596,619 | | | $ | 1,206,328 | | | 32.4 | |
| Premiums ceded | Premiums ceded | (382,167) | | | (302,034) | | | Premiums ceded | (442,806) | | | (382,167) | | |
| Net premiums written | Net premiums written | 824,161 | | | 703,840 | | | 17.1 | | Net premiums written | 1,153,813 | | | 824,161 | | | 40.0 | |
| Change in unearned premiums | Change in unearned premiums | (105,007) | | | (98,504) | | | Change in unearned premiums | (215,143) | | | (105,007) | | |
| Net premiums earned | Net premiums earned | 719,154 | | | 605,336 | | | 18.8 | | Net premiums earned | 938,670 | | | 719,154 | | | 30.5 | |
| Other underwriting income (loss) | Other underwriting income (loss) | (31) | | | — | | | | Other underwriting income (loss) | — | | | (31) | | | |
| Losses and loss adjustment expenses | Losses and loss adjustment expenses | (525,321) | | | (422,782) | | | | Losses and loss adjustment expenses | (668,630) | | | (525,321) | | | |
| Acquisition expenses | Acquisition expenses | (102,420) | | | (91,259) | | | | Acquisition expenses | (152,467) | | | (102,420) | | | |
| Other operating expenses | Other operating expenses | (122,541) | | | (115,408) | | | | Other operating expenses | (138,931) | | | (122,541) | | | |
| Underwriting income (loss) | Underwriting income (loss) | $ | (31,159) | | | $ | (24,113) | | | (29.2) | | Underwriting income (loss) | $ | (21,358) | | | $ | (31,159) | | | 31.5 | |
| | Underwriting Ratios | Underwriting Ratios | | | | | % Point
Change | Underwriting Ratios | | | | | % Point
Change |
| Loss ratio | Loss ratio | 73.0 | % | | 69.8 | % | | 3.2 | | Loss ratio | 71.2 | % | | 73.0 | % | | (1.8) | |
| Acquisition expense ratio | Acquisition expense ratio | 14.2 | % | | 15.1 | % | | (0.9) | | Acquisition expense ratio | 16.2 | % | | 14.2 | % | | 2.0 | |
| Other operating expense ratio | Other operating expense ratio | 17.0 | % | | 19.1 | % | | (2.1) | | Other operating expense ratio | 14.8 | % | | 17.0 | % | | (2.2) | |
| Combined ratio | Combined ratio | 104.2 | % | | 104.0 | % | | 0.2 | | Combined ratio | 102.2 | % | | 104.2 | % | | (2.0) | |
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | %
Change | | 2021 | | 2020 | | % Change |
| Gross premiums written | Gross premiums written | $ | 3,444,335 | | | $ | 2,867,753 | | | 20.1 | | Gross premiums written | $ | 4,381,372 | | | $ | 3,444,335 | | | 27.2 | |
| Premiums ceded | Premiums ceded | (1,119,165) | | | (914,751) | | | Premiums ceded | (1,269,165) | | | (1,119,165) | | |
| Net premiums written | Net premiums written | 2,325,170 | | | 1,953,002 | | | 19.1 | | Net premiums written | 3,112,207 | | | 2,325,170 | | | 33.8 | |
| Change in unearned premiums | Change in unearned premiums | (202,188) | | | (201,719) | | | Change in unearned premiums | (488,636) | | | (202,188) | | |
| Net premiums earned | Net premiums earned | 2,122,982 | | | 1,751,283 | | | 21.2 | | Net premiums earned | 2,623,571 | | | 2,122,982 | | | 23.6 | |
| Other underwriting income (loss) | (31) | | | — | | | | |
| Other underwriting income | | Other underwriting income | — | | | (31) | | | |
| Losses and loss adjustment expenses | Losses and loss adjustment expenses | (1,550,632) | | | (1,168,677) | | | | Losses and loss adjustment expenses | (1,750,257) | | | (1,550,632) | | | |
| Acquisition expenses | Acquisition expenses | (317,428) | | | (265,177) | | | | Acquisition expenses | (417,541) | | | (317,428) | | | |
| Other operating expenses | Other operating expenses | (370,947) | | | (338,327) | | | | Other operating expenses | (409,386) | | | (370,947) | | | |
| Underwriting income (loss) | Underwriting income (loss) | $ | (116,056) | | | $(20,898) | | (455.3) | | Underwriting income (loss) | $ | 46,387 | | | $ | (116,056) | | | 140.0 | |
| | Underwriting Ratios | Underwriting Ratios | | | | | % Point
Change | Underwriting Ratios | | | | | % Point
Change |
| Loss ratio | Loss ratio | 73.0 | % | | 66.7 | % | | 6.3 | | Loss ratio | 66.7 | % | | 73.0 | % | | (6.3) | |
| Acquisition expense ratio | Acquisition expense ratio | 15.0 | % | | 15.1 | % | | (0.1) | | Acquisition expense ratio | 15.9 | % | | 15.0 | % | | 0.9 | |
| Other operating expense ratio | Other operating expense ratio | 17.5 | % | | 19.3 | % | | (1.8) | | Other operating expense ratio | 15.6 | % | | 17.5 | % | | (1.9) | |
| Combined ratio | Combined ratio | 105.5 | % | | 101.1 | % | | 4.4 | | Combined ratio | 98.2 | % | | 105.5 | % | | (7.3) | |
The insurance segment consists of our 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
| | | | | | | | |
| ARCH CAPITAL | 4947 | 20202021 THIRD QUARTER FORM 10-Q |
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 standalone 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.
Premiums Written.
The following tables set forth our insurance segment’s net premiums written by major line of business:
| | | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Property, energy, marine and aviation | Property, energy, marine and aviation | $ | 152,193 | | | 18.5 | | | $ | 97,966 | | | 13.9 | | | Property, energy, marine and aviation | $ | 215,062 | | | 18.6 | | | $ | 152,193 | | | 18.5 | | |
| Professional lines | Professional lines | 199,163 | | | 24.2 | | | 137,569 | | | 19.5 | | | Professional lines | 310,185 | | | 26.9 | | | 199,163 | | | 24.2 | | |
| Programs | Programs | 123,768 | | | 15.0 | | | 120,039 | | | 17.1 | | | Programs | 196,048 | | | 17.0 | | | 123,768 | | | 15.0 | | |
| Construction and national accounts | Construction and national accounts | 88,790 | | | 10.8 | | | 98,522 | | | 14.0 | | | Construction and national accounts | 92,253 | | | 8.0 | | | 88,790 | | | 10.8 | | |
| Excess and surplus casualty | Excess and surplus casualty | 78,889 | | | 9.6 | | | 62,843 | | | 8.9 | | | Excess and surplus casualty | 98,320 | | | 8.5 | | | 78,889 | | | 9.6 | | |
| Travel, accident and health | Travel, accident and health | 28,972 | | | 3.5 | | | 75,192 | | | 10.7 | | | Travel, accident and health | 62,837 | | | 5.4 | | | 28,972 | | | 3.5 | | |
| Lenders products | Lenders products | 60,830 | | | 7.4 | | | 31,005 | | | 4.4 | | | Lenders products | 38,905 | | | 3.4 | | | 60,830 | | | 7.4 | | |
| Other | Other | 91,556 | | | 11.1 | | | 80,704 | | | 11.5 | | | Other | 140,203 | | | 12.2 | | | 91,556 | | | 11.1 | | |
| Total | Total | $ | 824,161 | | | 100.0 | | | $ | 703,840 | | | 100.0 | | | Total | $ | 1,153,813 | | | 100.0 | | | $ | 824,161 | | | 100.0 | | |
20202021 Third Quarter versus 20192020 Period. Gross premiums written by the insurance segment in the 20202021 third quarter were 19.9%32.4% higher than in the 20192020 third quarter, while net premiums written were 17.1%40.0% higher. The higher level of net premiums written reflected increases acrossin most lines of business, due in part to rate increases, new business opportunities rate increases and growth in existing accounts, partially offset by a decrease in travel business, reflecting the ongoing impact of the COVID-19 global pandemic.accounts.
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Property, energy, marine and aviation | Property, energy, marine and aviation | $ | 439,579 | | | 18.9 | | | $ | 272,271 | | | 13.9 | | | Property, energy, marine and aviation | $ | 593,322 | | | 19.1 | | | $ | 439,579 | | | 18.9 | | |
| Professional lines | 526,180 | | | 22.6 | | | 388,482 | | | 19.9 | | | |
| Professional Lines | | Professional Lines | 803,392 | | | 25.8 | | | 526,180 | | | 22.6 | | |
| Programs | Programs | 341,230 | | | 14.7 | | | 329,882 | | | 16.9 | | | Programs | 503,822 | | | 16.2 | | | 341,230 | | | 14.7 | | |
| Construction and national accounts | Construction and national accounts | 261,933 | | | 11.3 | | | 254,765 | | | 13.0 | | | Construction and national accounts | 304,624 | | | 9.8 | | | 261,933 | | | 11.3 | | |
| Excess and surplus casualty | Excess and surplus casualty | 209,011 | | | 9.0 | | | 166,474 | | | 8.5 | | | Excess and surplus casualty | 258,259 | | | 8.3 | | | 209,011 | | | 9.0 | | |
| Travel, accident and health | Travel, accident and health | 183,015 | | | 7.9 | | | 239,833 | | | 12.3 | | | Travel, accident and health | 226,214 | | | 7.3 | | | 183,015 | | | 7.9 | | |
| Lenders products | Lenders products | 117,812 | | | 5.1 | | | 75,793 | | | 3.9 | | | Lenders products | 114,151 | | | 3.7 | | | 117,812 | | | 5.1 | | |
| Other | Other | 246,410 | | | 10.6 | | | 225,502 | | | 11.5 | | | Other | 308,423 | | | 9.9 | | | 246,410 | | | 10.6 | | |
| Total | Total | $ | 2,325,170 | | | 100.0 | | | $ | 1,953,002 | | | 100.0 | | | Total | $ | 3,112,207 | | | 100.0 | | | $ | 2,325,170 | | | 100.0 | | |
Nine Months Ended September 30, 20202021 versus 20192020 Period. Gross premiums written by the insurance segment for the nine months ended September 30, 20202021 were 20.1%27.2% higher than in the 20192020 period, while net premiums written were 19.1% higher.33.8% higher than in the 2020 period. The higher level ofincrease in net premiums written reflected increases ingrowth across most lines of business, primarily due in part to rate increases, new business opportunities rate increases and growth in existing accounts. Such amounts were partially offset by a decrease in travel business, primarily due to the ongoing impact of COVID-19.
Net Premiums Earned.
The following tables set forth our insurance segment’s net premiums earned by major line of business:
| | | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Property, energy, marine and aviation | Property, energy, marine and aviation | $ | 133,827 | | | 18.6 | | | $ | 80,246 | | | 13.3 | | | Property, energy, marine and aviation | $ | 187,905 | | | 20.0 | | | $ | 133,827 | | | 18.6 | | |
| Professional lines | Professional lines | 168,502 | | | 23.4 | | | 135,343 | | | 22.4 | | | Professional lines | 249,007 | | | 26.5 | | | 168,502 | | | 23.4 | | |
| Programs | Programs | 104,861 | | | 14.6 | | | 104,432 | | | 17.3 | | | Programs | 137,299 | | | 14.6 | | | 104,861 | | | 14.6 | | |
| Construction and national accounts | Construction and national accounts | 95,386 | | | 13.3 | | | 81,472 | | | 13.5 | | | Construction and national accounts | 94,523 | | | 10.1 | | | 95,386 | | | 13.3 | | |
| Excess and surplus casualty | Excess and surplus casualty | 69,978 | | | 9.7 | | | 53,991 | | | 8.9 | | | Excess and surplus casualty | 84,048 | | | 9.0 | | | 69,978 | | | 9.7 | | |
| Travel, accident and health | Travel, accident and health | 36,726 | | | 5.1 | | | 81,952 | | | 13.5 | | | Travel, accident and health | 56,102 | | | 6.0 | | | 36,726 | | | 5.1 | | |
| Lenders products | Lenders products | 33,401 | | | 4.6 | | | (5,724) | | | (0.9) | | | Lenders products | 33,030 | | | 3.5 | | | 33,401 | | | 4.6 | | |
| Other | Other | 76,473 | | | 10.6 | | | 73,624 | | | 12.2 | | | Other | 96,756 | | | 10.3 | | | 76,473 | | | 10.6 | | |
| Total | Total | $ | 719,154 | | | 100.0 | | | $ | 605,336 | | | 100.0 | | | Total | $ | 938,670 | | | 100.0 | | | $ | 719,154 | | | 100.0 | | |
| | | | | | | | |
| ARCH CAPITAL | 5048 | 20202021 THIRD QUARTER FORM 10-Q |
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Property, energy, marine and aviation | Property, energy, marine and aviation | $ | 365,791 | | | 17.2 | | | $ | 208,879 | | | 11.9 | | | Property, energy, marine and aviation | $ | 512,880 | | | 19.5 | | | $ | 365,791 | | | 17.2 | | |
| Professional lines | 475,014 | | | 22.4 | | | 365,801 | | | 20.9 | | | |
| Professional Lines | | Professional Lines | 662,776 | | | 25.3 | | | 475,014 | | | 22.4 | | |
| Programs | Programs | 322,203 | | | 15.2 | | | 304,605 | | | 17.4 | | | Programs | 369,113 | | | 14.1 | | | 322,203 | | | 15.2 | | |
| Construction and national accounts | Construction and national accounts | 286,691 | | | 13.5 | | | 234,198 | | | 13.4 | | | Construction and national accounts | 293,043 | | | 11.2 | | | 286,691 | | | 13.5 | | |
| Excess and surplus casualty | Excess and surplus casualty | 196,041 | | | 9.2 | | | 144,218 | | | 8.2 | | | Excess and surplus casualty | 232,314 | | | 8.9 | | | 196,041 | | | 9.2 | | |
| Travel, accident and health | Travel, accident and health | 166,218 | | | 7.8 | | | 237,163 | | | 13.5 | | | Travel, accident and health | 168,378 | | | 6.4 | | | 166,218 | | | 7.8 | | |
| Lenders products | Lenders products | 81,855 | | | 3.9 | | | 41,078 | | | 2.3 | | | Lenders products | 119,507 | | | 4.6 | | | 81,855 | | | 3.9 | | |
| Other | Other | 229,169 | | | 10.8 | | | 215,341 | | | 12.3 | | | Other | 265,560 | | | 10.1 | | | 229,169 | | | 10.8 | | |
| Total | Total | $ | 2,122,982 | | | 100.0 | | | $ | 1,751,283 | | | 100.0 | | | Total | $ | 2,623,571 | | | 100.0 | | | $ | 2,122,982 | | | 100.0 | | |
Net premiums written are primarily earned on a pro rata basis over the terms of the policies for all products, usually 12 months. Net premiums earned in the 2020 third quarter were 18.8% higher than in the 2019 third quarter. For the nine months ended September 30, 2020, net premiums earned were 21.2% higher than in the 2019 period. Net premiums earned reflect changes in net premiums written over the previous five quarters. Net premiums earned in the 2021 third quarter were 30.5% higher than in the 2020 third quarter. Net premiums earned for the nine months ended September 30, 2021 were 23.6% higher than in the 2020 period.
Losses and Loss Adjustment Expenses.
The table below shows the components of the insurance segment’s loss ratio:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Current year | Current year | 73.3 | % | | 70.5 | % | | 73.3 | % | | 67.4 | % | Current year | 71.7 | % | | 73.3 | % | | 67.2 | % | | 73.3 | % |
| Prior period reserve development | Prior period reserve development | (0.3) | % | | (0.7) | % | | (0.3) | % | | (0.7) | % | Prior period reserve development | (0.5) | % | | (0.3) | % | | (0.5) | % | | (0.3) | % |
| Loss ratio | Loss ratio | 73.0 | % | | 69.8 | % | | 73.0 | % | | 66.7 | % | Loss ratio | 71.2 | % | | 73.0 | % | | 66.7 | % | | 73.0 | % |
Current Year Loss Ratio.
20202021 Third Quarter versus 20192020 Period. The insurance segment’s current year loss ratio in the 20202021 third quarter was 2.81.6 points higherlower than in the 20192020 third quarter. The 20202021 third quarter loss ratio reflected 10.312.2 points of current year catastrophic activity, primarily related to Hurricanes Isaias, LauraHurricane Ida and Sally, including 0.5 points related to COVID-19 exposure,other global events, compared to 4.310.3 points of catastrophic activity for the 20192020 third quarter.
Nine Months Ended September 30, 2020 versus 2019 Period.quarter, which included exposure to the COVID-19 global pandemic. The insurance segment’s current year loss ratio for the nine months ended September 30, 20202021 was 5.96.1 points higherlower than in the 2019 period. The loss ratio for the nine months ended September 30, 2020 period and reflected 9.97.0 points of current year catastrophic activity, including 5.5 points for exposure related to COVID-19, compared to 1.69.9 points of catastrophic
activity in the 20192020 period. The balance of the change in the 20202021 loss ratios resulted, in part, from changes in mix of business and the level of large attritional losses and the effect of rate increases.losses.
Prior Period Reserve Development.
The insurance segment’s net favorable development was $5.1 million, or 0.5 points, for the 2021 third quarter, compared to $2.3 million, or 0.3 points, for the 2020 third quarter, compared to $4.4and $13.1 million, or 0.7 points, for the 2019 third quarter, and $5.9 million, or 0.30.5 points for the nine months ended September 30, 2020,2021, compared to $11.4$5.9 million, or 0.70.3 points, for the 20192020 period. See note 5,6, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements for information about the insurance segment’s prior year reserve development. Underwriting Expenses.
20202021 Third Quarter versus 20192020 Period. The insurance segment’s underwriting expense ratio was 31.0% in the 2021 third quarter, consistent with 31.2% in the 2020 third quarter, compared to 34.2% in the 2019 third quarter, with the decrease primarily due to growth in net premiums earned.quarter.
Nine Months Ended September 30, 20202021 versus 2019 Period2020.Period. The insurance segment’s underwriting expense ratio was 32.5%31.5% for the nine months ended September 30, 2020,2021, compared to 34.4%32.5% for the 20192020 period, with the decrease primarily due to growth in net premiums earned.
Reinsurance Segment
The following tables set forth our reinsurance segment’s underwriting results:
| | | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | | 2020 | | 2019 | | % Change | | 2021 | | 2020 | | %
Change |
| Gross premiums written | Gross premiums written | $ | 1,004,590 | | | $ | 662,572 | | | 51.6 | | Gross premiums written | $ | 1,251,760 | | | $ | 1,004,590 | | | 24.6 | |
| Premiums ceded | Premiums ceded | (400,388) | | | (226,096) | | | Premiums ceded | (630,371) | | | (400,388) | | |
| Net premiums written | Net premiums written | 604,202 | | | 436,476 | | | 38.4 | | Net premiums written | 621,389 | | | 604,202 | | | 2.8 | |
| Change in unearned premiums | Change in unearned premiums | (49,704) | | | (72,621) | | | Change in unearned premiums | 57,313 | | | (49,704) | | |
| Net premiums earned | Net premiums earned | 554,498 | | | 363,855 | | | 52.4 | | Net premiums earned | 678,702 | | | 554,498 | | | 22.4 | |
| Other underwriting income (loss) | Other underwriting income (loss) | 298 | | | (1,208) | | | | Other underwriting income (loss) | 3,293 | | | 298 | | | |
| Losses and loss adjustment expenses | Losses and loss adjustment expenses | (422,084) | | | (270,379) | | | | Losses and loss adjustment expenses | (545,846) | | | (422,084) | | | |
| Acquisition expenses | Acquisition expenses | (85,388) | | | (62,393) | | | | Acquisition expenses | (129,450) | | | (85,388) | | | |
| Other operating expenses | Other operating expenses | (41,818) | | | (32,533) | | | | Other operating expenses | (45,647) | | | (41,818) | | | |
| Underwriting income (loss) | Underwriting income (loss) | $ | 5,506 | | | $ | (2,658) | | | 307.1 | | Underwriting income (loss) | $ | (38,948) | | | $ | 5,506 | | | (807.4) | |
| | Underwriting Ratios | Underwriting Ratios | | % Point
Change | Underwriting Ratios | | % Point
Change |
| Loss ratio | Loss ratio | 76.1 | % | | 74.3 | % | | 1.8 | | Loss ratio | 80.4 | % | | 76.1 | % | | 4.3 | |
| Acquisition expense ratio | Acquisition expense ratio | 15.4 | % | | 17.1 | % | | (1.7) | | Acquisition expense ratio | 19.1 | % | | 15.4 | % | | 3.7 | |
| Other operating expense ratio | Other operating expense ratio | 7.5 | % | | 8.9 | % | | (1.4) | | Other operating expense ratio | 6.7 | % | | 7.5 | % | | (0.8) | |
| Combined ratio | Combined ratio | 99.0 | % | | 100.3 | % | | (1.3) | | Combined ratio | 106.2 | % | | 99.0 | % | | 7.2 | |
| | | | | | | | |
| ARCH CAPITAL | 5149 | 20202021 THIRD QUARTER FORM 10-Q |
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | % Change | | 2021 | | 2020 | | % Change |
| Gross premiums written | Gross premiums written | $ | 2,934,174 | | | $ | 1,890,974 | | | 55.2 | | Gross premiums written | $ | 4,080,840 | | | $ | 2,934,174 | | | 39.1 | |
| Premiums ceded | Premiums ceded | (967,698) | | | (627,120) | | | Premiums ceded | (1,535,607) | | | (967,698) | | |
| Net premiums written | Net premiums written | 1,966,476 | | | 1,263,854 | | | 55.6 | | Net premiums written | 2,545,233 | | | 1,966,476 | | | 29.4 | |
| Change in unearned premiums | Change in unearned premiums | (388,321) | | | (186,450) | | | Change in unearned premiums | (484,607) | | | (388,321) | | |
| Net premiums earned | Net premiums earned | 1,578,155 | | | 1,077,404 | | | 46.5 | | Net premiums earned | 2,060,626 | | | 1,578,155 | | | 30.6 | |
| Other underwriting income | Other underwriting income | 1,767 | | | 4,393 | | | | Other underwriting income | 3,148 | | | 1,767 | | | |
| Losses and loss adjustment expenses | Losses and loss adjustment expenses | (1,235,586) | | | (751,147) | | | | Losses and loss adjustment expenses | (1,494,539) | | | (1,235,586) | | | |
| Acquisition expenses | Acquisition expenses | (255,516) | | | (173,504) | | | | Acquisition expenses | (381,060) | | | (255,516) | | | |
| Other operating expenses | Other operating expenses | (125,831) | | | (102,197) | | | | Other operating expenses | (150,856) | | | (125,831) | | | |
| Underwriting income (loss) | Underwriting income (loss) | $ | (37,011) | | | $ | 54,949 | | | (167.4) | | Underwriting income (loss) | $ | 37,319 | | | $ | (37,011) | | | 200.8 | |
| | Underwriting Ratios | Underwriting Ratios | | % Point
Change | Underwriting Ratios | | % Point
Change |
| Loss ratio | Loss ratio | 78.3 | % | | 69.7 | % | | 8.6 | | Loss ratio | 72.5 | % | | 78.3 | % | | (5.8) | |
| Acquisition expense ratio | Acquisition expense ratio | 16.2 | % | | 16.1 | % | | 0.1 | | Acquisition expense ratio | 18.5 | % | | 16.2 | % | | 2.3 | |
| Other operating expense ratio | Other operating expense ratio | 8.0 | % | | 9.5 | % | | (1.5) | | Other operating expense ratio | 7.3 | % | | 8.0 | % | | (0.7) | |
| Combined ratio | Combined ratio | 102.5 | % | | 95.3 | % | | 7.2 | | Combined ratio | 98.3 | % | | 102.5 | % | | (4.2) | |
The reinsurance segment consists of our 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 or aggregation of losses from 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 treaty basis and on a facultative 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.
