filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| ARCH CAPITAL | 99 | 2024 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, 2024 and 2023, 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, 2024, 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, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024 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, 2024, 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 accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded the acquired U.S. Middle Market Property & Casualty and U.S. Entertainment Property and Casualty Insurance Business (“MCE”) from its assessment of internal control over financial reporting as of December 31, 2024, because it was acquired by the Company in a purchase business combination during 2024. We have also excluded MCE from our audit of internal control over financial reporting. MCE represents 1.6% of total assets and 3.5% of total revenues as of and for the year ended December 31, 2024.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
| ARCH CAPITAL | 100 | 2024 FORM 10-K |
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Reserve for Losses and Loss Adjustment Expenses
As described in Notes 3, 5 and 6 to the consolidated financial statements, the reserve for losses and loss adjustment expenses represents estimates of future amounts required to pay losses and loss adjustment expenses for insured or reinsured events which have occurred at or before the balance sheet date. As of December 31, 2024, the Company’s total reserve for losses and loss adjustment expenses was $29.4 billion. For the insurance and reinsurance segments, management estimates ultimate losses and loss adjustment expenses using various generally accepted actuarial methods applied to known losses and other relevant information. Ultimate losses and loss adjustment expenses are generally determined by projection of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. Management makes a number of key assumptions in their reserving process, including estimating loss development patterns and expected loss ratios. For the mortgage segment, the lead actuarial methodology used by management is a frequency-severity method based on the inventory of pending delinquencies. The assumptions of frequency and severity reflect judgments based on historical data and experience.
The principal considerations for our determination that performing procedures relating to the valuation of the reserve for losses and loss adjustment expenses is a critical audit matter are (i) the significant judgment by management when developing their estimate, (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the aforementioned key actuarial methods and key assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of the reserve for losses and loss adjustment expenses, including controls over the selection of key actuarial methods and development of key assumptions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in performing one or a combination of procedures, including (i) developing an independent estimate, on a test basis, of the reserve for losses and loss adjustment expenses, and comparing the independent estimate to management’s actuarially determined reserve for losses and loss adjustment expenses to evaluate the reasonableness of the reserve for losses and loss adjustment expenses and (ii) evaluating the appropriateness of the actuarial methods and reasonableness of the assumptions related to loss development patterns, expected loss ratios, frequency, and severity used by management to determine the Company’s reserve for losses and loss adjustment expenses. Developing the independent estimate and evaluating the appropriateness of the key methods and reasonableness of the key assumptions related to loss development patterns, expected loss ratios, frequency and severity, as applicable, involved testing the completeness and accuracy of historical data provided by management.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 27, 2025
We have served as the Company’s or its predecessor’s auditor since 1995.
| ARCH CAPITAL | 101 | 2024 FORM 10-K |
| ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars and shares in millions) | |||||||||||
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Assets | |||||||||||
| Investments: | |||||||||||
| Fixed maturities available for sale, at fair value (amortized cost: $27,570 and $24,131; net of allowance for credit losses: $22 and $28) | $ | 27,035 | $ | 23,553 | |||||||
| Short-term investments available for sale, at fair value (amortized cost: $2,784 and $2,064; net of allowance for credit losses: $0 and $0 ) | 2,784 | 2,063 | |||||||||
| Equity securities, at fair value | 1,675 | 1,186 | |||||||||
| Other investments (portion measured at fair value: $3,066 and $2,488) | 3,066 | 2,488 | |||||||||
| Investments accounted for using the equity method | 5,980 | 4,566 | |||||||||
| Total investments | 40,540 | 33,856 | |||||||||
| Cash | 979 | 917 | |||||||||
| Accrued investment income | 298 | 236 | |||||||||
| Investment in operating affiliates | 1,240 | 1,119 | |||||||||
| Premiums receivable (net of allowance for credit losses: $45 and $34) | 5,634 | 4,644 | |||||||||
| Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $17 and $21) | 8,260 | 7,064 | |||||||||
| Contractholder receivables (net of allowance for credit losses: $5 and $3) | 2,161 | 1,814 | |||||||||
| Ceded unearned premiums | 2,428 | 2,170 | |||||||||
| Deferred acquisition costs | 1,734 | 1,531 | |||||||||
| Receivable for securities sold | 50 | 63 | |||||||||
| Goodwill and intangible assets | 1,351 | 731 | |||||||||
| Other assets | 6,231 | 4,761 | |||||||||
| Total assets | $ | 70,906 | $ | 58,906 | |||||||
| Liabilities | |||||||||||
| Reserve for losses and loss adjustment expenses | $ | 29,369 | $ | 22,752 | |||||||
| Unearned premiums | 10,218 | 8,808 | |||||||||
| Reinsurance balances payable | 2,137 | 2,000 | |||||||||
| Contractholder payables | 2,165 | 1,817 | |||||||||
| Collateral held for insured obligations | 249 | 259 | |||||||||
| Senior notes | 2,728 | 2,726 | |||||||||
| Payable for securities purchased | 181 | 247 | |||||||||
| Other liabilities | 3,039 | 1,942 | |||||||||
| Total liabilities | 50,086 | 40,551 | |||||||||
| Commitments and Contingencies (refer to Note 18****) | |||||||||||
| Redeemable noncontrolling interests | — | 2 | |||||||||
| Shareholders’ Equity | |||||||||||
| Non-cumulative preferred shares | 830 | 830 | |||||||||
| Common shares ($0.0011 par, shares issued: 595.6 and 591.9) | 1 | 1 | |||||||||
| Additional paid-in capital | 2,510 | 2,327 | |||||||||
| Retained earnings | 22,686 | 20,295 | |||||||||
| Accumulated other comprehensive income (loss), net of deferred income tax | (720) | (676) | |||||||||
| Common shares held in treasury, at cost (shares: 219.2 and 218.5) | (4,487) | (4,424) | |||||||||
| Total shareholders' equity available to Arch | 20,820 | 18,353 | |||||||||
| Total liabilities, noncontrolling interests and shareholders' equity | $ | 70,906 | $ | 58,906 |
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 102 | 2024 FORM 10-K |
| ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars and shares in millions, except per share data) | |||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Revenues | |||||||||||||||||
| Net premiums earned | $ | 15,100 | $ | 12,440 | $ | 9,679 | |||||||||||
| Net investment income | 1,495 | 1,023 | 496 | ||||||||||||||
| Net realized gains (losses) | 197 | (165) | (663) | ||||||||||||||
| Other underwriting income | 26 | 31 | 13 | ||||||||||||||
| Equity in net income of investments accounted for using the equity method | 580 | 278 | 115 | ||||||||||||||
| Other income (loss) | 42 | 27 | (27) | ||||||||||||||
| Total revenues | 17,440 | 13,634 | 9,613 | ||||||||||||||
| Expenses | |||||||||||||||||
| Losses and loss adjustment expenses | 8,342 | 6,246 | 5,028 | ||||||||||||||
| Acquisition expenses | 2,651 | 2,312 | 1,740 | ||||||||||||||
| Other operating expenses | 1,472 | 1,301 | 1,128 | ||||||||||||||
| Corporate expenses | 200 | 102 | 95 | ||||||||||||||
| Amortization of intangible assets | 235 | 95 | 106 | ||||||||||||||
| Interest expense | 141 | 133 | 131 | ||||||||||||||
| Net foreign exchange losses (gains) | (75) | 60 | (102) | ||||||||||||||
| Total expenses | 12,966 | 10,249 | 8,126 | ||||||||||||||
| Income before income taxes and income (loss) from operating affiliates | 4,474 | 3,385 | 1,487 | ||||||||||||||
| Income taxes: | |||||||||||||||||
| Current tax expense (benefit) | 397 | 288 | 201 | ||||||||||||||
| Deferred tax expense (benefit) | (35) | (1,161) | (121) | ||||||||||||||
| Income tax expense (benefit) | 362 | (873) | 80 | ||||||||||||||
| Income (loss) from operating affiliates | 200 | 184 | 75 | ||||||||||||||
| Net income | $ | 4,312 | $ | 4,442 | $ | 1,482 | |||||||||||
| Net (income) loss attributable to noncontrolling interests | — | 1 | (6) | ||||||||||||||
| Net income available to Arch | 4,312 | 4,443 | 1,476 | ||||||||||||||
| Preferred dividends | (40) | (40) | (40) | ||||||||||||||
| Net income available to Arch common shareholders | $ | 4,272 | $ | 4,403 | $ | 1,436 | |||||||||||
| Net income per common share and common share equivalent | |||||||||||||||||
| Basic | $ | 11.47 | $ | 11.94 | $ | 3.90 | |||||||||||
| Diluted | $ | 11.19 | $ | 11.62 | $ | 3.80 | |||||||||||
| Weighted average common shares and common share equivalents outstanding | |||||||||||||||||
| Basic | 372.5 | 368.7 | 368.6 | ||||||||||||||
| Diluted | 381.8 | 378.8 | 377.6 |
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 103 | 2024 FORM 10-K |
| ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (U.S. dollars in millions) | |||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Comprehensive Income | |||||||||||||||||
| Net income | $ | 4,312 | $ | 4,442 | $ | 1,482 | |||||||||||
| Other comprehensive income (loss), net of deferred income tax | |||||||||||||||||
| Unrealized appreciation (decline) in value of available-for-sale investments: | |||||||||||||||||
| Unrealized holding gains (losses) arising during year | (23) | 547 | (1,772) | ||||||||||||||
| Reclassification of net realized (gains) losses, included in net income | 81 | 400 | 247 | ||||||||||||||
| Foreign currency translation adjustments | (102) | 23 | (56) | ||||||||||||||
| Comprehensive income (loss) | 4,268 | 5,412 | (99) | ||||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | 1 | (6) | ||||||||||||||
| Comprehensive income available to Arch (loss) | $ | 4,268 | $ | 5,413 | $ | (105) |
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 104 | 2024 FORM 10-K |
| ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. dollars in millions) | |||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Non-cumulative preferred shares | |||||||||||||||||
| Balance at beginning and end of year | $ | 830 | $ | 830 | $ | 830 | |||||||||||
| Common shares | |||||||||||||||||
| Balance at beginning and end of year | 1 | 1 | 1 | ||||||||||||||
| Additional paid-in capital | |||||||||||||||||
| Balance at beginning of year | 2,327 | 2,211 | 2,085 | ||||||||||||||
| Amortization of share-based compensation | 133 | 93 | 88 | ||||||||||||||
| Other changes | 50 | 23 | 38 | ||||||||||||||
| Balance at end of year | 2,510 | 2,327 | 2,211 | ||||||||||||||
| Retained earnings | |||||||||||||||||
| Balance at beginning of year | 20,295 | 15,892 | 14,456 | ||||||||||||||
| Net income | 4,312 | 4,442 | 1,482 | ||||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | 1 | (6) | ||||||||||||||
| Common share dividends | (1,881) | — | — | ||||||||||||||
| Preferred share dividends | (40) | (40) | (40) | ||||||||||||||
| Balance at end of year | 22,686 | 20,295 | 15,892 | ||||||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||||||||
| Balance at beginning of year | (676) | (1,646) | (65) | ||||||||||||||
| Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax: | |||||||||||||||||
| Balance at beginning of year | (565) | (1,512) | 13 | ||||||||||||||
| Unrealized holding gains (losses) during period, net of reclassification adjustment | 58 | 947 | (1,525) | ||||||||||||||
| Balance at end of year | (507) | (565) | (1,512) | ||||||||||||||
| Foreign currency translation adjustments, net of deferred income tax: | |||||||||||||||||
| Balance at beginning of year | (111) | (134) | (78) | ||||||||||||||
| Foreign currency translation adjustments | (102) | 23 | (56) | ||||||||||||||
| Balance at end of year | (213) | (111) | (134) | ||||||||||||||
| Balance at end of year | (720) | (676) | (1,646) | ||||||||||||||
| Common shares held in treasury, at cost | |||||||||||||||||
| Balance at beginning of year | (4,424) | (4,378) | (3,761) | ||||||||||||||
| Shares repurchased for treasury | (63) | (46) | (617) | ||||||||||||||
| Balance at end of year | (4,487) | (4,424) | (4,378) | ||||||||||||||
| Total shareholders’ equity | $ | 20,820 | $ | 18,353 | $ | 12,910 |
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 105 | 2024 FORM 10-K |
| ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in millions) | |||||||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Operating Activities | |||||||||||||||||
| Net income | $ | 4,312 | $ | 4,442 | $ | 1,482 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Net realized (gains) losses | (185) | 182 | 651 | ||||||||||||||
| Equity in net (income) or loss of investments accounted for using the equity method and other income or loss | (488) | (215) | 154 | ||||||||||||||
| Amortization of intangible assets | 235 | 95 | 106 | ||||||||||||||
| Share-based compensation | 133 | 93 | 88 | ||||||||||||||
| Changes in: | |||||||||||||||||
| Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable | 3,279 | 2,138 | 1,890 | ||||||||||||||
| Unearned premiums, net of ceded unearned premiums | 632 | 1,028 | 1,399 | ||||||||||||||
| Premiums receivable | (818) | (981) | (1,110) | ||||||||||||||
| Deferred acquisition costs | (212) | (235) | (374) | ||||||||||||||
| Reinsurance balances payable | 179 | 455 | (36) | ||||||||||||||
| Deferred income tax assets, net | (35) | (1,161) | (121) | ||||||||||||||
| Other items, net | (359) | (92) | (313) | ||||||||||||||
| Net cash provided by operating activities | 6,673 | 5,749 | 3,816 | ||||||||||||||
| Investing Activities | |||||||||||||||||
| Purchases of fixed maturity investments | (31,290) | (18,062) | (16,390) | ||||||||||||||
| Purchases of equity securities | (1,423) | (456) | (797) | ||||||||||||||
| Purchases of other investments | (3,485) | (2,171) | (1,720) | ||||||||||||||
| Proceeds from sales of fixed maturity investments | 26,245 | 14,105 | 11,844 | ||||||||||||||
| Proceeds from sales of equity securities | 1,101 | 288 | 1,554 | ||||||||||||||
| Proceeds from sales, redemptions and maturities of other investments | 1,858 | 768 | 1,220 | ||||||||||||||
| Proceeds from redemptions and maturities of fixed maturity investments | 2,036 | 781 | 715 | ||||||||||||||
| Net settlements of derivative instruments | (5) | 50 | (69) | ||||||||||||||
| Net (purchases) sales of short-term investments | (269) | (696) | 467 | ||||||||||||||
| Acquisitions, net of cash | 852 | — | — | ||||||||||||||
| Purchases of fixed assets | (51) | (52) | (50) | ||||||||||||||
| Other | (30) | (23) | 125 | ||||||||||||||
| Net cash used for investing activities | (4,461) | (5,468) | (3,101) | ||||||||||||||
| Financing Activities | |||||||||||||||||
| Purchases of common shares under share repurchase program | (24) | — | (586) | ||||||||||||||
| Proceeds from common shares issued, net | 7 | (2) | 6 | ||||||||||||||
| Third party investment in redeemable noncontrolling interests | — | (22) | — | ||||||||||||||
| Common dividends paid | (1,866) | — | — | ||||||||||||||
| Preferred dividends paid | (40) | (40) | (40) | ||||||||||||||
| Other | (2) | (5) | (86) | ||||||||||||||
| Net cash provided by (used for) financing activities | (1,925) | (69) | (706) | ||||||||||||||
| Effects of exchange rate changes on foreign currency cash and restricted cash | (25) | 13 | (50) | ||||||||||||||
| Increase (decrease) in cash and restricted cash | 262 | 225 | (41) | ||||||||||||||
| Cash and restricted cash, beginning of year | 1,498 | 1,273 | 1,314 | ||||||||||||||
| Cash and restricted cash, end of year | $ | 1,760 | $ | 1,498 | $ | 1,273 | |||||||||||
| Income taxes paid (received) | $ | 378 | $ | 267 | $ | 255 | |||||||||||
| Interest paid | $ | 127 | $ | 127 | $ | 128 | |||||||||||
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 106 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
Arch Capital Group Ltd. (“Arch Capital,” “Arch” or the “Company”) is a publicly listed Bermuda exempted company which provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly owned subsidiaries. As used herein, the Company means Arch Capital and its subsidiaries. Similarly, “Common Shares” means the common shares of Arch Capital.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, shareholders’equity or cash flows. All amounts are in millions, except per share amounts, unless otherwise noted.
2. Acquisition
On August 1, 2024, the Company completed the acquisition of Allianz’s U.S Middle Market Property & Casualty Insurance and U.S. Entertainment Property and Casualty Insurance Business (“MCE Acquisition”). This business is written by Fireman’s Fund Insurance Company, an affiliate of Allianz, and its subsidiaries (collectively, the “Business Entities”), in each case, relating to relevant policies with accident years 2016 and onwards (collectively, the “Business”), as well as certain assets of Allianz and its affiliates related to the Business. In connection with the acquisition of the Business, the Company also entered into certain reinsurance agreements relating to the Business and the Business Entities and other agreements providing for administration and other services for the Business Entities by the Company for the applicable policies being reinsured following the closing. The acquisition of the Business is an important part of the Company’s growth strategy, and provides a ballast to our existing insurance business. It further enhances the Company’s capabilities in the U.S. middle markets and represents an attractive way to enter a new niche entertainment insurance market.
Aggregate cash consideration for the transaction was $450 million. Direct costs related to the acquisition are immaterial, and were expensed as incurred. These include one-time costs that are directly attributable to third party consulting fees and other professional and legal fees related to the acquisition. Such costs are included within ‘corporate expenses’ in the consolidated statement of income. The Business acquired is included within the Company’s insurance segment beginning from the acquisition date.
The following table summarizes the Company’s allocation of the purchase price to the acquired assets and liabilities assumed based on estimated fair values on August 1, 2024. The fair value of the assets and liabilities are preliminary and may change with offsetting adjustments to goodwill. The Company may make further adjustments to its purchase price allocation through the end of the permissible one-year measurement period.
| Total | Useful Life | |||||||||||||
| Purchase price | ||||||||||||||
| Cash paid (a) | $ | 450 | ||||||||||||
| Assets Acquired | ||||||||||||||
| Cash and investments, at fair value | $ | 2,332 | ||||||||||||
| Premiums receivable, net of commissions | 265 | |||||||||||||
| Intangible asset -- distribution relationships | 220 | 10 years | ||||||||||||
| Intangible asset -- value of business acquired | 165 | 1-2 years | ||||||||||||
| Intangible asset -- other (1) | 178 | 5-7 years | ||||||||||||
| Other assets acquired | 167 | |||||||||||||
| Total assets acquired | $ | 3,327 | ||||||||||||
| Liabilities Acquired | ||||||||||||||
| Reserves for losses and loss adjustment expenses | $ | 2,418 | ||||||||||||
| Unearned premiums | 636 | |||||||||||||
| Other liabilities acquired | 69 | |||||||||||||
| Total liabilities acquired | 3,123 | |||||||||||||
| Identifiable net assets acquired (b) | $ | 204 | ||||||||||||
| Goodwill (a) - (b) | $ | 246 |
(1) Includes $128 million related to the net fair value adjustment to reserves for loss and loss adjustment expenses on August 1, 2024.
The Company recognized goodwill of $246 million that is primarily attributed to the expanded presence and long-term growth opportunities in the insurance market provided by this strategic acquisition. Approximately $565 million of the acquired goodwill and intangibles is expected to be deductible for income tax purposes. At the date of the acquisition, the Company established a net deferred tax asset of $24 million related to the estimated fair value of reserves for losses and loss adjustment expenses and unearned premiums.
Intangible assets resulting from the acquisition are amortized as part of ‘amortization of intangible assets’ in the Company’s consolidated statements of income. The significant fair value adjustments and related future amortization are as follows:
Value of business acquired (“VOBA”)— which represents the present value of the expected underwriting profit within the unearned premium liability, less costs to service the related policies and a risk premium. The fair value of VOBA was determined after taking into consideration certain key assumptions, including the estimated cost of capital,
| ARCH CAPITAL | 107 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investment yield, loss ratio and related expenses;
*Reserves for losses and loss adjustment expenses—*to reflect a decrease related to the present value of the reserve for losses and loss adjustment expenses based on the estimated payout patterns, partially offset by an increase in losses and loss adjustment expenses related to the estimated market based risk margin. The risk margin represents the estimated costs of capital required by a market participant to assume the losses and loss adjustment expenses. The fair value of the reserve for losses and loss adjustment expenses was determined after taking into consideration certain key assumptions, including the estimated cost of capital, and investment yield.
*Distribution relationships—*the value of the distribution relationships was determined after taking into consideration certain key assumptions, including the estimated cost of capital, investment yield, retention rates, loss ratios, related expenses and effective tax rates that would impact the expected cash flows from Business policies written on a go forward basis.
The results of the acquired Business have been included in the Company’s consolidated financial statements beginning as of their acquisition date. It is impracticable to provide historical supplemental pro forma financial information along with revenue and earnings subsequent to the acquisition due to a variety of factors, including access to historical information and the operations of acquirees being integrated within the Company shortly after closing and not operating as discrete operations within the Company’s organizational structure.
3. Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Arch Capital and its subsidiaries, including Arch Reinsurance Ltd. (“Arch Re Bermuda”), Arch Reinsurance Company (“Arch Re U.S.”), Arch Capital Group (U.S.) Inc.(“Arch-U.S.”), Arch Insurance Company, Arch Specialty Insurance Company, Arch Property Casualty Insurance Company (“Arch P&C”), Arch Indemnity Insurance Company (“Arch Indemnity Insurance”), Arch Insurance Canada Ltd. (“Arch Insurance Canada”), Arch Reinsurance Europe Designated Activity Company (“Arch Re Europe”), Arch Mortgage Insurance Company (“AMIC”), Arch Mortgage Guaranty Company (“AMG”), United Guaranty Residential Insurance Company (“UGRIC”), Arch Lenders Mortgage Indemnity Ltd. (“Arch Indemnity”), Arch Insurance (EU) Designated Activity Company (“Arch Insurance (EU)”), Arch Insurance (U.K.) Limited (“Arch Insurance (U.K.)”) and the Company’s participation on Lloyd’s of London syndicates: 2012 (“Arch Syndicate 2012”)
and 1955 (“Arch Syndicate 1955” and together with Arch Syndicate 2012, the Company’s “Lloyd’s Syndicates”). All significant intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. The Company’s principal estimates include:
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The reserve for losses and loss adjustment expenses;
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Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses, including the provision for uncollectible amounts;
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Estimates of written and earned premiums;
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The valuation of the investment portfolio and assessment of allowance for credit losses;
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The valuation of purchased intangible assets;
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The assessment of goodwill and intangible assets for impairment; and
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The valuation of deferred income tax assets.
(b) Premium Revenues and Related Expenses
Insurance. Insurance premiums written are generally recorded at the policy inception and are primarily earned on a pro rata basis over the terms of the policies for all products, usually 12 months. Premiums written include estimates that are derived from multiple sources which include the historical experience of the underlying business, similar business and available industry information. Unearned premium reserves represent the portion of premiums written that relates to the unexpired terms of in-force insurance policies.
Reinsurance. Reinsurance premiums written include amounts reported by brokers and ceding companies, supplemented by the Company’s own estimates of premiums where reports have not been received. The determination of premium estimates requires a review of the Company’s experience with the ceding companies, familiarity with each market, the timing of the reported information, an analysis and understanding of the characteristics of each line of business, and management’s judgment of the impact of various factors, including premium or loss trends, on the volume of business written and ceded to the Company. On an ongoing basis, the Company’s underwriters review the amounts reported by these third parties for reasonableness based on their experience and knowledge of the subject class of business, taking into account the Company’s historical experience with the brokers or ceding companies. In addition, reinsurance contracts under which the Company assumes business
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generally contain specific provisions which allow the Company to perform audits of the ceding company to ensure compliance with the terms and conditions of the contract, including accurate and timely reporting of information. Based on a review of all available information, management establishes premium estimates where reports have not been received. Premium estimates are updated when new information is received and differences between such estimates and actual amounts are recorded in the period in which estimates are changed or the actual amounts are determined.
Reinsurance premiums written are recorded based on the type of contracts the Company writes. Premiums on the Company’s excess of loss and pro rata reinsurance contracts are estimated when the business is underwritten. For excess of loss contracts, premiums are recorded as written based on the terms of the contract. Estimates of premiums written under pro rata contracts are recorded in the period in which the underlying risks are expected to incept and are based on information provided by the brokers and the ceding companies. For multi-year reinsurance treaties which are payable in annual installments, generally, only the initial annual installment is included as premiums written at policy inception due to the ability of the reinsured to commute or cancel coverage during the term of the policy. The remaining annual installments are included as premiums written at each successive anniversary date within the multi-year term.
Reinsurance premiums written, irrespective of the class of business, are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts. Contracts and policies written on a “losses occurring” basis cover claims that may occur during the term of the contract or policy, which is typically 12 months. Accordingly, the premium is earned evenly over the term. Contracts which are written on a “risks attaching” basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24-month period. Certain of the Company’s reinsurance contracts include provisions that adjust premiums or acquisition expenses based upon the experience under the contracts. Premiums written and earned, as well as related acquisition expenses, are recorded based upon the projected experience under such contracts.
The Company also writes certain reinsurance business that is intended to provide insurers with risk management solutions that complement traditional reinsurance. Under these contracts, the Company assumes a measured amount of insurance risk in exchange for an anticipated margin, which is typically lower than on traditional reinsurance contracts. The terms and conditions of these contracts may include additional or return premiums based on loss experience, loss
corridors, sublimits and caps. Examples of such business include aggregate stop-loss coverages, financial quota share coverages and multi-year retrospectively rated excess of loss coverages. If these contracts are deemed to transfer risk, they are accounted for as reinsurance. Otherwise, such contracts are accounted for under the deposit method.
Mortgage. Mortgage guaranty insurance policies are contracts that are generally non-cancelable by the insurer, are renewable at a fixed price, and provide for payment of premiums on a monthly, annual or single basis. Upon renewal, the Company is not able to re-underwrite or re-price its policies. Consistent with industry accounting practices, premiums written on a monthly basis are earned as coverage is provided. Premiums written on an annual basis are amortized on a monthly pro rata basis over the year of coverage. Primary mortgage insurance premiums written on policies covering more than one year are referred to as single premiums. A portion of the revenue from single premiums is recognized in premiums earned in the current period, and the remaining portion is deferred as unearned premiums and earned over the estimated expiration of risk of the policy. If single premium policies related to insured loans are canceled due to repayment by the borrower and the policy is a non-refundable product, the remaining unearned premium related to each canceled policy is recognized as earned premium upon notification of the cancellation.
Unearned premiums for the Company’s mortgage operations represent the portion of premiums written that is applicable to the estimated unexpired risk of insured loans. A portion of premium payments may be refundable if the insured cancels coverage, which generally occurs when the loan is repaid, the loan amortizes to a sufficiently low amount to trigger a lender permitted or legally required cancellation, or the value of the property has increased sufficiently in accordance with the terms of the contract. Premium refunds reduce premiums earned in the consolidated statements of income. Generally, only unearned premiums are refundable.
Reinstatement premiums for the Company’s insurance and reinsurance operations are recognized at the time a loss event occurs, where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. Reinstatement premiums, if obligatory, are fully earned when recognized. The accrual of reinstatement premiums is based on an estimate of losses and loss adjustment expenses, which reflects management’s judgment.
Premium estimates are reviewed by management at least quarterly. Such review includes a comparison of actual reported premiums to expected ultimate premiums along with a review of the aging and collection of premium estimates. Based on management’s review, the appropriateness of the premium estimates is evaluated, and any adjustment to these estimates is recorded in the period in which it becomes
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known. Adjustments to premium estimates could be material and such adjustments could directly and significantly impact earnings favorably or unfavorably in the period they are determined because the estimated premium may be fully or substantially earned. A significant portion of amounts included as premiums receivable, which represent estimated premiums written, net of commissions, are not currently due based on the terms of the underlying contracts.
