filings.toolsArch Capital Group 10-K 2018-12-31
Filed 2019-02-28. 22 sections, 1041K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
10-K 1 a201810-k.htm 10-K
| UNITED STATES | ||
| SECURITIES AND EXCHANGE COMMISSION | ||
| Washington, D.C. 20549 | ||
| FORM 10-K | ||
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| OR | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Fiscal Year Ended December 31, 2018 | Commission File No. 001-16209 |
ARCH CAPITAL GROUP LTD.
(Exact name of registrant as specified in its charter)
| Bermuda | Not applicable |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| Waterloo House, Ground Floor | |
| 100 Pitts Bay Road, Pembroke HM 08, Bermuda | (441) 278-9250 |
| (Address of principal executive offices) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Name of each exchange on which registered |
| Common Shares, $0.0011 par value per share | NASDAQ Stock Market (Common Shares) |
| 5.25% Non-Cumulative Preferred Shares, Series E, $0.01 par value per share | NASDAQ Stock Market |
| 5.45% Non-Cumulative Preferred Shares, Series F, $0.01 par value per share | NASDAQ Stock Market |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer þ Accelerated Filer o Non-accelerated Filer o Smaller reporting company o Emerging Growth Company o
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the closing price as reported by the NASDAQ Stock Market as of the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $10.3 billion.
As of February 25, 2019, there were 402,529,670 of the registrant’s common shares outstanding.
| DOCUMENTS INCORPORATED BY REFERENCE | |
| Portions of Part III and Part IV incorporate by reference our definitive proxy statement for the 2019 annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A before May 1, 2019. | |
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. This report or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this report are forward-looking statements. Forward-looking statements, for purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-looking nature or their negative or variations or similar terminology.
Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed below, elsewhere in this report and in our periodic reports filed with the Securities and Exchange Commission (“SEC”), and include:
| • | our ability to successfully implement our business strategy during “soft” as well as “hard” markets; |
| • | acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and our insureds and reinsureds; |
| • | the integration of any businesses we have acquired or may acquire into our existing operations; |
| • | our ability to maintain or improve our ratings, which may be affected by our ability to raise additional equity or debt financings, by ratings agencies’ existing or new policies and practices, as well as other factors described herein; |
| • | general economic and market conditions (including inflation, interest rates, unemployment, housing prices, foreign currency exchange rates, prevailing credit terms and the depth and duration of a recession) and conditions specific to the reinsurance and insurance markets (including the length and magnitude of the current “soft” market) in which we operate; |
| • | competition, including increased competition, on the basis of pricing, capacity (including alternative sources of capital), coverage terms, or other factors; |
| • | developments in the world’s financial and capital markets and our access to such markets; |
| • | our ability to successfully enhance, integrate and maintain operating procedures (including information technology) to effectively support our current and new business; |
| • | the loss of key personnel; |
| • | accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting, which for a relatively new insurance and reinsurance company, like our company, are even more difficult to make than those made in a mature company since relatively limited historical information has been reported to us through December 31, 2018; |
| • | greater than expected loss ratios on business written by us and adverse development on claim and/or claim expense liabilities related to business written by our insurance and reinsurance subsidiaries; |
| • | severity and/or frequency of losses; |
| • | claims for natural or man-made catastrophic events or severe economic events in our insurance, reinsurance and mortgage businesses could cause large losses and substantial volatility in our results of operations; |
| • | the effect of climate change on our business; |
| • | acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events; |
| • | availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance; |
| • | the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to us; |
| • | the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us; |
| • | our investment performance, including legislative or regulatory developments that may adversely affect the fair value of our investments; |
| • | changes in general economic conditions, including new or continued sovereign debt concerns in Eurozone countries or downgrades of U.S. securities by credit rating agencies, which could affect our business, financial condition and results of operations; |
| • | the volatility of our shareholders’ equity from foreign currency fluctuations, which could increase due to us not matching portions of our projected liabilities in foreign currencies with investments in the same currencies; |
| • | changes in accounting principles or policies or in our application of such accounting principles or policies; |
| • | changes in the political environment of certain countries in which we operate or underwrite business; |
| • | a disruption caused by cyber-attacks or other technology breaches or failures on us or our business partners and service providers, which could negatively impact our business and/or expose us to litigation; |
| • | statutory or regulatory developments, including as to tax matters and insurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers and/or changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers, including the recently enacted Tax Cuts and Jobs Act of 2017; and |
| • | the other matters set forth under Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Annual Report on Form 10-K, as well as the other factors set forth in Arch Capital Group Ltd.’s other documents on file with the SEC, and management’s response to any of the aforementioned factors. |
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
PART I
Item 1. BUSINESS
As used in this report, references to “we,” “us,” “our,” “Arch” or the “Company” refer to the consolidated operations of Arch Capital Group Ltd. (“Arch Capital”) and its subsidiaries. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted. We refer you to Item 1A “Risk Factors” for a discussion of risk factors relating to our business.
OUR COMPANY
General
Arch Capital, a Bermuda public limited liability company with $11.17 billion in capital at December 31, 2018, provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly owned subsidiaries. While we are positioned to provide a full range of property, casualty and mortgage insurance and reinsurance lines, we focus on writing specialty lines of insurance and reinsurance. For 2018, we wrote $5.35 billion of net premiums and reported net income available to Arch common shareholders of $713.6 million. Book value per share was $21.52 at December 31, 2018, compared to $20.30 per share at December 31, 2017.
Arch Capital’s registered office is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda (telephone number: (441) 295-1422), and its principal executive offices are located at Waterloo House, Ground Floor, 100 Pitts Bay Road, Pembroke HM 08, Bermuda (telephone number: (441) 278-9250). Arch Capital makes available free of charge through its website, located at www.archcapgroup.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (such as Arch Capital) and the address of that site is www.sec.gov.