Premiums Written.
The following tables set forth our reinsurance segment’s net premiums written by major line of business:
| | | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Property excluding property catastrophe | Property excluding property catastrophe | $ | 223,880 | | | 37.1 | | | $ | 118,671 | | | 27.2 | | | Property excluding property catastrophe | $ | 237,025 | | | 38.1 | | | $ | 223,880 | | | 37.1 | | |
| Property catastrophe | Property catastrophe | 42,125 | | | 7.0 | | | 23,597 | | | 5.4 | | | Property catastrophe | (7,125) | | | (1.1) | | | 42,125 | | | 7.0 | | |
| Other specialty | Other specialty | 159,969 | | | 26.5 | | | 94,072 | | | 21.6 | | | Other specialty | 167,006 | | | 26.9 | | | 159,969 | | | 26.5 | | |
| Casualty | Casualty | 142,401 | | | 23.6 | | | 178,802 | | | 41.0 | | | Casualty | 187,066 | | | 30.1 | | | 142,401 | | | 23.6 | | |
| Marine and aviation | Marine and aviation | 27,839 | | | 4.6 | | | 10,181 | | | 2.3 | | | Marine and aviation | 19,159 | | | 3.1 | | | 27,839 | | | 4.6 | | |
| Other | Other | 7,988 | | | 1.3 | | | 11,153 | | | 2.6 | | | Other | 18,258 | | | 2.9 | | | 7,988 | | | 1.3 | | |
| Total | Total | $ | 604,202 | | | 100.0 | | | $ | 436,476 | | | 100.0 | | | Total | $ | 621,389 | | | 100.0 | | | $ | 604,202 | | | 100.0 | | |
|
20202021 Third Quarter versus 20192020 Period. Gross premiums written by the reinsurance segment in the 20202021 third quarter were 51.6%24.6% higher than in the 20192020 third quarter, while net premiums written were 38.4%2.8% higher. The higherlower level of growth in net premiums written compared to gross premiums written primarily reflected increases in property and other specialty lines, mainlya higher level of premiums ceded due to new business and rate increases.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | | | |
| | Amount | | % | | Amount | | % | | | | | | | | |
| Property excluding property catastrophe | $ | 546,443 | | | 27.8 | | | $ | 317,461 | | | 25.1 | | | | | | | | | |
| Property catastrophe | 248,893 | | | 12.7 | | | 73,574 | | | 5.8 | | | | | | | | | |
| Other specialty | 562,296 | | | 28.6 | | | 363,723 | | | 28.8 | | | | | | | | | |
| Casualty | 438,330 | | | 22.3 | | | 425,311 | | | 33.7 | | | | | | | | | |
| Marine and aviation | 109,996 | | | 5.6 | | | 41,758 | | | 3.3 | | | | | | | | | |
| Other | 60,518 | | | 3.1 | | | 42,027 | | | 3.3 | | | | | | | | | |
| Total | $ | 1,966,476 | | | 100.0 | | | $ | 1,263,854 | | | 100.0 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2020 versus 2019 Period. Gross premiums written bya one-time $161.2 million adjustment, resulting from retrocessions to Watford following its ownership change on July 1, 2021. Absent this item, the reinsurance segment for the nine months ended September 30, 2020 were 55.2% higher than in the 2019 period, while net premiums written were 55.6% higher than in the 2019 period. The increasegrowth in net premiums written reflectedwould have been 29.5%, consistent with the level of growth across allin gross premiums written, reflecting increases in most lines of business, due in part to new business opportunities and rate increases. The 2020 period was affected by the presence of an $88 million loss portfolio transfer contract, written and fully earned in the period in the
| | | | | | | | |
| ARCH CAPITAL | 5250 | 20202021 THIRD QUARTER FORM 10-Q |
other specialty line of business. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2021 | | 2020 | | | | |
| | Amount | | % | | Amount | | % | | | | | | | | |
| Property excluding property catastrophe | $ | 778,959 | | | 30.6 | | | $ | 546,443 | | | 27.8 | | | | | | | | | |
| Property catastrophe | 197,724 | | | 7.8 | | | 248,893 | | | 12.7 | | | | | | | | | |
| Other Specialty | 747,662 | | | 29.4 | | | 562,296 | | | 28.6 | | | | | | | | | |
| Casualty | 631,212 | | | 24.8 | | | 438,330 | | | 22.3 | | | | | | | | | |
| Marine and aviation | 131,045 | | | 5.1 | | | 109,996 | | | 5.6 | | | | | | | | | |
| Other | 58,631 | | | 2.3 | | | 60,518 | | | 3.1 | | | | | | | | | |
| Total | $ | 2,545,233 | | | 100.0 | | | $ | 1,966,476 | | | 100.0 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2021 versus 2020 Period. Gross premiums written by the reinsurance segment for the nine months ended September 30, 2021 were 39.1% higher than in the 2020 period, while net premiums written were 29.4% higher than in the 2020 period. The growthincrease in net premiums written also reflected increasesgrowth in most lines of business,property excluding property catastrophe, other specialty and casualty primarily due to growth in existing accounts, new business and rate increases.
Net Premiums Earned.
The following tables set forth our reinsurance segment’s net premiums earned by major line of business:
| | | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Property excluding property catastrophe | Property excluding property catastrophe | $ | 163,081 | | | 29.4 | | | $ | 90,358 | | | 24.8 | | | Property excluding property catastrophe | $ | 210,280 | | | 31.0 | | | $ | 163,081 | | | 29.4 | | |
| Property catastrophe | Property catastrophe | 69,524 | | | 12.5 | | | 22,617 | | | 6.2 | | | Property catastrophe | 61,107 | | | 9.0 | | | 69,524 | | | 12.5 | | |
| Other specialty | Other specialty | 141,201 | | | 25.5 | | | 112,349 | | | 30.9 | | | Other specialty | 195,649 | | | 28.8 | | | 141,201 | | | 25.5 | | |
| Casualty | Casualty | 136,421 | | | 24.6 | | | 116,242 | | | 31.9 | | | Casualty | 159,697 | | | 23.5 | | | 136,421 | | | 24.6 | | |
| Marine and aviation | Marine and aviation | 26,744 | | | 4.8 | | | 11,798 | | | 3.2 | | | Marine and aviation | 29,818 | | | 4.4 | | | 26,744 | | | 4.8 | | |
| Other | Other | 17,527 | | | 3.2 | | | 10,491 | | | 2.9 | | | Other | 22,151 | | | 3.3 | | | 17,527 | | | 3.2 | | |
| Total | Total | $ | 554,498 | | | 100.0 | | | $ | 363,855 | | | 100.0 | | | Total | $ | 678,702 | | | 100.0 | | | $ | 554,498 | | | 100.0 | | |
|
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Property excluding property catastrophe | Property excluding property catastrophe | $ | 399,752 | | | 25.3 | | | $ | 259,629 | | | 24.1 | | | Property excluding property catastrophe | $ | 600,842 | | | 29.2 | | | $ | 399,752 | | | 25.3 | | |
| Property catastrophe | Property catastrophe | 177,750 | | | 11.3 | | | 59,886 | | | 5.6 | | | Property catastrophe | 225,285 | | | 10.9 | | | 177,750 | | | 11.3 | | |
| Other specialty | 467,592 | | | 29.6 | | | 370,443 | | | 34.4 | | | |
| Other Specialty | | Other Specialty | 571,364 | | | 27.7 | | | 467,592 | | | 29.6 | | |
| Casualty | Casualty | 404,248 | | | 25.6 | | | 311,030 | | | 28.9 | | | Casualty | 492,574 | | | 23.9 | | | 404,248 | | | 25.6 | | |
| Marine and aviation | Marine and aviation | 76,562 | | | 4.9 | | | 35,355 | | | 3.3 | | | Marine and aviation | 112,699 | | | 5.5 | | | 76,562 | | | 4.9 | | |
| Other | Other | 52,251 | | | 3.3 | | | 41,061 | | | 3.8 | | | Other | 57,862 | | | 2.8 | | | 52,251 | | | 3.3 | | |
| Total | Total | $ | 1,578,155 | | | 100.0 | | | $ | 1,077,404 | | | 100.0 | | | Total | $ | 2,060,626 | | | 100.0 | | | $ | 1,578,155 | | | 100.0 | | |
|
Net premiums written, irrespective of the class of business, are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts. Net premiums earned by the reinsurance segment in the 20202021 third quarter were 52.4%22.4% higher than in the 20192020 third quarter.quarter, and reflect changes in net premiums written over the previous five quarters. For the nine months ended September 30, 2020,2021, net premiums earned were 46.5%30.6% higher than in the 20192020 period.
Other Underwriting Income (Loss).
Other underwriting income for the 2021 third quarter was $3.3 million, compared to an income of $0.3 million for the 2020 third quarter, was $0.3 million, compared to a loss of $1.2 million for the 2019 third quarter, and an income of $1.8$3.1 million for the nine months ended September 30, 2020,2021, compared to an income of $4.4$1.8 million for the 20192020 period.
Losses and Loss Adjustment Expenses.
The table below shows the components of the reinsurance segment’s loss ratio:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Current year | Current year | 83.7 | % | | 78.5 | % | | 84.2 | % | | 72.1 | % | Current year | 91.1 | % | | 83.7 | % | | 78.3 | % | | 84.2 | % |
| Prior period reserve development | Prior period reserve development | (7.6) | % | | (4.2) | % | | (5.9) | % | | (2.4) | % | Prior period reserve development | (10.7) | % | | (7.6) | % | | (5.8) | % | | (5.9) | % |
| Loss ratio | Loss ratio | 76.1 | % | | 74.3 | % | | 78.3 | % | | 69.7 | % | Loss ratio | 80.4 | % | | 76.1 | % | | 72.5 | % | | 78.3 | % |
Current Year Loss Ratio.
20202021 Third Quarter versus 20192020 Period. The reinsurance segment’s current year loss ratio in the 20202021 third quarter was 5.27.4 points higher than in the 20192020 third quarter. The 20202021 third quarter loss ratio reflected 26.134.6 points of current year catastrophic activity, primarily related to Hurricanes LauraHurricane Ida, European floods and Sally the Derecho Windstorm, including 1.5 points related to COVID-19.other global events. The 20192020 third quarter included 12.226.1 points of catastrophic activity, primarily relatedwhich included exposure to Hurricane Dorian and Typhoon Faxai.the COVID-19 pandemic.
Nine Months Ended September 30, 20202021 versus 20192020 Period. The reinsurance segment’s current year loss ratio for the nine months ended September 30, 20202021 was 12.15.9 points higherlower than in the 2019 period. The loss ratio for the nine months ended September 30, 2020 period and reflected 21.620.1 points of current year catastrophic activity, including 9.8 points for exposure related to COVID-19, compared to 5.321.6 points for the 2019 period. The balance of the change in the 2020 period. The 2020 period loss ratios resulted, in part, from changes in mix of business,ratio included exposure to the level of attritional losses and the effect of rate increases.COVID-19 pandemic.
Prior Period Reserve Development.
The reinsurance segment’s net favorable development was $72.3 million, or 10.7 points, for the 2021 third quarter, compared to $42.0 million, or 7.6 points, for the 2020 third quarter, compared to $15.3and $119.6 million, or 4.2 points, for the 2019 third quarter, and $93.8 million, or 5.95.8 points, for the nine months ended September 30, 2020,2021, compared to $26.3$93.8 million, or 2.45.9 points, for the 20192020 period. See note 5,6, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements for information about the reinsurance segment’s prior year reserve development. Underwriting Expenses.
20202021 Third Quarter versus 20192020 Period. The underwriting expense ratio for the reinsurance segment was 22.9%25.8% in the 2020 third quarter, compared to 26.0% in the 2019 third quarter, with the decrease primarily due to growth in net premiums earned.
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| ARCH CAPITAL | 5351 | 20202021 THIRD QUARTER FORM 10-Q |
2021 third quarter, compared to 22.9% in the 2020 third quarter, with the increase primarily resulting from changes in mix of business to lines with higher acquisition costs and a higher level of expenses related to favorable development of prior year loss reserves.
Nine Months Ended September 30, 20202021 versus 20192020 Period. The underwriting expense ratio for the reinsurance segment was 24.2%25.8% for the nine months ended September 30, 2020,2021, compared to 25.6%24.2% for the 2019 period, with2020 period. The comparison of the decrease primarily due to growthunderwriting expense ratios also reflected changes in the mix and type of business and a higher level of net premiums earned.earned for the 2021 period.
Mortgage Segment
Our mortgage operations include U.S. and international mortgage insurance and reinsurance operations as well as participation in GSE credit risk-sharing transactions. Our mortgage group includes direct mortgage insurance in the U.S. primarily through Arch Mortgage Insurance Company, and United Guaranty Residential Insurance Company and Arch Mortgage Guaranty Company (together, “Arch MI U.S.”),; mortgage reinsurance by Arch Reinsurance Ltd. (“Arch Re Bermuda”) to mortgage insurers on both a proportional and non-proportional basis globally; direct mortgage insurance in Europe through Arch Insurance (EU) Designated Activity Company (“Arch Insurance EU”),; in Hong Kong through Arch MI Asia Limited (“Arch MI Asia”); in Australia through Arch LMI Pty LtdLenders Mortgage Indemnity Limited (“Arch LMI”ALMI”); and participation in various GSE credit risk-sharing products primarily through Arch Re Bermuda.
The following tables set forth our mortgage segment’s underwriting results.
| | | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | | 2020 | | 2019 | | % Change | | 2021 | | 2020 | | % Change |
| Gross premiums written | Gross premiums written | $ | 346,248 | | | $ | 375,092 | | | (7.7) | | Gross premiums written | $ | 360,934 | | | $ | 346,248 | | | 4.2 | |
| Premiums ceded | Premiums ceded | (47,783) | | | (57,703) | | | Premiums ceded | (60,207) | | | (47,783) | | |
| Net premiums written | Net premiums written | 298,465 | | | 317,389 | | | (6.0) | | Net premiums written | 300,727 | | | 298,465 | | | 0.8 | |
| Change in unearned premiums | Change in unearned premiums | 52,944 | | | 25,611 | | | Change in unearned premiums | 11,238 | | | 52,944 | | |
| Net premiums earned | Net premiums earned | 351,409 | | | 343,000 | | | 2.5 | | Net premiums earned | 311,965 | | | 351,409 | | | (11.2) | |
| Other underwriting income | Other underwriting income | 4,600 | | | 3,955 | | | Other underwriting income | 3,981 | | | 4,600 | | |
| Losses and loss adjustment expenses | Losses and loss adjustment expenses | (153,055) | | | (13,080) | | | Losses and loss adjustment expenses | (11,543) | | | (153,055) | | |
| Acquisition expenses | Acquisition expenses | (35,716) | | | (34,396) | | | Acquisition expenses | (24,098) | | | (35,716) | | |
| Other operating expenses | Other operating expenses | (36,708) | | | (37,003) | | | Other operating expenses | (46,254) | | | (36,708) | | |
| Underwriting income | Underwriting income | $ | 130,530 | | | $ | 262,476 | | | (50.3) | | Underwriting income | $ | 234,051 | | | $ | 130,530 | | | 79.3 | |
| | Underwriting Ratios | Underwriting Ratios | | % Point
Change | Underwriting Ratios | | % Point
Change |
| Loss ratio | Loss ratio | 43.6 | % | | 3.8 | % | | 39.8 | | Loss ratio | 3.7 | % | | 43.6 | % | | (39.9) | |
| Acquisition expense ratio | Acquisition expense ratio | 10.2 | % | | 10.0 | % | | 0.2 | | Acquisition expense ratio | 7.7 | % | | 10.2 | % | | (2.5) | |
| Other operating expense ratio | Other operating expense ratio | 10.4 | % | | 10.8 | % | | (0.4) | | Other operating expense ratio | 14.8 | % | | 10.4 | % | | 4.4 | |
| Combined ratio | Combined ratio | 64.2 | % | | 24.6 | % | | 39.6 | | Combined ratio | 26.2 | % | | 64.2 | % | | (38.0) | |
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2020 | | 2019 | | % Change | | 2021 | | 2020 | | % Change |
| Gross premiums written | Gross premiums written | $ | 1,084,337 | | | $ | 1,095,607 | | | (1.0) | | Gross premiums written | $ | 1,143,691 | | | $ | 1,084,337 | | | 5.5 | |
| Premiums ceded | Premiums ceded | (136,154) | | | (149,358) | | | Premiums ceded | (171,923) | | | (136,154) | | |
| Net premiums written | Net premiums written | 948,183 | | | 946,249 | | | 0.2 | | Net premiums written | 971,768 | | | 948,183 | | | 2.5 | |
| Change in unearned premiums | Change in unearned premiums | 113,965 | | | 72,436 | | | Change in unearned premiums | 10,735 | | | 113,965 | | |
| Net premiums earned | Net premiums earned | 1,062,148 | | | 1,018,685 | | | 4.3 | | Net premiums earned | 982,503 | | | 1,062,148 | | | (7.5) | |
| Other underwriting income | Other underwriting income | 15,649 | | | 11,867 | | | | Other underwriting income | 15,026 | | | 15,649 | | | |
| Losses and loss adjustment expenses | Losses and loss adjustment expenses | (444,721) | | | (50,226) | | | | Losses and loss adjustment expenses | (85,112) | | | (444,721) | | | |
| Acquisition expenses | Acquisition expenses | (108,304) | | | (98,722) | | | | Acquisition expenses | (84,297) | | | (108,304) | | | |
| Other operating expenses | Other operating expenses | (120,178) | | | (116,697) | | | | Other operating expenses | (143,697) | | | (120,178) | | | |
| Underwriting income | Underwriting income | $ | 404,594 | | | $ | 764,907 | | | (47.1) | | Underwriting income | $ | 684,423 | | | $ | 404,594 | | | 69.2 | |
| | Underwriting Ratios | Underwriting Ratios | | | | | % Point
Change | Underwriting Ratios | | | | | % Point
Change |
| Loss ratio | Loss ratio | 41.9 | % | | 4.9 | % | | 37.0 | | Loss ratio | 8.7 | % | | 41.9 | % | | (33.2) | |
| Acquisition expense ratio | Acquisition expense ratio | 10.2 | % | | 9.7 | % | | 0.5 | | Acquisition expense ratio | 8.6 | % | | 10.2 | % | | (1.6) | |
| Other operating expense ratio | Other operating expense ratio | 11.3 | % | | 11.5 | % | | (0.2) | | Other operating expense ratio | 14.6 | % | | 11.3 | % | | 3.3 | |
| Combined ratio | Combined ratio | 63.4 | % | | 26.1 | % | | 37.3 | | Combined ratio | 31.9 | % | | 63.4 | % | | (31.5) | |
Premiums Written.
The following tables set forth our mortgage segment’s net premiums written by underwriting location (i.e., where the business is underwritten):
| | | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Underwriting location: | Underwriting location: | | | | | | | | | Underwriting location: | | | | | | | | |
| United States | United States | $ | 245,971 | | | 82.4 | | | $ | 260,202 | | | 82.0 | | | United States | $ | 221,315 | | | 73.6 | | | $ | 245,971 | | | 82.4 | | |
| Other | Other | 52,494 | | | 17.6 | | | 57,187 | | | 18.0 | | | Other | 79,412 | | | 26.4 | | | 52,494 | | | 17.6 | | |
| Total | Total | $ | 298,465 | | | 100.0 | | | $ | 317,389 | | | 100.0 | | | Total | $ | 300,727 | | | 100.0 | | | $ | 298,465 | | | 100.0 | | |
20202021 Third Quarter versus 20192020 Period. Gross premiums written by the mortgage segment in the 20202021 third quarter were 7.7% lower4.2% higher than in the 20192020 third quarter, while net premiums written were 6.0% lower, primarily reflecting a reduction0.8% higher. The increase in U.S. primarygross premiums written reflected growth in Australian single premium mortgage insurance partially as a result of the previously disclosed acquisition of Westpac Lenders Mortgage Insurance Limited. The lower increase in force due to mortgage refinance activity and a lower contribution from single premium policies. Netnet premiums written for the 2020 third quarter also reflected a lowerhigher level of premiums ceded premiums on U.S. primary mortgage insurance business.insurance.
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| | Underwriting location: | Underwriting location: | | | | | | | | | Underwriting location: | | | | | | | | |
| United States | United States | $ | 771,203 | | | 81.3 | | | $ | 774,356 | | | 81.8 | | | United States | $ | 703,489 | | | 72.4 | | | $ | 771,203 | | | 81.3 | | |
| Other | Other | 176,980 | | | 18.7 | | | 171,893 | | | 18.2 | | | Other | 268,279 | | | 27.6 | | | 176,980 | | | 18.7 | | |
| Total | Total | $ | 948,183 | | | 100.0 | | | $ | 946,249 | | | 100.0 | | | Total | $ | 971,768 | | | 100.0 | | | $ | 948,183 | | | 100.0 | | |
Nine Months Ended September 30, 20202021 versus 20192020 Period. Gross premiums written by the mortgage segment for the nine months ended September 30, 20202021 were 1.0% lower5.5% higher than in the 20192020 period, while net premiums written for the nine months ended September 30, 20202021 were 0.2%2.5% higher than in the 2019 period.
| | | | | | | | |
| ARCH CAPITAL | 5452 | 20202021 THIRD QUARTER FORM 10-Q |
than in the 2020 period, primarily reflecting growth in Australian single premium mortgage insurance and the benefit of premiums received related to the exercise of early redemption options by GSEs for certain seasoned callable credit risk transfer contracts. This growth was partially offset by a lower level of U.S. primary mortgage insurance in force on monthly premium policies, which resulted from the continued high level of refinancing activity.
The persistency rate, which represents the percentage of mortgage insurance in force at the beginning of a 12-month period that remains in force at the end of such period, of whichwas 57.7% for the Arch MI U.S. portfolio of mortgage insurance policies was 62.5% at September 30, 2020,2021, reflecting the higher level of mortgage refinancing activity, compared to 75.7%58.7% at December 31, 2019.2020.
