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

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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, 2022 (“2022 Form 10-K”). In addition, readers should review “Risk Factors” set forth in Item 1A of Part I of our 2022 Form 10-K and “ITEM 1A—Risk Factors” of this Form 10-Q. All amounts are in millions, except per 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 $18.0 billion in capital at September 30, 2023 and, through operations in Bermuda, the United States, Europe, Canada and Australia, writes insurance, reinsurance and mortgage insurance on a worldwide basis.


		Page No.

Current Outlook		39
Financial Measures		39
Comments on Non-GAAP Measures		40
Results of Operations		42
	Insurance Segment	43
	Reinsurance Segment	45
	Mortgage Segment	48
	Corporate Segment	50
Critical Accounting Policies, Estimates and Recent Accounting Pronouncements		52
Financial Condition		52
Liquidity		57
Capital Resources		58
Catastrophic and Severe Economic Events		60
Market Sensitive Instruments and Risk Management		61


ARCH CAPITAL			38			2023 THIRD QUARTER FORM 10-Q

CURRENT OUTLOOK

As we near the end of 2023 and look ahead to 2024, our objective to deliver long term value for our shareholders remains the same. With our commitment to underwriting acumen, prudent reserving and cycle-focused capital allocation, we were able to deliver another profitable quarter. The 2023 third quarter net income available to Arch common shareholder was $713 million, primarily reflecting strong underwriting returns. Our underwriting teams capitalized on good market conditions and relatively light catastrophe losses to produce an outstanding $721 million of underwriting income in the 2023 third quarter. Financial highlights for the quarter included book value per share growth of 4.3% and annualized net income and operating returns on average common equity of 20.2% and 24.8%, respectively. See “Comment on Non-GAAP Financial Measures.”

Our property and casualty underwriting teams continued to lean into attractive market conditions where excellent risk-adjusted returns remain available resulting in $3.1 billion of net premium written in the 2023 third quarter, up 26% from one year ago. Broadly, we continue to achieve rate increases above loss trend in most sectors of the property and casualty market. Although rate increases are slowing in some lines, they are re-accelerating in others, which is a good reminder that there is not a single insurance cycle, but many. We continue to execute our cycle management strategy by actively allocating capital to the segments with the best risk-adjusted returns.

In our insurance segment, we continue to take advantage of favorable global market conditions. Growth in net premiums written in the insurance segment was over 11% in the 2023 third quarter. Such growth was more broad-based because of our focus on small and medium-sized specialty accounts. Although pricing has declined in some lines, such as large public directors’ and officers’ liability insurance, the property and casualty markets in which our insurance segment operates generally continue to provide adequate returns.

As underwriting opportunities arise, our reinsurance segment is able to react quickly and significantly when markets pivot. In the reinsurance property market, our overall exposure to property catastrophe risk remains well below our self-imposed threshold (see “Catastrophic and Severe Economic Events ”) and, because of our diversified portfolio and broad set of opportunities, we retain the flexibility to pursue the most attractive returns across lines and geographies. Our expectation is that we will continue to see hard property market conditions through next year’s renewal cycle as loss activity remains elevated.

Inflation continues to be a focus for our industry. We proactively analyze available data and we incorporate emerging trends into our pricing and reserving. We believe

that this discipline, coupled with increases in future investment returns and prudent reserving, allows us to maximize the capabilities of our diversified platform.

Our mortgage segment continues to deliver a steady level of earnings for our shareholders. Higher persistency of our in force U.S. primary mortgage insurance portfolio helped offset the slight decrease in new insurance written, which has been affected by a lower volume of mortgage originations primarily as a result of higher mortgage rates. We continue to see meaningful opportunities for the mortgage segment outside of the U.S. and our strategic decision to diversify our mortgage operations is yielding positive results.

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 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 $38.62 at September 30, 2023, compared to $37.04 at June 30, 2023, and $29.69 at September 30, 2022. The 4.3% increase in book value per share for the 2023 third quarter 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


ARCH CAPITAL			39			2023 THIRD QUARTER FORM 10-Q

return generated to common shareholders. See “Comment on Non-GAAP Financial Measures.”

Our annualized net income return on average common equity was 20.2% for the 2023 third quarter, compared to 0.2% for the 2022 third quarter, and 20.9% for the nine months ended September 30, 2023, compared to 6.6% for the 2022 period. Our Operating ROAE was 24.8% for the 2023 third quarter, compared to 3.8% for the 2022 third quarter, and 22.7% for the nine months ended September 30, 2023, compared to 11.6% for the 2022 period. The 2023 periods reflected strong underwriting and investment results, while the 2022 periods reflected lower underwriting returns, due in part to a higher level of catastrophic loss activity.

Total Return on Investments

Total return on investments includes investment income, equity in net income or loss of 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):
2023 Third Quarter	(0.40)	%	(0.36)	%
2022 Third Quarter	(3.01)	%	(4.01)	%

Nine Months Ended September 30, 2023	2.68	%	2.97	%
Nine Months Ended September 30, 2022	(8.83)	%	(12.78)	%

Total return for the 2023 third quarter was negative as our fixed income portfolio was impacted by the increase in interest rates. We continue to maintain a relatively short duration on our portfolio of 2.97 years at September 30, 2023.

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 September 30, 2023, the benchmark return index had an average credit quality of “A1” by Moody’s Investors Service (“Moody’s”), and an estimated duration of 2.72 years.

The benchmark return index included weightings to the following indices:


	%
ICE BofA 1-10 Year U.S. Corporate Index	28.50
Yield on 3-5 Year U.S. Treasury Index plus 6%	16.50
ICE BofA 1-10 Year U.S. Treasury Index	15.75
ICE BofA U.S. High Yield Constrained Index	8.00
ICE BofA 1-5 Year U.K. Gilt Index	5.50
JPM CLOIE Investment Grade	4.50
ICE BofA German Government 1-10 Year Index	4.00
S&P 500 Total Return Index	4.00
ICE BofA 0-3 Month U.S. Treasury Index	3.00
ICE BofA U.S. ABS & CMBS Index	3.00
ICE BofA 1-5 Year Canada Government Index	2.50
ICE BofA 1-5 Year Australia Government Index	2.50
ICE BofA U.S. Mortgage Backed Securities Index	1.50
ICE BofA 15+ Year Canada Government Index	0.50
ICE BofA 1-5 Year Japan Government Index	0.25
Total	100.00	%

COMMENT ON NON-GAAP FINANCIAL MEASURES

Throughout this filing, we present our operations in the way that 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, 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


ARCH CAPITAL			40			2023 THIRD QUARTER FORM 10-Q

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 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 these items, 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 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 that we account for our other investments 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.