Our History
Arch Capital was formed in September 2000 and became the sole shareholder of Arch Capital Group (U.S.) Inc. (“Arch-U.S.”) pursuant to an internal reorganization transaction completed in November 2000. In October 2001, Arch Capital launched an underwriting initiative to meet current and future demand in the global insurance and reinsurance markets that included the recruitment of new management teams and an equity capital infusion of $763.2 million. Since that time, we
have attracted a proven management team with extensive industry experience and enhanced our existing global underwriting platform for our insurance and reinsurance businesses. It is our belief that our underwriting platform, our experienced management team and our strong capital base that is unencumbered by significant pre-2002 risks have enabled us to establish a strong presence in the global insurance and reinsurance markets.
Prior to the 2001 underwriting initiative, our insurance underwriting platform consisted of Arch Insurance (Bermuda), a division of Arch Reinsurance Ltd. (“Arch Re Bermuda”), our Bermuda-based reinsurer and insurer, and our U.S.-licensed insurers, Arch Insurance Company (“Arch Insurance”), Arch Excess & Surplus Insurance Company (“Arch E&S”), Arch Specialty Insurance Company (“Arch Specialty”) and Arch Indemnity Insurance Company (“Arch Indemnity”). We established Arch Insurance Company (Europe) Limited (“Arch Insurance Company Europe”), our United Kingdom-based subsidiary, in 2004, and we expanded our North American presence when Arch Insurance opened a branch office in Canada in 2005. In 2013, Arch Insurance Canada Ltd. (“Arch Insurance Canada”), a Canada domestic company, commenced operations and replaced the branch office. In 2009, we established a managing agent and syndicate 2012 (“Arch Syndicate 2012”) at Lloyd’s of London (“Lloyd’s”). In December 2018, we completed the acquisition of McNeil & Company, Inc. (“McNeil”), a U.S. nationwide leader in specialized risk management and program administration headquartered in Cortland, New York. In addition, we acquired U.K. commercial lines business from Ardonagh Group in January 2019. See “Operations—Insurance Operations” for further details on our insurance operations.
Prior to the 2001 underwriting initiative, our reinsurance underwriting platform consisted of Arch Re Bermuda and Arch Reinsurance Company (“Arch Re U.S.”), our U.S.-licensed reinsurer. Our reinsurance operations in Europe began in 2006 with the formation of a Swiss branch of Arch Re Bermuda, and the formation of a Danish underwriting agency in 2007. In addition to the U.S. reinsurance treaty activities of Arch Re U.S., we launched our property facultative reinsurance underwriting operations in 2007, which underwrite in the U.S., Canada and Europe. In 2008, we formed Arch Reinsurance Europe Designated Activity Company (“Arch Re Europe”), our Ireland-based reinsurance company, which replaced the Swiss branch. We launched treaty operations in Canada in 2011 and the following year we acquired the credit and surety reinsurance operations of Ariel Reinsurance Company Ltd. In 2015, we
| ARCH CAPITAL | 4 | 2018 FORM 10-K |
obtained complete ownership and effective control of Gulf Reinsurance Limited (“Gulf Re”), previously a joint venture. See “Operations—Reinsurance Operations” for further details on our reinsurance operations.
Our mortgage operations include U.S. and international mortgage insurance and reinsurance operations as well as participation in government sponsored enterprise (“GSE”) credit risk sharing transactions. Our mortgage platform was built through the acquisition of CMG Mortgage Insurance Company in 2014 (subsequently renamed Arch Mortgage Insurance Company) and further expanded through the acquisition of United Guaranty Corporation (“UGC”) (including United Guaranty Residential Insurance Company), from American International Group, Inc. (“AIG”), which closed at the end of 2016. In 2017, we completed the acquisition of AIG United Guaranty Insurance (Asia) Limited (renamed “Arch MI Asia Limited”) from AIG.
Our U.S. primary mortgage operations provide mortgage insurance products and services to the U.S. market. These operations include providers that are also approved as eligible mortgage insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE. Arch Mortgage Insurance Designated Activity Company (“Arch MI Europe”), provides mortgage insurance products and services to the European market. In January 2019, Arch LMI Pty Ltd (“Arch LMI”) was authorized by the Australian Prudential Regulation Authority (“APRA”) to write lenders’ mortgage insurance on a direct basis in Australia.
The mortgage operations also include participation in GSE credit risk-sharing transactions and direct mortgage insurance to U.S. mortgage lenders with respect to mortgages that lenders intend to retain in portfolio or include in non-agency securitizations along with mortgage reinsurance for the U.S. and Australian markets. See “Operations—Mortgage Operations” for further details on our mortgage operations.
In 2014 we acquired approximately 11% of Watford Holdings Ltd. Watford Holdings Ltd. is the parent of Watford Re Ltd., a multi-line Bermuda reinsurance company (together with Watford Holdings Ltd., “Watford Re”). In 2017, we acquired approximately 25% of Premia Holdings Ltd. Premia Holdings Ltd. is the parent of Premia Reinsurance Ltd., a multi-line Bermuda reinsurance company (together with Premia Holdings Ltd., “Premia Re”). See “Operations—Other Operations” for further details on Watford Re and Premia Re.
The board of directors of Arch Capital (the “Board”) has authorized the investment in Arch Capital’s common shares through a share repurchase program. Repurchases under the share repurchase program may be effected from time to time in open market or privately negotiated transactions through December 31, 2019. Since the inception of
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Item 1A. RISK FACTORS
Set forth below are risk factors relating to our business. These risks and uncertainties are not the only ones we face. There may be additional risks that we currently consider not to be material or of which we are not currently aware, and any of these risks could cause our actual results to differ materially from historical or anticipated results. You should carefully consider these risks along with the other information provided in this report, including our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our accompanying consolidated financial statements, as well as the information under the heading “Cautionary Note Regarding Forward-Looking Statements” before investing in any of our securities. We may amend, supplement or add to the risk factors described below from time to time in future reports filed with the SEC.
Risks Relating to Our Industry
We operate in a highly competitive environment, and we may not be able to compete successfully in our industry.
The insurance and reinsurance industry is highly competitive. We compete on an international and regional basis with major U.S. and non-U.S. insurers and reinsurers, many of which have greater financial, marketing and management resources than we do. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets, as well as with other capital market participants that create alternative products intended to compete with reinsurance products. Certain new companies entering the insurance and reinsurance markets are pursuing more aggressive investment strategies than do we and other traditional reinsurers, which may result in downward pressure on premium rates. In our U.S. mortgage business, we compete with other private mortgage insurers, with the Federal Housing Administration, and, increasingly, with well capitalized multiline reinsurers and capital markets alternatives to private mortgage insurance. Competition within the private mortgage insurance industry could result in the loss of customers, lower premiums, riskier credit guidelines and other changes that could lower our revenues or increase our expenses.
