Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with our consolidated financial statements included in Item 1 of this report and also our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”). In addition, readers should review “Risk Factors” set forth in Item 1A of Part I of our 2021 Form 10-K and “ITEM 1A—Risk Factors” of this Form 10-Q. Tabular amounts are in U.S. Dollars in thousands, except share amounts, unless otherwise noted.

Arch Capital Group Ltd. (“Arch Capital” and, together with its subsidiaries, “Arch”, “we”, “our” or “us”) is a publicly listed Bermuda exempted company with approximately $15.6 billion in capital at March 31, 2022 and, through operations in Bermuda, the United States, Europe, Canada, Australia and Hong Kong, writes insurance, reinsurance and mortgage insurance on a worldwide basis.

									Page No.
Current Outlook									36
Financial Measures									36
Comments on Non-GAAP Measures									38
Results of Operations									40
			Insurance Segment						40
			Reinsurance Segment						42
			Mortgage Segment						44
			Corporate Segment						45
Critical Accounting Policies, Estimates and Recent Accounting Pronouncements									46
Financial Condition									46
Liquidity									52
Capital Resources and Other									52

ARCH CAPITAL			35			2022 FIRST QUARTER FORM 10-Q

CURRENT OUTLOOK

The 2022 first quarter provided yet another reminder that we live in a world of uncertainty. The war in Ukraine has affected countless lives and initiated a humanitarian crisis that is still unfolding, along with the COVID-19 pandemic that continues into year three. In addition to the war in Ukraine, catastrophes, global inflation and supply chain issues impacted the quarter. In spite of these headwinds for our industry, our objective for 2022 remains the same, to deliver long term value for our shareholders. The underlying fundamentals of our businesses continue to improve as we benefit from better market conditions. In our property and casualty segments of insurance and reinsurance, we continue to execute our cycle management strategy by actively allocating capital to the sectors where rates allow for returns that are substantially higher than our cost of capital. Growth in our mortgage insurance segment has stabilized with insurance in force modestly growing again this quarter.

Inflation continues to be a focus for our industry. We proactively analyze the data and incorporate new trends into our pricing and reserving. We believe that this discipline, coupled with increases in future investment returns and reserving prudently, mitigate inflation’s impact. For our mortgage operations, inflation mainly has a positive effect as it increases homeowner equity, which can potentially mitigate future losses.

The 2022 first quarter reflected growth across most property and casualty lines as we remain in a growth phase of the underwriting cycle. As a result, we continue to show improved underwriting margins, partially due to the compounding of rate-on-rate increases and the rebalancing of our mix of business. We believe that this time-tested strategy of protecting capital through soft markets and increasing our writings in hard markets gives us the best chance to generate superior risk adjusted returns over time. As long as rate increases support returns above our required thresholds, we expect to continue to grow our writings.

Rate improvements have enabled us to continue to expand writings in our property casualty segments. Rate increases remain well above the long-term loss cost trends and have spread to more lines than last year. In specialty insurance, underwriting conditions remain opportunistic as pricing discipline, terms and conditions, and limits management are stable across most lines. This stability, combined with the uncertainties in the insurance market should keep the market disciplined and sustain rate increases. Our early focus on Lloyd’s and business in the UK has delivered strong growth, as our European insurance operation now represents 30% of our insurance group’s total net premiums written. Our U.S operations benefited from growth in professional liability,

including cyber, as well as travel where we believe relative returns are attractive.

In reinsurance, the emphasis remains on quota share treaties over excess of loss reinsurance. This strategy allows us to participate in the rate increases on primary insurance while improving the balance between risk and return. We remained disciplined in property catastrophe exposure and we will deploy more capital to the line if expected returns improve meaningfully.

For our U.S. primary mortgage operations, delinquencies continue to trend to historically low levels, and cures on delinquent mortgages in our portfolio resulted in favorable prior development in the quarter. The increase in mortgage interest rates is a steeper rise than we have seen in decades. These higher rates, have dramatically curtailed refinancing. However, our mortgage business is more geared to the purchase market, which continues to benefit from strong demand and limited housing supply. The decline in refinancing activity improves persistency, which benefits our insurance in force and should result in a stable base of premium income to help drive underwriting income for the rest of the year and beyond. Outside of the U.S., we increased our writings in Australia as a result of the housing market remaining strong and due to our acquisition of Westpac’s LMI business.

We remain committed to providing solutions across many offerings as the marketplace evolves, including the mortgage credit risk transfer programs initiated by government sponsored enterprises, or “GSEs.” In addition, we enter into aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda and issue mortgage insurance linked notes, increasing our protection for mortgage tail risk. The Bellemeade structures provide approximately $4.6 billion of aggregate reinsurance coverage at March 31, 2022.

FINANCIAL MEASURES

Management uses the following three key financial indicators in evaluating our performance and measuring the overall growth in value generated for Arch Capital’s common shareholders:

Book Value per Share

Book value per share represents total common shareholders’ equity available to Arch divided by the number of common shares outstanding. Management uses growth in book value per share as a key measure of the value generated for our common shareholders each period and believes that book value per share is the key driver of Arch Capital’s share price over time. Book value per share is impacted by, among other factors, our underwriting results, investment returns and

ARCH CAPITAL			36			2022 FIRST QUARTER FORM 10-Q

share repurchase activity, which has an accretive or dilutive impact on book value per share depending on the purchase price. Book value per share was $32.18 at March 31, 2022, compared to $33.56 at December 31, 2021 and $30.54 at March 31, 2021. The 4.1% decrease in book value per share for the 2022 first quarter reflected negative total return on investments driven by the increase in interest rates and negative returns in the equity markets. The 5.4% increase in book value per share over the trailing twelve months primarily reflected strong underwriting results.

Operating Return on Average Common Equity

Operating return on average common equity (“Operating ROAE”) represents annualized after-tax operating income available to Arch common shareholders divided by the average of beginning and ending common shareholders’ equity available to Arch during the period. After-tax operating income available to Arch common shareholders, a non-GAAP financial measure as defined in Regulation G, represents net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings) equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other, loss on redemption of preferred shares and income taxes. Management uses Operating ROAE as a key measure of the return generated to common shareholders. See “Comment on Non-GAAP Financial Measures.”

Our Operating ROAE was 13.6% for the 2022 first quarter, compared to 7.8% for the 2021 first quarter. Return for the 2022 period reflected strong underwriting returns and a lower level of catastrophic activity, while the 2021 period reflected lower underwriting returns due to an increased level of catastrophic activity and higher income from operating affiliates.

Total Return on Investments

Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses and reflects the effect of financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the periods. The following table summarizes our total return compared to the benchmark return against which we measured our portfolio during the periods. See “Comment on Non-GAAP Financial Measures.”

			Arch Portfolio						Benchmark Return
Pre-tax total return (before investment expenses):
2022 First Quarter			(3.07)		%				(3.97)		%
2021 First Quarter			(0.18)		%				(0.51)		%

Total return for the 2022 first quarter reflected mark to market impact on our fixed maturities portfolio due to rising interest rates and the negative returns in the equity markets. We continue to maintain a relative short duration on our portfolio of 2.93 years at March 31, 2022.

The benchmark return index is a customized combination of indices intended to approximate a target portfolio by asset mix and average credit quality while also matching the approximate estimated duration and currency mix of our insurance and reinsurance liabilities. Although the estimated duration and average credit quality of this index will move as the duration and rating of its constituent securities change, generally we do not adjust the composition of the benchmark return index except to incorporate changes to the mix of liability currencies and durations noted above. The benchmark return index should not be interpreted as expressing a preference for or aversion to any particular sector or sector weight. The index is intended solely to provide, unlike many master indices that change based on the size of their constituent indices, a relatively stable basket of investable indices. At March 31, 2022, the benchmark return index had an average credit quality of “Aa3” by Moody’s Investors Service (“Moody’s”), and an estimated duration of 3.15 years.

ARCH CAPITAL			37			2022 FIRST QUARTER FORM 10-Q

The benchmark return index included weightings to the following indices:

			%
ICE BoAML 1-5 Year A - AAA U.S. Corporate Index			13.00		%
ICE BoAML 5-10 Year A - AAA U.S. Corporate Index			11.00
ICE BoAML 1-5 Year U.S. Treasury Index			11.00
MSCI ACWI Net Total Return USD Index			9.30
ICE BoAML 1-10 Year BBB U.S. Corporate Index			5.00
JPM CLOIE Investment Grade			5.00
S&P/LSTA Leveraged Loan Total Return Index			4.965
ICE BoAML U.S. Mortgage Backed Securities Index			4.00
ICE BoAML AAA US Fixed Rate CMBS			4.00
ICE BoAML 1-5 Year U.K. Gilt Index			4.00
ICE BoAML German Government 1-10 Year Index			3.50
ICE BoAML 0-3 Year U.S. Treasury Index			3.25
ICE BoAML 5-10 Year U.S. Treasury Index			3.00
ICE BoAML 1-10 Year U.S. Municipal Securities Index			3.00
Bloomberg Barclays ABS Aaa Index			3.00
ICE BoAML 1-5 Year Australia Government Index			2.75
ICE BoAML U.S. High Yield Constrained Index			2.50
ICE BoAML 1-5 Year Canada Government Index			2.00
ICE BofA CCC and Lower US High Yield Constrained Index			1.38
Bloomberg Barclays Global High Yield Index			1.38
S&P DJ Global ex-US Select Real Estate Securities Net Index			0.825
FTSE Nareit All Mortgage Capped Index Total Return USD			0.825
Bloomberg Barclays CMBS: Erisa Eligible Unhedged USD			0.825
ICE BoAML 15+ Year Canada Government Index			0.50
Total			100.00		%

COMMENT ON NON-GAAP FINANCIAL MEASURES

Throughout this filing, we present our operations in the way we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use our financial information in evaluating the performance of our company. This presentation includes the use of after-tax operating income available to Arch common shareholders, which is defined as net income available to Arch common shareholders, excluding net realized gains or losses (which includes changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings), equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other, loss on redemption of preferred shares and income taxes, and the use of annualized operating return on average common equity. The presentation of after-tax operating income available to Arch common shareholders and annualized operating return on average common equity are non-GAAP financial measures as defined in Regulation G. The reconciliation of such measures to net income available to Arch common shareholders and annualized net income return on average

common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included under “Results of Operations” below.