The following tables provide details on the new insurance written (“NIW”) generated by Arch MI U.S. NIW represents the original principal balance of all loans that received coverage during the period.
| | (U.S. Dollars in millions) | (U.S. Dollars in millions) | Three Months Ended September 30, | | (U.S. Dollars in millions) | Three Months Ended September 30, | |
| 2020 | | 2019 | | 2021 | | 2020 | |
| | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Total new insurance written (NIW) (1) | Total new insurance written (NIW) (1) | $ | 32,787 | | | | | $ | 25,313 | | | | | Total new insurance written (NIW) (1) | $ | 27,841 | | | | | $ | 32,787 | | | | |
| | Credit quality (FICO): | Credit quality (FICO): | | | Credit quality (FICO): | | |
| >=740 | >=740 | $ | 21,160 | | | 64.5 | | | $ | 15,204 | | | 60.1 | | | >=740 | $ | 17,514 | | | 62.9 | | | $ | 21,160 | | | 64.5 | | |
| 680-739 | 680-739 | 10,562 | | | 32.2 | | | 8,725 | | | 34.5 | | | 680-739 | 9,012 | | | 32.4 | | | 10,562 | | | 32.2 | | |
| 620-679 | 620-679 | 1,065 | | | 3.2 | | | 1,384 | | | 5.5 | | | 620-679 | 1,315 | | | 4.7 | | | 1,065 | | | 3.2 | | |
| | Total | Total | $ | 32,787 | | | 100.0 | | | $ | 25,313 | | | 100.0 | | | Total | $ | 27,841 | | | 100.0 | | | $ | 32,787 | | | 100.0 | | |
| | Loan-to-value (LTV): | Loan-to-value (LTV): | | | Loan-to-value (LTV): | | |
| 95.01% and above | 95.01% and above | $ | 2,561 | | | 7.8 | | | $ | 3,182 | | | 12.6 | | | 95.01% and above | $ | 1,554 | | | 5.6 | | | $ | 2,561 | | | 7.8 | | |
| 90.01% to 95.00% | 90.01% to 95.00% | 13,967 | | | 42.6 | | | 10,409 | | | 41.1 | | | 90.01% to 95.00% | 14,240 | | | 51.1 | | | 13,967 | | | 42.6 | | |
| 85.01% to 90.00% | 85.01% to 90.00% | 10,052 | | | 30.7 | | | 7,762 | | | 30.7 | | | 85.01% to 90.00% | 8,394 | | | 30.1 | | | 10,052 | | | 30.7 | | |
| 85.00% and below | 85.00% and below | 6,207 | | | 18.9 | | | 3,960 | | | 15.6 | | | 85.00% and below | 3,653 | | | 13.1 | | | 6,207 | | | 18.9 | | |
| Total | Total | $ | 32,787 | | | 100.0 | | | $ | 25,313 | | | 100.0 | | | Total | $ | 27,841 | | | 100.0 | | | $ | 32,787 | | | 100.0 | | |
| | Monthly vs. single: | Monthly vs. single: | | | Monthly vs. single: | | |
| Monthly | Monthly | $ | 31,928 | | | 97.4 | | | $ | 23,358 | | | 92.3 | | | Monthly | $ | 26,515 | | | 95.2 | | | $ | 31,928 | | | 97.4 | | |
| Single | Single | 859 | | | 2.6 | | | 1,955 | | | 7.7 | | | Single | 1,326 | | | 4.8 | | | 859 | | | 2.6 | | |
| Total | Total | $ | 32,787 | | | 100.0 | | | $ | 25,313 | | | 100.0 | | | Total | $ | 27,841 | | | 100.0 | | | $ | 32,787 | | | 100.0 | | |
| | Purchase vs. refinance: | Purchase vs. refinance: | | | Purchase vs. refinance: | | |
| Purchase | Purchase | $ | 24,256 | | | 74.0 | | | $ | 19,068 | | | 75.3 | | | Purchase | $ | 25,711 | | | 92.3 | | | $ | 24,256 | | | 74.0 | | |
| Refinance | Refinance | 8,531 | | | 26.0 | | | 6,245 | | | 24.7 | | | Refinance | 2,130 | | | 7.7 | | | 8,531 | | | 26.0 | | |
| Total | Total | $ | 32,787 | | | 100.0 | | | $ | 25,313 | | | 100.0 | | | Total | $ | 27,841 | | | 100.0 | | | $ | 32,787 | | | 100.0 | | |
(1)Represents the original principal balance of all loans that received coverage during the period.
| | (U.S. Dollars in millions) | (U.S. Dollars in millions) | Nine Months Ended September 30, | | (U.S. Dollars in millions) | Nine Months Ended September 30, | |
| 2020 | | 2019 | | 2021 | | 2020 | |
| | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Total new insurance written (NIW) (1) | Total new insurance written (NIW) (1) | $ | 74,116 | | | | | $ | 53,681 | | | | | Total new insurance written (NIW) (1) | $ | 83,232 | | | | | $ | 74,116 | | | | |
| | Credit quality (FICO): | Credit quality (FICO): | | | Credit quality (FICO): | | |
| >=740 | >=740 | $ | 47,080 | | | 63.5 | | | $ | 31,416 | | | 58.5 | | | >=740 | $ | 54,572 | | | 65.6 | | | $ | 47,080 | | | 63.5 | | |
| 680-739 | 680-739 | 24,130 | | | 32.6 | | | 18,905 | | | 35.2 | | | 680-739 | 25,543 | | | 30.7 | | | 24,130 | | | 32.6 | | |
| 620-679 | 620-679 | 2,906 | | | 3.9 | | | 3,360 | | | 6.3 | | | 620-679 | 3,117 | | | 3.7 | | | 2,906 | | | 3.9 | | |
| | Total | Total | $ | 74,116 | | | 100.0 | | | $ | 53,681 | | | 100.0 | | | Total | $ | 83,232 | | | 100.0 | | | $ | 74,116 | | | 100.0 | | |
| | Loan-to-value (LTV): | Loan-to-value (LTV): | | | Loan-to-value (LTV): | | |
| 95.01% and above | 95.01% and above | $ | 6,177 | | | 8.3 | | | $ | 7,520 | | | 14.0 | | | 95.01% and above | $ | 4,646 | | | 5.6 | | | $ | 6,177 | | | 8.3 | | |
| 90.01% to 95.00% | 90.01% to 95.00% | 30,569 | | | 41.2 | | | 22,881 | | | 42.6 | | | 90.01% to 95.00% | 40,464 | | | 48.6 | | | 30,569 | | | 41.2 | | |
| 85.01% to 90.00% | 85.01% to 90.00% | 23,521 | | | 31.7 | | | 15,937 | | | 29.7 | | | 85.01% to 90.00% | 25,381 | | | 30.5 | | | 23,521 | | | 31.7 | | |
| 85.00% and below | 13,849 | | | 18.7 | | | 7,343 | | | 13.7 | | | |
| 85.01% and below | | 85.01% and below | 12,741 | | | 15.3 | | | 13,849 | | | 18.7 | | |
| Total | Total | $ | 74,116 | | | 100.0 | | | $ | 53,681 | | | 100.0 | | | Total | $ | 83,232 | | | 100.0 | | | $ | 74,116 | | | 100.0 | | |
| | Monthly vs. single: | Monthly vs. single: | | | Monthly vs. single: | | |
| Monthly | Monthly | $ | 71,011 | | | 95.8 | | | $ | 49,556 | | | 92.3 | | | Monthly | $ | 78,229 | | | 94.0 | | | $ | 71,011 | | | 95.8 | | |
| Single | Single | 3,105 | | | 4.2 | | | 4,125 | | | 7.7 | | | Single | 5,003 | | | 6.0 | | | 3,105 | | | 4.2 | | |
| Total | Total | $ | 74,116 | | | 100.0 | | | $ | 53,681 | | | 100.0 | | | Total | $ | 83,232 | | | 100.0 | | | $ | 74,116 | | | 100.0 | | |
| | Purchase vs. refinance: | Purchase vs. refinance: | | | Purchase vs. refinance: | | |
| Purchase | Purchase | $ | 51,511 | | | 69.5 | | | $ | 44,349 | | | 82.6 | | | Purchase | $ | 71,226 | | | 85.6 | | | $ | 51,511 | | | 69.5 | | |
| Refinance | Refinance | 22,605 | | | 30.5 | | | 9,332 | | | 17.4 | | | Refinance | 12,006 | | | 14.4 | | | 22,605 | | | 30.5 | | |
| Total | Total | $ | 74,116 | | | 100.0 | | | $ | 53,681 | | | 100.0 | | | Total | $ | 83,232 | | | 100.0 | | | $ | 74,116 | | | 100.0 | | |
(1)Represents the original principal balance of all loans that received coverage during the period.
Net Premiums Earned.
The following tables set forth our mortgage segment’s net premiums earned by underwriting location:
| | | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| Underwriting location: | Underwriting location: | | | | | | | | | Underwriting location: | | | | | | | | |
| United States | United States | $ | 290,451 | | | 82.7 | | | $ | 287,064 | | | 83.7 | | | United States | $ | 236,892 | | | 75.9 | | | $ | 290,451 | | | 82.7 | | |
| Other | Other | 60,958 | | | 17.3 | | | 55,936 | | | 16.3 | | | Other | 75,073 | | | 24.1 | | | 60,958 | | | 17.3 | | |
| Total | Total | $ | 351,409 | | | 100.0 | | | $ | 343,000 | | | 100.0 | | | Total | $ | 311,965 | | | 100.0 | | | $ | 351,409 | | | 100.0 | | |
20202021 Third Quarter versus 20192020 Period. Net premiums earned for the 20202021 third quarter were 2.5% higher11.2% lower than in the 20192020 third quarter, and reflected a higherlower level of single premiums earned as a result ofpremium policy terminations due to mortgage refinance activity, which more than offset the reduction in U.S. primary mortgage insurance in force noted above.terminations.
| | | | | | | | |
| ARCH CAPITAL | 5553 | 20202021 THIRD QUARTER FORM 10-Q |
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | Amount | | % | | Amount | | % | | | Amount | | % | | Amount | | % | |
| | Underwriting location: | Underwriting location: | | | | | | | | | Underwriting location: | | |
| United States | United States | $ | 884,265 | | | 83.3 | | | $ | 843,599 | | | 82.8 | | | United States | $ | 747,830 | | | 76.1 | | | $ | 884,265 | | | 83.3 | | |
| Other | Other | 177,883 | | | 16.7 | | | 175,086 | | | 17.2 | | | Other | 234,673 | | | 23.9 | | | 177,883 | | | 16.7 | | |
| Total | Total | $ | 1,062,148 | | | 100.0 | | | $ | 1,018,685 | | | 100.0 | | | Total | $ | 982,503 | | | 100.0 | | | $ | 1,062,148 | | | 100.0 | | |
Nine Months Ended September 30, 2021 versus 2020 versus 2019 PeriodPeriod. . Net premiums earned for the nine months ended September 30, 20202021 were 4.3% higher7.5% lower than in the 20192020 period, primarily reflecting a higherlower level of single premiums earned, as a result ofpartially offset by an increase in earnings from Australian single premium policy terminations due to mortgage refinance activity.terminations.
Other Underwriting Income.
Other underwriting income, which is primarily related to older GSE credit risk-sharing transactions receiving derivative accounting treatment andwas $4.0 million for the 2021 third quarter, compared to a lesser extent contract underwriting fees, was $4.6 million for the 2020 third quarter, compared to $4.0 million for the 2019 third quarter.
Losses and Loss Adjustment Expenses.
The table below shows the components of the mortgage segment’s loss ratio:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Current year | Current year | 44.9 | % | | 13.4 | % | | 42.9 | % | | 14.0 | % | Current year | 18.2 | % | | 44.9 | % | | 18.8 | % | | 42.9 | % |
| Prior period reserve development | Prior period reserve development | (1.3) | % | | (9.6) | % | | (1.0) | % | | (9.1) | % | Prior period reserve development | (14.5) | % | | (1.3) | % | | (10.1) | % | | (1.0) | % |
| Loss ratio | Loss ratio | 43.6 | % | | 3.8 | % | | 41.9 | % | | 4.9 | % | Loss ratio | 3.7 | % | | 43.6 | % | | 8.7 | % | | 41.9 | % |
Current Year Loss Ratio.
20202021 Third Quarter versus 20192020 Period. The mortgage segment’s current year loss ratio was 31.526.7 points higherlower in the 20202021 third quarter than in the 20192020 third quarter. The percentage of loans in default on U.S. primary mortgage business was 4.69% at September 30, 2020, compared to 1.48% at September 30, 2019. For U.S. primary mortgage insurance, loss reserving under GAAP is based on reported delinquencies.
Nine Months Ended September 30, 2020 versus 2019 Period. The mortgage segment’s current year loss ratio was 28.924.1 points higherlower for the nine months ended September 30, 20202021 than for the 20192020 period. The lower current year loss ratios for the 2021 period reflect decrease in loss assumptions related to COVID-19 pandemic, primarily driven by lower delinquencies.
Incurred losses forFor the 2020 periods, reflected elevated delinquency ratesthe increase in incurred losses was primarily due in part, to, the financial stress fromrelated to the COVID-19 pandemic. Segregating estimated losses due to COVID-19 from the overall mortgage segment estimated losses would require knowledge of the number of delinquencies specifically attributable to COVID-19. As this
exercise analysis cannot be performed accurately, the Company is not reporting COVID-19 provisions separately from its overall loss provisions.
Prior Period Reserve Development.
The mortgage segment’s net favorable development was $45.1 million, or 14.5 points, for the 2021 third quarter, compared to $4.5 million, or 1.3 points, for the 2020 third quarter, compared to $33.0and $99.1 million, or 9.6 points, for the 2019 third quarter, and $10.8 million, or 1.010.1 points, for the nine months ended September 30, 2020,2021, compared to $92.5$10.8 million, or 9.11.0 points, for the 20192020 period. See note 5,6, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements for information about the mortgage segment’s prior year reserve development. Underwriting Expenses.
20202021 Third Quarter versus 20192020 Period. The underwriting expense ratio for the mortgage segment was 22.5% in the 2021 third quarter, compared to 20.6% in the 2020 third quarter, consistent with 20.8%the increase primarily due to a lower level in the 2019 third quarter.net premiums earned on U.S. primary mortgage insurance business.
Nine Months Ended September 30, 20202021 versus 20192020 Period. The underwriting expense ratio for the mortgage segment was 21.5%23.2% for the nine months ended September 30, 2020, consistent with 21.2%2021, compared to 21.5% for the 2019 period.2020 period, with the increase primarily due to a lower level in net premiums earned on U.S. primary mortgage insurance business.
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 our non-cumulative preferred shares, net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), 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. See note 1, “Basis of Presentation and Recent Accounting Pronouncements,” to our consolidated financial statements for information about the change in presentation of income or loss from operating affiliates. | | | | | | | | |
| ARCH CAPITAL | 5654 | 20202021 THIRD QUARTER FORM 10-Q |
Net Investment Income.
The components of net investment income were derived from the following sources:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Fixed maturities | Fixed maturities | $ | 84,608 | | | $ | 109,953 | | | $ | 277,862 | | | $ | 331,939 | | Fixed maturities | $ | 75,964 | | | $ | 84,608 | | | $ | 232,690 | | | $ | 277,862 | |
| | Equity securities | Equity securities | 6,659 | | | 3,581 | | | 18,312 | | | 9,321 | | Equity securities | 9,867 | | | 6,659 | | | 23,799 | | | 18,312 | |
| Short-term investments | Short-term investments | 1,162 | | | 3,432 | | | 5,444 | | | 11,178 | | Short-term investments | 1,858 | | | 1,162 | | | 3,474 | | | 5,444 | |
| | Other (1) | Other (1) | 24,594 | | | 24,170 | | | 62,898 | | | 67,229 | | Other (1) | 19,114 | | | 24,594 | | | 55,699 | | | 62,898 | |
| Gross investment income | Gross investment income | 117,023 | | | 141,136 | | | 364,516 | | | 419,667 | | Gross investment income | 106,803 | | | 117,023 | | | 315,662 | | | 364,516 | |
| Investment expenses (2) | Investment expenses (2) | (17,166) | | | (14,262) | | | (50,600) | | | (48,506) | | Investment expenses (2) | (18,608) | | | (17,166) | | | (59,308) | | | (50,600) | |
| Net investment income | Net investment income | $ | 99,857 | | | $ | 126,874 | | | $ | 313,916 | | | 371,161 | | Net investment income | $ | 88,195 | | | $ | 99,857 | | | $ | 256,354 | | | 313,916 | |
(1) Amounts include dividends and other distributions on investment funds, term loan investments, funds held balances, cash balances and other items.
(2) Investment expenses were approximately 0.32% of average invested assets for the 2021 third quarter, compared to 0.32% for the 2020 third quarter, consistent with 0.31% for the 2019 third quarter, and 0.31%0.32% for the nine months ended September 30, 2020,2021, compared to 0.33%0.31% for the 20192020 period.
The lower level of net investment income for the 2020 periods2021 third quarter primarily related to lower yields available in the financial market. The pre-tax investment income yield, calculated based on amortized cost and on an annualized basis, was 1.41% for the 2021 third quarter, compared to 1.76% for the 2020 third quarter, compared to 2.58% for the 2019 third quarter, and 1.94%1.40% for the nine months ended September 30, 2020,2021, compared to 2.62%1.94% for the 20192020 period.
Corporate Expenses.
Corporate expenses were $18.6 million for the 2021 third quarter, compared to $16.3 million for the 2020 third quarter, compared to $15.1 million for the 2019 third quarter, and $51.4$59.3 million for the nine months ended September 30, 2020,2021, compared to $47.9$51.4 million for the 20192020 period. The increase in corporate expenses was primarily reflecteddue to higher professional fees and otherincentive compensation costs.
Transaction Costs and Other.
Transaction costs and other were $1.0 million for the 2021 third quarter, compared to $1.7 million for the 2020 third quarter, compared to $2.0 million for the 2019 third quarter, and $5.2$0.8 million for the nine months ended September 30, 2020, consistent with $5.42021, compared to $5.2 million for the 20192020 period. Amounts in the 2021 and 2020 periodperiods are primarily related to recent acquisition activity.acquisitions activity for the respective period.
Amortization of Intangible Assets.
Amortization of intangible assets for the 2021 third quarter was $20.1 million, compared to $16.7 million for the 2020 third quarter, was $16.7 million, compared to $20.0 million for the 2019 third quarter, and $49.8$48.9 million for the nine months ended
September 30, 2020,2021, compared to $60.2$49.8 million for the 20192020 period. Such expenses areAmounts in 2021 and 2020 primarily related to amortization of finite-lived intangible assets. The increase in amortization of intangible assets expense was a result of acquisitions closed during the UGC acquisition and other acquisitions in late 2018 to 2019. See the consolidated financial statements contained in our 2019 Form 10-K for disclosures on our amortization pattern.2021 third quarter.
Interest Expense.
Interest expense was $33.2 million for the 2021 third quarter, compared to the $36.2 million for the 2020 third quarter, compared to the $23.2 million for the 2019 third quarter and $86.6$98.8 million for the nine months ended September 30, 2020,2021, compared to $70.1$86.6 million for the 2019 period. The2020 period.The higher level of interest expense in 2021 period mainly resulted from the issuance of $1.0 billion of 3.635% senior notes on June 30, 2020.
Loss on Redemption of Preferred Shares.
In September 2021, we redeemed all 5.25% Series E preferred shares and, in June 2020. The increase in the 2020 period also reflected an increase in interest expenseaccordance with GAAP, we recorded a loss of $15.1 million to remove original issuance costs related to funds held liabilities.the redeemed shares from additional paid-in capital. Such adjustment had no impact on total shareholders’ equity or cash flows.
Net Realized Gains or Losses.
We recorded net realized losses of $25.0 million for the 2021 third quarter, compared to net realized gains of $211.0 million for the 2020 third quarter, compared toand net realized gains of $80.0$239.7 million for the 2019 third quarter, andnine months ended September 30, 2021, compared to net realized gains of $524.0 million for the nine months ended September 30, 2020 compared to net realized gainsperiod. In addition, 2021 third quarter included $33.1 million loss as a result of $316.2 million fordeconsolidation of Watford in our financial statements following the 2019 period.close of the transaction. Currently, our portfolio is actively managed to maximize total return within certain guidelines. The effect of financial market movements on the investment portfolio will directly impact net realized gains and losses as the portfolio is adjusted and rebalanced. Net realized gains or losses from the sale of fixed maturities primarily results from our decisions to reduce credit exposure, to change duration targets, to rebalance our portfolios or due to relative value determinations.
Net realized gains or losses also include realized and unrealized contract gains and losses on our derivative instruments, changes in the fair value of assets accounted for using the fair value option and in the fair value of equities, along with changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings. See note 7,8, “Investment Information—Net Realized Gains (Losses),” to our consolidated financial statements for additional information. See note 7,8, “Investment Information—Allowance for Credit Losses,” to our consolidated financial statements for additional information. | | | | | | | | |
| ARCH CAPITAL | 55 | 2021 THIRD QUARTER FORM 10-Q |
Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method.
We recorded $126.7$105.4 million of equity in net income related to investment funds accounted for using the equity method in the 20202021 third quarter, compared to $17.1income of $126.7 million of income for the 20192020 third quarter, and $57.4$299.3 million of income for the nine months ended September 30, 2020,2021, compared to $96.5income of $57.4 million for the 20192020 period. Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds. Investment
| | | | | | | | |
ARCH CAPITAL | 57 | 2020 THIRD QUARTER FORM 10-Q |
Net Foreign Exchange Gains or Losses.
Net foreign exchange gains for the 2021 third quarter were $36.1 million, compared to net foreign exchange losses for the 2020 third quarter wereof $38.7 million, compared to net foreign exchange gains for the 2019 third quarter of $29.8 million. Net foreign exchange lossesgains for the nine months ended September 30, 20202021 were $17.8$39.7 million, compared to net foreign exchange gainslosses for the 20192020 period of $28.8$17.8 million. Amounts in both periods were primarily unrealized and resulted from the effects of revaluing our net insurance liabilities required to be settled in foreign currencies at each balance sheet date.
Income Tax Expense.
Our income tax provision on income (loss) before income taxes, including income (loss) from operating affiliates, resulted in an expense of 1.0% for the 2021 third quarter, compared to 5.4% for the 2020 third quarter, compared to 8.9% for the 2019 third quarter and 8.3%5.8% for the nine months ended September 30, 2020,2021, compared to 9.0%8.3% for the 20192020 period. Such amounts excludeThe effective tax rates for the results2021 third quarter and nine months ended September 30, 2021 included discrete income tax benefits of $25.3 million and $28.7 million, respectively. The discrete tax items primarily related to the ‘other’ segment.partial release of a valuation allowance on certain U.K. deferred tax assets in the third quarter. Our effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction.
