Item 1. CONSOLIDATED FINANCIAL STATEMENTS

						Page No.
Report of Independent Registered Public Accounting Firm						5
Consolidated Balance Sheets
March 31, 2022 (unaudited) and December 31, 2021						6
Consolidated Statements of Income
For the three month periods ended March 31, 2022 and 2021 (unaudited)						7
Consolidated Statements of Comprehensive Income
For the three month periods ended March 31, 2022 and 2021 (unaudited)						8
Consolidated Statements of Changes in Shareholders’ Equity
For the three month periods ended March 31, 2022 and 2021 (unaudited)						9
Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2022 and 2021 (unaudited)						10
Notes to Consolidated Financial Statements (unaudited)
Note 1 - Basis of Presentation and Recent Accounting Pronouncements						11
Note 2 - Share Transactions						11
Note 3 - Earnings Per Common Share						12
Note 4 - Segment Information						13
Note 5 - Reserve for Losses and Loss Adjustment Expenses						16
Note 6 - Allowance for Expected Credit Losses						17
Note 7 - Investment Information						19
Note 8 - Fair Value						24
Note 9 - Derivative Instruments						29
Note 10 - Commitments and Contingencies						30
Note 11 - Variable Interest Entities and Noncontrolling Interests						31
Note 12 - Other Comprehensive Income (Loss)						33
Note 13 - Income Taxes						34
Note 14 - Legal Proceedings						34
Note 15 - Transactions with Related Parties						34

ARCH CAPITAL			4			2022 FIRST 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 March 31, 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and the consolidated statements of cash flows for the three-month periods ended March 31, 2022 and 2021, 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, 2021, 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 25, 2022, 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, 2021, 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

May 4, 2022

ARCH CAPITAL			5			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

			(Unaudited)
			March 31, 2022						December 31, 2021
Assets
Investments:
Fixed maturities available for sale, at fair value (amortized cost: $18,317,693 and $17,973,823; net of allowance for credit losses: $34,145 and $2,883 )			$	17,648,853					$	17,998,109
Short-term investments available for sale, at fair value (amortized cost: $2,332,513 and $1,734,738; net of allowance for credit losses: $0 and $0)			2,332,624						1,734,716
Equity securities, at fair value			1,002,572						1,804,170
Other investments, at fair value			1,686,666						1,973,550
Investments accounted for using the equity method			3,325,543						3,077,611
Total investments			25,996,258						26,588,156
Cash			812,917						858,668
Accrued investment income			82,607						85,453
Investment in operating affiliates			1,144,255						1,135,655
Premiums receivable (net of allowance for credit losses: $39,073 and $39,958)			3,223,504						2,633,280
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $18,483 and $13,230)			5,941,000						5,880,735
Contractholder receivables (net of allowance for credit losses: $3,731 and $3,437)			1,810,199						1,828,691
Ceded unearned premiums			1,951,960						1,729,455
Deferred acquisition costs			1,001,866						901,841
Receivable for securities sold			116,633						60,179
Goodwill and intangible assets			926,427						944,983
Other assets			2,670,315						2,453,849
Total assets			$	45,677,941					$	45,100,945
Liabilities
Reserve for losses and loss adjustment expenses			$	18,109,107					$	17,757,156
Unearned premiums			6,737,779						6,011,942
Reinsurance balances payable			1,510,906						1,583,253
Contractholder payables			1,813,930						1,832,127
Collateral held for insured obligations			244,502						242,352
Senior notes			2,724,642						2,724,394
Payable for securities purchased			176,452						64,850
Other liabilities			1,431,271						1,329,742
Total liabilities			32,748,589						31,545,816
Commitments and Contingencies
Redeemable noncontrolling interests			9,763						9,233
Shareholders' Equity
Non-cumulative preferred shares			830,000						830,000
Common shares ($0.0011 par, shares issued: 586,115,502 and 583,289,850)			651						648
Additional paid-in capital			2,134,241						2,085,075
Retained earnings			14,641,484						14,455,868
Accumulated other comprehensive income (loss), net of deferred income tax			(649,445)						(64,600)
Common shares held in treasury, at cost (shares: 210,384,611 and 204,365,956)			(4,037,342)						(3,761,095)
Total shareholders' equity available to Arch			12,919,589						13,545,896
Total liabilities, noncontrolling interests and shareholders' equity			$	45,677,941					$	45,100,945

See Notes to Consolidated Financial Statements

ARCH CAPITAL			6			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

			(Unaudited)
			Three Months Ended
			March 31,
			2022						2021
Revenues
Net premiums earned			$	2,120,633					$	1,948,422
Net investment income			80,436						98,856
Net realized gains (losses)			(292,414)						142,461
Other underwriting income			5,897						6,110
Equity in net income (loss) of investment funds accounted for using the equity method			36,305						71,686
Other income (loss)			(9,025)						(1,741)
Total revenues			1,941,832						2,265,794
Expenses
Losses and loss adjustment expenses			1,000,835						1,203,100
Acquisition expenses			378,159						304,481
Other operating expenses			289,943						261,033
Corporate expenses			32,332						25,384
Amortization of intangible assets			27,167						14,402
Interest expense			32,708						38,346
Net foreign exchange (gains) losses			(3,845)						(20,063)
Total expenses			1,757,299						1,826,683
Income (loss) before income taxes and income (loss) from operating affiliates			184,533						439,111
Income tax expense			(11,619)						(38,860)
Income (loss) from operating affiliates			24,518						75,457
Net income (loss)			$	197,432					$	475,708
Net (income) loss attributable to noncontrolling interests			(1,632)						(37,552)
Net income (loss) available to Arch			195,800						438,156
Preferred dividends			(10,184)						(10,403)
Net income (loss) available to Arch common shareholders			$	185,616					$	427,753
Net income per common share and common share equivalent
Basic			$	0.50					$	1.07
Diluted			$	0.48					$	1.05
Weighted average common shares and common share equivalents outstanding
Basic			374,243,812						400,807,895
Diluted			384,194,363						409,223,253

See Notes to Consolidated Financial Statements

ARCH CAPITAL			7			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands)

			(Unaudited)
			Three Months Ended
			March 31,
			2022						2021
Comprehensive Income
Net income (loss)			$	197,432					$	475,708
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			(684,355)						(261,750)
Reclassification of net realized (gains) losses, included in net income (loss)			102,278						2,697
Foreign currency translation adjustments			(2,768)						(28,584)
Comprehensive income (loss)			(387,413)						188,071
Net (income) loss attributable to noncontrolling interests			(1,632)						(37,552)
Other comprehensive (income) loss attributable to noncontrolling interests			—						4,570
Comprehensive income (loss) available to Arch			$	(389,045)					$	155,089