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 and transaction costs and other from the calculation of after-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 the 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. 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, in accordance with Regulation G, is shown in note 4, “Segment Information” of the notes accompanying 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.

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.


ARCH CAPITAL			41			2023 THIRD QUARTER FORM 10-Q

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.

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. See “Comment on Non-GAAP Financial Measures.”


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Net income available to Arch common shareholders	$	713	$	7	$	2,079	$	587
Net realized (gains) losses (1)	248		184		354		743

Equity in net (income) loss of investment funds accounted for using the equity method	(59)		19		(176)		(75)
Net foreign exchange (gains) losses	(22)		(91)		2		(183)
Transaction costs and other	1		—		2		—

Income tax expense (benefit) (2)	(5)		(13)		(5)		(38)
After-tax operating income available to Arch common shareholders	$	876	$	106	$	2,256	$	1,034

Beginning common shareholders’ equity	$	13,811	$	11,588	$	12,080	$	12,716
Ending common shareholders’ equity	14,409		10,966		$	14,409	$	10,966
Average common shareholders’ equity	$	14,110	$	11,277	$	13,245	$	11,841

Annualized net income return on average common equity %	20.2		0.2		20.9		6.6
Annualized operating return on average common equity %	24.8		3.8		22.7		11.6

(1) Net realized gains or losses include realized and unrealized changes in the fair value of equity securities and assets accounted for using the fair value option, realized and unrealized gains and losses on derivative instruments and changes in the allowance for credit losses on financial assets.

(2) 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. 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, the Chief Financial Officer and Treasurer and the President and Chief Underwriting Officer are the Company’s chief operating decision makers. They 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.


ARCH CAPITAL			42			2023 THIRD QUARTER FORM 10-Q

Insurance Segment

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


	Three Months Ended September 30,
	2023			2022			% Change
Gross premiums written	$	2,043		$	1,862		9.7
Premiums ceded	(521)			(493)
Net premiums written	1,522			1,369			11.2
Change in unearned premiums	(110)			(182)
Net premiums earned	1,412			1,187			19.0

Losses and loss adjustment expenses	(812)			(823)
Acquisition expenses	(269)			(233)
Other operating expenses	(202)			(165)
Underwriting income (loss)	$	129		$	(34)		479.4

Underwriting Ratios							% Point Change
Loss ratio	57.5		%	69.3		%	(11.8)
Acquisition expense ratio	19.1		%	19.6		%	(0.5)
Other operating expense ratio	14.3		%	13.9		%	0.4
Combined ratio	90.9		%	102.8		%	(11.9)


	Nine Months Ended September 30,
	2023			2022			% Change
Gross premiums written	$	5,977		$	5,287		13.1
Premiums ceded	(1,564)			(1,483)
Net premiums written	4,413			3,804			16.0
Change in unearned premiums	(416)			(488)
Net premiums earned	3,997			3,316			20.5

Losses and loss adjustment expenses	(2,276)			(2,054)
Acquisition expenses	(778)			(643)
Other operating expenses	(592)			(493)
Underwriting income (loss)	$	351		$	126		178.6

Underwriting Ratios							% Point Change
Loss ratio	57.0		%	61.9		%	(4.9)
Acquisition expense ratio	19.5		%	19.4		%	0.1
Other operating expense ratio	14.8		%	14.9		%	(0.1)
Combined ratio	91.3		%	96.2		%	(4.9)

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 for middle market and large construction accounts, a comprehensive range of products for middle market accounts in specialty industries and casualty solutions for large national accounts, including loss sensitive primary insurance programs (large deductible, self-insured retention and retrospectively rated programs).

Excess and surplus casualty: primary and excess casualty insurance coverages written on a non-admitted basis.

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

Programs: primarily targeting program managers with unique expertise and niche products offering some combination of general liability, commercial automobile, property, inland marine, umbrella and workers’ compensation.

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, cargo, war, specie and liability. Aviation, stand-alone terrorism and political risks are also offered. Coverage may be provided for operational and construction risk.

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.

Warranty and lenders solutions: 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.

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, commercial and transactional surety coverages.


ARCH CAPITAL			43			2023 THIRD QUARTER FORM 10-Q

Premiums Written.

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


	Three Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
Professional lines	$	375	24.6	$	412	30.1
Property, energy, marine and aviation	342		22.5	241		17.6
Programs	202		13.3	189		13.8
Excess and surplus casualty	130		8.5	111		8.1
Construction and national accounts	129		8.5	98		7.2
Travel, accident and health	126		8.3	107		7.8
Warranty and lenders solutions	51		3.4	42		3.1
Other	167		11.0	169		12.3
Total	$	1,522	100.0	$	1,369	100.0

2023 Third Quarter versus 2022 Period. Gross premiums written by the insurance segment in the 2023 third quarter were 9.7% higher than in the 2022 third quarter, while net premiums written were 11.2% higher. Growth in net premiums written reflected increases in most lines of business, due in part to new business opportunities, increases in existing accounts and rate changes. In addition, the insurance segment retained a higher portion of business written in the 2023 third quarter than in the 2022 third quarter.


	Nine Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
Professional lines	$	1,045	23.7	$	1,109	29.2
Property, energy, marine and aviation	937		21.2	688		18.1
Programs	553		12.5	481		12.6
Excess and surplus casualty	396		9.0	332		8.7
Construction and national accounts	446		10.1	335		8.8
Travel, accident and health	432		9.8	378		9.9
Warranty and lenders solutions	182		4.1	103		2.7
Other	422		9.6	378		9.9
Total	$	4,413	100.0	$	3,804	100.0

Nine Months Ended September 30, 2023 versus 2022 period. Gross premiums written by the insurance segment for the nine months ended September 30, 2023 were 13.1% higher than in the 2022 period, while net premiums written were 16.0% higher than in the 2022 period. The increase in net premiums written reflected growth in most lines of business, primarily due to rate increases, new business opportunities and growth in existing accounts. In addition, the insurance segment retained more business in the 2023 period than in the 2022 period.

