ARCH CAPITAL GROUP LTD. - FORM 8-K - EX-99.2 - February 9, 2021

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EXHIBIT 99.2
 
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Arch Capital Group Ltd.
Waterloo House, Ground Floor
100 Pitts Bay Road
Pembroke HM 08 Bermuda
 

Financial Supplement

Financial Information
as of December 31, 2020
 
The following financial supplement is provided to assist in your understanding of Arch Capital Group Ltd. (“Arch Capital”) and its subsidiaries (collectively, the “Company”).
 
This report is for informational purposes only.  It should be read in conjunction with documents filed by Arch Capital with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q.  Please refer to the Company’s website at www.archcapgroup.com for further information describing Arch Capital.


Contacts
Arch Capital Group Ltd.Investor Relations
François Morin: (441) 278-9250Donald Watson: (914) 872-3616; dwatson@archcapservices.com


Arch Capital Group Ltd. and Subsidiaries
Table of Contents

  Page
   
I.Financial Highlights
  
II.Consolidated Financial Statements
 a.Consolidated Statements of Income
 b.Consolidated Balance Sheets
 c.Consolidated Statements of Changes in Shareholders’ Equity
 d.Consolidated Statements of Cash Flows
  
III.Segment Information
 a.Overview
 b.Consolidated Results
 c.Insurance Segment Results
 d.Reinsurance Segment Results
e.Mortgage Segment Results
f.Consolidated Results Excluding ‘Other’ Segment
g.Selected Information on Losses and Loss Adjustment Expenses
  
IV.Investment Information
 a.Investable Asset Summary and Investment Portfolio Metrics
b.Composition of Net Investment Income, Yield and Total Return
 c.Composition of Fixed Maturities
d.Credit Quality Distribution and Maturity Profile
e.Analysis of Corporate Exposures
 f.Structured Securities
  
V.Other
 a.Comments on Regulation G
 b.Operating Income Reconciliation and Annualized Operating Return on Average Common Equity
c.Operating Income and Effective Tax Rate Calculations
 d.Capital Structure and Share Repurchase Activity

1
Arch Capital Group Ltd. and Subsidiaries
Basis of Presentation

Basis of Presentation

All financial information contained herein is unaudited, however, certain information relating to the consolidated balance sheet at December 31, 2019 is derived from or agrees to audited financial information. Unless otherwise noted, all data is in thousands, except for share and per share amounts and ratio information.

In March 2014, the Company invested $100.0 million to acquire common equity and a warrant to purchase additional common equity of Watford Holdings Ltd. In accordance with GAAP, the Company consolidates the results of Watford Holdings Ltd. (“Watford”) in its financial statements, although it only owns approximately 13% of Watford’s outstanding common equity at December 31, 2020. Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, 100% of the results of Watford are included in the Company’s consolidated financial statements. The portion of Watford’s earnings owned by third parties is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ In addition, the Company reflects Watford’s redeemable preference shares in the mezzanine section of the Company’s consolidated balance sheets as ‘redeemable noncontrolling interests’ because they have redemption features that are not solely within the control of Watford.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital and its subsidiaries may include forward-looking statements, which reflect the Company’s current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements.
 
Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology. Forward-looking statements involve the Company’s current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and the Company’s ability to maintain and improve the Company’s ratings; investment performance; the loss of key personnel; the adequacy of the Company’s loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; including pandemics such as COVID-19; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; the Company’s ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to the Company of reinsurance to manage gross and net exposures; the failure of others to meet their obligations to the Company; changes in the method for determining the London Inter-bank Offered Rate (“LIBOR”) and the potential replacement of LIBOR and other factors identified in the Company’s filings with the U.S. Securities and Exchange Commission.
 
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
2
Arch Capital Group Ltd. and Subsidiaries
Financial Highlights
The following table presents financial highlights (1):
(U.S. Dollars in thousands, except share data)Three Months EndedYear Ended
December 31,December 31,
20202019Change20202019Change
Underwriting results:
Gross premiums written$2,170,831 $1,842,071 17.8 %$9,632,691 $7,695,645 25.2 %
Net premiums written1,660,298 1,343,100 23.6 %6,900,127 5,506,205 25.3 %
Net premiums earned1,668,299 1,382,437 20.7 %6,431,584 5,229,809 23.0 %
Underwriting income (loss) (2)229,542 288,672 (20.5)%481,069 1,087,630 (55.8)%
Loss ratio61.0 %51.4 %9.6 66.1 %51.3 %14.8 
Acquisition expense ratio13.5 %14.3 %(0.8)14.1 %14.1 %— 
Other operating expense ratio12.1 %13.9 %(1.8)12.7 %14.3 %(1.6)
Combined ratio86.6 %79.6 %7.0 92.9 %79.7 %13.2 
Net investment income$87,992 $119,906 (26.6)%$401,908 $491,067 (18.2)%
Per diluted share$0.21 $0.29 (27.6)%$0.98 $1.19 (17.6)%
Net income available to Arch common shareholders$533,141 $315,981 68.7 %$1,363,909 $1,594,707 (14.5)%
Per diluted share$1.30 $0.76 71.1 %$3.32 $3.87 (14.2)%
After-tax operating income available to Arch common shareholders (2)$230,417 $308,357 (25.3)%$557,108 $1,162,639 (52.1)%
Per diluted share$0.56 $0.74 (24.3)%$1.36 $2.82 (51.8)%
Comprehensive income (loss) available to Arch$646,082 $326,760 97.7 %$1,682,325 $2,027,129 (17.0)%
Net cash provided by operating activities$507,017 $443,298 14.4 %$2,705,054 $1,810,060 49.4 %
Weighted average common shares and common share equivalents outstanding — diluted410,281,852 414,124,920 (0.9)%410,259,455 411,609,478 (0.3)%
Financial measures:      
Change in book value per common share during period5.4 %3.2 %2.2 14.7 %22.8 %(8.1)
Annualized return on average common equity17.8 %12.0 %5.8 11.8 %16.5 %(4.7)
Annualized operating return on average common equity (2)7.7 %11.7 %(4.0)4.8 %12.0 %(7.2)
Total return on investments (3)2.46 %1.07 %140 bps7.77 %7.30 %47 bps
 
(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)See ‘Comments on Regulation G’ for a further discussion of consolidated underwriting income or loss, after-tax operating income or loss available to Arch common shareholders and annualized operating return on average common equity.
(3)Total return on investments includes net investment income, equity in net income (loss) of investment funds accounted for using the equity method, net realized gains and losses and the change in unrealized gains and losses and is calculated on a pre-tax basis and before investment expenses. See ‘Comments on Regulation G’ for a further discussion of the presentation of total return on investments.
3
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Income
(U.S. Dollars in thousands, except share data)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Revenues       
Net premiums earned$1,811,045 $1,771,092 $1,665,354 $1,744,444 $1,515,882 $6,991,935 $5,786,498 
Net investment income114,458 128,512 131,485 145,153 154,263 519,608 627,738 
Net realized gains (losses)353,333 280,499 556,588 (366,960)40,830 823,460 363,198 
Other underwriting income7,852 5,413 6,667 6,852 6,757 26,784 24,861 
Equity in net income (loss) of investment funds accounted for using the equity method89,286 126,735 (65,119)(4,209)27,139 146,693 123,672 
Other income (loss)10,468 919 (3,140)8,548 (1,317)16,795 2,233 
Total revenues2,386,442 2,313,170 2,291,835 1,533,828 1,743,554 8,525,275 6,928,200 
Expenses
Losses and loss adjustment expenses(1,127,385)(1,216,273)(1,230,522)(1,115,419)(844,922)(4,689,599)(3,133,452)
Acquisition expenses(254,828)(247,942)(254,789)(247,283)(221,888)(1,004,842)(840,945)
Other operating expenses(215,697)(215,686)(209,249)(234,544)(204,408)(875,176)(800,997)
Corporate expenses(25,335)(17,937)(17,920)(20,796)(26,837)(81,988)(80,111)
Amortization of intangible assets(19,196)(16,715)(16,489)(16,631)(21,890)(69,031)(82,104)
Interest expense(38,419)(41,343)(31,139)(32,555)(31,199)(143,456)(120,872)
Net foreign exchange gains (losses)(72,209)(44,885)(39,211)72,671 (52,306)(83,634)(20,609)
Total expenses(1,753,069)(1,800,781)(1,799,319)(1,594,557)(1,403,450)(6,947,726)(5,079,090)
Income (loss) before income taxes633,373 512,389 492,516 (60,729)340,104 1,577,549 1,849,110 
Income tax expense(34,059)(23,707)(26,127)(27,945)(27,336)(111,838)(155,810)
Net income (loss)599,314 488,682 466,389 (88,674)312,768 1,465,711 1,693,300 
Net (income) loss attributable to noncontrolling interests(55,770)(69,643)(167,568)232,791 13,616 (60,190)(56,981)
Net income (loss) attributable to Arch543,544 419,039 298,821 144,117 326,384 1,405,521 1,636,319 
Preferred dividends(10,403)(10,403)(10,403)(10,403)(10,403)(41,612)(41,612)
Net income (loss) available to Arch common shareholders$533,141 $408,636 $288,418 $133,714 $315,981 $1,363,909 $1,594,707 
Comprehensive income (loss) available to Arch$646,082 $455,907 $626,366 $(46,030)$326,760 $1,682,325 $2,027,129 
Net income (loss) per common share and common share equivalent
Basic$1.32 $1.01 $0.72 $0.33 $0.78 $3.38 $3.97 
Diluted$1.30 $1.00 $0.71 $0.32 $0.76 $3.32 $3.87 
Weighted average common shares and common share equivalents outstanding
Basic403,005,335 402,850,485 402,503,687 403,892,161 402,941,290 403,062,179 401,802,815 
Diluted410,281,852 409,194,657 408,119,681 414,033,570 414,124,920 410,259,455 411,609,478 



4
Arch Capital Group Ltd. and Subsidiaries
Consolidated Balance Sheets

(U.S. Dollars in thousands, except share data)December 31,September 30,June 30,March 31,December 31,
20202020202020202019
Assets     
Investments:     
Fixed maturities available for sale, at fair value$18,717,825 $18,452,888 $17,207,731 $16,841,571 $16,894,526 
Short-term investments available for sale, at fair value1,924,922 2,039,097 2,277,866 944,531 956,546 
Collateral received under securities lending, at fair value301,096 64,259 473,790 182,284 388,376 
Equity securities, at fair value1,444,830 1,502,015 1,257,317 1,181,903 838,925 
Other investments4,324,796 3,749,575 3,520,771 3,310,517 3,663,477 
Investments accounted for using the equity method2,047,889 1,883,702 1,727,302 1,676,055 1,660,396 
Total investments28,761,358 27,691,536 26,464,777 24,136,861 24,402,246 
Cash906,448 976,398 854,259 882,284 726,230 
Accrued investment income103,299 106,940 102,064 118,089 117,937 
Securities pledged under securities lending, at fair value294,912 62,749 464,503 177,442 379,868 
Premiums receivable2,064,586 2,225,311 2,203,753 2,155,204 1,778,717 
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses4,500,802 4,621,937 4,363,507 4,303,135 4,346,816 
Contractholder receivables1,986,924 2,185,614 2,179,124 2,140,724 2,119,460 
Ceded unearned premiums1,234,075 1,450,200 1,364,603 1,357,284 1,234,683 
Deferred acquisition costs790,708 750,901 714,531 708,848 633,400 
Receivable for securities sold92,743 158,674 167,281 221,573 24,133 
Goodwill and intangible assets692,863 713,777 688,490 705,450 738,083 
Other assets1,853,579 1,771,998 1,632,756 1,509,232 1,383,788 
Total assets$43,282,297 $42,716,035 $41,199,648 $38,416,126 $37,885,361 
Liabilities     
Reserve for losses and loss adjustment expenses$16,513,929 $15,900,526 $15,044,874 $14,309,580 $13,891,842 
Unearned premiums4,838,965 5,062,052 4,827,445 4,817,191 4,339,549 
Reinsurance balances payable683,263 873,067 793,467 737,597 667,072 
Contractholder payables1,995,562 2,191,515 2,185,414 2,149,762 2,119,460 
Collateral held for insured obligations215,581 221,957 208,449 211,597 206,698 
Senior notes2,861,113 2,860,811 2,860,733 1,871,869 1,871,626 
Revolving credit agreement borrowings155,687 210,687 335,587 500,587 484,287 
Securities lending payable301,089 64,251 473,783 182,274 388,366 
Payable for securities purchased218,779 382,236 275,257 327,359 87,579 
Other liabilities1,510,888 1,681,181 1,467,739 1,392,905 1,513,330 
Total liabilities29,294,856 29,448,283 28,472,748 26,500,721 25,569,809 
Redeemable noncontrolling interests58,548 57,835 55,986 55,376 55,404 
Shareholders’ equity     
Non-cumulative preferred shares780,000 780,000 780,000 780,000 780,000 
Common shares643 642 642 642 638 
Additional paid-in capital1,977,794 1,950,782 1,935,514 1,921,487 1,889,683 
Retained earnings12,362,463 11,829,322 11,420,686 11,132,268 11,021,006 
Accumulated other comprehensive income (loss), net of deferred income tax488,895 386,357 349,488 21,944 212,091 
Common shares held in treasury, at cost(2,503,909)(2,495,106)(2,494,505)(2,489,097)(2,406,047)
Total shareholders’ equity available to Arch13,105,886 12,451,997 11,991,825 11,367,244 11,497,371 
Non-redeemable noncontrolling interests823,007 757,920 679,089 492,785 762,777 
Total shareholders’ equity13,928,893 13,209,917 12,670,914 11,860,029 12,260,148 
Total liabilities, noncontrolling interests and shareholders’ equity$43,282,297 $42,716,035 $41,199,648 $38,416,126 $37,885,361 
Common shares and common share equivalents outstanding, net of treasury shares406,720,642 406,018,958 405,970,251 405,609,867 405,619,201 
Book value per common share (1)$30.31 $28.75 $27.62 $26.10 $26.42 