See Notes to Consolidated Financial Statements

ARCH CAPITAL			8			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(U.S. dollars in thousands)

			(Unaudited)
			Three Months Ended
			March 31,
			2022						2021
Non-cumulative preferred shares
Balance at beginning and end of period			$	830,000					$	780,000
Common shares
Balance at beginning of period			648						643
Common shares issued, net			3						2
Balance at end of period			651						645
Additional paid-in capital
Balance at beginning of period			2,085,075						1,977,794
Amortization of share-based compensation			45,368						40,573
Other changes			3,798						(3,626)
Balance at end of period			2,134,241						2,014,741
Retained earnings
Balance at beginning of period			14,455,868						12,362,463
Net income (loss)			197,432						475,708
Net (income) loss attributable to noncontrolling interests			(1,632)						(37,552)
Preferred share dividends			(10,184)						(10,403)
Balance at end of period			14,641,484						12,790,216
Accumulated other comprehensive income (loss), net of deferred income tax
Balance at beginning of period			(64,600)						488,895
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax:
Balance at beginning of period			13,486						501,295
Unrealized holding gains (losses) during period, net of reclassification adjustment			(582,077)						(259,053)
Unrealized holding gains (losses) during period attributable to noncontrolling interests			—						4,469
Balance at end of period			(568,591)						246,711
Foreign currency translation adjustments, net of deferred income tax:
Balance at beginning of period			(78,086)						(12,400)
Foreign currency translation adjustments			(2,768)						(28,584)
Foreign currency translation adjustments attributable to noncontrolling interests			—						100
Balance at end of period			(80,854)						(40,884)
Balance at end of period			(649,445)						205,827
Common shares held in treasury, at cost
Balance at beginning of period			(3,761,095)						(2,503,909)
Shares repurchased for treasury			(276,247)						(191,048)
Balance at end of period			(4,037,342)						(2,694,957)
Total shareholders’ equity available to Arch			12,919,589						13,096,472
Non-redeemable noncontrolling interests			—						876,864
Total shareholders’ equity			$	12,919,589					$	13,973,336

See Notes to Consolidated Financial Statements

ARCH CAPITAL			9			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

			(Unaudited)
			Three Months Ended
			March 31,
			2022						2021
Operating Activities
Net income (loss)			$	197,432					$	475,708
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net realized (gains) losses			289,213						(161,007)
Equity in net (income) or loss of investment funds accounted for using the equity method and other income or loss			(11,420)						(135,939)
Amortization of intangible assets			27,167						14,402
Share-based compensation			45,379						40,812
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable			275,954						560,153
Unearned premiums, net of ceded unearned premiums			513,507						560,035
Premiums receivable			(600,691)						(608,250)
Deferred acquisition costs			(96,999)						(126,701)
Reinsurance balances payable			(74,022)						240,206
Other items, net			(13,957)						(96,574)
Net cash provided by (used for) operating activities			551,563						762,845
Investing Activities
Purchases of fixed maturity investments			(6,727,665)						(11,530,968)
Purchases of equity securities			(408,615)						(309,419)
Purchases of other investments			(616,659)						(430,961)
Proceeds from sales of fixed maturity investments			6,053,352						10,917,134
Proceeds from sales of equity securities			1,100,256						284,986
Proceeds from sales, redemptions and maturities of other investments			570,341						323,591
Proceeds from redemptions and maturities of fixed maturity investments			240,753						421,042
Net settlements of derivative instruments			(2,510)						47,660
Net (purchases) sales of short-term investments			(510,752)						589,175
Purchase of operating affiliate			—						(546,349)
Purchases of fixed assets			(11,770)						(12,490)
Other			550						(246,590)
Net cash provided by (used for) investing activities			(312,719)						(493,189)
Financing Activities
Purchases of common shares under share repurchase program			(254,988)						(179,266)
Proceeds from common shares issued, net			(17,260)						(10,008)
Third party investment in non-redeemable noncontrolling interests			—						15,971
Dividends paid to redeemable noncontrolling interests			—						(948)
Other			48,859						(1,948)
Preferred dividends paid			(10,184)						(10,403)
Net cash provided by (used for) financing activities			(233,573)						(186,602)
Effects of exchange rate changes on foreign currency cash and restricted cash			(3,924)						(6,084)
Increase (decrease) in cash and restricted cash			1,347						76,970
Cash and restricted cash, beginning of year			1,314,771						1,290,544
Cash and restricted cash, end of period			$	1,316,118					$	1,367,514

See Notes to Consolidated Financial Statements

ARCH CAPITAL			10			2022 FIRST 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 through June 30, 2021 included the results of Somers Group Holdings Ltd. (formerly Watford Holdings Ltd.) and its wholly owned subsidiaries (“Somers”). Effective July 1, 2021, Somers 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 Somers, Somers no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Somers in its consolidated financial statements and footnotes. See note 11.

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, 2021

(“2021 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. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

Recent Accounting Pronouncements

Recently Issued Accounting Standards Adopted

For information regarding additional accounting standards that the Company has not yet adopted, see note 3(s), “Significant Accounting Policies—Recent Accounting Pronouncements,” of the notes to consolidated financial statements in the Company’s 2021 Form 10-K.

2. Share Transactions

Share-Based Compensation

During the 2022 first quarter, the Company granted 734,254 stock options, 690,772 performance share awards (“PSAs”) and units (“PSUs”) and 971,262 restricted shares and units to certain employees. The stock options were valued at the grant date using the Black-Scholes option pricing model. The weighted average grant-date fair value of the stock options, PSAs/PSUs and restricted shares and units granted during the 2022 first quarter were approximately $13.13, $49.91 and $47.54 per share, respectively. Such values are being amortized over the respective substantive vesting period.

During the 2021 first quarter, the Company granted 1,218,465 stock options, 685,104 performance share awards (“PSAs”) and units (“PSUs”) and 1,168,577 restricted shares and units to certain employees. The stock options were valued at the grant date using the Black-Scholes option pricing model. The weighted average grant-date fair value of the stock options, PSAs/PSUs and restricted shares and units granted during the 2021 first quarter were approximately $9.20, $37.38 and $35.82 per share, respectively. Such values

are being amortized over the respective substantive vesting

period.