Net Premiums Earned.

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


	Three Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
Professional lines	$	363	25.7	$	342	28.8
Property, energy, marine and aviation	288		20.4	202		17.0
Programs	167		11.8	150		12.6
Excess and surplus casualty	126		8.9	100		8.4
Construction and national accounts	147		10.4	110		9.3
Travel, accident and health	148		10.5	133		11.2
Warranty and lenders solutions	43		3.0	33		2.8
Other	130		9.2	117		9.9
Total	$	1,412	100.0	$	1,187	100.0


	Nine Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
Professional lines	$	1,067	26.7	$	946	28.5
Property, energy, marine and aviation	752		18.8	557		16.8
Programs	473		11.8	439		13.2
Excess and surplus casualty	353		8.8	289		8.7
Construction and national accounts	406		10.2	306		9.2
Travel, accident and health	423		10.6	368		11.1
Warranty and lenders solutions	142		3.6	92		2.8
Other	381		9.5	319		9.6
Total	$	3,997	100.0	$	3,316	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. For the 2023 third quarter, net premiums earned were 19.0% higher than in the 2022 third quarter. Net premiums earned for the nine months ended September 30, 2023 were 20.5% higher than in the 2022 period.


ARCH CAPITAL			44			2023 THIRD QUARTER FORM 10-Q

Losses and Loss Adjustment Expenses.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Current year	58.2	%	69.8	%	57.8	%	62.5	%
Prior period reserve development	(0.7)	%	(0.5)	%	(0.8)	%	(0.6)	%
Loss ratio	57.5	%	69.3	%	57.0	%	61.9	%

Current Year Loss Ratio.

2023 Third Quarter versus 2022 Period. The insurance segment’s current year loss ratio in the 2023 third quarter was 11.6 points lower than in the 2022 third quarter. The 2023 third quarter loss ratio reflected 2.6 points of current year catastrophic activity, spread across a series of global events, compared to 13.4 points of catastrophic activity for the 2022 third quarter, primarily related to Hurricane Ian. The balance of the change in the current year loss ratio resulted, in part, from changes in mix of business.

Nine Months Ended September 30, 2023 versus 2022 Period. The insurance segment’s current year loss ratio for the nine months ended September 30, 2023 was 4.7 points lower than in the 2022 period and reflected 2.3 points of current year catastrophic activity, spread across series of global events, compared to 6.1 points in the 2022 period. The balance of the change in the current year loss ratio resulted, in part, from changes in mix of business.

Prior Period Reserve Development.

The insurance segment’s net favorable development was $10 million, or 0.7 points, for the 2023 third quarter, compared to $5 million, or 0.5 points, for the 2022 third quarter, and $34 million, or 0.8 points, for the nine months ended September 30, 2023, compared to $19 million, or 0.6 points, for the 2022 period. 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.

2023 Third Quarter versus 2022 Period. The insurance segment’s underwriting expense ratio was 33.4% in the 2023 third quarter, compared to 33.5% in the 2022 third quarter.

Nine Months Ended September 30, 2023 versus 2022 period. The insurance segment’s underwriting expense ratio was 34.3% for the nine months ended September 30, 2023, consistent with 34.3% for the 2022 period.

Reinsurance Segment

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


	Three Months Ended September 30,
	2023			2022			% Change
Gross premiums written	$	2,138		$	1,639		30.4
Premiums ceded	(576)			(560)
Net premiums written	1,562			1,079			44.8
Change in unearned premiums	(19)			(77)
Net premiums earned	1,543			1,002			54.0
Other underwriting income (loss)	2			—
Losses and loss adjustment expenses	(870)			(928)
Acquisition expenses	(304)			(208)
Other operating expenses	(61)			(63)
Underwriting income (loss)	$	310		$	(197)		257.4

Underwriting Ratios							% Point Change
Loss ratio	56.4		%	92.6		%	(36.2)
Acquisition expense ratio	19.7		%	20.8		%	(1.1)
Other operating expense ratio	3.9		%	6.3		%	(2.4)
Combined ratio	80.0		%	119.7		%	(39.7)


	Nine Months Ended September 30,
	2023			2022			% Change
Gross premiums written	$	7,142		$	5,151		38.7
Premiums ceded	(2,145)			(1,770)
Net premiums written	4,997			3,381			47.8
Change in unearned premiums	(781)			(647)
Net premiums earned	4,216			2,734			54.2
Other underwriting income	9			6
Losses and loss adjustment expenses	(2,379)			(1,920)
Acquisition expenses	(875)			(569)
Other operating expenses	(203)			(199)
Underwriting income (loss)	$	768		$	52		1,376.9

Underwriting Ratios							% Point Change
Loss ratio	56.4		%	70.2		%	(13.8)
Acquisition expense ratio	20.7		%	20.8		%	(0.1)
Other operating expense ratio	4.8		%	7.3		%	(2.5)
Combined ratio	81.9		%	98.3		%	(16.4)

The reinsurance segment consists of our reinsurance underwriting units which offer specialty product lines on a worldwide basis. Reinsurance agreements are typically offered on a proportional and/or excess of loss basis and provide coverage to ceding company clients for specific underlying written policies. Product lines include:

Casualty: provides coverage on third party liability exposures including, among others, executive assurance, professional liability, excess and umbrella liability, excess motor and healthcare business, and workers’ compensation. Business is assumed primarily on a treaty basis, with some facultative coverages also offered.


ARCH CAPITAL			45			2023 THIRD QUARTER FORM 10-Q

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 for proportional motor reinsurance, whole account multi-line treaties, cyber, trade credit and surety, accident and health, workers’ compensation catastrophe, agriculture and political risk, among others.