(1)    Excludes the effects of stock options and restricted stock units outstanding.
5
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity

(U.S. Dollars in thousands)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Non-cumulative preferred shares       
Balance at beginning and end of period$780,000 $780,000 $780,000 $780,000 $780,000 $780,000 $780,000 
Common shares
Balance at beginning of period642 642 642 638 638 638 634 
Common shares issued, net1 — — 4 — 5 4 
Balance at end of period643 642 642 642 638 643 638 
Additional paid-in capital
Balance at beginning of period1,950,782 1,935,514 1,921,487 1,889,683 1,864,468 1,889,683 1,793,781 
Amortization of share-based compensation14,663 14,662 13,160 28,050 11,862 70,535 64,152 
All other12,349 606 867 3,754 13,353 17,576 31,750 
Balance at end of period1,977,794 1,950,782 1,935,514 1,921,487 1,889,683 1,977,794 1,889,683 
Retained earnings
Balance at beginning of period11,829,322 11,420,686 11,132,268 11,021,006 10,705,025 11,021,006 9,426,299 
Cumulative effect of an accounting change (1)— — — (22,452)— (22,452)— 
Balance at beginning of period, as adjusted11,829,322 11,420,686 11,132,268 10,998,554 10,705,025 10,998,554 9,426,299 
Net income599,314 488,682 466,389 (88,674)312,768 1,465,711 1,693,300 
Amounts attributable to noncontrolling interests(55,770)(69,643)(167,568)232,791 13,616 (60,190)(56,981)
Preferred share dividends(10,403)(10,403)(10,403)(10,403)(10,403)(41,612)(41,612)
Balance at end of period12,362,463 11,829,322 11,420,686 11,132,268 11,021,006 12,362,463 11,021,006 
Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period386,357 349,488 21,944 212,091 211,714 212,091 (178,720)
Change in unrealized appreciation (decline) in value of available-for-sale investments63,008 19,800 305,338 (145,337)(24,707)242,809 372,664 
Change in foreign currency translation adjustments39,530 17,069 22,206 (44,810)25,084 33,995 18,147 
Balance at end of period488,895 386,357 349,488 21,944 212,091 488,895 212,091 
Common shares held in treasury, at cost
Balance at beginning of period(2,495,106)(2,494,505)(2,489,097)(2,406,047)(2,403,749)(2,406,047)(2,382,167)
Shares repurchased for treasury(8,803)(601)(5,408)(83,050)(2,298)(97,862)(23,880)
Balance at end of period(2,503,909)(2,495,106)(2,494,505)(2,489,097)(2,406,047)(2,503,909)(2,406,047)
Total shareholders’ equity available to Arch13,105,886 12,451,997 11,991,825 11,367,244 11,497,371 13,105,886 11,497,371 
Non-redeemable noncontrolling interests823,007 757,920 679,089 492,785 762,777 823,007 762,777 
Total shareholders’ equity$13,928,893 $13,209,917 $12,670,914 $11,860,029 $12,260,148 $13,928,893 $12,260,148 

(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).”
6
Arch Capital Group Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
(U.S. Dollars in thousands)Three Months EndedYear Ended
December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Operating Activities       
Net income (loss)$599,314 $488,682 $466,389 $(88,674)$312,768 $1,465,711 $1,693,300 
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses(366,942)(282,907)(557,740)362,964 (51,435)(844,625)(377,967)
Equity in net income or loss of investment funds accounted for using the equity method and other income or loss(78,257)(95,078)96,350 29,034 24,899 (47,951)(14,013)
Amortization of intangible assets19,196 16,715 16,489 16,631 21,890 69,031 82,104 
Share-based compensation14,829 14,521 13,363 28,549 11,985 71,262 66,417 
Changes in:
Reserve for losses and loss adjustment expenses, net445,758 509,623 652,389 506,057 112,907 2,113,827 489,981 
Unearned premiums, net(53,030)103,052 2,957 392,802 (60,429)445,781 252,569 
Premiums receivable143,123 1,872 (45,181)(418,457)91,013 (318,643)(237,752)
Deferred acquisition costs(36,710)(14,801)(17,302)(75,135)(8,654)(143,948)(47,260)
Reinsurance balances payable(139,670)73,459 52,354 79,807 (32,770)65,950 182,132 
Other items, net7,444 194,732 31,058 (223,124)83,146 10,110 (41,052)
Net cash provided by operating activities555,055 1,009,870 711,126 610,454 505,320 2,886,505 2,048,459 
Investing Activities       
Purchases of fixed maturity investments(5,714,394)(8,640,034)(13,444,854)(11,965,995)(6,043,154)(39,765,277)(30,053,777)
Purchases of equity securities(239,162)(330,699)(264,466)(760,683)(287,916)(1,595,010)(811,967)
Purchases of other investments(966,841)(340,194)(273,221)(228,471)(455,620)(1,808,727)(1,470,545)
Proceeds from sales of fixed maturity investments5,404,479 7,711,837 13,109,907 11,723,123 5,888,011 37,949,346 28,595,865 
Proceeds from sales of equity securities415,471 151,447 314,045 266,301 58,688 1,147,264 429,818 
Proceeds from sales, redemptions and maturities of other investments237,771 319,619 256,057 216,131 382,042 1,029,578 1,209,559 
Proceeds from redemptions and maturities of fixed maturity investments225,842 276,052 170,884 198,356 248,546 871,134 643,265 
Net settlements of derivative instruments15,716 12,819 (45,017)195,488 (32,441)179,006 59,982 
Net (purchases) sales of short-term investments129,670 164,012 (1,311,586)(11,777)(89,245)(1,029,681)39,833 
Change in cash collateral related to securities lending— 26,614 (405)55,001 (69,183)81,210 (62,193)
Purchases of fixed assets(13,155)(9,030)(9,217)(8,470)(10,202)(39,872)(37,837)
Other69,795 (140,671)(33,821)42,500 (145,533)(62,197)(348,486)
Net cash provided by (used for) investing activities(434,808)(798,228)(1,531,694)(278,496)(556,007)(3,043,226)(1,806,483)
Financing Activities       
Purchases of common shares under share repurchase program(7,986)— — (75,486)— (83,472)(2,871)
Proceeds from common shares issued, net11,532 5 (5,134)(4,527)5,685 1,876 6,203 
Proceeds from borrowings— 13,875 988,618 16,300 — 1,018,793 200,083 
Repayments of borrowings(55,000)(139,000)(165,000)— (21,644)(359,000)(49,182)
Change in cash collateral related to securities lending— (26,614)405 (55,001)69,183 (81,210)62,193 
Change in third party investment in non-redeemable noncontrolling interests— — — (2,867)(75,056)(2,867)(75,056)
Change in third party investment in redeemable noncontrolling interests — — — — (8)— (161,882)
Dividends paid to redeemable noncontrolling interests(1,404)(1,001)(1,359)(1,181)(1,107)(4,945)(12,515)
Other18,449 57,891 (1,294)(1,331)(816)73,715 (6,023)
Preferred dividends paid(10,403)(10,403)(10,403)(10,403)(10,403)(41,612)(41,612)
Net cash provided by (used for) financing activities(44,812)(105,247)805,833 (134,496)(34,166)521,278 (80,662)
Effects of exchange rate changes on foreign currency cash and restricted cash28,136 15,895 8,981 (30,723)26,076 22,289 17,741 
Increase (decrease) in cash and restricted cash103,571 122,290 (5,754)166,739 (58,777)386,846 179,055 
Cash and restricted cash, beginning of period1,186,973 1,064,683 1,070,437 903,698 962,475 903,698 724,643 
Cash and restricted cash, end of period$1,290,544 $1,186,973 $1,064,683 $1,070,437 $903,698 $1,290,544 $903,698 
Income taxes paid (received)$56,126 $136,404 $3,023 $7,387 $62,398 $202,940 $109,463 
Interest paid$72,936 $3,141 $50,767 $6,647 $58,385 $133,491 $126,945 
Net cash provided by operating activities, excluding the ‘other’ segment$507,017 $963,654 $648,427 $585,956 $443,298 $2,705,054 $1,810,060 

7
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview


The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — ‘other’ and corporate (non-underwriting). The Company’s Insurance, Reinsurance and Mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the 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 core underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment and, accordingly, investment income is not allocated to each underwriting segment.

The Company determined its reportable operating segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.

Insurance Segment

The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:

•    Construction and national accounts: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).
•    Excess and surplus casualty: primary and excess casualty insurance coverages, including middle market energy business, and contract binding, which primarily provides casualty coverage through a network of appointed agents to small and medium risks.
•    Lenders products: collateral protection, debt cancellation and service contract reimbursement products to banks, credit unions, automotive dealerships and original equipment manufacturers and other specialty programs that pertain to automotive lending and leasing.
•    Professional lines: directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity and other financial related coverages for corporate, private equity, venture capital, real estate investment trust, limited partnership, financial institution and not-for-profit clients of all sizes and medical professional and general liability insurance coverages for the healthcare industry. The business is predominately written on a claims-made basis.
•    Programs: primarily package policies, underwriting workers’ compensation and umbrella liability business in support of desirable package programs, targeting program managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.
•    Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, war, specie and liability. Aviation and stand alone terrorism are also offered.
•    Travel, accident and health: specialty travel and accident and related insurance products for individual, group travelers, travel agents and suppliers, as well as accident and health, which provides accident, disability and medical plan insurance coverages for employer groups, medical plan members, students and other participant groups.
•    Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract and commercial surety coverages, including contract bonds (payment and performance bonds) primarily for medium and large contractors and commercial surety bonds for Fortune 1,000 companies and smaller transaction business programs.
8
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Overview

Reinsurance Segment
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:

•Casualty: provides coverage to ceding company clients on third party liability and workers’ compensation exposures from ceding company clients, primarily on a treaty basis. Exposures include, among others, executive assurance, professional liability, workers’ compensation, excess and umbrella liability, excess motor and healthcare business.
•Marine and aviation: provides coverage for energy, hull, cargo, specie, liability and transit, and aviation business, including airline and general aviation risks. Business written may also include space business, which includes coverages for satellite assembly, launch and operation for commercial space programs.
•Other specialty: provides coverage to ceding company clients for proportional motor and other lines including surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk.
•Property catastrophe: provides protection for most catastrophic losses that are covered in the underlying policies written by reinsureds, including hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expense from a single occurrence of a covered peril exceed the retention specified in the contract.
•Property excluding property catastrophe: provides coverage for both personal lines and commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on both a proportional and excess of loss basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.
•Other. includes life reinsurance business on both a proportional and non-proportional basis, casualty clash business and, in limited instances, non-traditional business which is intended to provide insurers with risk management solutions that complement traditional reinsurance.
Mortgage Segment

The mortgage segment includes the Company’s U.S. and international mortgage insurance and reinsurance operations as well as government sponsored enterprise (“GSE”) credit-risk sharing transactions. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Fannie Mae and Freddie Mac.

Corporate (Non-Underwriting) Segment

The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and income taxes. Such amounts exclude the results of the ‘other’ segment.