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 426.2 million common shares for an aggregate purchase price of $5.54 billion. For the three months ended March 31, 2022, Arch Capital repurchased 5.6 million shares under the share repurchase program with an aggregate purchase price of $255.0 million. At March 31, 2022, $927.2 million of share

ARCH CAPITAL			11			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

3. Earnings Per Common Share

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

			Three Months Ended
			March 31,
			2022						2021
Numerator:
Net income (loss)			$	197,432					$	475,708
Amounts attributable to noncontrolling interests			(1,632)						(37,552)
Net income (loss) available to Arch			195,800						438,156
Preferred dividends			(10,184)						(10,403)
Net income (loss) available to Arch common shareholders			$	185,616					$	427,753
Denominator:
Weighted average common shares and common share equivalents outstanding — basic			374,243,812						400,807,895
Effect of dilutive common share equivalents:
Nonvested restricted shares			2,659,922						2,230,794
Stock options (1)			7,290,629						6,184,564
Weighted average common shares and common share equivalents outstanding — diluted			384,194,363						409,223,253
Earnings per common share:
Basic			$	0.50					$	1.07
Diluted			$	0.48					$	1.05

(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 2022 first quarter and 2021 first quarter, the number of stock options excluded were 769,026 and 2,400,082, respectively.

ARCH CAPITAL			12			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4. Segment Information

The Company classifies its businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — corporate and ‘other.’ 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 business, investment and services related to 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 segment results include net investment income, 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 investments accounted for using the equity method, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, net foreign exchange gains or losses, income taxes, income or loss from operating affiliates and items related to the Company’s non-cumulative preferred shares. Such amounts exclude the results of the ‘other’ segment.

Through June 30, 2021, the ‘other’ segment included the results of Somers. In July 2021, the Company announced the completion of the previously disclosed acquisition of Somers by Greysbridge. Based on the governing documents of Greysbridge, the Company has concluded that, while it retains significant influence over Somers, Somers no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, Arch no longer consolidates the results of Somers in its consolidated financial statements. See note 11.

ARCH CAPITAL			13			2022 FIRST 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
			March 31, 2022
			Insurance						Reinsurance						Mortgage						Sub-Total						Other						Total
Gross premiums written (1)			$	1,719,605					$	1,718,942					$	364,839					$	3,800,775					$	—					$	3,800,775
Premiums ceded			(512,709)						(579,818)						(76,719)						(1,166,635)						—						(1,166,635)
Net premiums written			1,206,896						1,139,124						288,120						2,634,140						—						2,634,140
Change in unearned premiums			(180,200)						(334,724)						1,417						(513,507)						—						(513,507)
Net premiums earned			1,026,696						804,400						289,537						2,120,633						—						2,120,633
Other underwriting income (loss)			—						836						5,061						5,897						—						5,897
Losses and loss adjustment expenses			(600,739)						(454,700)						54,604						(1,000,835)						—						(1,000,835)
Acquisition expenses			(195,650)						(171,996)						(10,513)						(378,159)						—						(378,159)
Other operating expenses			(166,825)						(69,776)						(53,342)						(289,943)						—						(289,943)
Underwriting income (loss)			$	63,482					$	108,764					$	285,347					457,593						—						457,593
Net investment income																					80,436						—						80,436
Net realized gains (losses)																					(292,414)						—						(292,414)
Equity in net income (loss) of investment funds accounted for using the equity method																					36,305						—						36,305
Other income (loss)																					(9,025)						—						(9,025)
Corporate expenses (2)																					(31,935)						—						(31,935)
Transaction costs and other (2)																					(397)						—						(397)
Amortization of intangible assets																					(27,167)						—						(27,167)
Interest expense																					(32,708)						—						(32,708)
Net foreign exchange gains (losses)																					3,845						—						3,845
Income (loss) before income taxes and income (loss) from operating affiliates																					184,533						—						184,533
Income tax (expense) benefit																					(11,619)						—						(11,619)
Income (loss) from operating affiliates																					24,518						—						24,518
Net income (loss)																					197,432						—						197,432
Amounts attributable to redeemable noncontrolling interests																					(1,632)						—						(1,632)
Net income (loss) available to Arch																					195,800						—						195,800
Preferred dividends																					(10,184)						—						(10,184)
Net income (loss) available to Arch common shareholders																					$	185,616					$	—					$	185,616
Underwriting Ratios
Loss ratio			58.5		%				56.5		%				(18.9)		%				47.2		%				—		%				47.2		%
Acquisition expense ratio			19.1		%				21.4		%				3.6		%				17.8		%				—		%				17.8		%
Other operating expense ratio			16.2		%				8.7		%				18.4		%				13.7		%				—		%				13.7		%
Combined ratio			93.8		%				86.6		%				3.1		%				78.7		%				—		%				78.7		%
Goodwill and intangible assets			$	249,423					$	183,675					$	493,329					$	926,427					$	—					$	926,427

(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			14			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

			Three Months Ended
			March 31, 2021
			Insurance						Reinsurance						Mortgage						Sub-Total						Other						Total
Gross premiums written (1)			$	1,415,886					$	1,471,060					$	391,246					$	3,277,293					$	216,523					$	3,397,206
Premiums ceded			(421,047)						(471,948)						(56,051)						(948,147)						(37,212)						(888,749)
Net premiums written			994,839						999,112						335,195						2,329,146						179,311						2,508,457
Change in unearned premiums			(175,365)						(354,212)						1,122						(528,455)						(31,580)						(560,035)
Net premiums earned			819,474						644,900						336,317						1,800,691						147,731						1,948,422
Other underwriting income (loss)			—						(1,198)						6,897						5,699						411						6,110
Losses and loss adjustment expenses			(535,747)						(484,870)						(63,689)						(1,084,306)						(118,794)						(1,203,100)
Acquisition expenses			(128,222)						(118,025)						(30,082)						(276,329)						(28,152)						(304,481)
Other operating expenses			(137,113)						(60,514)						(49,131)						(246,758)						(14,275)						(261,033)
Underwriting income (loss)			$	18,392					$	(19,707)					$	200,312					198,997						(13,079)						185,918
Net investment income																					78,729						20,127						98,856
Net realized gains (losses)																					101,336						41,125						142,461
Equity in net income (loss) of investment funds accounted for using the equity method																					71,686						—						71,686
Other income (loss)																					(1,741)						—						(1,741)
Corporate expenses (2)																					(23,468)						—						(23,468)
Transaction costs and other (2)																					(1,201)						(715)						(1,916)
Amortization of intangible assets																					(14,402)						—						(14,402)
Interest expense																					(34,197)						(4,149)						(38,346)
Net foreign exchange gains (losses)																					21,505						(1,442)						20,063
Income (loss) before income taxes and income (loss) from operating affiliates																					397,244						41,867						439,111
Income tax (expense) benefit																					(38,852)						(8)						(38,860)
Income (loss) from operating affiliates																					75,457						—						75,457
Net income (loss)																					433,849						41,859						475,708
Amounts attributable to redeemable noncontrolling interests																					117						(972)						(855)
Amounts attributable to nonredeemable noncontrolling interests																					—						(36,697)						(36,697)
Net income (loss) available to Arch																					433,966						4,190						438,156
Preferred dividends																					(10,403)						—						(10,403)
Net income (loss) available to Arch common shareholders																					$	423,563					$	4,190					$	427,753
Underwriting Ratios
Loss ratio			65.4		%				75.2		%				18.9		%				60.2		%				80.4		%				61.7		%
Acquisition expense ratio			15.6		%				18.3		%				8.9		%				15.3		%				19.1		%				15.6		%
Other operating expense ratio			16.7		%				9.4		%				14.6		%				13.7		%				9.7		%				13.4		%
Combined ratio			97.7		%				102.9		%				42.4		%				89.2		%				109.2		%				90.7		%
Goodwill and intangible assets			$	276,211					$	17,807					$	377,841					$	671,859					$	7,650					$	679,509