We believe that net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares in any particular period are not indicative of the performance, of or trends, in our business. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations, the decision to realize investment gains or losses, the recognition of the change in the carrying value of investments accounted for using the fair value option in net realized gains or losses, the recognition of net impairment losses, the recognition of equity in net income or loss of investment funds accounted for using the equity method and the recognition of foreign exchange gains or losses are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Furthermore, certain users of our financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, changes in the allowance for credit losses and net impairment losses recognized in earnings on our investments represent other-than-temporary declines in expected recovery values on securities without actual realization. The use of the equity method on certain of our investments in certain funds that invest in fixed maturity securities is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our 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). This method of accounting is different from the way we account for our other fixed maturity securities and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments. Transaction costs and other include advisory, financing, legal, severance, incentive compensation and other transaction costs related to acquisitions. We believe that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, our business performance. The loss on redemption of preferred shares related to the redemption of Arch’'s Series E preferred shares in September 2021 and had no impact on shareholders' equity or cash flows. Due to these reasons, we exclude net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other and loss on redemption of preferred shares from the calculation of after-

ARCH CAPITAL			38			2022 FIRST QUARTER FORM 10-Q

tax operating income available to Arch common shareholders.

We believe that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of our business since we evaluate the performance of and manage our business to produce an underwriting profit. In addition to presenting net income available to Arch common shareholders, we believe that this presentation enables investors and other users of our financial information to analyze our performance in a manner similar to how management analyzes performance. We also believe that this measure follows industry practice and, therefore, allows the users of financial information to compare our performance with our industry peer group. We believe that the equity analysts and certain rating agencies which follow us and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.

Our segment information includes the presentation of consolidated underwriting income or loss and a subtotal of underwriting income or loss before the contribution from the ‘other’ segment, through June 30, 2021. Such measures represent the pre-tax profitability of our underwriting operations and include net premiums earned plus other underwriting income, less losses and loss adjustment expenses, acquisition expenses and other operating expenses. Other operating expenses include those operating expenses that are incremental and/or directly attributable to our individual underwriting operations. Underwriting income or loss does not incorporate items included in our corporate segment. While these measures are presented in note 4, “Segment Information,” of the notes accompanying our consolidated financial statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. The reconciliations of underwriting income or loss to income before income taxes (the most directly comparable GAAP financial measure) on a consolidated basis and a subtotal before the contribution from the ‘other’ segment through June 30, 2021, in accordance with Regulation G, is shown in note 4, “Segment Information” to our consolidated financial statements.

We measure segment performance for our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment, with the exception of goodwill and intangibles and, accordingly, investment income and other non-underwriting related items are not allocated to each underwriting segment. The ‘other’ segment includes the results of Somers through June 30, 2021.

Along with consolidated underwriting income, we provide a subtotal of underwriting income or loss before the contribution from the ‘other’ segment. Through June 30, 2021, the ‘other’ segment included the results of Somers

Group Holdings Ltd. Somers Group Holdings Ltd. is the parent of Somers Re Ltd., a multi-line Bermuda reinsurance company (together with Somers Group Holdings Ltd., “Somers”). Pursuant to GAAP, Somers was considered a variable interest entity and we concluded that we were the primary beneficiary of Somers. As such, we consolidated the results of Somers in our consolidated financial statements through June 30, 2021. In the 2020 fourth quarter, Arch Capital, Somers, and Greysbridge Ltd., a wholly-owned subsidiary of Arch Capital, entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”). Arch Capital assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Greysbridge”). 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 Arch and 30% by certain funds managed by Kelso and 30% by certain funds managed by Warburg. Based on the governing documents of Greysbridge, we concluded that, while we retain significant influence over Greysbridge, Greysbridge does not constitute a variable interest entity. Accordingly, effective July 1, 2021, we no longer consolidate the results of Somers in our consolidated financial statements and footnotes. See note 11, “Variable Interest Entities and Noncontrolling Interests” and note 4, “Segment Information,” to our consolidated financial statements for additional information on Somers.

Our presentation of segment information includes the use of a current year loss ratio which excludes favorable or adverse development in prior year loss reserves. This ratio is a non-GAAP financial measure as defined in Regulation G. The reconciliation of such measure to the loss ratio (the most directly comparable GAAP financial measure) in accordance with Regulation G is shown on the individual segment pages. Management utilizes the current year loss ratio in its analysis of the underwriting performance of each of our underwriting segments.

Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains and losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains and losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, excludes amounts reflected in the ‘other’ segment, and reflects the effect of financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the periods. There is no directly comparable GAAP financial measure for total return. Management uses total return on investments as a key measure of the return generated to Arch common shareholders, and compares the return generated by our investment portfolio against benchmark returns during the periods.

ARCH CAPITAL			39			2022 FIRST QUARTER FORM 10-Q

RESULTS OF OPERATIONS

The following table summarizes our consolidated financial data, including a reconciliation of net income or loss available to Arch common shareholders to after-tax operating income or loss available to Arch common shareholders.

			Three Months Ended
			March 31,
			2022						2021
Net income available to Arch common shareholders			$	185,616					$	427,753
Net realized (gains) losses			292,414						(105,551)
Equity in net (income) loss of investment funds accounted for using the equity method			(36,305)						(71,686)
Net foreign exchange (gains) losses			(3,855)						(21,332)
Transaction costs and other			397						1,274
Income tax expense (1)			(16,268)						9,311
After-tax operating income available to Arch common shareholders			$	421,999					$	239,769
Beginning common shareholders’ equity			$	12,715,896					$	12,325,886
Ending common shareholders’ equity			$	12,089,589					$	12,316,472
Average common shareholders’ equity			$	12,402,743					$	12,321,179
Annualized net income return on average common equity %			6.0						13.9
Annualized operating return on average common equity %			13.6						7.8

(1) Income tax expense on net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses and transaction costs and other reflects the relative mix reported by jurisdiction and the varying tax rates in each jurisdiction.

Segment Information

We classify our businesses into three underwriting segments — insurance, reinsurance and mortgage — and two other operating segments — corporate and ‘other.’ Our 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 our 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 our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment, with the exception of goodwill and intangible assets, and, accordingly, investment income is not allocated to each underwriting segment.

We determined our 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 our consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.

Insurance Segment

The following tables set forth our insurance segment’s underwriting results:

			Three Months Ended March 31,
			2022						2021						% Change
Gross premiums written			$	1,719,605					$	1,415,886					21.5
Premiums ceded			(512,709)						(421,047)
Net premiums written			1,206,896						994,839						21.3
Change in unearned premiums			(180,200)						(175,365)
Net premiums earned			1,026,696						819,474						25.3
Losses and loss adjustment expenses			(600,739)						(535,747)
Acquisition expenses			(195,650)						(128,222)
Other operating expenses			(166,825)						(137,113)
Underwriting income (loss)			$	63,482					$	18,392					245.2
Underwriting Ratios															% Point Change
Loss ratio			58.5		%				65.4		%				(6.9)
Acquisition expense ratio			19.1		%				15.6		%				3.5
Other operating expense ratio			16.2		%				16.7		%				(0.5)
Combined ratio			93.8		%				97.7		%				(3.9)

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

• Construction and national accounts: primary and excess casualty coverages to middle and large accounts in the construction industry and a wide range of products for middle and large national accounts, specializing in loss sensitive primary casualty insurance programs (including large deductible, self-insured retention and retrospectively rated programs).

• Excess and surplus casualty: primary and excess casualty insurance coverages, including middle market energy business, and contract binding, which primarily provides casualty coverage through a network of appointed agents to small and medium risks.

• Lenders products: collateral protection, debt cancellation and service contract reimbursement products to banks, credit unions, automotive dealerships and original equipment manufacturers and other specialty programs that pertain to automotive lending and leasing.

• Professional lines: directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity and other financial related coverages for corporate, private equity,

ARCH CAPITAL			40			2022 FIRST QUARTER FORM 10-Q

venture capital, real estate investment trust, limited partnership, financial institution and not-for-profit clients of all sizes and medical professional and general liability insurance coverages for the healthcare industry. The business is predominately written on a claims-made basis.

• Programs: primarily package policies, underwriting workers’ compensation and umbrella liability business in support of desirable package programs, targeting program managers with unique expertise and niche products offering general liability, commercial automobile, inland marine and property business with minimal catastrophe exposure.

• Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, war, specie and liability. Aviation and standalone terrorism are also offered.

• Travel, accident and health: specialty travel and accident and related insurance products for individual, group travelers, travel agents and suppliers, as well as accident and health, which provides accident, disability and medical plan insurance coverages for employer groups, medical plan members, students and other participant groups.

• Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract and commercial surety coverages, including contract bonds (payment and performance bonds) primarily for medium and large contractors and commercial surety bonds for Fortune 1,000 companies and smaller transaction business programs.

Premiums Written.

The following tables set forth our insurance segment’s net premiums written by major line of business:

			Three Months Ended March 31,
			2022												2021
			Amount						%						Amount						%
Professional Lines			$	347,841					28.8						$	238,246					23.9
Property, energy, marine and aviation			210,221						17.4						170,498						17.1
Travel, accident and health			165,332						13.7						92,306						9.3
Programs			129,401						10.7						158,401						15.9
Construction and national accounts			126,123						10.5						134,792						13.5
Excess and surplus casualty			100,289						8.3						85,593						8.6
Lenders products			25,232						2.1						34,860						3.5
Other			102,457						8.5						80,143						8.1
Total			$	1,206,896					100.0						$	994,839					100.0

2022 First Quarter versus 2021 Period. Gross premiums written by the insurance segment in the 2022 first quarter

were 21.5% higher than in the 2021 first quarter, while net premiums written were 21.3% higher. The higher level of net premiums written reflected increases in most lines of business, due in part to rate increases, new business opportunities and growth in existing accounts.

Net Premiums Earned.