Other Segment

The ‘other’ segment includes the results of Watford. Subsidiaries of the Company act as Watford’s reinsurance and insurance underwriting managers while HPS Investment Partners, LLC manages Watford’s non-investment grade credit portfolios and the Company manages Watford’s investment grade portfolios, all under long term services agreements. Pursuant to generally accepted accounting principles, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, the Company consolidates the results of Watford in its consolidated financial statements, although it only owns approximately 13% of Watford’s common equity (listed on the Nasdaq Select Global Market under the ticker symbol “WTRE”). Watford has its own management and board of directors that is responsible for its own results and profitability. The portion of Watford’s earnings attributable to third party investors is recorded in the consolidated statements of income as ‘amounts attributable to noncontrolling interests.’ Management measures segment performance for the ‘other’ segment based on net income or loss.

9
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Three Months Ended
December 31, 2020
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$1,244,227 $537,912 $389,662 $2,170,831 $138,237 $2,256,514 
Premiums ceded(406,490)(47,018)(57,995)(510,533)(40,520)(498,499)
Net premiums written837,737 490,894 331,667 1,660,298 97,717 1,758,015 
Change in unearned premiums(89,299)93,180 4,120 8,001 45,029 53,030 
Net premiums earned748,438 584,074 335,787 1,668,299 142,746 1,811,045 
Other underwriting income (loss)— 2,687 4,667 7,354 498 7,852 
Losses and loss adjustment expenses(541,821)(392,734)(83,623)(1,018,178)(109,207)(1,127,385)
Acquisition expenses(101,055)(98,532)(25,936)(225,523)(29,305)(254,828)
Other operating expenses(118,206)(42,180)(42,024)(202,410)(13,287)(215,697)
Underwriting income (loss)$(12,644)$53,315 $188,871 229,542 (8,555)220,987 
Net investment income87,992 26,466 114,458 
Net realized gains (losses)289,817 63,516 353,333 
Equity in net income (loss) of investment funds accounted for using the equity method89,286 — 89,286 
Other income10,468 — 10,468 
Corporate expenses (2)(17,085)— (17,085)
Transaction costs and other (2)(4,210)(4,040)(8,250)
Amortization of intangible assets(19,196)— (19,196)
Interest expense(33,615)(4,804)(38,419)
Net foreign exchange gains (losses)(62,349)(9,860)(72,209)
Income (loss) before income taxes570,650 62,723 633,373 
Income tax (expense) benefit(33,700)(359)(34,059)
Net income (loss)536,950 62,364 599,314 
Dividends attributable to redeemable noncontrolling interests(1,124)(992)(2,116)
Amounts attributable to nonredeemable noncontrolling interests— (53,654)(53,654)
Net income (loss) available to Arch535,826 7,718 543,544 
Preferred dividends(10,403)— (10,403)
Net income (loss) available to Arch common shareholders$525,423 $7,718 $533,141 
Underwriting Ratios
Loss ratio72.4 %67.2 %24.9 %61.0 %76.5 %62.3 %
Acquisition expense ratio13.5 %16.9 %7.7 %13.5 %20.5 %14.1 %
Other operating expense ratio15.8 %7.2 %12.5 %12.1 %9.3 %11.9 %
Combined ratio101.7 %91.3 %45.1 %86.6 %106.3 %88.3 %
Net premiums written to gross premiums written67.3 %91.3 %85.1 %76.5 %70.7 %77.9 %
Total investable assets$26,856,295 $2,657,612 $29,513,907 
Total assets39,791,983 3,490,314 43,282,297 
Total liabilities26,789,149 2,505,707 29,294,856 
 
(1)    Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)    Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.
10
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Three Months Ended
December 31, 2019
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$1,040,240 $432,249 $370,658 $1,842,071 $156,254 $1,942,151 
Premiums ceded(351,516)(93,380)(55,151)(498,971)(43,901)(486,698)
Net premiums written688,724 338,869 315,507 1,343,100 112,353 1,455,453 
Change in unearned premiums(42,927)50,116 32,148 39,337 21,092 60,429 
Net premiums earned645,797 388,985 347,655 1,382,437 133,445 1,515,882 
Other underwriting income (loss)— 2,051 4,138 6,189 568 6,757 
Losses and loss adjustment expenses(446,798)(260,182)(3,287)(710,267)(134,655)(844,922)
Acquisition expenses(96,437)(65,528)(35,597)(197,562)(24,326)(221,888)
Other operating expenses(116,443)(39,287)(36,395)(192,125)(12,283)(204,408)
Underwriting income (loss)$(13,881)$26,039 $276,514 288,672 (37,251)251,421 
Net investment income119,906 34,357 154,263 
Net realized gains (losses)31,836 8,994 40,830 
Equity in net income (loss) of investment funds accounted for using the equity method27,139 — 27,139 
Other income (loss)(1,317)— (1,317)
Corporate expenses (2)(17,756)— (17,756)
Transaction costs and other (2)(9,081)— (9,081)
Amortization of intangible assets(21,890)— (21,890)
Interest expense(23,641)(7,558)(31,199)
Net foreign exchange gains (losses)(38,031)(14,275)(52,306)
Income (loss) before income taxes355,837 (15,733)340,104 
Income tax (expense) benefit(27,336)— (27,336)
Net income (loss)328,501 (15,733)312,768 
Dividends attributable to redeemable noncontrolling interests— (1,131)(1,131)
Amounts attributable to nonredeemable noncontrolling interests— 14,747 14,747 
Net income (loss) available to Arch328,501 (2,117)326,384 
Preferred dividends(10,403)— (10,403)
Net income (loss) available to Arch common shareholders$318,098 $(2,117)$315,981 
Underwriting Ratios
Loss ratio69.2 %66.9 %0.9 %51.4 %100.9 %55.7 %
Acquisition expense ratio14.9 %16.8 %10.2 %14.3 %18.2 %14.6 %
Other operating expense ratio18.0 %10.1 %10.5 %13.9 %9.2 %13.5 %
Combined ratio102.1 %93.8 %21.6 %79.6 %128.3 %83.8 %
Net premiums written to gross premiums written66.2 %78.4 %85.1 %72.9 %71.9 %74.9 %
Total investable assets$22,285,676 $2,704,589 $24,990,265 
Total assets34,374,468 3,510,893 37,885,361 
Total liabilities22,977,636 2,592,173 25,569,809 
 
(1)    Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)    Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.
11
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Year Ended
December 31, 2020
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$4,688,562 $3,472,086 $1,473,999 $9,632,691 $728,546 $10,088,068 
Premiums ceded(1,525,655)(1,014,716)(194,149)(2,732,564)(190,957)(2,650,352)
Net premiums written3,162,907 2,457,370 1,279,850 6,900,127 537,589 7,437,716 
Change in unearned premiums(291,487)(295,141)118,085 (468,543)22,762 (445,781)
Net premiums earned2,871,420 2,162,229 1,397,935 6,431,584 560,351 6,991,935 
Other underwriting income (loss)(31)4,454 20,316 24,739 2,045 26,784 
Losses and loss adjustment expenses(2,092,453)(1,628,320)(528,344)(4,249,117)(440,482)(4,689,599)
Acquisition expenses(418,483)(354,048)(134,240)(906,771)(98,071)(1,004,842)
Other operating expenses(489,153)(168,011)(162,202)(819,366)(55,810)(875,176)
Underwriting income (loss)$(128,700)$16,304 $593,465 481,069 (31,967)449,102 
Net investment income401,908 117,700 519,608 
Net realized gains (losses)813,781 9,679 823,460 
Equity in net income (loss) of investment funds accounted for using the equity method146,693 — 146,693 
Other income (loss)16,795 — 16,795 
Corporate expenses (2)(68,492)— (68,492)
Transaction costs and other (2)(9,456)(4,040)(13,496)
Amortization of intangible assets(69,031)— (69,031)
Interest expense(120,214)(23,242)(143,456)
Net foreign exchange gains (losses)(80,161)(3,473)(83,634)
Income (loss) before income taxes 1,512,892 64,657 1,577,549 
Income tax (expense) benefit(111,812)(26)(111,838)
Net income (loss)1,401,080 64,631 1,465,711 
Dividends attributable to redeemable noncontrolling interests(2,997)(4,117)(7,114)
Amounts attributable to nonredeemable noncontrolling interests— (53,076)(53,076)
Net income (loss) available to Arch1,398,083 7,438 1,405,521 
Preferred dividends(41,612)— (41,612)
Net income (loss) available to Arch common shareholders$1,356,471 $7,438 $1,363,909 
Underwriting Ratios
Loss ratio72.9 %75.3 %37.8 %66.1 %78.6 %67.1 %
Acquisition expense ratio14.6 %16.4 %9.6 %14.1 %17.5 %14.4 %
Other operating expense ratio17.0 %7.8 %11.6 %12.7 %10.0 %12.5 %
Combined ratio104.5 %99.5 %59.0 %92.9 %106.1 %94.0 %
Net premiums written to gross premiums written67.5 %70.8 %86.8 %71.6 %73.8 %73.7 %
 
(1)    Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)    Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.
12
Arch Capital Group Ltd. and Subsidiaries
Segment Information
(U.S. Dollars in thousands)Year Ended
December 31, 2019
 InsuranceReinsuranceMortgageSub-total (Core)OtherTotal
Gross premiums written (1)$3,907,993 $2,323,223 $1,466,265 $7,695,645 $754,881 $8,138,960 
Premiums ceded(1,266,267)(720,500)(204,509)(2,189,440)(222,019)(2,099,893)
Net premiums written2,641,726 1,602,723 1,261,756 5,506,205 532,862 6,039,067 
Change in unearned premiums(244,646)(136,334)104,584 (276,396)23,827 (252,569)
Net premiums earned2,397,080 1,466,389 1,366,340 5,229,809 556,689 5,786,498 
Other underwriting income (loss)— 6,444 16,005 22,449 2,412 24,861 
Losses and loss adjustment expenses(1,615,475)(1,011,329)(53,513)(2,680,317)(453,135)(3,133,452)
Acquisition expenses(361,614)(239,032)(134,319)(734,965)(105,980)(840,945)
Other operating expenses(454,770)(141,484)(153,092)(749,346)(51,651)(800,997)
Underwriting income (loss)$(34,779)$80,988 $1,041,421 1,087,630 (51,665)1,035,965 
Net investment income491,067 136,671 627,738 
Net realized gains (losses)348,037 15,161 363,198 
Equity in net income (loss) of investment funds accounted for using the equity method123,672 — 123,672 
Other income (loss)2,233 — 2,233 
Corporate expenses (2)(65,667)— (65,667)
Transaction costs and other (2)(14,444)— (14,444)
Amortization of intangible assets(82,104)— (82,104)
Interest expense(93,735)(27,137)(120,872)
Net foreign exchange gains (losses)(9,252)(11,357)(20,609)
Income (loss) before income taxes1,787,437 61,673 1,849,110 
Income tax (expense) benefit(155,790)(20)(155,810)
Net income (loss)1,631,647 61,653 1,693,300 
Dividends attributable to redeemable noncontrolling interests— (16,909)(16,909)
Amounts attributable to nonredeemable noncontrolling interests— (40,072)(40,072)
Net income (loss) available to Arch1,631,647 4,672 1,636,319 
Preferred dividends(41,612)— (41,612)
Net income (loss) available to Arch common shareholders$1,590,035 $4,672 $1,594,707 
Underwriting Ratios
Loss ratio67.4 %69.0 %3.9 %51.3 %81.4 %54.2 %
Acquisition expense ratio15.1 %16.3 %9.8 %14.1 %19.0 %14.5 %
Other operating expense ratio19.0 %9.6 %11.2 %14.3 %9.3 %13.8 %
Combined ratio101.5 %94.9 %24.9 %79.7 %109.7 %82.5 %
Net premiums written to gross premiums written67.6 %69.0 %86.1 %71.5 %70.6 %74.2 %
 
(1)    Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.
(2)    Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘Transaction costs and other.’ See ‘Comments on Regulation G’ for a further discussion of such items.