In addition, there has been significant consolidation in the insurance and reinsurance sector in recent years and we may experience increased competition as a result of that consolidation, with consolidated entities having enhanced market power. These consolidated entities may use their enhanced market power and broader capital base to negotiate price reductions for products and services that compete with ours, and we may experience rate declines and possibly write less business. Any failure by us to effectively compete could
adversely affect our financial condition and results of operations.
The insurance and reinsurance industry is highly cyclical, and we expect to continue to experience periods characterized by excess underwriting capacity and unfavorable premium rates.
Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of capacity, general economic conditions, changes in equity, debt and other investment markets, changes in legislation, case law and prevailing concepts of liability and other factors. In particular, demand for reinsurance is influenced significantly by the underwriting results of primary insurers and prevailing general economic conditions. The supply of insurance and reinsurance is related to prevailing prices and levels of surplus capacity that, in turn, may fluctuate in response to changes in rates of return being realized in the insurance and reinsurance industry on both underwriting and investment sides. As a result, the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels and changes in terms and conditions. The supply of insurance and reinsurance has increased over the past several years and may increase further, either as a result of capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers. Continued increases in the supply of insurance and reinsurance may have consequences for us, including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, and less favorable policy terms and conditions.
Claims for catastrophic events could cause large losses and substantial volatility in our results of operations and could have a material adverse effect on our financial position and results of operations.
We have large aggregate exposures to natural and man-made catastrophic events. Catastrophes can be caused by various events, including hurricanes, floods, tsunamis, windstorms, earthquakes, hailstorms, tornadoes, explosions, severe winter weather, fires, droughts and other natural disasters. Catastrophes can also cause losses in non-property business such as workers’ compensation or general liability. In addition to the nature of the property business, we believe that economic and geographic trends affecting insured property, including inflation, property value appreciation and geographic concentration tend to generally increase the size of losses from catastrophic events over time. Actual losses from future
| ARCH CAPITAL | 32 | 2018 FORM 10-K |
catastrophic events may vary materially from estimates due to the inherent uncertainties in making such determinations resulting from several factors, including the potential inaccuracies and inadequacies in the data provided by clients, brokers and ceding companies, the modeling techniques and the application of such techniques, the contingent nature of business interruption exposures, the effects of any resultant demand surge on claims activity and attendant coverage issues.
In addition, over the past several years, changing weather patterns and climatic conditions, such as global warming, have added to the unpredictability and frequency of natural disasters in certain parts of the world and created additional uncertainty as to future trends and exposures. Although the loss experience of catastrophe insurers and reinsurers has historically been characterized as low frequency, there is a growing consensus today that climate change increases the frequency and severity of extreme weather events and, in recent years, the frequency of major catastrophes appears to have increased. Claims for catastrophic events, or an unusual frequency of smaller losses in a particular period, could expose us to large losses, cause substantial volatility in our results of operations and could have a material adverse effect on our ability to write new business.
Additionally, we cannot predict how legal, regulatory and/or social responses to concerns around global climate change may impact our business. Although we attempt to manage our exposure to such events through the use of underwriting controls, risk models, and the purchase of third-party reinsurance, catastrophic events are inherently unpredictable and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophic events could have an adverse effect on our results of operations and financial condition.
We could face unanticipated losses from war, terrorism, cyber-attacks and political instability, and these or other unanticipated losses could have a material adverse effect on our financial condition and results of operations.
We have substantial exposure to unexpected, large losses resulting from future man-made catastrophic events, such as acts of war, acts of terrorism and poli
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Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We lease office space in Bermuda where our principal offices are located. Our insurance group leases space for offices in the U.S., Canada, Bermuda, Europe and Australia. Our reinsurance group leases space for offices in the U.S., Bermuda, Europe, Canada and Dubai. Our mortgage group leases space for offices
in the U.S., Hong Kong and Australia. We believe that the above described office space is adequate for our needs. However, as we continue to develop our business, we may open additional office locations in 2019.
| ARCH CAPITAL | 51 | 2018 FORM 10-K |
Item 3. LEGAL PROCEEDINGS
We, in common with the insurance industry in general, are subject to litigation and arbitration in the normal course of our business. As of December 31, 2018, we were not a party to any
litigation or arbitration which is expected by management to have a material adverse effect on our results of operations and financial condition and liquidity.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
HOLDERS
As of February 20, 2019, and based on information provided to us by our transfer agent and proxy solicitor, there were 860 holders of record of our common shares (NASDAQ: ACGL) and approximately 43,000 beneficial holders of our common shares.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes our purchases of common shares for the 2018 fourth quarter:
| Issuer Purchases of Common Shares | |||||||||||||
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Programs (2) | |||||||||
| 10/1/2018-10/31/2018 | 559,024 | $ | 26.69 | 549,043 | $ | 247,339 | |||||||
| 11/1/2018-11/30/2018 | 1,042,896 | $ | 27.99 | 922,344 | $ | 221,529 | |||||||
| 12/1/2018-12/31/2018 | 2,156,733 | $ | 26.85 | 2,152,147 | $ | 163,739 | |||||||
| Total | 3,758,653 | $ | 27.14 | 3,623,534 | $ | 163,739 |
| (1) | Includes repurchases by Arch Capital of shares, from time to time, from employees in order to facilitate the payment of withholding taxes on restricted shares granted and the exercise of stock appreciation rights. We purchased these shares at their fair market value, as determined by reference to the closing price of our common shares on the day the restricted shares vested or the stock appreciation rights were exercised. |
| (2) | Remaining amount available at December 31, 2018 under Arch Capital’s share repurchase authorization, under which repurchases may be effected from time to time in open market or privately negotiated transactions through December 31, 2019. |
| ARCH CAPITAL | 52 | 2018 FORM 10-K |
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on our common shares for each of the last five years through December 31, 2018 to the cumulative total return, assuming reinvestment of dividends, of (1) S&P 500 Composite Stock Index (“S&P 500 Index”) and (2) the S&P 500 Property & Casualty Insurance Index. The share price performance presented below is not necessarily indicative of future results.