Premiums receivable include amounts receivable from agents, brokers and insured that are both currently due and amounts not yet due on insurance, reinsurance and mortgage insurance policies. Premiums receivable balances are reported net of an allowance for expected credit losses. The Company monitors credit risk associated with premiums receivable through its ongoing review of amounts outstanding, aging of the receivable, historical loss data, and counterparty financial strength measures. The allowance also includes estimated uncollectible amounts related to dispute risk. In certain instances, credit risk may be reduced by the Company’s right to offset loss obligations or unearned premiums against premiums receivable. Any allowance for credit losses is charged to net realized gains (losses) in the period the receivable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses. See note 7, for additional information.
Acquisition Costs. Acquisition costs that are directly related and incremental to the successful acquisition or renewal of business are deferred and amortized based on the type of contract. The Company’s insurance and reinsurance operations capitalize incremental direct external costs that result from acquiring a contract but do not capitalize salaries, benefits and other internal underwriting costs. For the Company’s mortgage insurance operations, which include a substantial direct sales force, both external and certain internal direct costs are deferred and amortized. For property and casualty insurance and reinsurance contracts, deferred acquisition costs are amortized over the period in which the related premiums are earned. Consistent with mortgage insurance industry accounting practice, amortization of acquisition costs related to the mortgage insurance contracts for each underwriting year’s book of business is recorded in proportion to estimated gross profits. Estimated gross profits are comprised of earned premiums and losses and loss adjustment expenses. For each underwriting year, the Company estimates the rate of amortization to reflect actual experience and any changes to persistency or loss development.
Deferred acquisition costs are carried at their estimated realizable value and take into account anticipated losses and loss adjustment expenses, based on historical and current experience, and anticipated investment income.
A premium deficiency occurs if the sum of anticipated losses and loss adjustment expenses, unamortized acquisition costs and maintenance costs exceed unearned premiums (including expected future premiums) and anticipated investment income. A premium deficiency reserve (“PDR”) is recorded by charging any unamortized acquisition costs to expense to the extent required in order to eliminate the deficiency. If the premium deficiency exceeds unamortized acquisition costs then a liability is accrued for the excess deficiency.
To assess the need for a PDR on mortgage exposures, the Company develops loss projections based on modeled loan defaults related to its current policies in force. This projection is based on recent trends in default experience, severity and rates of defaulted loans moving to claim, as well as recent trends in the rate at which loans are prepaid, and incorporates anticipated interest income. Evaluating the expected profitability of the Company’s existing mortgage insurance business and the need for a PDR for its mortgage business involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of potential losses and premium revenues. No premium deficiency charges were recorded by the Company during 2024, 2023 or 2022.
(c) Deposit Accounting
Certain assumed reinsurance contracts that are deemed not to transfer insurance risk, are accounted for using the deposit method of accounting. However, it is possible that the Company could incur financial losses on such contracts. Management exercises significant judgment in the assumptions used in determining whether assumed contracts should be accounted for as reinsurance contracts or deposit contracts. For those contracts that contain only significant underwriting risk, the estimated profit margin is deferred and amortized over the contract period and such amount is included in the Company’s underwriting results. When the estimated profit margin is explicit, the margin is reflected as other underwriting income and any adverse financial results on such contracts are reflected as incurred losses. When the estimated profit margin is implicit, the margin is reflected as an offset to paid losses and any adverse financial results on such contracts are reflected as incurred losses. Additional judgments are required when applying the accounting guidance with respect to the revenue recognition criteria for contracts deemed to transfer only significant underwriting risk. For those contracts that contain only significant timing risk, an accretion rate is established at inception of the contract based on actuarial estimates whereby the deposit accounting liability is increased to the estimated amount payable over the contract term. The accretion on the deposit is based on the expected rate of return required to fund the expected future payment obligations. Periodically the Company reassesses the estimated ultimate liability and the related expected rate of return. The accretion of the deposit
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accounting liability as well as changes to the estimated ultimate liability and the accretion rate would be reflected as part of interest expense in the Company’s results of operations. Any negative accretion in a deposit accounting liability is shown in other underwriting income in the Company’s results of operations.
Under some of these contracts, the ceding company retains the related assets on a funds held basis. Such amounts are included in “Other assets” on the Company’s balance sheet. Interest income produced by those assets are recorded as part of net investment income in the Company's results of operations.
(d) Retroactive Reinsurance
Retroactive reinsurance reimburses a ceding company for liabilities incurred as a result of past insurable events covered by the underlying policies reinsured. In certain instances, reinsurance contracts cover losses both on a prospective basis and on a retroactive basis and, accordingly, the Company bifurcates the prospective and retrospective elements of these reinsurance contracts and accounts for each element separately where practical. Underwriting income generated in connection with retroactive reinsurance contracts is deferred and amortized into income over the settlement period while losses are charged to income immediately. Subsequent changes in estimated amount or timing of cash flows under such retroactive reinsurance contracts are accounted for by adjusting the previously deferred amount to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction, with a corresponding charge or credit to income.
(e) Reinsurance Ceded
In the normal course of business, the Company purchases reinsurance to increase capacity and to limit the impact of individual losses and events on its underwriting results by reinsuring certain levels of risk with other insurance enterprises or reinsurers. The Company uses pro rata, excess of loss and facultative reinsurance contracts. Reinsurance ceding commissions that represent a recovery of acquisition costs are recognized as a reduction to acquisition costs while the remaining portion is deferred. The accompanying consolidated statement of income reflects premiums and losses and loss adjustment expenses and acquisition costs, net of reinsurance ceded. See note 8, for information on the Company's reinsurance usage. Reinsurance premiums ceded and unpaid losses and loss adjustment expenses recoverable are estimated in a manner consistent with that of the original policies issued and the terms of the reinsurance contracts. If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance or reinsurance subsidiaries would be liable for such defaulted amounts.
Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. In certain instances, the Company obtains collateral, including letters of credit and trust accounts to further reduce the credit exposure on its reinsurance recoverables. The Company reports its reinsurance recoverables net of an allowance for expected credit loss. The allowance is based upon the Company’s ongoing review of amounts outstanding, the financial condition of its reinsurers, amounts and form of collateral obtained and other relevant factors. A ratings based probability-of-default and loss-given-default methodology is used to estimate the allowance for expected credit loss. Any allowance for credit losses is charged to net realized gains (losses) in the period the recoverable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses. See note 7, for additional information.
(f) Cash
Cash includes cash equivalents, which are investments with original maturities of three months or less which are not part of the investment portfolio.
(g) Restricted Cash
Restricted cash represents amounts held for the benefit of third parties or is legally or contractually restricted as to withdrawal or usage by the Company. Such amounts are included in “Other assets” on the Company’s balance sheet.
(h) Investments
The Company currently classifies substantially all of its fixed maturity investments and short-term investments as “available for sale” and, accordingly, they are carried at estimated fair value (also known as fair value) with the changes in fair value recorded as an unrealized gain or loss component of accumulated other comprehensive income in shareholders’ equity. The fair value of fixed maturity securities and equity securities is generally determined from quotations received from nationally recognized pricing services, or when such prices are not available, by reference to broker or underwriter bid indications. Short-term investments comprise securities due to mature within one year of the date of issue. Short-term investments include certain cash equivalents which are part of investment portfolios under the management of external and internal investment managers.
The Company’s investment portfolio includes certain funds that, due to their ownership structure, are accounted for by the Company using the equity method. In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on the Company’s
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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). Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds. Changes in the carrying value of such investments are recorded in net income as “Equity in net income (loss) of investments accounted for using the equity method.” As such, fluctuations in the carrying value of the investments accounted for using the equity method may increase the volatility of the Company’s reported results of operations.
The Company’s investment portfolio includes equity securities that are accounted for at fair value. Such holdings primarily include publicly traded common stocks. Dividend income on equities is reflected in net investment income. Changes in fair value on equity securities are included in “Net realized gains (losses)” in the consolidated statement of income.
The Company elected to carry certain fixed maturity securities, equity securities, short-term investments and other investments at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and liabilities. The fair value for certain of the Company’s other investments are determined using net asset values (“NAVs”) as advised by external fund managers. The NAV is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents.
Changes in fair value of investments accounted for using the fair value option are included in “Net realized gains (losses).” The primary reasons for electing the fair value option were to address simplification and cost-benefit considerations.
The Company invests in reverse repurchase agreements that are generally treated as collateralized receivables. Receivables for reverse repurchase agreements are reflected in “Other investments” or “Short-term investments” in the Company's consolidated balance sheet depending on their terms. These agreements are recorded at their contracted resale amount plus accrued interest, other than those that are accounted for at fair value. In reverse repurchase transactions, the Company obtains an interest in the purchased assets that are received as collateral.
The Company invests in limited partner interests and shares of limited liability companies. Such amounts are included in investments accounted for using the equity method and other investments. These investments can often have characteristics of a variable interest entity (“VIE”). A VIE refers to entities that have characteristics such as (i) insufficient equity at risk to allow the entity to finance its activities without additional financial support or (ii) instances where the equity investors, as a group, do not have the characteristic of a controlling
financial interest. If the Company is determined to be the primary beneficiary, it is required to consolidate the VIE. The primary beneficiary is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. At inception of the VIE as well as on an ongoing basis, the Company determines whether it is the primary beneficiary based on an analysis of the Company’s level of involvement in the VIE, the contractual terms, and the overall structure of the VIE. The Company's maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company's consolidated balance sheet and any unfunded commitment.
The Company conducts a periodic review to identify and evaluate credit based impairments related to the Company’s available for sale investments. The Company derives estimated credit losses by comparing expected future cash flows to be collected to the amortized cost of the security. Estimates of expected future cash flows consider among other things, macroeconomic conditions as well as the financial condition, near-term and long-term prospects for the issuer, and the likelihood of the recoverability of principal and interest. Effective January 1, 2020, credit losses are recognized through an allowance account subject to reversal, rather than a reduction in amortized cost. Declines in value attributable to factors other than credit are reported as an unrealized loss in other comprehensive income while the allowance for credit loss is charged to net realized gains (losses) in the consolidated statement of income.
For available for sale investments that the Company intends to sell or for which it is more likely than not that the Company would be required to sell before an anticipated recovery in value, the full amount of the impairment is included in net realized gains (losses). The new cost basis of the investment is the previous amortized cost basis reduced by the impairment recognized in net realized gains (losses). The new cost basis is not adjusted for any subsequent recoveries in fair value.
The Company reports accrued investment income separately from investment balances and has elected not to measure an allowance for credit losses for accrued investment income. Any uncollectible accrued interest income is written off in the period it is deemed uncollectible.
Net investment income includes interest and dividend income together with amortization of market premiums and discounts and is net of investment management and custody fees. Anticipated prepayments and expected maturities are used in applying the interest method for certain investments such as
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mortgage and other asset-backed securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in such securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security. Such adjustments, if any, are included in net investment income when determined.
Investment gains or losses realized on the sale of investments, except for certain fund investments, are determined on a first-in, first-out basis and are reflected in net income. Investment gains or losses realized on the sale of certain fund investments are determined on an average cost basis. Unrealized appreciation or decline in the value of available for sale securities, which are carried at fair value, is excluded from net income and recorded as a separate component of accumulated other comprehensive income, net of applicable deferred income tax.
(i) Derivative Instruments
The Company recognizes all derivative instruments, including embedded derivative instruments, at fair value in its consolidated balance sheets. The Company employs the use of derivative instruments within its operations to mitigate risks arising from assets and liabilities held in foreign currencies as well as part of its overall investment strategy. For such instruments, changes in assets and liabilities measured at fair value are recorded as “Net realized gains (losses)” in the consolidated statements of income. In addition, the Company’s derivative instruments include amounts related to underwriting activities where an insurance or reinsurance contract meets the accounting definition of a derivative instrument. For such contracts, changes in fair value are reflected in “Other underwriting income” in the consolidated statements of income as the underlying contract originates from the Company’s underwriting operations. For the periods ended 2024, 2023, and 2022, the Company did not designate any derivative instruments as hedges under the relevant accounting guidance. See note 11, for additional information.
(j) Reserves for Losses and Loss Adjustment Expenses
Insurance and Reinsurance. The reserve for losses and loss adjustment expenses consists of estimates of unpaid reported losses and loss adjustment expenses and estimates for losses incurred but not reported. The reserve for unpaid reported losses and loss adjustment expenses, established by management based on reports from ceding companies and claims from insureds, excludes estimates of amounts related to losses under high deductible policies, and represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company. Such
reserves are supplemented by management’s estimates of reserves for losses incurred for which reports or claims have not been received. The Company’s reserves are based on a combination of reserving methods, incorporating both Company and industry loss development patterns. The Company selects the initial expected loss and loss adjustment expense ratios based on information derived by its underwriters and actuaries during the initial pricing of the business, supplemented by industry data where appropriate. Such ratios consider, among other things, rate changes and changes in terms and conditions that have been observed in the market. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in income in the period in which they are determined. As actual loss information has been reported, the Company has developed its own loss experience and its reserving methods include other actuarial techniques. Over time, such techniques have been given further weight in its reserving process based on the continuing maturation of the Company’s reserves. Inherent in the estimates of ultimate losses and loss adjustment expenses are expected trends in claims severity and frequency and other factors which may vary significantly as claims are settled. Accordingly, ultimate losses and loss adjustment expenses may differ materially from the amounts recorded in the accompanying consolidated financial statements. Losses and loss adjustment expenses are recorded on an undiscounted basis, except for excess workers’ compensation and employers’ liability business written by the Company’s insurance operations.
Mortgage. The reserves for mortgage guaranty insurance losses and loss adjustment expenses are the estimated claim settlement costs on notices of delinquency that have been received by the Company, as well as loan delinquencies that have been incurred but have not been reported by the lenders. Consistent with primary mortgage insurance industry accounting practice, the Company does not establish loss reserves for future claims on insured loans that are not currently delinquent (defined as two or more payments in arrears). The Company establishes loss reserves on a case-by-case basis when insured loans are reported delinquent using estimated claim rates and average claim sizes for each cohort, net of any salvage recoverable. The Company also reserves for delinquencies that have occurred but have not yet been reported to the Company prior to the close of an accounting period. To determine this reserve, the Company estimates the number of delinquencies not yet reported using historical information regarding late reported delinquencies and applies estimated claim rates and claim sizes for the estimated delinquencies not yet reported.
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The establishment of reserves across the Company’s segments is an inherently uncertain process, are necessarily based on estimates, and the ultimate net cost may vary from such estimates. The methods for making such estimates and for establishing the resulting liability are reviewed and updated using the most current information available. Any resulting adjustments, which may be material, are reflected in current operations.
(k) Contractholder Receivables and Payables and Collateral Held for Insured Obligations
Certain insurance policies written by the Company’s U.S. insurance operations feature large deductibles, primarily in its construction and national accounts line of business. Under such contracts, the Company is obligated to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by the policy holder for the deductible amount. These amounts are included on a gross basis in the consolidated balance sheet as contractholder payables and contractholder receivables. In the event that the Company is unable to collect from the policyholder, the Company would be liable for such defaulted amounts. Collateral, primarily in the form of letters of credit, cash and trusts, is obtained from the policyholder to mitigate the Company’s credit risk. In the instances where the Company receives collateral in the form of cash, the Company reflects it in “Collateral held for insured obligations.”
Contractholder receivables are reported net of an allowance for expected credit losses. The allowance is based upon the Company’s ongoing review of amounts outstanding, changes in policyholder credit standing, amounts and form of collateral obtained, and other relevant factors. A ratings based probability-of-default and loss-given-default methodology is used to estimate the allowance for expected credit losses. Any allowance for credit losses is charged to net realized gains (losses) in the period the receivable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses. See note 7, for additional information.
(l) Foreign Exchange
Assets and liabilities of foreign operations whose functional currency is not the U.S. Dollar are translated at the prevailing exchange rates at each balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the year. The net effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income, net of applicable deferred income tax. Monetary assets and liabilities, such as premiums receivable and the reserve for losses and loss adjustment expenses, denominated in foreign currencies are revalued at the exchange rate in effect at the balance sheet date with the resulting foreign exchange gains and losses
included in net income. Accounts that are classified as non-monetary, such as deferred acquisition costs and the unearned premium reserves, are not revalued. In the case of foreign currency denominated fixed maturity securities which are classified as “available for sale,” the change in exchange rates between the local currency in which the investments are denominated and the Company’s functional currency at each balance sheet date is included in unrealized appreciation or decline in value of securities, a component of accumulated other comprehensive income, net of applicable deferred income tax.
(m) Income Taxes
Deferred income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. A valuation allowance is recorded if it is more likely than not that some or all of a deferred income tax asset may not be realized. The Company considers future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance. In the event the Company determines that it will not be able to realize all or part of its deferred income tax assets in the future, an adjustment to the deferred income tax assets would be charged to income in the period in which such determination is made. In addition, if the Company subsequently assesses that the valuation allowance is no longer needed, a benefit would be recorded to income in the period in which such determination is made. See note 15, for additional information.
The Company recognizes a tax benefit where it concludes that it is more likely than not that the tax benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in the Company’s judgment, is greater than 50% likely to be realized. The Company records interest and penalties related to unrecognized tax benefits in the provision for income taxes.
On December 27, 2023 the Bermuda government enacted tax legislation referred to as the Corporate Income Tax Act 2023 (“Bermuda CIT Act”). The Bermuda CIT Act establishes a 15% corporate income tax, for in-scope businesses, for fiscal years beginning on or after January 1, 2025. The enacted legislation includes a provision referred to as the Economic Transition Adjustment, which requires Bermuda Constituent entities to establish tax basis in their assets and liabilities, excluding goodwill, based on fair value as of September 30, 2023. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
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measurement date. See note 15, for additional information regarding Company’s deferred income tax asset.
(n) Share-Based Payment Arrangements
The Company applies a fair value based measurement method in accounting for its share-based payment arrangements with eligible employees and directors. Compensation expense is estimated based on the fair value of the award at the grant date and is recognized in net income over the requisite service period with a corresponding increase in shareholders’ equity. No value is attributed to awards that employees forfeit because they fail to satisfy vesting conditions. The Company’s (i) time-based awards generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date and (ii) performance-based awards cliff vest after each three year performance period based on achievement of the specified performance criteria. The share-based compensation expense associated with awards that have graded vesting features and vest based on service conditions only is calculated on a straight-line basis over the requisite service period for the entire award. Compensation expense recognized in connection with performance awards is based on the achievement of the specified performance and service conditions. The final measure of compensation expense recognized over the requisite service period reflects the final performance outcome. During the recognition period compensation expense is accrued based on the performance condition that is probable of achievement. For awards granted to retirement-eligible employees where no service is required for the employee to retain the award, the grant date fair value is immediately recognized as compensation expense at the grant date because the employee is able to retain the award without continuing to provide service. For employees near retirement eligibility, attribution of compensation cost is over the period from the grant date to the retirement eligibility date. These charges had no impact on the Company’s cash flows or total shareholders’ equity. See note 22, for information relating to the Company’s share-based payment awards.
(o) Guaranty Fund and Other Related Assessments
Liabilities for guaranty fund and other related assessments in the Company’s insurance and reinsurance operations are accrued when the Company receives notice that an amount is payable, or earlier if a reasonable estimate of the assessment can be made.
(p) Treasury Shares
Treasury shares are common shares purchased by the Company and not subsequently canceled. These shares are recorded at cost and result in a reduction of the Company’s shareholders’ equity in its Consolidated Balance Sheets.
(q) Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of business combination over the fair value of the net assets acquired and is assigned to the applicable reporting unit at acquisition. The annual goodwill impairment test was performed as of October 1, 2024. Impairment tests may be performed more frequently if the facts and circumstances indicate a possible impairment. In performing impairment tests, the Company may first assess qualitative factors to determine whether it is more likely than not (that is, more than a 50% probability) that the fair value of a reporting unit exceeds its carrying amount as a basis for determining whether it is necessary to perform goodwill impairment test described in the accounting guidance.
Indefinite-lived intangible assets, such as insurance licenses are evaluated for impairment similar to goodwill. Finite-lived intangible assets and liabilities include the value of acquired insurance and reinsurance contracts, which are estimated based on the present value of future expected cash flows and amortized in proportion to the estimated profits expected to be realized. Other finite-lived intangible assets, including customer lists, trade name and IT platforms, are amortized over their useful lives. Finite-lived intangible assets and liabilities are periodically reviewed for indicators of impairment. An impairment is recognized when the carrying amount is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value.
If goodwill or intangible assets are impaired, such assets are written down to their fair values with the related expense recorded in the Company’s results of operations.
(r) Investment in Operating Affiliates
Investment in operating affiliates primarily represent the Company’s investments in which it has significant influence and which are accounted for under the equity method of accounting. In applying the equity method of accounting, investments in operating affiliates are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of net income or loss of the operating affiliate. The Company records its proportionate share of other comprehensive income or loss of the operating affiliate as a component of other comprehensive income. Adjustments are based on the most recently available financial information from the operating affiliate. Changes in the carrying value of these investments are recorded in income (loss) from operating affiliates.
| ARCH CAPITAL | 115 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(s) Funds Held Arrangements
Funds held arrangements are agreements with a third party reinsurance company, where the reinsured retains the related assets on a funds held basis. Such amounts are included in “Other assets” on the Company’s balance sheet. Investment returns produced by those assets are recorded as part of net investment income and net realized gains (losses) in the Company's consolidated results of operations. Funds held as collateral by the Company are included in “Other liabilities” and changes to the funds held liability are reflected as part of interest expense in the Company’s consolidated results of operations.
(t) Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted
The Company adopted ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which was issued in March 2020 and amended in December 2022 with ASU 2022-06, “Reference Rate Reform (Topic 848)”. This ASU provides optional expedients and exceptions for applying GAAP to investments, derivatives, or other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. Along with the optional expedients, the amendments include a general principle that permits an entity to consider contract modifications due to reference reform to be an event that does not require contract re-measurement at the modification date or reassessment of a previous accounting determination. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
The Company adopted ASU 2023-07, “Segment Reporting – Improvements to Reportable Segments Disclosures,” which was issued in November 2023. This ASU enhances public entities’ segment disclosures by requiring the disclosures of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), and included within each reported measure of segment profit or loss. The ASU also extends certain annual disclosures to interim periods and allows the reporting of more than one measure of segment profit or loss under certain conditions. The adoption of this ASU did not have any effect on the Company’s consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
ASU 2023-09, “Improvements to Income Tax Disclosures,” was issued in December 2023 with the stated purpose of enhancing the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. While early adoption is permitted, a public entity should apply the amendments in ASU 2023-09 prospectively to all annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of this standard on the Company’s consolidated financial statements and related disclosures.
ASU 2024-03, “Disaggregation of Income Statement Expenses” was issued in November 2024, which requires disaggregated disclosure of income statement expenses for public business entities. The ASU does not change the expense captions an entity presents on the face of the income statement; rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements. The ASU is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027. The requirements will be applied prospectively with the option for retrospective application. Early adoption is permitted. The Company is currently evaluating the impact of this standard on the Company’s consolidated financial statements and related disclosures.
| ARCH CAPITAL | 116 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Segment Information
The Company classifies its businesses into three segments – insurance, reinsurance and mortgage. The Company determined its segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s CODMs, the Chief Executive Officer of Arch Capital and the Chief Financial Officer and Treasurer of Arch Capital. The CODMs 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 segments based on underwriting income or loss. The Company does not manage its assets by segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.
The Company’s insurance segment primarily consists of commercial insurance lines of business, with a focus on specialty insurance products. These products are mainly offered in North America, Bermuda, the United Kingdom, continental Europe and Australia. Products offered in North America include: commercial automobile; commercial multiperil; other liability—claims made, which includes financial and professional lines; other liability—occurrence, which includes admitted and excess and surplus casualty lines; property and short-tail specialty; workers compensation; and other. Products offered across the Company’s International units include: property and short-tail specialty; and casualty and other.
The Company’s reinsurance segment offers reinsurance products on a worldwide basis. Product lines of business include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe; and other.
The Company’s mortgage segment consists of U.S. primary mortgage insurance business written predominantly on loans sold to the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a government sponsored entity (“GSE”) and also through non GSE approved entities (combined “Arch MI U.S.”); reinsurance and underwriting services related to U.S. credit-risk transfer (“CRT”) business which are predominately with the GSEs and other U.S. mortgage reinsurance transactions; and international mortgage insurance and reinsurance business covering loans primarily in Australia and Europe.
The Company’s results also include net investment income, net realized gains or losses (which includes realized and unrealized changes in the fair value of equity securities and assets accounted for using the fair value option, realized and unrealized gains or losses on derivative instruments, changes in the allowance for credit losses on financial assets and gains or losses realized from the acquisition or disposition of subsidiaries), equity in net income or loss of investment funds accounted for using the equity method, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, net foreign exchange gains or losses, income tax items, income or loss from operating affiliates and items related to the Company’s non-cumulative preferred shares.
| ARCH CAPITAL | 117 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to Arch common shareholders, summary information regarding net premiums written and earned by major line of business and net premiums written by location:
| Year Ended December 31, 2024 | |||||||||||||||||||||||||||||||||||
| Insurance | Reinsurance | Mortgage | Total | ||||||||||||||||||||||||||||||||
| Gross premiums written (1) | $ | 9,053 | $ | 11,112 | $ | 1,351 | $ | 21,511 | |||||||||||||||||||||||||||
| Premiums ceded (1) | (2,179) | (3,366) | (239) | (5,779) | |||||||||||||||||||||||||||||||
| Net premiums written | 6,874 | 7,746 | 1,112 | 15,732 | |||||||||||||||||||||||||||||||
| Change in unearned premiums | (247) | (504) | 119 | (632) | |||||||||||||||||||||||||||||||
| Net premiums earned | 6,627 | 7,242 | 1,231 | 15,100 | |||||||||||||||||||||||||||||||
| Other underwriting income | — | 9 | 17 | 26 | |||||||||||||||||||||||||||||||
| Losses and loss adjustment expenses | (4,070) | (4,327) | 55 | (8,342) | |||||||||||||||||||||||||||||||
| Acquisition expenses | (1,217) | (1,432) | (2) | (2,651) | |||||||||||||||||||||||||||||||
| Other operating expenses (2) | (995) | (270) | (207) | (1,472) | |||||||||||||||||||||||||||||||
| Underwriting income | $ | 345 | $ | 1,222 | $ | 1,094 | 2,661 | ||||||||||||||||||||||||||||
| Net investment income | 1,495 | ||||||||||||||||||||||||||||||||||
| Net realized gains (losses) | 197 | ||||||||||||||||||||||||||||||||||
| Equity in net income (loss) of investments accounted for using the equity method | 580 | ||||||||||||||||||||||||||||||||||
| Other income (loss) | 42 | ||||||||||||||||||||||||||||||||||
| Corporate expenses | (119) | ||||||||||||||||||||||||||||||||||
| Transaction costs and other | (81) | ||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | (235) | ||||||||||||||||||||||||||||||||||
| Interest expense | (141) | ||||||||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | 75 | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes and income (loss) from operating affiliates | 4,474 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (362) | ||||||||||||||||||||||||||||||||||
| Income (loss) from operating affiliates | 200 | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch | 4,312 | ||||||||||||||||||||||||||||||||||
| Preferred dividends | (40) | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 4,272 | |||||||||||||||||||||||||||||||||
| Underwriting Ratios | |||||||||||||||||||||||||||||||||||
| Loss ratio | 61.4 | % | 59.7 | % | -4.4 | % | 55.2 | % | |||||||||||||||||||||||||||
| Acquisition expense ratio | 18.4 | % | 19.8 | % | 0.2 | % | 17.6 | % | |||||||||||||||||||||||||||
| Other operating expense ratio | 15.0 | % | 3.7 | % | 16.8 | % | 9.7 | % | |||||||||||||||||||||||||||
| Combined ratio | 94.8 | % | 83.2 | % | 12.6 | % | 82.5 | % | |||||||||||||||||||||||||||
| Goodwill and intangible assets | $ | 916 | $ | 102 | $ | 333 | $ | 1,351 | |||||||||||||||||||||||||||
| Total investable assets | $ | 41,388 | |||||||||||||||||||||||||||||||||
| Total assets | 70,906 | ||||||||||||||||||||||||||||||||||
| Total liabilities | 50,086 |
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such transactions for each segment does not agree to the total due to eliminations.