(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			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. Reserve for Losses and Loss Adjustment Expenses

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

			Three Months Ended
			March 31,
			2022						2021
Reserve for losses and loss adjustment expenses at beginning of period			$	17,757,156					$	16,513,929
Unpaid losses and loss adjustment expenses recoverable			5,599,231						4,314,855
Net reserve for losses and loss adjustment expenses at beginning of period			12,157,925						12,199,074
Net incurred losses and loss adjustment expenses relating to losses occurring in:
Current year			1,142,647						1,244,772
Prior years			(141,812)						(41,672)
Total net incurred losses and loss adjustment expenses			1,000,835						1,203,100
Retroactive reinsurance transactions (1)			—						(183,893)
Net foreign exchange (gains) losses and other			(32,640)						(46,877)
Net paid losses and loss adjustment expenses relating to losses occurring in:
Current year			(70,806)						(58,984)
Prior years			(656,205)						(585,118)
Total net paid losses and loss adjustment expenses			(727,011)						(644,102)
Net reserve for losses and loss adjustment expenses at end of period			12,399,109						12,527,302
Unpaid losses and loss adjustment expenses recoverable			5,709,998						3,916,650
Reserve for losses and loss adjustment expenses at end of period			$	18,109,107					$	16,443,952

(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”).

Development on Prior Year Loss Reserves

2022 First Quarter

During the 2022 first quarter, the Company recorded net favorable development on prior year loss reserves of $141.8 million, which consisted of $7.3 million from the insurance segment, $32.5 million from the reinsurance segment and $102.1 million from the mortgage segment.

The insurance segment’s net favorable development of $7.3 million, or 0.7 loss ratio points, for the 2022 first quarter consisted of $19.0 million of net favorable development in short-tailed lines and $11.7 million of net adverse development in medium-tailed and long-tailed lines. Net favorable development in short-tailed lines reflected $18.6 million of favorable development in lenders products, primarily from the 2021 accident year (i.e., the year in which a loss occurred). Net adverse development in medium-tailed lines included $7.2 million of adverse development in professional liability business, primarily from the 2010 to 2013, 2015 and 2019 accident years, and $6.0 million of adverse development in contract binding business, across

most accident years, partially offset by favorable development in program business of $5.0 million, primarily from the 2020 accident year. Net adverse development in long-tailed lines primarily reflected $5.8 million of unfavorable development related to casualty lines, primarily from 2019 to 2021 accident years.

The reinsurance segment’s net favorable development of $32.5 million, or 4.0 loss ratio points, for the 2022 first quarter consisted of $35.4 million of net favorable development in short-tailed and medium-tailed lines and $2.9 million of net adverse development in long-tailed lines. Net favorable development in short-tailed lines reflected $19.2 million of favorable development related to property catastrophe and property other than property catastrophe business, primarily from the 2018, 2019 and 2021 underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given twelve-month period). Net favorable development in medium-tailed lines included $10.7 million of favorable development in marine and aviation lines, across most underwriting years. Adverse development in long-tailed lines reflected an increase in casualty reserves, primarily from the

ARCH CAPITAL			16			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2021 underwriting year, which was partially offset by favorable development in earlier underwriting years.

The mortgage segment’s net favorable development was $102.1 million, or 35.3 loss ratio points, for the 2022 first quarter, primarily reflecting the impact of lower new delinquencies and favorable cure activity related to the U.S. first lien portfolio primarily from the 2020 accident year. The Company’s credit risk transfer, international, second lien and student loan business also contributed to the favorable development.

2021 First Quarter

During the 2021 first quarter, the Company recorded net favorable development on prior year loss reserves of $41.7 million, which consisted of $4.1 million from the insurance segment, $26.8 million from the reinsurance segment and $10.9 million from the mortgage segment, partially offset by $0.1 million unfavorable from the ‘other’ segment.

The insurance segment’s net favorable development of $4.1 million, or 0.5 loss ratio points, for the 2021 first quarter consisted of $25.0 million of net favorable development in short-tailed and $20.9 million of net adverse development in medium-tailed lines. Net favorable development in short-tailed lines reflected $14.6 million of favorable development from property (excluding marine), primarily from the 2019 and 2020 accident years, $8.0 million of favorable development in lenders products, primarily from the 2020 accident year, and $2.5 million of favorable development in travel and accident, primarily from the 2020 accident year. Net adverse development in medium-tailed lines included $10.8 million of adverse development in program business, primarily from the 2016 to 2020 accident years, $6.0 million of adverse development in professional liability business, primarily from the 2019 accident year, and $5.0 million of adverse development in surety, primarily from the 2019 accident year.

The reinsurance segment’s net favorable development of $26.8 million, or 4.2 loss ratio points, for the 2021 first quarter consisted of net favorable development in short-tailed, medium-tailed and long-tailed lines. Net favorable development of $17.5 million in short-tailed lines reflected $23.3 million of favorable development related to property other than property catastrophe business, primarily from the 2016 to 2019 underwriting years, and $16.6 million of favorable development from other specialty, primarily from the 2018 and 2019 underwriting years, partially offset by $22.5 million of net adverse development related to property catastrophe, primarily from the 2020 underwriting year. Net favorable development of $9.3 million in medium and long-tailed lines reflected favorable development in casualty across most underwriting years.

The mortgage segment’s net favorable development was $10.9 million, or 3.2 loss ratio points, for the 2021 first

quarter, primarily driven by favorable development in the credit risk transfer and international portfolios. Subrogation recoveries on second lien and student loan business also contributed.

6. 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 March 31, 2022
Balance at beginning of period			$	2,633,280		$	39,958
Change for provision of expected credit losses (1)						(885)
Balance at end of period			$	3,223,504		$	39,073
Three Months Ended March 31, 2021
Balance at beginning of period			$	2,064,586		$	37,781
Change for provision of expected credit losses (1)						(1,670)
Balance at end of period			$	2,618,175		$	36,111

(1)Amounts deemed uncollectible are written-off in operating expenses. For the 2022 first quarter and 2021 first quarter, amounts written off were $1.5 million and $0.1 million, respectively.