The following tables set forth our insurance segment’s net premiums earned by major line of business:

			Three Months Ended March 31,
			2022												2021
			Amount						%						Amount						%
Professional Lines			$	289,813					28.2						$	199,671					24.4
Property, energy, marine and aviation			185,655						18.1						157,259						19.2
Travel, accident and health			104,630						10.2						49,666						6.1
Programs			139,809						13.6						112,840						13.8
Construction and national accounts			86,148						8.4						102,671						12.5
Excess and surplus casualty			90,761						8.8						75,367						9.2
Lenders products			30,588						3.0						40,081						4.9
Other			99,292						9.7						81,919						10.0
Total			$	1,026,696					100.0						$	819,474					100.0

Net premiums written are primarily earned on a pro rata basis over the terms of the policies for all products, usually 12 months. Net premiums earned reflect changes in net premiums written over the previous five quarters. Net premiums earned in the 2022 first quarter were 25.3% higher than in the 2021 first quarter.

Losses and Loss Adjustment Expenses.

The table below shows the components of the insurance segment’s loss ratio:

			Three Months Ended
			March 31,
			2022						2021
Current year			59.2		%				65.9		%
Prior period reserve development			(0.7)		%				(0.5)		%
Loss ratio			58.5		%				65.4		%

Current Year Loss Ratio.

2022 First Quarter versus 2021 Period. The insurance segment’s current year loss ratio in the 2022 first quarter was 6.7 points lower than in the 2021 first quarter. The 2022 first quarter loss ratio reflected 3.1 points of current year catastrophic activity, primarily related to Russia’s invasion of Ukraine and other natural catastrophes occurring in the quarter, compared to 5.1 points of catastrophic activity for the 2021 first quarter, primarily related to winter storms Uri and Viola.

ARCH CAPITAL			41			2022 FIRST QUARTER FORM 10-Q

Prior Period Reserve Development.

The insurance segment’s net favorable development was $7.3 million, or 0.7 points, for the 2022 first quarter, compared to $4.1 million, or 0.5 points, for the 2021 first quarter. See note 5, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements for information about the insurance segment’s prior year reserve development.

Underwriting Expenses.

2022 First Quarter versus 2021 Period. The insurance segment’s underwriting expense ratio was 35.3% in the 2022 first quarter, compared to 32.3% in the 2021 first quarter. The increase in the 2022 first quarter was primarily due to a changing mix of business, primarily to growth in lines with higher acquisition costs, higher contingent commission accruals and lower levels of ceding commissions as a result of changes in our ceded reinsurance program. The underwriting expense ratio in the 2022 first quarter also reflected increased incentive compensation costs, which were more than offset by a higher level of net premiums earned.

Reinsurance Segment

The following tables set forth our reinsurance segment’s underwriting results:

			Three Months Ended March 31,
			2022						2021						% Change
Gross premiums written			$	1,718,942					$	1,471,060					16.9
Premiums ceded			(579,818)						(471,948)
Net premiums written			1,139,124						999,112						14.0
Change in unearned premiums			(334,724)						(354,212)
Net premiums earned			804,400						644,900						24.7
Other underwriting income (loss)			836						(1,198)
Losses and loss adjustment expenses			(454,700)						(484,870)
Acquisition expenses			(171,996)						(118,025)
Other operating expenses			(69,776)						(60,514)
Underwriting income (loss)			$	108,764					$	(19,707)					651.9
Underwriting Ratios															% Point Change
Loss ratio			56.5		%				75.2		%				(18.7)
Acquisition expense ratio			21.4		%				18.3		%				3.1
Other operating expense ratio			8.7		%				9.4		%				(0.7)
Combined ratio			86.6		%				102.9		%				(16.3)

The reinsurance segment consists of our reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include:

• Casualty: provides coverage to ceding company clients on third party liability and workers’ compensation exposures from ceding company clients, primarily on a treaty basis. Exposures include, among others, executive assurance, professional liability, workers’ compensation, excess and umbrella liability, excess motor and healthcare business.

• Marine and aviation: provides coverage for energy, hull, cargo, specie, liability and transit, and aviation business, including airline and general aviation risks. Business written may also include space business, which includes coverages for satellite assembly, launch and operation for commercial space programs.

• Other specialty: provides coverage to ceding company clients for proportional motor and other lines, including surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk.

• Property catastrophe: provides protection for most catastrophic losses that are covered in the underlying policies written by reinsureds, including hurricane, earthquake, flood, tornado, hail and fire, and coverage for other perils on a case-by-case basis. Property catastrophe reinsurance provides coverage on an excess of loss basis when aggregate losses and loss adjustment expense from a single occurrence or aggregation of losses from a covered peril exceed the retention specified in the contract.

• Property excluding property catastrophe: provides coverage for both personal lines and commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on both a proportional and excess of loss treaty basis and on a facultative basis. In addition, facultative business is written which focuses on commercial property risks on an excess of loss basis.

• Other: includes life reinsurance business on both a proportional and non-proportional basis, casualty clash business and, in limited instances, non-traditional business which is intended to provide insurers with risk management solutions that complement traditional reinsurance.

Premiums Written.

The following tables set forth our reinsurance segment’s net premiums written by major line of business:

			Three Months Ended March 31,
			2022												2021
			Amount						%						Amount						%
Other Specialty			$	363,834					31.9						$	284,331					28.5
Property excluding property catastrophe			295,419						25.9						292,833						29.3
Casualty			266,455						23.4						218,256						21.8
Property catastrophe			128,971						11.3						117,207						11.7
Marine and aviation			51,817						4.5						61,638						6.2
Other			32,628						2.9						24,847						2.5
Total			$	1,139,124					100.0						$	999,112					100.0

2022 First Quarter versus 2021 Period. Gross premiums written by the reinsurance segment in the 2022 first quarter

ARCH CAPITAL			42			2022 FIRST QUARTER FORM 10-Q

were 16.9% higher than in the 2021 first quarter, while net premiums written were 14.0% higher. The higher level of net premiums written reflected increases in most lines of business, due in part to rate increases, new business opportunities and growth in existing accounts.

Net Premiums Earned.

The following tables set forth our reinsurance segment’s net premiums earned by major line of business:

			Three Months Ended March 31,
			2022												2021
			Amount						%						Amount						%
Other Specialty			$	231,618					28.8						$	163,898					25.4
Property excluding property catastrophe			232,529						28.9						187,782						29.1
Casualty			197,858						24.6						149,031						23.1
Property catastrophe			77,076						9.6						88,011						13.6
Marine and aviation			42,192						5.2						40,108						6.2
Other			23,127						2.9						16,070						2.5
Total			$	804,400					100.0						$	644,900					100.0

Net premiums written, irrespective of the class of business, are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts. Net premiums earned by the reinsurance segment in the 2022 first quarter were 24.7% higher than in the 2021 first quarter, and reflect changes in net premiums written over the previous five quarters.

Other Underwriting Income (Loss).

Other underwriting income for the 2022 first quarter was $0.8 million, compared to a loss of $1.2 million for the 2021 first quarter.

Losses and Loss Adjustment Expenses.

The table below shows the components of the reinsurance segment’s loss ratio:

			Three Months Ended
			March 31,
			2022						2021
Current year			60.5		%				79.4		%
Prior period reserve development			(4.0)		%				(4.2)		%
Loss ratio			56.5		%				75.2		%

Current Year Loss Ratio.

2022 First Quarter versus 2021 Period. The reinsurance segment’s current year loss ratio in the 2022 first quarter was 18.9 points lower than in the 2021 first quarter. The 2022 first quarter loss ratio reflected 6.5 points of current year catastrophic activity, primarily related to Russia’s invasion of Ukraine. The 2021 first quarter included 24.7 points of catastrophic activity, primarily related to winter storms Uri and Viola as well as other minor global events.

Prior Period Reserve Development.

The reinsurance segment’s net favorable development was $32.5 million, or 4.0 points, for the 2022 first quarter, compared to $26.8 million, or 4.2 points, for the 2021 first quarter. See note 5, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements for information about the reinsurance segment’s prior year reserve development.

Underwriting Expenses.

2022 First Quarter versus 2021 Period. The underwriting expense ratio for the reinsurance segment was 30.1% in the 2022 first quarter, which included 1.2 points of expenses related to favorable development of prior year loss reserves, compared to 27.7% in the 2021 first quarter, with the balance of the increase primarily resulting from the change in mix of business to lines with higher acquisition costs. The underwriting expense ratio in the 2022 first quarter also reflected increased incentive compensation costs, which were more than offset by a higher level of net premiums earned.

ARCH CAPITAL			43			2022 FIRST QUARTER FORM 10-Q

Mortgage Segment

Our mortgage operations include U.S. and international mortgage insurance and reinsurance operations as well as participation in GSE credit risk-sharing transactions.

The following tables set forth our mortgage segment’s underwriting results.

			Three Months Ended March 31,
			2022						2021						% Change
Gross premiums written			$	364,839					$	391,246					(6.7)
Premiums ceded			(76,719)						(56,051)
Net premiums written			288,120						335,195						(14.0)
Change in unearned premiums			1,417						1,122
Net premiums earned			289,537						336,317						(13.9)
Other underwriting income			5,061						6,897
Losses and loss adjustment expenses			54,604						(63,689)
Acquisition expenses			(10,513)						(30,082)
Other operating expenses			(53,342)						(49,131)
Underwriting income			$	285,347					$	200,312					42.5
Underwriting Ratios															% Point Change
Loss ratio			(18.9)		%				18.9		%				(37.8)
Acquisition expense ratio			3.6		%				8.9		%				(5.3)
Other operating expense ratio			18.4		%				14.6		%				3.8
Combined ratio			3.1		%				42.4		%				(39.3)

Premiums Written.

The following tables set forth our mortgage segment’s net premiums written by underwriting location (i.e., where the business is underwritten):

			Three Months Ended March 31,
			2022												2021
			Amount						%						Amount						%
Underwriting location:
United States			$	201,150					69.8						$	247,529					73.8
Other			86,970						30.2						87,666						26.2
Total			$	288,120					100.0						$	335,195					100.0

2022 First Quarter versus 2021 Period. Gross premiums written by the mortgage segment in the 2022 first quarter were 6.7% lower than in the 2021 first quarter, while net premiums written were 14.0% lower. Net premiums written for the 2022 first quarter reflected a higher level of premiums ceded than in the 2021 first quarter.