(2) Other operating expenses primarily include expenses that are related to compensation and employee benefits, information technology and professional fees.
| ARCH CAPITAL | 118 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Year Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Insurance | Reinsurance | Mortgage | Total | ||||||||||||||||||||||||||||||||
| Gross premiums written (1) | $ | 7,911 | $ | 9,113 | $ | 1,387 | $ | 18,403 | |||||||||||||||||||||||||||
| Premiums ceded (1) | (2,049) | (2,559) | (335) | (4,935) | |||||||||||||||||||||||||||||||
| Net premiums written | 5,862 | 6,554 | 1,052 | 13,468 | |||||||||||||||||||||||||||||||
| Change in unearned premiums | (416) | (718) | 106 | (1,028) | |||||||||||||||||||||||||||||||
| Net premiums earned | 5,446 | 5,836 | 1,158 | 12,440 | |||||||||||||||||||||||||||||||
| Other underwriting income | — | 17 | 14 | 31 | |||||||||||||||||||||||||||||||
| Losses and loss adjustment expenses | (3,122) | (3,227) | 103 | (6,246) | |||||||||||||||||||||||||||||||
| Acquisition expenses, net | (1,055) | (1,240) | (17) | (2,312) | |||||||||||||||||||||||||||||||
| Other operating expenses (2) | (819) | (288) | (194) | (1,301) | |||||||||||||||||||||||||||||||
| Underwriting income (loss) | $ | 450 | $ | 1,098 | $ | 1,064 | 2,612 | ||||||||||||||||||||||||||||
| Net investment income | 1,023 | ||||||||||||||||||||||||||||||||||
| Net realized gains (losses) | (165) | ||||||||||||||||||||||||||||||||||
| Equity in net income (loss) of investments accounted for using the equity method | 278 | ||||||||||||||||||||||||||||||||||
| Other income (loss) | 27 | ||||||||||||||||||||||||||||||||||
| Corporate expenses | (96) | ||||||||||||||||||||||||||||||||||
| Transaction costs and other | (6) | ||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | (95) | ||||||||||||||||||||||||||||||||||
| Interest expense | (133) | ||||||||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | (60) | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes and income (loss) from operating affiliates | 3,385 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | 873 | ||||||||||||||||||||||||||||||||||
| Income (loss) from operating affiliates | 184 | ||||||||||||||||||||||||||||||||||
| Net income (loss) | 4,442 | ||||||||||||||||||||||||||||||||||
| Amounts attributable to redeemable noncontrolling interests | 1 | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch | 4,443 | ||||||||||||||||||||||||||||||||||
| Preferred dividends | (40) | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 4,403 | |||||||||||||||||||||||||||||||||
| Underwriting Ratios | |||||||||||||||||||||||||||||||||||
| Loss ratio | 57.3 | % | 55.3 | % | -8.9 | % | 50.2 | % | |||||||||||||||||||||||||||
| Acquisition expense ratio | 19.4 | % | 21.2 | % | 1.4 | % | 18.6 | % | |||||||||||||||||||||||||||
| Other operating expense ratio | 15.0 | % | 4.9 | % | 16.8 | % | 10.5 | % | |||||||||||||||||||||||||||
| Combined ratio | 91.7 | % | 81.4 | % | 9.3 | % | 79.3 | % | |||||||||||||||||||||||||||
| Goodwill and intangible assets | $ | 224 | $ | 130 | $ | 377 | $ | 731 | |||||||||||||||||||||||||||
| Total investable assets | $ | 34,589 | |||||||||||||||||||||||||||||||||
| Total assets | 58,906 | ||||||||||||||||||||||||||||||||||
| Total liabilities | 40,551 |
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such transactions for each segment does not agree to the total due to eliminations.
(2) Other operating expenses primarily include expenses that are related to compensation and employee benefits, information technology and professional fees.
| ARCH CAPITAL | 119 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Year Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Insurance | Reinsurance | Mortgage | Total | ||||||||||||||||||||||||||||||||
| Gross premiums written (1) | $ | 6,931 | $ | 6,948 | $ | 1,455 | $ | 15,327 | |||||||||||||||||||||||||||
| Premiums ceded (1) | (1,910) | (2,024) | (322) | (4,249) | |||||||||||||||||||||||||||||||
| Net premiums written | 5,021 | 4,924 | 1,133 | 11,078 | |||||||||||||||||||||||||||||||
| Change in unearned premiums | (461) | (965) | 27 | (1,399) | |||||||||||||||||||||||||||||||
| Net premiums earned | 4,560 | 3,959 | 1,160 | 9,679 | |||||||||||||||||||||||||||||||
| Other underwriting income | — | 5 | 8 | 13 | |||||||||||||||||||||||||||||||
| Losses and loss adjustment expenses | (2,784) | (2,568) | 324 | (5,028) | |||||||||||||||||||||||||||||||
| Acquisition expenses, net | (887) | (813) | (40) | (1,740) | |||||||||||||||||||||||||||||||
| Other operating expenses (2) | (665) | (268) | (195) | (1,128) | |||||||||||||||||||||||||||||||
| Underwriting income (loss) | $ | 224 | $ | 315 | $ | 1,257 | 1,796 | ||||||||||||||||||||||||||||
| Net investment income | 496 | ||||||||||||||||||||||||||||||||||
| Net realized gains (losses) | (663) | ||||||||||||||||||||||||||||||||||
| Equity in net income (loss) of investments accounted for using the equity method | 115 | ||||||||||||||||||||||||||||||||||
| Other income (loss) | (27) | ||||||||||||||||||||||||||||||||||
| Corporate expenses | (95) | ||||||||||||||||||||||||||||||||||
| Transaction costs and other | — | ||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | (106) | ||||||||||||||||||||||||||||||||||
| Interest expense | (131) | ||||||||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | 102 | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes and income (loss) from operating affiliates | 1,487 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (80) | ||||||||||||||||||||||||||||||||||
| Income (loss) from operating affiliates | 75 | ||||||||||||||||||||||||||||||||||
| Net income | 1,482 | ||||||||||||||||||||||||||||||||||
| Amounts attributable to redeemable noncontrolling interests | (6) | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch | 1,476 | ||||||||||||||||||||||||||||||||||
| Preferred dividends | (40) | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 1,436 | |||||||||||||||||||||||||||||||||
| Underwriting Ratios | |||||||||||||||||||||||||||||||||||
| Loss ratio | 61.0 | % | 64.9 | % | -28.0 | % | 51.9 | % | |||||||||||||||||||||||||||
| Acquisition expense ratio | 19.4 | % | 20.5 | % | 3.5 | % | 18.0 | % | |||||||||||||||||||||||||||
| Other operating expense ratio | 14.6 | % | 6.8 | % | 16.8 | % | 11.7 | % | |||||||||||||||||||||||||||
| Combined ratio | 95.0 | % | 92.2 | % | -7.7 | % | 81.6 | % | |||||||||||||||||||||||||||
| Goodwill and intangible assets | $ | 229 | $ | 145 | $ | 430 | $ | 804 | |||||||||||||||||||||||||||
| Total investable assets | $ | 28,065 | |||||||||||||||||||||||||||||||||
| Total assets | 47,990 | ||||||||||||||||||||||||||||||||||
| Total liabilities | 35,069 |
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such transactions for each segment does not agree to the total due to eliminations.
(2) Other operating expenses primarily include expenses that are related to compensation and employee benefits, information technology and professional fees.
| ARCH CAPITAL | 120 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide summary information regarding net premiums earned by major line of business and net premiums written by underwriting location:
| INSURANCE SEGMENT | Year Ended December 31, | ||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Net premiums earned | |||||||||||||||||
| North America | |||||||||||||||||
| Property and short-tail specialty | $ | 1,165 | $ | 976 | $ | 746 | |||||||||||
| Other liability - occurrence | 942 | 618 | 509 | ||||||||||||||
| Other liability - claims made | 843 | 866 | 874 | ||||||||||||||
| Workers compensation | 549 | 495 | 415 | ||||||||||||||
| Commercial automobile | 459 | 343 | 287 | ||||||||||||||
| Commercial multi-peril | 435 | 193 | 197 | ||||||||||||||
| Other | 309 | 290 | 255 | ||||||||||||||
| Total North America | 4,702 | 3,781 | 3,283 | ||||||||||||||
| International | |||||||||||||||||
| Property and short-tail specialty | $ | 1,050 | $ | 885 | $ | 613 | |||||||||||
| Casualty and other | 875 | 780 | 664 | ||||||||||||||
| Total International | 1,925 | 1,665 | 1,277 | ||||||||||||||
| Total | $ | 6,627 | $ | 5,446 | $ | 4,560 | |||||||||||
| Net premiums written by underwriting location | |||||||||||||||||
| North America | $ | 4,869 | $ | 3,995 | $ | 3,527 | |||||||||||
| International | 2,005 | 1,867 | 1,494 | ||||||||||||||
| Total | $ | 6,874 | $ | 5,862 | $ | 5,021 |
| REINSURANCE SEGMENT | Year Ended December 31, | ||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Net premiums earned | |||||||||||||||||
| Other specialty | $ | 2,619 | $ | 2,097 | $ | 1,378 | |||||||||||
| Property excluding property catastrophe | 2,148 | 1,645 | 1,090 | ||||||||||||||
| Casualty | 1,088 | 1,005 | 855 | ||||||||||||||
| Property catastrophe | 959 | 742 | 367 | ||||||||||||||
| Marine and aviation | 276 | 229 | 159 | ||||||||||||||
| Other | 152 | 118 | 110 | ||||||||||||||
| Total | $ | 7,242 | $ | 5,836 | $ | 3,959 | |||||||||||
| Net premiums written by underwriting location | |||||||||||||||||
| Bermuda | $ | 3,425 | $ | 3,288 | $ | 2,561 | |||||||||||
| United States | 2,135 | 1,756 | 1,247 | ||||||||||||||
| Europe and other | 2,186 | 1,510 | 1,116 | ||||||||||||||
| Total | $ | 7,746 | $ | 6,554 | $ | 4,924 |
| MORTGAGE SEGMENT | Year Ended December 31, | ||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Net premiums earned | |||||||||||||||||
| U.S. primary mortgage insurance | $ | 845 | $ | 759 | $ | 804 | |||||||||||
| U.S. credit risk transfer (CRT) and other | 213 | 220 | 196 | ||||||||||||||
| International mortgage insurance/reinsurance | 173 | 179 | 160 | ||||||||||||||
| Total | $ | 1,231 | $ | 1,158 | $ | 1,160 | |||||||||||
| Net premiums written by underwriting location | |||||||||||||||||
| United States | $ | 823 | $ | 743 | $ | 781 | |||||||||||
| Other | 289 | 309 | 352 | ||||||||||||||
| Total | $ | 1,112 | $ | 1,052 | $ | 1,133 |
| ARCH CAPITAL | 121 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Reserve for Losses and Loss Adjustment Expenses
The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Reserve for losses and loss adjustment expenses at beginning of year | $ | 22,752 | $ | 20,032 | $ | 17,757 | |||||||||||
| Unpaid losses and loss adjustment expenses recoverable | 6,690 | 6,280 | 5,599 | ||||||||||||||
| Net reserve for losses and loss adjustment expenses at beginning of year | 16,062 | 13,752 | 12,158 | ||||||||||||||
| Net incurred losses and loss adjustment expenses relating to losses occurring in: | |||||||||||||||||
| Current year | 8,849 | 6,784 | 5,797 | ||||||||||||||
| Prior years | (507) | (538) | (769) | ||||||||||||||
| Total net incurred losses and loss adjustment expenses | 8,342 | 6,246 | 5,028 | ||||||||||||||
| Net losses and loss adjustment expense reserves of acquired business (1) | 2,477 | — | — | ||||||||||||||
| Foreign exchange (gains) losses and other | (260) | 157 | (293) | ||||||||||||||
| Net paid losses and loss adjustment expenses relating to losses occurring in: | |||||||||||||||||
| Current year | (1,176) | (1,081) | (888) | ||||||||||||||
| Prior years | (3,897) | (3,012) | (2,253) | ||||||||||||||
| Total net paid losses and loss adjustment expenses | (5,073) | (4,093) | (3,141) | ||||||||||||||
| Net reserve for losses and loss adjustment expenses at end of year | 21,548 | 16,062 | 13,752 | ||||||||||||||
| Unpaid losses and loss adjustment expenses recoverable | 7,821 | 6,690 | 6,280 | ||||||||||||||
| Reserve for losses and loss adjustment expenses at end of year | $ | 29,369 | $ | 22,752 | $ | 20,032 |
(1) Activity in the 2024 period primarily related to the MCE Acquisition (see note 2), along with acquisitions of Watford Insurance Company (see note 16) and RMIC Companies, Inc. and its wholly-owned subsidiaries (“RMIC”) that, together, comprise the run-off mortgage insurance business of Old Republic International Corporation.
Prior year development (“PYD”) arises from changes in loss estimates during the current period related to events occurring in prior calendar years. Long-tailed lines include lines of business that typically take many years for claims to settle such as third-party liability; short-tailed lines are those that settle more quickly such as property. The table below summarizes (favorable) and adverse net PYD by segment and tail length:
| (Favorable) Adverse | Year Ended December 31, | ||||||||||||||||
| 2024 | Short-tailed | Long-tailed | Total | ||||||||||||||
| Insurance | $ | (53) | $ | 16 | $ | (37) | |||||||||||
| Reinsurance | (232) | 44 | (188) | ||||||||||||||
| Mortgage | (282) | — | (282) | ||||||||||||||
| Total | $ | (567) | $ | 60 | $ | (507) | |||||||||||
| 2023 | |||||||||||||||||
| Insurance | $ | (85) | $ | 43 | $ | (42) | |||||||||||
| Reinsurance | (202) | 50 | (152) | ||||||||||||||
| Mortgage | (344) | — | (344) | ||||||||||||||
| Total | $ | (631) | $ | 93 | $ | (538) | |||||||||||
| 2022 | |||||||||||||||||
| Insurance | $ | (65) | $ | 40 | $ | (25) | |||||||||||
| Reinsurance | (195) | 5 | (190) | ||||||||||||||
| Mortgage | (554) | — | (554) | ||||||||||||||
| Total | $ | (814) | $ | 45 | $ | (769) |
| ARCH CAPITAL | 122 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2024
The insurance segment’s short-tailed lines included $32 million of favorable development in travel and accident, primarily from the 2023 accident year, (i.e., the year in which a loss occurred), and $31 million of favorable development in surety, primarily from the 2007, 2022 and 2023 accident years. Net adverse development in long-tailed lines included adverse development in programs, mainly from the 2023 accident year.
The reinsurance segment’s short-tailed lines included $99 million of favorable development from property other than property catastrophe, primarily from the 2022 and 2023 underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given 12 month period), $74 million of favorable development from other specialty lines, primarily from the 2015 to 2022 underwriting years, and $64 million of favorable development from property catastrophe, primarily from the 2020 to 2023 underwriting years. Long-tailed lines included $44 million of adverse development in casualty, primarily from the 2016, 2017 and 2020 underwriting years.
The mortgage segment’s favorable development was driven by reserve releases associated with the U.S. first lien portfolio from the 2022 and 2023 accident years. The Company’s credit risk transfer and international businesses also contributed to the favorable development.
Year Ended December 31, 2023
The insurance segment’s short-tailed lines included $43 million of favorable development in property and marine, primarily from the 2021 and 2022 accident years, $22 million of favorable development in warranty and lenders solutions, primarily from the 2022 accident year, and $15 million of favorable development related to travel and accident business, primarily from the 2022 accident year. Long-tailed lines included $50 million of adverse development in professional liability, primarily from the 2017 to 2020 accident years.
The reinsurance segment’s short-tailed lines included $93 million of favorable development in property other than property catastrophe, primarily from the 2020 to 2022 underwriting years, $51 million of favorable development in property catastrophe, primarily from the 2019 to 2022 underwriting years, and $35 million from other specialty lines, primarily from the 2021 underwriting year. Long-tailed lines included $45 million of adverse development in casualty business, primarily from the 2013 to 2020 underwriting years.
The mortgage segment’s favorable development was driven by reserve releases associated with the U.S. first lien portfolio from the 2020 to 2022 accident years. The Company’s credit risk transfer and international businesses also contributed to the favorable development.
Year Ended December 31, 2022
The insurance segment’s short-tailed lines included $37 million of favorable development in warranty and lenders solutions, primarily from the 2021 accident year, and $15 million of favorable development related to travel and accident business, primarily from the 2021 accident year. Long-tailed lines included $25 million of adverse development in professional liability, primarily from the 2013 to 2015 and 2018 to 2020 accident years, and $18 million related to casualty business, primarily from the 2020 and 2021 accident years.
The reinsurance segment’s short-tailed lines included $109 million of favorable development from property other than property catastrophe business, primarily from the 2018 to 2021 underwriting years, $35 million from other specialty business, primarily from the 2016 and 2021 underwriting years, $28 million in marine and aviation lines, across most underwriting years, and $24 million of favorable development from property catastrophe business, primarily from the 2018 to 2020 underwriting years. Net adverse development in long-tailed lines included $5 million in casualty, spread across many prior underwriting years.
The mortgage segment’s favorable development was driven by reserve releases related to COVID-19 delinquencies associated with the U.S. first lien portfolio from the 2020 and 2021 accident years. The Company’s credit risk transfer, international, second lien and student loan businesses also contributed to the favorable development.
| ARCH CAPITAL | 123 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Short Duration Contracts
The Company’s reserves for losses and loss adjustment expenses primarily relate to short-duration contracts with various characteristics (e.g., type of coverage, geography, claims duration). The Company considered such information in determining the level of disaggregation for disclosures related to its short-duration contracts, as detailed in the table below:
| Reportable segment | Level of disaggregation | Included lines of business | ||||||||||||
| Insurance | Property energy, marine and aviation | Property energy, marine and aviation | ||||||||||||
| Third party occurrence business | Excess and surplus casualty (excluding contract binding); construction and national accounts; and other (including alternative market risks, excess workers’ compensation and employer’s liability insurance coverages) | |||||||||||||
| Third party claims-made business | Professional lines | |||||||||||||
| Multi-line and other specialty | Programs; contract binding (part of excess and surplus casualty); travel, accident and health; warranty and lenders solutions; and other (contract and commercial surety coverages); MCE business1 | |||||||||||||
| Reinsurance | Casualty | Casualty | ||||||||||||
| Property catastrophe | Property catastrophe | |||||||||||||
| Property excluding property catastrophe | Property excluding property catastrophe | |||||||||||||
| Marine and aviation | Marine and aviation | |||||||||||||
| Other specialty | Other specialty | |||||||||||||
| Mortgage | Direct mortgage insurance in the U.S. | Mortgage insurance on U.S. primary exposures |
(1) Includes business underwritten under a new business reinsurance agreement related to the MCE Acquisition. See note 2.
The Company determined the following to be insignificant for disclosure purposes: (i) certain mortgage business, including non-U.S. primary business, second lien and student loan exposures, global mortgage reinsurance and participation in various GSE credit risk-sharing products and (ii) certain reinsurance business, including casualty clash and non-traditional lines. Such amounts are included as reconciling items.
The Company is required to establish reserves for losses and loss adjustment expenses (“Loss Reserves”) that arise from the business the Company underwrites. Loss Reserves for the insurance, reinsurance and mortgage segments represent estimates of future amounts required to pay losses and loss adjustment expenses for insured or reinsured events which have occurred at or before the balance sheet date. Loss Reserves do not reflect contingency reserve allowances to account for future loss occurrences. Losses arising from
future events will be estimated and recognized at the time the losses are incurred and could be substantial.
Insurance Segment
Loss Reserves for the insurance segment are comprised of estimated amounts for (1) reported losses (“case reserves”) and (2) incurred but not reported losses (“IBNR reserves”). Generally, claims personnel determine whether to establish a case reserve for the estimated amount of the ultimate settlement of individual claims. The estimate reflects the judgment of claims personnel based on general corporate reserving practices, the experience and knowledge of such personnel regarding the nature and value of the specific type of claim and, where appropriate, advice of counsel. The Company also contracts with a number of outside third party administrators in the claims process who, in certain cases, have limited authority to establish case reserves. The work of such administrators is reviewed and monitored by our claims personnel. Loss Reserves are also established to provide for loss adjustment expenses and represent the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process. Periodically, adjustments to the case reserves may be made as additional information is reported or payments are made. IBNR reserves are established to provide for incurred claims which have not yet been reported at the balance sheet date as well as to adjust for any projected variance in case reserving. Actuaries estimate ultimate losses and loss adjustment expenses using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.
Ultimate losses and loss adjustment expenses are generally determined by projection of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. In forecasting ultimate losses and loss adjustment expenses with respect to any line of business, past experience with respect to that line of business is the primary resource, developed through both industry and company experience, but cannot be relied upon in isolation. Uncertainties in estimating ultimate losses and loss adjustment expenses are magnified by the length of the time lag between when a claim actually occurs and when it is reported and settled. This time lag is sometimes referred to as the “claim-tail.” During this period additional facts regarding coverages written in prior accident years, as well as about actual claims and trends, may become known and, as a result, may lead to adjustments of the related Loss Reserves. If the Company determines that an adjustment is appropriate, the adjustment is recorded in the accounting period in which such determination is made. Accordingly, should Loss
| ARCH CAPITAL | 124 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted respectively. The Company authorizes managing general agents, general agents and other producers to write program business on the Company’s behalf within prescribed underwriting authorities. This delegated authority process introduces additional complexity to the actuarial determination of unpaid future losses and loss adjustment expenses. In order to monitor adherence to the underwriting guidelines given to such parties, the Company periodically performs underwriting and claims due diligence reviews.
In determining ultimate losses and loss adjustment expenses, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from the past. A key objective of actuaries in developing estimates of ultimate losses and loss adjustment expenses, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and adjust for them so that the future can be projected more reliably. Because of the factors previously discussed, this process requires the substantial use of informed judgment and is inherently uncertain.
Although Loss Reserves are initially determined based on underwriting and pricing analyses, the Company’s insurance segment applies several generally accepted actuarial methods, as discussed below, on a quarterly basis to evaluate the Loss Reserves, in addition to the expected loss method, in particular for Loss Reserves from more mature accident years (the year in which a loss occurred). Each quarter, as part of the reserving process, the segments’ actuaries reaffirm that the assumptions used in the reserving process continue to form a sound basis for the projection of liabilities. If actual loss activity differs substantially from expectations based on historical information, an adjustment to Loss Reserves may be supported. The Company places more or less reliance on a particular actuarial method based on the facts and circumstances at the time the estimates of Loss Reserves are made.
These methods generally fall into one of the following categories or are hybrids of one or more of the following categories:
*•*Expected loss methods - these methods are based on the assumption that ultimate losses vary proportionately with premiums. Expected loss and loss adjustment expense ratios are typically developed based upon the information derived by underwriters and actuaries during the initial pricing of the business, supplemented by industry data available from organizations, such as statistical bureaus and consulting firms, where appropriate. These ratios consider, among other things, rate increases and changes in terms and conditions that have been observed in the market. Expected loss methods are useful for estimating ultimate losses and loss adjustment expenses in the early years of long-tailed lines of business, when little or no paid or incurred loss information is available, and is commonly applied when limited loss experience exists for a company.
-
Historical incurred loss development methods - these methods assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. These methods use incurred losses (i.e., the sum of cumulative historical loss payments plus outstanding case reserves) over discrete periods of time to estimate future losses. Historical incurred loss development methods may be preferable to historical paid loss development methods because they explicitly take into account open cases and the claims adjusters’ evaluations of the cost to settle all known claims. However, historical incurred loss development methods necessarily assume that case reserving practices are consistently applied over time. Therefore, when there have been significant changes in how case reserves are established, using incurred loss data to project ultimate losses may be less reliable than other methods.
-
Historical paid loss development methods - these methods, like historical incurred loss development methods, assume that the ratio of losses in one period to losses in an earlier period will remain constant. These methods use historical loss payments over discrete periods of time to estimate future losses and necessarily assume that factors that have affected paid losses in the past, such as inflation or the effects of litigation, will remain constant in the future. Because historical paid loss development methods do not use incurred losses to estimate ultimate losses, they may be more reliable than the other methods that use incurred losses in situations where there are significant changes in how incurred losses are established by a company’s claims adjusters. However, historical paid loss development methods are more leveraged (meaning that small changes in payments have a larger impact on estimates of ultimate losses) than
| ARCH CAPITAL | 125 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
actuarial methods that use incurred losses because cumulative loss payments take much longer to equal the expected ultimate losses than cumulative incurred amounts. In addition, and for similar reasons, historical paid loss development methods are often slow to react to situations when new or different factors arise than those that have affected paid losses in the past.
-
Adjusted historical paid and incurred loss development methods - these methods take traditional historical paid and incurred loss development methods and adjust them for the estimated impact of changes from the past in factors such as inflation, the speed of claim payments or the adequacy of case reserves. Adjusted historical paid and incurred loss development methods are often more reliable methods of predicting ultimate losses in periods of significant change, provided the actuaries can develop methods to reasonably quantify the impact of changes. As such, these methods utilize more judgment than historical paid and incurred loss development methods.
-
Bornhuetter-Ferguson (“B-F”) paid and incurred loss methods - these methods utilize actual paid and incurred losses and expected patterns of paid and incurred losses, taking the initial expected ultimate losses into account to determine an estimate of expected ultimate losses. The B-F paid and incurred loss methods are useful when there are few reported claims and a relatively less stable pattern of reported losses.
*•*Frequency-Severity methods - These methods utilize actual paid and incurred claim experience, but break the data down into its component pieces: claim counts, often expressed as a ratio to exposure or premium (frequency), and average claim size (severity). The component pieces are projected to an ultimate level and multiplied together to result in an estimate of ultimate loss. These methods are especially useful when the severity of claims can be confined to a relatively stable range of estimated ultimate average claim value.
- Additional analyses - other methodologies are often used in the reserving process for specific types of claims or events, such as catastrophic or other specific major events. These include vendor catastrophe models, which are typically used in the estimation of Loss Reserves at the early stage of known catastrophic events before information has been reported to an insurer or reinsurer.
In the initial reserving process for short-tail insurance lines (consisting of property, energy, marine and aviation and other exposures including travel, accident and health, and warranty and lenders solutions), the Company relies on a combination of the reserving methods discussed above. For catastrophe-exposed business, the reserving process also includes the usage of catastrophe models for known events
and a heavy reliance on analysis of individual catastrophic events and management judgment. The development of losses on short-tail business can be unstable, especially for policies characterized by high severity, low frequency losses. As time passes, for a given accident year, additional weight is given to the paid and incurred B-F loss development methods and eventually to the historical paid and incurred loss development methods in the reserving process. The Company makes a number of key assumptions in their reserving process, including that historical paid and reported development patterns are stable, catastrophe models provide useful information about our exposure to catastrophic events that have occurred and underwriters’ judgment as to potential loss exposures can be relied on. The expected loss ratios used in the initial reserving process for short-tail business have varied over time due to changes in pricing, reinsurance structure, estimates of catastrophe losses, policy changes (such as attachment points, class and limits) and geographical distribution. As losses in short-tail lines are reported relatively quickly, expected loss ratios are selected for the current accident year based upon actual attritional loss ratios for earlier accident years, adjusted for rate changes, inflation, changes in reinsurance programs and expected attritional losses based on modeling. Furthermore, ultimate losses for short-tail business are known in a reasonably short period of time.
In the initial reserving process for long-tail insurance lines **(**consisting of third party occurrence business, third party claims made business, and other exposures including surety, programs and contract binding exposures), the Company primarily relies on the expected loss method. The development of the Company’s long-tail business may be unstable, especially if there are high severity major events, as a portion of the Company’s casualty business is in high excess layers. As time passes, for a given accident year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. The Company makes a number of key assumptions in reserving for long-tail lines, including that the pricing loss ratio is the best estimate of the ultimate loss ratio at the time the policy is entered into, that the loss development patterns, which are based on a combination of company and industry loss development patterns and adjusted to reflect differences in the insurance segment’s mix of business, are reasonable and that claims personnel and underwriters analyses of our exposure to major events are assumed to be the best estimate of exposure to the known claims on those events. The expected loss ratios used in the initial reserving process for long-tail business for recent accident years have varied over time, in some cases significantly, from earlier accident years. As the credibility of historical experience for earlier accident years increases, the experience from these accident years will be given a greater weighting in the actuarial analysis to determine future
| ARCH CAPITAL | 126 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accident year expected loss ratios, adjusted for changes in pricing, loss trends, terms and conditions and reinsurance structure.