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 March 31, 2022
Balance at beginning of period			$	5,880,735					$	13,230
Change for provision of expected credit losses									5,253
Balance at end of period			$	5,941,000					$	18,483
Three Months Ended March 31, 2021
Balance at beginning of period			$	4,500,802					$	11,636
Change for provision of expected credit losses									(764)
Balance at end of period			$	4,041,076					$	10,872

ARCH CAPITAL			17			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

			March 31,						December 31
			2022						2021
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses			$	5,941,000					$	5,880,735
% due from carriers with A.M. Best rating of “A-” or better			69.5		%				69.7		%
% due from all other rated carriers			0.1		%				0.1		%
% due from all other carriers with no A.M. Best rating (1)			30.4		%				30.2		%
Largest balance due from any one carrier as % of total shareholders’ equity			7.2		%				6.7		%

(1) At March 31, 2022 and December 31, 2021 over 93% and 91% 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 March 31, 2022
Balance at beginning of period			$	1,828,691					$	3,437
Change for provision of expected credit losses									294
Balance at end of period			$	1,810,199					$	3,731
Three Months Ended March 31, 2021
Balance at beginning of period			$	1,986,924					$	8,638
Change for provision of expected credit losses									(2,785)
Balance at end of period			1,919,655						$	5,853

ARCH CAPITAL			18			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7. Investment Information

Available For Sale Investments

The following table summarizes the fair value and cost or amortized cost of the Company’s securities classified as available for sale:

			Estimated Fair Value						Gross Unrealized Gains						Gross Unrealized Losses						Allowance for Expected Credit Losses						Cost or Amortized Cost
March 31, 2022
Fixed maturities:
Corporate bonds			$	7,231,686					$	31,393					$	(356,464)					$	(26,509)					$	7,583,266
Mortgage backed securities			416,138						1,717						(28,430)						(797)						443,648
Municipal bonds			370,470						4,169						(10,900)						(106)						377,307
Commercial mortgage backed securities			1,066,365						751						(15,862)						(256)						1,081,732
U.S. government and government agencies			4,716,790						10,031						(178,836)						—						4,885,595
Non-U.S. government securities			2,169,714						42,121						(92,040)						(532)						2,220,165
Asset backed securities			1,677,690						1,128						(43,473)						(5,945)						1,725,980
Total			17,648,853						91,310						(726,005)						(34,145)						18,317,693
Short-term investments			2,332,624						758						(647)						—						2,332,513
Total			$	19,981,477					$	92,068					$	(726,652)					$	(34,145)					$	20,650,206
December 31, 2021
Fixed maturities:
Corporate bonds			$	6,553,333					$	104,170					$	(69,194)					$	(2,037)					$	6,520,394
Mortgage backed securities			408,477						2,825						(5,410)						(48)						411,110
Municipal bonds			404,666						18,724						(1,409)						(2)						387,353
Commercial mortgage backed securities			1,046,484						1,740						(3,117)						(6)						1,047,867
U.S. government and government agencies			4,772,764						10,076						(45,967)						—						4,808,655
Non-U.S. government securities			2,120,294						54,048						(34,749)						(82)						2,101,077
Asset backed securities			2,692,091						6,540						(11,108)						(708)						2,697,367
Total			17,998,109						198,123						(170,954)						(2,883)						17,973,823
Short-term investments			1,734,716						568						(590)						—						1,734,738
Total			$	19,732,825					$	198,691					$	(171,544)					$	(2,883)					$	19,708,561

ARCH CAPITAL			19			2022 FIRST 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
March 31, 2022
Fixed maturities:
Corporate bonds			$	5,798,556					$	(305,661)					$	513,866					$	(50,803)					$	6,312,422					$	(356,464)
Mortgage backed securities			328,090						(21,714)						68,490						(6,716)						396,580						(28,430)
Municipal bonds			203,717						(9,578)						14,759						(1,322)						218,476						(10,900)
Commercial mortgage backed securities			942,203						(15,815)						1,654						(47)						943,857						(15,862)
U.S. government and government agencies			4,201,416						(173,754)						80,735						(5,082)						4,282,151						(178,836)
Non-U.S. government securities			2,045,013						(82,107)						98,575						(9,933)						2,143,588						(92,040)
Asset backed securities			1,450,006						(41,196)						110,116						(2,277)						1,560,122						(43,473)
Total			14,969,001						(649,825)						888,195						(76,180)						15,857,196						(726,005)
Short-term investments			420,157						(647)						—						—						420,157						(647)
Total			$	15,389,158					$	(650,472)					$	888,195					$	(76,180)					$	16,277,353					$	(726,652)
December 31, 2021
Fixed maturities:
Corporate bonds			$	3,639,582					$	(63,938)					$	98,867					$	(5,256)					$	3,738,449					$	(69,194)
Mortgage backed securities			222,176						(3,545)						46,809						(1,865)						268,985						(5,410)
Municipal bonds			26,665						(385)						16,361						(1,024)						43,026						(1,409)
Commercial mortgage backed securities			675,603						(2,805)						5,908						(312)						681,511						(3,117)
U.S. government and government agencies			4,211,621						(44,180)						33,373						(1,787)						4,244,994						(45,967)
Non-U.S. government securities			1,511,301						(31,983)						62,957						(2,766)						1,574,258						(34,749)
Asset backed securities			1,667,002						(9,853)						33,082						(1,255)						1,700,084						(11,108)
Total			11,953,950						(156,689)						297,357						(14,265)						12,251,307						(170,954)
Short-term investments			284,733						(590)						—						—						284,733						(590)
Total			$	12,238,683					$	(157,279)					$	297,357					$	(14,265)					$	12,536,040					$	(171,544)

At March 31, 2022, on a lot level basis, approximately 6,550 security lots out of a total of approximately 9,060 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 $3.6 million. At December 31, 2021, on a lot level basis, approximately 4,700 security lots out of a total of approximately 10,240 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 $1.1 million.