The persistency rate, which represents the percentage of mortgage insurance in force at the beginning of a 12-month period that remains in force at the end of such period, was 66.9% for the Arch MI U.S. portfolio of mortgage insurance policies at March 31, 2022, reflecting a lower level of mortgage refinancing activity, compared to 62.4% at December 31, 2021.

The following tables provide details on the new insurance written (“NIW”) generated by Arch MI U.S. NIW represents the original principal balance of all loans that received coverage during the period.

(U.S. Dollars in millions)			Three Months Ended March 31,
2022												2021
			Amount						%						Amount						%
Total new insurance written (NIW) (1)			$	20,015											$	27,019
Credit quality (FICO):
>=740			$	13,152					65.7						$	17,818					65.9
680-739			6,254						31.2						8,418						31.2
620-679			606						3.0						783						2.9
<620			3						—						—						—
Total			$	20,015					100.0						$	27,019					100.0
Loan-to-value (LTV):
95.01% and above			$	1,096					5.5						$	1,608					6.0
90.01% to 95.00%			10,778						53.8						12,288						45.5
85.01% to 90.00%			5,733						28.6						8,312						30.8
85.00% and below			2,408						12.0						4,811						17.8
Total			$	20,015					100.0						$	27,019					100.0
Monthly vs. single:
Monthly			$	19,201					95.9						$	24,989					92.5
Single			814						4.1						2,030						7.5
Total			$	20,015					100.0						$	27,019					100.0
Purchase vs. refinance:
Purchase			$	19,157					95.7						$	20,505					75.9
Refinance			858						4.3						6,514						24.1
Total			$	20,015					100.0						$	27,019					100.0

(1)Represents the original principal balance of all loans that received coverage during the period.

Net Premiums Earned.

The following tables set forth our mortgage segment’s net premiums earned by underwriting location:

			Three Months Ended March 31,
			2022												2021
			Amount						%						Amount						%
Underwriting location:
United States			$	209,525					72.4						$	262,550					78.1
Other			80,012						27.6						73,767						21.9
Total			$	289,537					100.0						$	336,317					100.0

2022 First Quarter versus 2021 Period. Net premiums earned for the 2022 first quarter were 13.9% lower than in the 2021 first quarter, and reflected a lower level of earnings from single premium policy terminations in U.S. business.

Other Underwriting Income.

Other underwriting income, which is primarily related to GSE credit risk-sharing transactions was $5.1 million for the 2022 first quarter, compared to $6.9 million for the 2021 first quarter.

ARCH CAPITAL			44			2022 FIRST QUARTER FORM 10-Q

Losses and Loss Adjustment Expenses.

The table below shows the components of the mortgage segment’s loss ratio:

			Three Months Ended
			March 31,
			2022						2021
Current year			16.4		%				22.1		%
Prior period reserve development			(35.3)		%				(3.2)		%
Loss ratio			(18.9)		%				18.9		%

Current Year Loss Ratio.

2022 First Quarter versus 2021 Period. The mortgage segment’s current year loss ratio was 5.7 points lower in the 2022 first quarter than in the 2021 first quarter. The lower current year loss ratio for the 2022 period reflect lower delinquencies.

Prior Period Reserve Development.

The mortgage segment’s net favorable development was $102.1 million, or 35.3 points, for the 2022 first quarter, compared to $10.9 million, or 3.2 points, for the 2021 first quarter. See note 5, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements for information about the mortgage segment’s prior year reserve development.

Underwriting Expenses.

2022 First Quarter versus 2021 Period. The underwriting expense ratio for the mortgage segment was 22.0% in the 2022 first quarter, compared to 23.5% in the 2021 first quarter, with the decrease primarily due to lower acquisition expenses on Australian mortgage insurance following the acquisition of Westpac LMI in the 2021 third quarter and profit commissions adjustments related to favorable development of prior year loss reserves. Such amounts were partially offset by a lower level of net premiums earned in the U.S. primary mortgage insurance business.

Corporate Segment

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 from operating affiliates and items related to our non-cumulative preferred shares. Such amounts exclude the results of the ‘other’ segment. See note 1, “Basis of Presentation and Recent Accounting Pronouncements,” to our consolidated financial statements for information about the change in presentation of income or loss from operating affiliates.

Net Investment Income.

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

			Three Months Ended
			March 31,
			2022						2021
Fixed maturities			$	82,053					$	79,017
Equity securities			6,238						5,650
Short-term investments			2,575						644
Other (1)			12,076						15,559
Gross investment income			102,942						100,870
Investment expenses (2)			(22,506)						(22,141)
Net investment income			$	80,436					$	78,729

(1) Amounts include dividends and other distributions on investment funds, term loan investments, funds held balances, cash balances and other items.

(2) Investment expenses were approximately 0.35% of average invested assets for the 2022 first quarter, compared to 0.35% for the 2021 first quarter.

The higher level of net investment income for the 2022 first quarter primarily related to a higher yields available in the financial market. The pre-tax investment income yield, calculated based on amortized cost and on an annualized basis, was 1.34% for the 2022 first quarter, compared to 1.31% for the 2021 first quarter.

Corporate Expenses.

Corporate expenses were $31.9 million for the 2022 first quarter, compared to $23.5 million for the 2021 first quarter. The increase in corporate expenses was primarily due to higher incentive compensation costs.

Other Income or Losses

The loss of $9.0 million for the 2022 first quarter, compared to a loss of $1.7 million for the 2021 first quarter, primarily reflects changes in the cash surrender value of our investment in corporate-owned life insurance.

Transaction Costs and Other.

Transaction costs and other were $0.4 million for the 2022 first quarter, compared to $1.2 million for the 2021 first quarter. Amounts in the 2022 and 2021 periods are primarily related to acquisitions activity for the respective periods.

Amortization of Intangible Assets.

Amortization of intangible assets for the 2022 first quarter was $27.2 million, compared to $14.4 million for the 2021 first quarter. Amounts in 2022 and 2021 period primarily attributed to amortization of finite-lived intangible assets. The increase in amortization of intangible assets expense was a result of acquisitions closed during the 2021 period.

ARCH CAPITAL			45			2022 FIRST QUARTER FORM 10-Q

Interest Expense.

Interest expense was $32.7 million for the 2022 first quarter, compared to the $34.2 million for the 2021 first quarter. Interest expense primarily reflects amounts related to our outstanding senior notes.

Net Realized Gains or Losses.

We recorded net realized losses of $292.4 million for the 2022 first quarter, compared to net realized gains of $101.3 million for the 2021 first quarter. Currently, our portfolio is actively managed to maximize total return within certain guidelines. The effect of financial market movements on the investment portfolio will directly impact net realized gains and losses as the portfolio is adjusted and rebalanced. Net realized gains or losses from the sale of fixed maturities primarily results from our decisions to reduce credit exposure, to change duration targets, to rebalance our portfolios or due to relative value determinations.

Net realized gains or losses also include realized and unrealized contract gains and losses on our derivative instruments, changes in the fair value of assets accounted for using the fair value option and in the fair value of equities, along with changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings. See note 7, “Investment Information—Net Realized Gains (Losses)” and note 7, “Investment Information—Allowance for Expected Credit Losses,” to our consolidated financial statements for additional information.

Equity in Net Income or Losses of Investment Funds Accounted for Using the Equity Method.

We 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. Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds. Investment funds accounted for using the equity method totaled $3.3 billion at March 31, 2022, compared to $3.1 billion at December 31, 2021. See note 7, “Investment Information—Investments Accounted For Using the Equity Method,” to our consolidated financial statements for additional information.

Net Foreign Exchange Gains or Losses.

Net foreign exchange gains for the 2022 first quarter were $3.8 million, compared to net foreign exchange gains for the 2021 first quarter of $21.5 million. Amounts in both periods were primarily unrealized and resulted from the effects of revaluing our net insurance liabilities required to be settled in foreign currencies at each balance sheet date.

Income Tax Expense.

Our income tax provision on income (loss) before income taxes, including income (loss) from operating affiliates, resulted in an expense of 5.6% for the 2022 first quarter, compared to 8.2% for the 2021 first quarter. Our 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.

Income or Losses from Operating Affiliates.

We recorded $24.5 million of net income from our operating affiliates in the 2022 first quarter, compared to income of $75.5 million for the 2021 first quarter. Results for the 2021 period reflected a one-time gain of $74.5 million realized from our investment in Coface SA. See note 7, “Investment Information—Investments in Operating Affiliates,” to our consolidated financial statements for additional information.

CRITICAL ACCOUNTING POLICIES,

ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS

Critical accounting policies, estimates and recent accounting pronouncements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2021 Form 10-K, updated where applicable in the notes accompanying our consolidated financial statements, including note 1, “Basis of Presentation and Recent Accounting Pronouncements.”

FINANCIAL CONDITION

Investable Assets Held by Arch

At March 31, 2022, approximately $18.4 billion, or 68.9%, of total investable assets held by Arch were internally managed, compared to $18.5 billion, or 67.3%, at December 31, 2021. See note 7, “Investment Information” to our consolidated financial statements for information about the insurance segment’s prior year reserve development.

			March 31, 2022,						December 31, 2021
Average effective duration (in years)			2.93						2.70
Average S&P/Moody’s credit ratings (1)			AA-/Aa3						AA-/Aa3

(1)Average credit ratings on our investment portfolio on securities with ratings assigned by Standard & Poor’s Rating Services (“S&P”) and Moody’s Investors Service (“Moody’s”).

ARCH CAPITAL			46			2022 FIRST QUARTER FORM 10-Q

The following table provides the credit quality distribution of our Fixed Maturities. For individual fixed maturities, S&P ratings are used. In the absence of an S&P rating, ratings from Moody’s are used, followed by ratings from Fitch Ratings.

