Item 1. CONSOLIDATED FINANCIAL STATEMENTS

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Item 1. CONSOLIDATED FINANCIAL STATEMENTS


						Page No.

Report of Independent Registered Public Accounting Firm						5

Consolidated Balance Sheets
September 30, 2021 (unaudited) and December 31, 2020						6

Consolidated Statements of Income
For the three and nine month periods ended September 30, 2021 and 2020 (unaudited)						7

Consolidated Statements of Comprehensive Income
For the three and nine month periods ended September 30, 2021 and 2020 (unaudited)						8

Consolidated Statements of Changes in Shareholders’ Equity
For the three and nine month periods ended September 30, 2021 and 2020 (unaudited)						9

Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2021 and 2020 (unaudited)						10

Notes to Consolidated Financial Statements (unaudited)
Note 1 - Basis of Presentation and Recent Accounting Pronouncements						11
Note 2 - A cquisitions						11
Note 3 - Share Transactions						12
Note 4 - Earnings Per Common Share						13
Note 5 - Segment Information						14
Note 6 - Reserve for Losses and Loss Adjustment Expenses						19
Note 7 - Allowance for Expected Credit Losses						21
Note 8 - Investment Information						23
Note 9 - Fair Value						30
Note 10 - Derivative Instruments						36
Note 1 1 - Commitments and Contingencies						37

Note 1 2 - Variable Interest Entities and Noncontrolling Interests						37
Note 1 3 - Other Comprehensive Income (Loss)						40

Note 1 4 - Income Taxes						41
Note 1 5 - Legal Proceedings						41
Note 1 6 - Transactions with Related Parties						41
Note 1 7 - Subsequent Event						41


ARCH CAPITAL			4			2021 THIRD QUARTER FORM 10-Q

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Arch Capital Group Ltd.

Results of Review of Interim Financial Statements

We have reviewed the accompanying consolidated balance sheet of Arch Capital Group Ltd. and its subsidiaries (the “Company”) as of September 30, 2021, and the related consolidated statements of income, comprehensive income, and changes in shareholders’ equity for the three-month and nine-month periods ended September 30, 2021 and 2020, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2021 and 2020, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated February 26, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ PricewaterhouseCoopers LLP

New York, NY

November 4, 2021


ARCH CAPITAL			5			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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


	(Unaudited)
	September 30, 2021		December 31, 2020
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $16,629,621 and $18,143,305; net of allowance for credit losses: $2,111 and $2,397 )	$	16,768,363	$	18,717,825
Short-term investments available for sale, at fair value (amortized cost: $3,070,120 and $1,924,292; net of allowance for credit losses: $0 and $0)	3,069,965		1,924,922
Collateral received under securities lending, at fair value (amortized cost: $— and $301,089)	—		301,096
Equity securities, at fair value	1,790,640		1,444,830

Other investments (portion measured at fair value: $2,043,970 and $3,824,796)	2,043,970		4,324,796
Investments accounted for using the equity method	2,741,293		2,047,889
Total investments	26,414,231		28,761,358

Cash	1,137,721		906,448
Accrued investment income	75,832		103,299
Securities pledged under securities lending, at fair value (amortized cost: $— and $294,493)	—		294,912

Investment in operating affiliates	1,111,825		129,291
Premiums receivable (net of allowance for credit losses: $38,715 and $37,781)	2,807,720		2,064,586
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $12,831 and $11,636)	5,358,852		4,500,802
Contractholder receivables (net of allowance for credit losses: $3,484 and $8,638)	1,824,990		1,986,924
Ceded unearned premiums	1,824,910		1,234,075
Deferred acquisition costs	893,665		790,708
Receivable for securities sold	84,019		92,743
Goodwill and intangible assets	963,322		692,863

Other assets	2,286,649		1,724,288
Total assets	$	44,783,736	$	43,282,297

Liabilities
Reserve for losses and loss adjustment expenses	$	17,331,047	$	16,513,929
Unearned premiums	6,165,114		4,838,965
Reinsurance balances payable	1,403,929		683,263
Contractholder payables	1,828,474		1,995,562
Collateral held for insured obligations	254,259		215,581
Senior notes	2,724,149		2,861,113
Revolving credit agreement borrowings	—		155,687
Securities lending payable	—		301,089
Payable for securities purchased	357,531		218,779
Other liabilities	1,321,470		1,510,888
Total liabilities	31,385,973		29,294,856

Commitments and Contingencies
Redeemable noncontrolling interests	10,237		58,548

Shareholders' Equity
Non-cumulative preferred shares	830,000		780,000

Common shares ($0.0011 par, shares issued: 582,908,723 and 579,000,841)	648		643
Additional paid-in capital	2,061,906		1,977,794
Retained earnings	13,842,787		12,362,463
Accumulated other comprehensive income (loss), net of deferred income tax	49,184		488,895
Common shares held in treasury, at cost (shares: 195,650,971 and 172,280,199)	(3,396,999)		(2,503,909)
Total shareholders' equity available to Arch	13,387,526		13,105,886
Non-redeemable noncontrolling interests	—		823,007
Total shareholders' equity	13,387,526		13,928,893
Total liabilities, noncontrolling interests and shareholders' equity	$	44,783,736	$	43,282,297

See Notes to Consolidated Financial Statements


ARCH CAPITAL			6			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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


	(Unaudited)				(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Revenues


Net premiums earned	$	1,929,337	$	1,771,092	5,998,668		5,180,890
Net investment income	88,195		128,512		298,664		405,150
Net realized gains (losses)	(25,040)		280,499		320,328		470,127





Other underwriting income	7,274		5,413		18,913		18,932
Equity in net income (loss) of investment funds accounted for using the equity method	105,398		126,735		299,270		57,407
Other income (loss)	(3,960)		—		1,151		65
Total revenues	2,101,204		2,312,251		6,936,994		6,132,571

Expenses
Losses and loss adjustment expenses	1,226,019		1,216,273		3,588,950		3,562,214
Acquisition expenses	306,015		247,942		945,639		750,014
Other operating expenses	230,832		215,686		736,808		659,479
Corporate expenses	19,672		17,937		61,007		56,653
Amortization of intangible assets	20,135		16,715		49,823		49,835
Interest expense	33,176		41,343		107,222		105,037
Net foreign exchange (gains) losses	(36,078)		44,885		(38,366)		11,425
Total expenses	1,799,771		1,800,781		5,451,083		5,194,657

Income (loss) before income taxes and income (loss) from operating affiliates	301,433		511,470		1,485,911		937,914
Income tax expense	(4,137)		(23,707)		(94,176)		(77,779)
Income (loss) from operating affiliates	124,119		919		224,052		6,262
Net income (loss)	$	421,415	$	488,682	$	1,615,787	$	866,397
Net (income) loss attributable to noncontrolling interests	(1,473)		(69,643)		(82,203)		(4,420)
Net income (loss) available to Arch	419,942		419,039		1,533,584		861,977
Preferred dividends	(16,090)		(10,403)		(38,159)		(31,209)
Loss on redemption of preferred shares	(15,101)		—		(15,101)		—
Net income (loss) available to Arch common shareholders	$	388,751	$	408,636	$	1,480,324	$	830,768

Net income per common share and common share equivalent
Basic	$	1.00	$	1.01	$	3.74	$	2.06
Diluted	$	0.98	$	1.00	$	3.66	$	2.02

Weighted average common shares and common share equivalents outstanding
Basic	389,274,220		402,850,485		395,899,591		403,081,266
Diluted	397,903,347		409,194,657		404,260,485		410,314,897

See Notes to Consolidated Financial Statements


ARCH CAPITAL			7			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)


	(Unaudited)				(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Comprehensive Income
Net income (loss)	$	421,415	$	488,682	$	1,615,787	$	866,397
Other comprehensive income (loss), net of deferred income tax
Unrealized appreciation (decline) in value of available-for-sale investments:
Unrealized holding gains (losses) arising during period	(95,923)		110,782		(279,102)		546,291

Reclassification of net realized (gains) losses, included in net income (loss)	(62,654)		(79,803)		(120,504)		(368,423)
Foreign currency translation adjustments	(31,710)		16,709		(54,089)		(5,729)
Comprehensive income (loss)	231,128		536,370		1,162,092		1,038,536
Net (income) loss attributable to noncontrolling interests	(1,473)		(69,643)		(82,203)		(4,420)
Other comprehensive (income) loss attributable to noncontrolling interests	9,423		(10,820)		13,983		2,127
Comprehensive income (loss) available to Arch	$	239,078	$	455,907	$	1,093,872	$	1,036,243

See Notes to Consolidated Financial Statements


ARCH CAPITAL			8			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)


	(Unaudited)				(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Non-cumulative preferred shares
Balance at beginning of period	$	1,280,000	$	780,000	$	780,000	$	780,000
Preferred shares issued	—		—		500,000		—
Preferred shares redeemed	(450,000)		—		(450,000)		—
Balance at beginning and end of period	$	830,000	$	780,000	$	830,000	$	780,000







Common shares
Balance at beginning of period	647		642		643		638
Common shares issued, net	1		—		5		4
Balance at end of period	648		642		648		642

Additional paid-in capital
Balance at beginning of period	2,028,919		1,935,514		1,977,794		1,889,683



Amortization of share-based compensation	14,216		14,662		71,279		55,872
Issue costs on preferred shares	—		—		(14,179)		—
Reversal of issue costs on preferred shares redeemed	15,101		—		15,101		—

Other changes	3,670		606		11,911		5,227
Balance at end of period	2,061,906		1,950,782		2,061,906		1,950,782

Retained earnings
Balance at beginning of period	13,454,036		11,420,686		12,362,463		11,021,006
Cumulative effect of an accounting change (1)	—		—		—		(22,452)
Balance at beginning of period, as adjusted	13,454,036		11,420,686		12,362,463		10,998,554
Net income (loss)	421,415		488,682		1,615,787		866,397
Net (income) loss attributable to noncontrolling interests	(1,473)		(69,643)		(82,203)		(4,420)
Preferred share dividends	(16,090)		(10,403)		(38,159)		(31,209)
Loss on redemption of preferred shares	(15,101)		—		(15,101)		—
Balance at end of period	13,842,787		11,829,322		13,842,787		11,829,322

Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period	230,048		349,488		488,895		212,091
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
Balance at beginning of period	264,702		418,487		501,295		258,486


Unrealized holding gains (losses) during period, net of reclassification adjustment	(158,577)		30,979		(399,606)		177,868
Unrealized holding gains (losses) during period attributable to noncontrolling interests	10,752		(11,179)		15,188		1,933

Balance at end of period	116,877		438,287		116,877		438,287
Foreign currency translation adjustments, net of deferred income tax:
Balance at beginning of period	(34,654)		(68,999)		(12,400)		(46,395)
Foreign currency translation adjustments	(31,710)		16,709		(54,089)		(5,729)
Foreign currency translation adjustments attributable to noncontrolling interests	(1,329)		360		(1,204)		194
Balance at end of period	(67,693)		(51,930)		(67,693)		(51,930)
Balance at end of period	49,184		386,357		49,184		386,357

Common shares held in treasury, at cost
Balance at beginning of period	(3,007,578)		(2,494,505)		(2,503,909)		(2,406,047)
Shares repurchased for treasury	(389,421)		(601)		(893,090)		(89,059)
Balance at end of period	(3,396,999)		(2,495,106)		(3,396,999)		(2,495,106)

Total shareholders’ equity available to Arch	13,387,526		12,451,997		13,387,526		12,451,997
Non-redeemable noncontrolling interests	—		757,920		—		757,920
Total shareholders’ equity	$	13,387,526	$	13,209,917	$	13,387,526	$	13,209,917

(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.