From time to time, the Company enters into loss portfolio transfer and adverse development cover reinsurance agreements accounted for as retroactive reinsurance. These agreements transfer Loss Reserves and future favorable or adverse development on certain runoff programs and certain third party occurrence business, within multi-line and other specialty business (the “Covered Lines”). As incurred losses and allocated loss adjustment expenses for the Covered Lines
are ceded to the reinsurer, the Company is not exposed to changes in the amount, timing and uncertainty of cash flows arising from the Covered Lines. To avoid distortion, the incurred losses and allocated loss adjustment expenses and cumulative paid losses and loss adjustment expenses for the Covered Lines are excluded entirely from the tables below. Unpaid loss and loss adjustment expenses recoverable at December 31, 2024 included $168 million related to such reinsurance agreements.
The following tables present information on the insurance segment’s short-duration insurance contracts:
| Property, energy, marine and aviation (in millions except claim count) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of reported claims | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 112 | $ | 110 | $ | 104 | $ | 102 | $ | 98 | $ | 92 | $ | 92 | $ | 91 | $ | 89 | $ | 89 | $ | 1 | 4,535 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 104 | 101 | 105 | 100 | 96 | 92 | 87 | 87 | 86 | — | 6,177 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 281 | 246 | 236 | 230 | 231 | 225 | 225 | 224 | — | 6,481 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 181 | 186 | 174 | 170 | 170 | 172 | 170 | 4 | 5,085 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 179 | 179 | 165 | 161 | 159 | 156 | (2) | 7,436 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 359 | 329 | 336 | 333 | 337 | 3 | 8,682 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 427 | 429 | 423 | 421 | 19 | 10,077 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 522 | 495 | 576 | 148 | 15,860 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 571 | 510 | 110 | 20,178 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 703 | 348 | 17,889 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 3,272 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 24 | $ | 65 | $ | 76 | $ | 86 | $ | 88 | $ | 86 | $ | 87 | $ | 88 | $ | 86 | $ | 86 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 25 | 83 | 98 | 97 | 94 | 91 | 87 | 87 | 86 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 30 | 140 | 196 | 212 | 216 | 218 | 220 | 221 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 30 | 102 | 135 | 143 | 150 | 154 | 157 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 26 | 105 | 134 | 139 | 148 | 153 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 56 | 194 | 251 | 293 | 306 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 90 | 268 | 343 | 365 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 100 | 276 | 337 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 146 | 271 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 195 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2,177 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 19 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 1,114 |
| ARCH CAPITAL | 127 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Third party occurrence business (in millions except claim count) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of reported claims | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 359 | $ | 391 | $ | 398 | $ | 392 | $ | 391 | $ | 382 | $ | 386 | $ | 379 | $ | 377 | $ | 365 | $ | 51 | 78,553 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 389 | 394 | 406 | 399 | 375 | 367 | 363 | 352 | 345 | 67 | 78,811 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 417 | 418 | 422 | 412 | 407 | 406 | 404 | 408 | 89 | 84,682 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 430 | 453 | 450 | 451 | 459 | 461 | 448 | 106 | 79,202 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 456 | 487 | 480 | 471 | 470 | 451 | 122 | 88,964 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 606 | 616 | 640 | 632 | 606 | 138 | 98,530 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 622 | 662 | 659 | 671 | 147 | 99,287 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 688 | 726 | 735 | 408 | 100,455 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 877 | 936 | 622 | 102,558 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 1,001 | 883 | 83,386 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 5,966 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 11 | $ | 44 | $ | 88 | $ | 139 | $ | 181 | $ | 211 | $ | 227 | $ | 249 | $ | 268 | $ | 276 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 12 | 42 | 88 | 137 | 164 | 195 | 215 | 230 | 246 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 13 | 52 | 100 | 135 | 165 | 221 | 247 | 271 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 17 | 64 | 115 | 154 | 200 | 247 | 271 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 18 | 73 | 122 | 173 | 214 | 255 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 24 | 76 | 155 | 235 | 318 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 26 | 91 | 174 | 323 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 24 | 85 | 186 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 32 | 156 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 37 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2,339 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 339 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 3,966 |
| Third party claims-made business (in millions except claim count) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of reported claims | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 259 | $ | 277 | $ | 276 | $ | 260 | $ | 255 | $ | 252 | $ | 268 | $ | 267 | $ | 274 | $ | 268 | $ | 6 | 13,955 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 275 | 291 | 308 | 314 | 322 | 327 | 329 | 327 | 329 | 16 | 14,892 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 270 | 285 | 311 | 308 | 323 | 316 | 337 | 339 | 42 | 15,484 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 272 | 314 | 319 | 336 | 347 | 366 | 366 | 33 | 17,094 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 289 | 317 | 317 | 322 | 329 | 329 | 49 | 16,723 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 383 | 412 | 423 | 445 | 432 | 86 | 16,816 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 514 | 517 | 499 | 461 | 176 | 18,086 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 668 | 654 | 589 | 257 | 19,825 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 809 | 895 | 543 | 23,671 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 737 | 577 | 23,155 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 4,745 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 9 | $ | 52 | $ | 100 | $ | 126 | $ | 174 | $ | 193 | $ | 217 | $ | 221 | $ | 242 | $ | 248 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 11 | 68 | 127 | 158 | 205 | 242 | 257 | 295 | 296 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 9 | 67 | 113 | 143 | 196 | 232 | 257 | 276 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 12 | 68 | 118 | 158 | 208 | 258 | 285 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 12 | 65 | 122 | 154 | 196 | 235 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 17 | 87 | 151 | 214 | 265 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 23 | 90 | 162 | 223 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 25 | 100 | 218 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 64 | 200 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 56 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2,302 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 90 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 2,533 |
| ARCH CAPITAL | 128 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Multi-line and other specialty (in millions except claim count) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of reported claims | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 334 | $ | 358 | $ | 356 | $ | 365 | $ | 356 | $ | 349 | $ | 347 | $ | 345 | $ | 344 | $ | 344 | $ | 3 | 181,424 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 408 | 431 | 427 | 416 | 410 | 408 | 408 | 406 | 404 | 4 | 195,233 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 482 | 500 | 491 | 500 | 504 | 512 | 516 | 514 | 6 | 236,433 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 512 | 564 | 562 | 564 | 564 | 564 | 564 | 9 | 266,125 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 566 | 611 | 639 | 650 | 656 | 671 | 11 | 249,876 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 616 | 567 | 513 | 515 | 519 | 26 | 168,232 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 634 | 618 | 614 | 635 | 42 | 112,591 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 677 | 640 | 639 | 90 | 144,429 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 815 | 809 | 199 | 161,842 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 1,419 | 885 | 145,190 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 6,518 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 138 | $ | 236 | $ | 278 | $ | 306 | $ | 321 | $ | 326 | $ | 330 | $ | 331 | $ | 333 | $ | 337 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 176 | 304 | 341 | 363 | 379 | 385 | 390 | 391 | 396 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 181 | 342 | 380 | 423 | 446 | 472 | 479 | 493 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 211 | 389 | 442 | 479 | 508 | 526 | 543 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 212 | 385 | 486 | 548 | 576 | 611 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 171 | 308 | 358 | 405 | 450 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 157 | 334 | 427 | 511 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 177 | 370 | 439 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 253 | 489 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 337 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 4,606 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 29 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 1,941 |
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance, as of December 31, 2024:
| Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, energy, marine and aviation | 21.5 | % | 43.8 | % | 17.2 | % | 6.1 | % | 2.4 | % | — | % | — | % | 0.3 | % | (1.2) | % | — | % | ||||||||||||||||||||||||||||||||||||||||||
| Third party occurrence business | 3.6 | % | 10.0 | % | 12.3 | % | 13.2 | % | 10.0 | % | 10.0 | % | 5.5 | % | 5.5 | % | 4.8 | % | 2.2 | % | ||||||||||||||||||||||||||||||||||||||||||
| Third party claims-made business | 4.4 | % | 15.6 | % | 16.3 | % | 10.9 | % | 14.3 | % | 10.9 | % | 7.0 | % | 6.2 | % | 4.0 | % | 2.4 | % | ||||||||||||||||||||||||||||||||||||||||||
| Multi-line and other specialty | 32.8 | % | 29.2 | % | 11.0 | % | 8.5 | % | 5.1 | % | 3.3 | % | 1.7 | % | 1.1 | % | 0.8 | % | 1.4 | % |
Reinsurance Segment
Loss Reserves for the Company’s reinsurance segment are comprised of (1) case reserves, (2) additional case reserves (“ACRs”) and (3) IBNR reserves. The Company receives reports of claims notices from ceding companies and records case reserves based upon the amount of reserves recommended by the ceding company. Case reserves may be supplemented by ACRs, which may be estimated by the Company’s claims personnel ahead of official notification from the ceding company, or when judgment regarding the size or severity of the known event differs from the ceding company. In certain instances, the Company establishes ACRs even when the ceding company does not report any liability on a known event. In addition, specific claim information reported by ceding companies or obtained through claim audits can alert the Company to emerging trends such as changing legal interpretations of coverage and liability, claims from unexpected sources or classes of
business, and significant changes in the frequency or severity of individual claims. Such information is often used in the process of estimating IBNR reserves. IBNR reserves are established to provide for incurred claims which have not yet been reported at the balance sheet date as well as to adjust for any projected variance in case reserving. Actuaries estimate ultimate losses and loss adjustment expenses using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made. The process of estimating Loss Reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.
The estimation of Loss Reserves for the reinsurance segment is subject to the same risk factors as the estimation of Loss Reserves for the insurance segment. In addition, the inherent uncertainties of estimating such reserves are even greater for
| ARCH CAPITAL | 129 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reinsurers, due primarily to the following factors: (1) the claim-tail for reinsurers is generally longer because claims are first reported to the ceding company and then to the reinsurer through one or more intermediaries, (2) the reliance on premium estimates, where reports have not been received from the ceding company, in the reserving process, (3) the potential for writing a number of reinsurance contracts with different ceding companies with the same exposure to a single loss event, (4) the diversity of loss development patterns among different types of reinsurance contracts, (5) the necessary reliance on the ceding companies for information regarding reported claims and (6) the differing reserving practices among ceding companies.
Ultimate losses and loss adjustment expenses are generally determined by projection of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. As with the insurance segment, the process of estimating Loss Reserves for the reinsurance segment involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. As discussed above, such uncertainty is greater for reinsurers compared to insurers. As a result, our reinsurance operations obtain information from numerous sources to assist in the process. Pricing actuaries from the reinsurance segment devote considerable effort to understanding and analyzing a ceding company’s operations and loss history during the underwriting of the business, using a combination of ceding company and industry statistics. Such statistics normally include historical premium and loss data by class of business, individual claim information for larger claims, distributions of insurance limits provided, loss reporting and payment patterns, and rate change history. This analysis is used to project expected loss ratios for each treaty during the upcoming contract period.
As mentioned above, there can be a considerable time lag from the time a claim is reported to a ceding company to the time it is reported to the reinsurer. The lag can be several years in some cases and may be attributed to a number of reasons, including the time it takes to investigate a claim, delays associated with the litigation process, the deterioration in a claimant’s physical condition many years after an accident occurs, the case reserving approach of the ceding company, etc. In the reserving process, the Company assumes that such lags are predictable, on average, over time and therefore the lags are contemplated in the loss reporting patterns used in their actuarial methods. This means that the reinsurance segment must rely on estimates for a longer period of time than does an insurance company. Backlogs in the recording of assumed reinsurance can also complicate the accuracy of loss reserve estimation. As of December 31, 2024 there were no significant backlogs related to the processing of assumed reinsurance information at our reinsurance operations.
The reinsurance segment relies heavily on information reported by ceding companies, as discussed above. In order to determine the accuracy and completeness of such information, underwriters, actuaries, and claims personnel often perform audits of ceding companies and regularly review information received from ceding companies for unusual or unexpected results. Material findings are usually discussed with the ceding companies. The Company sometimes encounters situations where they determine that a claim presentation from a ceding company is not in accordance with contract terms. In these situations, the Company attempts to resolve the dispute with the ceding company. Most situations are resolved amicably and without the need for litigation or arbitration. However, in the infrequent situations where a resolution is not possible, the Company will vigorously defend its position in such disputes.
Although Loss Reserves are initially determined based on underwriting and pricing analysis, the Company applies several generally accepted actuarial methods, as discussed above, on a quarterly basis to evaluate its Loss Reserves in addition to the expected loss method, in particular for reserves from more mature underwriting years (the year in which business is underwritten). Each quarter, as part of the reserving process, the Company’s actuaries reaffirm that the assumptions used in the reserving process continue to form a sound basis for projection of liabilities. If actual loss activity differs substantially from expectations based on historical information, an adjustment to Loss Reserves may be supported. Estimated Loss Reserves for more mature underwriting years are now based more on actual loss activity and historical patterns than on the initial assumptions based on pricing indications. More recent underwriting years rely more heavily on internal pricing assumptions. The Company places more or less reliance on a particular actuarial method based on the facts and circumstances at the time the estimates of Loss Reserves are made.
In the initial reserving process for short-tail reinsurance lines (consisting of property excluding property catastrophe and property catastrophe exposures), the Company relies on a combination of the reserving methods discussed above. For known catastrophic events, the reserving process also includes the usage of catastrophe models and a heavy reliance on analysis which includes ceding company inquiries and management judgment. The development of property losses may be unstable, especially where there is high catastrophic exposure, may be characterized by high severity, low frequency losses for excess and catastrophe-exposed business and may be highly correlated across contracts. As time passes, for a given underwriting year, additional weight is given to the paid and incurred B-F loss development methods and historical paid and incurred loss development methods in the reserving process. The Company makes a number of key assumptions in reserving for short-tail lines, including that historical paid and reported development
| ARCH CAPITAL | 130 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
patterns are stable, catastrophe models provide useful information about our exposure to catastrophic events that have occurred and our underwriters’ judgment and guidance received from ceding companies as to potential loss exposures may be relied on. The expected loss ratios used in the initial reserving process for property exposures have varied over time due to changes in pricing, reinsurance structure, estimates of catastrophe losses, terms and conditions and geographical distribution. As losses in property lines are reported relatively quickly, expected loss ratios are selected for the current underwriting year incorporating the experience for earlier underwriting years, adjusted for rate changes, inflation, changes in reinsurance programs, expectations about present and future market conditions and expected attritional losses based on modeling. Due to the short-tail nature of property business, reported loss experience emerges quickly and ultimate losses are known in a reasonably short period of time.
In the initial reserving process for long-tail reinsurance lines (consisting of casualty, other specialty, marine and aviation and other exposures), the Company primarily relies on the expected loss method. The development of long-tail business may be unstable, especially if there are high severity major
events, with business written on an excess of loss basis typically having a longer tail than business written on a pro rata basis. As time passes, for a given underwriting year, additional weight is given to the paid and incurred B-F loss development methods and eventually to the historical paid and incurred loss development methods in the reserving process. Our reinsurance operations make a number of key assumptions in reserving for long-tail lines, including that the pricing loss ratio is the best estimate of the ultimate loss ratio at the time the contract is entered into, historical paid and reported development patterns are stable and claims personnel and underwriters’ analyses of our exposure to major events are our best estimate of our exposure to the known claims on those events. The expected loss ratios used in our reinsurance operations’ initial reserving process for long-tail contracts have varied over time due to changes in pricing, terms and conditions and reinsurance structure. As the credibility of historical experience for earlier underwriting years increases, the experience from these underwriting years is used in the actuarial analysis to determine future underwriting year expected loss ratios, adjusted for changes in pricing, loss trends, terms and conditions and reinsurance structure.
The following tables present information on the reinsurance segment’s short-duration insurance contracts:
| Casualty (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of reported claims | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 218 | $ | 217 | $ | 225 | $ | 232 | $ | 236 | $ | 243 | $ | 246 | $ | 248 | $ | 257 | $ | 248 | $ | 37 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 209 | 222 | 244 | 259 | 266 | 266 | 269 | 278 | 279 | 43 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 264 | 252 | 268 | 295 | 306 | 313 | 327 | 335 | 49 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 273 | 286 | 278 | 283 | 295 | 304 | 318 | 49 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 328 | 340 | 367 | 378 | 399 | 398 | 72 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 377 | 365 | 348 | 366 | 385 | 128 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 436 | 431 | 422 | 423 | 157 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 542 | 523 | 535 | 312 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 650 | 654 | 438 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 720 | 680 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 4,295 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 4 | $ | 20 | $ | 47 | $ | 71 | $ | 96 | $ | 119 | $ | 136 | $ | 151 | $ | 169 | $ | 177 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 6 | 26 | 51 | 86 | 113 | 132 | 156 | 172 | 186 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 6 | 30 | 64 | 113 | 137 | 164 | 188 | 221 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 8 | 31 | 106 | 129 | 154 | 182 | 205 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 16 | 58 | 97 | 130 | 219 | 256 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 18 | 50 | 90 | 131 | 177 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 14 | 53 | 102 | 190 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 17 | 60 | 111 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 18 | 86 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,623 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 354 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 3,026 |
| ARCH CAPITAL | 131 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Property catastrophe (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of reported claims | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 32 | $ | 17 | $ | 11 | $ | 5 | $ | 3 | $ | 3 | $ | 2 | $ | 2 | $ | 2 | $ | 2 | $ | — | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 21 | 15 | 11 | 8 | 5 | 5 | 4 | 3 | 3 | 1 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 85 | 53 | 48 | 35 | 23 | 20 | 20 | 20 | (1) | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 68 | 43 | 25 | 11 | 2 | (1) | (2) | — | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 10 | 2 | 1 | (7) | (14) | (10) | — | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 262 | 325 | 329 | 320 | 308 | 9 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 307 | 301 | 286 | 288 | 7 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 292 | 284 | 258 | 25 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 253 | 245 | 34 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 489 | 100 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,601 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | (3) | $ | (3) | $ | 1 | $ | 2 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | (7) | 1 | 1 | 2 | 1 | 1 | 1 | 1 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 31 | 31 | 36 | 26 | 13 | 15 | 16 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 27 | 2 | 12 | (18) | (15) | (14) | (12) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 4 | 3 | 6 | (19) | (19) | (27) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 55 | 155 | 203 | 243 | 253 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 66 | 168 | 217 | 224 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 68 | 162 | 200 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 6 | 75 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 58 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 791 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 812 |
| Property excluding property catastrophe (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of reported claims | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 213 | $ | 187 | $ | 183 | $ | 187 | $ | 186 | $ | 175 | $ | 171 | $ | 166 | $ | 166 | $ | 166 | $ | 4 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 172 | 143 | 135 | 133 | 137 | 133 | 127 | 128 | 126 | 6 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 263 | 244 | 233 | 225 | 209 | 201 | 198 | 197 | 7 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 221 | 236 | 232 | 209 | 199 | 201 | 201 | 6 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 212 | 202 | 192 | 187 | 187 | 193 | 4 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 363 | 336 | 316 | 317 | 319 | 14 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 537 | 489 | 483 | 491 | 28 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 728 | 654 | 645 | 74 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 819 | 720 | 136 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 1,183 | 687 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 4,241 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 75 | $ | 118 | $ | 148 | $ | 159 | $ | 164 | $ | 157 | $ | 158 | $ | 158 | $ | 159 | $ | 159 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 33 | 93 | 97 | 102 | 110 | 112 | 113 | 113 | 115 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 27 | 123 | 153 | 160 | 175 | 178 | 182 | 182 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 29 | 106 | 150 | 165 | 173 | 175 | 175 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 42 | 122 | 148 | 160 | 166 | 167 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 100 | 206 | 241 | 264 | 277 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 135 | 265 | 358 | 418 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 141 | 354 | 459 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 149 | 375 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 143 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2,470 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 1,777 |
| ARCH CAPITAL | 132 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Marine and aviation (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of reported claims | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 33 | $ | 37 | $ | 31 | $ | 31 | $ | 30 | $ | 28 | $ | 27 | $ | 25 | $ | 24 | $ | 24 | $ | 1 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 27 | 23 | 23 | 19 | 17 | 15 | 12 | 11 | 10 | 3 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 29 | 26 | 24 | 21 | 20 | 17 | 15 | 15 | 2 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 27 | 25 | 24 | 24 | 21 | 20 | 20 | 2 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 48 | 54 | 60 | 60 | 62 | 62 | 6 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 82 | 75 | 79 | 79 | 81 | 7 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 109 | 95 | 80 | 78 | 9 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 125 | 137 | 133 | 42 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 161 | 166 | 66 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 235 | 157 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 824 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | — | $ | 13 | $ | 19 | $ | 21 | $ | 22 | $ | 22 | $ | 22 | $ | 22 | $ | 22 | $ | 22 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | (7) | (2) | — | 3 | 6 | 7 | 7 | 7 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2 | 6 | 9 | 11 | 11 | 12 | 12 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2 | 7 | 11 | 13 | 14 | 15 | 16 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 10 | 21 | 28 | 34 | 43 | 49 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 9 | 26 | 42 | 59 | 66 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 8 | 24 | 45 | 52 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 12 | 37 | 62 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 13 | 43 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 18 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 347 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 18 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 495 |
| Other specialty (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of reported claims | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 270 | $ | 269 | $ | 267 | $ | 264 | $ | 264 | $ | 261 | $ | 251 | $ | 249 | $ | 247 | $ | 245 | $ | 1 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 317 | 314 | 307 | 298 | 304 | 300 | 297 | 298 | 291 | 3 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 386 | 378 | 361 | 360 | 358 | 355 | 352 | 348 | 11 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 403 | 396 | 391 | 415 | 411 | 411 | 405 | 22 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 414 | 393 | 388 | 383 | 393 | 388 | 27 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 578 | 511 | 506 | 526 | 518 | 44 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 594 | 594 | 594 | 602 | 55 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 929 | 911 | 956 | 161 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 1,310 | 1,238 | 390 | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 1,704 | 1,070 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 6,695 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 81 | $ | 157 | $ | 191 | $ | 205 | $ | 217 | $ | 228 | $ | 231 | $ | 232 | $ | 234 | $ | 234 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 105 | 199 | 235 | 253 | 269 | 275 | 281 | 284 | 284 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 132 | 249 | 289 | 303 | 316 | 327 | 336 | 337 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 126 | 267 | 306 | 327 | 344 | 366 | 369 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 118 | 205 | 269 | 295 | 316 | 335 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 130 | 286 | 361 | 396 | 434 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 148 | 302 | 420 | 481 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 176 | 451 | 606 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 238 | 534 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 362 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 3,976 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 2,749 |
| ARCH CAPITAL | 133 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance, as of December 31, 2024:
| Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Casualty | 2.8 | % | 8.3 | % | 11.9 | % | 11.9 | % | 11.5 | % | 8.4 | % | 7.5 | % | 7.2 | % | 6.0 | % | 3.4 | % | ||||||||||||||||||||||||||||||||||||||||||
| Property catastrophe | (134.2) | % | 168.4 | % | (22.5) | % | 213.9 | % | (38.4) | % | 9.1 | % | (12.1) | % | 1.5 | % | (0.8) | % | 9.4 | % | ||||||||||||||||||||||||||||||||||||||||||
| Property excluding property catastrophe | 23.6 | % | 36.2 | % | 14.7 | % | 6.8 | % | 4.7 | % | 0.2 | % | 0.8 | % | 0.2 | % | 1.1 | % | 0.1 | % | ||||||||||||||||||||||||||||||||||||||||||
| Marine and aviation | 1.4 | % | 28.9 | % | 20.3 | % | 13.8 | % | 10.0 | % | 4.9 | % | 2.3 | % | 1.4 | % | 0.6 | % | 0.4 | % | ||||||||||||||||||||||||||||||||||||||||||
| Other specialty | 27.7 | % | 29.2 | % | 14.2 | % | 6.4 | % | 5.2 | % | 4.0 | % | 1.6 | % | 0.7 | % | 0.3 | % | 0.3 | % |
Mortgage Segment
The Company’s mortgage segment includes (1) U.S. primary mortgage insurance (2) U.S. credit risk transfer and other, and (3) international mortgage insurance and reinsurance. The latter two categories along with second lien and student loan exposures are excluded on the basis of insignificance for the purposes of presenting disclosures related to short duration contracts.
For primary mortgage insurance business, the Company establishes case reserves for loans that have been reported as delinquent by loan servicers as well as those that are delinquent but not reported (IBNR reserves). The Company also reserves for the expenses of adjusting claims related to these delinquencies. The trigger that creates a case reserve estimate is that an insured loan is reported to us as being two payments in arrears. The actuarial reviews and documentation created in the reserving process are completed in accordance with generally accepted actuarial standards. The selected assumptions reflect actuarial judgment based on the analysis of historical data and experience combined with information concerning current underwriting, economic, judicial, regulatory and other influences on ultimate claim settlements.
Because the reserving process requires the Company to forecast future conditions, it is inherently uncertain and requires significant judgment and estimation. The use of different estimates would result in the establishment of different reserve levels. Additionally, changes in estimates are likely to occur from period to period as economic conditions change, and the ultimate liability may vary significantly from the estimates used. Major risk factors include (but are not limited to) changes in home prices and borrower equity, which can limit the borrower’s ability to sell the property and satisfy the outstanding loan balance, and changes in unemployment, which can affect the borrower’s income and ability to make mortgage payments. The unique nature of the COVID-19 pandemic, with no historical precedent, adds further uncertainty to current reserve estimates.
The lead actuarial methodology used by the Company is a frequency-severity method based on the inventory of pending delinquencies. Each month the loan servicers report the delinquency status of each insured loan. Using the frequency-
severity method allows the Company to take advantage of its knowledge of the number of delinquent loans and the coverage provided (“risk size”) on those loans by directly relating the reserves to these amounts. The delinquencies are grouped into homogeneous cohorts for analysis, reflecting the age of delinquency. A claim rate is then developed for each cohort which represents the frequency with which the delinquencies become claims. The claim frequency rates are based on an analysis of the patterns of emerging cure counts and claim counts, the foreclosure status of the pending delinquencies, the product and geographical mix of the delinquencies and our view of future economic and claim conditions, which include trends in home prices and unemployment. Claim rates can vary materially by age of delinquency, depending on the mix of delinquencies and economic conditions.
Claim size severity estimates are determined by examining the risk sizes on the delinquent loans and estimating the portion of risk that will be paid, as well as any expenses. This is done based on a review of historical development patterns, an assessment of economic conditions and the level of equity the borrowers may have in their homes, as well as considering economic conditions and loss mitigation opportunities. Mortgage insurance is generally not subject to large claim sizes, as with some other lines of insurance. A claim size over $250,000 is rare, and this helps reduce the volatility of claim size estimates.
The claim rate and claim size assumptions generate case reserves for the population of reported delinquencies. The reserve for unreported delinquencies (included in IBNR reserves) is estimated by looking at historical patterns of reporting. Claim rates and claim sizes can then be assigned to estimated unreported delinquencies using assumptions made in the establishment of case reserves.
Mortgage insurance Loss Reserves are short-tail, in the sense that the vast majority of delinquencies are resolved within two years of being reported. Due to the forbearances and foreclosure moratoriums associated with COVID-19, settlement timelines have been extended. While reserves are initially analyzed by reserve cohort, as described above, they are also rolled up by underwriting year to ensure that reserve assumptions are consistent with the performance of the underwriting year. The accuracy of prior reserve assumptions
| ARCH CAPITAL | 134 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is also checked in hindsight to determine if adjustments to the assumptions are needed.