			Estimated Fair Value						% of Total
March 31, 2022
U.S. government and gov’t agencies (1)			$	4,981,102					27.6
AAA			3,171,975						17.5
AA			2,222,236						12.3
A			3,227,560						17.9
BBB			3,181,195						17.6
BB			564,762						3.1
B			364,181						2.0
Lower than B			7,057						—
Not rated			354,972						2.0
Total			$	18,075,040					100.0
December 31, 2021
U.S. government and gov’t agencies (1)			$	5,063,191					27.5
AAA			3,783,386						20.5
AA			2,459,413						13.4
A			2,943,594						16.0
BBB			2,936,398						15.9
BB			501,588						2.7
B			371,747						2.0
Lower than B			43,756						0.2
Not rated			311,734						1.7
Total			$	18,414,807					100.0

(1)Includes U.S. government-sponsored agency residential mortgage-backed securities and agency commercial mortgage-backed securities.

The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for all Fixed Maturities which were in an unrealized loss position:

Severity of gross unrealized losses:			Estimated Fair Value						Gross Unrealized Losses						% of Total Gross Unrealized Losses
March 31, 2022
0-10%			$	15,378,359					$	(659,818)					90.9
10-20%			466,584						(61,761)						8.5
20-30%			11,255						(3,574)						0.5
Greater than 30%			998						(852)						0.1
Total			$	15,857,196					$	(726,005)					100.0
December 31, 2021
0-10%			$	12,231,146					$	(166,867)					97.6
10-20%			16,884						(2,412)						1.4
20-30%			2,593						(759)						0.4
Greater than 30%			684						(916)						0.5
Total			$	12,251,307					$	(170,954)					100.0

The following table summarizes our top ten exposures to fixed income corporate issuers by fair value at March 31, 2022, excluding guaranteed amounts and covered bonds:

			Estimated Fair Value						Credit Rating (1)
Bank of America Corporation			$	468,427					A-/A2
JPMorgan Chase & Co.			334,034						A-/A2
Citigroup Inc.			281,326						BBB+/A3
Morgan Stanley			261,164						BBB+/A1
Wells Fargo & Company			259,394						BBB+/A1
The Goldman Sachs Group, Inc.			253,527						BBB+/A2
Blackstone Inc.			179,207						BBB/Baa3
UBS Group AG			126,761						A/Aa3
Owl Rock Capital Partners LP			121,074						BBB-/Baa3
Dai-ichi Life Holdings, Inc.			114,194						AA-/A1
Total			$	2,399,108

(1)Average credit ratings as assigned by S&P and Moody’s, respectively.

The following table provides information on our structured securities, which includes residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”):

			Agencies						Investment Grade						Below Investment Grade						Total
March 31, 2022
RMBS			$	243,845					$	168,557					$	3,736					$	416,138
CMBS			20,466						957,126						88,773						1,066,365
ABS			—						1,498,471						181,748						1,680,219
Total			$	264,311					$	2,624,154					$	274,257					$	3,162,722
December 31, 2021
RMBS			$	268,229					$	129,296					$	10,952					$	408,477
CMBS			22,198						926,302						97,984						1,046,484
ABS			—						2,543,907						152,551						2,696,458
Total			$	290,427					$	3,599,505					$	261,487					$	4,151,419

The following table summarizes our equity securities, which include investments in exchange traded funds:

			March 31, 2022						December 31, 2021
Equities (1)			$	449,434					$	883,722
Exchange traded funds
Fixed income (2)			538,415						455,467
Equity and other (3)			36,023						491,474
Total			$	1,023,872					$	1,830,663

(1)Primarily in consumer non-cyclical, technology, financial, consumer cyclical and industrial at March 31, 2022.

(2)Primarily in corporate at March 31, 2022.

(3)Primarily in large cap stocks, foreign equities, technology, financial and utilities at March 31, 2022.

For details on our other investments and other investable assets, see note 7, “Investment Information—Other Investments” to our consolidated financial statements.

ARCH CAPITAL			47			2022 FIRST QUARTER FORM 10-Q

For details on our investments accounted for using the equity method, see note 7, “Investment Information—Investments Accounted For Using the Equity Method,” to our consolidated financial statements.

Our investment strategy allows for the use of derivative instruments. We utilize various derivative instruments such as futures contracts to enhance investment performance, replicate investment positions or manage market exposures and duration risk that would be allowed under our investment guidelines if implemented in other ways. See note 9, “Derivative Instruments,” to our consolidated financial statements for additional disclosures related to derivatives.

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. See note 8, “Fair Value,” to our consolidated financial statements for a summary of our financial assets and liabilities measured at fair value, segregated by level in the fair value hierarchy.

Reinsurance

The effects of reinsurance on written and earned premiums and losses and loss adjustment expenses (“LAE”) with unaffiliated reinsurers were as follows:

			Three Months Ended
			March 31,
			2022						2021
Premiums written:
Direct			$	2,131,309					$	1,892,245
Assumed			1,669,466						1,504,961
Ceded			(1,166,635)						(888,749)
Net			$	2,634,140					$	2,508,457
Premiums earned:
Direct			$	1,885,115					$	1,712,925
Assumed			1,172,804						947,614
Ceded			(937,286)						(712,117)
Net			$	2,120,633					$	1,948,422
Losses and LAE:
Direct			$	889,802					$	985,933
Assumed			654,261						667,311
Ceded			(543,228)						(450,144)
Net			$	1,000,835					$	1,203,100

See note 6, “Allowance for Expected Credit Losses,” to our consolidated financial statements for information about our reinsurance recoverables and related allowance for credit losses.

Bellemeade Re

We have entered into aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). For the respective coverage periods, we will retain the first layer of the respective aggregate losses and the special purpose reinsurance companies will provide second layer coverage up to the outstanding coverage amount. We will then retain losses in excess of the outstanding coverage limit. The aggregate excess of loss reinsurance coverage generally decreases over a ten-year period as the underlying covered mortgages amortize, unless provisional call options embedded within certain of the Bellemeade Agreements are executed or if pre-defined delinquency triggering events occur.

The following table summarizes the respective coverages and retentions at March 31, 2022:

Bellemeade Entities (Issue Date)			Initial Coverage at Issuance						Current Coverage						Remaining Retention, Net
2017-1 Ltd. (1)			$	368,114					$	81,415					$	127,902
2018-1 Ltd. (2)			374,460						147,647						126,952
2018-3 Ltd. (3)			506,110						283,088						131,858
2019-1 Ltd. (4)			341,790						157,397						95,943
2019-2 Ltd. (5)			621,022						398,316						161,990
2019-3 Ltd. (6)			700,920						347,583						187,666
2019-4 Ltd. (7)			577,267						352,232						120,702
2020-2 Ltd. (8)			449,167						186,164						226,692
2020-3 Ltd. (9)			451,816						337,044						159,588
2020-4 Ltd. (10)			337,013						152,996						134,889
2021-1 Ltd. (11)			643,577						598,252						156,828
2021-2 Ltd. (12)			616,017						606,173						144,713
2021-3 Ltd. (13)			639,391						639,391						142,162
2022-1 Ltd. (14)			316,760						316,760						155,082
Total			$	6,943,424					$	4,604,458					$	2,072,967

(1) Issued in October 2017, covering in-force policies issued between January 1, 2017 and June 30, 2017.

(2) Issued in April 2018, covering in-force policies issued between July 1, 2017 and December 31, 2017.

(3) Issued in October 2018, covering in-force policies issued between January 1, 2018 and June 30, 2018.

(4) Issued in March 2019, covering in-force policies primarily issued between 2005-2008 under United Guaranty Residential Insurance Company (“UGRIC”); as well as policies issued through 2015 under both UGRIC and Arch Mortgage Insurance Company.

(5) Issued in April 2019, covering in-force policies issued between July 1, 2018 and December 31, 2018.

(6) Issued in July 2019, covering in-force policies issued in 2016.

(7) Issued in October 2019, covering in-force policies issued between January 1, 2019 and June 30, 2019.

(8) Issued in September 2020, covering in-force policies issued between January 1, 2020 and May 31, 2020. $423 million was directly funded by Bellemeade 2020-2 Ltd. with an additional $26 million of capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.

ARCH CAPITAL			48			2022 FIRST QUARTER FORM 10-Q

(9) Issued in November 2020, covering in-force policies issued between June 1, 2020 and August 31, 2020. $418 million was directly funded by Bellemeade 2020-3 Ltd. with an additional $34 million of capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.

(10) Issued in December 2020, covering in-force policies issued between July 1, 2019 and December 31, 2019. $321 million was directly funded by Bellemeade 2020-4 Ltd. with an additional $16 million of capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.

(11) Issued in March 2021, covering in-force policies issued between September 1, 2020 and November 30, 2020. $580 million was directly funded by Bellemeade Re 2021-1 Ltd. with an additional $64 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.

(12) Issued in June 2021, covering in-force policies issued between December 1, 2020 and March 31, 2021. $523 million was directly funded by Bellemeade Re 2021-2 Ltd. via insurance-linked notes, with an additional $93 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.

(13) Issued in September 2021, covering in-force policies issued between April 1, 2021 and June 30, 2021. $508 million was directly funded by Bellemeade Re 2021-3 Ltd. via insurance-linked notes, with an additional $131 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.

(14) Issued in January 2022, covering in-force policies issued between July 1, 2021 and November 30, 2021. $284 million was directly funded by Bellemeade Re 2022-1 Ltd. via insurance-linked notes, with an additional $33 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.

Reserve for Losses and Loss Adjustment Expenses

We establish reserve for losses and loss adjustment expenses (“Loss Reserves”) which represent estimates involving actuarial and statistical projections, at a given point in time, of our expectations of the ultimate settlement and administration costs of losses incurred. Estimating Loss Reserves is inherently difficult. We utilize actuarial models as well as available historical insurance industry loss ratio experience and loss development patterns to assist in the establishment of Loss Reserves. Actual losses and loss adjustment expenses paid will deviate, perhaps substantially, from the reserve estimates reflected in our financial statements.