CUMULATIVE TOTAL SHAREHOLDER RETURN (1)(2)(3)
| Base Period | |||||||||||||||||||
| Company Name/Index | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | |||||||||||||
| l | Arch Capital Group Ltd. | $100.00 | $99.01 | $116.85 | $144.56 | $152.07 | $134.29 | ||||||||||||
| n | S&P 500 Index | $100.00 | $113.69 | $115.26 | $129.05 | $157.22 | $150.33 | ||||||||||||
| p | S&P 500 Property & Casualty Insurance Index | $100.00 | $115.74 | $126.77 | $146.68 | $179.52 | $171.10 |
| (1) | Stock price appreciation plus dividends. |
| (2) | The above graph assumes that the value of the investment was $100 on December 31, 2013. |
| (3) | This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act of 1933 or the Securities and Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. |
| ARCH CAPITAL | 53 | 2018 FORM 10-K |
Item 6. SELECTED FINANCIAL DATA
The following tables set forth summary historical consolidated financial and operating data (including the results of the ‘other’ segment) and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes.
| (U.S. dollars in thousands except share data) | Year Ended December 31, | ||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Statement of Income Data: | |||||||||||||||||||
| Net premiums written | $ | 5,346,747 | $ | 4,961,373 | $ | 4,031,391 | $ | 3,817,531 | $ | 3,891,938 | |||||||||
| Net premiums earned | 5,231,975 | 4,844,532 | 3,884,822 | 3,733,905 | 3,593,748 | ||||||||||||||
| Net investment income | 563,633 | 470,872 | 366,742 | 348,090 | 302,585 | ||||||||||||||
| Equity in net income (loss) of investments accounted for using the equity method | 45,641 | 142,286 | 48,475 | 25,455 | 19,883 | ||||||||||||||
| Net realized gains (losses) | (405,344 | ) | 149,141 | 137,586 | (185,842 | ) | 102,917 | ||||||||||||
| Total revenues | 5,450,568 | 5,627,375 | 4,463,556 | 3,936,590 | 3,988,873 | ||||||||||||||
| Income before income taxes | 841,772 | 757,277 | 855,552 | 567,194 | 844,247 | ||||||||||||||
| Net income | $ | 727,821 | $ | 629,709 | $ | 824,178 | $ | 526,582 | $ | 821,260 | |||||||||
| Net (income) loss attributable to noncontrolling interests | 30,150 | (10,431 | ) | (131,440 | ) | 11,156 | 13,095 | ||||||||||||
| Net income available to Arch | 757,971 | 619,278 | 692,738 | 537,738 | 834,355 | ||||||||||||||
| Preferred dividends | (41,645 | ) | (46,041 | ) | (28,070 | ) | (21,938 | ) | (21,938 | ) | |||||||||
| Loss on redemption of preferred shares | (2,710 | ) | (6,735 | ) | — | — | — | ||||||||||||
| Net income available to Arch common shareholders | $ | 713,616 | $ | 566,502 | $ | 664,668 | $ | 515,800 | $ | 812,417 | |||||||||
| Diluted net income per share | $ | 1.73 | $ | 1.36 | $ | 1.78 | $ | 1.36 | $ | 2.01 | |||||||||
| Cash dividends per share | — | — | — | — | — | ||||||||||||||
| After-tax operating income available to Arch common shareholders (1) | $ | 909,190 | $ | 447,155 | $ | 577,444 | $ | 565,199 | $ | 617,312 | |||||||||
| After-tax operating income available to Arch common shareholders per share — diluted (1) | $ | 2.20 | $ | 1.07 | $ | 1.54 | $ | 1.49 | $ | 1.53 | |||||||||
| After-tax return on average common equity (2) | 8.4 | % | 7.2 | % | 10.9 | % | 8.9 | % | 14.7 | % | |||||||||
| After-tax operating return on average common equity (2) | 10.7 | % | 5.7 | % | 9.4 | % | 9.7 | % | 11.2 | % | |||||||||
| Weighted average common shares and common share equivalents outstanding — diluted (2) | 412,906,478 | 417,785,025 | 374,152,479 | 378,116,229 | 404,766,966 |
| (1) | After-tax operating income available to Arch common shareholders is defined as net income available to Arch common shareholders, excluding net realized gains or losses, net impairment losses included in earnings, equity in net income or loss of investments accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares, net of income taxes. The presentation of after-tax operating income available to Arch common shareholders is a “non-GAAP financial measure” as defined in Regulation G. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General—Comment on Non-GAAP Financial Measures” for further details. |
| (2) | Equals after-tax operating income available to Arch common shareholders divided by the average of beginning and ending common shareholders’ equity for each period presented. For the 2016 period, the return on average common shareholders’ equity reflects the weighted impact of the $1.10 billion of convertible non-voting common equivalent preferred shares, which were issued on December 31, 2016 as part of the UGC acquisition. |
| ARCH CAPITAL | 54 | 2018 FORM 10-K |
| (U.S. dollars in thousands except share data) | December 31, | ||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||
| Total investable assets (1) | $ | 22,324,524 | $ | 22,156,488 | $ | 20,493,952 | $ | 16,340,938 | $ | 15,762,730 | |||||||||
| Premiums receivable | 1,299,150 | 1,135,249 | 1,072,435 | 983,443 | 948,695 | ||||||||||||||
| Reinsurance recoverables on unpaid and paid losses and loss adjustment expenses | 2,919,372 | 2,540,143 | 2,114,138 | 1,867,373 | 1,812,845 | ||||||||||||||
| Total assets | 32,218,329 | 32,051,658 | 29,372,109 | 23,138,931 | 21,967,742 | ||||||||||||||
| Reserves for losses and loss adjustment expenses: | |||||||||||||||||||
| Before unpaid losses and loss adjustment expenses recoverable | 11,853,297 | 11,383,792 | 10,200,960 | 9,125,250 | 9,036,448 | ||||||||||||||
| Net of unpaid losses and loss adjustment expenses recoverable | 9,039,006 | 8,918,882 | 8,117,385 | 7,296,413 | 7,258,145 | ||||||||||||||
| Unearned premiums: | |||||||||||||||||||
| Before ceded unearned premiums | 3,753,636 | 3,622,314 | 3,406,870 | 2,333,932 | 2,231,578 | ||||||||||||||
| Net of ceded unearned premiums | 2,778,167 | 2,695,703 | 2,547,303 | 1,906,323 | 1,854,500 | ||||||||||||||
| Senior notes | 1,733,528 | 1,732,884 | 1,732,258 | 791,306 | 791,141 | ||||||||||||||
| Revolving credit agreement borrowings | 455,682 | 816,132 | 756,650 | 530,434 | 100,000 | ||||||||||||||
| Total liabilities | 21,780,650 | 21,805,723 | 20,060,984 | 16,028,376 | 14,887,435 | ||||||||||||||
| Total shareholders’ equity | 10,231,387 | 10,040,013 | 9,105,572 | 6,905,373 | 6,860,795 | ||||||||||||||