Loss Reserves for the Company’s mortgage reinsurance business and GSE credit risk sharing transactions are comprised of case reserves and IBNR reserves. The Company’s mortgage reinsurance operations receive reports of delinquent loans and claims notices from ceding
companies and record case reserves based upon the amount of reserves recommended by the ceding company. In addition, specific claim and delinquency information reported by ceding companies is used in the process of estimating IBNR reserves.
The following table presents information on the mortgage segment’s short-duration insurance contracts:
| U.S. primary mortgage insurance (in millions except claim count) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Incurred losses and allocated loss adjustment expenses, net of reinsurance | December 31, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total of IBNR liabilities plus expected development on reported claims | Cumulative number of paid claims | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accident year | 2015 unaudited | 2016 unaudited | 2017 unaudited | 2018 unaudited | 2019 unaudited | 2020 unaudited | 2021 unaudited | 2022 unaudited | 2023 unaudited | 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | $ | 223 | $ | 197 | $ | 198 | $ | 195 | $ | 189 | $ | 191 | $ | 191 | $ | 189 | $ | 188 | $ | 188 | — | 4,686 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 184 | 171 | 149 | 141 | 142 | 142 | 137 | 136 | 136 | — | 3,557 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 179 | 132 | 107 | 108 | 109 | 102 | 99 | 99 | — | 2,707 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 132 | 96 | 89 | 88 | 72 | 69 | 69 | — | 1,966 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 108 | 119 | 110 | 63 | 51 | 52 | — | 1,435 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 420 | 374 | 78 | 33 | 31 | — | 835 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 144 | 77 | 20 | 17 | — | 381 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 173 | 55 | 30 | — | 469 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 182 | 71 | — | 366 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 180 | 1 | 40 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 873 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2015 | 16 | 92 | 151 | 171 | 180 | 183 | 184 | 185 | 186 | 186 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2016 | 11 | 72 | 113 | 127 | 131 | 132 | 132 | 133 | 134 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 9 | 48 | 79 | 87 | 90 | 92 | 93 | 95 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 4 | 31 | 50 | 56 | 59 | 60 | 63 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 3 | 20 | 29 | 34 | 39 | 42 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 1 | 4 | 8 | 13 | 19 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | — | 2 | 5 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | — | 3 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | — | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 565 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of reinsurance | 13 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and loss adjustment expenses, net of reinsurance | $ | 321 |
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance, as of December 31, 2024:
| Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Primary | 4.5 | % | 26.1 | % | 23.7 | % | 11.4 | % | 7.2 | % | 2.5 | % | 1.5 | % | 1.0 | % | 0.5 | % | 0.5 | % |
| ARCH CAPITAL | 135 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents a reconciliation of the disclosures of net incurred and paid loss development tables to the reserve for losses and loss adjustment expenses at December 31, 2024:
| December 31, 2024 | |||||
| Net outstanding liabilities | |||||
| Insurance | |||||
| Property, energy, marine and aviation | $ | 1,114 | |||
| Third party occurrence business | 3,966 | ||||
| Third party claims-made business | 2,533 | ||||
| Multi-line and other specialty | 1,941 | ||||
| Reinsurance | |||||
| Casualty | 3,026 | ||||
| Property catastrophe | 812 | ||||
| Property excluding property catastrophe | 1,777 | ||||
| Marine and aviation | 495 | ||||
| Other specialty | 2,749 | ||||
| Mortgage | |||||
| U.S. primary | 321 | ||||
| Other short duration lines not included in disclosures (1) | 2,384 | ||||
| Total for short duration lines | 21,118 | ||||
| Unpaid losses and loss adjustment expenses recoverable | |||||
| Insurance | |||||
| Property, energy, marine and aviation | 420 | ||||
| Third party occurrence business | 2,411 | ||||
| Third party claims-made business | 923 | ||||
| Multi-line and other specialty | 356 | ||||
| Reinsurance | |||||
| Casualty | 715 | ||||
| Property catastrophe | 783 | ||||
| Property excluding property catastrophe | 278 | ||||
| Marine and aviation | 462 | ||||
| Other specialty | 998 | ||||
| Mortgage | |||||
| U.S. primary | 33 | ||||
| Other short duration lines not included in disclosures (2) | 474 | ||||
| Intercompany eliminations | (32) | ||||
| Total for short duration lines | 7,821 | ||||
| Lines other than short duration | 146 | ||||
| Discounting | (68) | ||||
| Unallocated claims adjustment expenses | 352 | ||||
| 430 | |||||
| Reserve for losses and loss adjustment expenses | $ | 29,369 |
(1) Includes amounts associated with the loss portfolio reinsurance agreement related to the MCE Acquisition. See note 2.
(2) Includes unpaid loss and loss adjustment expenses recoverable of $168 million related to the loss portfolio transfer reinsurance agreements.
7. Allowance for Expected Credit Losses
Premiums Receivable
The following table provides a roll forward of the allowance for expected credit losses of the Company’s premium receivables:
| Year Ended December 31, 2024 | Premium Receivables, Net of Allowance | Allowance for Expected Credit Losses | |||||||||||||||
| Balance at beginning of period | $ | 4,644 | $ | 34 | |||||||||||||
| Provision on business acquired (1) | 16 | ||||||||||||||||
| Change for provision of expected credit losses (2) | (5) | ||||||||||||||||
| Balance at end of period | $ | 5,634 | $ | 45 | |||||||||||||
| Year Ended December 31, 2023 | |||||||||||||||||
| Balance at beginning of period | $ | 3,625 | $ | 35 | |||||||||||||
| Change for provision of expected credit losses (2) | (1) | ||||||||||||||||
| Balance at end of period | $ | 4,644 | $ | 34 |
(1) Reflects provision for current expected credit losses on premiums receivable related to the MCE Acquisition. See note 2.
(2) Amounts deemed uncollectible are written-off in operating expenses. For the 2024 and 2023 periods, amounts written off totaled $3 million and $3 million, respectively.
Reinsurance Recoverables
The Company monitors the financial condition of its reinsurers and attempts to place coverages only with substantial, financially sound carriers. Although the Company has not experienced any material credit losses to date, an inability of its reinsurers or retrocessionaires to meet their obligations to it over the relevant exposure periods for any reason could have a material adverse effect on its financial condition and results of operations.
The following table provides a roll forward of the allowance for expected credit losses of the Company’s reinsurance recoverables:
| Year Ended December 31, 2024 | Reinsurance Recoverables, Net of Allowance | Allowance for Expected Credit Losses | |||||||||||||||
| Balance at beginning of period | $ | 7,064 | $ | 21 | |||||||||||||
| Change for provision of expected credit losses | (4) | ||||||||||||||||
| Balance at end of period | $ | 8,260 | $ | 17 | |||||||||||||
| Year Ended December 31, 2023 | |||||||||||||||||
| Balance at beginning of period | $ | 6,564 | $ | 22 | |||||||||||||
| Change for provision of expected credit losses | (1) | ||||||||||||||||
| Balance at end of period | 7,064 | $ | 21 |
| ARCH CAPITAL | 136 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company’s reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums) at December 31, 2024 and 2023:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses | $ | 8,260 | $ | 7,064 | |||||||
| % due from carriers with A.M. Best rating of “A-” or better | 63.8 | % | 66.8 | % | |||||||
| % due from all other rated carriers | — | % | 0.1 | % | |||||||
| % due from all other carriers with no A.M. Best rating (1) | 36.2 | % | 33.1 | % | |||||||
| Largest balance due from any one carrier as % of total shareholders’ equity | 7.8 | % | 7.2 | % |
(1) At December 31, 2024 and 2023 period, over 95% of such amount were collateralized through reinsurance trusts, funds withheld arrangements, letters of credit or other, respectively.
Contractholder Receivables
The following table provides a roll forward of the allowance for expected credit losses of the Company’s contractholder receivables:
| Year Ended December 31, 2024 | Contractholder Receivables, Net of Allowance | Allowance for Expected Credit Losses | |||||||||||||||
| Balance at beginning of period | $ | 1,814 | $ | 3 | |||||||||||||
| Change for provision of expected credit losses | 2 | ||||||||||||||||
| Balance at end of period | $ | 2,161 | $ | 5 | |||||||||||||
| Year Ended December 31, 2023 | |||||||||||||||||
| Balance at beginning of period | $ | 1,731 | $ | 3 | |||||||||||||
| Change for provision of expected credit losses | — | ||||||||||||||||
| Balance at end of period | 1,814 | $ | 3 |
8. Reinsurance
In the normal course of business, the Company’s insurance subsidiaries cede a portion of their premium through pro rata and excess of loss reinsurance agreements on a treaty or facultative basis to third parties. The Company’s reinsurance subsidiaries participate in “common account” retrocessional arrangements for certain pro rata treaties. Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties, including the reinsurers, such as the Company’s reinsurance subsidiaries, and the ceding company. In addition, the Company’s reinsurance subsidiaries may purchase retrocessional coverage as part of their risk management program. The Company’s mortgage subsidiaries cede a portion of their premium through quota share arrangements and enter into various aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies. Reinsurance recoverables are recorded as assets, predicated on the reinsurers’ ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, the Company’s insurance or reinsurance subsidiaries would be liable for such defaulted amounts.
The effects of reinsurance on the Company’s written and earned premiums and losses and loss adjustment expenses with unaffiliated reinsurers were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Premiums Written | |||||||||||||||||
| Direct | $ | 10,056 | $ | 9,652 | $ | 8,542 | |||||||||||
| Assumed | 11,455 | 8,751 | 6,785 | ||||||||||||||
| Ceded | (5,779) | (4,935) | (4,249) | ||||||||||||||
| Net | $ | 15,732 | $ | 13,468 | $ | 11,078 | |||||||||||
| Premiums Earned | |||||||||||||||||
| Direct | $ | 9,721 | $ | 9,131 | $ | 8,058 | |||||||||||
| Assumed | 10,880 | 7,890 | 5,768 | ||||||||||||||
| Ceded | (5,501) | (4,581) | (4,147) | ||||||||||||||
| Net | $ | 15,100 | $ | 12,440 | $ | 9,679 | |||||||||||
| Losses and Loss Adjustment Expenses | |||||||||||||||||
| Direct | $ | 5,676 | $ | 4,739 | $ | 3,991 | |||||||||||
| Assumed | 6,137 | 3,975 | 3,558 | ||||||||||||||
| Ceded | (3,471) | (2,468) | (2,521) | ||||||||||||||
| Net | $ | 8,342 | $ | 6,246 | $ | 5,028 |
| ARCH CAPITAL | 137 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bellemeade Re
The Company has entered into various aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). For the respective coverage periods, the Company will retain the first layer of the respective aggregate losses and the special purpose reinsurance companies will provide second layer coverage up to the outstanding coverage amount. The Company will then retain losses in excess of the outstanding coverage limit. The aggregate excess of loss reinsurance coverage decreases over a ten-year period as the underlying covered mortgages amortize. See note 12.
The following table summarizes the respective coverages and retentions at December 31, 2024:
| Bellemeade Entities (Issue Date) | Initial Coverage at Issuance | Current Coverage | Remaining Retention, Net | ||||||||||||||
| 2021-3 Ltd. (1) | $ | 639 | $ | 461 | $ | 132 | |||||||||||
| 2022-1 Ltd. (2) | 317 | 218 | 140 | ||||||||||||||
| 2022-2 Ltd. (3) | 327 | 293 | 199 | ||||||||||||||
| 2023-1 Ltd. (4) | 233 | 233 | 175 | ||||||||||||||
| 2024-1 Ltd. (5) | 204 | 204 | 172 | ||||||||||||||
| Total | $ | 1,720 | $ | 1,409 | $ | 818 |
(1) Issued in September 2021, covering in-force policies issued between April 1, 2021 and June 30, 2021. $508 million was directly funded by Bellemeade Re 2021-3 Ltd. via insurance-linked notes, with an additional $131 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
(2) Issued in January 2022, covering in-force policies issued between July 1, 2021 and November 30, 2021. $284 million was directly funded by Bellemeade Re 2022-1 Ltd. via insurance-linked notes, with an additional $33 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
(3) Issued in September 2022, covering in-force policies issued between November 1, 2021 and June 30, 2022. $201 million was directly funded by Bellemeade Re 2022-2 Ltd. via insurance-linked notes, with an additional $126 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
(4) Issued in October 2023, covering in-force policies issued between January 1, 2023 and September 30, 2023. $186 million was directly funded by Bellemeade Re 2023-1 Ltd. via insurance-linked notes, with an additional $47 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
(5) Issued in August 2024, covering in-force policies issued between September 1, 2023 and July 31, 2024. $163 million was directly funded by Bellemeade Re 2024-1 Ltd. via insurance-linked notes, with an additional $41 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.
| ARCH CAPITAL | 138 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Investment Information
Available For Sale Investments
The following table summarizes the fair value and cost or amortized cost of the Company’s securities classified as available for sale:
| Estimated Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Expected Credit Losses | Cost or Amortized Cost | |||||||||||||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||||
| Corporate bonds | $ | 12,487 | $ | 110 | $ | (346) | $ | (12) | $ | 12,735 | |||||||||||||||||||
| U.S. government and government agencies | 6,710 | 8 | (149) | — | 6,851 | ||||||||||||||||||||||||
| Asset backed securities | 2,900 | 19 | (32) | (8) | 2,921 | ||||||||||||||||||||||||
| Non-U.S. government securities | 2,538 | 30 | (107) | (1) | 2,616 | ||||||||||||||||||||||||
| Commercial mortgage backed securities | 1,058 | 6 | (11) | (1) | 1,064 | ||||||||||||||||||||||||
| Residential mortgage backed securities | 1,079 | 6 | (31) | — | 1,104 | ||||||||||||||||||||||||
| Municipal bonds | 263 | — | (16) | — | 279 | ||||||||||||||||||||||||
| Total | 27,035 | 179 | (692) | (22) | 27,570 | ||||||||||||||||||||||||
| Short-term investments | 2,784 | 2 | (2) | — | 2,784 | ||||||||||||||||||||||||
| Total | $ | 29,819 | $ | 181 | $ | (694) | $ | (22) | $ | 30,354 | |||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||||
| Corporate bonds | $ | 10,855 | $ | 157 | $ | (464) | $ | (20) | $ | 11,182 | |||||||||||||||||||
| U.S. government and government agencies | 5,814 | 63 | (86) | — | 5,837 | ||||||||||||||||||||||||
| Asset backed securities | 2,250 | 11 | (55) | (5) | 2,299 | ||||||||||||||||||||||||
| Non-U.S. government securities | 2,062 | 33 | (100) | (1) | 2,130 | ||||||||||||||||||||||||
| Commercial mortgage backed securities | 1,213 | 3 | (34) | (2) | 1,246 | ||||||||||||||||||||||||
| Residential mortgage backed securities | 1,103 | 7 | (66) | — | 1,162 | ||||||||||||||||||||||||
| Municipal bonds | 256 | 1 | (20) | — | 275 | ||||||||||||||||||||||||
| Total | 23,553 | 275 | (825) | (28) | 24,131 | ||||||||||||||||||||||||
| Short-term investments | 2,063 | 1 | (2) | — | 2,064 | ||||||||||||||||||||||||
| Total | $ | 25,616 | $ | 276 | $ | (827) | $ | (28) | $ | 26,195 |
| ARCH CAPITAL | 139 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 4,582 | $ | (114) | $ | 2,924 | $ | (232) | $ | 7,506 | $ | (346) | |||||||||||||||||||||||
| U.S. government and government agencies | 5,130 | (100) | 516 | (49) | 5,646 | (149) | |||||||||||||||||||||||||||||
| Non-U.S. government securities | 1,650 | (58) | 418 | (49) | 2,068 | (107) | |||||||||||||||||||||||||||||
| Residential mortgage backed securities | 571 | (6) | 186 | (25) | 757 | (31) | |||||||||||||||||||||||||||||
| Asset backed securities | 236 | (8) | 426 | (24) | 662 | (32) | |||||||||||||||||||||||||||||
| Commercial mortgage backed securities | 180 | (1) | 434 | (10) | 614 | (11) | |||||||||||||||||||||||||||||
| Municipal bonds | 48 | (1) | 176 | (15) | 224 | (16) | |||||||||||||||||||||||||||||
| Total | 12,397 | (288) | 5,080 | (404) | 17,477 | (692) | |||||||||||||||||||||||||||||
| Short-term investments | 97 | (2) | — | — | 97 | (2) | |||||||||||||||||||||||||||||
| Total | $ | 12,494 | $ | (290) | $ | 5,080 | $ | (404) | $ | 17,574 | $ | (694) | |||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 1,559 | $ | (45) | $ | 4,959 | $ | (419) | $ | 6,518 | $ | (464) | |||||||||||||||||||||||
| U.S. government and government agencies | 1,066 | (10) | 941 | (76) | 2,007 | (86) | |||||||||||||||||||||||||||||
| Non-U.S. government securities | 365 | (4) | 897 | (96) | 1,262 | (100) | |||||||||||||||||||||||||||||
| Residential mortgage backed securities | 221 | (3) | 522 | (63) | 743 | (66) | |||||||||||||||||||||||||||||
| Asset backed securities | 234 | (1) | 1,112 | (54) | 1,346 | (55) | |||||||||||||||||||||||||||||
| Commercial mortgage backed securities | 100 | (1) | 909 | (33) | 1,009 | (34) | |||||||||||||||||||||||||||||
| Municipal bonds | 20 | (1) | 215 | (19) | 235 | (20) | |||||||||||||||||||||||||||||
| Total | 3,565 | (65) | 9,555 | (760) | 13,120 | (825) | |||||||||||||||||||||||||||||
| Short-term investments | 302 | (2) | — | — | 302 | (2) | |||||||||||||||||||||||||||||
| Total | $ | 3,867 | $ | (67) | $ | 9,555 | $ | (760) | $ | 13,422 | $ | (827) |
At December 31, 2024, on a lot level basis, approximately 9,980 security lots out of a total of approximately 20,930 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $8 million. The Company believes that such securities were temporarily impaired at December 31, 2024. At December 31, 2023, on a lot level basis, approximately 7,100 security lots out of a total of approximately 15,720 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $6 million.
The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| December 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||
| Maturity | Estimated Fair Value | Amortized Cost | Estimated Fair Value | Amortized Cost | ||||||||||||||||||||||
| Due in one year or less | $ | 438 | $ | 451 | $ | 480 | $ | 499 | ||||||||||||||||||
| Due after one year through five years | 15,364 | 15,590 | 12,924 | 13,101 | ||||||||||||||||||||||
| Due after five years through 10 years | 5,811 | 6,039 | 5,249 | 5,450 | ||||||||||||||||||||||
| Due after 10 years | 385 | 401 | 334 | 374 | ||||||||||||||||||||||
| 21,998 | 22,481 | 18,987 | 19,424 | |||||||||||||||||||||||
| Mortgage backed securities | 1,079 | 1,104 | 1,103 | 1,162 | ||||||||||||||||||||||
| Commercial mortgage backed securities | 1,058 | 1,064 | 1,213 | 1,246 | ||||||||||||||||||||||
| Asset backed securities | 2,900 | 2,921 | 2,250 | 2,299 | ||||||||||||||||||||||
| Total | $ | 27,035 | $ | 27,570 | $ | 23,553 | $ | 24,131 |
| ARCH CAPITAL | 140 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Securities, at Fair Value
At December 31, 2024, the Company held $1.7 billion of equity securities, at fair value, compared to $1.2 billion at December 31, 2023.
Net Investment Income
The components of net investment income were derived from the following sources:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Fixed maturities | $ | 1,266 | $ | 917 | $ | 469 | |||||||||||
| Short-term investments | 144 | 68 | 29 | ||||||||||||||
| Equity securities | 40 | 22 | 22 | ||||||||||||||
| Other (1) | 136 | 93 | 47 | ||||||||||||||
| Gross investment income | 1,586 | 1,100 | 567 | ||||||||||||||
| Investment expenses | (91) | (77) | (71) | ||||||||||||||
| Net investment income | $ | 1,495 | $ | 1,023 | $ | 496 |
(1) Amounts include dividends and other distributions on investment funds, term loan investments, funds held balances, cash balances and other items.
Net Realized Gains (Losses)
Net realized gains (losses) were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Available for sale securities: | |||||||||||||||||
| Gross gains on investment sales | $ | 259 | $ | 116 | $ | 81 | |||||||||||
| Gross losses on investment sales | (354) | (547) | (317) | ||||||||||||||
| Change in fair value of assets and liabilities accounted for using the fair value option: | |||||||||||||||||
| Fixed maturities | 3 | 18 | (71) | ||||||||||||||
| Other investments | (144) | 27 | (21) | ||||||||||||||
| Equity securities | (1) | 1 | (4) | ||||||||||||||
| Short-term investments | — | — | (3) | ||||||||||||||
| Equity securities, at fair value : | |||||||||||||||||
| Net realized gains (losses) on securities sold | 62 | 61 | 75 | ||||||||||||||
| Net unrealized gains (losses) on equity securities still held at reporting date | 108 | 88 | (267) | ||||||||||||||
| Allowance for credit losses: | |||||||||||||||||
| Investments related | — | 3 | (44) | ||||||||||||||
| Underwriting related | 5 | (1) | (13) | ||||||||||||||
| Derivative instruments (1) | 8 | 59 | (75) | ||||||||||||||
| Other (2) | 251 | 10 | (4) | ||||||||||||||
| Net realized gains (losses) | $ | 197 | $ | (165) | $ | (663) |
(1) See note 11, for information on the Company’s derivative instruments.
(2) Amounts in the 2024 period include benefits from the sale of Castel Underwriting Agencies Limited and the acquisition of RMIC.
Other Investments
The following table summarizes the Company’s assets and liabilities which are accounted for using the fair value option:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Other investments | $ | 2,135 | $ | 1,777 | |||||||
| Fixed maturities | 854 | 683 | |||||||||
| Equity securities | 7 | 7 | |||||||||
| Short-term investments | 70 | 21 | |||||||||
| Total other investments | $ | 3,066 | $ | 2,488 | |||||||
The following table summarizes the Company’s other investments, as detailed in the previous table, by strategy:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Investment grade fixed income | 1,055 | 754 | |||||||||
| Term loan investments | 430 | 272 | |||||||||
| Lending | 303 | 427 | |||||||||
| Private equity | 229 | 182 | |||||||||
| Credit related funds | 99 | 124 | |||||||||
| Energy | 19 | 18 | |||||||||
| Total | $ | 2,135 | $ | 1,777 |
Limited Partnership Interests
In the normal course of its activities, the Company invests in limited partnerships as part of its overall investment strategy. Such amounts are included in ‘investments accounted for using the equity method’ and ‘investments accounted for using the fair value option.’ The Company determined that these limited partnership interests represented variable interests in the funds. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment.
The following table summarizes investments in limited partnership interests where the Company has a variable interest by balance sheet item:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Investments accounted for using the equity method (1) | $ | 5,980 | $ | 4,566 | |||||||
| Investments accounted for using the fair value option (2) | 48 | 114 | |||||||||
| Total | $ | 6,028 | $ | 4,680 |
(1) Aggregate unfunded commitments were $4.3 billion at December 31, 2024, compared to $3.4 billion at December 31, 2023.
(2) Aggregate unfunded commitments were $21 million at December 31, 2024, compared to $32 million at December 31, 2023.
| ARCH CAPITAL | 141 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments Accounted For Using the Equity Method
The following table summarizes the Company’s investments accounted for using the equity method, by strategy:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Private equity | $ | 1,915 | $ | 1,175 | |||||||
| Credit related funds | 1,487 | 1,258 | |||||||||
| Real estate | 869 | 666 | |||||||||
| Lending | 616 | 597 | |||||||||
| Infrastructure | 425 | 320 | |||||||||
| Fixed income | 384 | 277 | |||||||||
| Equities | 217 | 178 | |||||||||
| Energy | 67 | 95 | |||||||||
| Total | $ | 5,980 | $ | 4,566 |
In applying the equity method, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the fair value of the underlying securities in the funds). Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds.
Equity in Net Income (Loss) of Investments Accounted For Using the Equity Method
The Company recorded equity in net income related to investments accounted for using the equity method of $580 million for 2024, compared to $278 million for 2023 and $115 million for 2022. In applying the equity method, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds).
A summary of aggregated financial information for the Company’s investment funds and operating affiliates accounted for using the equity method is as follows:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Invested assets | $ | 113,977 | $ | 91,534 | |||||||
| Total assets | 132,647 | 108,952 | |||||||||
| Total liabilities | 36,614 | 33,901 | |||||||||
| Net assets | $ | 96,033 | $ | 75,051 |
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Total revenues | $ | 19,160 | $ | 7,766 | $ | 12,305 | |||||||||||
| Total expenses | 7,269 | 7,174 | 5,374 | ||||||||||||||
| Net income (loss) | $ | 11,891 | $ | 592 | $ | 6,931 |
Certain of the Company’s other investments and investments accounted for using the equity method are in investment funds for which the Company has the option to redeem at
agreed upon values as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investments in investment funds may be redeemed daily, monthly, quarterly or on other terms. Two common redemption restrictions which may impact the Company’s ability to redeem these investment funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the investment fund's net assets which may otherwise hinder the general partner or investment manager's ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. If the investment funds are eligible to be redeemed, the time to redeem such fund can take weeks or months following the notification.
Investments in Operating Affiliates
Investments in which the Company has significant influence over the operating and financial policies are classified as ‘investments in operating affiliates’ on the Company’s balance sheets and are accounted for under the equity method. Such investments primarily include the Company’s investment in Coface SA (“Coface”), Greysbridge Holdings Ltd., (“Greysbridge”) and Premia Holdings Ltd. (“Premia”). Investments in Coface and Premia are generally recorded on a three month lag, while the Company’s investment in Greysbridge is not recorded on a lag.
In 2021, the Company completed the share purchase agreement with Natixis to purchase 29.5% of the common equity of Coface, a France-based leader in the global trade credit insurance market. The consideration paid was €9.95 per share, or an aggregate €453 million (approximately $546 million) including related fees. Income (loss) from operating affiliates reflected a one-time gain of $75 million realized from the acquisition. As a result of equity method accounting rules, approximately $36 million of additional gain was deferred and will generally be recognized over the next five years. As of December 31, 2024, the Company owned approximately 29.9% of the issued shares of Coface, or 30.03% excluding treasury shares, with a carrying value of $592 million, compared to $570 million at December 31, 2023.
In 2021, the Company completed acquisition of Somers Group Holdings Ltd. and its wholly owned subsidiaries (collectively, “Somers”) by Greysbridge for a cash purchase price of $35.00 per common share. Somers is wholly owned by Greysbridge, and Greysbridge is owned 40% by the Company, 30% by certain investment funds managed by
| ARCH CAPITAL | 142 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Kelso & Company (“Kelso”) and 30% owned by certain investment funds managed by Warburg Pincus LLC (“Warburg”). At December 31, 2024 the Company’s carrying value in Greysbridge was $523 million, compared to $430 million at December 31, 2023. The Company’s carrying value in Greysbridge reflected aggregate purchase price of $279 million along with income (loss) from operating affiliates, which included a one-time gain of $96 million recognized from the acquisition. See note 16.
The Company recorded income from operating affiliates of $200 million for 2024, compared to $184 million for 2023 and $75 million for 2022.
Allowance for Expected Credit Losses
The following table provides a roll forward of the allowance for expected credit losses of the Company’s securities classified as available for sale:
| Year Ended December 31, 2024 | Structured Securities (1) | Non-U.S. Government Securities | Corporate Bonds | Total | ||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 7 | $ | 1 | $ | 20 | $ | 28 | ||||||||||||||||||||||||||||||
| Additions for current-period provision for expected credit losses | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Additions (reductions) for previously recognized expected credit losses | 3 | — | (3) | — | ||||||||||||||||||||||||||||||||||
| Reductions due to disposals | (1) | — | (5) | (6) | ||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 9 | $ | 1 | $ | 12 | $ | 22 | ||||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 9 | $ | 2 | $ | 30 | $ | 41 | ||||||||||||||||||||||||||||||
| Additions for current-period provision for expected credit losses | 2 | — | 5 | 7 | ||||||||||||||||||||||||||||||||||
| Additions (reductions) for previously recognized expected credit losses | (3) | — | (7) | (10) | ||||||||||||||||||||||||||||||||||
| Reductions due to disposals | (1) | (1) | (8) | (10) | ||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 7 | $ | 1 | $ | 20 | $ | 28 |
(1) Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
Restricted Assets
The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its underwriting operations. The Company’s subsidiaries maintain assets in trust accounts as collateral for transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties
The following table details the value of the Company’s restricted assets:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Assets used for collateral or guarantees: | |||||||||||
| Affiliated transactions | $ | 4,730 | $ | 4,854 | |||||||
| Third party agreements (1) | 5,999 | 2,869 | |||||||||
| Deposits with U.S. regulatory authorities | 882 | 833 | |||||||||
| Other (2) | 1,437 | 1,376 | |||||||||
| Total restricted assets | $ | 13,048 | $ | 9,932 |
(1) 2024 period includes amounts related to the MCE Acquisition.