13
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment
(U.S. Dollars in thousands)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Gross premiums written$1,244,227 $1,206,328 $1,030,362 $1,207,645 $1,040,240 $4,688,562 $3,907,993 
Premiums ceded(406,490)(382,167)(358,101)(378,897)(351,516)(1,525,655)(1,266,267)
Net premiums written837,737 824,161 672,261 828,748 688,724 3,162,907 2,641,726 
Change in unearned premiums(89,299)(105,007)15,648 (112,829)(42,927)(291,487)(244,646)
Net premiums earned748,438 719,154 687,909 715,919 645,797 2,871,420 2,397,080 
Other underwriting income (loss)— (31)— — — (31)— 
Losses and loss adjustment expenses(541,821)(525,321)(518,203)(507,108)(446,798)(2,092,453)(1,615,475)
Acquisition expenses(101,055)(102,420)(107,671)(107,337)(96,437)(418,483)(361,614)
Other operating expenses(118,206)(122,541)(118,757)(129,649)(116,443)(489,153)(454,770)
Underwriting income (loss)$(12,644)$(31,159)$(56,722)$(28,175)$(13,881)$(128,700)$(34,779)
Underwriting Ratios
Loss ratio72.4 %73.0 %75.3 %70.8 %69.2 %72.9 %67.4 %
Acquisition expense ratio13.5 %14.2 %15.7 %15.0 %14.9 %14.6 %15.1 %
Other operating expense ratio15.8 %17.0 %17.3 %18.1 %18.0 %17.0 %19.0 %
Combined ratio101.7 %104.2 %108.3 %103.9 %102.1 %104.5 %101.5 %
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums8.3 %10.3 %12.5 %6.9 %0.9 %9.5 %1.4 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments(0.2)%(0.2)%(0.3)%(0.1)%(0.4)%(0.2)%(0.4)%
Combined ratio excluding catastrophic activity and prior year development (1)93.6 %94.1 %96.1 %97.1 %101.6 %95.2 %100.5 %
Net premiums written to gross premiums written67.3 %68.3 %65.2 %68.6 %66.2 %67.5 %67.6 %
 
(1)See ‘Comments on Regulation G’ for further discussion.

14
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Insurance Segment
(U.S. Dollars in thousands)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Net premiums written
Property, energy, marine and aviation$179,455 21.4 %$152,193 18.5 %$159,801 23.8 %$127,585 15.4 %$95,849 13.9 %$619,034 19.6 %$368,120 13.9 %
Professional lines (1)217,306 25.9 %199,163 24.2 %157,899 23.5 %169,118 20.4 %145,841 21.2 %743,486 23.5 %534,323 20.2 %
Programs96,743 11.5 %123,768 15.0 %104,930 15.6 %112,532 13.6 %96,653 14.0 %437,973 13.8 %426,535 16.1 %
Construction and national accounts102,171 12.2 %88,790 10.8 %57,144 8.5 %115,999 14.0 %114,437 16.6 %364,104 11.5 %369,202 14.0 %
Excess and surplus casualty (2)88,319 10.5 %78,889 9.6 %64,703 9.6 %65,419 7.9 %61,549 8.9 %297,330 9.4 %228,023 8.6 %
Travel, accident and health29,959 3.6 %28,972 3.5 %27,997 4.2 %126,046 15.2 %65,337 9.5 %212,974 6.7 %305,170 11.6 %
Lenders products38,307 4.6 %60,830 7.4 %23,690 3.5 %33,292 4.0 %35,915 5.2 %156,119 4.9 %111,708 4.2 %
Other (3)85,477 10.2 %91,556 11.1 %76,097 11.3 %78,757 9.5 %73,143 10.6 %331,887 10.5 %298,645 11.3 %
Total$837,737 100.0 %$824,161 100.0 %$672,261 100.0 %$828,748 100.0 %$688,724 100.0 %$3,162,907 100.0 %$2,641,726 100.0 %
Underwriting location
United States$527,824 63.0 %$574,699 69.7 %$453,215 67.4 %$602,677 72.7 %$507,193 73.6 %$2,158,415 68.2 %$1,983,476 75.1 %
Europe266,761 31.8 %212,203 25.7 %181,566 27.0 %196,042 23.7 %151,182 22.0 %856,572 27.1 %559,214 21.2 %
Other43,152 5.2 %37,259 4.5 %37,480 5.6 %30,029 3.6 %30,349 4.4 %147,920 4.7 %99,036 3.7 %
Total$837,737 100.0 %$824,161 100.0 %$672,261 100.0 %$828,748 100.0 %$688,724 100.0 %$3,162,907 100.0 %$2,641,726 100.0 %
Net premiums earned
Property, energy, marine and aviation$151,456 20.2 %$133,827 18.6 %$120,781 17.6 %$111,183 15.5 %$90,087 13.9 %$517,247 18.0 %$298,966 12.5 %
Professional lines (1)180,858 24.2 %168,502 23.4 %154,812 22.5 %151,700 21.2 %133,423 20.7 %655,872 22.8 %499,224 20.8 %
Programs110,651 14.8 %104,861 14.6 %108,464 15.8 %108,878 15.2 %109,498 17.0 %432,854 15.1 %414,103 17.3 %
Construction and national accounts101,243 13.5 %95,386 13.3 %91,605 13.3 %99,700 13.9 %91,489 14.2 %387,934 13.5 %325,687 13.6 %
Excess and surplus casualty (2)74,579 10.0 %69,978 9.7 %60,966 8.9 %65,097 9.1 %56,397 8.7 %270,620 9.4 %200,615 8.4 %
Travel, accident and health24,726 3.3 %36,726 5.1 %52,117 7.6 %77,375 10.8 %67,922 10.5 %190,944 6.6 %305,085 12.7 %
Lenders products32,832 4.4 %33,401 4.6 %23,111 3.4 %25,343 3.5 %25,001 3.9 %114,687 4.0 %66,079 2.8 %
Other (3)72,093 9.6 %76,473 10.6 %76,053 11.1 %76,643 10.7 %71,980 11.1 %301,262 10.5 %287,321 12.0 %
Total$748,438 100.0 %$719,154 100.0 %$687,909 100.0 %$715,919 100.0 %$645,797 100.0 %$2,871,420 100.0 %$2,397,080 100.0 %

(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.

15
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment
(U.S. Dollars in thousands)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Gross premiums written$537,912 $1,004,590 $807,065 $1,122,519 $432,249 $3,472,086 $2,323,223 
Premiums ceded(47,018)(400,388)(241,971)(325,339)(93,380)(1,014,716)(720,500)
Net premiums written490,894 604,202 565,094 797,180 338,869 2,457,370 1,602,723 
Change in unearned premiums93,180 (49,704)(84,897)(253,720)50,116 (295,141)(136,334)
Net premiums earned584,074 554,498 480,197 543,460 388,985 2,162,229 1,466,389 
Other underwriting income (loss)2,687 298 (651)2,120 2,051 4,454 6,444 
Losses and loss adjustment expenses(392,734)(422,084)(383,433)(430,069)(260,182)(1,628,320)(1,011,329)
Acquisition expenses(98,532)(85,388)(90,522)(79,606)(65,528)(354,048)(239,032)
Other operating expenses(42,180)(41,818)(38,716)(45,297)(39,287)(168,011)(141,484)
Underwriting income (loss)$53,315 $5,506 $(33,125)$(9,392)$26,039 $16,304 $80,988 
Underwriting Ratios
Loss ratio67.2 %76.1 %79.8 %79.1 %66.9 %75.3 %69.0 %
Acquisition expense ratio16.9 %15.4 %18.9 %14.6 %16.8 %16.4 %16.3 %
Other operating expense ratio7.2 %7.5 %8.1 %8.3 %10.1 %7.8 %9.6 %
Combined ratio91.3 %99.0 %106.8 %102.0 %93.8 %99.5 %94.9 %
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums16.1 %23.3 %25.3 %12.7 %6.4 %19.1 %5.4 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments(6.9)%(7.4)%(6.0)%(2.0)%(4.9)%(5.6)%(3.0)%
Combined ratio excluding catastrophic activity and prior year development (1)82.1 %83.1 %87.5 %91.3 %92.3 %86.0 %92.5 %
Net premiums written to gross premiums written91.3 %60.1 %70.0 %71.0 %78.4 %70.8 %69.0 %
 
(1)See ‘Comments on Regulation G’ for further discussion.



16
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Reinsurance Segment
(U.S. Dollars in thousands)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Net premiums written
Property excluding property catastrophe$150,643 30.7 %$223,880 37.1 %$163,639 29.0 %$158,924 19.9 %$85,859 25.3 %$697,086 28.4 %$403,320 25.2 %
Property catastrophe37,317 7.6 %42,125 7.0 %117,676 20.8 %89,092 11.2 %37,069 10.9 %286,210 11.6 %110,643 6.9 %
Other specialty (1)147,012 29.9 %159,969 26.5 %117,375 20.8 %284,952 35.7 %103,254 30.5 %709,308 28.9 %466,977 29.1 %
Casualty (2)103,989 21.2 %142,401 23.6 %105,049 18.6 %190,880 23.9 %85,063 25.1 %542,319 22.1 %510,374 31.8 %
Marine and aviation31,418 6.4 %27,839 4.6 %32,372 5.7 %49,785 6.2 %11,921 3.5 %141,414 5.8 %53,679 3.3 %
Other (3)20,515 4.2 %7,988 1.3 %28,983 5.1 %23,547 3.0 %15,703 4.6 %81,033 3.3 %57,730 3.6 %
Total$490,894 100.0 %$604,202 100.0 %$565,094 100.0 %$797,180 100.0 %$338,869 100.0 %$2,457,370 100.0 %$1,602,723 100.0 %
Underwriting location
Bermuda$187,727 38.2 %$240,193 39.8 %$240,451 42.6 %$333,619 41.8 %$116,974 34.5 %$1,001,990 40.8 %$578,618 36.1 %
United States148,994 30.4 %189,135 31.3 %162,027 28.7 %187,466 23.5 %119,003 35.1 %687,622 28.0 %529,943 33.1 %
Europe and other154,173 31.4 %174,874 28.9 %162,616 28.8 %276,095 34.6 %102,892 30.4 %767,758 31.2 %494,162 30.8 %
Total$490,894 100.0 %$604,202 100.0 %$565,094 100.0 %$797,180 100.0 %$338,869 100.0 %$2,457,370 100.0 %$1,602,723 100.0 %
Net premiums earned
Property excluding property catastrophe$162,456 27.8 %$163,081 29.4 %$124,019 25.8 %$112,652 20.7 %$103,212 26.5 %$562,208 26.0 %$362,841 24.7 %
Property catastrophe59,986 10.3 %69,524 12.5 %55,226 11.5 %53,000 9.8 %31,048 8.0 %237,736 11.0 %90,934 6.2 %
Other specialty (1)158,817 27.2 %141,201 25.5 %123,006 25.6 %203,385 37.4 %108,074 27.8 %626,409 29.0 %478,517 32.6 %
Casualty (2)144,808 24.8 %136,421 24.6 %132,756 27.6 %135,071 24.9 %118,258 30.4 %549,056 25.4 %429,288 29.3 %
Marine and aviation33,062 5.7 %26,744 4.8 %24,960 5.2 %24,858 4.6 %12,919 3.3 %109,624 5.1 %48,274 3.3 %
Other (3)24,945 4.3 %17,527 3.2 %20,230 4.2 %14,494 2.7 %15,474 4.0 %77,196 3.6 %56,535 3.9 %
Total$584,074 100.0 %$554,498 100.0 %$480,197 100.0 %$543,460 100.0 %$388,985 100.0 %$2,162,229 100.0 %$1,466,389 100.0 %
                        
(1)    Includes proportional motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.
(2)      Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.    
(3)     Includes life, casualty clash and other.    
17
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in thousands)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
2020202020202020201920202019
Gross premiums written$389,662 $346,248 $369,144 $368,945 $370,658 $1,473,999 $1,466,265 
Premiums ceded(57,995)(47,783)(44,044)(44,327)(55,151)(194,149)(204,509)
Net premiums written331,667 298,465 325,100 324,618 315,507 1,279,850 1,261,756 
Change in unearned premiums4,120 52,944 40,613 20,408 32,148 118,085 104,584 
Net premiums earned335,787 351,409 365,713 345,026 347,655 1,397,935 1,366,340 
Other underwriting income (1)4,667 4,600 6,450 4,599 4,138 20,316 16,005 
Losses and loss adjustment expenses(83,623)(153,055)(224,100)(67,566)(3,287)(528,344)(53,513)
Acquisition expenses(25,936)(35,716)(34,052)(38,536)(35,597)(134,240)(134,319)
Other operating expenses(42,024)(36,708)(37,574)(45,896)(36,395)(162,202)(153,092)
Underwriting income$188,871 $130,530 $76,437 $197,627 $276,514 $593,465 $1,041,421 
Underwriting Ratios
Loss ratio24.9 %43.6 %61.3 %19.6 %0.9 %37.8 %3.9 %
Acquisition expense ratio7.7 %10.2 %9.3 %11.2 %10.2 %9.6 %9.8 %
Other operating expense ratio12.5 %10.4 %10.3 %13.3 %10.5 %11.6 %11.2 %
Combined ratio45.1 %64.2 %80.9 %44.1 %21.6 %59.0 %24.9 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments(2.4)%(1.3)%(0.1)%(1.8)%(9.4)%(1.4)%(9.2)%
Combined ratio excluding prior year development (2)47.5 %65.5 %81.0 %45.9 %31.0 %60.4 %34.1 %
Net premiums written to gross premiums written85.1 %86.2 %88.1 %88.0 %85.1 %86.8 %86.1 %
Net premiums written by underwriting location
United States$250,747 $245,971 $261,124 $264,108 $258,512 $1,021,950 $1,032,868 
Other80,920 52,494 63,976 60,510 56,995 257,900 228,888 
Total$331,667 $298,465 $325,100 $324,618 $315,507 $1,279,850 $1,261,756 
United States %75.6 %82.4 %80.3 %81.4 %81.9 %79.8 %81.9 %
Other %24.4 %17.6 %19.7 %18.6 %18.1 %20.2 %18.1 %