ARCH CAPITAL			20			2022 FIRST QUARTER FORM 10-Q

ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

						March 31, 2022												December 31, 2021
Maturity						Estimated Fair Value						Amortized Cost						Estimated Fair Value						Amortized Cost
Due in one year or less						$	313,167					$	311,780					$	300,889					$	299,772
Due after one year through five years						9,592,143						9,884,149						8,355,255						8,339,387
Due after five years through 10 years						4,107,319						4,353,470						4,689,155						4,684,393
Due after 10 years						476,031						516,934						505,758						493,927
						14,488,660						15,066,333						13,851,057						13,817,479
Mortgage backed securities						416,138						443,648						408,477						411,110
Commercial mortgage backed securities						1,066,365						1,081,732						1,046,484						1,047,867
Asset backed securities						1,677,690						1,725,980						2,692,091						2,697,367
Total						$	17,648,853					$	18,317,693					$	17,998,109					$	17,973,823

Equity Securities, at Fair Value

At March 31, 2022, the Company held $1.0 billion of equity securities, at fair value, compared to $1.8 billion at December 31, 2021. Such holdings include publicly traded common stocks primarily in the consumer cyclical and non-cyclical, technology, communication and financial sectors and exchange-traded funds in fixed income, equity and other sectors.

Other Investments, at Fair Value

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

			March 31, 2022						December 31, 2021
Fixed maturities			$	426,187					$	416,698
Other investments			1,226,808						1,432,553
Short-term investments			12,371						97,806
Equity securities			21,300						26,493
Total			$	1,686,666					$	1,973,550

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

			March 31, 2022						December 31, 2021
Lending			$	472,099					$	536,345
Investment grade fixed income			350,217						147,810
Term loan investments			160,945						484,950
Private equity			98,471						91,126
Energy			81,693						81,692
Credit related funds			63,383						70,278
Infrastructure			—						20,352
Total			$	1,226,808					$	1,432,553

Investments Accounted For Using the Equity Method

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

			March 31, 2022						December 31, 2021
Credit related funds			$	1,067,549					$	1,022,334
Private equity			602,802						436,042
Real estate			444,755						396,395
Lending			409,736						376,649
Equities			360,906						395,090
Infrastructure			226,430						230,070
Energy			107,842						119,141
Fixed income			105,523						101,890
Total			$	3,325,543					$	3,077,611

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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:

			March 31, 2022						December 31, 2021
Investments accounted for using the equity method (1)			3,325,543						3,077,611
Investments accounted for using the fair value option (2)			146,718						170,595
Total			$	3,472,261					$	3,248,206

(1) Aggregate unfunded commitments were $2.7 billion at March 31, 2022, compared to $2.6 billion at December 31, 2021.

(2) Aggregate unfunded commitments were $21.3 million at March 31, 2022, compared to $18.8 million at December 31, 2021.

Net Investment Income

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

			March 31,
			2022						2021
Three Months Ended
Fixed maturities			$	82,053					$	90,626
Term loans			1,617						14,728
Equity securities			6,238						5,650
Short-term investments			2,575						607
Other (1)			10,459						14,355
Gross investment income			102,942						125,966
Investment expenses			(22,506)						(27,110)
Net investment income			$	80,436					$	98,856

(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:

			March 31,
			2022						2021
Three Months Ended
Available for sale securities:
Gross gains on investment sales			$	19,707					$	65,002
Gross losses on investment sales			(108,347)						(62,998)
Change in fair value of assets and liabilities accounted for using the fair value option:
Fixed maturities			(30,589)						16,553
Other investments			4,389						46,855
Equity securities			(3,313)						2,065
Short-term investments			(149)						736
Equity securities, at fair value:
Net realized gains (losses) on sales during the period			65,211						37,849
Net unrealized gains (losses) on equity securities still held at reporting date			(176,195)						19,708
Allowance for credit losses:
Investments related			(31,722)						(1,648)
Underwriting related			(4,286)						5,268
Derivative instruments (1)			(23,711)						36,116
Other			(3,409)						(23,045)
Net realized gains (losses)			$	(292,414)					$	142,461

(1) See note 9 for information on the Company’s derivative instruments.

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

The Company recorded $36.3 million of equity in net income related to investment funds accounted for using the equity method in the 2022 first quarter, compared to income of $71.7 million for the 2021 first quarter. 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 SA (“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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 of March 31, 2022, the Company owned approximately 29.86% of the issued shares of Coface, or 30.09% excluding treasury shares, with a carrying value of $646.0 million, compared to $630.5 million at December 31, 2021.

In July 2021, the Company announced the completion of the previously disclosed acquisition of Somers by Greysbridge for a cash purchase price of $35.00 per common share.

Effective July 1, 2021, Somers 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 March 31, 2022 the Company’s carrying value in Greysbridge was $362.2 million, compared to $375.7 million at December 31, 2021, 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.

Income from operating affiliates for the 2022 first quarter was $24.5 million, compared to an income of $75.5 million, for the 2021 first quarter.

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 March 31, 2022
Balance at beginning of period						$	802					$	2					$	2,079											$	2,883
Additions for current-period provision for expected credit losses						5,990						95						25,150												31,235
Additions (reductions) for previously recognized expected credit losses						487						9						(15)												481
Reductions due to disposals						(281)						—						(173)												(454)
Balance at end of period						$	6,998					$	106					$	27,041											$	34,145
Three Months Ended March 31, 2021
Balance at beginning of period						$	1,490					$	11					$	896											$	2,397
Additions for current-period provision for expected credit losses						182						—						2,421												2,603
Additions (reductions) for previously recognized expected credit losses						(382)						(9)						(540)												(931)
Reductions due to disposals						(83)						—						(156)												(239)
Balance at end of period						$	1,207					$	2					$	2,621											$	3,830

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

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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 2021 Form 10-K.

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

			March 31, 2022						December 31, 2021
Assets used for collateral or guarantees:
Affiliated transactions			$	4,202,190					$	4,223,955
Third party agreements			3,018,035						2,721,160
Deposits with U.S. regulatory authorities			773,105						798,100
Deposits with non-U.S. regulatory authorities			509,741						506,517
Total restricted assets			$	8,503,071					$	8,249,732

Reconciliation of Cash and Restricted Cash

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

			March 31, 2022						December 31, 2021
Cash			$	812,917					$	858,668
Restricted cash (included in ‘other assets’)			$	503,201					$	456,103
Cash and restricted cash			$	1,316,118					$	1,314,771

8. 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 March 31, 2022.