See Notes to Consolidated Financial Statements


ARCH CAPITAL			9			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)


	(Unaudited)
	Nine Months Ended
	September 30,
	2021		2020
Operating Activities
Net income (loss)	$	1,615,787	$	866,397
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized (gains) losses	(367,313)		(477,683)

Equity in net (income) or loss of investment funds accounted for using the equity method and other income or loss	(372,650)		30,306
Amortization of intangible assets	49,823		49,835
Share-based compensation	72,303		56,433
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable	1,548,211		1,668,069
Unearned premiums, net of ceded unearned premiums	985,242		498,811
Premiums receivable	(847,098)		(461,766)
Deferred acquisition costs	(247,966)		(107,238)
Reinsurance balances payable	618,571		205,620
Other items, net	(427,359)		2,666
Net cash provided by (used for) operating activities	2,627,551		2,331,450
Investing Activities
Purchases of fixed maturity investments	(29,870,023)		(34,050,883)
Purchases of equity securities	(978,951)		(1,355,848)
Purchases of other investments	(1,350,056)		(841,886)
Proceeds from sales of fixed maturity investments	30,067,792		32,544,867
Proceeds from sales of equity securities	695,633		731,793
Proceeds from sales, redemptions and maturities of other investments	1,487,919		791,807
Proceeds from redemptions and maturities of fixed maturity investments	1,234,412		645,292
Net settlements of derivative instruments	(67,830)		163,290

Net (purchases) sales of short-term investments	(1,172,798)		(1,159,351)
Change in cash collateral related to securities lending	—		81,210

Purchase of operating affiliate	(753,916)		—
Impact of the deconsolidation of the variable interest entity	(349,202)		—
Purchases of fixed assets	(34,407)		(26,717)
Other	(361,857)		(131,992)
Net cash provided by (used for) investing activities	(1,453,284)		(2,608,418)
Financing Activities
Proceeds from issuance of preferred shares, net	485,821		—
Redemption of preferred shares	(450,000)		—
Purchases of common shares under share repurchase program	(872,197)		(75,486)
Proceeds from common shares issued, net	281		(9,656)
Proceeds from borrowings	—		1,018,793
Repayments of borrowings	—		(304,000)
Change in cash collateral related to securities lending	—		(81,210)
Third party investment in non-redeemable noncontrolling interests	15,971		(2,867)

Dividends paid to redeemable noncontrolling interests	(1,907)		(3,541)
Other	(21,752)		55,266
Preferred dividends paid	(38,096)		(31,209)
Net cash provided by (used for) financing activities	(881,879)		566,090

Effects of exchange rate changes on foreign currency cash and restricted cash	(34,023)		(5,847)

Increase (decrease) in cash and restricted cash	258,365		283,275
Cash and restricted cash, beginning of year	1,290,544		903,698
Cash and restricted cash, end of period	$	1,548,909	$	1,186,973

See Notes to Consolidated Financial Statements


ARCH CAPITAL			10			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation and Recent Accounting Pronouncements

General

Arch Capital Group Ltd. (“Arch Capital”) is a public listed Bermuda 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. The Company’s consolidated financial statements included the results of Watford Holdings Ltd. and its wholly owned subsidiaries (“Watford”) through June 30, 2021. Effective July 1, 2021, Watford is wholly owned by Greysbridge Holdings Ltd., (“Greysbridge”) and Greysbridge is owned 40% by the Company, 30% by certain investment funds managed by Kelso & Company (“Kelso”) and 30% by certain investment funds managed by Warburg Pincus LLC (“Warburg”). Based on the governing documents of Greysbridge, the Company concluded that, while it retains significant influence over Watford, Watford no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Watford in its consolidated financial statements and footnotes. See note 12.

Basis of Presentation

The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020

(“2020 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.

The Company has reclassified the presentation of certain prior year information to conform to the current presentation, including the correct presentation of ‘income (loss) from operating affiliates’ on its consolidated statements of income for all periods presented to reclass such item from ‘other income (loss)’. The Company also changed its presentation of ‘investment in operating affiliates’ on its consolidated balance sheet for all periods presented to reclass such item from ‘other assets’. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. Management views the impact of the prior period misclassification as not material to the financial statements on a quantitative and qualitative basis. See note 8. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

Recent Accounting Pronouncements

Recently Issued Accounting Standards Adopted

The Company adopted ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This ASU eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod tax allocations and calculating income taxes in interim periods. The ASU also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

For information regarding additional accounting standards that the Company has not yet adopted, see note 3(r), “Significant Accounting Policies—Recent Accounting Pronouncements,” of the notes to consolidated financial statements in the Company’s 2020 Form 10-K.

2. Acquisitions

Westpac Lenders Mortgage Insurance Limited (“WLMI”)

On August 31, 2021, the Company completed the acquisition of WLMI, an Australian Prudential Regulation Authority authorized captive lenders mortgage insurance (“LMI”) provider to the Westpac Banking Corporation (“Westpac”). As part of the acquisition, WLMI will retain its existing risk in force and remain Westpac’s exclusive provider of LMI on new mortgage originations for a period of 10 years. Upon completion of this transaction, the Company renamed WLMI to Arch Lenders Mortgage Indemnity Limited (“ALMI”). ALMI will become the Company’s primary provider of LMI to the Australian market.


ARCH CAPITAL			11			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Somerset Bridge Group Limited, Southern Rock Holdings Limited and affiliates (“Somerset”)

On August 6, 2021, the Company completed the acquisition of Somerset. The acquisition includes Somerset’s motor insurance managing general agent, distribution capabilities through direct and aggregator channels, affiliated insurer and fully integrated claims operation.

In connection with the acquisitions noted above, the Company increased its goodwill and intangible assets by $337.4 million.

3. Share Transactions

Share Repurchases

The board of directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. Since the inception of the share repurchase program, Arch Capital has repurchased 412.0 million common shares for an aggregate purchase price of $4.92 billion. For the nine months ended September 30, 2021, Arch Capital repurchased 22.8 million shares under the share repurchase program with an aggregate purchase price of $872.2 million. Arch Capital repurchased 2.6 million shares under the share repurchase program with an aggregate purchase price of $75.5 million during the nine months ended September 30, 2020. At September 30, 2021, $44.3 million of share repurchases were available under the program, which may be effected from time to time in open market or privately negotiated transactions. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations. See note 17.

Series G Preferred Shares

In June 2021, Arch Capital completed a $500 million underwritten public offering of 20.0 million depositary shares (the “Depositary Shares”), each of which represents a 1/1,000th interest in a share of its 4.550% 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 Company’s board of directors or a duly authorized committee of the board. Any such dividends will be payable from, and including, the date of original issue on a non-cumulative basis, quarterly in arrears on the last day of March, June, September and December of each year, at an annual rate of 4.550%. Dividends on the Series G Preferred Shares are not cumulative. The Company will be restricted from paying dividends on or repurchasing its common shares unless certain dividend payments are made on the Series G Preferred Shares. The Company may not declare or pay a dividend on the Series G Preferred Shares under certain circumstances, including if the Company is or, after giving effect to such payment, would be in breach of applicable individual or group solvency and liquidity requirements or applicable individual or group enhanced capital requirements ("ECR"). The Series G Preferred Shares may not be redeemed at any time if the ECR would be breached immediately before or after giving effect to such redemption, unless the Company replaces the capital represented by preference shares to be redeemed with capital having equal or better capital treatment.

Except in specified circumstances relating to certain tax or corporate events, the Series G Preferred Shares are not redeemable prior to June 11, 2026. On and after that 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.

The net proceeds from the Series G Preferred Shares offering of approximately $485.8 million were primarily used to redeem the Company’s issued and outstanding 5.25% Series E Non-Cumulative Preferred Shares in September 2021. The preferred shares were redeemed at a redemption price equal to $25 per share, plus all declared and unpaid dividends to (but excluding) the redemption date. In accordance with GAAP, following the redemption, original issuance costs related to such shares have been removed from additional paid-in capital and recorded as a “loss on redemption of preferred shares.” Such adjustment had no impact on total shareholders’ equity or cash flows.


ARCH CAPITAL			12			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Numerator:
Net income (loss)	$	421,415	$	488,682	$	1,615,787	$	866,397
Amounts attributable to noncontrolling interests	(1,473)		(69,643)		(82,203)		(4,420)
Net income (loss) available to Arch	419,942		419,039		1,533,584		861,977
Preferred dividends	(16,090)		(10,403)		(38,159)		(31,209)
Loss on redemption of preferred shares	(15,101)		—		(15,101)		—
Net income (loss) available to Arch common shareholders	$	388,751	$	408,636	$	1,480,324	$	830,768

Denominator:


Weighted average common shares and common share equivalents outstanding — basic	389,274,220		402,850,485		395,899,591		403,081,266
Effect of dilutive common share equivalents:
Nonvested restricted shares	2,131,915		1,580,791		1,877,930		1,690,447
Stock options (1)	6,497,212		4,763,381		6,482,964		5,543,184
Weighted average common shares and common share equivalents outstanding — diluted	397,903,347		409,194,657		404,260,485		410,314,897

Earnings per common share:
Basic	$	1.00	$	1.01	$	3.74	$	2.06
Diluted	$	0.98	$	1.00	$	3.66	$	2.02

(1) Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2021 third quarter and 2020 third quarter, the number of stock options excluded were 1,948,006 and 4,713,241, respectively. For the nine months ended September 30, 2021 and 2020 period, the number of stock options excluded were 2,397,507 and 2,361,413, respectively.


ARCH CAPITAL			13			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. Segment Information

The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — ‘other’ and corporate (non-underwriting). The Company determined its reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.

The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers, the Chief Executive Officer of Arch Capital, the Chief Financial Officer and Treasurer of Arch Capital and the President and Chief Underwriting Officer of Arch Capital. The chief operating decision makers do not assess performance, measure return on equity or make resource allocation decisions on a line of business basis. Management measures segment performance for its three underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.

The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: construction and national accounts; excess and surplus casualty; lenders products; professional lines; programs; property, energy, marine and aviation; travel, accident and health; and other (consisting of alternative markets, excess workers' compensation and surety business).

The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).

The mortgage segment includes the Company’s U.S. primary mortgage insurance, U.S. credit-risk transfer (“CRT”) which are predominately with government sponsored enterprises (“GSE’s”) and international mortgage insurance and reinsurance operations. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE. Arch MI U.S. also includes Arch Mortgage Guaranty Company, which is not a GSE-approved entity.

The corporate (non-underwriting) segment results include net investment income, other income (loss), corporate expenses, transaction costs and other, interest expense, items related to the Company’s non-cumulative preferred shares, net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, income or loss from operating affiliates and income taxes. Such amounts exclude the results of the ‘other’ segment.

Through June 30, 2021, the ‘other’ segment included the results of Watford. In July 2021, the Company announced the completion of the previously disclosed acquisition of Watford by Greysbridge. Based on the governing documents of Greysbridge, the Company has concluded that, while it retains significant influence over Watford, Watford no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Watford in its consolidated financial statements. See note 12.


ARCH CAPITAL			14			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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:


	Three Months Ended
	September 30, 2021
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	1,596,619		$	1,251,760		$	360,934		$	3,207,415		$	—		$	3,207,415
Premiums ceded	(442,806)			(630,371)			(60,207)			(1,131,486)			—			(1,131,486)
Net premiums written	1,153,813			621,389			300,727			2,075,929			—			2,075,929
Change in unearned premiums	(215,143)			57,313			11,238			(146,592)			—			(146,592)
Net premiums earned	938,670			678,702			311,965			1,929,337			—			1,929,337
Other underwriting income (loss)	—			3,293			3,981			7,274			—			7,274
Losses and loss adjustment expenses	(668,630)			(545,846)			(11,543)			(1,226,019)			—			(1,226,019)
Acquisition expenses	(152,467)			(129,450)			(24,098)			(306,015)			—			(306,015)
Other operating expenses	(138,931)			(45,647)			(46,254)			(230,832)			—			(230,832)
Underwriting income (loss)	$	(21,358)		$	(38,948)		$	234,051		173,745			—			173,745

Net investment income										88,195			—			88,195
Net realized gains (losses)										(25,040)			—			(25,040)

Equity in net income (loss) of investment funds accounted for using the equity method										105,398			—			105,398
Other income (loss)										(3,960)			—			(3,960)
Corporate expenses (2)										(18,636)			—			(18,636)
Transaction costs and other (2)										(1,036)			—			(1,036)
Amortization of intangible assets										(20,135)			—			(20,135)
Interest expense										(33,176)			—			(33,176)
Net foreign exchange gains (losses)										36,078			—			36,078
Income (loss) before income taxes and income (loss) from operating affiliates										301,433			—			301,433
Income tax (expense) benefit										(4,137)			—			(4,137)
Income (loss) from operating affiliates										124,119			—			124,119
Net income (loss)										421,415			—			421,415
Amounts attributable to redeemable noncontrolling interests										(1,473)			—			(1,473)
Amounts attributable to nonredeemable noncontrolling interests										—			—			—
Net income (loss) available to Arch										419,942			—			419,942
Preferred dividends										(16,090)			—			(16,090)
Loss on redemption of preferred shares										(15,101)			—			(15,101)
Net income (loss) available to Arch common shareholders										$	388,751		$	—		$	388,751

Underwriting Ratios
Loss ratio	71.2		%	80.4		%	3.7		%	63.5		%	—		%	63.5		%
Acquisition expense ratio	16.2		%	19.1		%	7.7		%	15.9		%	—		%	15.9		%
Other operating expense ratio	14.8		%	6.7		%	14.8		%	12.0		%	—		%	12.0		%
Combined ratio	102.2		%	106.2		%	26.2		%	91.4		%	—		%	91.4		%

Goodwill and intangible assets	$	261,103		$	176,128		$	526,091		$	963,322		$	—		$	963,322

(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment transactions in the total.