(1)     Primarily related to income earned on various risk-sharing products offered to government sponsored enterprises and mortgage lenders.
(2)    See ‘Comments on Regulation G’ for further discussion.
18
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in millions)December 31, 2020September 30, 2020June 30, 2020March 31, 2020December 31, 2019
Insurance In Force (IIF) (1)
U.S. primary mortgage insurance$280,579 66.2 %$275,846 66.8 %$276,643 65.9 %$284,203 68.9 %$287,150 68.7 %
Mortgage reinsurance31,220 7.4 %28,421 6.9 %27,457 6.5 %24,335 5.9 %26,768 6.4 %
Other (2)111,740 26.4 %108,786 26.3 %115,803 27.6 %103,731 25.2 %104,346 24.9 %
Total$423,539 100.0 %$413,053 100.0 %$419,903 100.0 %$412,269 100.0 %$418,264 100.0 %
Risk In Force (RIF) (3)
U.S. primary mortgage insurance$70,522 90.5 %$69,620 91.0 %$70,200 91.0 %$72,566 92.0 %$73,388 91.9 %
Mortgage reinsurance2,226 2.9 %2,145 2.8 %2,116 2.7 %1,961 2.5 %2,129 2.7 %
Other (2)5,146 6.6 %4,750 6.2 %4,795 6.2 %4,387 5.6 %4,380 5.5 %
Total$77,894 100.0 %$76,515 100.0 %$77,111 100.0 %$78,914 100.0 %$79,897 100.0 %
Supplemental disclosures for U.S. primary mortgage insurance:
Total RIF by credit quality (FICO score):
>=740$40,774 57.8 %$40,017 57.5 %$40,297 57.4 %$41,738 57.5 %$42,301 57.6 %
680-73924,498 34.7 %24,236 34.8 %24,346 34.7 %25,078 34.6 %25,240 34.4 %
620-6794,837 6.9 %5,016 7.2 %5,188 7.4 %5,368 7.4 %5,444 7.4 %
<620413 0.6 %351 0.5 %369 0.5 %382 0.5 %403 0.5 %
Total$70,522 100.0 %$69,620 100.0 %$70,200 100.0 %$72,566 100.0 %$73,388 100.0 %
Weighted average FICO score743 743 743 743 743 
Total RIF by Loan-To-Value (LTV):
95.01% and above$8,643 12.3 %$8,789 12.6 %$8,859 12.6 %$9,060 12.5 %$9,064 12.4 %
90.01% to 95.00%37,877 53.7 %37,278 53.5 %37,830 53.9 %39,594 54.6 %40,136 54.7 %
85.01% to 90.00%20,013 28.4 %19,870 28.5 %20,071 28.6 %20,619 28.4 %20,890 28.5 %
85.00% and below3,989 5.7 %3,683 5.3 %3,440 4.9 %3,293 4.5 %3,298 4.5 %
Total$70,522 100.0 %$69,620 100.0 %$70,200 100.0 %$72,566 100.0 %$73,388 100.0 %
Weighted average LTV92.8 %92.9 %92.9 %93.0 %93.0 %
Total RIF by State:
Texas$5,636 8.0 %$5,536 8.0 %$5,560 7.9 %$5,683 7.8 %$5,678 7.7 %
California5,261 7.5 %5,019 7.2 %4,948 7.0 %5,106 7.0 %5,187 7.1 %
Florida3,632 5.2 %3,648 5.2 %3,737 5.3 %3,863 5.3 %3,887 5.3 %
Georgia2,959 4.2 %2,890 4.2 %2,861 4.1 %2,819 3.9 %2,753 3.8 %
Illinois2,762 3.9 %2,670 3.8 %2,643 3.8 %2,621 3.6 %2,616 3.6 %
North Carolina2,622 3.7 %2,516 3.6 %2,459 3.5 %2,475 3.4 %2,470 3.4 %
Virginia2,526 3.6 %2,540 3.6 %2,656 3.8 %2,814 3.9 %2,881 3.9 %
Minnesota2,520 3.6 %2,489 3.6 %2,473 3.5 %2,509 3.5 %2,514 3.4 %
Massachusetts2,464 3.5 %2,344 3.4 %2,345 3.3 %2,409 3.3 %2,432 3.3 %
Washington2,220 3.1 %2,222 3.2 %2,291 3.3 %2,426 3.3 %2,474 3.4 %
Other37,920 53.8 %37,746 54.2 %38,227 54.5 %39,841 54.9 %40,496 55.2 %
Total$70,522 100.0 %$69,620 100.0 %$70,200 100.0 %$72,566 100.0 %$73,388 100.0 %
Weighted average coverage (end of period RIF divided by IIF)25.1 %25.2 %25.4 %25.5 %25.6 %
U.S. mortgage insurance total RIF, net of reinsurance (4)$56,658 $56,067 $57,258 $58,693 $58,512 
Analysts’ persistency (5)58.7 %62.5 %66.6 %72.6 %75.7 %
Risk-to-capital ratio -- Arch MI U.S. (6)9.3:1 9.6:110.2:111.3:112.0:1
PMIER sufficiency ratio -- Arch MI U.S. (7)173 %158 %161 %165 %161 %

(1)    The aggregate dollar amount of each insured mortgage loan’s current principal balance.         (4)    Total RIF for the U.S. mortgage insurance operations (see note 3) after external reinsurance.
(2)    Includes GSE credit risk-sharing transactions and international insurance business.        (5)    Represents the % of IIF at the beginning of a 12-month period that remained in force at the end of the period.
(3)    The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied    (6)    Represents current (non-delinquent) RIF, net of reinsurance, divided by statutory capital (estimate for December 31, 2020).
    by the insurance coverage percentage specified in the policy for insurance policies issued and    (7)    Calculated as available assets divided by required assets as defined within PMIERs (estimate for December 31, 2020).
    after contract limits and/or loss ratio caps for risk-sharing or reinsurance transactions.            There was approximately $1.59 billion of excess available assets at December 31, 2020.
19
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
(U.S. Dollars in millions, except policy/loan/claim count)Three Months Ended
December 31, 2020September 30, 2020June 30, 2020March 31, 2020December 31, 2019
Supplemental disclosures for U.S. primary mortgage insurance:
Total new insurance written (NIW) (1)$38,011 $32,787 $24,551 $16,778 $24,051 
Total NIW by credit quality (FICO score):
>=740$25,128 66.1 %$21,160 64.5 %$15,851 64.6 %$10,069 60.0 %$14,793 61.5 %
680-73911,877 31.2 %10,562 32.2 %7,781 31.7 %5,787 34.5 %8,092 33.6 %
620-6791,006 2.6 %1,065 3.2 %919 3.7 %922 5.5 %1,166 4.8 %
  Total$38,011 100.0 %$32,787 100.0 %$24,551 100.0 %$16,778 100.0 %$24,051 100.0 %
Total NIW by LTV:
95.01% and above$2,475 6.5 %$2,561 7.8 %$1,948 7.9 %$1,668 9.9 %$2,260 9.4 %
90.01% to 95.00%17,783 46.8 %13,967 42.6 %9,403 38.3 %7,199 42.9 %10,059 41.8 %
85.01% to 90.00%11,014 29.0 %10,052 30.7 %8,140 33.2 %5,329 31.8 %7,839 32.6 %
85.00% and below6,739 17.7 %6,207 18.9 %5,060 20.6 %2,582 15.4 %3,893 16.2 %
  Total$38,011 100.0 %$32,787 100.0 %$24,551 100.0 %$16,778 100.0 %$24,051 100.0 %
Total NIW monthly vs. single:
Monthly$35,672 93.8 %$31,928 97.4 %$23,391 95.3 %$15,692 93.5 %$22,707 94.4 %
Single2,339 6.2 %859 2.6 %1,160 4.7 %1,086 6.5 %1,344 5.6 %
  Total$38,011 100.0 %$32,787 100.0 %$24,551 100.0 %$16,778 100.0 %$24,051 100.0 %
Total NIW purchase vs. refinance:
Purchase$29,584 77.8 %$24,256 74.0 %$14,956 60.9 %$12,299 73.3 %$16,476 68.5 %
Refinance8,427 22.2 %8,531 26.0 %9,595 39.1 %4,479 26.7 %7,575 31.5 %
  Total$38,011 100.0 %$32,787 100.0 %$24,551 100.0 %$16,778 100.0 %$24,051 100.0 %
Ending number of policies in force (PIF) (2)1,245,771 1,245,408 1,259,328 1,293,799 1,307,884 
Rollforward of insured loans in default:
Beginning delinquent number of loans58,362 64,667 18,414 20,163 19,243 
Plus: new notices14,564 19,967 58,374 9,419 10,289 
Less: cures(20,457)(26,029)(11,664)(10,541)(8,724)
Less: paid claims(235)(243)(457)(627)(645)
Ending delinquent number of loans (2)52,234 58,362 64,667 18,414 20,163 
Ending percentage of loans in default (2)4.19 %4.69 %5.14 %1.42 %1.54 %
Losses:
Number of claims paid235 243 457 627 645 
Total paid claims (in thousands)$9,344 $9,420 $20,101 $26,038 $25,253 
Average per claim (in thousands)$39.8 $38.8 $44.0 $41.5 $39.2 
Severity (3)87.2 %88.6 %96.3 %92.8 %94.0 %
Average case reserve per default (in thousands)$12.6 $10.1 $6.9 $14.4 $13.3 

(1)    The original principal balance of all loans that received coverage during the period.    
(2)    Includes first lien primary and pool policies.    
(3)    Represents total paid claims divided by RIF of loans for which claims were paid.

20
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Mortgage Segment
Supplemental disclosures for U.S. primary mortgage insurance:
(U.S. Dollars in millions)December 31, 2020December 31, 2019
Loss Reserves, Net (1)Primary IIF (2)Primary RIF (3)Delinquency RateLoss Reserves, Net (1)Primary IIF (2)Primary RIF (3)Delinquency Rate
% of TotalTotal% of TotalTotal% of Total% of TotalTotal% of TotalTotal% of Total
Policy year:
2010 and prior27.7 %$13,684 4.9 %$3,088 4.4 %11.78 %58.2 %$17,251 6.0 %$3,990 5.4 %8.79 %
20110.5 %904 0.3 %239 0.3 %3.97 %0.7 %1,678 0.6 %464 0.6 %1.59 %
20121.3 %3,651 1.3 %992 1.4 %2.98 %1.3 %6,293 2.2 %1,753 2.4 %0.89 %
20133.0 %7,546 2.7 %2,107 3.0 %3.30 %3.0 %12,276 4.3 %3,433 4.7 %0.99 %
20142.2 %8,261 2.9 %2,273 3.2 %4.06 %2.4 %13,714 4.8 %3,778 5.1 %1.16 %
20153.4 %15,032 5.4 %4,048 5.7 %3.72 %3.2 %25,788 9.0 %6,880 9.4 %0.87 %
20168.8 %24,958 8.9 %6,648 9.4 %4.77 %7.6 %40,898 14.2 %10,670 14.5 %1.03 %
201712.9 %24,748 8.8 %6,413 9.1 %5.52 %9.9 %43,896 15.3 %11,262 15.3 %1.00 %
201816.8 %27,304 9.7 %6,918 9.8 %6.76 %11.2 %51,776 18.0 %13,086 17.8 %0.86 %
201917.8 %48,304 17.2 %12,001 17.0 %4.61 %2.4 %73,580 25.6 %18,072 24.6 %0.14 %
20205.5 %106,187 37.8 %25,795 36.6 %0.76 %
Total100.0 %$280,579 100.0 %$70,522 100.0 %4.19 %100.0 %$287,150 100.0 %$73,388 100.0 %1.54 %