Income (loss) from operating affiliates.
We recorded $124.1 million of net income from our operating affiliates in the 2021 third quarter, compared to income of $0.9 million for the 2020 third quarter, and $224.1 million of income for the nine months ended September 30, 2021, compared to $6.3 million for the 2020 period. Results for the 2021 third quarter reflected a one-time gain of $95.7 million recognized from the Company’s previously disclosed
acquisition of a 40% share of Greysbridge. Results for 2021 period, primarily include income from our investment in Coface, Greysbridge and Premia.
Other Segment
TheThrough June 30, 2021, the ‘other’ segment includesincluded the results of Watford. Pursuant to generally accepted accounting principles,GAAP, Watford iswas considered a variable interest entity and we concluded that we arewere the primary beneficiary of Watford. As such, we consolidateconsolidated the results of Watford in our consolidated financial statements althoughthrough June 30, 2021. In July 2021, we only own approximately 13%announced the completion of Watford’s common equity.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. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Watford in its consolidated financial statements. See note 11,12, “Variable Interest Entities and Noncontrolling Interests,”Interests” and note 4,5, “Segment Information,”Information” to our consolidated financial statements for additional information on Watford.CRITICAL ACCOUNTING POLICIES,
ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS
Critical accounting policies, estimates and recent accounting pronouncements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 20192020 Form 10-K, updated where applicable in the notes accompanying our consolidated financial statements, including note 1, “Basis of Presentation and Recent Accounting Pronouncements.” | | | | | | | | |
| ARCH CAPITAL | 56 | 2021 THIRD QUARTER FORM 10-Q |
FINANCIAL CONDITION
Investable Assets
At September 30, 2020, total investable assets held by Arch were $25.7 billion, excluding the $2.7 billion included in the ‘other’ segment (i.e., attributable to Watford).
Investable Assets Held by Arch
The following table summarizes the fair value of the investable assets held by Arch:
| | Investable assets (1): | Investable assets (1): | Estimated
Fair Value | | % of
Total | | Investable assets (1): | Estimated
Fair Value | | % of
Total | |
| September 30, 2020 | | | | | |
| September 30, 2021 | | September 30, 2021 | | | | |
| Fixed maturities (2) | Fixed maturities (2) | $ | 18,294,480 | | | 71.1 | | | Fixed maturities (2) | $ | 17,182,370 | | | 63.0 | | |
| Short-term investments (2) | Short-term investments (2) | 2,157,410 | | | 8.4 | | | Short-term investments (2) | 3,185,646 | | | 11.7 | | |
| Cash | Cash | 781,065 | | | 3.0 | | | Cash | 1,137,721 | | | 4.2 | | |
| Equity securities (2) | Equity securities (2) | 1,479,702 | | | 5.8 | | | Equity securities (2) | 1,815,163 | | | 6.7 | | |
| Other investments (2) | Other investments (2) | 1,276,867 | | | 5.0 | | | Other investments (2) | 1,489,759 | | | 5.5 | | |
| Other investable assets (3) | | Other investable assets (3) | — | | | — | | |
| Investments accounted for using the equity method | Investments accounted for using the equity method | 1,883,702 | | | 7.3 | | | Investments accounted for using the equity method | 2,741,293 | | | 10.0 | | |
| | Securities transactions entered into but not settled at the balance sheet date | Securities transactions entered into but not settled at the balance sheet date | (148,725) | | | (0.6) | | | Securities transactions entered into but not settled at the balance sheet date | (273,512) | | | (1.0) | | |
| Total investable assets held by Arch | Total investable assets held by Arch | $ | 25,724,501 | | | 100.0 | | | Total investable assets held by Arch | $ | 27,278,440 | | | 100.0 | | |
| | Average effective duration (in years) | Average effective duration (in years) | 3.21 | | | | Average effective duration (in years) | 2.68 | | | |
| Average S&P/Moody’s credit ratings (3) | AA/Aa2 | | | |
| Embedded book yield (4) | 1.71 | % | | | |
| Average S&P/Moody’s credit ratings (4) | | Average S&P/Moody’s credit ratings (4) | AA-/Aa3 | | |
| Embedded book yield (5) | | Embedded book yield (5) | 1.54 | % | | |
| | December 31, 2019 | | | |
| December 31, 2020 | | December 31, 2020 | | |
| Fixed maturities (2) | Fixed maturities (2) | $ | 16,894,021 | | | 75.8 | | | Fixed maturities (2) | $ | 18,771,296 | | | 69.9 | | |
| Short-term investments (2) | Short-term investments (2) | 1,004,257 | | | 4.5 | | | Short-term investments (2) | 2,063,240 | | | 7.7 | | |
| Cash | Cash | 623,793 | | | 2.8 | | | Cash | 694,997 | | | 2.6 | | |
| Equity securities (2) | Equity securities (2) | 827,842 | | | 3.7 | | | Equity securities (2) | 1,436,104 | | | 5.3 | | |
| Other investments (2) | Other investments (2) | 1,336,920 | | | 6.0 | | | Other investments (2) | 1,480,347 | | | 5.5 | | |
| Other investable assets (3) | | Other investable assets (3) | 500,000 | | | 1.9 | | |
| Investments accounted for using the equity method | Investments accounted for using the equity method | 1,660,396 | | | 7.5 | | | Investments accounted for using the equity method | 2,047,889 | | | 7.6 | | |
| | Securities transactions entered into but not settled at the balance sheet date | Securities transactions entered into but not settled at the balance sheet date | (61,553) | | | (0.3) | | | Securities transactions entered into but not settled at the balance sheet date | (137,578) | | | (0.5) | | |
| Total investable assets held by Arch | Total investable assets held by Arch | $ | 22,285,676 | | | 100.0 | | | Total investable assets held by Arch | $ | 26,856,295 | | | 100.0 | | |
| | Average effective duration (in years) | Average effective duration (in years) | 3.40 | | | | Average effective duration (in years) | 3.01 | | | |
| Average S&P/Moody’s credit ratings (3) | AA/Aa2 | | | |
| Embedded book yield (4) | 2.55 | % | | | |
| Average S&P/Moody’s credit ratings (4) | | Average S&P/Moody’s credit ratings (4) | AA/Aa2 | | |
| Embedded book yield (5) | | Embedded book yield (5) | 1.56 | % | | |
(1)In securities lending transactions, we receive collateral in excess of the fair value of the securities pledged. For purposes of this table, we have excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. In September 2021, the Company terminated its securities lending program.
(2)Includes investments carried as available for sale, at fair value and at fair value under the fair value option.
(3)Represents participation interests in a receivable of a reverse repurchase agreement.
(4)Average credit ratings on our investment portfolio on securities with ratings by Standard & Poor’s Rating Services (“S&P”) and Moody’s Investors Service (“Moody’s”).
(4)(5)Before investment expenses.
At September 30, 2020,2021, approximately $18.7$18.4 billion, or 72.8%67.3%, of total investable assets held by Arch were internally managed, compared to $15.8$19.2 billion, or 70.9%71.4%, at December 31, 2019.
2020. | | | | | | | | |
ARCH CAPITAL | 58 | 2020 THIRD QUARTER FORM 10-Q |
The following table summarizes our fixed maturities and fixed maturities pledged under securities lending agreements (“Fixed Maturities”) by type:
| | | Estimated
Fair Value | | % of
Total | | Estimated
Fair Value | | % of
Total |
| September 30, 2020 | | | | |
| September 30, 2021 | | September 30, 2021 | | | |
| Corporate bonds | Corporate bonds | $ | 8,137,582 | | | 44.5 | | Corporate bonds | $ | 6,777,943 | | | 39.4 | |
| Residential mortgage backed securities | Residential mortgage backed securities | 703,393 | | | 3.8 | | Residential mortgage backed securities | 405,797 | | | 2.4 | |
| Municipal bonds | Municipal bonds | 525,617 | | | 2.9 | | Municipal bonds | 382,722 | | | 2.2 | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | 375,510 | | | 2.1 | | Commercial mortgage backed securities | 579,424 | | | 3.4 | |
| U.S. government and government agencies | U.S. government and government agencies | 4,662,260 | | | 25.5 | | U.S. government and government agencies | 4,460,515 | | | 26.0 | |
| Non-U.S. government securities | Non-U.S. government securities | 2,196,827 | | | 12.0 | | Non-U.S. government securities | 1,883,563 | | | 11.0 | |
| Asset backed securities | Asset backed securities | 1,693,291 | | | 9.3 | | Asset backed securities | 2,692,406 | | | 15.7 | |
| Total | Total | $ | 18,294,480 | | | 100.0 | | Total | $ | 17,182,370 | | | 100.0 | |
| | December 31, 2019 | | | |
| December 31, 2020 | | December 31, 2020 | | |
| Corporate bonds | Corporate bonds | $ | 6,561,354 | | | 38.8 | | Corporate bonds | $ | 8,039,745 | | | 42.8 | |
| Residential mortgage backed securities | Residential mortgage backed securities | 541,800 | | | 3.2 | | Residential mortgage backed securities | 616,619 | | | 3.3 | |
| Municipal bonds | Municipal bonds | 880,119 | | | 5.2 | | Municipal bonds | 492,734 | | | 2.6 | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | 734,244 | | | 4.3 | | Commercial mortgage backed securities | 390,990 | | | 2.1 | |
| U.S. government and government agencies | U.S. government and government agencies | 4,632,947 | | | 27.4 | | U.S. government and government agencies | 5,354,863 | | | 28.5 | |
| Non-U.S. government securities | Non-U.S. government securities | 1,995,813 | | | 11.8 | | Non-U.S. government securities | 2,310,157 | | | 12.3 | |
| Asset backed securities | Asset backed securities | 1,547,744 | | | 9.2 | | Asset backed securities | 1,566,188 | | | 8.3 | |
| Total | Total | $ | 16,894,021 | | | 100.0 | | Total | $ | 18,771,296 | | | 100.0 | |
The following table provides the credit quality distribution of our Fixed Maturities. For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings.
| | | Estimated Fair Value | | % of
Total | | Estimated Fair Value | | % of
Total |
| September 30, 2020 | | | | |
| September 30, 2021 | | September 30, 2021 | | | |
| U.S. government and gov’t agencies (1) | U.S. government and gov’t agencies (1) | $ | 5,360,798 | | | 29.3 | | U.S. government and gov’t agencies (1) | $ | 4,830,467 | | | 28.1 | |
| AAA | AAA | 3,352,902 | | | 18.3 | | AAA | 3,257,679 | | | 19.0 | |
| AA | AA | 2,087,245 | | | 11.4 | | AA | 2,217,452 | | | 12.9 | |
| A | A | 3,895,053 | | | 21.3 | | A | 2,773,104 | | | 16.1 | |
| BBB | BBB | 2,542,233 | | | 13.9 | | BBB | 2,807,788 | | | 16.3 | |
| BB | BB | 504,570 | | | 2.8 | | BB | 522,357 | | | 3.0 | |
| B | B | 231,774 | | | 1.3 | | B | 348,036 | | | 2.0 | |
| Lower than B | Lower than B | 54,118 | | | 0.3 | | Lower than B | 43,751 | | | 0.3 | |
| Not rated | Not rated | 265,787 | | | 1.5 | | Not rated | 381,736 | | | 2.2 | |
| Total | Total | $ | 18,294,480 | | | 100.0 | | Total | $ | 17,182,370 | | | 100.0 | |
| | December 31, 2019 | | |
| December 31, 2020 | | December 31, 2020 | |
| U.S. government and gov’t agencies (1) | U.S. government and gov’t agencies (1) | $ | 5,215,489 | | | 30.9 | | U.S. government and gov’t agencies (1) | $ | 5,963,758 | | | 31.8 | |
| AAA | AAA | 3,392,341 | | | 20.1 | | AAA | 3,117,046 | | | 16.6 | |
| AA | AA | 2,115,828 | | | 12.5 | | AA | 2,063,738 | | | 11.0 | |
| A | A | 3,849,458 | | | 22.8 | | A | 3,760,280 | | | 20.0 | |
| BBB | BBB | 1,495,467 | | | 8.9 | | BBB | 2,699,201 | | | 14.4 | |
| BB | BB | 355,803 | | | 2.1 | | BB | 574,189 | | | 3.1 | |
| B | B | 216,663 | | | 1.3 | | B | 268,095 | | | 1.4 | |
| Lower than B | Lower than B | 56,865 | | | 0.3 | | Lower than B | 54,795 | | | 0.3 | |
| Not rated | Not rated | 196,107 | | | 1.2 | | Not rated | 270,194 | | | 1.4 | |
| Total | Total | $ | 16,894,021 | | | 100.0 | | Total | $ | 18,771,296 | | | 100.0 | |
(1)Includes U.S. government-sponsored agency residential mortgage-backed securities and agency commercial mortgage-backed securities.
| | | | | | | | |
| ARCH CAPITAL | 57 | 2021 THIRD QUARTER FORM 10-Q |
The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for all Fixed Maturities which were in an unrealized loss position:
| | Severity of gross unrealized losses: | Severity of gross unrealized losses: | Estimated Fair Value | | Gross
Unrealized
Losses | | % of
Total Gross
Unrealized
Losses | Severity of gross unrealized losses: | Estimated Fair Value | | Gross
Unrealized
Losses | | % of
Total Gross
Unrealized
Losses |
| September 30, 2020 | | | | | | |
| September 30, 2021 | | September 30, 2021 | | | | | |
| 0-10% | 0-10% | $ | 4,535,833 | | | $ | (62,221) | | | 78.3 | | 0-10% | $ | 9,287,536 | | | $ | (106,042) | | | 93.6 | |
| 10-20% | 10-20% | 58,233 | | | (10,279) | | | 12.9 | | 10-20% | 27,315 | | | (4,173) | | | 3.7 | |
| 20-30% | 20-30% | 9,417 | | | (2,839) | | | 3.6 | | 20-30% | 8,233 | | | (2,034) | | | 1.8 | |
| Greater than 30% | Greater than 30% | 3,132 | | | (4,079) | | | 5.1 | | Greater than 30% | 993 | | | (1,088) | | | 1.0 | |
| Total | Total | $ | 4,606,615 | | | $ | (79,418) | | | 100.0 | | Total | $ | 9,324,077 | | | $ | (113,337) | | | 100.0 | |
| | December 31, 2019 | | |
| December 31, 2020 | | December 31, 2020 | |
| 0-10% | 0-10% | $ | 4,136,798 | | | $ | (49,072) | | | 95.3 | | 0-10% | $ | 3,583,981 | | | $ | (55,542) | | | 79.4 | |
| 10-20% | 10-20% | 12,405 | | | (1,796) | | | 3.5 | | 10-20% | 95,495 | | | (12,183) | | | 17.4 | |
| 20-30% | 20-30% | 830 | | | (273) | | | 0.5 | | 20-30% | 1,061 | | | (406) | | | 0.6 | |
| Greater than 30% | Greater than 30% | 315 | | | (363) | | | 0.7 | | Greater than 30% | 1,249 | | | (1,785) | | | 2.6 | |
| Total | Total | $ | 4,150,348 | | | $ | (51,504) | | | 100.0 | | Total | $ | 3,681,786 | | | $ | (69,916) | | | 100.0 | |
The following table summarizes our top ten exposures to fixed income corporate issuers by fair value at September 30, 2020,2021, excluding guaranteed amounts and covered bonds:
| | | | | | | | | | | |
| | Estimated Fair Value | | Credit
Rating (1) |
| Bank of America Corporation | $ | 320,603359,893 | | | A-/A2 |
| JPMorgan Chase & Co. | 294,411 | | | A-/A2 |
| Citigroup Inc. | 247,892 | | | BBB+/A3 |
| Wells Fargo & Company | 259,752231,542 | | | BBB+/A1 |
| Morgan Stanley | 215,424 | | | BBB+/A1 |
| The Goldman Sachs Group, Inc. | 180,324 | | | BBB+/A2 |
Nestlé S.A.Dai-ichi Life Holdings, Inc. | 228,219111,418 | | | AA-/A1 |
| Apple Inc. | 111,280 | | | AA+/Aa1 |
| Westpac Banking Corporation | 107,389 | | | AA-/Aa3 |
JPMorgan Chase & Co.Nestlé S.A. | 227,54383,838 | | | A-AA-/A2 |
Johnson & Johnson | 220,521 | | | AAA/Aaa |
Apple Inc. | 169,793 | | | AA+/Aa1 |
Citigroup Inc. | 145,195 | | | BBB+/A3 |
Morgan Stanley | 134,680 | | | BBB+/A3 |
Comcast Corporation | 120,210 | | | A-/A3 |
BP p.l.c. | 120,177 | | | A-/A1Aa3 |
| Total | $ | 1,946,6931,943,411 | | | |
(1)Average credit ratings as assigned by S&P and Moody’s, respectively.
| | | | | | | | |
ARCH CAPITAL | 59 | 2020 THIRD QUARTER FORM 10-Q |
The following table provides information on our structured securities, which includes residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”):
| | | Agencies | | Investment Grade | | Below Investment Grade | | Total | | Agencies | | Investment Grade | | Below Investment Grade | | Total |
| Sep 30, 2020 | | | | | | | | |
| Sep 30, 2021 | | Sep 30, 2021 | | | | | | | |
| RMBS | RMBS | $ | 669,672 | | | $ | 4,371 | | | $ | 29,350 | | | $ | 703,393 | | RMBS | $ | 345,175 | | | $ | 48,301 | | | $ | 12,321 | | | $ | 405,797 | |
| CMBS | CMBS | 28,865 | | | 326,774 | | | 19,871 | | | 375,510 | | CMBS | 24,779 | | | 502,218 | | | 52,427 | | | 579,424 | |
| ABS | ABS | — | | | 1,579,166 | | | 114,125 | | | 1,693,291 | | ABS | — | | | 2,374,981 | | | 317,425 | | | 2,692,406 | |
| Total | Total | $ | 698,537 | | | $ | 1,910,311 | | | $ | 163,346 | | | $ | 2,772,194 | | Total | $ | 369,954 | | | $ | 2,925,500 | | | $ | 382,173 | | | $ | 3,677,627 | |
| | Dec 31, 2019 | | |
| Dec 31, 2020 | | Dec 31, 2020 | |
| RMBS | RMBS | $ | 503,929 | | | $ | 7,770 | | | $ | 30,101 | | | $ | 541,800 | | RMBS | $ | 584,499 | | | $ | 4,102 | | | $ | 28,018 | | | $ | 616,619 | |
| CMBS | CMBS | 78,612 | | | 629,424 | | | 26,208 | | | 734,244 | | CMBS | 24,396 | | | 342,491 | | | 24,103 | | | 390,990 | |
| ABS | ABS | — | | | 1,483,449 | | | 64,295 | | | 1,547,744 | | ABS | — | | | 1,403,137 | | | 163,051 | | | 1,566,188 | |
| Total | Total | $ | 582,541 | | | $ | 2,120,643 | | | $ | 120,604 | | | $ | 2,823,788 | | Total | $ | 608,895 | | | $ | 1,749,730 | | | $ | 215,172 | | | $ | 2,573,797 | |
The following table summarizes our equity securities, which include investments in exchange traded funds:
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Equities (1) | Equities (1) | $ | 494,159 | | | $ | 375,067 | | Equities (1) | $ | 856,837 | | | $ | 676,437 | |
| Exchange traded funds | Exchange traded funds | | Exchange traded funds | |
| Fixed income (2) | Fixed income (2) | 602,133 | | | 7,237 | | Fixed income (2) | 348,613 | | | 341,139 | |
| Equity and other (3) | Equity and other (3) | 383,410 | | | 445,538 | | Equity and other (3) | 609,713 | | | 418,528 | |
| Total | Total | $ | 1,479,702 | | | $ | 827,842 | | Total | $ | 1,815,163 | | | $ | 1,436,104 | |
(1)Primarily in consumer non-cyclical, consumer cyclical, technology, communications financial and financial stocksconsumer cyclical at September 30, 2020.2021.
(2)Primarily in corporate MBS and municipal strategies at September 30, 2020.2021.
(3)Primarily in utilities, large cap stocks, and foreign equities, technology, financial and utilities at September 30, 2020.2021.
The following table summarizes our other investments which are included in investments accounted for using the fair value option, by strategy:and other investable assets:
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Lending | Lending | $ | 575,623 | | | $ | 602,841 | | Lending | $ | 579,563 | | | $ | 572,636 | |
| Term loan investments | Term loan investments | 309,496 | | | 264,083 | | Term loan investments | 528,585 | | | 380,193 | |
| Energy | Energy | 65,330 | | | 97,402 | | Energy | 84,880 | | | 65,813 | |
| Credit related funds | Credit related funds | 98,121 | | | 123,020 | | Credit related funds | 56,997 | | | 90,780 | |
| Investment grade fixed income | Investment grade fixed income | 114,784 | | | 151,594 | | Investment grade fixed income | 131,910 | | | 138,646 | |
| Infrastructure | Infrastructure | 60,579 | | | 61,786 | | Infrastructure | 26,359 | | | 165,516 | |
| Private equity | Private equity | 34,983 | | | 18,915 | | Private equity | 81,465 | | | 48,750 | |
| Real estate | Real estate | 17,951 | | | 17,279 | | Real estate | — | | | 18,013 | |
| Total | $ | 1,276,867 | | | $ | 1,336,920 | | |
| Total fair value option | | Total fair value option | $ | 1,489,759 | | | $ | 1,480,347 | |
| | Other investable assets | | Other investable assets | — | | | 500,000 | |
| | Total other investments | | Total other investments | $ | 1,489,759 | | | $ | 1,980,347 | |
| | | | | | | | |
| ARCH CAPITAL | 58 | 2021 THIRD QUARTER FORM 10-Q |
Our investment strategy allows for the use of derivative instruments. We utilize various derivative instruments such as futures contracts to enhance investment performance, replicate investment positions or manage market exposures and duration risk that would be allowed under our investment guidelines if implemented in other ways. See note 9,10, “Derivative Instruments,” to our consolidated financial statements for additional disclosures related to derivatives. Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. See note 8,9, “Fair Value,” to our consolidated financial statements for a summary of our financial assets and liabilities measured at fair value, segregated by level in the fair value hierarchy. Investable Assets in the ‘Other’ Segment
Investable assets in the ‘other’ segment are managed by Watford. The board of directors of Watford establishes its investment policies and guidelines. A significant amount of Watford’s investments are accounted for using the fair value option with changes in the carrying value of such investments recorded in net realized gains or losses.