(2) Primarily includes Funds at Lloyds, deposits with non-U.S. regulatory authorities and other restricted assets.
Reconciliation of Cash and Restricted Cash
The following table details reconciliation of cash and restricted cash within the Consolidated Balance Sheets:
| December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Cash | $ | 979 | $ | 917 | $ | 855 | |||||||||||
| Restricted cash (included in ‘other assets’) | 781 | 581 | 418 | ||||||||||||||
| Cash and restricted cash | $ | 1,760 | $ | 1,498 | $ | 1,273 |
| ARCH CAPITAL | 143 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Fair Value
Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).
The levels in the hierarchy are defined as follows:
| Level 1: | Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets | ||||||||||
| Level 2: | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument | ||||||||||
| Level 3: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement | ||||||||||
Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.
The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target
benchmark, with significant differences identified and investigated); (ii) a review of the prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value.
In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Of the $35.0 billion of financial assets and liabilities measured at fair value at December 31, 2024, approximately $185 million, or 0.5%, were priced using non-binding broker-dealer quotes. Of the $29.6 billion of financial assets and liabilities measured at fair value at December 31, 2023, approximately $14 million, or 0.0%, were priced using non-binding broker-dealer quotes.
Fixed maturities
The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value. The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:
| ARCH CAPITAL | 144 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. government and government agencies – valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.
Corporate bonds – valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these securities are unobservable, the fair value of such securities are classified as Level 3.
Residential mortgage-backed securities – valuations provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.
Municipal bonds – valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.
Commercial mortgage-backed securities – valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for commercial mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.
Non-U.S. government securities – valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.
Asset-backed securities – valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
Equity securities
The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other equity securities are included in Level 2 of the valuation hierarchy. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these securities are unobservable, the fair value of such securities are classified as Level 3.
| ARCH CAPITAL | 145 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other investments
The Company determined that exchange-traded investments would be included in Level 1 as their fair values are based on quoted market prices in active markets. Other investments also include term loan investments for which fair values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities.
Derivative instruments
The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.
Short-term investments
The Company determined that certain of its short-term investments held in highly liquid money market-type funds, Treasury bills and commercial paper would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of certain short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2. Other short-term investments are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these short-term securities are unobservable, the fair value of such securities are classified as Level 3.
Residential mortgage loans
The Company’s residential mortgage loans (included in ‘other assets’ in the consolidated balance sheets) include amounts related to the Company’s whole mortgage loan purchase and sell program. Fair values of residential mortgage loans are generally determined based on market prices. As significant inputs used in pricing process for these residential mortgage loans are observable market inputs, the fair value of these securities are classified within Level 2.
Other liabilities
The Company’s other liabilities include contingent and deferred consideration liabilities related to the Company’s acquisitions. Contingent consideration liabilities are remeasured at fair value at each balance sheet date with changes in fair value recognized in ‘net realized gains (losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates the future payments using an income approach based on modeled inputs which include a weighted average cost of capital. Deferred consideration liabilities are measured at fair value on the transaction date. The Company determined that contingent and deferred consideration liabilities would be included within Level 3.
| ARCH CAPITAL | 146 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2024:
| Fair Value Measurement Using: | |||||||||||||||||||||||
| Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets measured at fair value: | |||||||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| Corporate bonds | $ | 12,487 | $ | — | $ | 12,390 | $ | 97 | |||||||||||||||
| U.S. government and government agencies | 6,710 | 6,709 | 1 | — | |||||||||||||||||||
| Asset backed securities | 2,900 | — | 2,900 | — | |||||||||||||||||||
| Non-U.S. government securities | 2,538 | — | 2,538 | — | |||||||||||||||||||
| Commercial mortgage backed securities | 1,058 | — | 1,058 | — | |||||||||||||||||||
| Residential mortgage backed securities | 1,079 | — | 1,079 | — | |||||||||||||||||||
| Municipal bonds | 263 | — | 263 | — | |||||||||||||||||||
| Total | 27,035 | 6,709 | 20,229 | 97 | |||||||||||||||||||
| Short-term investments | 2,784 | 2,704 | 80 | — | |||||||||||||||||||
| Equity securities, at fair value | 1,675 | 1,640 | 28 | 7 | |||||||||||||||||||
| Derivative instruments (1) | 206 | — | 206 | — | |||||||||||||||||||
| Residential mortgage loans | 15 | — | 15 | — | |||||||||||||||||||
| Fair value option: | |||||||||||||||||||||||
| Corporate bonds | 832 | — | 832 | — | |||||||||||||||||||
| Non-U.S. government bonds | 8 | — | 8 | — | |||||||||||||||||||
| Asset backed securities | — | — | — | — | |||||||||||||||||||
| U.S. government and government agencies | 14 | 14 | — | — | |||||||||||||||||||
| Short-term investments | 70 | — | 37 | 33 | |||||||||||||||||||
| Equity securities | 6 | 2 | — | 4 | |||||||||||||||||||
| Other investments | 752 | — | 563 | 189 | |||||||||||||||||||
| Other investments measured at net asset value (2) | 1,383 | ||||||||||||||||||||||
| Total | 3,065 | 16 | 1,440 | 226 | |||||||||||||||||||
| Total assets measured at fair value | $ | 34,780 | $ | 11,069 | $ | 21,998 | $ | 330 | |||||||||||||||
| Liabilities measured at fair value: | |||||||||||||||||||||||
| Other liabilities | $ | (73) | $ | — | $ | — | $ | (73) | |||||||||||||||
| Derivative instruments (1) | (115) | — | (115) | — | |||||||||||||||||||
| Total liabilities measured at fair value | $ | (188) | $ | — | $ | (115) | $ | (73) |
(1) See note 11.
(2) In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
| ARCH CAPITAL | 147 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2023:
| Fair Value Measurement Using: | |||||||||||||||||||||||
| Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets measured at fair value: | |||||||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| Corporate bonds | $ | 10,855 | $ | — | $ | 10,708 | $ | 147 | |||||||||||||||
| U.S. government and government agencies | 5,814 | 5,792 | 22 | — | |||||||||||||||||||
| Asset backed securities | 2,250 | — | 2,250 | — | |||||||||||||||||||
| Non-U.S. government securities | 2,062 | — | 2,062 | — | |||||||||||||||||||
| Commercial mortgage backed securities | 1,213 | — | 1,213 | — | |||||||||||||||||||
| Residential mortgage backed securities | 1,103 | — | 1,103 | — | |||||||||||||||||||
| Municipal bonds | 256 | — | 256 | — | |||||||||||||||||||
| Total | 23,553 | 5,792 | 17,614 | 147 | |||||||||||||||||||
| Equity securities, at fair value | 1,186 | 1,151 | 30 | 5 | |||||||||||||||||||
| Short-term investments | 2,063 | 1,786 | 193 | 84 | |||||||||||||||||||
| Derivative instruments (1) | 197 | — | 197 | — | |||||||||||||||||||
| Residential mortgage loans | 2 | — | 2 | — | |||||||||||||||||||
| Fair value option: | |||||||||||||||||||||||
| Corporate bonds | 662 | — | 662 | — | |||||||||||||||||||
| Non-U.S. government bonds | 6 | — | 6 | — | |||||||||||||||||||
| Asset backed securities | 2 | — | 2 | — | |||||||||||||||||||
| U.S. government and government agencies | 13 | 13 | — | — | |||||||||||||||||||
| Short-term investments | 21 | — | 11 | 10 | |||||||||||||||||||
| Equity securities | 7 | 3 | — | 4 | |||||||||||||||||||
| Other investments | 316 | — | 210 | 106 | |||||||||||||||||||
| Other investments measured at net asset value (2) | 1,461 | ||||||||||||||||||||||
| Total | 2,488 | 16 | 891 | 120 | |||||||||||||||||||
| Total assets measured at fair value | $ | 29,489 | $ | 8,745 | $ | 18,927 | $ | 356 | |||||||||||||||
| Liabilities measured at fair value: | |||||||||||||||||||||||
| Other liabilities | $ | (22) | $ | — | $ | — | $ | (22) | |||||||||||||||
| Derivative instruments (1) | (119) | — | (119) | — | |||||||||||||||||||
| Total liabilities measured at fair value | $ | (141) | $ | — | $ | (119) | $ | (22) | |||||||||||||||
(1) See note 11.
(2) In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
| ARCH CAPITAL | 148 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for 2024 and 2023:
| Assets | Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Available For Sale | Fair Value Option | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate Bonds | Short-term Investments | Other Investments | Short-term Investments | Equity Securities | Equity Securities | Other Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 147 | $ | 84 | $ | 106 | $ | 10 | $ | 4 | $ | 5 | $ | (22) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total gains or (losses) (realized/unrealized) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Included in earnings (1) | 1 | — | (5) | — | — | — | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Included in other comprehensive income | 2 | 1 | — | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases, issuances, sales and settlements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases | 100 | 12 | 148 | 41 | — | 2 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuances | — | — | — | — | — | — | (64) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales | — | — | (5) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | (153) | (97) | (70) | (18) | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transfers in and/or out of Level 3 | — | — | 15 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of year | $ | 97 | $ | — | $ | 189 | $ | 33 | $ | 4 | $ | 7 | $ | (73) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 121 | $ | — | $ | 33 | $ | — | $ | 4 | $ | 4 | $ | (14) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total gains or (losses) (realized/unrealized) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Included in earnings (1) | 1 | — | (5) | — | — | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Included in other comprehensive income | (1) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases, issuances, sales and settlements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases | 111 | 84 | 107 | 11 | — | 1 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuances | — | — | — | — | — | — | (9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales | — | — | (10) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | (85) | — | (19) | (1) | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transfers in and/or out of Level 3 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of year | $ | 147 | $ | 84 | $ | 106 | $ | 10 | $ | 4 | $ | 5 | $ | (22) |
(1) Gains or losses were included in net realized gains (losses).
Financial Instruments Disclosed, But Not Carried, At Fair Value
The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at December 31, 2024, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
At December 31, 2024, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.7 billion and had a fair value of $2.4 billion. At December 31, 2023, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.7 billion and had a fair value of $2.5 billion. The fair values of the senior notes were obtained from a third party pricing service and are based on observable market inputs. As such, the fair value of the senior notes is classified within Level 2.
| ARCH CAPITAL | 149 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements on a Non-Recurring Basis
The Company measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include investments accounted for using the equity method, certain other investments, goodwill and intangible assets, and long-lived assets. The Company uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:
Investments accounted for using the equity method. When the Company determines that the carrying value of these assets may not be recoverable, the Company records the assets at fair value with the loss recognized in income. In such cases, the Company measures the fair value of these assets using the techniques discussed above in “—Fair Value Measurements on a Recurring Basis.”
Goodwill and Intangible Assets. The Company tests goodwill and intangible assets annually for impairment or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. When the Company determines goodwill and intangible assets may be impaired, the Company uses techniques including discounted expected future cash flows, to measure fair value.
Long-Lived Assets. The Company tests its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable.
11. Derivative Instruments
The Company’s investment strategy allows for the use of derivative instruments. The Company’s derivative instruments are recorded on its consolidated balance sheets at fair value. The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other futures contracts and commodity futures to manage portfolio duration or replicate investment positions in its portfolios and the Company routinely utilizes foreign currency forward contracts, currency options, index futures contracts and other derivatives as part of its total return objective. In addition, certain of the Company’s investments are managed in portfolios which incorporate the use of foreign currency forward contracts which are intended to provide an economic hedge against foreign currency movements.
The following table summarizes information on the fair values and notional values of the Company’s derivative instruments:
| Estimated Fair Value | |||||||||||||||||||||||
| Asset Derivatives (1) | Liability Derivatives (1) | Notional Value (2) | |||||||||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||
| Futures contracts | $ | 78 | $ | (46) | $ | 4,781 | |||||||||||||||||
| Foreign currency forward contracts | 90 | (48) | 1,698 | ||||||||||||||||||||
| Other (3) | 38 | (21) | 236 | ||||||||||||||||||||
| Total | $ | 206 | $ | (115) | |||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Futures contracts | $ | 139 | $ | (61) | $ | 3,746 | |||||||||||||||||
| Foreign currency forward contracts | 27 | (32) | 1,224 | ||||||||||||||||||||
| Other (3) | 31 | (26) | 512 | ||||||||||||||||||||
| Total | $ | 197 | $ | (119) |
(1) The fair value of asset derivatives are included in ‘other assets’ and the fair value of liability derivatives are included in ‘other liabilities.’
(2) Represents the absolute notional value of all outstanding contracts, consisting of long and short positions.
(3) Includes swaps, options and other derivatives contracts.
The Company did not hold any derivatives which were designated as hedging instruments at December 31, 2024 or 2023.
The Company’s derivative instruments can be traded under master netting agreements, which establish terms that apply to all derivative transactions with a counterparty. In the event of a bankruptcy or other stipulated event of default, such agreements provide that the non-defaulting party may elect to terminate all outstanding derivative transactions, in which case all individual derivative positions (loss or gain) with a counterparty are closed out and netted and replaced with a single amount, usually referred to as the termination amount, which is expressed in a single currency. The resulting single net amount, where positive, is payable to the party “in-the-money” regardless of whether or not it is the defaulting party, unless the parties have agreed that only the non-defaulting party is entitled to receive a termination payment where the net amount is positive and is in its favor.
At December 31, 2024, $206 million and $115 million, respectively, of asset derivatives and liability derivatives were subject to a master netting agreement compared to $197 million and $119 million, respectively, at December 31, 2023. The remaining derivatives included in the table above were not subject to a master netting agreement.
| ARCH CAPITAL | 150 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realized and unrealized contract gains and losses on the Company’s derivative instruments are reflected in ‘net realized gains (losses)’ in the consolidated statements of income, as summarized in the following table:
| Derivatives not designated as hedging instruments | Year Ended December 31, | |||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||
| Net realized gains (losses): | ||||||||||||||||||||
| Futures contracts | $ | 4 | $ | 49 | $ | (86) | ||||||||||||||
| Foreign currency forward contracts | (6) | 21 | 6 | |||||||||||||||||
| Other (1) | 10 | (11) | 5 | |||||||||||||||||
| Total | $ | 8 | $ | 59 | $ | (75) |
(1) Includes realized gains or losses on swaps, options and other derivatives contracts.
12. Variable Interest Entities
Bellemeade Re
The Company has entered into aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). At the time the Bellemeade Agreements were entered into, the applicability of the accounting guidance that addresses VIEs was evaluated. As a result of the evaluation of the Bellemeade Agreements, the Company concluded that these entities are VIEs. However, given that the ceding insurers do not have the unilateral power to direct those activities that are significant to their economic performance, the Company does not consolidate such entities in its consolidated financial statements. The reinsurance premium paid in regard to the Bellemeade Agreements is calculated by multiplying the outstanding
reinsurance coverage amount at the beginning of the period by the coupon rate, which is the SOFR plus a contractual risk margin, less the actual investment income collected during the preceding month on the assets included in the underlying reinsurance trusts. In the event the assets included in the underlying reinsurance trusts became severely impaired or worthless and the special purpose reinsurance companies were unable to meet their future obligations, the Company’s mortgage insurance subsidiaries would be liable to fulfill claim payments to policyholders. The Company’s maximum exposure to loss associated with these VIEs is determined as the amount of mortgage insurance claim payments on the insured policies, net of aggregate reinsurance payments previously received, up to the full aggregate excess of loss reinsurance coverage amounts.
The following table summarizes the total assets of the Bellemeade entities:
| December 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bellemeade Entities (Issue Date) | Total VIE Assets | Coverage Remaining from Reinsurers (1) | Total VIE Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019-1 Ltd. (Mar-19) | $ | — | $ | — | $ | 71 | |||||||||||||||||||||||||||||||||||||||||||||||
| 2019-3 Ltd. (Jul-19) | — | — | 99 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021-3 Ltd. (Sep-21) | 363 | 98 | 429 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022-1 Ltd. (Jan-22) | 202 | 16 | 256 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022-2 Ltd. (Sep-22) | 180 | 113 | 201 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023-1 Ltd. (Oct-23) | 186 | 47 | 186 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024-1 Ltd. (Aug-24) | 163 | 41 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,094 | $ | 315 | $ | 1,242 | |||||||||||||||||||||||||||||||||||||||||||||||
(1) Coverage from a separate panel of reinsurers remaining at December 31, 2024.
| ARCH CAPITAL | 151 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Other Comprehensive Income (Loss)
The following table presents the changes in each component of AOCI, net of noncontrolling interests:
| Unrealized Appreciation on Available-For-Sale Investments | Foreign Currency Translation Adjustments | Total | |||||||||||||||
| Year Ended December 31, 2024 | |||||||||||||||||
| Beginning balance | $ | (565) | $ | (111) | $ | (676) | |||||||||||
| Other comprehensive income (loss) before reclassifications | (23) | (102) | (125) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 81 | — | 81 | ||||||||||||||
| Net current period other comprehensive income (loss) | 58 | (102) | (44) | ||||||||||||||
| Ending balance | $ | (507) | $ | (213) | $ | (720) | |||||||||||
| Year Ended December 31, 2023 | |||||||||||||||||
| Beginning balance | $ | (1,512) | $ | (134) | $ | (1,646) | |||||||||||
| Other comprehensive income (loss) before reclassifications | 547 | 23 | 570 | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 400 | — | 400 | ||||||||||||||
| Net current period other comprehensive income (loss) | 947 | 23 | 970 | ||||||||||||||
| Ending balance | $ | (565) | $ | (111) | $ | (676) | |||||||||||
| Year Ended December 31, 2022 | |||||||||||||||||
| Beginning balance | $ | 13 | $ | (78) | $ | (65) | |||||||||||
| Other comprehensive income (loss) before reclassifications | (1,772) | (56) | (1,828) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | 247 | — | 247 | ||||||||||||||
| Net current period other comprehensive income (loss) | (1,525) | (56) | (1,581) | ||||||||||||||
| Ending balance | $ | (1,512) | $ | (134) | $ | (1,646) |
The following tables present details about amounts reclassified from accumulated other comprehensive income and the tax effects allocated to each component of other comprehensive income (loss):
| Consolidated Statement of Income | Amounts Reclassified from AOCI | |||||||||||||||||||||||||
| Details About | Line Item That Includes | Year Ended December 31, | ||||||||||||||||||||||||
| AOCI Components | Reclassification | 2024 | 2023 | 2022 | ||||||||||||||||||||||
| Unrealized appreciation on available-for-sale investments | ||||||||||||||||||||||||||
| Net realized gains (losses) | $ | (95) | $ | (431) | $ | (235) | ||||||||||||||||||||
| Provision for credit losses | — | 3 | (44) | |||||||||||||||||||||||
| Total before tax | (95) | (428) | (279) | |||||||||||||||||||||||
| Income tax (expense) benefit | 14 | 28 | 32 | |||||||||||||||||||||||
| Net of tax | $ | (81) | $ | (400) | $ | (247) |
| ARCH CAPITAL | 152 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following are the related tax effects allocated to each component of other comprehensive income (loss):
| Before Tax | Tax Expense | Net of Tax | |||||||||||||||
| Amount | (Benefit) | Amount | |||||||||||||||
| Year Ended December 31, 2024 | |||||||||||||||||
| Unrealized appreciation (decline) in value of investments: | |||||||||||||||||
| Unrealized holding gains (losses) arising during period | $ | (23) | $ | — | $ | (23) | |||||||||||
| Less reclassification of net realized gains (losses) included in net income | (95) | (14) | (81) | ||||||||||||||
| Foreign currency translation adjustments | (105) | (3) | (102) | ||||||||||||||
| Other comprehensive income (loss) | $ | (33) | $ | 11 | $ | (44) | |||||||||||
| Year Ended December 31, 2023 | |||||||||||||||||
| Unrealized appreciation (decline) in value of investments: | |||||||||||||||||
| Unrealized holding gains (losses) arising during period | $ | 617 | $ | 70 | $ | 547 | |||||||||||
| Less reclassification of net realized gains (losses) included in net income | (428) | (28) | (400) | ||||||||||||||
| Foreign currency translation adjustments | 23 | — | 23 | ||||||||||||||
| Other comprehensive income (loss) | $ | 1,068 | $ | 98 | $ | 970 | |||||||||||
| Year Ended December 31, 2022 | |||||||||||||||||
| Unrealized appreciation (decline) in value of investments: | |||||||||||||||||
| Unrealized holding gains (losses) arising during period | $ | (2,009) | $ | (237) | $ | (1,772) | |||||||||||
| Less reclassification of net realized gains (losses) included in net income | (279) | (32) | (247) | ||||||||||||||
| Foreign currency translation adjustments | (56) | — | (56) | ||||||||||||||
| Other comprehensive income (loss) | $ | (1,786) | $ | (205) | $ | (1,581) |
| ARCH CAPITAL | 153 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Earnings Per Common Share
The calculation of basic earnings per common share is computed by dividing income available to Arch common shareholders by the weighted average number of Common Shares and common share equivalents outstanding. The following table sets forth the computation of basic and diluted earnings per common share:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Numerator: | |||||||||||||||||
| Net income | $ | 4,312 | $ | 4,442 | $ | 1,482 | |||||||||||
| Amounts attributable to noncontrolling interests | — | 1 | (6) | ||||||||||||||
| Net income available to Arch | 4,312 | 4,443 | 1,476 | ||||||||||||||
| Preferred dividends | (40) | (40) | (40) | ||||||||||||||
| Net income available to Arch common shareholders | $ | 4,272 | $ | 4,403 | $ | 1,436 | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted average common shares outstanding | 372.5 | 368.7 | 368.6 | ||||||||||||||
| Effect of dilutive common share equivalents: | |||||||||||||||||
| Nonvested restricted shares | 2.1 | 2.5 | 2.1 | ||||||||||||||
| Stock options (1) | 7.2 | 7.6 | 6.9 | ||||||||||||||
| Weighted average common shares and common share equivalents outstanding – diluted | 381.8 | 378.8 | 377.6 | ||||||||||||||
| Earnings per common share: | |||||||||||||||||
| Basic | $ | 11.47 | $ | 11.94 | $ | 3.90 | |||||||||||
| Diluted | $ | 11.19 | $ | 11.62 | $ | 3.80 |
(1) Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For 2024, 2023 and 2022, the number of stock options excluded were 2.2 million, 0.5 million and 0.8 million, respectively.
15. Income Taxes
Arch Capital is incorporated under the laws of Bermuda and, under Bermuda law in effect as of December 31, 2024, is not obligated to pay taxes on income or capital gains in Bermuda. Upon its formation in 2000, the Company received a written undertaking from the Minister of Finance in Bermuda under the Exempted Undertakings Tax Protection Act 1966 assuring that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to Arch Capital or any of its operations until March 31, 2035. However, on December 27, 2023, the Government of Bermuda enacted the Bermuda CIT Act, which is effective for tax years beginning on or after January 1, 2025. Once in effect, the new corporate income tax regime in Bermuda is expected to supersede the Minister of Finance’s assurance, and the Company will become subject to taxes in Bermuda before March 31, 2035.
The Bermuda CIT Act will apply a 15% corporate income tax to certain Bermuda constituent entities of multi-national groups in fiscal years beginning on or after January 1, 2025. The Company expects to incur and pay increased taxes in Bermuda beginning in 2025. The Bermuda CIT Act, together with the widespread adoption of the OECD Pillar II minimum tax proposal, is expected to result in a minimum effective tax rate of 15% in most jurisdictions in which the Company operates.
Arch Capital has subsidiaries and branches that operate in various jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The significant jurisdictions in which Arch Capital’s subsidiaries and branches are subject to tax are the United States, United Kingdom, Ireland, Switzerland, Australia, Canada, and Gibraltar.
| ARCH CAPITAL | 154 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of income taxes attributable to operations were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Current expense (benefit): | |||||||||||||||||
| United States | $ | 332 | $ | 251 | $ | 195 | |||||||||||
| Non-U.S. | 65 | 37 | 6 | ||||||||||||||
| 397 | 288 | 201 | |||||||||||||||
| Deferred expense (benefit): | |||||||||||||||||
| United States | (21) | (20) | (96) | ||||||||||||||
| Non-U.S. | (14) | (1,141) | (25) | ||||||||||||||
| (35) | (1,161) | (121) | |||||||||||||||
| Income tax expense (benefit) | $ | 362 | $ | (873) | $ | 80 |
The Company’s income or loss before income taxes was earned in the following jurisdictions:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Income (Loss) Before Income Taxes: | |||||||||||||||||
| Bermuda | $ | 2,611 | $ | 2,099 | $ | 986 | |||||||||||
| United States | 1,438 | 1,239 | 401 | ||||||||||||||
| Other | 625 | 232 | 175 | ||||||||||||||
| Total | $ | 4,674 | $ | 3,570 | $ | 1,562 |
The expected tax provision computed on pre-tax income or loss at the weighted average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. The 2024 applicable statutory tax rates by jurisdiction were as follows: Bermuda (0.0%), United States (21.0%), United Kingdom (25.0%), Ireland (12.5%), Switzerland (19.6%), Australia (30.0%), Canada (26.4%) and Gibraltar (13.8%).
A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate follows:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Expected income tax expense (benefit) computed on pre-tax income at weighted average income tax rate | $ | 424 | $ | 300 | $ | 110 | |||||||||||
| Addition (reduction) in income tax expense (benefit) resulting from: | |||||||||||||||||
| Sale of subsidiaries/Bargain purchase option | (45) | — | — | ||||||||||||||
| Investment income | (39) | (14) | (13) | ||||||||||||||
| Change in tax rate | 12 | (1,179) | (5) | ||||||||||||||
| Share based compensation | (11) | (13) | (9) | ||||||||||||||
| Tax credits | (5) | (3) | (10) | ||||||||||||||
| Base eroding tax/Alternative minimum tax | 5 | 9 | 8 | ||||||||||||||
| State taxes, net of U.S. federal tax benefit | 4 | 6 | 11 | ||||||||||||||
| Change in valuation allowance | 3 | 4 | (23) | ||||||||||||||
| Uncertain tax position | 3 | — | — | ||||||||||||||
| Dividend withholding taxes | 3 | 9 | 11 | ||||||||||||||
| Other | 8 | 8 | — | ||||||||||||||
| Income tax expense (benefit) | $ | 362 | $ | (873) | $ | 80 |
The effect of a change in tax laws or rates on deferred income tax assets and liabilities is recognized in income in the period in which such change is enacted.