(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’


ARCH CAPITAL			15			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Three Months Ended
	September 30, 2020
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	1,206,328		$	1,004,590		$	346,248		$	2,556,914		$	197,480		$	2,681,032
Premiums ceded	(382,167)			(400,388)			(47,783)			(830,086)			(50,164)			(806,888)
Net premiums written	824,161			604,202			298,465			1,726,828			147,316			1,874,144
Change in unearned premiums	(105,007)			(49,704)			52,944			(101,767)			(1,285)			(103,052)
Net premiums earned	719,154			554,498			351,409			1,625,061			146,031			1,771,092
Other underwriting income (loss)	(31)			298			4,600			4,867			546			5,413
Losses and loss adjustment expenses	(525,321)			(422,084)			(153,055)			(1,100,460)			(115,813)			(1,216,273)
Acquisition expenses	(102,420)			(85,388)			(35,716)			(223,524)			(24,418)			(247,942)
Other operating expenses	(122,541)			(41,818)			(36,708)			(201,067)			(14,619)			(215,686)
Underwriting income (loss)	$	(31,159)		$	5,506		$	130,530		104,877			(8,273)			96,604

Net investment income										99,857			28,655			128,512
Net realized gains (losses)										210,984			69,515			280,499

Equity in net income (loss) of investment funds accounted for using the equity method										126,735			—			126,735
Other income (loss)										—			—			—
Corporate expenses (2)										(16,263)			—			(16,263)
Transaction costs and other (2)										(1,674)			—			(1,674)
Amortization of intangible assets										(16,715)			—			(16,715)
Interest expense										(36,224)			(5,119)			(41,343)
Net foreign exchange gains (losses)										(38,681)			(6,204)			(44,885)
Income (loss) before income taxes and income (loss) from operating affiliates										432,896			78,574			511,470
Income tax (expense) benefit										(23,638)			(69)			(23,707)
Income (loss) from operating affiliates										919			—			919
Net income (loss)										410,177			78,505			488,682
Amounts attributable to redeemable noncontrolling interests										(882)			(993)			(1,875)
Amounts attributable to nonredeemable noncontrolling interests										—			(67,768)			(67,768)
Net income (loss) available to Arch										409,295			9,744			419,039
Preferred dividends										(10,403)			—			(10,403)

Net income (loss) available to Arch common shareholders										$	398,892		$	9,744		$	408,636

Underwriting Ratios
Loss ratio	73.0		%	76.1		%	43.6		%	67.7		%	79.3		%	68.7		%
Acquisition expense ratio	14.2		%	15.4		%	10.2		%	13.8		%	16.7		%	14.0		%
Other operating expense ratio	17.0		%	7.5		%	10.4		%	12.4		%	10.0		%	12.2		%
Combined ratio	104.2		%	99.0		%	64.2		%	93.9		%	106.0		%	94.9		%

Goodwill and intangible assets	$	282,146		$	20,319		$	403,662		$	706,127		$	7,650		$	713,777

(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’


ARCH CAPITAL			16			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Nine Months Ended
	September 30, 2021
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	4,381,372		$	4,080,840		$	1,143,691		$	9,602,213		$	457,465		$	9,890,912
Premiums ceded	(1,269,165)			(1,535,607)			(171,923)			(2,973,005)			(102,763)			(2,907,002)
Net premiums written	3,112,207			2,545,233			971,768			6,629,208			354,702			6,983,910
Change in unearned premiums	(488,636)			(484,607)			10,735			(962,508)			(22,734)			(985,242)
Net premiums earned	2,623,571			2,060,626			982,503			5,666,700			331,968			5,998,668
Other underwriting income (loss)	—			3,148			15,026			18,174			739			18,913
Losses and loss adjustment expenses	(1,750,257)			(1,494,539)			(85,112)			(3,329,908)			(259,042)			(3,588,950)
Acquisition expenses	(417,541)			(381,060)			(84,297)			(882,898)			(62,741)			(945,639)
Other operating expenses	(409,386)			(150,856)			(143,697)			(703,939)			(32,869)			(736,808)
Underwriting income (loss)	$	46,387		$	37,319		$	684,423		$	768,129		$	(21,945)		$	746,184

Net investment income										256,354			42,310			298,664
Net realized gains (losses)										239,690			80,638			320,328

Equity in net income (loss) of investment funds accounted for using the equity method										299,270			—			299,270
Other income (loss)										1,151			—			1,151
Corporate expenses (2)										(59,279)			—			(59,279)
Transaction costs and other (2)										(793)			(935)			(1,728)
Amortization of intangible assets										(48,925)			(898)			(49,823)
Interest expense										(98,812)			(8,410)			(107,222)
Net foreign exchange gains (losses)										39,691			(1,325)			38,366
Income (loss) before income taxes and income (loss) from operating affiliates										1,396,476			89,435			1,485,911
Income tax (expense) benefit										(93,942)			(234)			(94,176)
Income (loss) from operating affiliates										224,052			—			224,052
Net income (loss)										1,526,586			89,201			1,615,787
Amounts attributable to redeemable noncontrolling interests										(1,936)			(1,953)			(3,889)
Amounts attributable to nonredeemable noncontrolling interests										—			(78,314)			(78,314)
Net income (loss) available to Arch										1,524,650			8,934			1,533,584
Preferred dividends										(38,159)			—			(38,159)
Loss on redemption of preferred shares										(15,101)			—			(15,101)
Net income (loss) available to Arch common shareholders										$	1,471,390		$	8,934		$	1,480,324

Underwriting Ratios
Loss ratio	66.7		%	72.5		%	8.7		%	58.8		%	78.0		%	59.8		%
Acquisition expense ratio	15.9		%	18.5		%	8.6		%	15.6		%	18.9		%	15.8		%
Other operating expense ratio	15.6		%	7.3		%	14.6		%	12.4		%	9.9		%	12.3		%
Combined ratio	98.2		%	98.3		%	31.9		%	86.8		%	106.8		%	87.9		%

(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’


ARCH CAPITAL			17			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Nine Months Ended
	September 30, 2020
	Insurance			Reinsurance			Mortgage			Sub-Total			Other			Total

Gross premiums written (1)	$	3,444,335		$	2,934,174		$	1,084,337		$	7,461,860		$	590,309		$	7,831,554
Premiums ceded	(1,119,165)			(967,698)			(136,154)			(2,222,031)			(150,437)			(2,151,853)
Net premiums written	2,325,170			1,966,476			948,183			5,239,829			439,872			5,679,701
Change in unearned premiums	(202,188)			(388,321)			113,965			(476,544)			(22,267)			(498,811)
Net premiums earned	2,122,982			1,578,155			1,062,148			4,763,285			417,605			5,180,890
Other underwriting income (loss)	(31)			1,767			15,649			17,385			1,547			18,932
Losses and loss adjustment expenses	(1,550,632)			(1,235,586)			(444,721)			(3,230,939)			(331,275)			(3,562,214)
Acquisition expenses	(317,428)			(255,516)			(108,304)			(681,248)			(68,766)			(750,014)
Other operating expenses	(370,947)			(125,831)			(120,178)			(616,956)			(42,523)			(659,479)
Underwriting income (loss)	$	(116,056)		$	(37,011)		$	404,594		$	251,527		$	(23,412)		$	228,115

Net investment income										313,916			91,234			405,150
Net realized gains (losses)										523,964			(53,837)			470,127

Equity in net income (loss) of investment funds accounted for using the equity method										57,407			—			57,407
Other income (loss)										65			—			65
Corporate expenses (2)										(51,407)			—			(51,407)
Transaction costs and other (2)										(5,246)			—			(5,246)
Amortization of intangible assets										(49,835)			—			(49,835)
Interest expense										(86,599)			(18,438)			(105,037)
Net foreign exchange gains (losses)										(17,812)			6,387			(11,425)
Income (loss) before income taxes and income (loss) from operating affiliates										935,980			1,934			937,914
Income tax (expense) benefit										(78,112)			333			(77,779)
Income (loss) from operating affiliates										6,262			—			6,262
Net income (loss)										864,130			2,267			866,397
Amounts attributable to redeemable noncontrolling interests										(1,873)			(3,125)			(4,998)
Amounts attributable to nonredeemable noncontrolling interests										—			578			578
Net income (loss) available to Arch										862,257			(280)			861,977
Preferred dividends										(31,209)			—			(31,209)

Net income (loss) available to Arch common shareholders										$	831,048		$	(280)		$	830,768

Underwriting Ratios
Loss ratio	73.0		%	78.3		%	41.9		%	67.8		%	79.3		%	68.8		%
Acquisition expense ratio	15.0		%	16.2		%	10.2		%	14.3		%	16.5		%	14.5		%
Other operating expense ratio	17.5		%	8.0		%	11.3		%	13.0		%	10.2		%	12.7		%
Combined ratio	105.5		%	102.5		%	63.4		%	95.1		%	106.0		%	96.0		%

(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’


ARCH CAPITAL			18			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6. Reserve for Losses and Loss Adjustment Expenses

The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Reserve for losses and loss adjustment expenses at beginning of period	$	17,196,648	$	15,044,874	$	16,513,929	$	13,891,842
Unpaid losses and loss adjustment expenses recoverable	4,146,020		4,156,157		4,314,855		4,082,650
Net reserve for losses and loss adjustment expenses at beginning of period	13,050,628		10,888,717		12,199,074		9,809,192

Net incurred losses and loss adjustment expenses relating to losses occurring in:
Current year	1,348,528		1,264,315		3,812,381		3,673,346
Prior years	(122,509)		(48,042)		(223,431)		(111,132)
Total net incurred losses and loss adjustment expenses	1,226,019		1,216,273		3,588,950		3,562,214

Net losses and loss adjustment expense reserves of acquired business (2)	104,307		—		104,307		$	—

Retroactive reinsurance transactions (1)	—		—		(183,893)		60,635

Impact of deconsolidation of Watford (3)	(1,460,611)		—		(1,460,611)		—

Net foreign exchange (gains) losses	(78,152)		114,122		10,818		22,706

Net paid losses and loss adjustment expenses relating to losses occurring in:
Current year	(208,923)		(189,961)		(432,348)		(359,395)
Prior years	(417,368)		(512,263)		(1,610,397)		(1,578,464)
Total net paid losses and loss adjustment expenses	(626,291)		(702,224)		(2,042,745)		(1,937,859)

Net reserve for losses and loss adjustment expenses at end of period	12,215,900		11,516,888		12,215,900		11,516,888
Unpaid losses and loss adjustment expenses recoverable	5,115,147		4,383,638		5,115,147		4,383,638
Reserve for losses and loss adjustment expenses at end of period	$	17,331,047	$	15,900,526	$	17,331,047	$	15,900,526

(1) During the 2021 first quarter, the Company entered into a reinsurance to close and other related agreements with Premia Managing Agency Limited (“Premia”), in connection with the 2018 and prior years of account related to the acquisition of Barbican Group Holdings Limited (“Barbican”). During the 2020 first quarter, the Company entered into a reinsurance to close agreement of the 2017 and prior years of account previously covered by a third party arrangement.