(1)    Total reserves for losses and loss adjustment expenses, net of recoverables, was $649.7 million at December 31, 2020, compared to $278.7 million at December 31, 2019.
(2)    The aggregate dollar amount of each insured mortgage loan’s current principal balance.
(3)    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 risk-sharing transactions.
21
Arch Capital Group Ltd. and Subsidiaries
Segment Information - Consolidated Excluding the 'Other' Segment (Sub-Total (Core))

(U.S. Dollars in thousands)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Gross premiums written$2,170,831 $2,556,914 $2,206,410 $2,698,537 $1,842,071 $9,632,691 $7,695,645 
Premiums ceded(510,533)(830,086)(643,955)(747,991)(498,971)(2,732,564)(2,189,440)
Net premiums written1,660,298 1,726,828 1,562,455 1,950,546 1,343,100 6,900,127 5,506,205 
Change in unearned premiums8,001 (101,767)(28,636)(346,141)39,337 (468,543)(276,396)
Net premiums earned1,668,299 1,625,061 1,533,819 1,604,405 1,382,437 6,431,584 5,229,809 
Other underwriting income (loss)7,354 4,867 5,799 6,719 6,189 24,739 22,449 
Losses and loss adjustment expenses(1,018,178)(1,100,460)(1,125,736)(1,004,743)(710,267)(4,249,117)(2,680,317)
Acquisition expenses(225,523)(223,524)(232,245)(225,479)(197,562)(906,771)(734,965)
Other operating expenses(202,410)(201,067)(195,047)(220,842)(192,125)(819,366)(749,346)
Underwriting income (loss)$229,542 $104,877 $(13,410)$160,060 $288,672 $481,069 $1,087,630 
Underwriting Ratios
Loss ratio61.0 %67.7 %73.4 %62.6 %51.4 %66.1 %51.3 %
Acquisition expense ratio13.5 %13.8 %15.1 %14.1 %14.3 %14.1 %14.1 %
Other operating expense ratio12.1 %12.4 %12.7 %13.8 %13.9 %12.7 %14.3 %
Combined ratio86.6 %93.9 %101.2 %90.5 %79.6 %92.9 %79.7 %
Catastrophic activity and prior year development:
Current accident year catastrophic events, net of reinsurance and reinstatement premiums9.4 %12.5 %13.5 %7.4 %2.2 %10.7 %2.2 %
Net (favorable) adverse development in prior year loss reserves, net of related adjustments(3.0)%(2.9)%(2.0)%(1.1)%(4.0)%(2.3)%(3.4)%
Combined ratio excluding catastrophic activity and prior year development (1)80.2 %84.3 %89.7 %84.2 %81.4 %84.5 %80.9 %
Components of losses and loss adjustment expenses incurred (1)
Paid losses and loss adjustment expenses$652,077 $618,638 $550,481 $530,012 $627,929 $2,351,208 $2,061,385 
Change in unpaid losses and loss adjustment expenses366,101 481,822 575,255 474,731 82,338 1,897,909 618,932 
Total losses and loss adjustment expenses$1,018,178 $1,100,460 $1,125,736 $1,004,743 $710,267 $4,249,117 $2,680,317 
Net premiums written to gross premiums written76.5 %67.5 %70.8 %72.3 %72.9 %71.6 %71.5 %
 
(1)See ‘Comments on Regulation G’ for further discussion.


22
Arch Capital Group Ltd. and Subsidiaries
Segment Information — Selected Information on Losses and Loss Adjustment Expenses

(U.S. Dollars in thousands)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Estimated net (favorable) adverse development in prior year loss reserves, net of related adjustments (1)
Net impact on underwriting results:
Insurance$(1,158)$(1,136)$(2,148)$(776)$(2,839)$(5,218)$(9,893)
Reinsurance(40,472)(40,766)(28,933)(10,960)(19,081)(121,131)(43,468)
Mortgage(8,151)(4,523)(306)(6,101)(32,763)(19,081)(125,213)
Total $(49,781)$(46,425)$(31,387)$(17,837)$(54,683)$(145,430)$(178,574)
Impact on losses and loss adjustment expenses:
Insurance$(1,906)$(2,282)$(2,518)$(1,115)$(4,403)$(7,821)$(15,790)
Reinsurance(40,156)(41,960)(40,211)(11,627)(20,058)(133,954)(46,396)
Mortgage(8,151)(4,523)(208)(6,101)(32,763)(18,983)(125,219)
Total$(50,213)$(48,765)$(42,937)$(18,843)$(57,224)$(160,758)$(187,405)
Impact on acquisition expenses:
Insurance$748 $1,146 $370 $339 $1,564 $2,603 $5,897 
Reinsurance(316)1,194 11,278 667 977 12,823 2,928 
Mortgage— — (98)— — (98)6 
Total$432 $2,340 $11,550 $1,006 $2,541 $15,328 $8,831 
Impact on combined ratio:
Insurance(0.2)%(0.2)%(0.3)%(0.1)%(0.4)%(0.2)%(0.4)%
Reinsurance(6.9)%(7.4)%(6.0)%(2.0)%(4.9)%(5.6)%(3.0)%
Mortgage(2.4)%(1.3)%(0.1)%(1.8)%(9.4)%(1.4)%(9.2)%
Total (3.0)%(2.9)%(2.0)%(1.1)%(4.0)%(2.3)%(3.4)%
Impact on loss ratio:
Insurance(0.3)%(0.3)%(0.4)%(0.2)%(0.7)%(0.3)%(0.7)%
Reinsurance(6.9)%(7.6)%(8.4)%(2.1)%(5.2)%(6.2)%(3.2)%
Mortgage(2.4)%(1.3)%(0.1)%(1.8)%(9.4)%(1.4)%(9.2)%
Total(3.0)%(3.0)%(2.8)%(1.2)%(4.1)%(2.5)%(3.6)%
Impact on acquisition expense ratio:
Insurance0.1 %0.1 %0.1 %0.1 %0.3 %0.1 %0.3 %
Reinsurance0.0 %0.2 %2.4 %0.1 %0.3 %0.6 %0.2 %
Mortgage0.0 %0.0 %0.0 %0.0 %0.0 %0.0 %0.0 %
Total 0.0 %0.1 %0.8 %0.1 %0.1 %0.2 %0.2 %
Estimated net losses incurred from current accident year catastrophic events (2)
Insurance$62,398 $74,365 $85,929 $49,483 $5,531 $272,175 $34,235 
Reinsurance93,959 128,939 121,263 68,953 24,831 413,114 79,192 
Total$156,357 $203,304 $207,192 $118,436 $30,362 $685,289 $113,427 
Impact on combined ratio:
Insurance8.3 %10.3 %12.5 %6.9 %0.9 %9.5 %1.4 %
Reinsurance16.1 %23.3 %25.3 %12.7 %6.4 %19.1 %5.4 %
Total9.4 %12.5 %13.5 %7.4 %2.2 %10.7 %2.2 %
Estimated impact of COVID-19 event, net of reinsurance and reinstatement premiums, included in current accident year catastrophic events (3)
Insurance$(75)$3,442 $78,059 $35,946 $— $117,372 $— 
Reinsurance446 $8,449 95,039 50,700 — 154,634 — 
Total$371 $11,891 $173,098 $86,646 $— $272,006 $— 
Impact on combined ratio:
Insurance0.0 %0.5 %11.3 %5.0 %0.0 %4.1 %0.0 %
Reinsurance0.1 %1.5 %19.8 %9.3 %0.0 %7.2 %0.0 %
Total0.0 %0.7 %11.3 %5.4 %0.0 %4.2 %0.0 %
(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)Equals estimated losses from catastrophic events occurring in the current accident year (e.g. natural catastrophes, man-made events, pandemic events), net of reinsurance and reinstatement premiums. As regards the natural catastrophe estimates included within, amounts shown for the insurance segment are for named catastrophic events only, while amounts shown for the reinsurance segment include (i) named events with over $5 million of losses incurred by its Bermuda and Europe operations and (ii) all catastrophe losses incurred by its U.S. operations. Amounts not applicable for the mortgage segment.
(3)Equals estimated losses for exposures through December 31, 2020 to the COVID-19 global pandemic, net of reinsurance and reinstatement premiums. The amounts represent a subset of the estimated losses for the current accident year catastrophic events.
23
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Investable Asset Summary and Investment Portfolio Metrics
The following table summarizes the Company’s investable assets and portfolio metrics (1):
(U.S. Dollars in thousands)December 31,September 30,June 30,March 31,December 31,
20202020202020202019
Investable assets (1) (2):
Fixed maturities available for sale, at fair value$18,104,322 67.4 %$17,844,866 69.4 %$16,557,966 67.5 %$16,163,702 72.2 %$16,187,651 72.6 %
Fixed maturities—fair value option (3)388,191 1.4 %386,865 1.5 %375,793 1.5 %342,241 1.5 %337,860 1.5 %
Fixed maturities pledged under securities lending agreements, at fair value278,783 1.0 %62,749 0.2 %457,906 1.9 %177,442 0.8 %368,510 1.7 %
Total fixed maturities18,771,296 69.9 %18,294,480 71.1 %17,391,665 70.9 %16,683,385 74.6 %16,894,021 75.8 %
Equity securities, at fair value1,392,420 5.2 %1,449,208 5.6 %1,194,874 4.9 %1,118,734 5.0 %773,588 3.5 %
Equity securities—fair value option (3)27,555 0.1 %30,494 0.1 %31,197 0.1 %29,905 0.1 %42,896 0.2 %
Equity securities pledged under securities lending agreements, at fair value16,129 0.1 %— 0.0 %6,597 0.0 %— 0.0 %11,358 0.1 %
Total equity securities1,436,104 5.3 %1,479,702 5.8 %1,232,668 5.0 %1,148,639 5.1 %827,842 3.7 %
Other investments—fair value option (3)1,480,347 5.5 %1,276,867 5.0 %1,212,788 4.9 %1,153,737 5.2 %1,336,920 6.0 %
Other investable assets (3)500,000 1.9 %— 0.0 %— 0.0 %— 0.0 %— 0.0 %
Total other investments1,980,347 7.4 %1,276,867 5.0 %1,212,788 4.9 %1,153,737 5.2 %1,336,920 6.0 %
Investments accounted for using the equity method (4)2,047,889 7.6 %1,883,702 7.3 %1,727,302 7.0 %1,676,055 7.5 %1,660,396 7.5 %
Short-term investments available for sale, at fair value1,924,922 7.2 %2,039,097 7.9 %2,277,866 9.3 %944,531 4.2 %956,546 4.3 %
Short-term investments—fair value option (3)138,318 0.5 %118,313 0.5 %14,317 0.1 %52,548 0.2 %47,711 0.2 %
Total short-term investments2,063,240 7.7 %2,157,410 8.4 %2,292,183 9.3 %997,079 4.5 %1,004,257 4.5 %
Cash694,997 2.6 %781,065 3.0 %746,606 3.0 %785,704 3.5 %623,793 2.8 %
Securities transactions entered into but not settled at the balance sheet date(137,578)(0.5)%(148,725)(0.6)%(72,018)(0.3)%(68,747)(0.3)%(61,553)(0.3)%
Total investable assets held by the Company$26,856,295 100.0 %$25,724,501 100.0 %$24,531,194 100.0 %$22,375,852 100.0 %$22,285,676 100.0 %
Average effective duration (in years)3.01 3.21 3.18 3.19 3.40  
Average S&P/Moody’s credit ratings (5) AA/Aa2  AA/Aa2  AA/Aa2  AA/Aa2  AA/Aa2  
Embedded book yield (before investment expenses)1.56 %1.71 %1.85 %2.34 %2.55 % 

(1)    Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results. Such amounts are summarized as follows:
Investable assets in ‘other’ segment:
Cash$211,451 $195,333 $107,653 $96,580 $102,437 
Investments accounted for using the fair value option1,790,385 1,937,036 1,886,676 1,732,086 1,898,090 
Fixed maturities available for sale, at fair value613,503 608,022 649,765 677,869 706,875 
Equity securities, at fair value52,410 52,807 62,443 63,169 65,337 
Securities sold but not yet purchased(21,679)(24,909)(29,289)(30,076)(66,257)
Securities transactions entered into but not settled at the balance sheet date11,542 (74,837)(35,958)(37,039)(1,893)
Total investable assets included in ‘other’ segment$2,657,612 $2,693,452 $2,641,290 $2,502,589 $2,704,589 
(2)    This table excludes the collateral received and reinvested and includes the securities pledged under securities lending agreements, at fair value.
(3)    Included in “other investments” on the balance sheet.
(4)    Changes in the carrying value of investment funds accounted for using the equity method are recorded as “equity in net income (loss) of investment funds accounted for using the equity method” rather than as an unrealized gain or loss component of accumulated other comprehensive income.
(5)    Average credit ratings on the Company’s investment portfolio on securities with ratings assigned by Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”).
24
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Composition of Net Investment Income, Yield and Total Return