| Total shareholders' equity available to Arch | 9,439,827 | 9,196,602 | 8,253,718 | 6,166,542 | 6,091,714 | ||||||||||||||
| Preferred shareholders' equity | 780,000 | 872,555 | 772,555 | 325,000 | 325,000 | ||||||||||||||
| Common shareholders' equity available to Arch | $ | 8,659,827 | $ | 8,324,047 | $ | 7,481,163 | $ | 5,841,542 | $ | 5,766,714 | |||||||||
| Common shares and common share equivalents outstanding, net of treasury shares (2) | 402,454,834 | 409,956,417 | 406,651,011 | 367,883,349 | 382,103,802 | ||||||||||||||
| Book value per share (2) (3) | $ | 21.52 | $ | 20.30 | $ | 18.40 | $ | 15.88 | $ | 15.09 |
| (1) | This table excludes the collateral received and reinvested and includes the securities pledged under securities lending agreements, at fair value. |
| (2) | Reflects the impact of outstanding convertible non-voting common equivalent preferred shares which were issued on December 31, 2016 as part of the UGC acquisition. |
| (3) | Excludes the effects of stock options and restricted stock units. |
| ARCH CAPITAL | 55 | 2018 FORM 10-K |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements which involve inherent risks and uncertainties. All statements other than statements of historical fact are forward-looking statements. These statements are based on our current assessment of risks and uncertainties. Actual results may differ materially from those expressed or implied in these statements and, therefore, undue reliance should not be placed on them. Important factors that could cause actual events or results to differ materially from those indicated in such statements are discussed in this report, including the sections entitled “Cautionary Note Regarding Forward-Looking Statements,” and “Risk Factors.”
This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto presented under Item 8. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.
GENERAL
Overview
Arch Capital Group Ltd. (“Arch Capital” and, together with its subsidiaries, “we” or “us”) is a Bermuda public limited liability company with approximately $11.17 billion in capital at December 31, 2018 and, through operations in Bermuda, the United States, Europe and Canada, writes specialty lines of property and casualty insurance and reinsurance, as well as mortgage insurance and reinsurance, on a worldwide basis. It is our belief that our underwriting platform, our experienced management team and our strong capital base have enabled us to establish a strong presence in the insurance and reinsurance markets.
The worldwide property casualty insurance and reinsurance industry is highly competitive and has traditionally been subject to an underwriting cycle in which a hard market (high premium rates, restrictive underwriting standards, as well as terms and conditions, and underwriting gains) is eventually followed by a soft market (low premium rates, relaxed underwriting standards, as well as broader terms and conditions, and underwriting losses). Property casualty market conditions may affect, among other things, the demand for our products, our ability to increase premium rates, the terms and conditions of the insurance policies we write, changes in the products offered by us or changes in our business strategy.
The financial results of the property casualty insurance and reinsurance industry are influenced by factors such as the frequency and/or severity of claims and losses, including natural disasters or other catastrophic events, variations in
interest rates and financial markets, changes in the legal, regulatory and judicial environments, inflationary pressures and general economic conditions. These factors influence, among other things, the demand for insurance or reinsurance, the supply of which is generally related to the total capital of competitors in the market.
Mortgage insurance and reinsurance is subject to similar cycles to property casualty except that they have historically been more dependent on macroeconomic conditions.
Current Outlook
Our objective is to achieve an average operating return on average equity of 15% or greater over the insurance cycle, which we believe to be an attractive return to our common shareholders given the risks we assume. We continue to look for opportunities to find acceptable books of business to underwrite without sacrificing underwriting discipline and continue to write a portion of our overall book in catastrophe-exposed business which has the potential to increase the volatility of our operating results.
The broad property casualty insurance market environment continues to be competitive, with only a few specialty areas providing opportunities to deploy capital at returns which meet our risk-adjusted return requirements. In most of our insurance lines of business, rate increases appear to be in excess of loss cost trends. However, the spread between rate changes and loss trend is a key variable in assessing expected returns and, in specialty lines, is volatile by nature. Our underwriting teams continue to execute a disciplined strategy by emphasizing small and medium-sized accounts over large accounts, shrinking premiums in more commoditized lines such as general liability and directors and officers, and by utilizing reinsurance purchases to reduce volatility on large account, high capacity business. Writings in property catastrophe-exposed business continued to remain low in 2018.
Our mortgage segment continues to experience generally favorable market conditions, with pricing in the U.S. stabilizing in the third quarter following the rate changes announced in the first half of 2018. Our results continue to reflect our success in making high quality credit underwriting risk decisions and building customer relationships.
Arch remains committed to providing solutions across many offerings as the marketplace evolves, including new mortgage credit risk transfer programs initiated by government sponsored enterprises, or “GSEs,” in 2018. Such programs have begun generating business with banks developing new systems to handle the programs and momentum beginning to build. In
| ARCH CAPITAL | 56 | 2018 FORM 10-K |
addition, we completed multiple Bellemeade risk transfers to the capital markets throughout 2018, increasing our protection for mortgage tail risk.