Property catastrophe: provides protection for most types of catastrophic losses, including hurricane, earthquake, flood, tornado, hail and fire, and for other perils on a case-by-case basis. Excess of loss coverages are triggered 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 personal lines and/or 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 either a treaty basis or facultative basis.

Other: includes life reinsurance business, 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 September 30,
	2023			2022
	Amount		%	Amount		%
Property excluding property catastrophe	$	593	38.0	$	342	31.7
Other specialty	527		33.7	381		35.3
Casualty	273		17.5	230		21.3
Property catastrophe	76		4.9	78		7.2
Marine and aviation	54		3.5	29		2.7
Other	39		2.5	19		1.8
Total	$	1,562	100.0	$	1,079	100.0

2023 Third Quarter versus 2022 Period. Gross premiums written by the reinsurance segment in the 2023 third quarter were 30.4% higher than in the 2022 third quarter, while net premiums written were 44.8% higher. Growth in net premiums written primarily reflected increases in property excluding property catastrophe and other specialty lines, due in part to rate increases, new business opportunities and growth in existing accounts. In addition, the reinsurance

segment retained a higher portion of business written in the 2023 third quarter than in the 2022 third quarter.


	Nine Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
Property excluding property catastrophe	$	1,496	29.9	$	936	27.7
Other specialty	1,625		32.5	1,180		34.9
Casualty	787		15.7	709		21.0
Property catastrophe	802		16.0	361		10.7
Marine and aviation	208		4.2	116		3.4
Other	79		1.6	79		2.3
Total	$	4,997	100.0	$	3,381	100.0

Nine Months Ended September 30, 2023 versus 2022 period. Gross premiums written by the reinsurance segment for the nine months ended September 30, 2023 were 38.7% higher than in the 2022 period, while net premiums written were 47.8% higher than in the 2022 period. The increase in net premiums written reflected growth in most lines of business, primarily due to new business, rate increases and growth in existing accounts. In addition, the reinsurance segment retained a higher portion of business written in the 2023 period than in the 2022 period.

Net Premiums Earned.

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


	Three Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
Property excluding property catastrophe	$	449	29.1	$	282	28.1
Other specialty	505		32.7	330		32.9
Casualty	264		17.1	222		22.2
Property catastrophe	219		14.2	118		11.8
Marine and aviation	66		4.3	25		2.5
Other	40		2.6	25		2.5
Total	$	1,543	100.0	$	1,002	100.0


ARCH CAPITAL			46			2023 THIRD QUARTER FORM 10-Q


	Nine Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
Property excluding property catastrophe	$	1,161	27.5	$	780	28.5
Other specialty	1,499		35.6	846		30.9
Casualty	775		18.4	635		23.2
Property catastrophe	527		12.5	290		10.6
Marine and aviation	173		4.1	109		4.0
Other	81		1.9	74		2.7
Total	$	4,216	100.0	$	2,734	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 2023 third quarter were 54.0% higher than in the 2022 third quarter, and reflect changes in net premiums written over the previous five quarters. Net premiums earned for the nine months ended September 30, 2023 were 54.2% higher than in the 2022 period.

Other Underwriting Income (Loss).

Other underwriting income for the 2023 third quarter was $2 million, compared to nil for the 2022 third quarter, and $9 million for the nine months ended September 30, 2023, compared to $6 million for the 2022 period.

Losses and Loss Adjustment Expenses.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Current year	59.2	%	97.5	%	59.4	%	74.9	%
Prior period reserve development	(2.8)	%	(4.9)	%	(3.0)	%	(4.7)	%
Loss ratio	56.4	%	92.6	%	56.4	%	70.2	%

Current Year Loss Ratio.

2023 Third Quarter versus 2022 Period. The reinsurance segment’s current year loss ratio in the 2023 third quarter was 38.3 points lower than in the 2022 third quarter. The 2023 third quarter loss ratio reflected 9.7 points of current year catastrophic activity spread across a series of global events. The 2022 third quarter included 42.8 points of current year catastrophic activity, primarily related to Hurricane Ian and other global events. The improvement in the current year loss ratio reflected the impact of rate increases and changes in mix of business, while the 2022 period reflected a higher level of catastrophic activity.

Nine Months Ended September 30, 2023 versus 2022 Period. The reinsurance segment’s current year loss ratio for the nine months ended September 30, 2023 was 15.5 points lower than in the 2022 period and reflected 7.4 points of current year catastrophic activity, compared to 20.1 points in the

2022 period. The improvement in the current year loss ratio reflected the impact of rate increases and changes in mix of business, while the 2022 period reflected a higher level of catastrophic activity.

Prior Period Reserve Development.

The reinsurance segment’s net favorable development was $44 million, or 2.8 points, for the 2023 third quarter, compared to $49 million, or 4.9 points, for the 2022 third quarter, and $126 million, or 3.0 points, for the nine months ended September 30, 2023, compared to $127 million, or 4.7 points, for the 2022 period. 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.

2023 Third Quarter versus 2022 Period. The underwriting expense ratio for the reinsurance segment was 23.6% in the 2023 third quarter, compared to 27.1% in the 2022 third quarter, with the decrease primarily due to growth in net premiums earned. The 2022 third quarter ratio also reflected a lower level of contingent commissions on ceded business, primarily due to Hurricane Ian.

Nine Months Ended September 30, 2023 versus 2022 period. The underwriting expense ratio for the reinsurance segment was 25.5% for the nine months ended September 30, 2023, compared to 28.1% for the 2022 period, with the decrease primarily due to growth in net premiums earned. The 2022 period ratio also reflected a lower level of contingent commissions on ceded business, primarily due to Hurricane Ian.