At March 31, 2022 and December 31, 2021, our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, by type and by operating segment were as follows:

			March 31, 2022						December 31, 2021
Insurance segment:
Case reserves			$	2,162,933					$	2,102,891
IBNR reserves			4,381,321						4,269,904
Total net reserves			6,544,254						6,372,795
Reinsurance segment:
Case reserves			1,775,847						1,733,571
Additional case reserves			408,019						426,531
IBNR reserves			2,752,894						2,656,527
Total net reserves			4,936,760						4,816,629
Mortgage segment:
Case reserves			677,872						741,897
IBNR reserves			240,223						226,604
Total net reserves			918,095						968,501
Total:
Case reserves			4,616,652						4,578,359
Additional case reserves			408,019						426,531
IBNR reserves			7,374,438						7,153,035
Total net reserves			$	12,399,109					$	12,157,925

At March 31, 2022 and December 31, 2021, the insurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

			March 31, 2022						December 31, 2021
Insurance segment:
Professional lines (1)			$	1,754,859					$	1,673,615
Construction and national accounts			1,500,319						1,490,206
Programs			804,682						793,187
Excess and surplus casualty (2)			694,002						657,307
Property, energy, marine and aviation			603,783						599,093
Travel, accident and health			103,506						96,051
Lenders products			48,170						58,351
Other (3)			1,034,933						1,004,985
Total net reserves			$	6,544,254					$	6,372,795

(1)Includes professional liability, executive assurance and healthcare business.

(2)Includes casualty and contract binding business.

(3)Includes alternative markets, excess workers’ compensation and surety business.

ARCH CAPITAL			49			2022 FIRST QUARTER FORM 10-Q

At March 31, 2022 and December 31, 2021, the reinsurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

			March 31, 2022						December 31, 2021
Reinsurance segment:
Casualty (1)			$	2,178,795					$	2,123,360
Other specialty (2)			1,153,553						1,113,766
Property excluding property catastrophe			710,214						711,859
Property catastrophe			487,399						486,911
Marine and aviation			269,717						246,861
Other (3)			137,082						133,872
Total net reserves			$	4,936,760					$	4,816,629

(1)Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.

(2)Includes non-excess motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.

(3)Includes life, casualty clash and other.

At March 31, 2022 and December 31, 2021, the mortgage segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

			March 31, 2022						December 31, 2021
U.S. primary mortgage insurance (1)			$	666,264					$	710,708
U.S. credit risk transfer (CRT) and other			108,239						112,549
International mortgage insurance/ reinsurance			143,592						145,244
Total net reserves			$	918,095					$	968,501

(1) At March 31, 2022, 30.7% represents policy years 2012 and prior and the remainder from later policy years. At December 31, 2021, 27.9% of total net reserves represent policy years 2012 and prior and the remainder from later policy years.

Mortgage Operations Supplemental Information

The mortgage segment’s insurance in force (“IIF”) and risk in force (“RIF”) were as follows at March 31, 2022 and December 31, 2021:

(U.S. Dollars in millions)			March 31, 2022												December 31, 2021
Amount						%						Amount						%
Insurance In Force (IIF) (1):
U.S. primary mortgage insurance			$	283,484					59.7						$	280,945					61.0
U.S. credit risk transfer (CRT) and other (2)			122,189						25.8						110,018						23.9
International mortgage insurance/reinsurance (3)			68,800						14.5						69,655						15.1
Total			$	474,473					100.0						$	460,618					100.0
Risk In Force (RIF) (4):
U.S. primary mortgage insurance			$	71,699					84.3						$	70,619					84.3
U.S. credit risk transfer (CRT) and other (2)			5,670						6.7						5,120						6.1
International mortgage insurance/reinsurance (3)			7,709						9.1						7,983						9.5
Total			$	85,078					100.0						$	83,722					100.0

(1)Represents the aggregate dollar amount of each insured mortgage loan’s current principal balance.

(2)Includes all CRT transactions, which are predominantly with GSEs, and other U.S. reinsurance transactions.

(3)International mortgage insurance and reinsurance with risk primarily located in Australia and to lesser extent Europe and Asia.

(4)The aggregate dollar amount of each insured mortgage loan’s current principal balance multiplied by the insurance coverage percentage specified in the policy for insurance policies issued and after contract limits and/or loss ratio caps for risk-sharing or reinsurance.

The IIF and RIF for our U.S. primary mortgage insurance business by policy year were as follows at March 31, 2022:

(U.S. Dollars in millions)			IIF												RIF												Delinquency
Amount						%						Amount						%						Rate (1)
Policy year:
2012 and prior			$	11,651					4.1						$	2,778					3.9						8.77		%
2013			3,810						1.3						1,033						1.4						2.40		%
2014			4,433						1.6						1,221						1.7						3.00		%
2015			7,857						2.8						2,115						2.9						2.31		%
2016			12,967						4.6						3,473						4.8						2.91		%
2017			11,773						4.2						3,099						4.3						3.71		%
2018			12,548						4.4						3,187						4.4						4.67		%
2019			23,195						8.2						5,819						8.1						2.76		%
2020			77,873						27.5						19,302						26.9						0.94		%
2021			97,485						34.4						24,527						34.2						0.45		%
2022			19,892						7.0						5,145						7.2						0.02		%
Total			$	283,484					100.0						$	71,699					100.0						2.09		%

(1)Represents the ending percentage of loans in default.

ARCH CAPITAL			50			2022 FIRST QUARTER FORM 10-Q

The IIF and RIF for our U.S. primary mortgage insurance business by policy year were as follows at December 31, 2021:

(U.S. Dollars in millions)			IIF												RIF												Delinquency
Amount						%						Amount						%						Rate (1)
Policy year:
2012 and prior			$	13,030					4.6						$	2,960					4.2						8.48		%
2013			4,206						1.5						1,148						1.6						2.63		%
2014			4,822						1.7						1,328						1.9						3.14		%
2015			8,703						3.1						2,340						3.3						2.67		%
2016			14,344						5.1						3,841						5.4						3.29		%
2017			13,128						4.7						3,436						4.9						4.09		%
2018			14,046						5.0						3,562						5.0						5.28		%
2019			25,841						9.2						6,467						9.2						3.13		%
2020			82,502						29.4						20,341						28.8						0.97		%
2021			100,323						35.7						25,196						35.7						0.29		%
Total			$	280,945					100.0						$	70,619					100.0						2.36		%

(1)Represents the ending percentage of loans in default.

The following tables provide supplemental disclosures on risk in force for our U.S. primary mortgage insurance business at March 31, 2022 and December 31, 2021:

(U.S. Dollars in millions)			March 31, 2022												December 31, 2021
Amount						%						Amount						%
Credit quality (FICO):
>=740			$	43,509					60.7						$	42,451					60.1
680-739			23,827						33.2						23,646						33.5
620-679			4,052						5.7						4,196						5.9
<620			311						0.4						326						0.5
Total			$	71,699					100.0						$	70,619					100.0
Weighted average FICO score			747												746
Loan-to-value (LTV):
95.01% and above			$	7,421					10.4						$	7,538					10.7
90.01% to 95.00%			39,882						55.6						38,829						55.0
85.01% to 90.00%			20,183						28.1						20,006						28.3
85.00% and below			4,213						5.9						4,246						6.0
Total			$	71,699					100.0						$	70,619					100.0
Weighted average LTV			92.8		%										92.8		%
Total RIF, net of external reinsurance			$	54,792											$	54,574

(U.S. Dollars in millions)			March 31, 2022												December 31, 2021
Amount						%						Amount						%
Total RIF by State:
California			$	5,781					8.1						$	5,559					7.9
Texas			5,733						8.0						5,594						7.9
Florida			3,272						4.6						3,303						4.7
Georgia			2,978						4.2						2,902						4.1
North Carolina			2,964						4.1						2,921						4.1
Illinois			2,955						4.1						2,933						4.2
Minnesota			2,913						4.1						2,916						4.1
Massachusetts			2,566						3.6						2,537						3.6
Michigan			2,509						3.5						2,492						3.5
Virginia			2,504						3.5						2,446						3.5
Other			37,524						52.3						37,016						52.4
Total			$	71,699					100.0						$	70,619					100.0

The following table provides supplemental disclosures for our U.S. primary mortgage insurance business related to insured loans and loss metrics:

(U.S. Dollars in thousands, except policy, loan and claim count)			Three Months Ended
March 31, 2022						December 31, 2021
Roll-forward of insured loans in default:
Beginning delinquent number of loans			27,645						31,770
New notices			8,835						9,071
Cures			(12,030)						(13,038)
Paid claims			(180)						(158)
Ending delinquent number of loans (1)			24,270						27,645
Ending number of policies in force (1)			1,159,020						1,171,835
Delinquency rate (1)			2.09		%				2.36		%
Losses:
Number of claims paid			180						158
Total paid claims			$	6,016					$	8,131
Average per claim			$	33.4					$	51.5
Severity (2)			78.1		%				83.0		%
Average case reserve per default (in thousands) (1)			$	28.4					$	26.7

(1)Includes first lien primary and pool policies.

(2)Represents total paid claims divided by RIF of loans for which claims were paid.

The risk to capital ratio, which represents total current (non-delinquent) risk in force, net of reinsurance, divided by total statutory capital, for Arch MI U.S. was approximately 7.8 to 1 at March 31, 2022, compared to 8 to 1 at December 31, 2021.

ARCH CAPITAL			51			2022 FIRST QUARTER FORM 10-Q

Shareholders’ Equity and Book Value per Share

The following table presents the calculation of book value per share:

(U.S. dollars in thousands, except share data)			March 31, 2022						December 31, 2021
Total shareholders’ equity available to Arch			$	12,919,589					$	13,545,896
Less preferred shareholders’ equity			830,000						830,000
Common shareholders’ equity available to Arch			$	12,089,589					$	12,715,896
Common shares and common share equivalents outstanding, net of treasury shares (1)			375,730,891						378,923,894
Book value per share			$	32.18					$	33.56

(1)Excludes the effects of 16,398,853 and 17,083,160 stock options and 569,646 and 729,636 restricted stock units outstanding at March 31, 2022 and December 31, 2021, respectively.

LIQUIDITY

Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations.

Arch Capital is a holding company whose assets primarily consist of the shares in its subsidiaries. Generally, Arch Capital depends on its available cash resources, liquid investments and dividends or other distributions from its subsidiaries to make payments, including the payment of debt service obligations and operating expenses it may incur and any dividends or liquidation amounts with respect to our preferred and common shares.