The following table summarizes investable assets in the ‘other’ segment:
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Investments accounted for using the fair value option: | | | |
| Other investments | $ | 893,030 | | | $ | 1,092,396 | |
| Fixed maturities | 632,664 | | | 416,592 | |
| Short-term investments | 350,391 | | | 329,303 | |
| Equity securities | 60,951 | | | 59,799 | |
| Total | 1,937,036 | | | 1,898,090 | |
| Fixed maturities available for sale, at fair value | 608,022 | | | 706,875 | |
| Equity securities, at fair value | 52,807 | | | 65,337 | |
| Cash | 195,333 | | | 102,437 | |
| Securities sold but not yet purchased | (24,909) | | | (66,257) | |
| Securities transactions entered into but not settled at the balance sheet date | (74,837) | | | (1,893) | |
| Total investable assets included in ‘other’ segment | $ | 2,693,452 | | | $ | 2,704,589 | |
| | | | | | | | |
ARCH CAPITAL | 60 | 2020 THIRD QUARTER FORM 10-Q |
Reinsurance
The effects of reinsurance on written and earned premiums and losses and loss adjustment expenses (“LAE”) with unaffiliated reinsurers were as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| Premiums written: | Premiums written: | | | | | | | | Premiums written: | | | | | | | |
| Direct | Direct | $ | 1,667,449 | | | $ | 1,438,943 | | | $ | 4,841,874 | | | $ | 4,176,274 | | Direct | $ | 1,993,098 | | | $ | 1,667,449 | | | $ | 5,795,236 | | | $ | 4,841,874 | |
| Assumed | Assumed | 1,013,583 | | | 742,178 | | | 2,989,680 | | | 2,020,535 | | Assumed | 1,214,317 | | | 1,013,583 | | | 4,095,676 | | | 2,989,680 | |
| Ceded | Ceded | (806,888) | | | (567,664) | | | (2,151,853) | | | (1,613,195) | | Ceded | (1,131,486) | | | (806,888) | | | (2,907,002) | | | (2,151,853) | |
| Net | Net | $ | 1,874,144 | | | $ | 1,613,457 | | | $ | 5,679,701 | | | $ | 4,583,614 | | Net | $ | 2,075,929 | | | $ | 1,874,144 | | | $ | 6,983,910 | | | $ | 5,679,701 | |
| | Premiums earned: | Premiums earned: | | Premiums earned: | |
| Direct | Direct | $ | 1,618,583 | | | $ | 1,375,384 | | | $ | 4,723,630 | | | $ | 3,977,005 | | Direct | $ | 1,754,462 | | | $ | 1,618,583 | | | $ | 5,263,286 | | | $ | 4,723,630 | |
| Assumed | Assumed | 880,024 | | | 593,129 | | | 2,387,286 | | | 1,701,307 | | Assumed | 1,129,434 | | | 880,024 | | | 3,169,016 | | | 2,387,286 | |
| Ceded | Ceded | (727,515) | | | (530,490) | | | (1,930,026) | | | (1,407,696) | | Ceded | (954,559) | | | (727,515) | | | (2,433,634) | | | (1,930,026) | |
| Net | Net | $ | 1,771,092 | | | $ | 1,438,023 | | | $ | 5,180,890 | | | $ | 4,270,616 | | Net | $ | 1,929,337 | | | $ | 1,771,092 | | | $ | 5,998,668 | | | $ | 5,180,890 | |
| | Losses and LAE: | Losses and LAE: | | Losses and LAE: | |
| Direct | Direct | $ | 1,131,696 | | | $ | 741,871 | | | $ | 3,279,737 | | | $ | 2,063,168 | | Direct | $ | 1,101,793 | | | $ | 1,131,696 | | | $ | 3,134,305 | | | $ | 3,279,737 | |
| Assumed | Assumed | 635,199 | | | 366,904 | | | 1,689,176 | | | 1,093,541 | | Assumed | 961,285 | | | 635,199 | | | 2,182,852 | | | 1,689,176 | |
| Ceded | Ceded | (550,622) | | | (306,320) | | | (1,406,699) | | | (868,179) | | Ceded | (837,059) | | | (550,622) | | | (1,728,207) | | | (1,406,699) | |
| Net | Net | $ | 1,216,273 | | | $ | 802,455 | | | $ | 3,562,214 | | | $ | 2,288,530 | | Net | $ | 1,226,019 | | | $ | 1,216,273 | | | $ | 3,588,950 | | | $ | 3,562,214 | |
Bellemeade Re
We have entered into various aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). For the respective coverage periods, we will retain the first layer of the respective aggregate losses and the special purpose reinsurance companies will provide second layer coverage up to the outstanding coverage amount. We will then retain losses in excess of the outstanding coverage limit. The aggregate excess of loss reinsurance coverage generally decreases over a ten-year period as the underlying covered mortgages amortize, unless provisional call options embedded within certain of the Bellemeade Agreements are executed or if pre-defined delinquency triggering events occur.
The following table summarizes the respective coverages and retentions at September 30, 2020:2021:
| | | | | | | | | | | | | | | | | |
| | | September 30, 2020 |
| Initial Coverage at Issuance | | Current Coverage | | Remaining Retention, Net |
| Bellemeade 2017-1 Ltd. (1) | $ | 368,114 | | | $ | 145,573 | | | $ | 130,138 | |
| Bellemeade 2018-1 Ltd. (2) | 374,460 | | | 250,095 | | | 129,515 | |
| Bellemeade 2018-2 Ltd. (3) | 653,278 | | | 187,362 | | | 308,439 | |
| Bellemeade 2018-3 Ltd. (4) | 506,110 | | | 302,563 | | | 137,695 | |
| Bellemeade 2019-1 Ltd. (5) | 341,790 | | | 219,256 | | | 133,014 | |
| Bellemeade 2019-2 Ltd. (6) | 621,022 | | | 398,316 | | | 173,083 | |
| Bellemeade 2019-3 Ltd. (7) | 700,920 | | | 528,084 | | | 185,645 | |
| Bellemeade 2019-4 Ltd. (8) | 577,267 | | | 468,737 | | | 124,732 | |
| Bellemeade 2020-1 Ltd. (9) | 528,540 | | | 473,817 | | | 763,650 | |
| Bellemeade 2020-2 Ltd. (10) | 449,167 | | | 449,167 | | | 246,055 | |
| Total | $ | 5,120,668 | | | $ | 3,422,970 | | | $ | 2,331,966 | |
| | | | | | | | | | | | | | | | | |
| | | September 30, 2021 |
| Initial Coverage at Issuance | | Current Coverage | | Remaining Retention, Net |
| Bellemeade 2017-1 Ltd. (1) | $ | 368,114 | | | $ | 145,573 | | | $ | 124,777 | |
| Bellemeade 2018-1 Ltd. (2) | 374,460 | | | 228,938 | | | 121,411 | |
| Bellemeade 2018-3 Ltd. (3) | 506,110 | | | 302,563 | | | 126,578 | |
| Bellemeade 2019-1 Ltd. (4) | 341,790 | | | 210,529 | | | 98,340 | |
| Bellemeade 2019-2 Ltd. (5) | 621,022 | | | 398,316 | | | 156,085 | |
| Bellemeade 2019-3 Ltd. (6) | 700,920 | | | 491,634 | | | 178,759 | |
| Bellemeade 2019-4 Ltd. (7) | 577,267 | | | 468,737 | | | 113,674 | |
| Bellemeade 2020-2 Ltd. (8) | 449,167 | | | 268,468 | | | 227,140 | |
| Bellemeade 2020-3 Ltd. (9) | 451,816 | | | 405,881 | | | 159,615 | |
| Bellemeade 2020-4 Ltd. (10) | 337,013 | | | 238,480 | | | 133,872 | |
| Bellemeade 2021-1 Ltd. (11) | 643,577 | | | 643,577 | | | 157,685 | |
| Bellemeade 2021-2 Ltd. (12) | 616,017 | | | 616,017 | | | 146,956 | |
| Bellemeade 2021-3 Ltd. (13) | 639,391 | | | 639,391 | | | 145,790 | |
| Total | $ | 6,626,664 | | | $ | 5,058,104 | | | $ | 1,890,682 | |
(1) Issued in October 2017, covering in-force policies issued between January 1, 2017 and June 30, 2017.
(2) Issued in April 2018, covering in-force policies issued between July 1, 2017 and December 31, 2017.
(3) Issued in August 2018, covering in-force policies issued between April 1, 2013 and December 31, 2015.
(4) Issued in October 2018, covering in-force policies issued between January 1, 2018 and June 30, 2018.
(5)(4) Issued in March 2019, covering in-force policies primarily issued between 2005-2008 under United Guaranty Residential Insurance Company (“UGRIC”); as well as policies issued through 2015 under both UGRIC and Arch Mortgage Insurance Company.
(6)(5) Issued in April 2019, covering in-force policies issued between July 1, 2018 and December 31, 2018.
(7)(6) Issued in July 2019, covering in-force policies issued in 2016.
(8)(7) Issued in October 2019, covering in-force policies issued between January 1, 2019 and June 30, 2019.
(9) Issued in June 2020, covering in-force policies issued between July 1, 2019 and December 31, 2019. $450 million was directly funded by Bellemeade 2020-1 Ltd. with an additional $79 million of capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
(10)(8) Issued in September 2020, covering in-force policies issued between January 1, 2020 and May 31, 2020. $423 million was directly funded by Bellemeade 2020-2 Ltd. with an additional $26 million of capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
| | | | | | | | |
| ARCH CAPITAL | 59 | 2021 THIRD QUARTER FORM 10-Q |
(9) Issued in November 2020, covering in-force policies issued between June 1, 2020 and August 31, 2020. $418 million was directly funded by Bellemeade 2020-3 Ltd. with an additional $34 million of capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
(10) Issued in December 2020, covering in-force policies issued between July 1, 2019 and December 31, 2019. $321 million was directly funded by Bellemeade 2020-4 Ltd. with an additional $16 million of capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
(11) Issued in March 2021, covering in-force policies issued between September 1, 2020 and November 30, 2020. $580 million was directly funded by Bellemeade Re 2021-1 Ltd. with an additional $64 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
(12) Issued in June 2021, covering in-force policies issued between December 1, 2020 and March 31, 2021. $523 million was directly funded by Bellemeade Re 2021-2 Ltd. via insurance-linked notes, with an additional $93 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
(13) Issued in September 2021, covering in-force policies issued between April 1, 2021 and June 30, 2021. $508 million was directly funded by Bellemeade Re 2021-3 Ltd. via insurance-linked notes, with an additional $131 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
Reserve for Losses and Loss Adjustment Expenses
We establish reserve for losses and loss adjustment expenses (“Loss Reserves”) which represent estimates involving actuarial and statistical projections, at a given point in time, of our expectations of the ultimate settlement and administration costs of losses incurred. Estimating Loss Reserves is inherently difficult. We utilize actuarial models as well as available historical insurance industry loss ratio experience and loss development patterns to assist in the establishment of Loss Reserves. Actual losses and loss adjustment expenses paid will deviate, perhaps substantially, from the reserve estimates reflected in our financial statements.
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ARCH CAPITAL | 61 | 2020 THIRD QUARTER FORM 10-Q |
At September 30, 20202021 and December 31, 2019,2020, our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, by type and by operating segment were as follows:
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Insurance segment: | | | |
| Case reserves | $ | 1,755,511 | | | $ | 1,601,627 | |
| IBNR reserves | 3,840,659 | | | 3,403,051 | |
| Total net reserves | 5,596,170 | | | 5,004,678 | |
| Reinsurance segment: | | | |
| Case reserves | 1,444,823 | | | 1,273,523 | |
| Additional case reserves | 290,983 | | | 166,251 | |
| IBNR reserves | 2,175,367 | | | 1,835,993 | |
| Total net reserves | 3,911,173 | | | 3,275,767 | |
| Mortgage segment: | | | |
| Case reserves | 546,425 | | | 266,030 | |
| IBNR reserves | 272,381 | | | 157,712 | |
| Total net reserves (1) | 818,806 | | | 423,742 | |
| Other segment: | | | |
| Case reserves | 515,358 | | | 478,036 | |
| Additional case reserves | 32,931 | | | 29,059 | |
| IBNR reserves | 642,450 | | | 597,910 | |
| Total net reserves | 1,190,739 | | | 1,105,005 | |
| Total: | | | |
| Case reserves | 4,262,117 | | | 3,619,216 | |
| Additional case reserves | 323,914 | | | 195,310 | |
| IBNR reserves | 6,930,857 | | | 5,994,666 | |
| Total net reserves | $ | 11,516,888 | | | $ | 9,809,192 | |
(1)At September 30, 2020, total net reserves include $593.2 million from U.S. primary mortgage insurance business, of which 27.8% represents policy years 2010 and prior and the remainder from later policy years. At December 31, 2019, total net reserves include $278.7 million from U.S. primary mortgage insurance business, of which 58.2% represents policy years 2010 and prior and the remainder from later policy years. | | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| Insurance segment: | | | |
| Case reserves | $ | 2,147,930 | | | $ | 2,051,640 | |
| IBNR reserves | 4,341,016 | | | 3,889,823 | |
| Total net reserves | 6,488,946 | | | 5,941,463 | |
| Reinsurance segment: | | | |
| Case reserves | 1,562,072 | | | 1,560,523 | |
| Additional case reserves | 549,476 | | | 280,472 | |
| IBNR reserves | 2,617,728 | | | 2,253,953 | |
| Total net reserves | 4,729,276 | | | 4,094,948 | |
| Mortgage segment: | | | |
| Case reserves | 731,671 | | | 631,921 | |
| IBNR reserves | 266,007 | | | 271,702 | |
| Total net reserves | 997,678 | | | 903,623 | |
| Other segment: | | | |
| Case reserves | — | | | 566,587 | |
| Additional case reserves | — | | | 32,321 | |
| IBNR reserves | — | | | 660,132 | |
| Total net reserves | — | | | 1,259,040 | |
| Total: | | | |
| Case reserves | 4,441,673 | | | 4,810,671 | |
| Additional case reserves | 549,476 | | | 312,793 | |
| IBNR reserves | 7,224,751 | | | 7,075,610 | |
| Total net reserves | $ | 12,215,900 | | | $ | 12,199,074 | |
At September 30, 20202021 and December 31, 2019,2020, the insurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Insurance segment: | Insurance segment: | | | | Insurance segment: | | | |
| Professional lines (1) | Professional lines (1) | $ | 1,439,717 | | | $ | 1,322,969 | | Professional lines (1) | $ | 1,587,042 | | | $ | 1,482,820 | |
| Construction and national accounts | Construction and national accounts | 1,352,674 | | | 1,248,750 | | Construction and national accounts | 1,468,668 | | | 1,395,067 | |
| Excess and surplus casualty (2) | Excess and surplus casualty (2) | 665,666 | | | 564,254 | | Excess and surplus casualty (2) | 903,966 | | | 816,495 | |
| Programs | Programs | 663,465 | | | 571,926 | | Programs | 760,273 | | | 699,354 | |
| Property, energy, marine and aviation | Property, energy, marine and aviation | 469,450 | | | 371,822 | | Property, energy, marine and aviation | 599,431 | | | 517,692 | |
| Travel, accident and health | Travel, accident and health | 115,116 | | | 109,613 | | Travel, accident and health | 93,632 | | | 98,910 | |
| Lenders products | Lenders products | 38,190 | | | 28,233 | | Lenders products | 70,520 | | | 48,946 | |
| Other (3) | Other (3) | 851,892 | | | 787,111 | | Other (3) | 1,005,414 | | | 882,179 | |
| Total net reserves | Total net reserves | $ | 5,596,170 | | | $ | 5,004,678 | | Total net reserves | $ | 6,488,946 | | | $ | 5,941,463 | |
(1)Includes professional liability, executive assurance and healthcare business.
(2)Includes casualty and contract binding business.
(3)Includes alternative markets, excess workers’ compensation and surety business.
| | | | | | | | |
| ARCH CAPITAL | 60 | 2021 THIRD QUARTER FORM 10-Q |
At September 30, 20202021 and December 31, 2019,2020, the reinsurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:
| | | September 30,
2020 | | December 31,
2019 | | September 30,
2021 | | December 31,
2020 |
| Reinsurance segment: | Reinsurance segment: | | | | Reinsurance segment: | | | |
| Casualty (1) | Casualty (1) | $ | 1,920,125 | | | $ | 1,796,073 | | Casualty (1) | $ | 2,079,990 | | | $ | 1,995,849 | |
| Other specialty (2) | Other specialty (2) | 860,154 | | | 649,309 | | Other specialty (2) | 1,093,611 | | | 917,178 | |
| Property excluding property catastrophe | Property excluding property catastrophe | 585,110 | | | 471,775 | | Property excluding property catastrophe | 669,922 | | | 594,033 | |
| Marine and aviation | Marine and aviation | 190,955 | | | 160,930 | | Marine and aviation | 231,203 | | | 204,205 | |
| Property catastrophe | Property catastrophe | 250,602 | | | 113,565 | | Property catastrophe | 526,356 | | | 268,858 | |
| Other (3) | Other (3) | 104,227 | | | 84,115 | | Other (3) | 128,194 | | | 114,825 | |
| Total net reserves | Total net reserves | $ | 3,911,173 | | | $ | 3,275,767 | | Total net reserves | $ | 4,729,276 | | | $ | 4,094,948 | |
(1)Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.
(2)Includes non-excess motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.
(3)Includes life, casualty clash and other.
At September 30, 2021 and December 31, 2020, the mortgage segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:
| | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| U.S. primary mortgage insurance (1) | $ | 726,636 | | | $ | 649,748 | |
| Other | 271,042 | | | 253,875 | |
| Total net reserves | $ | 997,678 | | | $ | 903,623 | |
(1) At September 30, 2021, 27.9% represents policy years 2011 and prior and the remainder from later policy years. At December 31, 2020, 28.3% of total net reserves represent policy years 2011 and prior and the remainder from later policy years.
Mortgage Operations Supplemental Information
The mortgage segment’s insurance in force (“IIF”) and risk in force (“RIF”) were as follows at September 30, 20202021 and December 31, 2019:2020:
| | (U.S. Dollars in millions) | (U.S. Dollars in millions) | September 30, 2020 | | December 31, 2019 | (U.S. Dollars in millions) | September 30, 2021 | | December 31, 2020 |
| Amount | | % | | Amount | | % | Amount | | % | | Amount | | % |
| Insurance In Force (IIF) (1): | Insurance In Force (IIF) (1): | | | | | | | | Insurance In Force (IIF) (1): | | | | | | | |
| U.S. primary mortgage insurance | U.S. primary mortgage insurance | $ | 275,846 | | | 66.8 | | | $ | 287,150 | | | 68.7 | | U.S. primary mortgage insurance | $ | 280,379 | | | 61.3 | | | $ | 280,579 | | | 66.2 | |
| Mortgage reinsurance | 28,421 | | | 6.9 | | | 26,768 | | | 6.4 | | |
| Other (2) | 108,786 | | | 26.3 | | | 104,346 | | | 24.9 | | |
| U.S. credit risk transfer (CRT) and other (2) | | U.S. credit risk transfer (CRT) and other (2) | 108,203 | | | 23.6 | | | 103,535 | | | 24.4 | |
| International mortgage insurance/reinsurance (3) | | International mortgage insurance/reinsurance (3) | 69,127 | | | 15.1 | | | 39,425 | | | 9.3 | |
| Total | Total | $ | 413,053 | | | 100.0 | | | $ | 418,264 | | | 100.0 | | Total | $ | 457,709 | | | 100.0 | | | $ | 423,539 | | | 100.0 | |
| | Risk In Force (RIF) (3): | | |
| Risk In Force (RIF) (4): | | Risk In Force (RIF) (4): | |
| U.S. primary mortgage insurance | U.S. primary mortgage insurance | $ | 69,620 | | | 91.0 | | | $ | 73,388 | | | 91.9 | | U.S. primary mortgage insurance | $ | 70,320 | | | 84.8 | | | $ | 70,522 | | | 90.5 | |
| Mortgage reinsurance | 2,145 | | | 2.8 | | | 2,129 | | | 2.7 | | |
| Other (2) | 4,750 | | | 6.2 | | | 4,380 | | | 5.5 | | |
| U.S. credit risk transfer (CRT) and other (2) | | U.S. credit risk transfer (CRT) and other (2) | 4,817 | | | 5.8 | | | 4,699 | | | 6.0 | |
| International mortgage insurance/reinsurance (3) | | International mortgage insurance/reinsurance (3) | 7,803 | | | 9.4 | | | 2,673 | | | 3.4 | |
| Total | Total | $ | 76,515 | | | 100.0 | | | $ | 79,897 | | | 100.0 | | Total | $ | 82,940 | | | 100.0 | | | $ | 77,894 | | | 100.0 | |
(1)Represents the aggregate dollar amount of each insured mortgage loan’s current principal balance.
(2)Includes GSE credit risk-sharingall CRT transactions, which are predominantly with GSEs, and international insurance business.other U.S. reinsurance transactions.
(3)RepresentsInternational mortgage insurance and reinsurance with risk primarily located in Australia, which reflects WLMI acquisition in the 2021 third quarter and to lesser extent Europe and Asia.
(4)The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied by the insurance coverage percentage specified in the policy for insurance policies issued and after contract limits and/or loss ratio caps for credit risk-sharing or reinsurance transactions.reinsurance.
The IIF and RIF for our U.S. primary mortgage insurance business by policy year were as follows at September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (U.S. Dollars in millions) | IIF | | RIF | | Delinquency |
| Amount | | % | | Amount | | % | | Rate (1) |
| Policy year: | | | | | | | | | |
| 2011 and prior | $ | 11,888 | | | 4.2 | | | $ | 2,672 | | | 3.8 | | | 9.51 | % |
| 2012 | 1,974 | | | 0.7 | | | 505 | | | 0.7 | | | 2.76 | % |
| 2013 | 4,876 | | | 1.7 | | | 1,342 | | | 1.9 | | | 2.72 | % |
| 2014 | 5,454 | | | 1.9 | | | 1,501 | | | 2.1 | | | 3.37 | % |
| 2015 | 9,810 | | | 3.5 | | | 2,637 | | | 3.8 | | | 2.92 | % |
| 2016 | 16,150 | | | 5.8 | | | 4,324 | | | 6.1 | | | 3.64 | % |
| 2017 | 15,001 | | | 5.4 | | | 3,910 | | | 5.6 | | | 4.50 | % |
| 2018 | 16,193 | | | 5.8 | | | 4,105 | | | 5.8 | | | 5.75 | % |
| 2019 | 29,860 | | | 10.6 | | | 7,463 | | | 10.6 | | | 3.58 | % |
| 2020 | 88,737 | | | 31.6 | | | 21,777 | | | 31.0 | | | 0.91 | % |
| 2021 | 80,436 | | | 28.7 | | | 20,084 | | | 28.6 | | | 0.19 | % |
| Total | $ | 280,379 | | | 100.0 | | | $ | 70,320 | | | 100.0 | | | 2.67 | % |
(1)Represents the ending percentage of loans in default.
| | | | | | | | |
| ARCH CAPITAL | 6261 | 20202021 THIRD QUARTER FORM 10-Q |
The insurance in forceIIF and risk in force for our U.S. primary mortgage insurance business by policy year were as follows at September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (U.S. Dollars in millions) | IIF | | RIF | | Delinquency |
| Amount | | % | | Amount | | % | | Rate (1) |
| Policy year: | | | | | | | | | |
| 2010 and prior | $ | 14,603 | | | 5.3 | | | $ | 3,320 | | | 4.8 | | | 11.59 | % |
| 2011 | 1,141 | | | 0.4 | | | 308 | | | 0.4 | | | 3.67 | % |
| 2012 | 4,467 | | | 1.6 | | | 1,228 | | | 1.8 | | | 2.92 | % |
| 2013 | 8,754 | | | 3.2 | | | 2,447 | | | 3.5 | | | 3.37 | % |
| 2014 | 9,613 | | | 3.5 | | | 2,647 | | | 3.8 | | | 4.02 | % |
| 2015 | 17,752 | | | 6.4 | | | 4,778 | | | 6.9 | | | 3.79 | % |
| 2016 | 29,299 | | | 10.6 | | | 7,753 | | | 11.1 | | | 4.89 | % |
| 2017 | 29,537 | | | 10.7 | | | 7,639 | | | 11.0 | | | 5.52 | % |
| 2018 | 32,788 | | | 11.9 | | | 8,304 | | | 11.9 | | | 6.66 | % |
| 2019 | 56,189 | | | 20.4 | | | 13,900 | | | 20.0 | | | 4.68 | % |
| 2020 | 71,703 | | | 26.0 | | | 17,296 | | | 24.8 | | | 1.01 | % |
| Total | $ | 275,846 | | | 100.0 | | | $ | 69,620 | | | 100.0 | | | 4.69 | % |
(1)Represents the ending percentage of loans in default.