(2) Represents activity related to the Company’s acquisitions in the 2021 period. See note 2.

(3) See note 12.

Development on Prior Year Loss Reserves

2021 Third Quarter

During the 2021 third quarter, the Company recorded net favorable development on prior year loss reserves of $122.5 million, which consisted of $5.1 million from the insurance segment, $72.3 million from the reinsurance segment and $45.1 million from the mortgage segment.

The insurance segment’s net favorable development of $5.1 million, or 0.5 loss ratio points, for the 2021 third quarter consisted of $49.0 million of net favorable development in short-tailed and long-tailed lines and $43.9 million of net adverse development in medium-tailed lines. Net favorable development in short-tailed lines reflected $5.4 million of

favorable development in lenders products, primarily from the 2020 accident year (i.e., the year in which a loss occurred), $5.4 million of favorable development from property (excluding marine), primarily from the 2020 accident year, and $5.1 million of favorable development in travel and accident, across most accident years. Net favorable development in long-tailed lines reflected $26.3 million of favorable development related to construction and national accounts, across most accident years, and $6.7 million of favorable development related to other business, including alternative markets, primarily from the 2015 to 2018 accident years. Net adverse development in medium-tailed lines included $37.0 million of adverse development in contract binding business, across most accident years, partially offset by favorable development in marine and programs, primarily from more recent accident years.


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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The reinsurance segment’s net favorable development of $72.3 million, or 10.7 loss ratio points, for the 2021 third quarter consisted of $65.4 million of net favorable development in short-tailed lines and $6.9 million in medium-tailed and long-tailed lines. Net favorable development in short-tailed lines reflected $46.1 million of favorable development related to property catastrophe and property other than property catastrophe business, primarily from the 2017 to 2020 underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period) and $18.9 million of favorable development related to other specialty, primarily from the 2012 to 2017 underwriting years. Net favorable development in medium-tailed and long-tailed lines included $4.7 million of favorable development in casualty, primarily from the 2013 and 2014 underwriting years.

The mortgage segment’s net favorable development was $45.1 million, or 14.5 loss ratio points, for the 2021 third quarter, about half of which came from U.S. primary mortgage insurance, from better than expected cure activity in pre-pandemic delinquencies and recoveries on second lien and student loans, and the other half from our CRT portfolio and international mortgage insurance.

2020 Third Quarter

During the 2020 third quarter, the Company recorded net favorable development on prior year loss reserves of $48.0 million, which consisted of $2.3 million from the insurance segment, $42.0 million from the reinsurance segment and $4.5 million from the mortgage segment, partially offset by $0.7 million unfavorable from the ‘other’ segment.

The insurance segment’s net favorable development of $2.3 million, or 0.3 loss ratio points, for the 2020 third quarter consisted of $12.9 million of net favorable development in short-tailed and long-tailed lines and $10.6 million of net adverse development in medium-tailed lines. Net favorable development of $11.8 million in short-tailed lines reflected $8.0 million of favorable development from property (excluding marine), primarily from the 2015 to 2018 accident years and $3.4 million of favorable development in travel and accident, primarily from the 2019 accident year. Net favorable development of $1.1 million in long-tailed lines reflected $8.7 million of favorable development in construction and national accounts, primarily from the 2018 accident year, and $4.2 million of favorable development related to other business, including alternative markets and excess workers’ compensation, primarily from the 2013 to 2017 accident years, partially offset by $11.7 million of adverse development in executive assurance and casualty, primarily from the 2015 and 2019 accident year. Net adverse development in medium-tailed lines included $7.1 million of adverse development in program business, primarily from

2015 to 2018 accident years and $3.7 million of adverse development in contract binding, across all accident years.

The reinsurance segment’s net favorable development of $42.0 million, or 7.6 loss ratio points, for the 2020 third quarter consisted of $45.6 million of net favorable development in short-tailed and medium-tailed lines and net adverse development of $3.6 million from long-tailed lines. Net favorable development in short-tailed lines reflected $27.6 million of favorable development related to property catastrophe and property other than property catastrophe business, primarily from the 2016 to 2019 underwriting years and $7.8 million of favorable development from other specialty, primarily from the 2016 to 2019 underwriting years. Net favorable development of $9.4 million in medium-tailed lines reflected favorable development in marine and aviation across most underwriting years. Adverse development of $3.6 million in long-tailed lines reflected an increase in reserves from casualty, primarily from the 2012 to 2019 underwriting years.

The mortgage segment’s net favorable development was $4.5 million, or 1.3 loss ratio points, for the 2020 third quarter, primarily driven by subrogation recoveries on second lien and student loan business.

Nine Months Ended September 30, 2021

During the nine months ended September 30, 2021, the Company recorded net favorable development on prior year loss reserves of $223.4 million, which consisted of $13.1 million from the insurance segment, $119.6 million from the reinsurance segment and $99.1 million from the mortgage segment, partially offset by $8.4 million of adverse development from the ‘other’ segment (activity for the six months ended June 30, 2021 prior to deconsolidation of Watford).

The insurance segment’s net favorable development of $13.1 million, or 0.5 loss ratio points, for the 2021 period consisted of $102.5 million of net favorable development in short-tailed and long-tailed lines, partially offset by $89.4 million of net adverse development in medium-tailed lines. Net favorable development of $65.3 million in short-tailed lines reflected $27.0 million of favorable development from property (excluding marine), primarily from the 2019 and 2020 accident years, $24.0 million of favorable development in lenders products, primarily from the 2020 accident year, and $14.4 million of favorable development in travel and accident, primarily from the 2017 to 2020 accident years. Net favorable development of $37.1 million in long-tailed lines included favorable development primarily related to construction, national accounts and alternative markets, primarily from the 2016 to 2019 accident years. Net adverse development in medium-tailed lines reflected $57.1 million of adverse development in contract binding business, primarily from the 2014 to 2019 accident years, $26.2 million of adverse development in professional liability business,


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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

primarily from the 2019 and 2020 accident years, and $6.9 million of adverse development in programs business, primarily from the 2019 accident year.

The reinsurance segment’s net favorable development of $119.6 million, or 5.8 loss ratio points, for the 2021 period consisted of $139.7 million of net favorable development from short-tailed and medium-tailed lines, partially offset by $20.1 million of net adverse development from long-tailed lines. Net favorable development of $132.6 million in short-tailed lines reflected $97.1 million of favorable development from other specialty lines, primarily from the 2016 to 2019 underwriting years, and $71.7 million of favorable development from property other than property catastrophe business, primarily from the 2017 to 2020 underwriting years. Such amounts were partially offset by adverse development of $36.3 million from property catastrophe, primarily from the 2020 underwriting year. Adverse development in long-tailed lines reflected an increase in reserves from casualty, primarily from the 2018 underwriting year.

The mortgage segment’s net favorable development was $99.1 million, or 10.1 loss ratio points, for the 2021 period, which included reserve releases associated with various vintage credit risk transfer contracts that were called by the GSEs, favorable development on U.S. and international business and subrogation recoveries on second lien and student loan business.

Nine Months Ended September 30, 2020

During the nine months ended September 30, 2020, the Company recorded net favorable development on prior year loss reserves of $111.1 million, which consisted of $5.9 million from the insurance segment, $93.8 million from the reinsurance segment, $10.8 million from the mortgage segment and $0.6 million from the ‘other’ segment.

The insurance segment’s net favorable development of $5.9 million, or 0.3 loss ratio points, for the 2020 period consisted of $41.6 million of net favorable development in short-tailed and long-tailed lines, partially offset by $35.7 million of net adverse development in medium-tailed lines. Net favorable development of $27.2 million in short-tailed lines reflected $17.5 million of favorable development from property (excluding marine), primarily from the 2015 to 2018 accident years, $6.2 million of favorable development on travel and accident, primarily from 2019 accident year, and $3.5 million of favorable development in lenders products, primarily from the 2018 and 2019 accident years. Net favorable development of $14.4 million in long-tailed lines included $11.7 million of favorable development related to other business, including alternative markets and excess workers’ compensation, primarily from the 2013 to 2017 accident years. Net adverse development in medium-tailed lines reflected $23.0 million of adverse development in contract binding business, across all accident years, and $13.5 million of adverse development

in program business, primarily from the 2016 to 2018 accident years.

The reinsurance segment’s net favorable development of $93.8 million, or 5.9 loss ratio points, for the 2020 period consisted of $113.0 million of net favorable development from short-tailed and medium-tailed lines, partially offset by $19.2 million of net adverse development from long-tailed lines. Net favorable development of $101.8 million in short-tailed lines reflected $52.1 million related to property catastrophe and property other than property catastrophe business, primarily from the 2016 to 2019 underwriting years, and $47.1 million from other specialty lines, across most underwriting years. Adverse development in long-tailed lines of $19.2 million reflected an increase in reserves from casualty, primarily from the 2012 to 2015 underwriting years.

The mortgage segment’s net favorable development was $10.8 million, or 1.0 loss ratio points, for the 2020 period, primarily driven by subrogation recoveries on second lien and student loan business.

7. Allowance for Expected Credit Losses

Premiums Receivable

The following table provides a roll forward of the allowance for expected credit losses of the Company’s premium receivables:


	Premium Receivables, Net of Allowance		Allowance for Expected Credit Losses
Three Months Ended September 30, 2021
Balance at beginning of period	$	2,866,578	$	35,979

Change for provision of expected credit losses (1)			2,736


Balance at end of period	$	2,807,720	$	38,715

Three Months Ended September 30, 2020
Balance at beginning of period	$	2,203,753	$	36,054

Change for provision of expected credit losses (1)			1,046
Balance at end of period	$	2,225,311	$	37,100

Nine Months Ended September 30, 2021
Balance at beginning of period	$	2,064,586	$	37,781

Change for provision of expected credit losses (1)			934


Balance at end of period	$	2,807,720	$	38,715

Nine Months Ended September 30, 2020
Balance at beginning of period	$	1,778,717	$	21,003
Cumulative effect of accounting change (2)			6,539
Change for provision of expected credit losses (1)			9,558


Balance at end of period	$	2,225,311	$	37,100

(1)Amounts deemed uncollectible are written-off in operating expenses. For the 2021 third quarter and 2020 third quarter, amounts written off were $1.2 million and nil, respectively. For the nine months ended September 30, 2021 and 2020 period, amounts written off were were $2.4 million and $2.3 million, respectively.

(2)Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.


ARCH CAPITAL			21			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Reinsurance Recoverables

The following table provides a roll forward of the allowance for expected credit losses of the Company’s reinsurance recoverables:


	Reinsurance Recoverables, Net of Allowance		Allowance for Expected Credit Losses
Three Months Ended September 30, 2021
Balance at beginning of period	$	4,314,515	$	11,029

Change for provision of expected credit losses			1,802


Balance at end of period	$	5,358,852	$	12,831

Three Months Ended September 30, 2020
Balance at beginning of period	$	4,363,507	$	13,595

Change for provision of expected credit losses			399
Balance at end of period	$	4,621,937	$	13,994

Nine Months Ended September 30, 2021
Balance at beginning of period	$	4,500,802	$	11,636

Change for provision of expected credit losses			1,195


Balance at end of period	$	5,358,852	$	12,831

Nine Months Ended September 30, 2020
Balance at beginning of period	$	4,346,816	$	1,364
Cumulative effect of accounting change (1)			12,010
Change for provision of expected credit losses			620


Balance at end of period	$	4,621,937	$	13,994

(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.

The following table summarizes the Company’s reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums):


	September 30,			December 31
	2021			2020
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	$	5,358,852		$	4,500,802
% due from carriers with A.M. Best rating of “A-” or better	69.1		%	63.9		%
% due from all other carriers with no A.M. Best rating (1)	30.9		%	36.1		%
Largest balance due from any one carrier as % of total shareholders’ equity	6.5		%	1.8		%

(1) At September 30, 2021 and December 31, 2020 over 93% and 94% of such amount were collateralized through reinsurance trusts, funds withheld arrangements, letters of credit or other, respectively.