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 $23.0 billion of financial assets and liabilities measured at fair value at March 31, 2022, approximately $7.3 million, or 0.0%, were priced using non-binding broker-dealer quotes or modeled valuations. Of the $23.8 billion of financial assets and liabilities measured at fair value at December 31, 2021, approximately $7.7 million, or 0.0%, 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 mortgage-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

Other liabilities

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

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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 March 31, 2022:

									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:
Available for sale securities:
Fixed maturities:
Corporate bonds			$	7,231,686					$	—					$	7,228,116					$	3,570
Mortgage backed securities			416,138						—						416,138						—
Municipal bonds			370,470						—						370,470						—
Commercial mortgage backed securities			1,066,365						—						1,066,365						—
U.S. government and government agencies			4,716,790						4,689,733						27,057						—
Non-U.S. government securities			2,169,714						—						2,169,714						—
Asset backed securities			1,677,690						—						1,674,538						3,152
Total			17,648,853						4,689,733						12,952,398						6,722
Short-term investments			2,332,624						2,088,131						244,493						—
Equity securities, at fair value			1,002,572						963,395						36,409						2,768
Derivative instruments (2)			127,153						—						127,153						—
Residential mortgage loans			75,411						—						75,411						—
Fair value option:
Corporate bonds			421,995						—						421,995						—
Non-U.S. government bonds			1,663						—						1,663						—
Asset backed securities			2,529						—						2,529						—
Short-term investments			12,371						820						11,551						—
Equity securities			21,301						16,790						—						4,511
Other investments			177,680						—						155,078						22,602
Other investments measured at net asset value (1)			1,049,128
Total			1,686,667						17,610						592,816						27,113
Total assets measured at fair value			$	22,873,280					$	7,758,869					$	14,028,680					$	36,603
Liabilities measured at fair value:
Other liabilities			$	(17,591)					$	—					$	—					$	(17,591)
Derivative instruments (2)			(72,655)						—						(72,655)						—
Total liabilities measured at fair value			$	(90,246)					$	—					$	(72,655)					$	(17,591)

(1) 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.

(2) See note 9.

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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, 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:
Available for sale securities:
Fixed maturities:
Corporate bonds			$	6,553,333					$	—					$	6,553,320					$	13
Mortgage backed securities			408,477						—						408,477						—
Municipal bonds			404,666						—						404,666						—
Commercial mortgage backed securities			1,046,484						—						1,046,484						—
U.S. government and government agencies			4,772,764						4,744,517						28,247						—
Non-U.S. government securities			2,120,294						—						2,120,294						—
Asset backed securities			2,692,091						—						2,688,744						3,347
Total			17,998,109						4,744,517						13,250,232						3,360
Short-term investments			1,734,716						1,052,822						681,894						—
Equity securities, at fair value			1,804,170						1,762,864						38,388						2,918
Derivative instruments (2)			127,121						—						127,121						—
Residential mortgage loans			49,847						—						49,847						—
Fair value option:
Corporate bonds			388,546						—						388,546						—
Non-U.S. government bonds			23,785						—						23,785						—
Asset backed securities			4,367						—						4,367						—
Short-term investments			97,806						528						97,278						—
Equity securities			26,493						21,745						—						4,748
Other investments			310,798						20,352						262,465						27,981
Other investments measured at net asset value (1)			1,121,755
Total			1,973,550						42,625						776,441						32,729
Total assets measured at fair value			$	23,687,513					$	7,602,828					$	14,923,923					$	39,007
Liabilities measured at fair value:
Other liabilities			$	(16,960)					$	—					$	—					$	(16,960)
Derivative instruments (2)			(54,224)						—						(54,224)						—
Total liabilities measured at fair value			$	(71,184)					$	—					$	(54,224)					$	(16,960)

(1) 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.

(2) See note 9.

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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						Other Liabilities
Three Months Ended March 31, 2022
Balance at beginning of period			$	3,347					$	13					$	—					$	27,981					$	4,748					$	2,918					$	(16,960)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)			10						—						—						7						(237)						(147)						(98)
Included in other comprehensive income			(60)						—						—						—						—						—						(533)
Purchases, issuances, sales and settlements
Purchases			—						—						—						68						—						—						—
Issuances			—						—						—						—						—						—						—
Sales			—						—						—						(2,471)						—						(3)						—
Settlements			(145)						—						—						(2,983)						—						—						—
Transfers in and/or out of Level 3			—						3,557						—						—						—						—						—
Balance at end of period			$	3,152					$	3,570					$	—					$	22,602					$	4,511					$	2,768					$	(17,591)
Three Months Ended March 31, 2021
Balance at beginning of period			$	3,426					$	13					$	985					$	67,103					$	68,988					$	42,015					$	(461)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)			(68)						—						4						248						2,188						904						(4)
Included in other comprehensive income			114						—						—						—						—						—						—
Purchases, issuances, sales and settlements
Purchases			—						—						—						7,365						—						193						—
Issuances			—						—						—						—						—						—						—
Sales			—						—						—						(6,786)						—						—						—
Settlements			—						—						—						—						—						—						—
Transfers in and/or out of Level 3			—						—						—						—						—						—						—
Balance at end of period			$	3,472					$	13					$	989					$	67,930					$	71,176					$	43,112					$	(465)

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

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

Financial Instruments Disclosed, But Not Carried, At Fair Value

The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at March 31, 2022, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

At March 31, 2022, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.7 billion and had a fair value of $2.9 billion. At December 31, 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. The fair values of the senior notes were obtained from a third party pricing service and are based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.

9. 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

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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 (1)						Liability Derivatives (1)						Notional Value (2)
March 31, 2022
Futures contracts			$	35,734					$	(28,704)					$	1,759,560
Foreign currency forward contracts			13,956						(13,651)						1,310,849
TBAs			—						—						—
Other			77,463						(30,300)						3,675,245
Total			$	127,153					$	(72,655)
December 31, 2021
Futures contracts			$	34,999					$	(9,808)					$	2,826,564
Foreign currency forward contracts			7,734						(11,390)						915,962
TBAs			11,227						—						11,227
Other			73,161						(33,026)						3,736,773
Total			$	127,121					$	(54,224)

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

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

The Company did not hold any derivatives which were designated as hedging instruments at March 31, 2022 or December 31, 2021.

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 March 31, 2022, asset derivatives and liability derivatives of $123.0 million and $72.6 million, respectively, were subject to a master netting agreement, compared to $122.3 million and $53.9 million, respectively, at December 31, 2021. The remaining derivatives included in the preceding table were not subject to a master netting agreement.

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						March 31,
hedging instruments:						2022						2021
Three Months Ended
Net realized gains (losses):
Futures contracts						$	(46,774)					$	47,438
Foreign currency forward contracts						(2,038)						(22,071)
TBAs						(51)						—
Other (1)						25,152						10,749
Total						$	(23,711)					$	36,116

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

10. 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 $3.1 billion at March 31, 2022, compared to $3.0 billion at December 31, 2021.

Interest Paid

Interest paid on the Company’s senior notes and other borrowings were $0.6 million for the three months ended March 31, 2022, compared to $1.0 million for the 2021 period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

11. Variable Interest Entities and Noncontrolling Interests

Somers

In March 2014, the Company invested $100.0 million and acquired approximately 11% of Somers’ outstanding common equity. Somers was considered a VIE and the Company concluded that it was the primary beneficiary of Somers, through June 30, 2021. As such, the results of Somers 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, Somers 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, Somers 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 Somers, Somers no longer constitutes a variable interest entity. Accordingly, effective July 1, 2021, the Company no longer consolidates the results of Somers 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.