The insurance in force and risk in forceRIF for our U.S. primary mortgage insurance business by policy year were as follows at December 31, 2019:2020:
| | (U.S. Dollars in millions) | (U.S. Dollars in millions) | IIF | | RIF | | Delinquency | (U.S. Dollars in millions) | IIF | | RIF | | Delinquency |
| Amount | | % | | Amount | | % | | Rate (1) | Amount | | % | | Amount | | % | | Rate (1) |
| Policy year: | Policy year: | | | | | | | | | | Policy year: | | | | | | | | | |
| 2010 and prior | $ | 17,251 | | | 6.0 | | | $ | 3,990 | | | 5.4 | | | 8.79 | % | |
| 2011 | 1,678 | | | 0.6 | | | 464 | | | 0.6 | | | 1.59 | % | |
| 2011 and prior | | 2011 and prior | $ | 14,588 | | | 5.2 | | | $ | 3,327 | | | 4.7 | | | 11.36 | % |
| 2012 | 2012 | 6,293 | | | 2.2 | | | 1,753 | | | 2.4 | | | 0.89 | % | 2012 | 3,651 | | | 1.3 | | | 992 | | | 1.4 | | | 2.98 | % |
| 2013 | 2013 | 12,276 | | | 4.3 | | | 3,433 | | | 4.7 | | | 0.99 | % | 2013 | 7,546 | | | 2.7 | | | 2,107 | | | 3.0 | | | 3.30 | % |
| 2014 | 2014 | 13,714 | | | 4.8 | | | 3,778 | | | 5.1 | | | 1.16 | % | 2014 | 8,261 | | | 2.9 | | | 2,273 | | | 3.2 | | | 4.06 | % |
| 2015 | 2015 | 25,788 | | | 9.0 | | | 6,880 | | | 9.4 | | | 0.87 | % | 2015 | 15,032 | | | 5.4 | | | 4,048 | | | 5.7 | | | 3.72 | % |
| 2016 | 2016 | 40,898 | | | 14.2 | | | 10,670 | | | 14.5 | | | 1.03 | % | 2016 | 24,958 | | | 8.9 | | | 6,648 | | | 9.4 | | | 4.77 | % |
| 2017 | 2017 | 43,896 | | | 15.3 | | | 11,262 | | | 15.3 | | | 1.00 | % | 2017 | 24,748 | | | 8.8 | | | 6,413 | | | 9.1 | | | 5.52 | % |
| 2018 | 2018 | 51,776 | | | 18.0 | | | 13,086 | | | 17.8 | | | 0.86 | % | 2018 | 27,304 | | | 9.7 | | | 6,918 | | | 9.8 | | | 6.76 | % |
| 2019 | 2019 | 73,580 | | | 25.6 | | | 18,072 | | | 24.6 | | | 0.14 | % | 2019 | 48,304 | | | 17.2 | | | 12,001 | | | 17.0 | | | 4.61 | % |
| 2020 | | 2020 | 106,187 | | | 37.8 | | | 25,795 | | | 36.6 | | | 0.76 | % |
| | Total | Total | $ | 287,150 | | | 100.0 | | | $ | 73,388 | | | 100.0 | | | 1.54 | % | Total | $ | 280,579 | | | 100.0 | | | $ | 70,522 | | | 100.0 | | | 4.19 | % |
(1)Represents the ending percentage of loans in default.
The following tables provide supplemental disclosures on risk in force for our U.S. primary mortgage insurance business at September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| (U.S. Dollars in millions) | September 30, 2020 | | December 31, 2019 |
| Amount | | % | | Amount | | % |
| Credit quality (FICO): | | | | | | | |
| >=740 | $ | 40,017 | | | 57.5 | | | $ | 42,301 | | | 57.6 | |
| 680-739 | 24,236 | | | 34.8 | | | 25,240 | | | 34.4 | |
| 620-679 | 5,016 | | | 7.2 | | | 5,444 | | | 7.4 | |
| <620 | 351 | | | 0.5 | | | 403 | | | 0.5 | |
| Total | $ | 69,620 | | | 100.0 | | | $ | 73,388 | | | 100.0 | |
| Weighted average FICO score | 743 | | | | | 743 | | | |
| | | | | | | |
| Loan-to-value (LTV): | | | | | | | |
| 95.01% and above | $ | 8,789 | | | 12.6 | | | $ | 9,064 | | | 12.4 | |
| 90.01% to 95.00% | 37,278 | | | 53.5 | | | 40,136 | | | 54.7 | |
| 85.01% to 90.00% | 19,870 | | | 28.5 | | | 20,890 | | | 28.5 | |
| 85.00% and below | 3,683 | | | 5.3 | | | 3,298 | | | 4.5 | |
| Total | $ | 69,620 | | | 100.0 | | | $ | 73,388 | | | 100.0 | |
| Weighted average LTV | 92.9 | % | | | | 93.0 | % | | |
| | | | | | | |
| Total RIF, net of external reinsurance | $ | 56,067 | | | | | $ | 58,512 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (U.S. Dollars in millions) | September 30, 2020 | | December 31, 2019 |
| Amount | | % | | Amount | | % |
| Total RIF by State: | | | | | | | |
| Texas | $ | 5,536 | | | 8.0 | | | $ | 5,678 | | | 7.7 | |
| California | 5,019 | | | 7.2 | | | 5,187 | | | 7.1 | |
| Florida | 3,648 | | | 5.2 | | | 3,887 | | | 5.3 | |
| Georgia | 2,890 | | | 4.2 | | | 2,753 | | | 3.8 | |
| Illinois | 2,670 | | | 3.8 | | | 2,616 | | | 3.6 | |
| Virginia | 2,540 | | | 3.6 | | | 2,881 | | | 3.9 | |
| North Carolina | 2,516 | | | 3.6 | | | 2,470 | | | 3.4 | |
| Minnesota | 2,489 | | | 3.6 | | | 2,514 | | | 3.4 | |
| Massachusetts | 2,344 | | | 3.4 | | | 2,432 | | | 3.3 | |
| Washington | 2,222 | | | 3.2 | | | 2,474 | | | 3.4 | |
| Other | 37,746 | | | 54.2 | | | 40,496 | | | 55.2 | |
| Total | $ | 69,620 | | | 100.0 | | | $ | 73,388 | | | 100.0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (U.S. Dollars in millions) | September 30, 2021 | | December 31, 2020 |
| Amount | | % | | Amount | | % |
| Credit quality (FICO): | | | | | | | |
| >=740 | $ | 41,927 | | | 59.6 | | | $ | 40,774 | | | 57.8 | |
| 680-739 | 23,732 | | | 33.7 | | | 24,498 | | | 34.7 | |
| 620-679 | 4,323 | | | 6.1 | | | 4,837 | | | 6.9 | |
| <620 | 338 | | | 0.5 | | | 413 | | | 0.6 | |
| Total | $ | 70,320 | | | 100.0 | | | $ | 70,522 | | | 100.0 | |
| Weighted average FICO score | 745 | | | | | 743 | | | |
| | | | | | | |
| Loan-to-value (LTV): | | | | | | | |
| 95.01% and above | $ | 7,708 | | | 11.0 | | | $ | 8,643 | | | 12.3 | |
| 90.01% to 95.00% | 38,378 | | | 54.6 | | | 37,877 | | | 53.7 | |
| 85.01% to 90.00% | 19,980 | | | 28.4 | | | 20,013 | | | 28.4 | |
| 85.00% and below | 4,254 | | | 6.0 | | | 3,989 | | | 5.7 | |
| Total | $ | 70,320 | | | 100.0 | | | $ | 70,522 | | | 100.0 | |
| Weighted average LTV | 92.8 | % | | | | 92.8 | % | | |
| | | | | | | |
| Total RIF, net of external reinsurance | $ | 54,847 | | | | | $ | 56,658 | | | |
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ARCH CAPITAL | 63 | 2020 THIRD QUARTER FORM 10-Q |
| | | | | | | | | | | | | | | | | | | | | | | |
| (U.S. Dollars in millions) | September 30, 2021 | | December 31, 2020 |
| Amount | | % | | Amount | | % |
| Total RIF by State: | | | | | | | |
| Texas | $ | 5,590 | | | 7.9 | | | $ | 5,636 | | | 8.0 | |
| California | 5,451 | | | 7.8 | | | 5,261 | | | 7.5 | |
| Florida | 3,344 | | | 4.8 | | | 3,632 | | | 5.2 | |
| Minnesota | 2,936 | | | 4.2 | | | 2,520 | | | 3.6 | |
| North Carolina | 2,921 | | | 4.2 | | | 2,622 | | | 3.7 | |
| Illinois | 2,920 | | | 4.2 | | | 2,762 | | | 3.9 | |
| Georgia | 2,908 | | | 4.1 | | | 2,959 | | | 4.2 | |
| Massachusetts | 2,519 | | | 3.6 | | | 2,464 | | | 3.5 | |
| Virginia | 2,412 | | | 3.4 | | | 2,526 | | | 3.6 | |
| Ohio | 2,263 | | | 3.2 | | | 2,264 | | | 3.2 | |
| Other | 37,056 | | | 52.7 | | | 37,876 | | | 53.7 | |
| Total | $ | 70,320 | | | 100.0 | | | $ | 70,522 | | | 100.0 | |
The following table provides supplemental disclosures for our U.S. primary mortgage insurance business related to insured loans and loss metrics:
| | (U.S. Dollars in thousands, except policy, loan and claim count) | (U.S. Dollars in thousands, except policy, loan and claim count) | Nine Months Ended | (U.S. Dollars in thousands, except policy, loan and claim count) | Nine Months Ended |
| September 30, | September 30, |
| 2020 | | 2019 | 2021 | | 2020 |
| Roll-forward of insured loans in default: | Roll-forward of insured loans in default: | | | | Roll-forward of insured loans in default: | | | |
| Beginning delinquent number of loans | Beginning delinquent number of loans | 20,163 | | | 20,665 | | Beginning delinquent number of loans | 52,234 | | | 20,163 | |
| New notices | New notices | 87,760 | | | 28,728 | | New notices | 26,483 | | | 87,760 | |
| Cures | Cures | (48,234) | | | (27,877) | | Cures | (46,334) | | | (48,234) | |
| Paid claims | Paid claims | (1,327) | | | (2,273) | | Paid claims | (613) | | | (1,327) | |
| | Ending delinquent number of loans (1) | Ending delinquent number of loans (1) | 58,362 | | | 19,243 | | Ending delinquent number of loans (1) | 31,770 | | | 58,362 | |
| | Ending number of policies in force (1) | Ending number of policies in force (1) | 1,245,408 | | | 1,304,263 | | Ending number of policies in force (1) | 1,188,768 | | | 1,245,408 | |
| | Delinquency rate (1) | Delinquency rate (1) | 4.69 | % | | 1.48 | % | Delinquency rate (1) | 2.67 | % | | 4.69 | % |
| | Losses: | Losses: | | Losses: | |
| Number of claims paid | Number of claims paid | 1,327 | | | 2,273 | | Number of claims paid | 613 | | | 1,327 | |
| Total paid claims | Total paid claims | $ | 55,559 | | | $ | 91,601 | | Total paid claims | $ | 22,848 | | | $ | 55,559 | |
| Average per claim | Average per claim | $ | 41.9 | | | $ | 40.3 | | Average per claim | $ | 37.3 | | | $ | 41.9 | |
| Severity (2) | Severity (2) | 93.3 | % | | 96.6 | % | Severity (2) | 80.2 | % | | 93.3 | % |
| Average case reserve per default (in thousands) | Average case reserve per default (in thousands) | $ | 10.1 | | | $ | 14.7 | | Average case reserve per default (in thousands) | $ | 23.5 | | | $ | 10.1 | |
(1)Includes first lien primary and pool policies.
(2)Represents total paid claims divided by RIF of loans for which claims were paid.
The risk-to-capitalrisk to capital ratio, which represents total current (non-delinquent) risk in force, net of reinsurance, divided by total statutory capital, for Arch MI U.S. was approximately 9.68.6 to 1 at September 30, 2020,2021, compared to 12.09.3 to 1 at December 31, 2019.2020.
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| ARCH CAPITAL | 62 | 2021 THIRD QUARTER FORM 10-Q |
Shareholders’ Equity and Book Value per Share
Total shareholders’ equity available to Arch was $12.5 billion at September 30, 2020, compared to $11.5 billion at December 31, 2019. The increase primarily reflected the impact of investment returns, partially offset by the impact of a higher level of catastrophic activity (including COVID-19) on underwriting returns.
The following table presents the calculation of book value per share:
| (U.S. dollars in thousands, except
share data) | (U.S. dollars in thousands, except
share data) | September 30,
2020 | | December 31,
2019 | (U.S. dollars in thousands, except
share data) | September 30,
2021 | | December 31,
2020 |
| Total shareholders’ equity available to Arch | Total shareholders’ equity available to Arch | $ | 12,451,997 | | | $ | 11,497,371 | | Total shareholders’ equity available to Arch | $ | 13,387,526 | | | $ | 13,105,886 | |
| Less preferred shareholders’ equity | Less preferred shareholders’ equity | 780,000 | | | 780,000 | | Less preferred shareholders’ equity | 830,000 | | | 780,000 | |
| Common shareholders’ equity available to Arch | Common shareholders’ equity available to Arch | $ | 11,671,997 | | | $ | 10,717,371 | | Common shareholders’ equity available to Arch | $ | 12,557,526 | | | $ | 12,325,886 | |
| Common shares and common share equivalents outstanding, net of treasury shares (1) | Common shares and common share equivalents outstanding, net of treasury shares (1) | 406,018,958 | | | 405,619,201 | | Common shares and common share equivalents outstanding, net of treasury shares (1) | 387,257,752 | | | 406,720,642 | |
| Book value per share | Book value per share | $ | 28.75 | | | $ | 26.42 | | Book value per share | $ | 32.43 | | | $ | 30.31 | |
(1)Excludes the effects of 17,967,73517,419,530 and 18,853,01817,839,333 stock options and 1,064,759739,407 and 1,586,7791,153,784 restricted stock units outstanding at September 30, 20202021 and December 31, 2019,2020, respectively.
LIQUIDITY
Our liquidity and capital resources were not materially impacted by COVID-19 during the third quarter of 2020. We raised an additional $1.0 billion of capital in the form of long-term senior notes at the end of June 2020. For further discussion of the risks related to our potential future impacts of COVID-19 on our liquidity and capital resources, see “ITEM 1A—Risk Factors”.
This section does not include information specific to Watford. We do not guarantee or provide credit support for Watford, and our financial exposure to Watford is limited to our investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions with Watford.
Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations.
Arch Capital is a holding company whose assets primarily consist of the shares in its subsidiaries. Generally, Arch Capital depends on its available cash resources, liquid investments and dividends or other distributions from its subsidiaries to make payments, including the payment of debt service obligations and operating expenses it may incur and any dividends or liquidation amounts with respect to our preferred and common shares.
For the nine months ended September 30, 2020,2021, Arch Capital received dividends of $163.7 million$1.4 billion from Arch Re Bermuda, our Bermuda-based reinsurer and insurer, which can pay approximately $2.9$2.3 billion to Arch Capital during the remainder of 20202021 without providing an affidavit to the Bermuda Monetary Authority (“BMA”).
For the nine months ended September 30, 2021, Arch-U.S. received $200.0 million of dividends from Arch U.S. MI Holdings Inc., a subsidiary of Arch-U.S., which received a total of $300.0 million of ordinary and extraordinary dividends, $140 million from United Guaranty Residential Insurance Company (“UGRIC”) and $160 million from Arch Mortgage Insurance Company (“AMIC”). UGRIC and AMIC have minimal ordinary dividend capacity remaining for the remainder of 2021.
In June 2021, Arch Capital completed a $500.0 million underwritten public offering of 20.0 million depositary shares, each of which represents a 1/1,000th interest in a
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ARCH CAPITAL | 64 | 2020 THIRD QUARTER FORM 10-Q |
We expect that our liquidity needs, including our anticipated (re)insurance obligations and operating and capital expenditure needs, for the next twelve months, will be met by funds generated from underwriting activities and investment income, as well as by our balance of cash, short-term investments, proceeds on the sale or maturity of our investments, and our credit facilities.
Cash Flows
| | | Nine Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Total cash provided by (used for): | Total cash provided by (used for): | | | | Total cash provided by (used for): | | | |
| Operating activities | Operating activities | $ | 2,198,037 | | | $ | 1,366,762 | | Operating activities | $ | 2,580,697 | | | $ | 2,198,037 | |
| Investing activities | Investing activities | (2,850,392) | | | (1,093,054) | | Investing activities | (1,184,436) | | | (2,850,392) | |
| Financing activities | Financing activities | 845,612 | | | (45,757) | | Financing activities | (895,943) | | | 845,612 | |
| Effects of exchange rate changes on foreign currency cash | Effects of exchange rate changes on foreign currency cash | (2,878) | | | (6,981) | | Effects of exchange rate changes on foreign currency cash | (30,501) | | | (2,878) | |
| Increase (decrease) in cash and restricted cash | Increase (decrease) in cash and restricted cash | $ | 190,379 | | | $ | 220,970 | | Increase (decrease) in cash and restricted cash | $ | 469,817 | | | $ | 190,379 | |
•Cash provided by operating activities for the nine months ended September 30, 20202021 reflected a higher level of premiums collected than in the 20192020 period.
•Cash used for investing activities for the nine months ended September 30, 20202021 was higherlower than in the 20192020 period. Activity for the nine months ended September 30, 2021 reflected cash used to purchase our non-controlling interest in Coface and Watford, while the 2020 period reflectingreflected a higher level of securities purchased, and the investing of proceeds from our issuance of the senior notes.
•Cash provided byused for financing activities for the nine months ended September 30, 2021 reflected $485.8 million inflow from issuance of preferred shares, $450.0 million related to redemption of our Series E preferred shares and $872.2 million of repurchases under our share repurchase program. Activity for the 2020 period primarily reflected the issuance of $1.0 billion of our senior notes. Cash flows also reflectednotes and $75.5 million of repurchases under our share repurchase program.
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| ARCH CAPITAL | 63 | 2021 THIRD QUARTER FORM 10-Q |
CAPITAL RESOURCES
This section does not include information specific to Watford. We do not guarantee or provide credit support for Watford, and our financial exposure to Watford is limited to our investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions with Watford.
The following table provides an analysis of our capital structure:
| | | | | | | | | | | |
(U.S. dollars in thousands, except
share data) | Sep 30,
2020 | | Dec 31,
2019 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Senior notes | $ | 2,723,189 | | | $ | 1,734,209 | |
| | | |
| Shareholders’ equity available to Arch: | | | |
| Series E non-cumulative preferred shares | $ | 450,000 | | | $ | 450,000 | |
| Series F non-cumulative preferred shares | 330,000 | | | 330,000 | |
| Common shareholders’ equity | 11,671,997 | | | 10,717,371 | |
| Total | $ | 12,451,997 | | | $ | 11,497,371 | |
| | | |
| Total capital available to Arch | $ | 15,175,186 | | | $ | 13,231,580 | |
| | | |
| | | |
| | | |
| Debt to total capital (%) | 17.9 | | | 13.1 | |
| Preferred to total capital (%) | 5.1 | | | 5.9 | |
| Debt and preferred to total capital (%) | 23.1 | | | 19.0 | |
On June 30, 2020, Arch Capital issued $1.0 billion of 30 year senior notes. The net proceeds of the offering were contributed to Arch Re Bermuda to support our underwriting operations. | | | | | | | | | | | |
(U.S. dollars in thousands, except
share data) | Sep 30,
2021 | | Dec 31,
2020 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Senior notes | $ | 2,724,149 | | | $ | 2,723,423 | |
| | | |
| Shareholders’ equity available to Arch: | | | |
| Series E non-cumulative preferred shares | $ | — | | | $ | 450,000 | |
| Series F non-cumulative preferred shares | 330,000 | | | 330,000 | |
| Series G non-cumulative preferred shares | 500,000 | | | — | |
| Common shareholders’ equity | 12,557,526 | | | 12,325,886 | |
| Total | $ | 13,387,526 | | | $ | 13,105,886 | |
| | | |
| Total capital available to Arch | $ | 16,111,675 | | | $ | 15,829,309 | |
| | | |
| | | |
| | | |
| Debt to total capital (%) | 16.9 | | | 17.2 | |
| Preferred to total capital (%) | 5.2 | | | 4.9 | |
| Debt and preferred to total capital (%) | 22.1 | | | 22.1 | |
Arch MI U.S. is required to maintain compliance with the GSEs requirements, known as the Private Mortgage Insurer Eligibility Requirements or “PMIERs.” The financial requirements require an eligible mortgage insurer’s available assets, which generally include only the most liquid assets of an insurer, to meet or exceed “minimum required assets” as of each quarter end. Minimum required assets are calculated from PMIERs tables with several risk dimensions (including origination year, original loan-to-value and original credit score of performing loans, and the delinquency status of non-performing loans) and are subject to a minimum amount. Arch MI U.S. satisfied the PMIERs’ financial requirements as of September 30, 20202021 with an estimated PMIER sufficiency ratio of 158%195%, compared to 161%173% at December 31, 2019.2020.