Contractholder Receivables

The following table provides a roll forward of the allowance for expected credit losses of the Company’s contractholder receivables:



	Contract-holder Receivables, Net of Allowance		Allowance for Expected Credit Losses
Three Months Ended September 30, 2021
Balance at beginning of period	$	1,882,948	$	4,471

Change for provision of expected credit losses			(987)


Balance at end of period	$	1,824,990	$	3,484


Three Months Ended September 30, 2020
Balance at beginning of period	$	2,179,124	$	6,290

Change for provision of expected credit losses			(389)


Balance at end of period	2,185,614		$	5,901

Nine Months Ended September 30, 2021
Balance at beginning of period	$	1,986,924	$	8,638

Change for provision of expected credit losses			(5,154)


Balance at end of period	$	1,824,990	$	3,484

Nine Months Ended September 30, 2020
Balance at beginning of period	$	2,119,460	$	—
Cumulative effect of accounting change (1)			6,663
Change for provision of expected credit losses			(762)


Balance at end of period	$	2,185,614	$	5,901

(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.


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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8. 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 (2)		Cost or Amortized Cost
September 30, 2021
Fixed maturities (1):
Corporate bonds	$	6,403,617	$	155,246	$	(40,649)	$	(1,440)	$	6,290,460
Mortgage backed securities	405,797		3,384		(3,966)		(24)		406,403
Municipal bonds	382,722		20,096		(1,206)		(2)		363,834
Commercial mortgage backed securities	579,424		3,598		(548)		(3)		576,377
U.S. government and government agencies	4,460,515		12,912		(30,320)		—		4,477,923
Non-U.S. government securities	1,863,734		46,378		(28,948)		(82)		1,846,386
Asset backed securities	2,672,554		12,576		(7,700)		(560)		2,668,238
Total	16,768,363		254,190		(113,337)		(2,111)		16,629,621

Short-term investments	3,069,965		1,625		(1,780)		—		3,070,120
Total	$	19,838,328	$	255,815	$	(115,117)	$	(2,111)	$	19,699,741

December 31, 2020
Fixed maturities (1):
Corporate bonds	$	7,856,571	$	414,247	$	(34,388)	$	(896)	$	7,477,608
Mortgage backed securities	630,001		8,939		(5,028)		(278)		626,368
Municipal bonds	494,522		27,291		(3,835)		(11)		471,077
Commercial mortgage backed securities	389,900		8,722		(2,954)		(122)		384,254
U.S. government and government agencies	5,557,077		22,612		(12,611)		—		5,547,076
Non-U.S. government securities	2,433,733		153,891		(8,060)		—		2,287,902
Asset backed securities	1,634,804		19,225		(10,715)		(1,090)		1,627,384
Total	18,996,608		654,927		(77,591)		(2,397)		18,421,669

Short-term investments	1,924,922		2,693		(2,063)		—		1,924,292
Total	$	20,921,530	$	657,620	$	(79,654)	$	(2,397)	$	20,345,961

(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See “—Securities Lending Agreements.” In September 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions.

(2) Effective January 1, 2020, the Company adopted ASU 2016-13 and as a result any credit impairment losses on the Company’s available-for-sale investments are recorded as an allowance, subject to reversal.


ARCH CAPITAL			23			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:


	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
September 30, 2021
Fixed maturities (1):
Corporate bonds	$	2,744,615	$	(36,595)	$	68,450	$	(4,054)	$	2,813,065	$	(40,649)
Mortgage backed securities	257,789		(3,113)		22,769		(853)		280,558		(3,966)
Municipal bonds	46,450		(731)		7,148		(475)		53,598		(1,206)
Commercial mortgage backed securities	76,518		(256)		6,578		(292)		83,096		(548)
U.S. government and government agencies	3,621,719		(29,797)		9,755		(523)		3,631,474		(30,320)
Non-U.S. government securities	1,283,266		(27,523)		22,304		(1,425)		1,305,570		(28,948)
Asset backed securities	1,119,638		(6,524)		37,078		(1,176)		1,156,716		(7,700)
Total	9,149,995		(104,539)		174,082		(8,798)		9,324,077		(113,337)

Short-term investments	265,011		(1,780)		—		—		265,011		(1,780)
Total	$	9,415,006	$	(106,319)	$	174,082	$	(8,798)	$	9,589,088	$	(115,117)

December 31, 2020
Fixed maturities (1):
Corporate bonds	$	747,442	$	(33,086)	$	3,934	$	(1,302)	$	751,376	$	(34,388)
Mortgage backed securities	284,619		(4,788)		3,637		(240)		288,256		(5,028)
Municipal bonds	67,937		(3,835)		—		—		67,937		(3,835)
Commercial mortgage backed securities	126,624		(2,916)		2,655		(38)		129,279		(2,954)
U.S. government and government agencies	1,285,907		(12,611)		—		—		1,285,907		(12,611)
Non-U.S. government securities	543,844		(7,658)		2,441		(402)		546,285		(8,060)
Asset backed securities	634,470		(9,110)		57,737		(1,605)		692,207		(10,715)
Total	3,690,843		(74,004)		70,404		(3,587)		3,761,247		(77,591)

Short-term investments	97,920		(2,063)		—		—		97,920		(2,063)
Total	$	3,788,763	$	(76,067)	$	70,404	$	(3,587)	$	3,859,167	$	(79,654)

At September 30, 2021, on a lot level basis, approximately 3,910 security lots out of a total of approximately 10,020 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $2.5 million. At December 31, 2020, on a lot level basis, approximately 2,320 security lots out of a total of approximately 11,180 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $0.9 million.


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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2021				December 31, 2020
Maturity	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Due in one year or less	$	416,601	$	410,373	$	348,200	$	339,951
Due after one year through five years	7,862,472		7,772,773		10,629,959		10,340,819
Due after five years through 10 years	4,483,025		4,453,526		4,881,564		4,654,754
Due after 10 years	348,490		341,931		482,180		448,139
	13,110,588		12,978,603		16,341,903		15,783,663
Mortgage backed securities	405,797		406,403		630,001		626,368
Commercial mortgage backed securities	579,424		576,377		389,900		384,254
Asset backed securities	2,672,554		2,668,238		1,634,804		1,627,384
Total (1)	$	16,768,363	$	16,629,621	$	18,996,608	$	18,421,669

Securities Lending Agreements

In September 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions to enhance investment income. Prior to the termination of this program, the Company loaned certain of its securities to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintained legal control over the securities it lent (shown as ‘Securities pledged under securities lending, at fair value’ on the Company’s balance sheet), retained the earnings and cash flows associated with the loaned securities and received a fee from the borrower for the temporary use of the securities. An indemnification agreement with the lending agent protected the Company in the event a borrower became insolvent or failed to return any of the securities on loan from the Company.

The Company received collateral (shown as ‘Collateral received under securities lending, at fair value’ on the Company’s balance sheet) in the form of cash or U.S. government and government agency securities. At September 30, 2021, the Company had no cash collateral or security collateral due to the termination of the program. At December 31, 2020, the fair value of the cash collateral received on securities lending was nil, and the fair value of security collateral received was $301.1 million.

The carrying value of collateral held under the Company’s securities lending transactions by significant investment category and remaining contractual maturity of the underlying agreements was as follows at December 31, 2020 (no balances at September 30, 2021 due to the termination of the program):


	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Less than 30 Days		30-90 Days		90 Days or More		Total








December 31, 2020
U.S. government and government agencies	$	142,317	$	—	$	139,290	$	—	$	281,607
Corporate bonds	3,021		—		—		—		3,021
Equity securities	16,461		—		—		—		16,461
Total	$	161,799	$	—	$	139,290	$	—	$	301,089
Gross amount of recognized liabilities for securities lending in offsetting disclosure in note 10									$	—
Amounts related to securities lending not included in offsetting disclosure in note 10									$	301,089

Equity Securities, at Fair Value

At September 30, 2021, the Company held $1.8 billion of equity securities, at fair value, compared to $1.4 billion at

December 31, 2020. Such holdings include publicly traded common stocks primarily in the consumer cyclical and non-cyclical, technology, communication and financial sectors


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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

and exchange-traded funds in fixed income, equity and other sectors.

Other Investments

The following table summarizes the Company’s other investments and other investable assets:


	September 30, 2021		December 31, 2020
Fixed maturities	$	414,007	$	843,354
Other investments	1,489,759		2,331,885
Short-term investments	115,681		557,008
Equity securities	24,523		92,549
Investments accounted for using the fair value option	$	2,043,970	$	3,824,796

Other investable assets (1)	—		500,000
Total other investments	$	2,043,970	$	4,324,796

(1) Participation interests in a receivable of a reverse repurchase agreement.

The following table summarizes the Company’s other investments, as detailed in the previous table, by strategy:


	September 30, 2021		December 31, 2020
Term loan investments	$	528,585	$	1,231,731
Lending	579,563		572,636
Credit related funds	56,997		90,780
Energy	84,880		65,813
Investment grade fixed income	131,910		138,646
Infrastructure	26,359		165,516
Private equity	81,465		48,750
Real estate	—		18,013
Total	$	1,489,759	$	2,331,885

Investments Accounted For Using the Equity Method

The following table summarizes the Company’s investments accounted for using the equity method, by strategy:


	September 30, 2021		December 31, 2020
Credit related funds	$	952,794	$	740,060
Equities	414,322		343,058
Real estate	340,510		258,518
Lending	330,368		179,629
Private equity	365,840		235,289
Infrastructure	222,484		175,882
Energy	114,975		115,453
Total	$	2,741,293	$	2,047,889

Certain of the Company’s other investments are in investment funds for which the Company has the option to redeem at agreed upon values as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investments in investment funds may be redeemed daily, monthly, quarterly or on other terms. Two common redemption restrictions

which may impact the Company’s ability to redeem these investment funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the investment fund’s net assets which may otherwise hinder the general partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. If the investment funds are eligible to be redeemed, the time to redeem such fund can take weeks or months following the notification.

Limited Partnership Interests

In the normal course of its activities, the Company invests in limited partnerships as part of its overall investment strategy. Such amounts are included in ‘investments accounted for using the equity method’ and ‘investments accounted for using the fair value option.’ The Company has determined that it is not required to consolidate these investments because it is not the primary beneficiary of the funds. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment.

The following table summarizes investments in limited partnership interests where the Company has a variable interest by balance sheet line item:


	September 30, 2021		December 31, 2020
Investments accounted for using the equity method (1)	2,741,293		2,047,889
Investments accounted for using the fair value option (2)	176,884		184,720
Total	$	2,918,177	$	2,232,609

(1) Aggregate unfunded commitments were $2.3 billion at September 30, 2021, compared to $1.8 billion at December 31, 2020.

(2) Aggregate unfunded commitments were $22.9 million at September 30, 2021, compared to $35.6 million at December 31, 2020.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Net Investment Income

The components of net investment income were derived from the following sources:


	September 30,
	2021		2020
Three Months Ended
Fixed maturities	$	75,964	$	98,344
Term loans	1,736		22,459
Equity securities	9,867		6,659
Short-term investments	1,858		1,332
Other (1)	17,378		22,060
Gross investment income	106,803		150,854
Investment expenses	(18,608)		(22,342)
Net investment income	$	88,195	$	128,512

Nine Months Ended
Fixed maturities	$	255,215	$	318,582
Term loans	33,343		66,141
Equity securities	24,101		18,885
Short-term investments	3,603		9,611
Other (1)	51,683		57,926
Gross investment income	367,945		471,145
Investment expenses	(69,281)		(65,995)
Net investment income	$	298,664	$	405,150

(1) Includes income distributions from investment funds and other items.