The following table summarizes the Company’s net investment income, yield and total return (1):
(U.S. Dollars in thousands, except share data)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Composition of net investment income (1):       
Fixed maturities$80,942 $84,608 $91,491 $101,763 $108,885 $358,804 $440,824 
Equity securities (dividends)9,695 6,659 6,023 5,630 4,134 28,007 13,455 
Short-term investments1,129 1,162 897 3,385 3,464 6,573 14,642 
Other (2)15,053 24,594 17,825 20,479 19,211 77,951 86,440 
Gross investment income106,819 117,023 116,236 131,257 135,694 471,335 555,361 
Investment expenses(18,827)(17,166)(15,205)(18,229)(15,788)(69,427)(64,294)
Net investment income$87,992 $99,857 $101,031 $113,028 $119,906 $401,908 $491,067 
Per share$0.21 $0.24 $0.25 $0.27 $0.29 $0.98 $1.19 
Investment income yield, at amortized cost (1) (3):
Pre-tax1.45 %1.76 %1.92 %2.20 %2.36 %1.78 %2.52 %
After-tax1.26 %1.57 %1.68 %1.91 %2.07 %1.56 %2.25 %
Total return on investments (1) (4)2.46 %2.30 %3.72 %(0.86)%1.07 %7.77 %7.30 %

(1)Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)Amounts include dividends and other distributions on investment funds, term loan investments funds held balances, cash balances and other.
(3)Presented on an annualized basis and excluding the impact of investments for which returns are not included within investment income, such as investments accounted for using the equity method and certain equities.
(4)Total return on investments includes net 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 allowance for credit loses on non-investment related financial assets) and the change in unrealized gains or losses and is calculated on a pre-tax basis and before investment expenses. See ‘Comments on Regulation G’ for a further discussion of the presentation of total return on investments.

25
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Composition of Fixed Maturities
 
The following table summarizes the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):
(U.S. Dollars in thousands)

Fair
Value		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Net
Unrealized
Gains (Losses)		Allowance
for Credit Losses		Amortized
Cost		Fair Value /
Amortized Cost		Fair Value
% of Total
At December 31, 2020
Corporates$8,039,745 $405,071 $(30,666)$374,405 $(700)$7,666,040 104.9 %42.8 %
U.S. government and government agencies5,354,863 21,490 (12,587)8,903 — 5,345,960 100.2 %28.5 %
Municipal bonds492,734 27,189 (3,835)23,354 (11)469,391 105.0 %2.6 %
Non-U.S. government securities2,310,157 143,054 (7,958)135,096 — 2,175,061 106.2 %12.3 %
Asset-backed securities1,566,188 18,689 (7,635)11,054 (1,090)1,556,224 100.6 %8.3 %
Commercial mortgage-backed securities390,990 8,722 (2,954)5,768 (122)385,344 101.5 %2.1 %
Residential mortgage-backed securities616,619 8,934 (4,280)4,654 (278)612,243 100.7 %3.3 %
Total$18,771,296 $633,149 $(69,915)$563,234 $(2,201)$18,210,263 103.1 %100.0 %
At December 31, 2019
Corporates$6,561,354 $189,917 $(12,752)$177,165 $— $6,384,189 102.8 %38.8 %
U.S. government and government agencies4,632,947 34,892 (9,997)24,895 — 4,608,052 100.5 %27.4 %
Municipal bonds880,119 24,582 (2,213)22,369 — 857,750 102.6 %5.2 %
Non-U.S. government securities1,995,813 45,019 (19,297)25,722 — 1,970,091 101.3 %11.8 %
Asset-backed securities1,547,744 23,403 (4,028)19,375 — 1,528,369 101.3 %9.2 %
Commercial mortgage-backed securities734,244 14,951 (2,330)12,621 — 721,623 101.7 %4.3 %
Residential mortgage-backed securities541,800 9,651 (887)8,764 — 533,036 101.6 %3.2 %
Total$16,894,021 $342,415 $(51,504)$290,911 $— $16,603,110 101.8 %100.0 %
 
(1)    Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.


26
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Credit Quality Distribution and Maturity Profile

The following table summarizes the credit quality distribution and maturity profile of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements (1):
(U.S. Dollars in thousands)December 31,September 30,June 30,March 31,December 31,
20202020202020202019
Credit quality distribution of total fixed maturities (2) (3):
U.S. government and government agencies (4)$5,963,758 31.8 %$5,360,798 29.3 %$5,566,339 32.0 %$4,804,048 28.8 %$5,215,489 30.9 %
AAA3,117,046 16.6 %3,352,902 18.3 %3,035,513 17.5 %3,486,700 20.9 %3,392,341 20.1 %
AA2,063,738 11.0 %2,087,245 11.4 %1,818,693 10.5 %1,994,127 12.0 %2,115,828 12.5 %
A3,760,280 20.0 %3,895,053 21.3 %4,232,245 24.3 %3,937,053 23.6 %3,849,458 22.8 %
BBB2,699,201 14.4 %2,542,233 13.9 %1,874,332 10.8 %1,565,912 9.4 %1,495,467 8.9 %
BB574,189 3.1 %504,570 2.8 %406,342 2.3 %366,759 2.2 %355,803 2.1 %
B268,095 1.4 %231,774 1.3 %211,638 1.2 %205,181 1.2 %216,663 1.3 %
Lower than B54,795 0.3 %54,118 0.3 %51,273 0.3 %51,712 0.3 %56,865 0.3 %
Not rated270,194 1.4 %265,787 1.5 %195,290 1.1 %271,893 1.6 %196,107 1.2 %
Total fixed maturities, at fair value$18,771,296 100.0 %$18,294,480 100.0 %$17,391,665 100.0 %$16,683,385 100.0 %$16,894,021 100.0 %
Maturity profile of total fixed maturities (2):
Due in one year or less$327,899 1.7 %$314,243 1.7 %$350,520 2.0 %$459,191 2.8 %$443,914 2.6 %
Due after one year through five years10,424,114 55.5 %9,744,246 53.3 %9,730,262 55.9 %9,381,924 56.2 %9,875,925 58.5 %
Due after five years through ten years4,901,382 26.1 %4,861,677 26.6 %4,342,055 25.0 %3,416,637 20.5 %3,296,839 19.5 %
Due after 10 years544,104 2.9 %602,120 3.3 %467,099 2.7 %555,462 3.3 %453,555 2.7 %
16,197,499 86.3 %15,522,286 84.8 %14,889,936 85.6 %13,813,214 82.8 %14,070,233 83.3 %
Mortgage-backed securities616,619 3.3 %703,393 3.8 %593,799 3.4 %449,024 2.7 %541,800 3.2 %
Commercial mortgage-backed securities390,990 2.1 %375,510 2.1 %396,813 2.3 %781,417 4.7 %734,244 4.3 %
Asset-backed securities1,566,188 8.3 %1,693,291 9.3 %1,511,117 8.7 %1,639,730 9.8 %1,547,744 9.2 %
Total fixed maturities, at fair value$18,771,296 100.0 %$18,294,480 100.0 %$17,391,665 100.0 %$16,683,385 100.0 %$16,894,021 100.0 %

(1)    Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)    This table excludes the collateral received and reinvested and includes the fixed maturities pledged under securities lending agreements, at fair value.
(3)     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.
(4)     Includes U.S. government-sponsored agency mortgage backed securities and agency commercial mortgage backed securities.


27
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Analysis of Corporate Exposures

The following table summarizes the Company’s corporate bonds by sector (1):
(U.S. Dollars in thousands)
December 31,September 30,June 30,March 31,December 31,
20202020202020202019
Sector:
Industrials$4,940,996 61.5 %$5,303,089 65.2 %$4,650,615 63.6 %$3,903,927 58.5 %$3,639,891 55.5 %
Financials2,432,719 30.3 %2,156,871 26.5 %2,164,859 29.6 %2,400,415 35.9 %2,645,393 40.3 %
Utilities584,869 7.3 %562,939 6.9 %409,778 5.6 %321,022 4.8 %224,615 3.4 %
Covered bonds2,013 0.0 %2,072 0.0 %1,974 0.0 %2,662 0.0 %3,520 0.1 %
All other (2)79,148 1.0 %112,611 1.4 %82,190 1.1 %49,981 0.7 %47,935 0.7 %
Total$8,039,745 100.0 %$8,137,582 100.0 %$7,309,416 100.0 %$6,678,007 100.0 %$6,561,354 100.0 %
Credit quality distribution (3):
AAA$220,584 2.7 %$291,154 3.6 %$76,923 1.1 %$86,420 1.3 %$95,559 1.5 %
AA995,742 12.4 %1,068,945 13.1 %894,495 12.2 %982,202 14.7 %1,035,817 15.8 %
A3,313,349 41.2 %3,478,591 42.7 %3,834,480 52.5 %3,480,871 52.1 %3,392,134 51.7 %
BBB2,574,823 32.0 %2,427,829 29.8 %1,773,620 24.3 %1,451,807 21.7 %1,355,868 20.7 %
BB540,397 6.7 %478,445 5.9 %388,112 5.3 %348,848 5.2 %334,264 5.1 %
B258,035 3.2 %224,644 2.8 %205,342 2.8 %198,828 3.0 %207,713 3.2 %
Lower than B30,625 0.4 %30,423 0.4 %27,865 0.4 %22,869 0.3 %22,233 0.3 %
Not rated106,190 1.3 %137,551 1.7 %108,579 1.5 %106,162 1.6 %117,766 1.8 %
Total$8,039,745 100.0 %$8,137,582 100.0 %$7,309,416 100.0 %$6,678,007 100.0 %$6,561,354 100.0 %

(1)    Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)    Includes sovereign securities, supranational securities and other.
(3)    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.

The following table summarizes the Company’s top ten exposures to fixed income corporate issuers by fair value at December 31, 2020 (1):
(U.S. Dollars in thousands)Fair
Value		% of Asset Class% of Investable AssetsCredit Quality (2)
Issuer:
Bank of America Corporation$323,808 4.0 %1.2 %A-/A2
JPMorgan Chase & Co.275,040 3.4 %1.0 %A-/A2
Wells Fargo & Company264,035 3.3 %1.0 %BBB+/A2
Nestlé S.A.213,454 2.7 %0.8 %AA-/Aa3
Citigroup Inc.187,920 2.3 %0.7 %BBB+/A3
Morgan Stanley178,906 2.2 %0.7 %BBB+/A2
Johnson & Johnson156,579 1.9 %0.6 %AAA/Aaa
Apple Inc.152,573 1.9 %0.6 %AA+/Aa1
The Goldman Sachs Group, Inc.129,030 1.6 %0.5 %BBB+/A3
Comcast Corporation115,407 1.4 %0.4 %A-/A3
Total$1,996,752 24.8 %7.4 %
 
(1)    Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)    Average credit ratings assigned by S&P and Moody’s, respectively.

28
Arch Capital Group Ltd. and Subsidiaries
Investment Information — Structured Securities

The following table provides the composition of the Company’s structured securities at December 31, 2020 (1):

(U.S. Dollars in thousands)AgenciesAAAAAABBBNon-Investment GradeTotal
      
Residential mortgage-backed securities$584,499 $2,059 $1,124 $— $919 $28,018 $616,619 
Commercial mortgage-backed securities24,396 279,514 31,287 14,461 17,229 24,103 390,990 
Asset-backed securities— 958,419 99,844 288,601 56,273 163,051 1,566,188 
Total$608,895 $1,239,992 $132,255 $303,062 $74,421 $215,172 $2,573,797 

(1)    Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.