Deferred income tax assets and liabilities reflect temporary differences based on enacted tax rates between the carrying amounts of assets and liabilities for financial reporting and income tax purposes.
| ARCH CAPITAL | 155 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company’s deferred income tax assets and liabilities were as follows:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Deferred income tax assets: | |||||||||||
| Net operating loss | $ | 77 | $ | 93 | |||||||
| Discounting of net loss reserves | 203 | 219 | |||||||||
| Net unearned premium reserve | 190 | 133 | |||||||||
| Compensation liabilities | 75 | 64 | |||||||||
| Foreign tax credit carryforward | 22 | 16 | |||||||||
| Goodwill and intangible assets | 1,034 | 1,020 | |||||||||
| Bad debt reserves | 15 | 16 | |||||||||
| Depreciation and amortization | 151 | 133 | |||||||||
| Lease liability | 32 | 31 | |||||||||
| Net unrealized decline of investments | 77 | 89 | |||||||||
| Fair value adjustment to senior notes | 41 | 41 | |||||||||
| Other, net | — | 13 | |||||||||
| Deferred income tax assets before valuation allowance | 1,917 | 1,868 | |||||||||
| Valuation allowance | (18) | (15) | |||||||||
| Deferred income tax assets net of valuation allowance | 1,899 | 1,853 | |||||||||
| Deferred income tax liabilities: | |||||||||||
| Lloyds year of account deferral | (19) | (13) | |||||||||
| Contingency reserve | (27) | (50) | |||||||||
| Deferred policy acquisition costs | (143) | (144) | |||||||||
| Investment related | (43) | (13) | |||||||||
| Right-of-use asset | (25) | (24) | |||||||||
| Other | (6) | — | |||||||||
| Total deferred income tax liabilities | (263) | (244) | |||||||||
| Net deferred income tax assets | $ | 1,636 | $ | 1,609 |
The Company provides a valuation allowance to reduce the net value of certain deferred income tax assets to an amount which management expects to more likely than not be realized. As of December 31, 2024, the Company’s valuation allowance was $18 million, compared to $15 million at December 31, 2023. The valuation allowance at December 31, 2024, was primarily attributable to valuation allowances on the Company’s Australia, Gibraltar and Hong Kong operations and certain other deferred income tax assets relating to tax attributes that have a limited use.
At December 31, 2024, the Company’s net operating loss carryforwards and tax credits were as follows:
| Year Ended December 31, | |||||||||||
| 2024 | Expiration | ||||||||||
| Operating Loss Carryforwards | |||||||||||
| United Kingdom | $ | 146 | No expiration | ||||||||
| Ireland | 26 | No expiration | |||||||||
| Australia | 43 | No expiration | |||||||||
| Hong Kong | 35 | No expiration | |||||||||
| Gibraltar | 26 | No expiration | |||||||||
| Cyprus | 1 | No expiration | |||||||||
| United States (1) | 70 | 2029 - 2038 | |||||||||
| Tax Credits | |||||||||||
| U.K. foreign tax credits | 14 | No expiration | |||||||||
| U.S. foreign tax credits | 8 | 2029 - 2033 | |||||||||
(1) The Company’s U.S. operations have recorded $70 million of net operating loss (“NOL”) carryforwards that are subject to annual usage limitations under Section 382 of the Internal Revenue Code (“the Code”).
The Company’s U.S. mortgage operations are eligible for a tax deduction, subject to certain limitations, under Section 832(e) of the Code for amounts required by state law or regulation to be set aside in statutory contingency reserves. The deduction is allowed only to the extent that the Company purchases non-interest bearing U.S. Mortgage Guaranty Tax and Loss Bonds (“T&L Bonds”) issued by the U.S. Treasury Department in an amount equal to the tax benefit derived from deducting any portion of the statutory contingency reserves. T&L Bonds are reflected in ‘other assets’ on the Company’s balance sheet and totaled approximately $47 million at December 31, 2024, compared to $42 million at December 31, 2023.
Deferred income tax liabilities have not been accrued with respect to the undistributed earnings of the Company's U.S., U.K. and Ireland subsidiaries as it is the Company’s intention that all such earnings will be indefinitely reinvested. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding tax in the jurisdiction of the paying entity. The Company does not intend to indefinitely reinvest earnings from the Company's Canada subsidiary, however, no income or withholding taxes have been accrued as the Canada subsidiary does not have positive cumulative earnings and profits and therefore a distribution from this particular subsidiary would not be subject to income taxes or withholding taxes. Potential tax implications of repatriation from the Company’s unremitted earnings that are indefinitely reinvested are driven by facts at the time of distribution. Therefore, it is not practicable to estimate the income tax liabilities that might be incurred if such earnings were remitted. Distributions from the U.K. or Ireland would not be subject to withholding tax and no deferred income tax liability would need to be accrued.
| ARCH CAPITAL | 156 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes interest and penalties relating to unrecognized tax benefits in the provision for income taxes. As of December 31, 2024, the Company’s total unrecognized tax benefits, including interest and penalties, were $5 million. If recognized, the full amount of the unrecognized tax benefit would impact the consolidated effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Balance at beginning of year | $ | 2 | $ | 2 | |||||||
| Additions based on tax positions related to the current year | 1 | — | |||||||||
| Additions for tax positions of prior years | 2 | — | |||||||||
| Reductions for tax positions of prior years | — | — | |||||||||
| Settlements | — | — | |||||||||
| Balance at end of year | $ | 5 | $ | 2 |
The Company, its subsidiaries and branches file income tax returns in various federal, state and local jurisdictions. The following table details open tax years that are potentially subject to examination by local tax authorities, in the following major jurisdictions:
| Jurisdiction | Tax Years | |||||||
| United States | 2019-2024 | |||||||
| United Kingdom | 2022-2024 | |||||||
| Ireland | 2020-2024 | |||||||
| Switzerland | 2020-2024 | |||||||
| Australia | 2019-2024 | |||||||
| Canada | 2020-2024 | |||||||
| Gibraltar | 2019-2024 | |||||||
As of December 31, 2024, the Company’s current income tax recoverable (included in “Other assets”) was $3 million.
16. Transactions with Related Parties
In 2017, the Company acquired approximately 25% of Premia. Premia is the parent of Premia Reinsurance Ltd., a multi-line Bermuda reinsurance company. Premia’s strategy is to reinsure or acquire companies or reserve portfolios in the non-life property and casualty insurance and reinsurance run-off market. Arch Re Bermuda and certain Arch co-investors invested $100 million and acquired approximately 25% of Premia as well as warrants to purchase additional common equity. Arch has appointed two directors to serve on the seven person board of directors of Premia. Arch Re Bermuda is providing a quota share reinsurance treaty on certain business written by Premia, and subsidiaries of Arch Capital are providing certain administrative and support services to Premia, in each case pursuant to separate multi-year agreements. During the 2024 period, the Company did not enter into any new reinsurance transactions with Premia, compared to $80 million and $81 million of net premiums
written and earned, respectively in 2023. At December 31, 2024, the Company recorded a funds held asset from Premia of $137 million, compared to $158 million at December 31, 2023.
In 2021, the Company completed the acquisition of Somers. Somers is wholly owned by Greysbridge, and Greysbridge is owned 40% by the Company and by certain funds managed by Kelso and Warburg. The Company entered into certain reinsurance transactions with Somers. During 2024 and 2023 periods, the Company’s net premiums written was reduced by $738 million and $574 million, respectively. In addition, Somers paid certain acquisition costs and administrative fees to the Company. At December 31, 2024, the Company recorded a reinsurance recoverable on unpaid and paid losses from Somers of $1.6 billion and a reinsurance balance payable to Somers of $489 million. At December 31, 2023, reinsurance recoverable on unpaid and paid losses from Somers was $1.3 billion, with a reinsurance balance payable to Somers of $475 million.
Under the terms of the Greysbridge equity financing, beginning January 1, 2024, the Company has a call right (but not the obligation) and Warburg and Kelso each have a put right (but not the obligation) to buy/sell a certain amount of their initial shares annually at the current year-end tangible book value per share of Greysbridge. In 2024, Warburg and Kelso both delivered a put option notice to sell a certain amount of their initial shares. The transaction, which will involve third-party purchasers of such shares, is expected to close in the 2025 calendar year, subject to any required regulatory approvals and other closing conditions. In association with the put option notice at December 31, 2024, the Company’s balance sheet reflected $261 million in both other assets and other liabilities.
During 2024 period, the Company completed the acquisition of Watford Insurance Company from Somers for a total consideration paid of $35 million.
As of December 31, 2024, the Company owns $35 million in aggregate principal amount of Somers 6.5% senior notes, due July 2, 2029.
| ARCH CAPITAL | 157 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Leases
In the ordinary course of business, the Company renews and enters into new leases for office property and equipment. At the lease inception date, the Company determines whether a contract contains a lease and its classification as a finance or operating lease. Primarily all of the Company’s leases are classified as operating leases. The Company’s operating leases have remaining lease terms of up to 13 years, some of which include options to extend the lease term. The Company considers these options when determining the lease term and measuring its lease liability and right-of-use asset. In addition, the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Short-term operating leases with an initial term of twelve months or less were excluded on the Company's consolidated balance sheet and represent an inconsequential amount of operating lease expense.
As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments.
Additional information regarding the Company’s operating leases is as follows:
| December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Operating lease costs | $ | 34 | $ | 33 | ||||||||||
| Sublease income (1) | $ | (2) | $ | (2) | ||||||||||
| Cash payments included in the measurement of lease liabilities reported in operating cash flows | $ | 30 | $ | 31 | ||||||||||
| Right-of-use assets obtained in exchange for new lease liabilities | $ | 30 | $ | 28 | ||||||||||
| Right-of-use assets (2) | $ | 129 | $ | 125 | ||||||||||
| Operating lease liability (2) | $ | 163 | $ | 156 | ||||||||||
| Weighted average discount rate | 4.9 | % | 4.7 | % | ||||||||||
| Weighted average remaining lease term | 7.2 years | 7.2 years |
(1) The sublease income primarily relates to office property in Raleigh, North Carolina.
(2) The right-of-use assets are included in ‘other assets’ while the operating lease liability is included in ‘other liabilities.’
The following table presents the contractual maturities of the Company's operating lease liabilities at December 31, 2024:
| Years Ending December 31, | ||||||||
| 2025 | $ | 31 | ||||||
| 2026 | 31 | |||||||
| 2027 | 28 | |||||||
| 2028 | 24 | |||||||
| 2029 | 19 | |||||||
| 2030 and thereafter | 63 | |||||||
| Total undiscounted lease liability | $ | 196 | ||||||
| Less: present value adjustment | (33) | |||||||
| Operating lease liability | $ | 163 |
Rental expense was approximately $35 million, $38 million and $39 million for 2024, 2023 and 2022, respectively.
18. Commitments and Contingencies
Concentrations of Credit Risk
The creditworthiness of a counterparty is evaluated by the Company, taking into account credit ratings assigned by independent agencies. The credit approval process involves an assessment of factors, including, among others, the counterparty, country and industry credit exposure limits. Collateral may be required, at the discretion of the Company, on certain transactions based on the creditworthiness of the counterparty.
The areas where significant concentrations of credit risk may exist include unpaid losses and loss adjustment expenses recoverable, contractholder receivables, ceded unearned premiums, paid losses and loss adjustment expenses recoverable net of reinsurance balances payable, investments and cash and cash equivalent balances. A credit exposure exists with respect to reinsurance recoverables as they may become uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound and, if necessary, the Company may hold collateral in the form of funds, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. In addition, certain insurance policies written by the Company’s insurance operations feature large deductibles, primarily in its construction and national accounts lines of business. Under such contracts, the Company is obligated to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by the policyholder for the deductible amount. These amounts are included on a gross basis in the consolidated balance sheet in contractholder payables and contractholder receivables, respectively. In the event that the Company is unable to collect from the policyholder, the Company would be liable for such
| ARCH CAPITAL | 158 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
defaulted amounts. Collateral, primarily in the form of letters of credit, cash and trusts, is obtained from the policyholder to mitigate the Company’s credit risk. In the instances where the company receives collateral in the form of cash, the Company records a related liability in “Collateral held for insured obligations.”
In addition, the Company underwrites a significant amount of its business through brokers and a credit risk exists should any of these brokers be unable to fulfill their contractual obligations with respect to the payments of insurance and reinsurance balances owed to the Company. The following table summarizes the percentage of the Company’s gross premiums written generated from or placed by the largest brokers:
| Broker | Year Ended December 31, | |||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||
| Marsh & McLennan Companies and its subsidiaries | 18.6 | % | 19.0 | % | 17.3 | % | ||||||||||||||
| Aon Corporation and its subsidiaries | 14.5 | % | 13.9 | % | 13.8 | % |
No other broker and no one insured or reinsured accounted for more than 10% of gross premiums written for 2024, 2023 and 2022.
The Company’s available for sale investment portfolio is managed in accordance with guidelines that have been tailored to meet specific investment strategies, including standards of diversification, which limit the allowable holdings of any single issue. There were no investments in any entity in excess of 10% of the Company’s shareholders’ equity at December 31, 2024 other than investments issued or guaranteed by the United States government or its agencies.
Investment Commitments
The Company’s investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately $4.4 billion and $3.6 billion at December 31, 2024 and 2023, respectively.
Purchase Obligations
The Company has also entered into certain agreements which commit the Company to purchase goods or services, primarily related to software and computerized systems. Such purchase obligations were approximately $260 million and $148 million at December 31, 2024 and 2023, respectively.
Employment and Other Arrangements
At December 31, 2024, the Company has entered into employment agreements with certain of its executive officers. Such employment arrangements provide for compensation in the form of base salary, annual bonus, share-based awards, participation in the Company’s employee benefit programs and the reimbursements of expenses.
19. Debt and Financing Arrangements
The Company’s senior notes payable at December 31, 2024 and 2023 were as follows:
| Carrying Amount at | ||||||||||||||||||||||||||
| Interest | Principal | December 31, | ||||||||||||||||||||||||
| (Fixed) | Amount | 2024 | 2023 | |||||||||||||||||||||||
| 2034 notes (1) | 7.350 | % | $ | 300 | $ | 298 | $ | 298 | ||||||||||||||||||
| 2043 notes (2) | 5.144 | % | 500 | 496 | 495 | |||||||||||||||||||||
| 2026 notes (3) | 4.011 | % | 500 | 499 | 498 | |||||||||||||||||||||
| 2046 notes (4) | 5.031 | % | 450 | 446 | 446 | |||||||||||||||||||||
| 2050 notes (5) | 3.635 | % | 1,000 | 989 | 989 | |||||||||||||||||||||
| $ | 2,750 | $ | 2,728 | $ | 2,726 |
(1) Senior notes of Arch Capital issued on May 4, 2004 and due May 1, 2034 (“2034 notes”).
(2) Senior notes of Arch-U.S., a wholly-owned subsidiary of Arch Capital, issued on December 13, 2013 and due November 1, 2043 (“2043 notes”), fully and unconditionally guaranteed by Arch Capital.
(3) Senior notes of Arch Capital Finance LLC (“Arch Finance”), a wholly-owned finance subsidiary of Arch Capital, issued on December 8, 2016 and due December 15, 2026 (“2026 notes”), fully and unconditionally guaranteed by Arch Capital.
(4) Senior notes of Arch Finance issued on December 8, 2016 and due December 15, 2046 (“2046 notes”), fully and unconditionally guaranteed by Arch Capital
(5) Senior notes of Arch Capital issued on June 30, 2020 and due June 30, 2050 (“2050 notes”).
The 2034 notes are Arch Capital’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the 2034 notes are due on May 1st and November 1st of each year. Arch Capital may redeem the 2034 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.
The 2043 notes are unsecured and unsubordinated obligations of Arch-U.S. and Arch Capital, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch-U.S. and Arch Capital, respectively. Interest payments on the 2043 notes are due on May 1st and November 1st of each year. Arch-U.S. may redeem the 2043 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.
| ARCH CAPITAL | 159 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2026 notes are unsecured and unsubordinated obligations of Arch Finance and Arch Capital, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch Finance and Arch Capital, respectively. Interest payments on the 2026 notes are due on June 15th and December 15th of each year. Arch Finance may redeem the 2026 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.
The 2046 notes are unsecured and unsubordinated obligations of Arch Finance and Arch Capital, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch Finance and Arch Capital, respectively. Interest payments on the 2046 notes are due on June 15th and December 15th of each year. Arch Finance may redeem the 2046 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.
The 2050 notes are Arch Capital’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the 2050 notes are due on June 30 and December 30 of each year. Arch Capital may redeem the 2050 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.
Letter of Credit and Revolving Credit Facilities
In the normal course of its operations, the Company enters into agreements with financial institutions that provide access to secured and unsecured credit facilities.
Group Credit Facility
Arch Capital and certain of its subsidiaries have access to a credit facility with a syndicate of financial institutions (the “Group Credit Facility”) that expires on August 23, 2028. The Group Credit Facility consists of a $425 million secured facility for letters of credit (the “Secured Facility”) and a $500 million unsecured facility for revolving loans and letters of credit (the “Unsecured Facility”). At December 31, 2024, the Secured Facility had $275 million of letters of credit outstanding and remaining capacity of $150 million, and the Unsecured Facility had no outstanding revolving loans or letters of credit, with remaining capacity of $500 million.
The Group Credit Facility contains certain restrictive and maintenance covenants customary for facilities of this type, including restrictions on indebtedness, minimum consolidated tangible net worth, maximum leverage levels and minimum financial strength ratings. Arch Capital and its subsidiaries which are party to the agreement were in compliance with all covenants contained therein at December 31, 2024.
Obligations of each borrower for letters of credit under the Secured Facility are secured by cash and eligible securities of such borrower and held in collateral accounts. Commitments under the Group Credit Facility may be increased up to, but not exceeding, an aggregate of $1.5 billion. Arch Capital has a one-time option to convert any or all outstanding revolving loans of Arch Capital and/or Arch-U.S. to term loans with the same terms as the revolving loans except that any prepayments may not be re-borrowed. Borrowings of revolving loans may be made at a variable rate based on Secured Overnight Financing Rate (“SOFR”). Secured letters of credit are available for issuance on behalf of certain Arch Capital subsidiaries. Arch Capital guarantees the obligations of Arch-U.S. and Arch U.S. MI Holdings Inc., Arch-U.S. guarantees the obligations of Arch Capital, and Arch Capital Finance LLC guarantees the obligations of Arch Capital and Arch-U.S.
Other Credit Facilities
Arch Re Bermuda, a wholly-owned subsidiary of Arch Capital, has access to a $175 million unsecured letter of credit facility with Lloyds Bank Corporate Markets plc., which expires on September 27, 2025. At December 31, 2024, this credit facility had $106 million of letters of credit outstanding and remaining capacity of $69 million.
Arch Re Bermuda also has access to a letter of credit facility with Lloyds Bank Corporate Markets plc., which expires on December 31, 2027. Such credit facility provides for a $700 million facility for letters of credit in respect of Tier 2 Funds at Lloyds. As of December 31, 2024, $700 million face amount of letters of credit had been issued under this facility.
In addition, Arch Re Bermuda had outstanding secured letters of credit through other facilities in the amount of $55 million, which were issued in the normal course of business (“LOC Facilities”). The principal purpose of the LOC Facilities is to issue, as required, evergreen standby letters of credit in favor of primary insurance or reinsurance counterparties with which certain of Arch Capital’s subsidiaries has entered into reinsurance arrangements.
When issued, all secured letters of credit are secured by a portion of the investment portfolio. At December 31, 2024, these letters of credit were secured by investments with a fair value of $400 million. The Company had no outstanding revolving credit agreement borrowings at December 31, 2024 and 2023.
| ARCH CAPITAL | 160 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Home Loan Bank Membership
Certain subsidiaries of the Company are members of Federal Home Loan Banks (“FHLBs”). Members may borrow from the FHLBs at competitive rates subject to certain conditions. Conditions include maintaining sufficient collateral deposits for funding and a requirement to hold stock in the FHLBs related to both membership and outstanding advances. At December 31, 2024 and 2023, the Company had no advances outstanding under the FHLB program.
20. Goodwill and Intangible Assets
The following table shows an analysis of goodwill and intangible assets:
| Goodwill | Intangible assets (indefinite life) | Intangible assets (finite life) | Total | ||||||||||||||||||||
| Net balance at Dec. 31, 2022 | $ | 342 | $ | 69 | $ | 393 | $ | 804 | |||||||||||||||
| Acquisitions | — | — | 11 | 11 | |||||||||||||||||||
| Amortization | — | — | (95) | (95) | |||||||||||||||||||
| Impairment | (2) | — | — | (2) | |||||||||||||||||||
| Foreign currency movements and other adjustments | 5 | 1 | 7 | 13 | |||||||||||||||||||
| Net balance at Dec. 31, 2023 | 345 | 70 | 316 | 731 | |||||||||||||||||||
| Acquisitions (1) | 246 | 9 | 637 | 892 | |||||||||||||||||||
| Amortization | — | — | (235) | (235) | |||||||||||||||||||
| Foreign currency movements and other adjustments (2) | (20) | — | (17) | (37) | |||||||||||||||||||
| Net balance at Dec. 31, 2024 | $ | 571 | $ | 79 | $ | 701 | $ | 1,351 | |||||||||||||||
| Gross balance at Dec. 31, 2024 | $ | 576 | $ | 80 | $ | 1,724 | $ | 2,380 | |||||||||||||||
| Accumulated amortization | — | — | (994) | (994) | |||||||||||||||||||
| Foreign currency movements and other adjustments | (5) | (1) | (29) | (35) | |||||||||||||||||||
| Net balance at Dec. 31, 2024 | $ | 571 | $ | 79 | $ | 701 | $ | 1,351 |
(1) Certain amounts for the Company’s 2024 acquisitions are considered
provisional. See note 2.
(2) Amount primarily related to the sale of Castel Underwriting Agencies Limited.
The following table presents the components of goodwill and intangible assets:
| Gross Balance | Accumulated Amortization | Foreign Currency Translation Adjustment and Other | Net Balance | ||||||||||||||||||||
| Dec. 31, 2024 | |||||||||||||||||||||||
| Acquired insurance contracts | $ | 620 | $ | (562) | $ | 1 | $ | 59 | |||||||||||||||
| Operating platform | 117 | (63) | — | 54 | |||||||||||||||||||
| Distribution relationships | 865 | (358) | (30) | 477 | |||||||||||||||||||
| Goodwill | 576 | — | (5) | 571 | |||||||||||||||||||
| Insurance licenses | 58 | — | — | 58 | |||||||||||||||||||
| Syndicate capacity | 22 | — | (1) | 21 | |||||||||||||||||||
| Unfavorable service contract | (10) | 10 | — | — | |||||||||||||||||||
| Other | 132 | (21) | — | 111 | |||||||||||||||||||
| Total | $ | 2,380 | $ | (994) | $ | (35) | $ | 1,351 | |||||||||||||||
| Dec. 31, 2023 | |||||||||||||||||||||||
| Acquired insurance contracts | $ | 452 | $ | (441) | $ | — | $ | 11 | |||||||||||||||
| Operating platform | 64 | (54) | — | 10 | |||||||||||||||||||
| Distribution relationships | 594 | (277) | (23) | 294 | |||||||||||||||||||
| Goodwill | 348 | — | (3) | 345 | |||||||||||||||||||
| Insurance licenses | 48 | — | — | 48 | |||||||||||||||||||
| Syndicate capacity | 22 | — | — | 22 | |||||||||||||||||||
| Unfavorable service contract | (10) | 10 | — | — | |||||||||||||||||||
| Other | 5 | (4) | — | 1 | |||||||||||||||||||
| Total | $ | 1,523 | $ | (766) | $ | (26) | $ | 731 |
The estimated remaining amortization expense for the Company’s intangible assets with finite lives is as follows:
| 2025 | $ | 193 | |||
| 2026 | 115 | ||||
| 2027 | 88 | ||||
| 2028 | 73 | ||||
| 2029 | 60 | ||||
| 2030 and thereafter | 172 | ||||
| Total | $ | 701 |
The estimated remaining useful lives of these assets range from one to twelve years at December 31, 2024.
| ARCH CAPITAL | 161 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. Shareholders’ Equity
Authorized and Issued
The authorized share capital of Arch Capital consists of 1.8 billion Common Shares, par value of $0.0011 per share, and 50 million Preferred Shares, par value of $0.01 per share.
Common Shares
The following table presents a roll-forward of changes in Arch Capital’s issued and outstanding Common Shares:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Common Shares: | |||||||||||||||||
| Shares issued and outstanding, beginning of year | 591.9 | 588.3 | 583.3 | ||||||||||||||
| Shares issued (1) | 2.5 | 2.8 | 3.5 | ||||||||||||||
| Restricted shares issued, net of cancellations | 1.2 | 0.8 | 1.5 | ||||||||||||||
| Shares issued and outstanding, end of year | 595.6 | 591.9 | 588.3 | ||||||||||||||
| Common shares in treasury, end of year | (219.2) | (218.5) | (217.9) | ||||||||||||||
| Shares issued and outstanding, end of year | 376.4 | 373.4 | 370.4 |
(1) Includes shares issued from the exercise of stock options and stock appreciation rights, the vesting of restricted share units and shares issued from the employee share purchase plan.
Special Cash Dividend
In 2024, the Board of Directors of Arch Capital (the “Board”) has declared and paid a special cash dividend of $1.9 billion to common shareholders, representing $5.00 per outstanding common share.
Share Repurchase Program
The Board has authorized the investment in Arch Capital’s common shares through a share repurchase program. At December 31, 2024, $996.8 million of share repurchases were available under the program. Repurchases under the program may be effected from time to time in open market. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.
Repurchases of Arch Capital’s common shares in connection with the share repurchase plan and other share-based transactions were held in the treasury under the cost method, and the cost of the common shares acquired is included in ‘Common shares held in treasury, at cost.’ At December 31, 2024, Arch Capital held 219.2 million shares for an aggregate cost of $4.5 billion in treasury, at cost.
The Company’s repurchases under the share repurchase program were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Aggregate cost of shares repurchased | $ | 23.5 | $ | — | $ | 585.8 | |||||||||||
| Shares repurchased | 0.3 | — | 12.9 | ||||||||||||||
| Average price per share repurchased | $ | 89.65 | $ | — | $ | 45.44 |
Since the inception of the share repurchase program through December 31, 2024, Arch Capital has repurchased approximately 433.8 million common shares for an aggregate purchase price of $5.9 billion.
Series G Preferred Shares
In June 2021, Arch Capital completed a $500 million underwritten public offering of 20.0 million depositary shares
(the “Depositary Shares”), each of which represents a 1/1,000th interest in a share of its 4.55% Non-Cumulative Preferred Shares, Series G, $0.01 par value and $25,000 liquidation preference per share (equivalent to $25 liquidation preference per Depositary Share) (the “Series G Preferred Shares”). Each Depositary Share, evidenced by a depositary receipt, entitles the holder, through the depositary,
to a proportional fractional interest in all rights and preferences of the Series G Preferred Shares represented thereby (including any dividend, liquidation, redemption and voting rights).
Holders of Series G Preferred Shares will be entitled to receive dividend payments only when, as and if declared by the Board or a duly authorized committee of the Board. Any such dividends will be payable from, and including, the date of original issue on a noncumulative basis, quarterly in arrears on the last day of March, June, September and December of each year, at an annual rate of 4.55%. Dividends on the Series G Preferred Shares are not cumulative. The Company will be restricted from paying dividends on or repurchasing its common shares unless certain dividend payments are made on the Series G Preferred Shares. The Company may not declare or pay a dividend on the Series G Preferred Shares under certain circumstances, including if the Company is or, after giving effect to such payment, would be in breach of applicable individual or group solvency and liquidity requirements or applicable individual or group enhanced capital requirements (“ECR”). The Series G Preferred Shares may not be redeemed at any time if the ECR would be breached immediately before or after giving effect to such redemption, unless the Company replaces the capital represented by preference shares to be redeemed with capital having equal or better capital treatment.
| ARCH CAPITAL | 162 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except in specified circumstances relating to certain tax or corporate events, the Series G Preferred Shares are not redeemable prior to June 11, 2026. On and after that date, the
Series G Preferred Shares will be redeemable at the Company’s option, in whole or in part, at a redemption price of $25,000 per share of the Series G Preferred Shares (equivalent to $25 per depositary share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends to, but excluding, the redemption date. The Depositary Shares will be redeemed if and to the extent the related Series G Preferred Shares are redeemed by the Company. Neither the Depositary Shares nor the Series G Preferred Shares have a stated maturity, nor will they be subject to any sinking fund or mandatory redemption. The Series G Preferred Shares are not convertible into any other securities. The Series G Preferred Shares do not have voting rights, except under limited circumstances.