Net Realized Gains (Losses)

Net realized gains (losses), which include changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings were as follows:


	September 30,
	2021		2020
Three Months Ended
Available for sale securities:
Gross gains on investment sales	$	86,819	$	104,733
Gross losses on investment sales	(18,446)		(16,862)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	(7,492)		34,115
Other investments	3,811		61,622
Equity securities	3,042		4,048
Short-term investments	16		3,377
Equity securities, at fair value:
Net realized gains (losses) on sales during the period	14,736		26,549
Net unrealized gains (losses) on equity securities still held at reporting date	(40,155)		33,562
Allowance for credit losses:
Investments related	(456)		1,332
Underwriting related	(3,985)		351

Derivative instruments (1)	(21,435)		20,369
Other (2)	(41,495)		7,303
Net realized gains (losses)	$	(25,040)	$	280,499

Nine Months Ended
Available for sale securities:
Gross gains on investment sales	$	267,362	$	515,086
Gross losses on investment sales	(132,071)		(98,654)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities	19,973		(25,370)
Other investments	111,550		(67,608)
Equity securities	10,599		5,803
Short-term investments	648		(1,936)
Equity securities, at fair value:
Net realized gains (losses) on sales during the period	86,155		7,760
Net unrealized gains (losses) on equity securities still held at reporting date	45,400		3,682
Allowance for credit losses:
Investments related	(1,208)		(4,763)
Underwriting related	2,664		(8,753)
Net impairments losses	—		(533)
Derivative instruments (1)	(36,428)		146,722
Other (2)	(54,316)		(1,309)
Net realized gains (losses)	$	320,328	$	470,127

(1) See note 10 for information on the Company’s derivative instruments.

(2) 2021 periods reflected $33.1 million of losses related to the Company’s deconsolidation of Watford.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method

The Company recorded $105.4 million of equity in net income related to investment funds accounted for using the equity method in the 2021 third quarter, compared to income of $126.7 million for the 2020 third quarter, and an income of $299.3 million for the nine months ended September 30, 2021, compared to income of $57.4 million for nine months ended September 30, 2020. In applying the equity method, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds.

Investments in Operating Affiliates

Investments in which the Company has significant influence over the operating and financial policies are classified as ‘investments in operating affiliates’ on the Company’s balance sheets and are accounted for under the equity method. Such investments primarily include the Company’s investment in Coface, Greysbridge and Premia. Investments in Coface and Premia are generally recorded on a three month lag, while the Company’s investment in Greysbridge is not recorded on a lag.

In 2021, the Company completed the share purchase agreement with Natixis to purchase 29.5% of the common equity of Coface, a France-based leader in the global trade credit insurance market. The consideration paid was €9.95 per share, or an aggregate €453 million (approximately $546 million) including related fees. Income (loss) from

operating affiliates reflected a one-time gain of $74.5 million realized from the acquisition. As a result of equity method accounting rules, approximately $36 million of additional gain was deferred and will generally be recognized over the next five years. As of September 30, 2021, the Company owned approximately 29.86% of the issued shares of Coface, or 30.10% excluding treasury shares, with a carrying value of $615.9 million.

In July 2021, the Company announced the completion of the previously disclosed acquisition of Watford by Greysbridge for a cash purchase price of $35.00 per common share. Effective July 1, 2021, Watford is wholly owned by Greysbridge, and Greysbridge is owned 40% by the Company, 30% by certain investment funds managed by Kelso and 30% by certain investment funds managed by Warburg. At September 30, 2021 the Company’s carrying value in Greysbridge was $363.3 million, which reflected the Company’s aggregate purchase price of $278.9 million along with income (loss) from operating affiliates, which included a one-time gain of $95.7 million recognized from the acquisition. In addition, the ‘net realized gains (losses)’ line on the Company’s consolidated statements of income included a $33.1 million loss as a result of deconsolidation of Watford in the Company’s financial statements following the close of the transaction. See n ote 12.

Income from operating affiliates for the 2021 third quarter was $124.1 million, compared to an income of $0.9 million, for the 2020 third quarter, and income of $224.1 million for the nine months ended September 30, 2021, compared to an income of $6.3 million for the nine months ended September 30, 2020. The income from operating affiliates for the 2021 period, primarily related to the Company’s recent acquisitions of Coface and Greysbridge.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Allowance for Expected Credit Losses

The following table provides a roll forward of the allowance for expected credit losses of the Company’s securities classified as available for sale:


	Structured Securities (1)		Municipal Bonds		Corporate Bonds		Total
Three Months Ended September 30, 2021
Balance at beginning of period	$	759	$	6	$	1,359	$	2,124

Additions for current-period provision for expected credit losses	48		—		—		48
Additions (reductions) for previously recognized expected credit losses	14		(4)		395		405
Reductions due to disposals (3)	(234)		—		(232)		(466)

Balance at end of period	$	587	$	2	$	1,522	$	2,111

Three Months Ended September 30, 2020
Balance at beginning of period	$	1,726	$	28	$	4,115	$	5,869

Additions for current-period provision for expected credit losses	27		—		202		229
Additions (reductions) for previously recognized expected credit losses	403		33		(1,996)		(1,560)
Reductions due to disposals	(28)		—		(577)		(605)

Balance at end of period	$	2,128	$	61	$	1,744	$	3,933


Nine Months Ended September 30, 2021
Balance at beginning of period	$	1,490	$	11	$	896	$	2,397

Additions for current-period provision for expected credit losses	282		—		2,428		2,710
Additions (reductions) for previously recognized expected credit losses	(751)		(9)		(557)		(1,317)
Reductions due to disposals (3)	(434)		—		(1,245)		(1,679)

Balance at end of period	$	587	$	2	$	1,522	$	2,111

Nine Months Ended September 30, 2020
Balance at beginning of period	$	—	$	—	$	—	$	—
Cumulative effect of accounting change (2)	517		—		117		634
Additions for current-period provision for expected credit losses	2,868		67		7,643		10,578
Additions (reductions) for previously recognized expected credit losses	(903)		8		(4,920)		(5,815)
Reductions due to disposals	(354)		(14)		(1,096)		(1,464)

Balance at end of period	$	2,128	$	61	$	1,744	$	3,933

(1) Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.

(2) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”.

(3) Reduction for the 2021 periods primarily related to the Company’s deconsolidation of Watford.


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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Restricted Assets

The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its underwriting operations. The Company’s subsidiaries maintain assets in trust accounts as collateral for transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See note 18, “Commitments and Contingencies,” of the notes to consolidated financial statements in the Company’s 2020 Form 10-K.

The following table details the value of the Company’s restricted assets:


	September 30, 2021		December 31, 2020
Assets used for collateral or guarantees:
Affiliated transactions	$	4,271,208	$	4,643,334
Third party agreements	2,594,053		3,083,324
Deposits with U.S. regulatory authorities	803,878		827,552
Deposits with non-U.S. regulatory authorities	469,497		179,099

Total restricted assets	$	8,138,636	$	8,733,309

Reconciliation of Cash and Restricted Cash

The following table details reconciliation of cash and restricted cash within the Consolidated Balance Sheets:


	September 30, 2021		December 31, 2020
Cash	$	1,137,721	$	906,448
Restricted cash (included in ‘other assets’)	$	411,188	$	384,096
Cash and restricted cash	$	1,548,909	$	1,290,544

9. Fair Value

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).

The levels in the hierarchy are defined as follows:


Level 1:						Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2:						Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument

Level 3:						Inputs to the valuation methodology are unobservable and significant to the fair value measurement

Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.

The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. The Company did not adjust any of the prices obtained from the independent pricing sources at September 30, 2021.

In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Where quotes are unavailable, fair value is determined by the Investment Manager using quantitative and qualitative assessments such as internally modeled values. Of the $23.8 billion of financial assets and liabilities measured at fair value at September 30, 2021, approximately $9.0 million, or 0.0%, were priced using non-binding broker-dealer quotes or modeled valuations. Of the $26.5 billion of financial assets and liabilities measured at fair value at December 31, 2020, approximately $150.1 million, or 0.6%, were priced using non-binding broker-dealer quotes or modeled valuations.

Fixed maturities

The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:

U.S. government and government agencies — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the

fair values of U.S. government agency securities are classified within Level 2.

Corporate bonds — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
Mortgage-backed securities — valuations provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
Municipal bonds — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.
Commercial mortgage-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for commercial


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.

Non-U.S. government securities — valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.
Asset-backed securities — valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.

Equity securities

The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Certain equity securities are included in Level 2 of the valuation hierarchy as the significant inputs used in the pricing process for such securities are observable market inputs. Other equity securities are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these securities are unobservable, the fair value of such securities are classified as Level 3.

Other investments

The Company’s other investments include term loan investments for which fair values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. The fair values for certain of the Company’s other investments are determined using net asset values as advised by external fund managers. The net asset value is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. In accordance with applicable

accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities.

Derivative instruments

The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.

Short-term investments

The Company determined that certain of its short-term investments held in highly liquid money market-type funds, Treasury bills and commercial paper would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of other short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2.

Residential mortgage loans

The Company’s residential mortgage loans (included in ‘other assets’ in the consolidated balance sheets) include amounts related to the Company’s whole mortgage loan purchase and sell program. Fair values of residential mortgage loans are generally determined based on market prices. As significant inputs used in pricing process for these residential mortgage loans are observable market inputs, the fair value of these securities are classified within Level 2.

Contingent consideration liabilities

Contingent consideration liabilities (included in ‘other liabilities’ in the consolidated balance sheets) include amounts related to various Company’s acquisitions. Such amounts are remeasured at fair value at each balance sheet date with changes in fair value recognized in ‘net realized gains (losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates future payments using an income approach based on modeled inputs which include a weighted average cost of capital. The Company determined that contingent consideration liabilities would be included within Level 3.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the Company’s financial assets and liabilities measured at fair value by level at September 30, 2021:


			Estimated Fair Value Measurements Using:
	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds	$	6,403,617	$	—	$	6,403,604	$	13
Mortgage backed securities	405,797		—		405,797		—
Municipal bonds	382,722		—		382,722		—
Commercial mortgage backed securities	579,424		—		579,424		—
U.S. government and government agencies	4,460,515		4,431,935		28,580		—
Non-U.S. government securities	1,863,734		—		1,863,734		—
Asset backed securities	2,672,554		—		2,669,110		3,444
Total	16,768,363		4,431,935		12,332,971		3,457

Short-term investments	3,069,965		2,046,391		1,023,574		—

Equity securities, at fair value	1,790,640		1,756,462		31,596		2,582





Derivative instruments (4)	89,958		—		89,958		—

Residential mortgage loans	7,701		—		7,701		—

Fair value option:
Corporate bonds	374,326		—		374,326		—
Non-U.S. government bonds	19,829		—		19,829		—
Mortgage backed securities	—		—		—		—

Commercial mortgage backed securities	—		—		—		—
Asset backed securities	19,852		—		19,852		—
U.S. government and government agencies	—		—		—		—
Short-term investments	115,681		1,190		114,491		—
Equity securities	24,522		19,987		—		4,535
Other investments	359,011		17,861		311,393		29,757
Other investments measured at net asset value (2)	1,130,748
Total	2,043,969		39,038		839,891		34,292

Total assets measured at fair value	$	23,770,596	$	8,273,826	$	14,325,691	$	40,331

Liabilities measured at fair value:
Contingent consideration liabilities	$	(17,811)	$	—	$	—	$	(17,811)
Securities sold but not yet purchased (3)	—		—		—		—
Derivative instruments (4)	(43,526)		—		(43,526)		—
Total liabilities measured at fair value	$	(61,337)	$	—	$	(43,526)	$	(17,811)

(1) In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair value. See note 8, “—Securities Lending Agreements.” In September 2021, the Company terminated its securities lending program and no longer enters into securities lending agreements with financial institutions.

(2) In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

(3) Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company’s consolidated balance sheets.