Somers generated $7.0 million of cash provided by operating activities, $21.4 million of cash provided by investing activities and $1.0 million of cash used for financing activities for the three months ended March 31, 2021.

Non-redeemable noncontrolling interests

Through June 30, 2021, the Company accounted for the portion of Somers’s common equity attributable to third party investors in the shareholders’ equity section of its consolidated balance sheets. The portion of Somers’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:

									March 31,
									2021
Three Months Ended
Balance, beginning of period									$	823,007
Additional paid in capital attributable to noncontrolling interests									21,730
Amounts attributable to noncontrolling interests									36,697
Other comprehensive income (loss) attributable to noncontrolling interests									(4,570)
Balance, end of period									$	876,864

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 Somers 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 Somers 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:

			March 31,
			2022						2021
Three Months Ended
Balance, beginning of period			$	9,233					$	58,548
Accretion of preference share issuance costs			—						23
Other			530						(901)
Balance, end of period			$	9,763					$	57,670

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:

			March 31,
			2022						2021
Three Months Ended
Amounts attributable to non-redeemable noncontrolling interests			$	—					$	(36,697)
Amounts attributable to redeemable noncontrolling interests			(1,632)						(855)
Net (income) loss attributable to noncontrolling interests			$	(1,632)					$	(37,552)

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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 and later 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.

												March 31, 2022																														December 31, 2021
												Maximum Exposure to Loss																														Maximum Exposure to Loss
Bellemeade Entities (Issue Date)						Total VIE Assets						On-Balance Sheet (Asset) Liability						Off-Balance Sheet						Total						Coverage Remaining from Reinsurers (1)						Total VIE Assets						On-Balance Sheet (Asset) Liability						Off-Balance Sheet						Total
2017-1 Ltd. (Oct-17)						$	81,415					$	(90)					$	380					$	290											$	108,368					$	(159)					$	424					$	265
2018-1 Ltd. (Apr-18)						147,647						(384)						1,176						792												181,136						(528)						1,268						740
2018-3 Ltd. (Oct-18)						283,088						(707)						1,953						1,246												302,563						(1,018)						2,496						1,478
2019-1 Ltd. (Mar-19)						157,397						(135)						1,407						1,272												181,324						(380)						5,807						5,427
2019-2 Ltd. (Apr-19)						398,316						(379)						5,906						5,527												398,316						(515)						3,998						3,483
2019-3 Ltd. (Jul-19)						347,583						(298)						2,783						2,485												409,859						(584)						3,190						2,606
2019-4 Ltd. (Oct-19)						352,232						(251)						4,728						4,477												411,954						(462)						4,759						4,297
2020-2 Ltd. (Sep-20)						185,380						(36)						1,800						1,764						784						217,766						(177)						1,984						1,807
2020-3 Ltd. (Nov-20)						324,869						47						5,088						5,135						12,175						348,818						(128)						5,793						5,665
2020-4 Ltd. (Dec-20)						145,747						56						1,528						1,584						7,249						176,826						(50)						1,630						1,580
2021-1 Ltd. (Mar-21)						543,457						(600)						3,596						2,996						54,795						568,986						(303)						3,283						2,980
2021-2 Ltd. (Jun-21)						514,932						(111)						4,392						4,281						91,241						522,807						281						4,124						4,405
2021-3 Ltd. (Sep-21)						507,873						(779)						3,574						2,795						131,518						507,873						(411)						3,446						3,035
2022-1 Ltd. (Jan-22)						283,500						(29)						2,464						2,435						33,260
Total						$	4,273,436					$	(3,696)					$	40,775					$	37,079					$	331,022					$	4,336,596					$	(4,434)					$	42,202					$	37,768

(1) Coverage from a separate panel of reinsurers remaining at March 31, 2022.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12. 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
Details About						Line Item That Includes						March 31,
AOCI Components						Reclassification						2022						2021
Unrealized appreciation (decline) on available-for-sale investments
						Net realized gains (losses)						$	(88,640)					$	2,004
						Provision for credit losses						(31,722)						(1,647)
						Total before tax						(120,362)						357
						Income tax (expense) benefit						18,084						(3,054)
						Net of tax						$	(102,278)					$	(2,697)

			Before Tax Amount						Tax Expense (Benefit)						Net of Tax Amount
Three Months Ended March 31, 2022
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period			$	(784,890)					$	(100,535)					$	(684,355)
Less reclassification of net realized gains (losses) included in net income			(120,362)						(18,084)						(102,278)
Foreign currency translation adjustments			(2,565)						203						(2,768)
Other comprehensive income (loss)			$	(667,093)					$	(82,248)					$	(584,845)
Three Months Ended March 31, 2021
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period			$	(294,360)					$	(32,610)					$	(261,750)
Less reclassification of net realized gains (losses) included in net income			357						3,054						(2,697)
Foreign currency translation adjustments			(28,415)						169						(28,584)
Other comprehensive income (loss)			$	(323,132)					$	(35,495)					$	(287,637)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13. 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 5.6% for the three months ended March 31, 2022, compared to 7.6% for the three months ended March 31, 2021. 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 $303.2 million at March 31, 2022, compared to a net deferred tax asset of $194.0 million at December 31, 2021. The change is primarily a result of market value fluctuations in the investment portfolio. In addition, the Company paid $9.0 million and $7.1 million of income taxes for the three months ended March 31, 2022 and 2021, respectively.

14. 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 March 31, 2022, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.

15. 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. The Company had no reinsurance recoverable on unpaid and paid losses or funds held liability at March 31, 2022 and December 31, 2021.

In July 2021, following consummation of the Merger Agreement and the related Greysbridge equity financing, pursuant to which Somers 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 Somers. For the three months

ended March 31, 2022, the Company ceded premiums written related to such transactions of $220.5 million (which includes reinsurance transactions in force as well as those entered into in conjunction with the Merger Agreement). In addition, Somers paid certain acquisition costs and administrative fees to the Company. At March 31, 2022, reinsurance recoverable on unpaid and paid losses from Somers was $933.7 million, with a reinsurance balance payable to Somers of $324.4 million. See note 11, “Variable Interest Entities and Noncontrolling Interests,” for information about Somers.

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 March 31, 2022, the Company owns $35.0 million in aggregate principal amount of Somers Group Holdings Ltd’s 6.5% senior notes, due July 2, 2029 and approximately 6.6% of Somers’s preference shares.

ARCH CAPITAL			34			2022 FIRST QUARTER FORM 10-Q