For the three months ended March 31, 2022, Arch Capital received dividends of $0.3 billion from Arch Reinsurance Ltd. (“Arch Re Bermuda”), our Bermuda based reinsurer and insurer which can pay approximately $3.5 billion to Arch Capital during the remainder of 2022 without providing an affidavit to the Bermuda Monetary Authority.

We expect that our liquidity needs, including our anticipated (re)insurance obligations and operating and capital expenditure needs, for the next twelve months, will be met by funds generated from underwriting activities and investment income, as well as by our balance of cash, short-term investments, proceeds on the sale or maturity of our investments, and our credit facilities.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities.

			Three Months Ended
			March 31,
			2022						2021
Total cash provided by (used for):
Operating activities			$	551,563					$	755,928
Investing activities			(312,719)						(498,658)
Financing activities			(233,573)						(201,625)
Effects of exchange rate changes on foreign currency cash			(3,924)						(3,387)
Increase (decrease) in cash and restricted cash			$	1,347					$	52,258

• Cash provided by operating activities for the three months ended March 31, 2022, primarily reflected a higher level of expenses paid than in the 2021 period.

• Cash used for investing activities for the three months ended March 31, 2022 was lower than in the 2021 period. Activity for the 2021 period reflected our $546.3 million purchase of 29.5% interest in Coface.

• Cash used for financing activities for the three months ended March 31, 2022 reflected $255.0 million of repurchases under our share repurchase program. Activity for the 2021 period, primarily reflected $179.3 million of repurchases under our share repurchase program.

CAPITAL RESOURCES

The following table provides an analysis of our capital structure:

(U.S. dollars in thousands, except share data)			Mar 31, 2022						Dec 31, 2021
Senior notes			$	2,724,642					$	2,724,394
Shareholders’ equity available to Arch:
Series F non-cumulative preferred shares			330,000						330,000
Series G non-cumulative preferred shares			500,000						500,000
Common shareholders’ equity			12,089,589						12,715,896
Total			$	12,919,589					$	13,545,896
Total capital available to Arch			$	15,644,231					$	16,270,290
Debt to total capital (%)			17.4						16.7
Preferred to total capital (%)			5.3						5.1
Debt and preferred to total capital (%)			22.7						21.8

Arch MI U.S. is required to maintain compliance with the GSEs requirements, known as the Private Mortgage Insurer Eligibility Requirements or “PMIERs.” The financial requirements require an eligible mortgage insurer’s available assets, which generally include only the most liquid assets of

ARCH CAPITAL			52			2022 FIRST QUARTER FORM 10-Q

an insurer, to meet or exceed “minimum required assets” as of each quarter end. Minimum required assets are calculated from PMIERs tables with several risk dimensions (including origination year, original loan-to-value and original credit score of performing loans, and the delinquency status of non-performing loans) and are subject to a minimum amount. Arch MI U.S. satisfied the PMIERs’ financial requirements as of March 31, 2022 with an estimated PMIER sufficiency ratio of 205%, compared to 197% at December 31, 2021.

Arch Capital, through its subsidiaries, provides financial support to certain of its insurance subsidiaries and affiliates, through certain reinsurance arrangements beneficial to the ratings of such subsidiaries. Historically, our insurance, reinsurance and mortgage insurance subsidiaries have entered into separate reinsurance arrangements with Arch Re Bermuda covering individual lines of business.

GUARANTOR INFORMATION

The below table provides a description of our senior notes payable at March 31, 2022:

						Interest						Principal						Carrying
Issuer/Due						(Fixed)						Amount						Amount
Arch Capital:
May 1, 2034						7.350		%				$	300,000					$	297,519
June 30, 2050						3.635		%				1,000,000						988,776
Arch-U.S.:
Nov. 1, 2043 (1)						5.144		%				500,000						495,094
Arch Finance:
Dec. 15, 2026 (1)						4.011		%				500,000						497,741
Dec. 15, 2046 (1)						5.031		%				450,000						445,512
Total												$	2,750,000					$	2,724,642

(1)Fully and unconditionally guaranteed by Arch Capital.

Our senior notes were issued by Arch Capital, Arch Capital Group (U.S.) Inc. (“Arch-U.S.”) and Arch Capital Finance LLC (“Arch Finance”). Arch-U.S. is a wholly-owned subsidiary of Arch Capital and Arch Finance is a wholly-owned finance subsidiary of Arch-U.S. Our 2034 senior notes and 2050 senior notes issued by Arch Capital are unsecured and unsubordinated obligations of Arch Capital and ranked equally with all of its existing and future unsecured and unsubordinated indebtedness. The 2043 senior notes issued by Arch-U.S. are unsecured and unsubordinated obligations of Arch-U.S. and Arch Capital and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch-U.S. and Arch Capital. The 2026 senior notes and 2046 senior notes issued by Arch Finance are unsecured and unsubordinated obligations of Arch Finance and Arch Capital and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch Finance and Arch Capital.

Arch-U.S. and Arch Finance depend on their available cash

resources, liquid investments and dividends or other distributions from their subsidiaries or affiliates to make payments, including the payment of debt service obligations and operating expenses they may incur.

The following tables present condensed financial information for Arch Capital (parent guarantor) and Arch-U.S. (subsidiary issuer):

			March 31, 2022
			Arch Capital						Arch-U.S.
Assets
Total investments			$	50					$	209,588
Cash			20,065						15,255
Investment in operating affiliates			6,304						—
Due from subsidiaries and affiliates			—						59,000
Other assets			8,830						35,723
Total assets			$	35,249					$	319,566
Liabilities
Senior notes			1,286,295						495,094
Due to subsidiaries and affiliates			—						577,110
Other liabilities			32,678						80,917
Total liabilities			$	1,318,973					$	1,153,121
Non-cumulative preferred shares			$	830,000					—

									December 31, 2021
															Arch Capital						Arch-U.S.
Assets
Total investments															$	2,038					$	137,124
Cash															16,317						18,392
Investment in operating affiliates															6,877						—
Due from subsidiaries and affiliates															—						26,000
Other assets															9,615						37,040
Total assets															$	34,847					$	218,556
Liabilities
Senior notes															1,286,208						495,063
Due to subsidiaries and affiliates															—						521,839
Other liabilities															24,767						47,410
Total liabilities															$	1,310,975					$	1,064,312
Non-cumulative preferred shares															$	830,000					—

ARCH CAPITAL			53			2022 FIRST QUARTER FORM 10-Q

									March 31, 2022
Three Months Ended									Arch Capital						Arch-U.S.
Revenues
Net investment income															$	364					$	33
Net realized gains (losses)															—						(362)
Equity in net income (loss) of investments accounted for using the equity method															—						3,848
Total revenues															364						3,519
Expenses
Corporate expenses															28,431						4,445
Interest expense															14,687						11,762
Total expenses															43,118						16,207
Income (loss) before income taxes and income (loss) from operating affiliates															(42,754)						(12,688)
Income tax (expense) benefit															—						4,883
Income (loss) from operating affiliates															(280)						—
Net income available to Arch															(43,034)						(7,805)
Preferred dividends															(10,184)						—
Net income (loss) available to Arch common shareholders															$	(53,218)					$	(7,805)

															December 31, 2021
Year Ended																					Arch Capital						Arch-U.S.
Revenues
Net investment income																											1,524						11,596
Net realized gains (losses)																											—						72,437
Equity in net income (loss) of investments accounted for using the equity method																											—						18,149
Total revenues																											1,524						102,182
Expenses
Corporate expenses																											71,818						5,875
Interest expense																											58,741						47,292
Net foreign exchange (gains) losses																											7						—
Total expenses																											130,566						53,167
Income (loss) before income taxes and income (loss) from operating affiliates																											(129,042)						49,015
Income tax (expense) benefit																											—						(12,513)
Income (loss) from operating affiliates																											(590)						—
Net income available to Arch																											(129,632)						36,502
Preferred dividends																											(48,343)						—
Loss on redemption of preferred shares																											(15,101)						—
Net income (loss) available to Arch common shareholders																											$	(193,076)					$	36,502

SHARE REPURCHASE PROGRAM

The board of directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. 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. Since the inception of the share repurchase program through March 31, 2022, Arch Capital has repurchased 426.2 million common shares for an aggregate purchase price of $5.54 billion. At March 31, 2022, approximately $927.2 million of share repurchases were available under the program. 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. We will continue to monitor our share price and, depending upon results of operations, market conditions and the development of the economy, as well as other factors, we will consider share repurchases on an opportunistic basis.

CATASTROPHIC EVENTS AND SEVERE ECONOMIC EVENTS

We have large aggregate exposures to natural and man-made catastrophic events, pandemic events like COVID-19 and severe economic events. Natural catastrophes can be caused by various events, including hurricanes, floods, windstorms, earthquakes, hailstorms, tornadoes, explosions, severe winter weather, fires, droughts and other natural disasters. Man-made catastrophic events may include acts of war, acts of terrorism and political instability. Catastrophes can also cause losses in non-property business such as mortgage insurance, workers’ compensation or general liability. In addition to the nature of property business, we believe that economic and geographic trends affecting insured property, including inflation, property value appreciation and geographic concentration, tend to generally increase the size of losses from catastrophic events over time.

Our models employ both proprietary and vendor-based systems and include cross-line correlations for property, marine, offshore energy, aviation, workers compensation and personal accident. We seek to limit the probable maximum pre-tax loss to a specific level for severe catastrophic events. Currently, we seek to limit our 1-in-250 year return period net probable maximum loss from a severe catastrophic event in any geographic zone to approximately 25% of tangible shareholders’ equity available to Arch (total shareholders’ equity available to Arch less goodwill and intangible assets). We reserve the right to change this threshold at any time.

Based on in-force exposure estimated as of April 1, 2022, our modeled peak zone catastrophe exposure was a windstorm affecting the Florida Tri-County, with a net probable maximum pre-tax loss of $768 million, followed by

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windstorms affecting the Northeastern U.S. and the Gulf of Mexico regions with net probable maximum pre-tax losses of $744 and $681 million, respectively. Our exposures to other perils, such as U.S. earthquake and international events, were less than the exposures arising from U.S. windstorms and hurricanes. As of April 1, 2022, our modeled peak zone earthquake exposure (San Francisco earthquake) represented approximately 75% of our peak zone catastrophe exposure, and our modeled peak zone international exposure (UK windstorm) was substantially less than both our peak zone windstorm and earthquake exposures.