Arch Capital, through its subsidiaries, provides financial support to certain of its insurance subsidiaries and affiliates, through certain reinsurance arrangements beneficial to the ratings of such subsidiaries. Historically, our insurance, reinsurance and mortgage insurance subsidiaries have entered into separate reinsurance arrangements with Arch Re Bermuda covering individual lines of business. The reinsurance agreements between our U.S.-based property casualty insurance and reinsurance subsidiaries and Arch Re
Bermuda were canceled on a cutoff basis as of January 1, 2018. In 2019, certain reinsurance agreements between our insurance subsidiaries and Arch Re Bermuda were reinstated.
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ARCH CAPITAL | 65 | 2020 THIRD QUARTER FORM 10-Q |
GUARANTOR INFORMATION
The below table provides a description of our senior notes payable at September 30, 2020, excluding amounts attributable to the ‘other’ segment (i.e., Watford):2021:
| | | Interest | | Principal | | Carrying | | Interest | | Principal | | Carrying |
| Issuer/Due | Issuer/Due | | (Fixed) | | Amount | | Amount | Issuer/Due | | (Fixed) | | Amount | | Amount |
| Arch Capital: | Arch Capital: | | | | | | | Arch Capital: | | | | | | |
| May 1, 2034 | May 1, 2034 | | 7.350 | % | | $ | 300,000 | | | $ | 297,338 | | May 1, 2034 | | 7.350 | % | | $ | 300,000 | | | $ | 297,457 | |
| June 30, 2050 | June 30, 2050 | | 3.635 | % | | 1,000,000 | | 988,447 | June 30, 2050 | | 3.635 | % | | 1,000,000 | | 988,665 |
| Arch-U.S.: | Arch-U.S.: | | Arch-U.S.: | |
| Nov. 1, 2043 (1) | Nov. 1, 2043 (1) | | 5.144 | % | | 500,000 | | 494,915 | Nov. 1, 2043 (1) | | 5.144 | % | | 500,000 | | 495,033 |
| Arch Finance: | Arch Finance: | | Arch Finance: | |
| Dec. 15, 2026 (1) | Dec. 15, 2026 (1) | | 4.011 | % | | 500,000 | | 497,109 | Dec. 15, 2026 (1) | | 4.011 | % | | 500,000 | | 497,527 |
| Dec. 15, 2046 (1) | Dec. 15, 2046 (1) | | 5.031 | % | | 450,000 | | 445,380 | Dec. 15, 2046 (1) | | 5.031 | % | | 450,000 | | 445,467 |
| Total | Total | | $ | 2,750,000 | | | $ | 2,723,189 | | Total | | $ | 2,750,000 | | | $ | 2,724,149 | |
(1)Fully and unconditionally guaranteed by Arch Capital.
Our senior notes were issued by Arch Capital, Arch Capital Group (U.S.) Inc. (“Arch-U.S.”) and Arch Capital Finance LLC (“Arch Finance”). Arch-U.S. is a wholly-owned
subsidiary of Arch Capital and Arch Finance is a wholly-owned finance subsidiary of Arch-U.S. Our 2034 senior notes and 2050 senior notes issued by Arch Capital are unsecured and unsubordinated obligations of Arch Capital and ranked equally with all of its existing and future unsecured and unsubordinated indebtedness. The 2043 senior notes issued by Arch-U.S. are unsecured and unsubordinated obligations of Arch-U.S. and Arch Capital and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch-U.S. and Arch Capital. The 2026 senior notes and 2046 senior notes issued by Arch Finance are unsecured and unsubordinated obligations of Arch Finance and Arch Capital and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch Finance and Arch Capital.
Arch-U.S. and Arch Finance depend on their available cash resources, liquid investments and dividends or other distributions from their subsidiaries or affiliates to make payments, including the payment of debt service obligations and operating expenses they may incur.
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| ARCH CAPITAL | 64 | 2021 THIRD QUARTER FORM 10-Q |
The following tables present condensed financial information for Arch Capital (parent guarantor) and Arch-U.S. (subsidiary issuer):
| | | September 30, 2020 | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 | |
| | Arch Capital | | Arch-U.S. | | Arch Capital | | Arch-U.S. | | | Arch Capital | | Arch-U.S. | | Arch Capital | | Arch-U.S. | |
| Assets | Assets | | | | | | | Assets | | | | | | |
| Total investments | Total investments | $ | 158 | | | $ | 715,800 | | | $ | 42 | | | $ | 692,606 | | | Total investments | $ | 135 | | | $ | 565,314 | | | $ | 172 | | | $ | 396,547 | | |
| Cash | Cash | 9,041 | | | 10,092 | | | 18,113 | | | 54,518 | | | Cash | 10,796 | | | 10,386 | | | 18,932 | | | 11,368 | | |
| Investments in subsidiaries | 13,745,334 | | | 4,743,177 | | | 11,786,861 | | | 4,347,806 | | | |
| | Investment in operating affiliates | | Investment in operating affiliates | 7,099 | | | — | | | 7,731 | | | — | | |
| Due from subsidiaries and affiliates | Due from subsidiaries and affiliates | 17 | | | 200,758 | | | 17 | | | 200,635 | | | Due from subsidiaries and affiliates | — | | | 200,786 | | | — | | | 201,515 | | |
| | Other assets | Other assets | 19,357 | | | 31,328 | | | 20,461 | | | 32,187 | | | Other assets | 10,281 | | | 36,601 | | | 10,659 | | | 34,405 | | |
| Total assets | Total assets | $ | 13,773,907 | | | $ | 5,701,155 | | | $ | 11,825,494 | | | $ | 5,327,752 | | | Total assets | $ | 28,311 | | | $ | 813,087 | | | $ | 37,494 | | | $ | 643,835 | | |
| | Liabilities | Liabilities | | | Liabilities | | |
| | Senior notes | Senior notes | 1,285,785 | | | 494,915 | | | 297,254 | | | 494,831 | | | Senior notes | 1,286,122 | | | 495,033 | | | 1,285,867 | | | 494,944 | | |
| | Due to subsidiaries and affiliates | Due to subsidiaries and affiliates | — | | | 542,103 | | | — | | | 536,805 | | | Due to subsidiaries and affiliates | 4 | | | 507,103 | | | — | | | 586,805 | | |
| Other liabilities | Other liabilities | 36,125 | | | 43,134 | | | 30,869 | | | 33,267 | | | Other liabilities | 37,226 | | | 55,132 | | | 23,270 | | | 41,876 | | |
| Total liabilities | Total liabilities | 1,321,910 | | | 1,080,152 | | | 328,123 | | | 1,064,903 | | | Total liabilities | $ | 1,323,352 | | | $ | 1,057,268 | | | $ | 1,309,137 | | | $ | 1,123,625 | | |
| | Non-cumulative preferred shares | | Non-cumulative preferred shares | $ | 830,000 | | | — | | | $ | 780,000 | | | — | | |
| | | Shareholders' Equity | | | |
| Total shareholders' equity available to Arch | 12,451,997 | | | 4,621,003 | | | 11,497,371 | | | 4,262,849 | | | |
| | Total shareholders' equity | 12,451,997 | | | 4,621,003 | | | 11,497,371 | | | 4,262,849 | | | |
| | Total liabilities and shareholders' equity | $ | 13,773,907 | | | $ | 5,701,155 | | | $ | 11,825,494 | | | $ | 5,327,752 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended | | Year Ended | | | | | | |
| | | September 30, 2021 | | December 31, 2020 | | | | | | |
| | | | | Arch Capital | | Arch-U.S. | | Arch Capital | | Arch-U.S. | | | | | | |
| | | | | | | | | | | | | | | | | |
| Revenues | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net investment income | | | | | $ | 1,160 | | | $ | 9,392 | | | $ | 53 | | | $ | 18,084 | | | | | | | |
| Net realized gains (losses) | | | | | — | | | 66,147 | | | (2,110) | | | 26,096 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Equity in net income (loss) of investments accounted for using the equity method | | | | | — | | | 13,726 | | | — | | | 2,507 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total revenues | | | | | 1,160 | | | 89,265 | | | (2,057) | | | 46,687 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Corporate expenses | | | | | 54,726 | | | 4,438 | | | 65,566 | | | 7,227 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest expense | | | | | 44,055 | | | 35,455 | | | 40,445 | | | 47,566 | | | | | | | |
| Net foreign exchange (gains) losses | | | | | 7 | | | — | | | 3 | | | — | | | | | | | |
| Total expenses | | | | | 98,788 | | | 39,893 | | | 106,014 | | | 54,793 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes and income (loss) from operating affiliates | | | | | (97,628) | | | 49,372 | | | (108,071) | | | (8,106) | | | | | | | |
| Income tax (expense) benefit | | | | | — | | | (12,843) | | | — | | | 2,689 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Income (loss) from operating affiliates | | | | | (443) | | | — | | | (437) | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income available to Arch | | | | | (98,071) | | | 36,529 | | | (108,508) | | | (5,417) | | | | | | | |
| Preferred dividends | | | | | (38,159) | | | — | | | (41,612) | | | — | | | | | | | |
| Loss on redemption of preferred shares | | | | | (15,101) | | | — | | | — | | | — | | | | | | | |
| Net income (loss) available to Arch common shareholders | | | | | $ | (151,331) | | | $ | 36,529 | | | $ | (150,120) | | | $ | (5,417) | | | | | | | |
| | | | | | | | |
| ARCH CAPITAL | 6665 | 20202021 THIRD QUARTER FORM 10-Q |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended | | Year Ended | | | | | | |
| | | September 30, 2020 | | December 31, 2019 | | | | | | |
| | | | | Arch Capital | | Arch-U.S. | | Arch Capital | | Arch-U.S. | | | | | | |
| | | | | | | | | | | | | | | | | |
| Revenues | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net investment income | | | | | $ | 53 | | | $ | 13,104 | | | $ | 212 | | | $ | 14,270 | | | | | | | |
| Net realized gains (losses) | | | | | — | | | 1,428 | | | — | | | 25,313 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Equity in net income (loss) of investments accounted for using the equity method | | | | | — | | | 2,308 | | | — | | | 779 | | | | | | | |
| Other income (loss) | | | | | (327) | | | — | | | (762) | | | — | | | | | | | |
| Total revenues | | | | | (274) | | | 16,840 | | | (550) | | | 40,362 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Corporate expenses | | | | | 47,802 | | | 5,642 | | | 62,701 | | | 7,221 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest expense | | | | | 25,762 | | | 35,645 | | | 22,154 | | | 47,951 | | | | | | | |
| Net foreign exchange (gains) losses | | | | | 3 | | | — | | | 1 | | | — | | | | | | | |
| Total expenses | | | | | 73,567 | | | 41,287 | | | 84,856 | | | 55,172 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | | | (73,841) | | | (24,447) | | | (85,406) | | | (14,810) | | | | | | | |
| Income tax (expense) benefit | | | | | — | | | 5,429 | | | — | | | 3,696 | | | | | | | |
| Income (loss) before equity in net income of subsidiaries | | | | | (73,841) | | | (19,018) | | | (85,406) | | | (11,114) | | | | | | | |
| Equity in net income of subsidiaries | | | | | 935,818 | | | 272,253 | | | 1,721,725 | | | 564,657 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income available to Arch | | | | | 861,977 | | | 253,235 | | | 1,636,319 | | | 553,543 | | | | | | | |
| Preferred dividends | | | | | (31,209) | | | — | | | (41,612) | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net income available to Arch common shareholders | | | | | $ | 830,768 | | | $ | 253,235 | | | $ | 1,594,707 | | | $ | 553,543 | | | | | | | |
SHARE REPURCHASE PROGRAM
The board of directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. For the nine months ended September 30, 2020,2021, Arch Capital repurchased 2.622.8 million shares under the share repurchase program with an aggregate purchase price of $75.5$872.2 million. Since the inception of the share repurchase program through September 30, 2020,2021, Arch Capital has repurchased 388.9412.0 million common shares for an aggregate purchase price of $4.04$4.92 billion. At September 30, 2020,2021, approximately $924.5$44.3 million of share repurchases were available under the program. On October 8, 2021, the board of directors of ACGL increased the aggregate purchase amount authorized under the share repurchase program to $1.5 billion, which may be effected from time to time in open market or privately negotiated transactions through December 31, 2021.2022. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. DependingWe will continue to monitor our share price and, depending upon results of operations, market conditions and the development of the economy, as well as other factors, generally we will consider share repurchases on an opportunistic basis from time to time. During the 2020 third quarter, we have not repurchased any shares under our share repurchase program.basis. See note 17, “Subsequent Event.” CATASTROPHIC EVENTS AND SEVERE ECONOMIC EVENTS
We have large aggregate exposures to natural and man-made catastrophic events, pandemic events like COVID-19 and severe economic events. Natural catastrophes can be caused by various events, including hurricanes, floods, windstorms, earthquakes, hailstorms, tornadoes, explosions, severe winter weather, fires, droughts and other natural disasters. Man-made catastrophic events may include acts of war, acts of terrorism and political instability. Catastrophes can also cause losses in non-property business such as mortgage insurance, workers’ compensation or general liability. In addition to the nature of property business, we believe that economic and geographic trends affecting insured property, including inflation, property value appreciation and geographic concentration, tend to generally increase the size of losses from catastrophic events over time.
Our models employ both proprietary and vendor-based systems and include cross-line correlations for property, marine, offshore energy, aviation, workers compensation and personal accident. We seek to limit the probable maximum pre-tax loss to a specific level for severe catastrophic events. Currently, we seek to limit our 1-in-250 year return period net probable maximum loss from a severe catastrophic event in any geographic zone to approximately 25% of tangible shareholders’ equity available to Arch (total shareholders’
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ARCH CAPITAL | 67 | 2020 THIRD QUARTER FORM 10-Q |
equity available to Arch less goodwill and intangible assets). We reserve the right to change this threshold at any time.
Based on in-force exposure estimated as of October 1, 2020,2021, our modeled peak zone catastrophe exposure was a windstorm affecting the Florida Tri-County, with a net probable maximum pre-tax loss of $918$671 million, followed by windstorms affecting the Northeastern U.S. and the Gulf of Mexico regions with net probable maximum pre-tax losses of $674$650 and $644$661 million, respectively. Our exposures to other perils, such as U.S. earthquake and international events, were less than the exposures arising from U.S. windstorms and hurricanes. As of October 1, 2020,2021, our modeled peak zone earthquake exposure (San Francisco earthquake) represented approximately 57%75% of our peak zone catastrophe exposure, and our modeled peak zone international exposure (Japan earthquake)(UK windstorm) was substantially less than both our peak zone windstorm and earthquake exposures.
Effective July 1, 2020,2021, our insurance operations had in effect a reinsurance program which provided coverage for certain property-catastrophe related losses equal to $243$276 million in excess of various retentions per occurrence.
We also have significant exposure to losses due to mortgage defaults resulting from severe economic events in the future. For our U.S. mortgage insurance business, we have developed a proprietary risk model (“Realistic Disaster Scenario” or “RDS”) that simulates the maximum loss resulting from a severe economic downturn impacting the housing market. The RDS models the collective impact of adverse conditions for key economic indicators, the most significant of which is a decline in home prices. The RDS model projects paths of future home prices, unemployment rates, income levels and interest rates and assumes correlation across states and geographic regions. The resulting future performance of our in-force portfolio is then estimated under the economic stress scenario, reflecting loan and borrower information.
Currently, we seek to limit our modeled RDS loss from a severe economic event to approximately 25% of tangible shareholders’ equity available to Arch. We reserve the right to change this threshold at any time. Based on in-force exposure estimated as of October 1, 2020,2021, our modeled RDS loss was approximately 8%6% of tangible shareholders’ equity available to Arch.
Net probable maximum loss estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums. RDS loss estimates are net of expected reinsurance recoveries and before income tax. Catastrophe loss estimates are reflective of the zone indicated and not the entire portfolio. Since hurricanes and windstorms can affect more than one zone and make multiple landfalls, our catastrophe loss estimates include clash estimates from
| | | | | | | | |
| ARCH CAPITAL | 66 | 2021 THIRD QUARTER FORM 10-Q |
other zones. Our catastrophe loss estimates and RDS loss estimates do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates. There can be no assurances that we will not suffer pre-tax losses greater than 25% of our tangible shareholders’ equity from one or more catastrophic events or severe economic events due to several factors. These factors include the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques or as a result of a decision to change the percentage of shareholders' equity exposed to a single catastrophic event or severe economic event. In addition, actual losses may increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable. See “Risk Factors—Risks Relating to Our Industry” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Catastrophic Events and Severe Economic Events” in our
20192020 Form
10-K, updated where applicable in “ITEM 1A—Risk Factors”10-K.OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 20192020 Form 10-K.
MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
In accordance with the SEC’s Financial Reporting Release No. 48, we performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of our financial instruments as of September 30, 2020.2021. Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of several components, including liquidity, basis and price risks. We have not included Watford in the following analyses as we do not guarantee or provide credit support for Watford, and our financial exposure to Watford is limited to our investment in Watford’s senior notes, common and preferred shares and counterparty credit risk (mitigated by collateral) arising from reinsurance transactions.
An analysis of material changes in market risk exposures at September 30, 20202021 that affect the quantitative and qualitative disclosures presented in our 20192020 Form 10-K (see section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market
| | | | | | | | |
ARCH CAPITAL | 68 | 2020 THIRD QUARTER FORM 10-Q |
Sensitive Instruments and Risk Management”) were as follows:
Investment Market Risk
Fixed Income Securities. We invest in interest rate sensitive securities, primarily debt securities. We consider the effect of interest rate movements on the fair value of our fixed
maturities, fixed maturities pledged under securities lending agreements, short-term investments and certain of our other investments, equity securities and investment funds accounted for using the equity method which invest in fixed income securities (collectively, “Fixed Income Securities”) and the corresponding change in unrealized appreciation. As interest rates rise, the fair value of our Fixed Income Securities falls, and the converse is also true. Based on historical observations, there is a low probability that all interest rate yield curves would shift in the same direction at the same time. Furthermore, at times interest rate movements in certain credit sectors exhibit a much lower correlation to changes in U.S. Treasury yields. Accordingly, the actual effect of interest rate movements may differ materially from the amounts set forth in the following tables.
The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on our Fixed Income Securities:
| (U.S. dollars in
billions) | (U.S. dollars in
billions) | Interest Rate Shift in Basis Points | (U.S. dollars in
billions) | Interest Rate Shift in Basis Points |
| -100 | | -50 | | — | | +50 | | +100 | -100 | | -50 | | — | | +50 | | +100 |
| Sep 30, 2020 | | | | | | | | | | |
| Sept. 30, 2021 | | Sept. 30, 2021 | | | | | | | | | |
| Total fair value | Total fair value | $ | 24.84 | | | $ | 24.45 | | | $ | 24.07 | | | $ | 23.68 | | | $ | 23.30 | | Total fair value | $ | 25.29 | | | $ | 25.00 | | | $ | 24.67 | | | $ | 24.35 | | | $ | 24.06 | |
| Change from base | Change from base | 3.2 | % | | 1.6 | % | | (1.6) | % | | (3.2) | % | Change from base | 2.5 | % | | 1.3 | % | | (1.3) | % | | (2.5) | % |
| Change in unrealized value | Change in unrealized value | $ | 0.77 | | | $ | 0.39 | | | $ | (0.39) | | | $ | (0.77) | | Change in unrealized value | $ | 0.62 | | | $ | 0.32 | | | $ | (0.32) | | | $ | (0.62) | |
| | Dec 31, 2019 | | |
| Dec. 31, 2020 | | Dec. 31, 2020 | |
| Total fair value | Total fair value | $ | 21.54 | | | $ | 21.19 | | | $ | 20.83 | | | $ | 20.48 | | | $ | 20.13 | | Total fair value | $ | 25.82 | | | $ | 25.44 | | | $ | 25.07 | | | $ | 24.69 | | | $ | 24.31 | |
| Change from base | Change from base | 3.4 | % | | 1.7 | % | | (1.7) | % | | (3.4) | % | Change from base | 3.0 | % | | 1.5 | % | | (1.5) | % | | (3.0) | % |
| Change in unrealized value | Change in unrealized value | $ | 0.71 | | | $ | 0.35 | | | $ | (0.35) | | | $ | (0.71) | | Change in unrealized value | $ | 0.75 | | | $ | 0.38 | | | $ | (0.38) | | | $ | (0.75) | |
In addition, we consider the effect of credit spread movements on the market value of our Fixed Income Securities and the corresponding change in unrealized value. As credit spreads widen, the fair value of our Fixed Income Securities falls, and the converse is also true. In periods where the spreads on our Fixed Income Securities are much higher than their historical average due to short-term market dislocations, a parallel shift in credit spread levels would result in a much more pronounced change in unrealized value.
| | | | | | | | |
| ARCH CAPITAL | 67 | 2021 THIRD QUARTER FORM 10-Q |
The following table summarizes the effect that an immediate, parallel shift in credit spreads in a static interest rate environment would have had on our Fixed Income Securities:
| (U.S. dollars in
billions) | (U.S. dollars in
billions) | Credit Spread Shift in Percentage Points | (U.S. dollars in
billions) | Credit Spread Shift in Percentage Points |
| -100 | | -50 | | — | | +50 | | +100 | -100 | | -50 | | — | | +50 | | +100 |
| Sep 30, 2020 | | | | | | | | | | |
| Sept. 30, 2021 | | Sept. 30, 2021 | | | | | | | | | |
| Total fair value | Total fair value | $ | 24.74 | | | $ | 24.40 | | | $ | 24.07 | | | $ | 23.73 | | | $ | 23.39 | | Total fair value | $ | 25.24 | | | $ | 24.97 | | | $ | 24.67 | | | $ | 24.38 | | | $ | 24.11 | |
| Change from base | Change from base | 2.8 | % | | 1.4 | % | | (1.4) | % | | (2.8) | % | Change from base | 2.3 | % | | 1.2 | % | | (1.2) | % | | (2.3) | % |
| Change in unrealized value | Change in unrealized value | $ | 0.67 | | | $ | 0.34 | | | $ | (0.34) | | | $ | (0.67) | | Change in unrealized value | $ | 0.57 | | | $ | 0.30 | | | $ | (0.30) | | | $ | (0.57) | |
| | Dec 31, 2019 | | |
| Dec. 31, 2020 | | Dec. 31, 2020 | |
| Total fair value | Total fair value | $ | 21.19 | | | $ | 21.02 | | | $ | 20.83 | | | $ | 20.65 | | | $ | 20.48 | | Total fair value | $ | 25.54 | | | $ | 25.32 | | | $ | 25.07 | | | $ | 24.82 | | | $ | 24.59 | |
| Change from base | Change from base | 1.7 | % | | 0.9 | % | | (0.9) | % | | (1.7) | % | Change from base | 1.9 | % | | 1.0 | % | | (1.0) | % | | (1.9) | % |
| Change in unrealized value | Change in unrealized value | $ | 0.35 | | | $ | 0.19 | | | $ | (0.19) | | | $ | (0.35) | | Change in unrealized value | $ | 0.48 | | | $ | 0.25 | | | $ | (0.25) | | | $ | (0.48) | |
Another method that attempts to measure portfolio risk is Value-at-Risk (“VaR”). VaR measures the worst expected loss under normal market conditions over a specific time interval at a given confidence level. The 1-year 95th percentile parametric VaR reported herein estimates that 95% of the time, the portfolio loss in a one-year horizon would be less than or equal to the calculated number, stated as a percentage of the measured portfolio’s initial value. The VaR is a variance-covariance based estimate, based on linear sensitivities of a portfolio to a broad set of systematic market risk factors and idiosyncratic risk factors mapped to the portfolio exposures. The relationships between the risk factors are estimated using historical data, and the most recent data points are generally given more weight. As of September 30, 2020,2021, our portfolio’s VaR was estimated to be 5.4%3.2% compared to an estimated 3.19%4.3% at December 31, 2019.2020. In periods where the volatility of the risk factors mapped to our portfolio’s exposures is higher due to market conditions, the resulting VaR is higher than in other periods.