ARCH CAPITAL			47			2023 THIRD 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 September 30,
	2023			2022			% Change
Gross premiums written	$	347		$	362		(4.1)
Premiums ceded	(76)			(86)
Net premiums written	271			276			(1.8)
Change in unearned premiums	22			6
Net premiums earned	293			282			3.9
Other underwriting income	3			3
Losses and loss adjustment expenses	35			68
Acquisition expenses	(2)			(7)
Other operating expenses	(47)			(47)
Underwriting income	$	282		$	299		(5.7)

Underwriting Ratios							% Point Change
Loss ratio	(12.1)		%	(24.1)		%	12.0
Acquisition expense ratio	0.6		%	2.4		%	(1.8)
Other operating expense ratio	16.2		%	16.5		%	(0.3)
Combined ratio	4.7		%	(5.2)		%	9.9


	Nine Months Ended September 30,
	2023			2022			% Change
Gross premiums written	$	1,037		$	1,099		(5.6)
Premiums ceded	(240)			(241)
Net premiums written	797			858			(7.1)
Change in unearned premiums	86			10
Net premiums earned	883			868			1.7
Other underwriting income	12			6
Losses and loss adjustment expenses	46			187
Acquisition expenses	(16)			(27)
Other operating expenses	(147)			(150)
Underwriting income	$	778		$	884		(12.0)

Underwriting Ratios							% Point Change
Loss ratio	(5.3)		%	(21.6)		%	16.3
Acquisition expense ratio	1.8		%	3.2		%	(1.4)
Other operating expense ratio	16.7		%	17.3		%	(0.6)
Combined ratio	13.2		%	(1.1)		%	14.3

Premiums Written.

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


	Three Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
U.S. primary mortgage insurance	$	190	70.1	$	185	67.0
U.S. credit risk transfer (CRT) and other	57		21.0	51		18.5
International mortgage insurance/ reinsurance	24		8.9	40		14.5
Total	$	271	100.0	$	276	100.0

2023 Third Quarter versus 2022 Period. Gross premiums written by the mortgage segment in the 2023 third quarter were 4.1% lower than in the 2022 third quarter, while net premiums written were 1.8% lower. The reduction in net premiums written primarily reflected lower levels of mortgage originations in the Australian market than in the 2022 third quarter, partially offset by growth in credit risk transfer business and higher levels of retained premiums in U.S. primary mortgage insurance business.


	Nine Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
U.S. primary mortgage insurance	$	562	70.5	$	582	67.8
U.S. credit risk transfer (CRT) and other	164		20.6	143		16.7
International mortgage insurance/ reinsurance	71		8.9	133		15.5
Total	$	797	100.0	$	858	100.0

Nine Months Ended September 30, 2023 versus 2022 Period. Gross premiums written by the mortgage segment for the nine months ended September 30, 2023 were 5.6% lower than in the 2022 period, while net premiums written for the nine months ended September 30, 2023 were 7.1% lower than in the 2022 period. The reduction in net premiums written primarily reflected lower levels of mortgage originations in the Australian market and a decrease in U.S. primary mortgage insurance business, which was partially offset by a higher volume of credit risk transfer transactions.

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 83.9% for the Arch MI U.S. portfolio of mortgage insurance policies at September 30, 2023. This compares to 75.4% at September 30, 2022 and reflects a lower level of refinancing activity in the period.

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.


ARCH CAPITAL			48			2023 THIRD QUARTER FORM 10-Q


	Three Months Ended September 30,
2023				2022
	Amount		%		Amount		%
Total new insurance written (NIW) (1)	$	11,494			$	17,425

Credit quality (FICO):
>=740	$	7,646	66.5		$	11,615	66.7
680-739	3,520		30.6		5,322		30.5
620-679	326		2.8		485		2.8
<620	2		—		3		—
Total	$	11,494	100.0		$	17,425	100.0

Loan-to-value (LTV):
95.01% and above	$	880	7.7		$	973	5.6
90.01% to 95.00%	6,306		54.9		9,916		56.9
85.01% to 90.00%	3,126		27.2		4,839		27.8
85.00% and below	1,182		10.3		1,697		9.7
Total	$	11,494	100.0		$	17,425	100.0

Monthly vs. single:
Monthly	$	10,712	93.2		$	16,911	97.1
Single	782		6.8		514		2.9
Total	$	11,494	100.0		$	17,425	100.0

Purchase vs. refinance:
Purchase	$	11,334	98.6		$	17,159	98.5
Refinance	160		1.4		266		1.5
Total	$	11,494	100.0		$	17,425	100.0

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


(U.S. Dollars in millions)	Nine Months Ended September 30,
2023				2022
	Amount		%		Amount		%
Total new insurance written (NIW) (1)	$	34,180			$	60,939

Credit quality (FICO):
>=740	$	22,469	65.7		$	40,888	67.1
680-739	10,842		31.7		18,376		30.2
620-679	863		2.5		1,667		2.7
<620	6		—		8		—
Total	$	34,180	100.0		$	60,939	100.0

Loan-to-value (LTV):
95.01% and above	$	2,034	6.0		$	3,264	5.4
90.01% to 95.00%	19,204		56.2		33,984		55.8
85.01% to 90.00%	9,414		27.5		17,163		28.2
85.01% and below	3,528		10.3		6,528		10.7
Total	$	34,180	100.0		$	60,939	100.0

Monthly vs. single:
Monthly	$	32,688	95.6		$	58,984	96.8
Single	1,492		4.4		1,955		3.2
Total	$	34,180	100.0		$	60,939	100.0

Purchase vs. refinance:
Purchase	$	33,598	98.3		$	59,375	97.4
Refinance	582		1.7		1,564		2.6
Total	$	34,180	100.0		$	60,939	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 major line of business:


	Three Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
U.S. primary mortgage insurance	$	192	65.5	$	194	68.8
U.S. credit risk transfer (CRT) and other	58		19.8	51		18.1
International mortgage insurance/ reinsurance	43		14.7	37		13.1
Total	$	293	100.0	$	282	100.0

2023 Third Quarter versus 2022 Period. Net premiums earned for the 2023 third quarter were 3.9% higher than in the 2022 third quarter, primarily due to growth in credit risk transfer and international business, which was partially offset by a small decrease in U.S. primary mortgage insurance in force.