FINANCIAL MEASURES
Management uses the following three key financial indicators in evaluating our performance and measuring the overall growth in value generated for Arch Capital’s common shareholders:
Book Value per Share
Book value per share represents total common shareholders’ equity available to Arch divided by the number of common shares and common share equivalents outstanding. Management uses growth in book value per share as a key measure of the value generated for our common shareholders each period and believes that book value per share is the key driver of Arch Capital’s share price over time. Book value per share is impacted by, among other factors, our underwriting results, investment returns and share repurchase activity, which has an accretive or dilutive impact on book value per share depending on the purchase price. Book value per share was $21.52 at December 31, 2018, a 6.0% increase from $20.30 at December 31, 2017. The growth in 2018 reflected strong underwriting results, partially offset by the impact of an increase in interest rates on our fixed income securities.
Operating Return on Average Common Equity
Operating return on average common equity (“Operating ROAE”) represents annualized after-tax operating income available to Arch common shareholders divided by average common shareholders’ equity available to Arch during the period. After-tax operating income available to Arch common shareholders, a “non-GAAP measure” as defined in the SEC rules, represents net income available to Arch common shareholders, excluding net realized gains or losses, net impairment losses recognized in earnings, equity in net income or loss of investments accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other, net of income taxes. Management uses Operating ROAE as a key measure of the return generated to Arch common shareholders. See “Comment on Non-GAAP Financial Measures.” Our Operating ROAE was 10.7% for 2018, compared to 5.7% for 2017 and 9.4% for 2016. The higher Operating ROAE for 2018 reflected strong mortgage insurance underwriting performance, while 2017 returns reflected a higher level of catastrophic loss activity.
Total Return on Investments
Total return on investments includes investment income, equity in net income or loss of investments accounted for using the equity method, net realized gains and losses 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 exclu
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information appearing above under the subheading “Market Sensitive Instruments and Risk Management” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” which information is hereby incorporated by reference.
| ARCH CAPITAL | 92 | 2018 FORM 10-K |
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| ARCH CAPITAL | 93 | 2018 FORM 10-K |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Arch Capital Group Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income, of comprehensive income, of changes in shareholders’ equity, and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018,based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the ac
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the filing of this Form 10-K, our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation, as of December 31, 2018, for the purposes set forth in the applicable rules under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective.
We continue to enhance our operating procedures and internal controls (including information technology initiatives and controls over financial reporting) to effectively support our business and our regulatory and reporting requirements. Our management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. As a result of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the disclosure controls and procedures are met.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control-Integrated Framework (2013).
Based on our assessment, management determined that, as of December 31, 2018, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in Item 8.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting that occurred in connection with our evaluation required pursuant to Rules 13a-15 and 15d-15 under the Exchange Act during the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
| ARCH CAPITAL | 176 | 2018 FORM 10-K |
Item 9B. OTHER INFORMATION
Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934
Section 13(r) of the Securities Exchange Act of 1934, as amended, requires an issuer to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities described in that section, including certain activities related to Iran during the period covered by the report.
On January 16, 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) adopted General License H which authorized non-U.S. entities that are owned or controlled by a U.S. person to engage in certain activities with Iran so long as they complied with certain specific requirements set forth therein.
As and when allowed by the applicable law and regulations, certain of our non-U.S. subsidiaries provide global marine and energy policies and global marine reinsurance which may have some exposure to Iran. The global marine policies and reinsurance provide coverage for vessels navigating into and out of ports worldwide. In light of European Union and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, we have been notified that certain of our policyholders shipped cargo to and from Iran, and that such cargo may include transporting crude oil from Iran to another country. Since these policies insure multiple voyages and fleets containing multiple ships, we are unable to attribute gross revenues or net profits from these policies to activities involving Iran. On May 8, 2018,
the President announced that the U.S. would withdraw from the Joint Comprehensive Plan of Action and begin reinstituting Iranian sanctions. Since May 8, 2018, our non-U.S. subsidiaries operating under General License H have not entered into any new transactions that had previously been permitted under General License H. On June 27, 2018, OFAC revoked General License H and added regulations which authorized all transactions and activities ordinarily incident and necessary to the winding down of activities previously approved under General License H through November 4, 2018. Our non-U.S. subsidiaries operating under General License H completed their wind down activities by November 4, 2018, in accordance with all applicable laws and regulations.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from the information to be included in our definitive proxy statement (“Proxy Statement”) for our annual meeting of shareholders to be held in 2018, which we intend to file with the SEC pursuant to Regulation 14A before May 1, 2019. Copies of our code of ethics applicable to our chief executive officer, chief financial officer and principal accounting officer or controller are available free of charge to investors upon written request addressed to the attention of Arch Capital’s corporate secretary, Waterloo House, 100 Pitts Bay Road, Pembroke HM 08, Bermuda. In addition, our code of ethics and certain other basic corporate documents, including the charters of our audit committee, compensation committee and nominating committee are posted on our website. If any substantive amendments are made to the code of ethics or if
there is a grant of a waiver, including any implicit waiver, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K, to the extent required by applicable law or the rules and regulations of any exchange applicable to us. Our website address is intended to be an inactive, textual reference only and none of the material on our website is incorporated by reference into this report.
| ARCH CAPITAL | 177 | 2018 FORM 10-K |
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information to be included in the Proxy Statement which we intend to file pursuant to Regulation 14A
with the SEC before May 1, 2019, which Proxy Statement is incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Other than the information set forth below, the information required by this item is incorporated by reference from the information to be included in the Proxy Statement which we intend to file pursuant to Regulation 14A with the SEC before May 1, 2019, which Proxy Statement is incorporated by reference.