Equity Securities. At September 30, 20202021 and December 31, 2019,2020, the fair value of our investments in equity securities (excluding securities included in Fixed Income Securities above) totaled $877.6 million$1.5 billion and $827.8 million,$1.1 billion, respectively. These investments are exposed to price risk, which is the potential loss arising from decreases in fair value. An immediate hypothetical 10% decline in the value of each position would reduce the fair value of such investments by approximately $87.8$146.7 million and $82.8$109.5 million at September 30, 20202021 and December 31, 2019,2020, respectively, and would have decreased book value per share by approximately $0.22$0.38 and $0.20,$0.27, respectively. An immediate hypothetical 10% increase in the value of each position would increase the fair value of such investments by approximately $87.8$146.7 million and $82.8$109.5 million at September 30, 20202021 and December 31, 2019,2020, respectively, and would have increased book value per share by approximately $0.22$0.38 and $0.20,$0.27, respectively.
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ARCH CAPITAL | 69 | 2020 THIRD QUARTER FORM 10-Q |
Investment-Related Derivatives. At September 30, 2020,2021, the notional value of all derivative instruments (excluding to-be-announced mortgage backed securities which are included in the fixed income securities analysis above and foreign currency forward contracts which are included in the foreign currency exchange risk analysis below) was $8.70$6.8 billion, compared to $8.04$8.6 billion at December 31, 2019.2020. If the underlying exposure of each investment-related derivative held at September 30, 20202021 depreciated by 100 basis points, it would have resulted in a reduction in net income of approximately $87.0$68.2 million, and a decrease in book value per share of approximately $0.21$0.18 per share, compared to $80.4$85.7 million and $0.20$0.21 per share, respectively, on investment-related derivatives held at December 31, 2019.2020. If the underlying exposure of each investment-related derivative held at September 30, 20202021 appreciated by 100 basis points, it would have resulted in an increase in net income of approximately $87.0$68.2 million, and an increase in book value per share of approximately $0.21$0.18 per share, compared to $80.4$85.7 million and $0.20$0.21 per share, respectively, on investment-related derivatives held at December 31, 2019.2020. See note 9,10, “Derivative Instruments,” to our consolidated financial statements for additional disclosures concerning derivatives. For further discussion on investment activity, please refer to “Financial Condition—Investable Assets.”
Foreign Currency Exchange Risk
Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Through our subsidiaries and branches located in various foreign countries, we conduct our insurance and reinsurance operations in a variety of local currencies other than the U.S. Dollar. We generally hold investments in foreign currencies which are intended to mitigate our exposure to foreign currency fluctuations in our net insurance liabilities. We may also utilize foreign currency forward contracts and currency options as part of our investment strategy. See note 9,10, “Derivative Instruments,” to our consolidated financial statements for additional information. | | | | | | | | |
| ARCH CAPITAL | 68 | 2021 THIRD QUARTER FORM 10-Q |
The following table provides a summary of our net foreign currency exchange exposures, as well as foreign currency derivatives in place to manage these exposures:
| (U.S. dollars in thousands, except
per share data) | (U.S. dollars in thousands, except
per share data) | September 30,
2020 | | December 31,
2019 | (U.S. dollars in thousands, except
per share data) | September 30,
2021 | | December 31,
2020 |
| Net assets (liabilities), denominated in foreign currencies, excluding shareholders’ equity and derivatives | Net assets (liabilities), denominated in foreign currencies, excluding shareholders’ equity and derivatives | $ | (336,400) | | | $ | 265,501 | | Net assets (liabilities), denominated in foreign currencies, excluding shareholders’ equity and derivatives | $ | (813,451) | | | $ | (309,968) | |
| Shareholders’ equity denominated in foreign currencies (1) | Shareholders’ equity denominated in foreign currencies (1) | 773,491 | | | 744,690 | | Shareholders’ equity denominated in foreign currencies (1) | 1,088,134 | | | 695,355 | |
| Net foreign currency forward contracts outstanding (2) | Net foreign currency forward contracts outstanding (2) | 368,379 | | | 81,731 | | Net foreign currency forward contracts outstanding (2) | 39,171 | | | 1,108,161 | |
| Net exposures denominated in foreign currencies | Net exposures denominated in foreign currencies | $ | 805,470 | | | $ | 1,091,922 | | Net exposures denominated in foreign currencies | $ | 313,854 | | | $ | 1,493,548 | |
| | Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies: | Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies: | | | | Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies: | | | |
| Shareholders’ equity | Shareholders’ equity | $ | (80,547) | | | $ | (109,192) | | Shareholders’ equity | $ | (31,385) | | | $ | (149,355) | |
| Book value per share | Book value per share | $ | (0.20) | | | $ | (0.27) | | Book value per share | $ | (0.08) | | | $ | (0.37) | |
| | Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies: | Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies: | | | | Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies: | | | |
| Shareholders’ equity | Shareholders’ equity | $ | 80,547 | | | $ | 109,192 | | Shareholders’ equity | $ | 31,385 | | | $ | 149,355 | |
| Book value per share | Book value per share | $ | 0.20 | | | $ | 0.27 | | Book value per share | $ | 0.08 | | | $ | 0.37 | |
(1) Represents capital contributions held in the foreign currencies of our operating units.
(2) Represents the net notional value of outstanding foreign currency forward contracts.
Although we generally attempt to match the currency of our projected liabilities with investments in the same currencies, from time to time we may elect to over or underweight one or more currencies, which could increase our exposure to foreign currency fluctuations and increase the volatility of our shareholders’ equity. Historical observations indicate a low probability that all foreign currency exchange rates would shift against the U.S. Dollar in the same direction and at the same time and, accordingly, the actual effect of foreign currency rate movements may differ materially from the amounts set forth above. For further discussion on foreign exchange activity, please refer to “Results of Operations.”
Effects of Inflation
We do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect our reserve for losses and loss adjustment expenses and interest rates. The potential exists, after a catastrophe loss or pandemic events like COVID-19, for the development of inflationary pressures in a local economy. The anticipated effects of inflation on us are considered in our catastrophe loss models. The actual effects of inflation on our results cannot be accurately known until claims are ultimately settled.
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ARCH CAPITAL | 70 | 2020 THIRD QUARTER FORM 10-Q |
OTHER FINANCIAL INFORMATION
The consolidated financial statements as of September 30, 2020 and for the three month and nine month periods ended September 30, 2020 and 20192021 have been reviewed by PricewaterhouseCoopers LLP, the registrant's independent public accountants, whose report is included as an exhibit to this filing. The report of PricewaterhouseCoopers LLP states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information appearing above under the subheading “Market Sensitive Instruments and Risk Management” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which information is hereby incorporated by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the filing of this Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to applicable Exchange Act Rules as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of and during the period covered by this report with respect to information being recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms and with respect to timely communication to them and other members of management responsible for preparing periodic reports of all material information required to be disclosed in this report as it relates to Arch Capital and its consolidated subsidiaries.
We continue to enhance our operating procedures and internal controls to effectively support our business and our regulatory and reporting requirements. Our management does
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| ARCH CAPITAL | 69 | 2021 THIRD QUARTER FORM 10-Q |
not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. As a result of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the disclosure controls and procedures are met.
Changes in Internal Controls Over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the quarter ended September 30, 20202021 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19. We are continually monitoring and assessing COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
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ARCH CAPITAL | 71 | 2020 THIRD QUARTER FORM 10-Q |
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We, in common with the insurance industry in general, are subject to litigation and arbitration in the normal course of our business. As of September 30, 2020,2021, we were not a party to any litigation or arbitration which is expected by management to have a material adverse effect on our results of operations and financial condition and liquidity.
ITEM 1A. RISK FACTORS
Our business is subject to a number of risks, including those identified in Part I—Item 1A of our 2019 Form 10-K, that could have a material adverse effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. The risks described in our 2019 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also could have a material adverse effect on our business, results of operations, financial condition and/or liquidity. Other than as described below, there have beenThere were no material changes tofrom the risk factors previously disclosed in Part I—Item 1A of our 2019Annual Report on Form 10-K.
The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity.
The continuing global pandemic related to10-K for the novel coronavirus COVID-19 has impacted the global economy, financial markets and our results of operations. In addition, COVID-19 could materially disrupt the business operations of third parties with whom we interact. The resurgence of the pandemic in many countries has resulted in continued disruption in global supply chains, and adversely impacted operations in many sectors of the economy. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time.
The pandemic could have a significant effect on our Company’s business, results of operations, and current and future financial performance. We may experience higher levels of loss and claims activity in certain lines of business and our premiums written and earned could also be adversely affected by a suppression of global commercial activity that results in a reduction in insurable assets and other exposure. Conditions of the financial markets resulting from the virus may also have a negative effect on the value and quality of
the assets we hold within our portfolio of invested assets, thereby adversely affecting our investment income and increasing our credit and related risk. Certain lines of our business may require additional forms of collateral in the event of a decline in the fair value of securities and benchmarks to which those repayment mechanisms are linked. The continued impacts of the pandemic to the financial markets may also adversely affect our ability to fund through public or private equity offerings, debt financings, and through other means at acceptable terms. For a further discussion, see “We could face unanticipated losses from war, terrorism, cyber-attacks, pandemics and political instability, and these or other unanticipated losses could have a material adverse effect on our financial condition and results of operations” and “Emerging claim and coverage issues may adversely affect our business” included in “Part I—Item 1A—Risk Factors” in our 2019 Form 10-K.
The disruption in the financial markets related to COVID-19 has contributed to net realized losses, primarily due to the impact of changes in fair value on our equity investments and, to a lesser extent, our fixed-income investment portfolio. Our corporate fixed income portfolio may be adversely impacted by ratings downgrades, increased bankruptcies and credit spread widening in distressed industries, such as energy, gaming, lodging and leisure, autos, airlines and retail. In addition, in recent years, many state and local governments have been operating under deficits or projected deficits. These deficits may be exacerbated by the costs of responding to COVID-19 and reduced tax revenues due to adverse economic conditions. The severity and duration of these deficits could have an adverse impact on the collectability and valuation of our municipal bond portfolio. Our investment portfolio also includes residential mortgage-backed securities, commercial mortgage-backed securities and commercial mortgage loans, all of which could be adversely impacted by declines in real estate valuations and/or financial market disruption, including a heightened collection risk on the underlying mortgages and on rent receivables. Further disruptions in global financial markets due to the continuing impact of COVID-19 could result in additional net realized investment losses, including potential impairments in our fixed income portfolio. In addition, declines in fixed income yields would result in decreases in net investment income from future investment activity, including re-investments. Furthermore, issuers of the investments we hold under the equity method of accounting report their financial information to us one month to three months following the end of the reporting period. Accordingly, the adverse impact of any disruptions in global financial markets on equity method income from these investments would likely not be reflected in our current quarter results and would instead be reported in the subsequent quarter. Further disruptions in global financial markets could adversely impact our net investment income inyear ended December 31, 2020.
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| ARCH CAPITAL | 7270 | 2020 THIRD QUARTER FORM 10-Q |
future periods from its non-fixed income investment portfolio. For further discussion of the risks related to our investment portfolio see “We may be adversely affected by changes in economic conditions, including interest rate changes” and “The determination of the amount of allowances and impairments taken on our investments is highly subjective and could materially impact our results of operations or financial position” included in “Part I—Item 1A—Risk Factors” in our 2019 Form 10-K.
Governmental, regulatory and rating actions in response to the COVID-19 pandemic may adversely affect our financial performance and our ability to conduct our businesses as we have in the past.
Federal, state and local government actions in the U.S. and other countries where we do business to address and mitigate the impact of COVID-19 may adversely affect us. For example, we are potentially subject to legislative and/or regulatory action that seeks to retroactively mandate coverage for losses which our insurance policies were not designed or priced to cover. Currently, in some states there is proposed legislation to require insurers to cover business interruption claims irrespective of terms, exclusions or other conditions included in the policies that would otherwise preclude coverage. In addition, a number of states have instituted, and other states are considering instituting, changes designed to effectively expand workers' compensation coverage by creating presumptions of compensability of claims for certain types of workers. Regulatory restrictions or requirements could also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums. Some state regulators have issued orders to review insurers’ rates to determine whether premium refunds are required, and regulators in other states could take similar actions. Many insurers, including us, have also voluntarily provided, and may further provide, premium refunds to their customers. It is also possible that changes in economic conditions and steps taken by federal, state and local governments in response to COVID-19 could require an increase in taxes at the federal, state and local levels, which would adversely impact our results of operations.
We expect the pandemic to result in a material increase in new defaults as borrowers fail to make timely payments on their mortgages, including as a result of entering mortgage forbearance programs that allow borrowers to defer mortgage payments, which may impact our eligible insurers’ ability to remain compliant with the Private Mortgage Insurers Eligibility Requirements (“PMIERs”) financial requirements. On March 18, 2020, the Federal Housing Finance Agency (“FHFA”) directed Fannie Mae and Freddie Mac (the “GSEs”), the primary purchasers of mortgages insured by the Company, to suspend foreclosures and evictions for at least
60 days and to provide payment forbearance to borrowers impacted by COVID-19. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted. The CARES Act suspends foreclosures and evictions for at least 60 days from March 18, 2020, on mortgages purchased or securitized by the GSEs. In addition, the CARES Act provides for payment forbearance for up to 360 days to borrowers experiencing a hardship during the COVID-19 emergency. FHFA directed Fannie Mae and Freddie Mac to extend the suspension of eviction and foreclosure-related activities through at least December 31, 2020.
Consistent with the CARES Act, the GSEs will provide a forbearance plan to any borrower who requests a forbearance with an attestation of the financial hardship caused by the COVID-19 emergency. No additional documentation other than the borrower’s attestation to a financial hardship caused by the COVID-19 emergency is required. It is unclear how many borrowers will obtain forbearance plans, the length of assistance borrowers will require, and whether borrowers will be able to resume their mortgage payments thereafter. Increases in unemployment as well as borrowers entering into forbearance plans will result in higher notices of delinquency (“NODs”) which may have an adverse impact on our results or operations. In addition, as a result of COVID-19-related relief programs, the defaults related to the pandemic, if not cured, could remain in our defaulted loan inventory for a protracted period of time, potentially resulting in higher frequency (claim rate) and severity (amount of the claim) for those loans that ultimately result in a claim. Accordingly, extended or extensive forbearance programs and other changes in regulations or laws may adversely impact our mortgage insurance segment.
When a borrower obtains a forbearance plan and does not make mortgage payments for two consecutive months, the servicer will report the NOD with a special code that indicates the loan is subject to a COVID-19 related forbearance plan. Under PMIERs, eligible insurers are required to hold additional risk-based required assets for delinquent mortgages. However, this amount is reduced for mortgages backed by a property located in a FEMA Declared Major Disaster Area that are either 1) subject to a forbearance plan executed in response to a FEMA Declared Major Disaster Area eligible for Individual Assistance, or 2) has an initial default date occurring up to either (i) 30 days prior to or (ii) 90 days following the Major Disaster event. FEMA has issued Major Disaster Area declarations in all states related to COVID-19, noting the incident date as January 20, 2020. On June 30, 2020 as amended and restated thereafter on September 29, 2020, the GSEs published guidance clarifying the applicability of the reduced delinquent loan charges on loans with their first missed payments occurring between March 1, 2020 and December 31, 2020 in response to a hardship related to COVID-19. Additionally, through March
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ARCH CAPITAL | 73 | 2020 THIRD QUARTER FORM 10-Q |
31, 2021 the GSEs have temporarily required eligible insurers to obtain prior approval of dividends or entering into any new arrangements or altering any existing arrangements under tax sharing and intercompany expense-sharing agreements. The Company is reliant on the accurate reporting of servicers to correctly identify which NODs are subject to COVID-19 related forbearance plans and the reduced delinquent loan charge. In addition, the rating agencies continually review the financial strength ratings assigned to the Company and its subsidiaries, and the ratings are subject to change. The COVID-19 pandemic and its impact on financial results and condition, could cause one or more of the rating agencies to downgrade the ratings assigned to the Company and its subsidiaries.
The disruption and other effects caused by COVID-19 could adversely impact our business operations, which could adversely affect our financial performance and results.
To protect our employees and in response to the global and regional restrictions on interpersonal contact and travel because of the COVID-19 pandemic, our work force (other than a small percentage of workers performing services which require them to visit the office) is working remotely, placing increased demands on our IT systems. Remote working arrangements may increase the risk of cyber-security attacks or data security incidents. While we have continued to conduct our business effectively, there is no assurance that our ability to continue to function in this new environment will not be adversely affected by an extended period of limited access to our physical facilities or by other developments such as an extended disruption to our systems that support our remote work capability. We depend on third-party platforms and other infrastructure to provide certain of our products and services, and such third-party infrastructures face similar risks. In addition, the continuation of the COVID-19 pandemic may continue to adversely affect our business operations, including decreased worker productivity, our ability to carry on business development activities and unavailability of employees due to illness or quarantines, among others. For a further discussion, see “Our information technology systems may be unable to meet the demands of customers” and “Technology breaches or failures, including, but not limited to, those resulting from a malicious cyber-attack on us or our business partners and service providers, could disrupt or otherwise negatively impact our business and/or expose us to litigation” included in “Part I—Item 1A—Risk Factors” in our 2019 Form 10-K.
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ARCH CAPITAL | 74 | 2020 THIRD QUARTER FORM 10-Q |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes our purchases of common shares for the 20202021 third quarter:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Issuer Purchases of Equity Securities |
| Period | | Total Number of Shares
Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of
Publicly Announced
Plans or Programs | | Approximate Dollar
Value of Shares that
May Yet be Purchased
Under the Plan or
Programs (2) |
| 7/1/2020 - 7/31/2020 | | 472 | | | $ | 30.34 | | | — | | | $ | 924,514 | |
| 8/1/2020 - 8/31/2020 | | 1,964 | | | 32.26 | | | — | | | $ | 924,514 | |
| 9/1/2020 -9/30/2020 | | 17,296 | | | 30.29 | | | — | | | $ | 924,514 | |
| Total | | 19,732 | | | $ | 30.49 | | | — | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Issuer Purchases of Equity Securities |
| Period | | Total Number of Shares
Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of
Publicly Announced
Plans or Programs | | Approximate Dollar
Value of Shares that
May Yet be Purchased
Under the Plan or
Programs (2) |
| 7/1/2021-7/31/2021 | | 729,925 | | | $ | 39.01 | | | 727,778 | | | $ | 402,822 | |
| 8/1/2021-8/31/2021 | | 4,173,006 | | | 40.66 | | | 4,130,776 | | | $ | 234,886 | |
| 9/1/2021-9/30/2021 | | 4,864,398 | | | 39.32 | | | 4,846,402 | | | $ | 44,331 | |
| Total | | 9,767,329 | | | $ | 39.87 | | | 9,704,956 | | | |
(1)Represents repurchases by Arch Capital of shares, from time to time, from employees in order to facilitate the payment of withholding taxes on restricted shares granted and the exercise of stock appreciation rights. We purchased these shares at their fair value, as determined by reference to the closing price of our common shares on the day the restricted shares vested or the stock appreciation rights were exercised.
(2)Remaining amount available at September 30, 20202021 under Arch Capital’s share repurchase authorization, under which repurchases may be effected from time to time in open market or privately negotiated transactions. On October 8, 2021, the board of directors of ACGL increased the aggregate purchase amount authorized under the share repurchase program to $1.5 billion. Repurchases under this authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2021.2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
In accordance with Section 10a(i)(2) of the Securities Exchange Act of 1934, as amended, we are responsible for disclosing non-audit services to be provided by our independent auditor, PricewaterhouseCoopers LLP, which are approved by the Audit Committee of our board of directors. During the 20202021 third quarter, the Audit Committee approved engagements of PricewaterhouseCoopers LLP for permitted non-audit services, which consisted of tax consulting services, tax compliance services and other accounting consulting services.
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| ARCH CAPITAL | 7571 | 20202021 THIRD QUARTER FORM 10-Q |
ITEM 6. EXHIBITS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | Original Number | | Date Filed | | Filed Herewith |
| 2.1 | | | | 8-K | | 2.1 | | October 14, 2020 | | |
| 2.2 | | | | 8-K | | 2.1 | | November 2, 2020 | | |
| 10.1 | | | | 8-K | | 10.1 | | October 14, 2020 | | |
| 15 | | | | | | | | | | X |
| 31.1 | | | | | | | | | | X |
| 31.2 | | | | | | | | | | X |
| 32.1 | | | | | | | | | | X |
| 32.2 | | | | | | | | | | X |
| 101.INS | | XBRL Instance Document | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
| Exhibit Number | | Exhibit Description | | Form | | Original Number | | Date Filed | | Filed Herewith |
| 10.1 | | | | | | | | | | X |
| 10.2 | | | | | | | | | | X |
| 15 | | | | | | | | | | X |
| 31.1 | | | | | | | | | | X |
| 31.2 | | | | | | | | | | X |
| 32.1 | | | | | | | | | | X |
| 32.2 | | | | | | | | | | X |
| 101.INS | | XBRL Instance Document | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | |
| ARCH CAPITAL | 7672 | 20202021 THIRD QUARTER FORM 10-Q |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | | ARCH CAPITAL GROUP LTD. |
| | | (REGISTRANT) |
| | | |
| | | /s/ Marc Grandisson |
Date: November 5, 20204, 2021 | | Marc Grandisson |
| | | President and Chief Executive Officer (Principal Executive Officer) |
| | | |
| | | /s/ François Morin |
Date: November 5, 20204, 2021 | | François Morin |
| | | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) and Treasurer |
| | | | | | | | |
| ARCH CAPITAL | 7773 | 20202021 THIRD QUARTER FORM 10-Q |