	Nine Months Ended September 30,
	2023			2022
	Amount		%	Amount		%
U.S. primary mortgage insurance	$	582	65.9	$	607	69.9
U.S. credit risk transfer (CRT) and other	165		18.7	143		16.5
International mortgage insurance/ reinsurance	136		15.4	118		13.6
Total	$	883	100.0	$	868	100.0

Nine Months Ended September 30, 2023 versus 2022 Period. For the nine months ended September 30, 2023, net premiums earned were 1.7% higher than in the 2022 period, primarily due to growth in credit risk transfer and international business, which was partially offset by a decrease in U.S. primary mortgage insurance in force.

Other Underwriting Income (Loss).

Other underwriting income, which is primarily related to GSE credit risk-sharing transactions and our whole mortgage loan purchase and sell program was $3 million for the 2023 third quarter, consistent with $3 million for the 2022 third quarter.


ARCH CAPITAL			49			2023 THIRD 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				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Current year	19.3	%	20.6	%	22.2	%	18.3	%
Prior period reserve development	(31.4)	%	(44.7)	%	(27.5)	%	(39.9)	%
Loss ratio	(12.1)	%	(24.1)	%	(5.3)	%	(21.6)	%

Current Year Loss Ratio.

2023 Third Quarter versus 2022 Period. The mortgage segment’s current year loss ratio was 1.3 points lower in the 2023 third quarter than in the 2022 third quarter. The current year loss ratio for the 2023 third quarter, excluding net favorable development, was down slightly, reflecting lower estimated claim rates partially offset by slightly higher new delinquencies than in the comparable 2022 third quarter loss ratio.

Nine Months Ended September 30, 2023 versus 2022 Period. The mortgage segment’s current year loss ratio was 3.9 points higher for the nine months ended September 30, 2023 than for the 2022 period. The higher current year loss ratio for the 2023 period reflected higher level of new delinquencies than in the 2022 period.

Prior Period Reserve Development.

The mortgage segment’s net favorable development was $92 million, or 31.4 points, for the 2023 third quarter, compared to $126 million, or 44.7 points, for the 2022 third quarter, and $243 million, or 27.5 points, for the nine months ended September 30, 2023, compared to $346 million, or 39.9 points, for the 2022 period. 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.

2023 Third Quarter versus 2022 Period. The underwriting expense ratio for the mortgage segment was 16.8% in the 2023 third quarter, compared to 18.9% in the 2022 third quarter. The decrease was primarily due to higher level of profit commissions on ceded U.S. primary and Australian mortgage insurance business.

Nine Months Ended September 30, 2023 versus 2022 period. The underwriting expense ratio for the mortgage segment was 18.5% for the nine months ended September 30, 2023, compared to 20.5% for the 2022 period. The decrease was primarily due to higher level of profit commissions on ceded U.S. primary mortgage insurance business.

Corporate Segment

The corporate segment results include net investment income, net realized gains or losses (which includes realized and unrealized changes in the fair value of equity securities and assets accounted for using the fair value option, realized and unrealized gains and losses on derivative instruments and changes in the allowance for credit losses on financial assets), equity in net income or loss of investments accounted for using the equity method, other income or 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.

Net Investment Income.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Fixed maturities	$	243	$	124	$	645	$	311

Short-term investments	19		9		48		16
Equity securities	5		4		15		16

Other (1)	22		9		60		29
Gross investment income	289		146		768		372
Investment expenses (2)	(20)		(17)		(58)		(57)
Net investment income	$	269	$	129	$	710	315

(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 0.30% of average invested assets for the 2023 third quarter, compared to 0.29% for the 2022 third quarter, and 0.28% for the nine months ended September 30, 2023, compared to 0.30% for the 2022 period.

The higher level of net investment income for the 2023 third quarter was primarily related to higher yields available in the financial market. The pre-tax investment income yield, calculated based on amortized cost and on an annualized basis, was 3.68% for the 2023 third quarter, compared to 2.06% for the 2022 third quarter, and 3.41% for the nine months ended September 30, 2023, compared to 1.72% for the 2022 period. Net cash flow from operating activities contributed $4.1 billion for the nine months ended September 30, 2023, which has helped to grow our invested asset base by approximately 20% in the last twelve months and contributed to the growth in net investment income.

Corporate Expenses.

Corporate expenses were $20 million for the 2023 third quarter, compared to $18 million for the 2022 third quarter, and $69 million for the nine months ended September 30, 2023, compared to $78 million for the 2022 period. Such amounts primarily represent certain holding company costs


ARCH CAPITAL			50			2023 THIRD QUARTER FORM 10-Q

necessary to support our worldwide operations and costs associated with operating as a publicly traded company.

Other Income or Losses.

Other income or loss for the 2023 third quarter was a loss of $4 million, compared to a loss of $14 million for the 2022 third quarter, and income of $10 million for the nine months ended September 30, 2023, compared to a loss of $35 million for the 2022 period. Amounts in both periods primarily reflect changes in the cash surrender value of our investment in corporate-owned life insurance.

Amortization of Intangible Assets.

Amortization of intangible assets for the 2023 third quarter was $24 million, compared to $26 million for the 2022 third quarter, and $71 million for the nine months ended September 30, 2023, compared to $80 million for the 2022 period. Amounts in both periods primarily attributed to amortization of finite-lived intangible assets.

Interest Expense.

Interest expense was $34 million for the 2023 third quarter, compared to $33 million for the 2022 third quarter, and $99 million for the nine months ended September 30, 2023, consistent with $99 million for the 2022 period. Interest expense primarily reflects amounts related to our outstanding senior notes.

Net Realized Gains or Losses.

Net realized losses for the 2023 third quarter were $248 million, compared to net realized losses of $184 million for the 2022 third quarter. Net realized losses were $354 million for the nine months ended September 30, 2023, compared to net realized losses of $743 million for the 2022 period. Amounts in both periods reflected sales of investments as well as the impact of financial market movements on the Company’s equity securities and investments accounted for under the fair value option method. 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.

Equity in net income of investment funds accounted for using the equity method was $59 million in the 2023 third quarter, compared to a loss of $19 million for the 2022 third quarter, and income of $176 million for the nine months ended September 30, 2023, compared to income of $75 million for the 2022 period. 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 $4.3 billion at September 30, 2023, compared to $3.8 billion at December 31, 2022. 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 2023 third quarter were $22 million, compared to gains of $91 million for the 2022 third quarter. Net foreign exchange losses for the nine months ended September 30, 2023 were $1 million, compared to gains of $183 million for the 2022 period. 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 or loss before income taxes, including income or loss from operating affiliates, resulted in an expense of 8.8% for the nine months ended September 30, 2023, compared to an expense of 3.0% for the 2022 period. See note 13, “Income Taxes” to our consolidated financial statements for additional information.