29
Arch Capital Group Ltd. and Subsidiaries
Comments on Regulation G
Throughout this financial supplement, the Company presents its operations in the way it believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use the Company’s financial information in evaluating the performance of the 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, and transaction costs and other, net of 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 return on average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included on the following page.
The Company believes 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 in any particular period are not indicative of the performance of, or trends in, the Company’s business performance. 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 the Company’s 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 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 the Company’s 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 the Company’s investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (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 the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair value of the underlying securities in the funds). This method of accounting is different from the way the Company accounts for its 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 and Watford’s non-recurring listing expenses. The Company believes that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, the Company’s business performance. Due to these reasons, the Company excludes 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 from the calculation of after-tax operating income or loss available to Arch common shareholders.
The Company believes that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of the Company’s business since the Company evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, the Company believes that this presentation enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. The Company also believes that this measure follows industry practice and, therefore, allows the users of the Company’s financial information to compare the Company’s performance with its industry peer group. The Company believes that the equity analysts and certain rating agencies which follow the Company and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.
In addition, the Company’s presentation includes the use of information prepared on a ‘core’ basis, which excludes amounts related to the ‘other’ segment (i.e., results of Watford). Information provided on a ‘core’ basis are non-GAAP financial measures as defined in Regulation G. Pursuant to generally accepted accounting principles, Watford is considered a variable interest entity and the Company concluded that it is the primary beneficiary of Watford. As such, the Company consolidates the results of Watford in its consolidated financial statements, although it only owns approximately 13% of Watford’s outstanding common equity. Watford has its own management and board of directors that is responsible for its own results and profitability. In addition, the Company does not guarantee or provide credit support for Watford. Because Watford is an independent company, the assets of Watford can be used only to settle obligations of Watford and Watford is solely responsible for its own liabilities and commitments. 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 the reinsurance transactions. The Company believes that presenting information on a ‘core’ basis enables investors and other users of the Company’s financial information to analyze the Company’s performance in a manner similar to how the Company’s management analyzes performance. See ‘Segment Information’ for a further discussion of segment results and a reconciliation of core and consolidated results.
The Company’s segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss on a ‘core’ basis. Such measures represent the pre-tax profitability of the Company’s 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 the Company’s individual underwriting operations. Underwriting income or loss does not incorporate items included in the Company’s corporate (non-underwriting) segment. While these measures are presented in the Segment Information footnote to the Company’s 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 ‘core’ basis, in accordance with Regulation G, is shown on pages 10 to 13.
In addition, the Company’s segment information includes the use of a combined ratio excluding catastrophic activity and prior year development, for the insurance and reinsurance segments, and a combined ratio excluding prior year development, for the mortgage segment. These ratios are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to the combined ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G are shown on the individual segment pages. The Company’s management utilizes the adjusted combined ratios excluding current accident year catastrophic events and favorable or adverse development in prior year loss reserves in its analysis of the underwriting performance of each of its 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. Management uses total return on investments as a key measure of the return generated to Arch common shareholders, and compares the return generated by the Company’s investment portfolio against benchmark returns during the periods presented.
30
Arch Capital Group Ltd. and Subsidiaries
Operating Income Reconciliation and Annualized Operating Return on Average Common Equity
The following table summarizes the Company’s consolidated financial data, including a reconciliation of net income (loss) available to Arch common shareholders to after-tax operating income (loss) available to Arch common shareholders and related diluted per share results. Each line item reflects the impact of the Company’s ownership of Watford’s outstanding common equity:
(U.S. Dollars in thousands, except share data)Three Months EndedYear Ended
 December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Net income available to Arch common shareholders$533,141 $408,636 $288,418 $133,714 $315,981 $1,363,909 $1,594,707 
Net realized (gains) losses(297,801)(219,726)(406,645)109,364 (32,966)(814,808)(349,848)
Equity in net (income) loss of investment funds accounted for using the equity method(89,286)(126,735)65,119 4,209 (27,139)(146,693)(123,672)
Net foreign exchange (gains) losses63,588 39,462 42,032 (64,491)39,832 80,591 10,732 
Transaction costs and other4,718 1,674 977 2,595 9,081 9,964 14,444 
Income tax expense (benefit) (1)16,057 17,010 26,713 4,365 3,568 64,145 16,276 
After-tax operating income available to Arch common shareholders$230,417 $120,321 $16,614 $189,756 $308,357 $557,108 $1,162,639 
Diluted per common share results:
Net income available to Arch common shareholders$1.30 $1.00 $0.71 $0.32 $0.76 $3.32 $3.87 
Net realized (gains) losses(0.72)(0.54)(1.00)0.27 (0.08)(1.98)(0.86)
Equity in net (income) loss of investment funds accounted for using the equity method(0.22)(0.31)0.16 0.01 (0.07)(0.36)(0.30)
Net foreign exchange (gains) losses0.15 0.10 0.10 (0.16)0.10 0.20 0.03 
Transaction costs and other0.01 0.00 0.00 0.01 0.02 0.02 0.04 
Income tax expense (benefit) (1)0.04 0.04 0.07 0.01 0.01 0.16 0.04 
After-tax operating income available to Arch common shareholders$0.56 $0.29 $0.04 $0.46 $0.74 $1.36 $2.82 
Weighted average common shares and common share equivalents outstanding - diluted410,281,852 409,194,657 408,119,681 414,033,570 414,124,920 410,259,455 411,609,478 
Beginning common shareholders’ equity$11,671,997 $11,211,825 $10,587,244 $10,717,371 $10,378,096 $10,717,371 $8,659,827 
Ending common shareholders’ equity12,325,886 11,671,997 11,211,825 10,587,244 10,717,371 12,325,886 10,717,371 
Average common shareholders’ equity$11,998,942 $11,441,911 $10,899,535 $10,652,308 $10,547,734 $11,521,629 $9,688,599 
Annualized return on average common equity17.8 %14.3 %10.6 %5.0 %12.0 %11.8 %16.5 %
Annualized operating return on average common equity7.7 %4.2 %0.6 %7.1 %11.7 %4.8 %12.0 %

(1)Income tax expense on 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 (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.


31
Arch Capital Group Ltd. and Subsidiaries
Operating Income and Effective Tax Rate Calculations
The following table provides a reconciliation of income (loss) before income taxes to after-tax operating income (loss) available to Arch common shareholders and an analysis of the effective tax rate on pre-tax operating income (loss) available to Arch common shareholders:
(U.S. Dollars in thousands)Three Months EndedYear Ended
December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Arch Operating Income Components (1):
Income before income taxes$570,650 $433,815 $302,474 $205,953 $355,837 $1,512,892 $1,787,437 
Net realized (gains) losses(289,817)(210,984)(385,089)72,109 (31,836)(813,781)(348,037)
Equity in net (income) loss of investment funds accounted for using the equity method(89,286)(126,735)65,119 4,209 (27,139)(146,693)(123,672)
Net foreign exchange (gains) losses62,349 38,681 42,438 (63,307)38,031 80,161 9,252 
Transaction costs and other3,086 792 43 2,538 9,081 6,459 14,444 
Pre-tax operating income256,982 135,569 24,985 221,502 343,974 639,038 1,339,424 
Arch share of ‘other’ segment operating income (loss) (2)1,526 1,792 1,798 2,237 (1,450)7,353 4,339 
Pre-tax operating income available to Arch (b)258,508 137,361 26,783 223,739 342,524 646,391 1,343,763 
Income tax expense (a)(17,688)(6,637)234 (23,580)(23,764)(47,671)(139,512)
After-tax operating income available to Arch240,820 130,724 27,017 200,159 318,760 598,720 1,204,251 
Preferred dividends(10,403)(10,403)(10,403)(10,403)(10,403)(41,612)(41,612)
After-tax operating income available to Arch common shareholders$230,417 $120,321 $16,614 $189,756 $308,357 $557,108 $1,162,639 
Effective tax rate on pre-tax operating income (loss) available to Arch (a)/(b)6.8 %4.8 %(0.9)%10.5 %6.9 %7.4 %10.4 %

(1)    Line items are presented on a ‘core’ basis, excluding amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)    Balances in the ‘other’ segment and a calculation of Arch’s share of the ‘other’ segment operating income (loss) is as follows:
(U.S. Dollars in thousands)Three Months EndedYear Ended
December 31,September 30,June 30,March 31,December 31,December 31,December 31,
 2020202020202020201920202019
Balances in ‘other’ segment:
Underwriting income (loss)$(8,555)$(8,273)$(9,129)$(6,010)$(37,251)$(31,967)$(51,665)
Net investment income26,466 28,655 30,454 32,125 34,357 117,700 136,671 
Interest expense(4,804)(5,119)(6,009)(7,310)(7,558)(23,242)(27,137)
Preferred dividends(992)(993)(1,036)(1,096)(1,131)(4,117)(16,909)
Pre-tax operating income (loss) available to common shareholders12,115 14,270 14,280 17,709 (11,583)58,374 40,960 
Arch ownership13 %13 %13 %13 %13 %13 %11 %
Arch share of ‘Other’ segment operating income (loss) (3)$1,526 $1,792 $1,798 $2,237 $(1,450)$7,353 $4,339 

(3) Excludes amounts attributable to net realized gains or losses and net foreign exchange gains or losses in the ‘other’ segment (see ‘Segment Information’).
32
Arch Capital Group Ltd. and Subsidiaries
Capital Structure and Share Repurchase Activity
The following table provides an analysis of the Company’s capital structure (1):
(U.S. Dollars in thousands, except share data)December 31,September 30,June 30,March 31,December 31,
20202020202020202019
Debt:
Arch Capital senior notes, due May 1, 2034 ($300,000 principal, 7.35%)$300,000 $300,000 $300,000 $300,000 $300,000 
Arch-U.S. senior notes, due Nov. 1, 2043 ($500,000 principal, 5.144%) (2)500,000 500,000 500,000 500,000 500,000 
Arch Finance senior notes, due December 15, 2026 ($500,000 principal, 4.011%) (3)500,000 500,000 500,000 500,000 500,000 
Arch Finance senior notes, due December 15, 2046 ($450,000 principal, 5.031%) (3)450,000 450,000 450,000 450,000 450,000 
Arch Capital senior notes, due June 30, 2050 ($1,000,000 principal, 3.635%)1,000,000 1,000,000 1,000,000 — — 
Deferred debt costs on senior notes(26,577)(26,811)(26,820)(15,616)(15,791)
Revolving credit agreement borrowings, due October 26, 2021 (variable)— — — — — 
Total debt$2,723,423 $2,723,189 $2,723,180 $1,734,384 $1,734,209 
Shareholders’ equity available to Arch:
Series E non-cumulative preferred shares (5.25%)450,000 450,000 450,000 450,000 450,000 
Series F non-cumulative preferred shares (5.45%)330,000 330,000 330,000 330,000 330,000 
Common shareholders’ equity (a)12,325,886 11,671,997 11,211,825 10,587,244 10,717,371 
Total shareholders’ equity available to Arch$13,105,886 $12,451,997 $11,991,825 $11,367,244 $11,497,371 
Total capital available to Arch$15,829,309 $15,175,186 $14,715,005 $13,101,628 $13,231,580 
Common shares outstanding, net of treasury shares (b)406,720,642 406,018,958 405,970,251 405,609,867 405,619,201 
Book value per common share (4) (a)/(b)$30.31 $28.75 $27.62 $26.10 $26.42 
Leverage ratios:
Senior notes/total capital available to Arch17.2 %17.9 %18.5 %13.2 %13.1 %
Revolving credit agreement borrowings/total capital available to Arch— %— %— %— %— %
Debt/total capital available to Arch17.2 %17.9 %18.5 %13.2 %13.1 %
Preferred/total capital available to Arch4.9 %5.1 %5.3 %6.0 %5.9 %
Debt and preferred/total capital available to Arch22.1 %23.1 %23.8 %19.2 %19.0 %

(1)    Presented on a ‘core’ basis which excludes amounts related to the ‘other’ segment (i.e., results of Watford). See ‘Comments on Regulation G’ for a further discussion of the presentation of ‘core’ results.
(2)    Issued by Arch Capital Group (U.S.) Inc. (“Arch-U.S.”), a wholly owned subsidiary of Arch Capital, and fully and unconditionally guaranteed by Arch Capital.
(3)    Issued by Arch Capital Finance LLC (“Arch Finance”), a wholly owned subsidiary of Arch U.S. MI Holdings Inc., and fully and unconditionally guaranteed by Arch Capital.
(4)    Excludes the effects of stock options, restricted and performance stock units outstanding.

The following table provides the impact of share repurchases under the Company’s share repurchase program:
(U.S. Dollars in thousands except share data)Three Months EndedCumulative
 December 31,September 30,June 30,March 31,December 31,December 31,
 202020202020202020192020
Effect of share repurchases:
Aggregate cost of shares repurchased$7,986 $— $— $75,486 $— $4,051,766 
Shares repurchased250,714 — — 2,599,388 — 389,192,082 
Average price per share repurchased$31.85 $— $— $29.04 $— $10.41 
Remaining share repurchase authorization (1)$916,528 
 
(1)    Repurchases under the share repurchase authorization may be effected from time to time in open market or privately negotiated transactions through December 31, 2021.
33

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