We also have significant exposure to losses due to mortgage defaults resulting from severe economic events in the future. For our U.S. mortgage insurance business, we have developed a proprietary risk model (“Realistic Disaster Scenario” or “RDS”) that simulates the maximum loss resulting from a severe economic downturn impacting the housing market. The RDS models the collective impact of adverse conditions for key economic indicators, the most significant of which is a decline in home prices. The RDS model projects paths of future home prices, unemployment rates, income levels and interest rates and assumes correlation across states and geographic regions. The resulting future performance of our in-force portfolio is then estimated under the economic stress scenario, reflecting loan and borrower information.

Currently, we seek to limit our modeled RDS loss from a severe economic event to approximately 25% of tangible shareholders’ equity available to Arch. We reserve the right to change this threshold at any time. Based on in-force exposure estimated as of April 1, 2022, our modeled RDS loss was approximately 7% of tangible shareholders’ equity available to Arch.

Net probable maximum loss estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums. RDS loss estimates are net of expected reinsurance recoveries and before income tax. Catastrophe loss estimates are reflective of the zone indicated and not the entire portfolio. Since hurricanes and windstorms can affect more than one zone and make multiple landfalls, our catastrophe loss estimates include clash estimates from other zones. Our catastrophe loss estimates and RDS loss estimates do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates. There can be no assurances that we will not suffer pre-tax losses greater than 25% of our tangible shareholders’ equity from one or more catastrophic events or severe economic events due to several factors. These factors include the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the

application of such techniques or as a result of a decision to change the percentage of shareholders' equity exposed to a single catastrophic event or severe economic event. In addition, actual losses may increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable. See “Risk Factors—Risks Relating to Our Industry” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Catastrophic Events and Severe Economic Events” in our 2021 Form 10-K.

MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

In accordance with the SEC’s Financial Reporting Release No. 48, we performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of our financial instruments as of March 31, 2022. Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of several components, including liquidity, basis and price risks.

An analysis of material changes in market risk exposures at March 31, 2022 that affect the quantitative and qualitative disclosures presented in our 2021 Form 10-K (see section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Sensitive Instruments and Risk Management”) were as follows:

Investment Market Risk

Fixed Income Securities. We invest in interest rate sensitive securities, primarily debt securities. We consider the effect of interest rate movements on the fair value of our fixed maturities, short-term investments and certain of our other investments, equity securities and investment funds accounted for using the equity method which invest in fixed income securities (collectively, “Fixed Income Securities”) and the corresponding change in unrealized appreciation. As interest rates rise, the fair value of our Fixed Income Securities falls, and the converse is also true. Based on historical observations, there is a low probability that all interest rate yield curves would shift in the same direction at the same time. Furthermore, at times interest rate movements in certain credit sectors exhibit a much lower correlation to changes in U.S. Treasury yields. Accordingly, the actual effect of interest rate movements may differ materially from the amounts set forth in the following tables.

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The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on our Fixed Income Securities:

(U.S. dollars in billions)			Interest Rate Shift in Basis Points
-100						-50						—						+50						+100
Mar. 31, 2022
Total fair value			$	26.19					$	25.81					$	25.45					$	25.09					$	24.74
Change from base			2.9		%				1.4		%										(1.4)		%				(2.8)		%
Change in unrealized value			$	0.74					$	0.36											$	(0.36)					$	(0.71)
Dec. 31, 2021
Total fair value			$	25.79					$	25.44					$	25.21					$	24.75					$	24.43
Change from base			2.3		%				0.9		%										(1.8)		%				(3.1)		%
Change in unrealized value			$	0.58					$	0.23											$	(0.45)					$	(0.78)

In addition, we consider the effect of credit spread movements on the market value of our Fixed Income Securities and the corresponding change in unrealized value. As credit spreads widen, the fair value of our Fixed Income Securities falls, and the converse is also true. In periods where the spreads on our Fixed Income Securities are much higher than their historical average due to short-term market dislocations, a parallel shift in credit spread levels would result in a much more pronounced change in unrealized value.

The following table summarizes the effect that an immediate, parallel shift in credit spreads in a static interest rate environment would have had on our Fixed Income Securities:

(U.S. dollars in billions)			Credit Spread Shift in Percentage Points
-100						-50						—						+50						+100
Mar. 31, 2022
Total fair value			$	26.30					$	25.87					$	25.45					$	25.03					$	24.61
Change from base			3.3		%				1.7		%										(1.7)		%				(3.3)		%
Change in unrealized value			$	0.85					$	0.42											$	(0.42)					$	(0.85)
Dec. 31, 2021
Total fair value			$	26.17					$	25.69					$	25.21					$	24.72					$	24.24
Change from base			3.8		%				1.9		%										(1.9)		%				(3.8)		%
Change in unrealized value			$	0.97					$	0.48											$	(0.48)					$	(0.97)

Another method that attempts to measure portfolio risk is Value-at-Risk (“VaR”). VaR measures the worst expected loss under normal market conditions over a specific time interval at a given confidence level. The 1-year 95th percentile parametric VaR reported herein estimates that 95% of the time, the portfolio loss in a one-year horizon would be less than or equal to the calculated number, stated as a percentage of the measured portfolio’s initial value. The VaR is a variance-covariance based estimate, based on linear sensitivities of a portfolio to a broad set of systematic market risk factors and idiosyncratic risk factors mapped to the portfolio exposures. The relationships between the risk factors are estimated using historical data, and the most

recent data points are generally given more weight. As of March 31, 2022, our portfolio’s VaR was estimated to be 4.4% compared to an estimated 4.8% at December 31, 2021. In periods where the volatility of the risk factors mapped to our portfolio’s exposures is higher due to market conditions, the resulting VaR is higher than in other periods.

Equity Securities. At March 31, 2022 and December 31, 2021, the fair value of our investments in equity securities (excluding securities included in Fixed Income Securities above) totaled $0.5 billion and $1.4 billion, respectively. These investments are exposed to price risk, which is the potential loss arising from decreases in fair value. An immediate hypothetical 10% decline in the value of each position would reduce the fair value of such investments by approximately $48.5 million and $137.5 million at March 31, 2022 and December 31, 2021, respectively, and would have decreased book value per share by approximately $0.13 and $0.36, respectively. An immediate hypothetical 10% increase in the value of each position would increase the fair value of such investments by approximately $48.5 million and $137.5 million at March 31, 2022 and December 31, 2021, respectively, and would have increased book value per share by approximately $0.13 and $0.36, respectively.

Investment-Related Derivatives. At March 31, 2022, the notional value of all derivative instruments (excluding foreign currency forward contracts which are included in the foreign currency exchange risk analysis below) was $5.2 billion, compared to $6.4 billion at December 31, 2021. If the underlying exposure of each investment-related derivative held at March 31, 2022 depreciated by 100 basis points, it would have resulted in a reduction in net income of approximately $52.4 million, and a decrease in book value per share of approximately $0.14 per share, compared to $63.8 million and $0.17 per share, respectively, on investment-related derivatives held at December 31, 2021. If the underlying exposure of each investment-related derivative held at March 31, 2022 appreciated by 100 basis points, it would have resulted in an increase in net income of approximately $52.4 million, and an increase in book value per share of approximately $0.14 per share, compared to $63.8 million and $0.17 per share, respectively, on investment-related derivatives held at December 31, 2021. See note 9, “Derivative Instruments,” to our consolidated financial statements for additional disclosures concerning derivatives.

For further discussion on investment activity, please refer to “Financial Condition—Investable Assets.”

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Foreign Currency Exchange Risk

Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Through our subsidiaries and branches located in various foreign countries, we conduct our insurance and reinsurance operations in a variety of local currencies other than the U.S. Dollar. We generally hold investments in foreign currencies which are intended to mitigate our exposure to foreign currency fluctuations in our net insurance liabilities. We may also utilize foreign currency forward contracts and currency options as part of our investment strategy. See note 9, “Derivative Instruments,” to our consolidated financial statements for additional information.

The following table provides a summary of our net foreign currency exchange exposures, as well as foreign currency derivatives in place to manage these exposures:

(U.S. dollars in thousands, except per share data)			March 31, 2022						December 31, 2021
Net assets (liabilities), denominated in foreign currencies, excluding shareholders’ equity and derivatives			$	(1,213,788)					$	(825,371)
Shareholders’ equity denominated in foreign currencies (1)			1,115,185						1,095,706
Net foreign currency forward contracts outstanding (2)			57,328						15,151
Net exposures denominated in foreign currencies			$	(41,275)					$	285,486
Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies:
Shareholders’ equity			$	4,128					$	(28,549)
Book value per share			$	0.01					$	(0.08)
Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies:
Shareholders’ equity			$	(4,128)					$	28,549
Book value per share			$	(0.01)					$	0.08

(1) Represents capital contributions held in the foreign currencies of our operating units.

(2) Represents the net notional value of outstanding foreign currency forward contracts.

Although we generally attempt to match the currency of our projected liabilities with investments in the same currencies, from time to time we may elect to over or underweight one or more currencies, which could increase our exposure to foreign currency fluctuations and increase the volatility of our shareholders’ equity. Historical observations indicate a low probability that all foreign currency exchange rates would shift against the U.S. Dollar in the same direction and at the same time and, accordingly, the actual effect of foreign currency rate movements may differ materially from the amounts set forth above. For further discussion on foreign exchange activity, please refer to “Results of Operations.”

Effects of Inflation

We do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect our reserve for losses and loss adjustment expenses and interest rates. The potential exists, after a catastrophe loss or pandemic events like COVID-19, for the development of inflationary pressures in a local economy. The anticipated effects of inflation on us are considered in our catastrophe loss models. The actual effects of inflation on our results cannot be accurately known until claims are ultimately settled.

OTHER FINANCIAL INFORMATION

The consolidated financial statements as of March 31, 2022 have been reviewed by PricewaterhouseCoopers LLP, the registrant's independent public accountants, whose report is included as an exhibit to this filing. The report of PricewaterhouseCoopers LLP states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933.