Income or Losses from Operating Affiliates.

Income from operating affiliates for 2023 third quarter was $54 million, compared to income of $9 million for the 2022 third quarter, and income of $115 million for the nine months ended September 30, 2023, compared to income of $39 million for the 2022 period. See note 7, “Investment Information—Investments in Operating Affiliates,” to our consolidated financial statements for additional information.


ARCH CAPITAL			51			2023 THIRD QUARTER FORM 10-Q

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 2022 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 September 30, 2023, approximately $20.9 billion, or 65%, of total investable assets held by Arch were internally managed, compared to $18.8 billion, or 67%, at December 31, 2022. See note 7, “Investment Information” to our consolidated financial statements for additional information.


	September 30, 2023	December 31, 2022
Average effective duration (in years)	2.97	2.89
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”).

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
September 30, 2023
U.S. government and gov’t agencies (1)	$	6,359	27.5
AAA	4,164		18.0
AA	2,061		8.9
A	4,523		19.6
BBB	4,390		19.0
BB	773		3.3
B	352		1.5
Lower than B	16		0.1
Not rated	491		2.1
Total	$	23,129	100.0

December 31, 2022
U.S. government and gov’t agencies (1)	$	5,831	28.8
AAA	3,617		17.9
AA	2,214		10.9
A	3,993		19.7
BBB	3,324		16.4
BB	560		2.8
B	377		1.9
Lower than B	12		0.1
Not rated	309		1.5
Total	$	20,237	100.0

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


ARCH CAPITAL			52			2023 THIRD QUARTER FORM 10-Q

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
September 30, 2023
0-10%	$	16,607	$	(571)	40.4
10-20%	3,510		(555)		39.3
20-30%	834		(243)		17.2
Greater than 30%	82		(45)		3.2
Total	$	21,033	$	(1,414)	100.0

December 31, 2022
0-10%	$	12,343	$	(580)	35.2
10-20%	5,331		(844)		51.2
20-30%	692		(199)		12.1
Greater than 30%	44		(24)		1.5
Total	$	18,410	$	(1,647)	100.0

The following table summarizes our top ten exposures to fixed income corporate issuers by fair value at September 30, 2023, excluding guaranteed amounts and covered bonds:


	Estimated Fair Value		Credit Rating (1)
Bank of America Corporation	$	360	A-/A1
Morgan Stanley	333		A-/A1
JPMorgan Chase & Co.	315		A-/A1
The Goldman Sachs Group, Inc.	240		BBB+/A2
Citigroup Inc.	222		BBB+/A3
HSBC Holdings plc	167		A-/A2
Blue Owl Capital Inc.	160		BBB-/Baa3
Wells Fargo & Company	149		BBB+/A1
Philip Morris International Inc.	142		A-/A2
Deere & Company	129		A/A2
Total	$	2,217

(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
September 30, 2023
RMBS	$	682	$	283	$	—	$	965
CMBS	7		998		97		1,102
ABS	—		2,205		139		2,344
Total	$	689	$	3,486	$	236	$	4,411

December 31, 2022
RMBS	$	645	$	134	$	16	$	795
CMBS	18		947		82		1,047
ABS	—		1,788		141		1,929
Total	$	663	$	2,869	$	239	$	3,771

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


	September 30, 2023		December 31, 2022
Equities (1)	$	528	$	570
Exchange traded funds
Fixed income (2)	277		272
Equity and other (3)	96		32
Total	$	901	$	874

(1)Primarily in consumer non-cyclical, communications, technology, financial and consumer cyclical at September 30, 2023.

(2)Primarily in corporate exposure at September 30, 2023.

(3)Primarily in large cap stocks, foreign equities, healthcare, technology and consumer discretionary at September 30, 2023.

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

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


ARCH CAPITAL			53			2023 THIRD QUARTER FORM 10-Q

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				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Premiums written:
Direct	$	2,496	$	2,248	$	7,227	$	6,505
Assumed	2,031		1,613		6,925		5,027
Ceded	(1,172)		(1,137)		(3,945)		(3,489)
Net	$	3,355	$	2,724	$	10,207	$	8,043

Premiums earned:
Direct	$	2,338	$	2,067	$	6,721	$	5,926
Assumed	2,084		1,525		5,675		4,038
Ceded	(1,174)		(1,121)		(3,300)		(3,046)
Net	$	3,248	$	2,471	$	9,096	$	6,918

Losses and LAE:
Direct	$	1,206	$	1,228	$	3,438	$	3,017
Assumed	1,084		1,370		3,001		2,661
Ceded	(643)		(915)		(1,830)		(1,891)
Net	$	1,647	$	1,683	$	4,609	$	3,787

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 September 30, 2023:


Bellemeade Entities (Issue Date)	Initial Coverage at Issuance		Current Coverage		Remaining Retention, Net
2018-1 Ltd. (1)	374		51		149
2018-3 Ltd. (2)	506		154		158
2019-1 Ltd. (3)	342		80		127
2019-2 Ltd. (4)	621		265		198
2019-3 Ltd. (5)	701		120		215
2019-4 Ltd. (6)	577		218		145
2020-2 Ltd. (7)	449		54		241
2020-3 Ltd. (8)	452		187		162
2020-4 Ltd. (9)	337		69		141
2021-1 Ltd. (10)	644		404		154
2021-2 Ltd. (11)	616		438		138
2021-3 Ltd. (12)	639		560		134
2022-1 Ltd. (13)	317		298		139
2022-2 Ltd. (14)	327		327		204
Total	$	6,902	$	3,225	$	2,305

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

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

(3) 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.

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

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

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

(7) 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.

(8) 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.

(9) 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.

(10) 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.

(11) 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.

(12) 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.