The following information is as of December 31, 2018:
| Column A | Column B | Column C | ||||||||
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Stock Options(1), Warrants and Rights | Weighted-Average Exercise Price of Outstanding Stock Options(1), Warrants and Rights ($) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A | |||||||
| Equity compensation plans approved by security holders | 21,383,897 | $ | 19.37 | 37,136,857 | ||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||
| Total | 21,383,897 | $ | 19.37 | 37,136,857 | (2) |
| (1) | Includes all vested and unvested stock options outstanding of 20,076,593 and restricted stock and performance units outstanding of 1,307,304. The weighted average exercise price does not take into account restricted stock units. In addition, the weighted average remaining contractual life of the Company's outstanding exercisable stock options and SARs at December 31, 2018 was 5.4 years. |
| (2) | Includes 3,281,686 common shares remaining available for future issuance under our Employee Share Purchase Plan and 33,855,171 common shares remaining available for future issuance under our equity compensation plans. Shares available for future issuance under our equity compensation plans may be issued in the form of stock options, SARs, restricted shares, restricted share units payable in common shares or cash, share awards in lieu of cash awards, dividend equivalents, performance shares and performance units and other share-based awards. In addition, 9,784,515 common shares, or 28.9% of the 33,855,171 common shares remaining available for future issuance may be issued in connection with full value awards (i.e., awards other than stock options or SARs). |
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the information to be included in the Proxy Statement which we intend to file pursuant to Regulation 14A
with the SEC before May 1, 2019, which Proxy Statement is incorporated by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the information to be included in our Proxy Statement which we intend to file pursuant to Regulation 14A
with the SEC before May 1, 2019, which Proxy Statement is incorporated by reference.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements, Financial Statement Schedules and Exhibits.
| 1. | Financial Statements |
Included in Part II – see Item 8 of this report.
2.Financial Statement Schedules
| Page No. | |
| III. Supplementary Insurance Information | |
| For the years ended December 31, 2018, 2017 and 2016 | 186 |
| IV. Reinsurance | |
| For the years ended December 31, 2018, 2017 and 2016 | 187 |
| VI. Supplementary Information for Property and Casualty Insurance Underwriters | |
| For the years ended December 31, 2018, 2017 and 2016 | 188 |
Schedules other than those listed above are omitted for the reason that they are not applicable or the information is provided in Item 8 of this report.
| ARCH CAPITAL | 179 | 2018 FORM 10-K |
- Exhibits
| ARCH CAPITAL | 180 | 2018 FORM 10-K |
| ARCH CAPITAL | 181 | 2018 FORM 10-K |
| ARCH CAPITAL | 182 | 2018 FORM 10-K |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | X | ||||||||
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) | X | ||||||||
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) | X | ||||||||
| 101 | The following financial information from ACGL’s Annual Report on Form 10-K for the year ended December 31, 2018 formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2018 and 2017; (ii) Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements | X |
† Management contract or compensatory plan or arrangement.
| ARCH CAPITAL | 183 | 2018 FORM 10-K |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ARCH CAPITAL GROUP LTD. (Registrant) | |||
| By: | /s/ Marc Grandisson | ||
| Name: | Marc Grandisson | ||
| Title: | President and Chief Executive Officer (Principal Executive Officer) |
February 28, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Name | Title | Date |
| /s/ Marc Grandisson | ||
| Marc Grandisson | President and Chief Executive Officer (Principal Executive Officer) | February 28, 2019 |
| /s/ François Morin | ||
| François Morin | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | February 28, 2019 |
| * | ||
| Constantine Iordanou | Chairman of the Board | February 28, 2019 |
| * | ||
| John L. Bunce. Jr. | Director | February 28, 2019 |
| * | ||
| Eric W. Doppstadt | Director | February 28, 2019 |
| * | ||
| Laurie S. Goodman | Director | February 28, 2019 |
| ARCH CAPITAL | 184 | 2018 FORM 10-K |
| Name | Title | Date |
| * | ||
| Louis J. Paglia | Director | February 28, 2019 |
| * | ||
| John M. Pasquesi | Director | February 28, 2019 |
| * | ||
| Brian S. Posner | Director | February 28, 2019 |
| * | ||
| Eugene S. Sunshine | Director | February 28, 2019 |
| * | ||
| John D. Vollaro | Director | February 28, 2019 |
| * | By François Morin, as attorney-in-fact and agent, pursuant to a power of attorney, a copy of which has been filed with the Securities and Exchange Commission as Exhibit 24 to this report. |
| /s/ François Morin | |
| Name: | François Morin Attorney-in-Fact |
| ARCH CAPITAL | 185 | 2018 FORM 10-K |
SCHEDULE III
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(U.S. dollars in thousands)
| Deferred Acquisition Costs | Reserves for Losses and Loss Adjustment Expenses | Unearned Premiums | Net Premiums Earned | Net Investment Income (1) | Net Losses and Loss Adjustment Expenses Incurred | Amortization of Deferred Acquisition Costs | Other Operating Expenses (2) | Net Premiums Written | |||||||||||||||||
| December 31, 2018 | |||||||||||||||||||||||||
| Insurance | $152,360 | $7,093,018 | $1,549,183 | $2,205,661 | NM | $1,520,680 | $349,702 | $364,138 | $2,212,125 | ||||||||||||||||