(4) See note 10.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2020:


			Estimated Fair Value Measurements Using:
	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds	$	7,856,571	$	—	$	7,856,558	$	13
Mortgage backed securities	630,001		—		630,001		—
Municipal bonds	494,522		—		494,522		—
Commercial mortgage backed securities	389,900		—		389,900		—
U.S. government and government agencies	5,557,077		5,463,356		93,721		—
Non-U.S. government securities	2,433,733		—		2,433,733		—
Asset backed securities	1,634,804		—		1,631,378		3,426
Total	18,996,608		5,463,356		13,529,813		3,439

Short-term investments	1,924,922		1,920,565		4,357		—

Equity securities, at fair value	1,460,959		1,401,653		17,291		42,015





Derivative instruments (4)	177,383		—		177,383		—

Fair value option:
Corporate bonds	651,294		—		650,309		985
Non-U.S. government bonds	35,263		—		35,263		—
Mortgage backed securities	3,282		—		3,282		—

Commercial mortgage backed securities	1,090		—		1,090		—
Asset backed securities	152,151		—		152,151		—
U.S. government and government agencies	274		164		110		—
Short-term investments	557,008		420,131		136,877		—
Equity securities	92,549		23,373		188		68,988
Other investments	1,134,229		51,149		1,015,977		67,103
Other investments measured at net asset value (2)	1,197,656
Total	3,824,796		494,817		1,995,247		137,076

Total assets measured at fair value	$	26,384,668	$	9,280,391	$	15,724,091	$	182,530

Liabilities measured at fair value:
Contingent consideration liabilities	$	(461)	$	—	$	—	$	(461)
Securities sold but not yet purchased (3)	(21,679)		—		(21,679)		—
Derivative instruments (4)	(108,705)		—		(108,705)		—
Total liabilities measured at fair value	$	(130,845)	$	—	$	(130,384)	$	(461)

(4) See note 10.


ARCH CAPITAL			34			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs:


	Assets												Liabilities
s	Available For Sale				Fair Value Option						Fair Value
	Structured Securities (1)		Corporate Bonds		Corporate Bonds		Other Investments		Equity Securities		Equity Securities		Contingent Consideration Liabilities
Three Months Ended September 30, 2021
Balance at beginning of period	$	3,424	$	13	$	998	$	73,900	$	73,678	$	49,136	$	(466)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	10		—		—		—		38		11		—
Included in other comprehensive income	10		—		—		—		—		—		—
Purchases, issuances, sales and settlements
Purchases	—		—		—		—		—		208		(17,345)
Issuances	—		—		—		—		—		—		—
Sales (3)	—		—		(998)		(44,143)		(69,181)		(46,773)		—
Settlements	—		—		—		—		—		—		—
Transfers in and/or out of Level 3	—		—		—		—		—		—		—
Balance at end of period	$	3,444	$	13	$	—	$	29,757	$	4,535	$	2,582	$	(17,811)

Three Months Ended September 30, 2020
Balance at beginning of period	$	3,450	$	857	$	998	$	46,453	$	61,447	$	51,981	$	(1,250)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	(75)		(5,872)		(34)		885		2,076		(946)		—
Included in other comprehensive income	191		6,936		—		—		—		—		—
Purchases, issuances, sales and settlements
Purchases	—		—		—		22,436		—		—		—
Issuances	—		—		—		—		—		—		—
Sales	—		—		—		(3,588)		—		(8,349)		—
Settlements	(11)		—		—		—		—		—		620
Transfers in and/or out of Level 3	—		(1,908)		—		—		—		—		—
Balance at end of period	$	3,555	$	13	$	964	$	66,186	$	63,523	$	42,686	$	(630)

Nine Months Ended September 30, 2021
Balance at beginning of year	$	3,426	$	13	$	985	$	67,103	$	68,988	$	42,015	$	(461)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	(46)		—		13		881		4,728		1,837		—
Included in other comprehensive income	67		—		—		—		—		—		—
Purchases, issuances, sales and settlements
Purchases	—		—		—		13,003		—		5,503		(17,345)
Issuances	—		—		—		—		—		—		—
Sales (3)	—		—		(998)		(51,230)		(69,181)		(46,773)		—
Settlements	(3)		—		—		—		—		—		(5)
Transfers in and/or out of Level 3	—		—		—		—		—		—		—
Balance at end of period	$	3,444	$	13	$	—	$	29,757	$	4,535	$	2,582	$	(17,811)

Nine Months Ended September 30, 2020
Balance at beginning of year	$	5,216	$	8,851	$	932	$	68,817	$	58,094	$	55,889	$	(7,998)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)	(130)		(5,865)		(34)		(129)		5,429		7,132		(72)
Included in other comprehensive income	(118)		397		—		—		—		—		—
Purchases, issuances, sales and settlements
Purchases	—		—		66		22,460		—		3,464		—
Issuances	—		—		—		—		—		—		—
Sales	—		—		—		(27,946)		—		(23,799)		—
Settlements	(1,413)		(1,462)		—		—		—		—		7,440
Transfers in and/or out of Level 3	—		(1,908)		—		2,984		—		—		—
Balance at end of period	$	3,555	$	13	$	964	$	66,186	$	63,523	$	42,686	$	(630)

(1) Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.

(2) Gains or losses were included in net realized gains (losses).

(3) Sales for the 2021 periods primarily related to the Company’s deconsolidation of Watford.


ARCH CAPITAL			35			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Financial Instruments Disclosed, But Not Carried, At Fair Value

The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at September 30, 2021, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

At September 30, 2021, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.7 billion and had a fair value of $3.3 billion. At December 31, 2020, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.9 billion and had a fair value of $3.7 billion. The fair values of the senior notes were obtained from a third party pricing service and are based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.

10. Derivative Instruments

The Company’s investment strategy allows for the use of derivative instruments. The Company’s derivative instruments are recorded on its consolidated balance sheets at fair value. The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other futures contracts and commodity futures to manage portfolio duration or replicate investment positions in its portfolios and the Company routinely utilizes foreign currency forward contracts, currency options, index futures contracts and other derivatives as part of its total return objective. In addition, certain of the Company’s investments are managed in portfolios which incorporate the use of foreign currency forward contracts which are intended to provide an economic hedge against foreign currency movements.

In addition, the Company purchases to-be-announced mortgage backed securities (“TBAs”) as part of its investment strategy. TBAs represent commitments to purchase a future issuance of agency mortgage backed securities. For the period between purchase of a TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative. The Company purchases TBAs in both long and short positions to enhance investment performance and as part of its overall investment strategy.

The following table summarizes information on the fair values and notional values of the Company’s derivative instruments:


	Estimated Fair Value
	Asset Derivatives		Liability Derivatives		Notional Value (1)
September 30, 2021
Futures contracts (2)	$	36,010	$	(17,562)	$	2,796,442
Foreign currency forward contracts (2)	7,380		(13,914)		1,234,665
TBAs (3)	49,227		—		47,603
Other (2)	46,568		(12,050)		4,184,225
Total	$	139,185	$	(43,526)

December 31, 2020
Futures contracts (2)	$	11,046	$	(4,496)	$	3,099,796
Foreign currency forward contracts (2)	52,716		(6,202)		1,656,729
TBAs (3)	—		—		—
Other (2)	113,621		(98,007)		5,763,919
Total	$	177,383	$	(108,705)

(1) Represents the absolute notional value of all outstanding contracts, consisting of long and short positions.

(2) The fair value of asset derivatives are included in ‘other assets’ and the fair value of liability derivatives are included in ‘other liabilities.’

(3) The fair value of TBAs are included in ‘fixed maturities available for

sale, at fair value.’

The Company did not hold any derivatives which were designated as hedging instruments at September 30, 2021 or December 31, 2020.

The Company’s derivative instruments can be traded under master netting agreements, which establish terms that apply to all derivative transactions with a counterparty. In the event of a bankruptcy or other stipulated event of default, such agreements provide that the non-defaulting party may elect to terminate all outstanding derivative transactions, in which case all individual derivative positions (loss or gain) with a counterparty are closed out and netted and replaced with a single amount, usually referred to as the termination amount, which is expressed in a single currency. The resulting single net amount, where positive, is payable to the party “in-the-money” regardless of whether or not it is the defaulting party, unless the parties have agreed that only the non-defaulting party is entitled to receive a termination payment where the net amount is positive and is in its favor. Contractual close-out netting reduces derivatives credit exposure from gross to net exposure.

At September 30, 2021, asset derivatives and liability derivatives of $133.1 million and $42.2 million, respectively, were subject to a master netting agreement, compared to $138.8 million and $93.0 million, respectively, at December 31, 2020. The remaining derivatives included in the preceding table were not subject to a master netting agreement.


ARCH CAPITAL			36			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Realized and unrealized contract gains and losses on the Company’s derivative instruments are reflected in ‘net realized gains (losses)’ in the consolidated statements of income, as summarized in the following table:


Derivatives not designated as	September 30,
hedging instruments:	2021		2020

Three Months Ended
Net realized gains (losses):
Futures contracts	$	(10,073)	$	10,945
Foreign currency forward contracts	(16,146)		10,813
TBAs	(46)		120
Other (1)	4,830		(1,509)
Total	$	(21,435)	$	20,369

Nine Months Ended
Net realized gains (losses):
Futures contracts	$	(17,394)	$	105,282
Foreign currency forward contracts	(36,922)		3,466
TBAs	(46)		1,129
Other (1)	17,934		36,845
Total	$	(36,428)	$	146,722

(1) Includes realized gains and losses on swaps, options and other derivatives contracts.

11. Commitments and Contingencies

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 $2.6 billion at September 30, 2021, compared to $2.1 billion at December 31, 2020.

Interest Paid

Interest paid on the Company’s senior notes and other borrowings were $75.8 million for the nine months ended September 30, 2021, compared to $60.6 million for the 2020 period.

12. Variable Interest Entities and Noncontrolling Interests

Watford

In March 2014, the Company invested $100.0 million and acquired approximately 11% of Watford’s outstanding common equity. Watford was considered a VIE and the Company concluded that it was the primary beneficiary of Watford, through June 30, 2021. As such, the results of Watford were included in the Company’s consolidated

financial statements as of and for the periods ended June 30, 2021.

In the 2020 fourth quarter, Arch Capital, Watford and Greysbridge, a wholly-owned subsidiary of Arch Capital, entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”). The merger and the related Greysbridge equity financing closed on July 1, 2021. Effective July 1, 2021, Watford is wholly owned by Greysbridge, and Greysbridge is owned 40% by the Company, 30% by certain investment funds managed by Kelso and 30% by certain investment funds managed by Warburg. Based on the governing documents of Greysbridge, the Company concluded that, while it retains significant influence over Watford, Watford no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, the Company no longer consolidates the results of Watford in its consolidated financial statements and footnotes. Beginning in the 2021 third quarter, the Company classifies its investment as ‘investments in operating affiliates’ on the Company’s balance sheets and is accounted for under the equity method.

The following table provides the carrying amount and balance sheet caption in which the assets and liabilities of Watford were reported at December 31, 2020:


	December 31,
	2020
Assets
Investments accounted for using the fair value option (1)	$	1,790,385
Fixed maturities available for sale, at fair value	655,249
Equity securities, at fair value	52,410
Cash	211,451
Accrued investment income	14,679
Premiums receivable	224,377
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses	286,590
Ceded unearned premiums	122,339
Deferred acquisition costs	53,705
Receivable for securities sold	37,423
Goodwill and intangible assets	7,650
Other assets	75,801
Total assets of consolidated VIE	$	3,532,059

Liabilities
Reserve for losses and loss adjustment expenses	$	1,519,583
Unearned premiums	407,714
Reinsurance balances payable	63,269
Revolving credit agreement borrowings	155,687
Senior notes	172,689
Payable for securities purchased	25,881
Other liabilities	193,494
Total liabilities of consolidated VIE	$	2,538,317

Redeemable noncontrolling interests	$	52,398

(1) Included in “other investments” on the Company’s balance sheet.


ARCH CAPITAL			37			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Through June 30, 2021, Watford generated $47.0 million of cash provided by operating activities, $96.3 million of cash provided by investing activities and $2.0 million of cash used for financing activities, compared to $133.6 million of cash provided by operating activities, $242.0 million of cash provided by investing activities and $279.7 million of cash used for financing activities for the nine months ended September 30, 2020.

Non-redeemable noncontrolling interests

Through June 30, 2021, the Company accounted for the portion of Watford’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The portion of Watford’s income or loss attributable to third party investors was recorded in the consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests.’