Series F Preferred Shares
In August 2017 and November 2017, Arch Capital completed combined $330 million of underwritten public offerings ($230 million in August 2017 and $100 million in November 2017) of 13.2 million depositary shares (the “Series F Depositary Shares”), each of which represents a 1/1,000th interest in a share of its 5.45% Non-Cumulative Preferred Shares, Series F, with a $0.01 par value and $25,000 liquidation preference per share (equivalent to $25 liquidation preference per Series F Depositary Share) (the “Series F Preferred Shares”). Each Series F Depositary Share, evidenced by a depositary receipt, entitles the holder, through the depositary, to a proportional fractional interest in all rights and preferences of the Series F Preferred Shares represented thereby (including any dividend, liquidation, redemption and voting rights).
Holders of Series F Preferred Shares will be entitled to receive dividend payments only when, as and if declared by the Board or a duly authorized committee of the board. Any such dividends will be payable from, and including, the date of original issue on a noncumulative basis, quarterly in arrears on the last day of March, June, September and December of each year, at an annual rate of 5.45%. Dividends on the Series F Preferred Shares are not cumulative. The Company will be restricted from paying dividends on or repurchasing its common shares unless certain dividend payments are made on the Series F Preferred Shares.
Except in specified circumstances relating to certain tax or corporate events, the Series F Preferred Shares are not redeemable prior to August 17, 2022 (the fifth anniversary of the issue date). On and after that date, the Series F Preferred Shares will be redeemable at the Company’s option, in whole or in part, at a redemption price of $25,000 per share of the Series F Preferred Shares (equivalent to $25 per depositary
share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends to, but excluding, the redemption date. The Series F Depositary Shares will be redeemed if and to the extent the related Series F Preferred Shares are redeemed by the Company. Neither the Series F Depositary Shares nor the Series F Preferred Shares have a stated maturity, nor will they be subject to any sinking fund or mandatory redemption. The Series F Preferred Shares are not convertible into any other securities. The Series F Preferred Shares will not have voting rights, except under limited circumstances.
22. Share-Based Compensation
Long Term Incentive and Share Award Plans
The Company utilizes share-based compensation plans for officers, other employees and directors of Arch Capital and its subsidiaries to provide competitive compensation opportunities, to encourage long-term service, to recognize individual contributions and reward achievement of performance goals and to promote the creation of long-term value for shareholders by aligning the interests of such persons with those of shareholders.
The 2022 Long-Term Incentive and Share Award Plan (“the 2022 Plan”) became effective as of May 4, 2022 following approval by shareholders of the Company. The 2022 Plan provides for the issuance of stock options, stock appreciation rights, restricted shares, restricted share units payable in common shares or cash, dividend equivalents, performance shares and performance units and other share-based awards to Arch Capital’s eligible employees and directors. The number of common shares reserved for grants under the 2022 Plan, subject to anti-dilution adjustments in the event of certain changes in Arch Capital’s capital structure, is 9.0 million; provided that no more than 6.0 million common shares may be issued as incentive stock options under Section 422 of the Code. The 2022 Plan will terminate as to future awards on February 25, 2032. At December 31, 2024, 6.7 million shares are available for future issuance.
The 2018 Long-Term Incentive and Share Award Plan (the “2018 Plan”) became effective as of May 9, 2018 following approval by shareholders of the Company. The 2018 Plan provides for the issuance of restricted stock units, performance units, restricted shares, performance shares, stock options and stock appreciation rights and other equity-based awards to our eligible employees and directors. The 2018 Plan authorizes the issuance of 34.5 million common shares; provided that no more than 6.0 million common shares may be issued as incentive stock options under Section 422 of the Code. The 2018 Plan will terminate as to future awards on February 28, 2028. At December 31, 2024, 2.7 million shares are available for future issuance.
| ARCH CAPITAL | 163 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon shareholder approval on May 4, 2023, the Amended and Restated Arch Capital Group Ltd. 2007 Employee Share Purchase Plan (the “ESPP”) became effective. The total common shares that may be purchased under the ESPP was increased by 3.0 million shares for a total of 12.75 million shares authorized. The purpose of the ESPP is to give employees of the Company an opportunity to purchase common shares through payroll deductions, thereby encouraging employees to share in the economic growth and success of the Company. The ESPP is designed to qualify as an “employee share purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. At December 31, 2024, 3.2 million shares remain available for issuance.
Stock Options and Stock Appreciation Rights
The Company generally issues stock options and SARs to eligible employees, with exercise prices equal to the fair market values of the Company’s Common Shares on the grant dates (adjusted for special dividends). Such grants generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date. In connection with the Company’s recent leadership transition in November 2024, the Compensation and Human Capital Committee approved the grant of equity awards, which consist of 1.75 million premium-priced stock options to eligible employees. The premium-priced stock options have an exercise price equal to 1.685 times the closing price of the Company's common shares on the grant date (or $161.24 per share) and will vest in full on the third anniversary of the grant date.
The grant date fair value is determined using the Black-Scholes option valuation model. The expected life assumption is based on an expected term analysis, which incorporates the Company’s historical exercise experience. Expected volatility is based on the Company’s daily historical trading data of its common shares. The table below summarizes the assumptions used:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Dividend yield | — | % | — | % | — | % | |||||||||||
| Expected volatility (1) | 26.5 | % | 25.1 | % | 24.0 | % | |||||||||||
| Risk free interest rate (1) | 4.4 | % | 4.1 | % | 2.0 | % | |||||||||||
| Expected option life (1) | 9.0 years | 6.0 years | 6.0 years |
(1) The 2024 period includes an expected volatility, risk free interest rate and expected option life of 26.65%, 4.39% and 10 years, respectively, related to the grant of 1.75 million premium-priced stock options.
A summary of stock option and SAR activity under the Company’s Long Term Incentive and Share Award Plans during 2024 is presented below:
| Year Ended December 31, 2024 | |||||||||||||||||||||||
| Number of Options / SARs | Weighted Average Exercise Price | Weighted Average Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding, beginning of year | 12,536,593 | $ | 31.14 | ||||||||||||||||||||
| Granted (1) | 2,172,916 | $ | 145.88 | ||||||||||||||||||||
| Exercised | (2,270,334) | $ | 22.82 | ||||||||||||||||||||
| Forfeited or expired | (10,141) | $ | 46.47 | ||||||||||||||||||||
| Outstanding, end of year | 12,429,034 | $ | 48.54 | 4.69 | $ | 665 | |||||||||||||||||
| Exercisable, end of year | 9,710,426 | $ | 26.55 | 3.40 | $ | 639 |
(1) Includes 1.75 million premium-priced stock options with a weighted average exercise price of $161.24 per share.
The aggregate intrinsic value of stock options and SARs exercised represents the difference between the exercise price of the stock options and SARs and the closing market price of the Company’s common shares on the exercise dates. During 2024, the Company received proceeds of $19 million from the exercise of stock options and recognized a tax benefit of $9 million from the exercise of stock options and SARs.
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Weighted average grant date fair value | $ | 29.03 | $ | 23.50 | $ | 13.26 | |||||||||||
| Aggregate intrinsic value of Options/SARs exercised (in millions) | $ | 153 | $ | 116 | $ | 113 |
| ARCH CAPITAL | 164 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Common Shares and Restricted Units
The Company also issues restricted share and unit awards to eligible employees and directors, for which the fair value is equal to the fair market values of the Company’s Common Shares on the grant dates. Restricted share and unit awards generally vest over a three year period with one-third vesting on the first, second and third anniversaries of the grant date.
A summary of restricted share and restricted unit activity under the Company’s Long Term Incentive and Share Award Plans for 2024 is presented below:
| Number of Restricted Common Shares | Number of Restricted Unit Awards | ||||||||||
| Unvested Shares: | |||||||||||
| Unvested balance, beginning of year | 1,524,605 | 305,928 | |||||||||
| Granted | 835,843 | 146,496 | |||||||||
| Vested | (809,174) | (154,710) | |||||||||
| Forfeited | (22,733) | (16,621) | |||||||||
| Unvested balance, end of year | 1,528,541 | 281,093 | |||||||||
| Weighted Average Grant Date Fair Value: | |||||||||||
| Unvested balance, beginning of year | $ | 54.57 | $ | 55.63 | |||||||
| Granted | $ | 90.32 | $ | 87.21 | |||||||
| Vested | $ | 49.88 | $ | 50.57 | |||||||
| Forfeited | $ | 72.05 | $ | 77.53 | |||||||
| Unvested balance, end of year | $ | 76.34 | $ | 73.58 |
The following table presents the weighted average grant date fair value of restricted shares and restricted unit awards granted and the aggregate fair value of restricted shares and unit awards vesting in each year.
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Number of restricted shares and restricted unit awards granted | 982,339 | 825,191 | 1,089,393 | ||||||||||||||
| Weighted average grant date fair value | $ | 89.86 | $ | 69.42 | $ | 47.45 | |||||||||||
| Aggregate fair value of vested restricted share and unit awards (in millions) | $ | 85 | $ | 122 | $ | 51 |
The aggregate intrinsic value of restricted units outstanding at December 31, 2024 was $26 million.
Performance Awards
The Company also issues performance share and unit awards (“performance awards”) to eligible employees, which are earned based on the achievement of pre-established threshold, target and maximum goals over three-year performance periods. Final payouts depend on the level of achievement along with each employees continued service through the vest date, and can vary between 0% and 200%. The grant date fair value of the performance awards is measured using a Monte Carlo simulation model, which incorporated the assumptions summarized in the table below. Expected volatility is based on the Company’s daily historical trading data of its common shares. The cumulative compensation expense recognized and unrecognized as of any reporting period date represents the adjusted estimate of performance shares and units that will ultimately be awarded, valued at their original grant date fair values.
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Expected volatility | 25.3 | % | 30.4 | % | 38.1 | % | |||||||||||
| Risk free interest rate | 4.5 | % | 4.6 | % | 1.7 | % |
| Number of Performance Shares | Number of Performance Units | ||||||||||
| Unvested Shares: | |||||||||||
| Unvested balance, beginning of year | 1,880,696 | 49,594 | |||||||||
| Granted | 476,906 | 15,728 | |||||||||
| Performance adjustment (1) (2) | — | 10,698 | |||||||||
| Vested | (674,406) | (21,396) | |||||||||
| Forfeited | (3,820) | (1,687) | |||||||||
| Unvested balance, end of year | 1,679,376 | 52,937 | |||||||||
| Weighted Average Grant Date Fair Value: | |||||||||||
| Unvested balance, beginning of year | $ | 52.47 | $ | 56.15 | |||||||
| Granted | $ | 93.28 | $ | 93.24 | |||||||
| Performance adjustment (1) (2) | $ | 0.00 | $ | 37.38 | |||||||
| Vested | $ | 37.38 | $ | 37.38 | |||||||
| Forfeited | $ | 75.41 | $ | 68.61 | |||||||
| Unvested balance, end of year | $ | 70.07 | $ | 70.57 |
(1) The performance adjustment represents the difference between the number of performance shares granted and earned, which vested following the end of the performance period. The performance shares were granted at the maximum level of achievement.
(2) The performance adjustment represents the change in PSUs, which vested following the end of the performance period. The performance units were granted at the target level of achievement.
| ARCH CAPITAL | 165 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the weighted average grant date fair values of performance awards granted.
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Number of performance awards | 492,634 | 568,576 | 690,772 | ||||||||||||||
| Weighted average grant date fair value | $ | 93.28 | $ | 74.09 | $ | 49.91 | |||||||||||
| Aggregate fair value of vested performance share and unit awards (in millions) | $ | 61 | $ | 14 | $ | 27 |
The aggregate intrinsic value of performance units outstanding at December 31, 2024 was $5 million.
The issuance of share-based awards and amortization thereon has no effect on the Company’s consolidated shareholders’ equity.
Share-Based Compensation Expense
The following tables present pre-tax and after-tax share-based compensation expense recognized as well as the unrecognized compensation cost associated with unvested awards and the weighted average period over which it is expected to be recognized:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Pre-Tax | |||||||||||||||||
| Stock options and SARs | $ | 15 | $ | 11 | $ | 12 | |||||||||||
| Restricted share and unit awards | 57 | 54 | 50 | ||||||||||||||
| Performance awards | 55 | 23 | 22 | ||||||||||||||
| ESPP | 6 | 4 | 4 | ||||||||||||||
| Total | $ | 133 | $ | 92 | $ | 88 | |||||||||||
| After-Tax | |||||||||||||||||
| Stock options and SARs | $ | 13 | $ | 10 | $ | 11 | |||||||||||
| Restricted share and unit awards | 48 | 45 | 42 | ||||||||||||||
| Performance awards | 50 | 21 | 20 | ||||||||||||||
| ESPP | 5 | 4 | 4 | ||||||||||||||
| Total | $ | 116 | $ | 80 | $ | 77 |
| December 31, 2024 | |||||||||||||||||
| Stock Options and SARs (1) | Restricted Common Shares and Units (1) | Performance Common Shares and Units | |||||||||||||||
| Unrecognized compensation cost related to unvested awards | $ | 55 | $ | 70 | $ | 12 | |||||||||||
| Weighted average recognition period (years) | 2.08 | 1.21 | 0.38 |
(1) Includes awards granted in connection with 1.75 million premium-priced stock options and 0.3 million time-vested restricted shares granted in November 2024.
23. Retirement Plans
For purposes of providing employees with retirement benefits, the Company maintains defined contribution retirement plans. Contributions are based on the participants’ eligible compensation. For 2024, 2023 and 2022, the Company expensed $86 million, $77 million and $67 million, respectively, related to these retirement plans.
24. Legal Proceedings
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of December 31, 2024, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.
25. Statutory Information
The Company’s insurance and reinsurance subsidiaries are subject to insurance and/or reinsurance laws and regulations in the jurisdictions in which they operate. These regulations include certain restrictions on the amount of dividends or other distributions available to shareholders without prior approval of the insurance regulatory authorities.
The actual and required statutory capital and surplus for the Company’s principal operating subsidiaries at December 31, 2024 and 2023:
| December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Actual capital and surplus (1): | |||||||||||
| Bermuda | $ | 28,422 | $ | 24,120 | |||||||
| Ireland | 1,476 | 1,148 | |||||||||
| United States | 7,547 | 6,897 | |||||||||
| United Kingdom | 1,585 | 1,367 | |||||||||
| Canada | 83 | 83 | |||||||||
| Australia | 377 | 366 | |||||||||
| Required capital and surplus: | |||||||||||
| Bermuda | $ | 8,344 | $ | 7,112 | |||||||
| Ireland | 1,142 | 942 | |||||||||
| United States | 2,152 | 1,895 | |||||||||
| United Kingdom | 1,302 | 1,192 | |||||||||
| Canada | 57 | 53 | |||||||||
| Australia | 143 | 179 |
(1)Such amounts include ownership interests in affiliated insurance and reinsurance subsidiaries.
| ARCH CAPITAL | 166 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no state-prescribed or permitted regulatory accounting practices for any of the Company’s insurance or reinsurance entities that resulted in reported statutory surplus that differed from that which would have been reported under the prescribed practices of the respective regulatory authorities, including the National Association of Insurance Commissioners. The differences between statutory financial statements and statements prepared in accordance with GAAP vary by jurisdiction, however, with the primary differences being that statutory financial statements may not reflect deferred acquisition costs, certain net deferred income tax assets, goodwill and intangible assets, unrealized appreciation or depreciation on debt securities and certain unauthorized reinsurance recoverables and include contingency reserves.
The statutory net income (loss) for the Company’s principal operating subsidiaries for 2024, 2023 and 2022 was as follows:
| Year Ended December 31, | |||||||||||||||||
| 2024 | 2023 | 2022 | |||||||||||||||
| Statutory net income (loss): | |||||||||||||||||
| Bermuda | $ | 4,750 | $ | 3,519 | $ | 1,730 | |||||||||||
| Ireland | 62 | 53 | (53) | ||||||||||||||
| United States | 918 | 592 | 220 | ||||||||||||||
| United Kingdom | 41 | 72 | 57 | ||||||||||||||
| Canada | 6 | 6 | 9 | ||||||||||||||
| Australia | 54 | 68 | 39 |
Bermuda
The Company’s Bermuda insurance and reinsurance subsidiaries are subject to the Bermuda Insurance Act 1978 and related regulations, each as amended (the “Insurance Act”). Arch Re Bermuda, the Company’s principal reinsurance and insurance subsidiary, is dual licensed as a Class 4 general business insurer and a Class C long-term insurer while Arch Group Reinsurance Ltd. (“AGRL”) is registered as a Class 3A general insurer and provides affiliated quota share reinsurance covering certain U.S. business. The Insurance Act requires that both entities maintain minimum statutory capital and surplus equal to the greater of a minimum solvency margin and the enhanced capital requirement (“ECR”) as determined by the Bermuda Monetary Authority (“BMA”). The ECR is calculated based on the Bermuda Solvency Capital Requirement model, a risk-based model that takes into account the risk characteristics of different aspects of the company’s business. At December 31, 2024 and 2023, the actual and required capital and surplus were based on the economic balance sheet requirements.
Under the Insurance Act, Arch Re Bermuda and AGRL are restricted with respect to the payment of dividends. Each entity is prohibited from declaring or paying in any financial
year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year’s statutory balance sheet) unless it files, at least seven days before payment of such dividends, with the BMA an affidavit stating that it will continue to meet the required margins following the declaration of those dividends. Accordingly, Arch Re Bermuda can pay approximately $5.5 billion to Arch Capital during 2025 without providing an affidavit to the BMA. Dividends or distributions, if any, made by AGRL would result in an increase in available capital at Arch-U.S.
Ireland
The Company has three Irish subsidiaries: Arch Re Europe, an authorized life and non-life reinsurer, Arch Insurance (EU), an authorized non-life insurer and Arch Underwriting Europe, a registered insurance and reinsurance intermediary. Irish authorized reinsurers and insurers, such as Arch Re Europe, Arch Insurance (EU) and Irish intermediaries, and Arch Underwriters Europe, are subject to the general body of Irish laws and regulations including the provisions of the Companies Act 2014. As part of the Company’s Brexit plan, Arch Insurance (EU) received approval from the Central Bank of Ireland (“CBI”) to expand the nature of its business in 2019 and commenced writing insurance lines in the European Economic Area in 2020, and the Part VII Transfer was completed at the end of December 2020. Arch Re Europe, Arch Insurance (EU) and Arch Underwriters Europe are subject to the supervision of the CBI and must comply with Irish insurance acts and regulations as well as with directions and guidance issued by the CBI. Arch Re Europe and Arch Insurance (EU) are required to maintain a minimum level of capital. At December 31, 2024 and 2023, these requirements were met.
The amount of dividends these subsidiaries are permitted to declare is limited to accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. The solvency and capital requirements must still be met following any distribution. Dividends or distributions, if any, made by Arch Re Europe would result in an increase in available capital at Arch Re Bermuda.
United States
The Company’s U.S. insurance and reinsurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate. The ability of the Company’s regulated insurance subsidiaries to pay dividends or make distributions is dependent on their ability to meet applicable regulatory standards. These regulations include restrictions that limit the amount of dividends or other distributions, such as loans or cash advances, available to
| ARCH CAPITAL | 167 | 2024 FORM 10-K |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shareholders without prior approval of the insurance regulatory authorities.
Dividends or distributions, if any, made by Arch Re U.S. would result in an increase in available capital at Arch-U.S., the Company’s U.S. holding company. Arch Re U.S. can declare a maximum of approximately $339 million of dividends during 2025 subject to the approval of the Commissioner of the Delaware Department of Insurance.
AMIC and UGRIC are approved as eligible mortgage insurers by Fannie Mae and Freddie Mac, subject to their comprehensive requirements, known as the Private Mortgage Insurer Eligibility Requirements or “PMIERs.” The GSEs amend the PMIERs from time to time at their discretion and most recently issued PMIERs Guidance 2024-01 on August 21, 2024 (effective March 31, 2025 with a corresponding transition schedule through September 30, 2026), to incorporate new deductions to the definition of “available assets” for investment risk. Further, the amount of assets required to satisfy the revised financial requirements of the PMIERs may be affected by many factors, including macro-economic conditions, the size and composition of our mortgage insurance portfolio, and the amount of risk ceded to reinsurers that may be deducted in our calculation of “minimum required assets.”
The Company’s U.S. mortgage insurance subsidiaries are also subject to regulation by their respective domiciliary and primary regulators, which include the Wisconsin Office of the Commissioner of Insurance (“Wisconsin OCI”) and the North Carolina Department of Insurance (“NC DOI”), as well as the state insurance departments in each state in which they are licensed. As mandated by state insurance laws, mortgage insurers are generally mono-line companies. Each company is subject to the statutory requirements of their domiciliary regulator as to payment of dividends and return of capital; the GSEs may also impart limitations on dividends with respect to the Company’s eligible mortgage insurers, such as if available assets fall below the required minimum assets. Under respective state law, the Company’s U.S. mortgage subsidiaries can declare a maximum of approximately $237 million of ordinary dividends in 2025, however, dividend capacity is limited by the respective companies unassigned surplus amounts. Such dividends would increase the available capital at Arch U.S. MI Holdings Inc., a subsidiary of Arch-U.S.
Mortgage insurance companies licensed in Wisconsin or North Carolina are required to establish contingency loss reserves for purposes of statutory accounting in an amount equal to at least 50% of net earned premiums. These amounts generally cannot be withdrawn for a period of 10 years and are separate liabilities for statutory accounting purposes, which affects the ability to pay dividends. However, with prior regulatory approval, a mortgage insurance company
may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net premiums earned in a calendar year.
Under Wisconsin and North Carolina law, as well as that of 14 other states, a mortgage insurer must maintain a minimum amount of statutory capital relative to its risk in force in order for the mortgage insurer to continue to write new business. While formulations of minimum capital vary in certain jurisdictions, the most common measure applied allows for a maximum risk-to-capital ratio of 25 to 1. Wisconsin and North Carolina require mortgage insurers to maintain a “minimum policyholder position” calculated in accordance with their respective regulations. Policyholders' position consists primarily of statutory policyholders' surplus plus the contingency loss reserves.
United Kingdom
The Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”) regulate insurance and reinsurance companies and the FCA regulates firms carrying on insurance mediation activities operating in the U.K., both under the Financial Services and Markets Act 2000. In May 2004, Arch Insurance (U.K.) was granted the relevant permissions for the classes of insurance business which it underwrites in the U.K. AMAL currently manages our Lloyd’s Syndicates pursuant to its authorizations by the U.K. regulators and Lloyd’s. All U.K. companies are also subject to a range of statutory provisions, including the laws and regulations of the Companies Act 2006 (as amended) (the “U.K. Companies Act”).
Arch Insurance (U.K.) and AMAL must maintain a margin of solvency at all times under the Solvency II Directive from the European Insurance and Occupational Pensions Authority. The regulations stipulate that insurers are required to maintain the minimum capital requirement and solvency capital requirement at all times. At December 31, 2024 and 2023, these requirements were met.
As corporate members of Lloyd’s, AMAL (as managing agent of the Company’s Lloyd’s Syndicates) and each syndicate’s respective corporate members are subject to the oversight of the Council of Lloyd’s. The capital required to support a Syndicate’s underwriting capacity, or funds at Lloyd’s, is assessed annually and is determined by Lloyd’s in accordance with the capital adequacy rules established by the PRA. The Company has provided capital to support the underwriting of our Lloyd’s Syndicates in the form of pledged assets and letters of credit provided by Arch Re Bermuda. The amount which the Company provides as funds at Lloyd’s is not available for distribution to the Company for the payment of dividends. Lloyd’s is supervised by the PRA and required to implement certain rules prescribed by the PRA under the Lloyd’s Act of 1982 regarding the operation
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of the Lloyd’s market. With respect to managing agents and corporate members, Lloyd’s prescribes certain minimum standards relating to management and control, solvency and other requirements and monitors managing agents’ compliance with such standards.
Under U.K. law, all U.K. companies are restricted from declaring a dividend to their shareholders unless they have “profits available for distribution.” The calculation as to whether a company has sufficient profits is based on its accumulated realized profits minus its accumulated realized losses. U.K. insurance regulatory laws do not prohibit the payment of dividends, but the PRA or FCA, as applicable, requires that insurance companies and insurance intermediaries maintain certain solvency margins and may restrict the payment of a dividend by Arch Insurance (U.K.) and AMAL.
Canada
Arch Insurance Canada and the Canadian branch of Arch Re U.S. (“Arch Re Canada”) are subject to federal, as well as provincial and territorial, regulation in Canada. The Office of the Superintendent of Financial Institutions (“OSFI”) is the federal regulatory body that, under the Insurance Companies Act (Canada), regulates federal Canadian and non-Canadian insurance companies operating in Canada. Arch Insurance Canada and Arch Re Canada are subject to regulation in the provinces and territories in which they underwrite insurance/reinsurance, and the primary goal of insurance/reinsurance regulation at the provincial and territorial levels is to govern the market conduct of insurance/reinsurance companies. Arch Insurance Canada is licensed to carry on insurance business by OSFI and in each province and territory. Arch Re Canada is licensed to carry-on reinsurance business by OSFI and in the provinces of Ontario and Quebec.
Under the Insurance Companies Act (Canada), Arch Insurance Canada is required to maintain an adequate amount of capital in Canada, calculated in accordance with a test promulgated by OSFI called the Minimum Capital Test (“MCT”), and Arch Re Canada is required to maintain an adequate margin of assets over liabilities in Canada, calculated in accordance with a test promulgated by OSFI called the Branch Adequacy of Assets Test. Under the Insurance Companies Act (Canada), approval of the Minister of Finance (Canada) is required in connection with certain acquisitions of shares of, or control of, Canadian insurance companies such as Arch Insurance Canada, and notice to and/or approval of OSFI is required in connection with the payment of dividends by or redemption of shares by Canadian insurance companies such as Arch Insurance Canada.
Australia
The Australian Prudential Regulation Authority (“APRA”) is an independent statutory authority responsible for prudential supervision of institutions across banking, insurance and superannuation and promotes financial stability in Australia. Arch Indemnity has been authorized to conduct monoline lenders’ mortgage insurance business in Australia since June 2002 and was acquired by Arch Capital on August 30, 2021 and since that date is the primary provider of lenders’ mortgage insurance for the group. Arch Indemnity has also been licensed by the Australian Securities and Investments Commission (“ASIC”) since March 2011 to engage in credit activities in Australia. Arch LMI Pty Ltd. (“Arch LMI”) was formerly authorized by APRA in January 2019 to conduct monoline lenders’ mortgage insurance business in Australia; however, in December 2022, we converted Arch LMI to a services company for our Australian lenders mortgage insurance operations and the company relinquished its APRA authorization. Major regulatory requirements that are applicable to Arch Indemnity in general as an insurance provider and financial institution in Australia include requirements and compliance with minimum capital levels; risk management strategy; corporate governance standards, privacy legislation on the collection, use and storage of personal information; cyber security obligations imposed by APRA and ASIC; modern slavery legislation; anti-money laundering and counter-terrorism legislation. At December 31, 2024 and 2023, these requirements were met.
Arch Capital also conducts property and casualty insurance business in Australia through the Company’s Lloyd’s platform. This insurance business is managed by and distributed through local coverholders and is subject to Lloyd’s Supervision. In addition, the business is subject to local Australian prudential regulatory oversight by APRA, and additional separate financial services market conduct regulation by the Australian Securities and Investments Commission.
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26. Subsequent Events
California Wildfires
The Company estimates that its 2025 first quarter results will be negatively impacted by the California wildfires, which occurred in January 2025. The Company currently estimates that the losses will be in a range of $450 million to $550 million, net of reinsurance and reinstatement premiums. This pre-tax preliminary loss estimate is based on industry insured losses ranging from $35 billion to $45 billion. The Company’s preliminary estimate is based on currently available information derived from modeling techniques, industry assessments of exposure, preliminary claims information obtained from the Company’s clients and brokers to date and a review of in-force contracts. The Company’s actual losses from this event may vary materially from the estimates due to the inherent uncertainties in making such determinations.
Share Repurchases
From January 1 to February 27, 2025, the Company repurchased approximately 2.0 million common shares for an aggregate purchase price of $180 million. At February 27, 2025, approximately $817 million of repurchases were available under the Company’s share repurchase program.
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