| Reinsurance | 166,276 | 3,215,909 | 710,774 | 1,261,216 | NM | 846,882 | 211,280 | 133,350 | 1,372,572 | ||||||||||||||||
| Mortgage | 170,080 | 511,610 | 1,103,565 | 1,186,236 | NM | 81,289 | 118,595 | 142,432 | 1,157,875 | ||||||||||||||||
| Other | 80,858 | 1,032,760 | 390,114 | 578,862 | NM | 441,255 | 125,558 | 37,889 | 604,175 | ||||||||||||||||
| Total | $569,574 | $11,853,297 | $3,753,636 | $5,231,975 | NM | $2,890,106 | $805,135 | $677,809 | $5,346,747 | ||||||||||||||||
| December 31, 2017 | |||||||||||||||||||||||||
| Insurance | $159,224 | $6,952,676 | $1,451,390 | $2,113,018 | NM | $1,622,444 | $323,639 | $359,524 | $2,122,440 | ||||||||||||||||
| Reinsurance | 150,582 | 3,053,694 | 633,810 | 1,142,621 | NM | 773,923 | 221,250 | 146,663 | 1,174,474 | ||||||||||||||||
| Mortgage | 140,057 | 579,160 | 1,206,470 | 1,057,166 | NM | 134,677 | 100,598 | 146,336 | 1,111,342 | ||||||||||||||||
| Other | 85,961 | 798,262 | 330,644 | 531,727 | NM | 436,402 | 129,971 | 31,928 | 553,117 | ||||||||||||||||
| Total | $535,824 | $11,383,792 | $3,622,314 | $4,844,532 | NM | $2,967,446 | $775,458 | $684,451 | $4,961,373 | ||||||||||||||||
| December 31, 2016 | |||||||||||||||||||||||||
| Insurance | $152,983 | $6,502,745 | $1,403,822 | $2,073,904 | NM | $1,622,444 | $323,639 | $359,524 | $2,122,440 | ||||||||||||||||
| Reinsurance | 121,806 | 2,506,239 | 532,759 | 1,056,232 | NM | 773,923 | 221,250 | 146,663 | 1,174,474 | ||||||||||||||||
| Mortgage | 86,392 | 681,167 | 1,176,809 | 286,716 | NM | 134,677 | 100,598 | 146,336 | 1,111,342 | ||||||||||||||||
| Other | 86,379 | 510,809 | 293,480 | 467,970 | NM | 436,402 | 129,971 | 31,928 | 553,117 | ||||||||||||||||
| Total | $447,560 | $10,200,960 | $3,406,870 | $3,884,822 | NM | $2,967,446 | $775,458 | $684,451 | $4,961,373 |
| (1) | The Company does not manage its assets by segment and, accordingly, net investment income is not allocated to each underwriting segment. See note 4, “Segment Information,” to our consolidated financial statements in Item 8 for information related to the ‘other’ segment. |
| (2) | Certain other operating expenses relate to the Company’s corporate segment (non-underwriting). Such amounts are not reflected in the table above. note 4, “Segment Information,” to our consolidated financial statements in Item 8 for information related to the corporate segment. |
| ARCH CAPITAL | 186 | 2018 FORM 10-K |
SCHEDULE IV
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
REINSURANCE
(U.S. dollars in thousands)
| Gross Amount | Ceded to Other Companies (1) | Assumed From Other Companies (1) | Net Amount | Percentage of Amount Assumed to Net | ||||||||||||||
| Year Ended December 31, 2018 | ||||||||||||||||||
| Premiums Written: | ||||||||||||||||||
| Insurance | $ | 3,232,234 | $ | (1,050,207 | ) | $ | 30,098 | $ | 2,212,125 | 1.4 | % | |||||||
| Reinsurance | 213,809 | (539,950 | ) | 1,698,713 | 1,372,572 | 123.8 | % | |||||||||||
| Mortgage | 1,139,099 | (202,833 | ) | 221,609 | 1,157,875 | 19.1 | % | |||||||||||
| Other | 253,760 | (130,840 | ) | 481,255 | 604,175 | 79.7 | % | |||||||||||
| Total | $ | 4,838,902 | $ | (1,614,257 | ) | $ | 2,122,102 | $ | 5,346,747 | 39.7 | % | |||||||
| Year Ended December 31, 2017 | ||||||||||||||||||
| Premiums Written: | ||||||||||||||||||
| Insurance | $ | 3,050,876 | $ | (958,646 | ) | $ | 30,210 | $ | 2,122,440 | 1.4 | % | |||||||
| Reinsurance | 152,404 | (465,925 | ) | 1,487,995 | 1,174,474 | 126.7 | % | |||||||||||
| Mortgage | 1,110,319 | (256,796 | ) | 257,819 | 1,111,342 | 23.2 | % | |||||||||||
| Other | 133,858 | (47,187 | ) | 466,446 | 553,117 | 84.3 | % | |||||||||||
| Total | $ | 4,447,457 | $ | (1,407,052 | ) | $ | 1,920,968 | $ | 4,961,373 | 38.7 | % | |||||||
| Year Ended December 31, 2016 | ||||||||||||||||||
| Premiums Written: | ||||||||||||||||||
| Insurance | $ | 2,999,106 | $ | (954,768 | ) | $ | 27,943 | $ | 2,072,281 | 1.3 | % | |||||||
| Reinsurance | 62,427 | (440,541 | ) | 1,431,970 | 1,053,856 | 135.9 | % | |||||||||||
| Mortgage | 209,351 | (108,259 | ) | 290,374 | 391,466 | 74.2 | % | |||||||||||
| Other | 66,806 | (21,306 | ) | 468,288 | 513,788 | 91.1 | % | |||||||||||
| Total | $ | 3,337,690 | $ | (1,170,743 | ) | $ | 1,864,444 | $ | 4,031,391 | 46.2 | % |
| (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. |
| ARCH CAPITAL | 187 | 2018 FORM 10-K |
SCHEDULE VI
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION FOR PROPERTY AND CASUALTY INSURANCE UNDERWRITERS
(U.S. dollars in thousands)
| Column A | Column B | Column C | Column D | Column E | Column F | Column G | Column H | Column I | Column J | Column K | |||||||||||||||||||||||
| Affiliation with Registrant | Deferred Acquisition Costs | Reserves for Losses and Loss Adjustment Expenses | Discount, if any, deducted in Column C | Unearned Premiums | Net Premiums Earned | Net Investment Income | Net Losses and Loss Adjustment Expenses Incurred Related to | Amortization of Deferred Acquisition Costs | Net Paid Losses and Loss Adjustment Expenses | Net Premiums Written | |||||||||||||||||||||||
| (a) Current Year | (b) Prior Years | ||||||||||||||||||||||||||||||||
| Consolidated Subsidiaries | |||||||||||||||||||||||||||||||||
| 2018 | $ | 569,574 | $ | 11,853,297 | $ | 21,145 | $ | 3,753,636 | $ | 5,231,975 | $ | 563,633 | $ | 3,162,818 | $ | (272,712 | ) | $ | 805,135 | $ | 2,206,164 | $ | 5,346,747 | ||||||||||
| 2017 | 535,824 | 11,383,792 | 20,016 | 3,622,314 | 4,844,532 | 470,872 | 3,205,428 | (237,982 | ) | 775,458 | 2,352,912 | 4,961,373 | |||||||||||||||||||||
| 2016 | 447,560 | 10,200,960 | 18,246 | 3,406,870 | 3,884,822 | 366,742 | 2,455,563 | (269,964 | ) | 667,625 | 1,813,356 | 4,031,391 |
Item 16. FORM 10-K SUMMARY
Not applicable.
| ARCH CAPITAL | 188 | 2018 FORM 10-K |