The following table sets forth activity in the non-redeemable noncontrolling interests:


	September 30,
	2021		2020
Three Months Ended
Balance, beginning of period	$	918,874	$	679,089
Impact of deconsolidation of Watford	(918,874)		—
Additional paid in capital attributable to noncontrolling interests	—		243
Amounts attributable to noncontrolling interests	—		67,768
Other comprehensive income (loss) attributable to noncontrolling interests	—		10,820
Balance, end of period	$	—	$	757,920

Nine Months Ended
Balance, beginning of year	$	823,007	$	762,777
Impact of deconsolidation of Watford	(918,874)
Additional paid in capital attributable to noncontrolling interests	22,113		715
Repurchases attributable to non-redeemable noncontrolling interests (1)	—		(2,867)
Amounts attributable to noncontrolling interests	78,314		(578)
Other comprehensive income (loss) attributable to noncontrolling interests	(4,560)		(2,127)
Balance, end of period	$	—	$	757,920

(1) During 2020, Watford’s board of directors authorized the investment in Watford’s common shares through a share repurchase program.

Redeemable noncontrolling interests

Through June 30, 2021, the Company accounted for redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheets in accordance with applicable accounting guidance. Such redeemable noncontrolling interests primarily related to the Watford Preference Shares issued in late March 2014 with a par value of $0.01 per share and a liquidation preference of $25.00 per

share. The Watford Preference Shares were issued at a discounted amount of $24.50 per share. Through June 30, 2021 preferred dividends, including the accretion of the discount and issuance costs, were included in ‘net (income) loss attributable to noncontrolling interests’ in the Company’s consolidated statements of income.

The following table sets forth activity in the redeemable non-controlling interests:


	September 30,
	2021		2020
Three Months Ended
Balance, beginning of period	$	57,533	$	55,986

Impact of deconsolidation of Watford	(48,919)		—
Accretion of preference share issuance costs	—		23
Other	1,623		1,826
Balance, end of period	$	10,237	$	57,835

Nine Months Ended
Balance, beginning of year	$	58,548	$	55,404

Impact of deconsolidation of Watford	(48,919)		—
Accretion of preference share issuance costs	—		70
Other	608		2,361
Balance, end of period	$	10,237	$	57,835

The portion of income or loss attributable to third party investors, recorded in the Company’s consolidated statements of income in ‘net (income) loss attributable to noncontrolling interests,’ are summarized in the table below:


	September 30,
	2021		2020
Three Months Ended
Amounts attributable to non-redeemable noncontrolling interests	$	—	$	(67,768)
Amounts attributable to redeemable noncontrolling interests	(1,473)		(1,875)
Net (income) loss attributable to noncontrolling interests	$	(1,473)	$	(69,643)

Nine Months Ended
Amounts attributable to non-redeemable noncontrolling interests	$	(78,314)	$	578
Amounts attributable to redeemable noncontrolling interests	(3,889)		(4,998)
Net (income) loss attributable to noncontrolling interests	$	(82,203)	$	(4,420)


ARCH CAPITAL			38			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Bellemeade Re

The Company has entered into aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). At the time the Bellemeade Agreements were entered into, the applicability of the accounting guidance that addresses VIEs was evaluated. As a result of the evaluation of the Bellemeade Agreements, the Company concluded that these entities are VIEs. However, given that the ceding insurers do not have the unilateral power to direct those activities that are significant to their economic performance, the Company does not consolidate such entities in its consolidated financial statements.

The following table presents the total assets of the Bellemeade entities, as well as the Company’s maximum exposure to loss associated with these VIEs, calculated as the maximum historical observable spread between the benchmark index for each respective transaction and short term invested trust asset yields. The benchmark index for agreements effective prior to 2021 is based on one-month LIBOR, while the 2021 agreements benchmark index is based on the Secured Overnight Financing Rate (“SOFR”). SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.


			September 30, 2021								December 31, 2020
			Maximum Exposure to Loss								Maximum Exposure to Loss
Bellemeade Entities (Issue Date)	Total VIE Assets		On-Balance Sheet (Asset) Liability		Off-Balance Sheet		Total		Total VIE Assets		On-Balance Sheet (Asset) Liability		Off-Balance Sheet		Total

Bellemeade 2017-1 Ltd. (Oct-17)	$	145,573	$	(214)	$	585	$	371	$	145,573	$	(245)	$	844	$	599
Bellemeade 2018-1 Ltd. (Apr-18)	228,938		(764)		1,683		919		250,095		(903)		2,245		1,342
Bellemeade 2018-2 Ltd. (Aug-18)	—		—		—		—		108,395		(138)		280		142
Bellemeade 2018-3 Ltd. (Oct-18)	302,563		(1,049)		2,328		1,279		302,563		(1,320)		3,262		1,942
Bellemeade 2019-1 Ltd. (Mar-19)	210,529		(931)		8,142		7,211		219,256		(1,361)		8,461		7,100
Bellemeade 2019-2 Ltd. (Apr-19)	398,316		(787)		5,658		4,871		398,316		(730)		5,201		4,471
Bellemeade 2019-3 Ltd. (Jul-19)	491,634		(826)		3,971		3,145		528,084		(861)		5,079		4,218
Bellemeade 2019-4 Ltd. (Oct-19)	468,737		(682)		4,761		4,079		468,737		(890)		6,676		5,786
Bellemeade 2020-1 Ltd. (Jun-20) (1)	—		—		—		—		275,068		(178)		1,012		834
Bellemeade 2020-2 Ltd. (Sep-20) (2)	266,704		(279)		2,629		2,350		423,420		(556)		6,839		6,283
Bellemeade 2020-3 Ltd. (Nov-20) (3)	381,410		(395)		6,646		6,251		418,158		(631)		9,605		8,974
Bellemeade 2020-4 Ltd. (Dec-20) (4)	226,916		(100)		2,190		2,090		321,393		(156)		6,816		6,660
Bellemeade 2021-1 Ltd. (Mar-21) (5)	579,717		229		4,217		4,446		—		—		—		—
Bellemeade 2021-2 Ltd. (Jun-21) (6)	522,807		906		5,090		5,996		—		—		—		—
Bellemeade 2021-3 Ltd. (Sep-21) (7)	507,873		182		4,561		4,743		—		—		—		—
Total	$	4,731,717	$	(4,710)	$	52,461	$	47,751	$	3,859,058	$	(7,969)	$	56,320	$	48,351

(1) An additional $79 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.

(2) An additional $26 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.

(3) An additional $34 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.

(4) An additional $16 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.

(5) An additional $64 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.

(6) An additional $93 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.

(7) An additional $131 million capacity was provided directly to Arch MI U.S. by a separate panel of reinsurers and is not reflected in this table.


ARCH CAPITAL			39			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13. Other Comprehensive Income (Loss)

The following tables present details about amounts reclassified from accumulated other comprehensive income and the tax effects allocated to each component of other comprehensive income (loss):


		Amounts Reclassified from AOCI
	Consolidated Statement of Income	Three Months Ended				Nine Months Ended
Details About	Line Item That Includes	September 30,				September 30,
AOCI Components	Reclassification	2021		2020		2021		2020

Unrealized appreciation on available-for-sale investments
	Net realized gains (losses)	$	68,373	$	87,871	$	135,291	$	416,432
	Provision for credit losses	(457)		1,333		(1,208)		(4,762)
	Other-than-temporary impairment losses	—		—		—		(533)
	Total before tax	67,916		89,204		134,083		411,137
	Income tax (expense) benefit	(5,262)		(9,401)		(13,579)		(42,714)
	Net of tax	$	62,654	$	79,803	$	120,504	$	368,423


	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
Three Months Ended September 30, 2021
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	(104,607)	$	(8,684)	$	(95,923)

Less reclassification of net realized gains (losses) included in net income	67,916		5,262		62,654
Foreign currency translation adjustments	(32,060)		(350)		(31,710)
Other comprehensive income (loss)	$	(204,583)	$	(14,296)	$	(190,287)

Three Months Ended September 30, 2020
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	119,265	$	8,483	$	110,782

Less reclassification of net realized gains (losses) included in net income	89,204		9,401		79,803
Foreign currency translation adjustments	16,918		209		16,709
Other comprehensive income (loss)	$	46,979	$	(709)	$	47,688

Nine Months Ended September 30, 2021
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	(307,910)	$	(28,808)	$	(279,102)

Less reclassification of net realized gains (losses) included in net income	134,083		13,579		120,504
Foreign currency translation adjustments	(54,083)		6		(54,089)
Other comprehensive income (loss)	$	(496,076)	$	(42,381)	$	(453,695)

Nine Months Ended September 30, 2020
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period	$	611,390	$	65,099	$	546,291

Less reclassification of net realized gains (losses) included in net income	411,137		42,714		368,423
Foreign currency translation adjustments	(5,911)		(182)		(5,729)
Other comprehensive income (loss)	$	194,342	$	22,203	$	172,139


ARCH CAPITAL			40			2021 THIRD QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

14. Income Taxes

The Company’s income tax provision on income before income taxes, including income (loss) from operating affiliates, resulted in an effective tax rate of 5.5% for the nine months ended September 30, 2021, compared to 8.2% for the nine months ended September 30, 2020. The effective tax rate for the 2021 period included discrete income tax benefits of $28.7 million which had the effect of decreasing the effective tax rate on net income available to Arch common shareholders by 1.7%. The discrete tax items in the 2021 period primarily related to the partial release of a valuation allowance on certain U.K. deferred tax assets.

The Company’s effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction.

The Company had a net deferred tax asset of $162.5 million at September 30, 2021, compared to a net deferred tax asset of $15.7 million at December 31, 2020. The change is primarily a result of mortgage contingency reserves activity, fixed asset capitalization and market value fluctuations in the investment portfolio. In addition, the Company paid $202.4 million and $146.8 million of income taxes for the nine months ended September 30, 2021 and 2020, respectively.

15. Legal Proceedings

The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of September 30, 2021, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.

16. Transactions with Related Parties

In the 2021 first quarter, as part of the Company’s acquisition of Barbican, the Company entered into an agreement with Premia Managing Agency Limited for the reinsurance to close of Syndicate 1955’s 2018 underwriting year of account into Premia Syndicate 1884’s 2021 underwriting year of account. The reinsurance to close covers legacy business underwritten by Syndicate 1955 on the underwriting 2018 and prior years of account and under the agreement, approximately $380 million of net liabilities was transferred to Syndicate 1884, with an effective date of January 1, 2021. Barbican recorded reinsurance recoverable on unpaid and paid losses and funds held liability of nil and $8.8 million, respectively, at September 30, 2021, compared to

$199.8 million and $149.6 million, respectively, at December 31, 2020.

In July 2021, following consummation of the Merger Agreement and the related Greysbridge equity financing, pursuant to which Watford is wholly owned by Greysbridge, and Greysbridge is owned 40% by the Company, 30% by certain funds managed by Kelso and 30% by certain funds managed by Warburg, the Company entered into certain reinsurance transactions with Watford. For the three months ended September 30, 2021, the Company ceded premiums written related to such transactions of $316.2 million (which includes reinsurance transactions in force as well as those entered into in conjunction with the Merger Agreement). In addition, Watford paid certain acquisition costs and administrative fees to the Company. At September 30, 2021, the Company recorded a reinsurance recoverable on unpaid and paid losses from Watford of $874.9 million and a reinsurance balance payable to Watford of $281.2 million. See note 12, “Variable Interest Entities and Noncontrolling Interests ,” for information about Watford.

The Company has a put/call option that was entered into in connection with the Greysbridge equity financing, whereby beginning January 1, 2024 the Company will have a call right (but not the obligation) and Warburg and Kelso will each have a put right (but not the obligation) to buy/sell one third of their initial shares annually at the tangible book value per share of Greysbridge for the most recently ended fiscal quarter.

As of September 30, 2021, the Company owns $35.0 million in aggregate principal amount of Watford Holdings Ltd’s 6.5% senior notes, due July 2, 2029 and approximately 6.6% of Watford’s preference shares.

17. Subsequent Event

Share Repurchases

In October 2021, the Company announced that its Board of Directors has increased its share repurchase program to an aggregate of up to $1.5 billion, which may be effected from time to time in open market or privately negotiated transactions through December 31, 2022. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.

From October 1 to October 13, 2021, the Company repurchased approximately 1.2 million common shares for an aggregate purchase price of $45.5 million. At October 27, 2021 approximately $1.5 billion of repurchases were available under the share repurchase program.


ARCH CAPITAL			41			2021 THIRD QUARTER FORM 10-Q

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