ARCH CAPITAL			54			2023 THIRD QUARTER FORM 10-Q

(13) 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.

(14) Issued in September 2022, covering in-force policies issued between November 1, 2021 and June 30, 2022. $201 million was directly funded by Bellemeade Re 2022-2 Ltd. via insurance-linked notes, with an additional $126 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.

See note 1 6, “Subsequent Event s,” to our consolidated financial statements for information about our Bellemeade Agreements.

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 September 30, 2023 and December 31, 2022, our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, by type and by operating segment were as follows:


	September 30, 2023		December 31, 2022
Insurance segment:
Case reserves	$	2,577	$	2,398
IBNR reserves	5,461		4,934
Total net reserves	8,038		7,332
Reinsurance segment:
Case reserves	2,267		1,903
Additional case reserves	511		481
IBNR reserves	3,954		3,403
Total net reserves	6,732		5,787
Mortgage segment:
Case reserves	383		447
IBNR reserves	187		186
Total net reserves	570		633





Total:
Case reserves	5,227		4,748
Additional case reserves	511		481
IBNR reserves	9,602		8,523
Total net reserves	$	15,340	$	13,752

At September 30, 2023 and December 31, 2022, the insurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:


	September 30, 2023		December 31, 2022
Insurance segment:
Professional lines	$	2,347	$	2,070
Construction and national accounts	1,661		1,558
Excess and surplus casualty	914		786
Programs	911		843
Property, energy, marine and aviation	762		764
Travel, accident and health	148		139
Warranty and lenders solutions	63		47
Other	1,232		1,125
Total net reserves	$	8,038	$	7,332

At September 30, 2023 and December 31, 2022, the reinsurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:


	September 30, 2023		December 31, 2022
Reinsurance segment:
Casualty	$	2,606	$	2,342
Other specialty	1,949		1,476
Property excluding property catastrophe	1,123		993
Property catastrophe	559		536
Marine and aviation	350		292
Other	145		148
Total net reserves	$	6,732	$	5,787

At September 30, 2023 and December 31, 2022, the mortgage segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:


	September 30, 2023		December 31, 2022
Mortgage segment:
U.S. primary mortgage insurance (1)	$	377	$	415
U.S. credit risk transfer (CRT) and other	102		109
International mortgage insurance/ reinsurance	91		109
Total net reserves	$	570	$	633

(1) At September 30, 2023, 31.8% of total net reserves represents policy years 2013 and prior and the remainder from later policy years. At December 31, 2022, 36.1% of total net reserves represent policy years 2013 and prior and the remainder from later policy years.


ARCH CAPITAL			55			2023 THIRD QUARTER FORM 10-Q

Mortgage Operations Supplemental Information

The mortgage segment’s insurance in force (“IIF”) and risk in force (“RIF”) were as follows at September 30, 2023 and December 31, 2022:


	September 30, 2023					December 31, 2022
Amount			%		Amount			%
Insurance In Force (IIF) (1):
U.S. primary mortgage insurance	$	292,903		57.4		$	295,651		57.6
U.S. credit risk transfer (CRT) and other	152,453			29.9		145,087			28.3
International mortgage insurance/reinsurance	65,107			12.8		72,315			14.1
Total	$	510,463		100.0		$	513,053		100.0

Risk In Force (RIF) (2):
U.S. primary mortgage insurance	$	75,850		84.9		$	75,806		84.8
U.S. credit risk transfer (CRT) and other	6,478			7.2		6,245			7.0
International mortgage insurance/reinsurance	7,034			7.9		7,369			8.2
Total	$	89,362		100.0		$	89,420		100.0

(1)Represents the aggregate dollar amount of each insured mortgage loan’s current principal balance. Such amounts are shown before external reinsurance.

(2)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. Such amounts are shown before external reinsurance.

The IIF and RIF for our U.S. primary mortgage insurance business by policy year were as follows at September 30, 2023:


	IIF					RIF					Delinquency
Amount			%		Amount			%		Rate (1)
Policy year:
2013 and prior	$	11,263		3.8		$	2,842		3.7		6.52	%
2014	2,759			0.9		742			1.0		2.43	%
2015	5,113			1.7		1,366			1.8		1.88	%
2016	7,970			2.7		2,148			2.8		2.51	%
2017	8,016			2.7		2,132			2.8		2.96	%
2018	8,908			3.0		2,302			3.0		3.66	%
2019	16,572			5.7		4,250			5.6		2.22	%
2020	54,238			18.5		13,997			18.5		1.06	%
2021	80,045			27.3		20,567			27.1		1.00	%
2022	65,065			22.2		17,038			22.5		0.72	%
2023	32,954			11.3		8,466			11.2		0.15	%
Total	$	292,903		100.0		$	75,850		100.0		1.65	%

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

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


	IIF					RIF					Delinquency
Amount			%		Amount			%		Rate (1)
Policy year:
2013 and prior	$	12,931		4.4		$	3,222		4.3		7.07	%
2014	3,696			1.3		1,012			1.3		2.61	%
2015	6,236			2.1		1,680			2.2		2.08	%
2016	10,225			3.5		2,744			3.6		2.66	%
2017	9,508			3.2		2,521			3.3		3.06	%
2018	10,260			3.5		2,625			3.5		4.11	%
2019	19,096			6.5		4,840			6.4		2.36	%
2020	65,141			22.0		16,414			21.7		1.20	%
2021	89,621			30.3		22,740			30.0		0.95	%
2022	68,937			23.3		18,008			23.8		0.20	%

Total	$	295,651		100.0		$	75,806		100.0		1.77	%

(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 September 30, 2023 and December 31, 2022:


	September 30, 2023						December 31, 2022
Amount				%		Amount				%
Credit quality (FICO):
>=740	$	46,990			62.0		$	46,812			61.8
680-739	25,055				33.0		24,945				32.9
620-679	3,554				4.7		3,772				5.0
<620	251				0.3		277				0.4
Total	$	75,850			100.0		$	75,806			100.0
Weighted average FICO score	748						750

Loan-to-value (LTV):
95.01% and above	$	7,113			9.4		$	7,289			9.6
90.01% to 95.00%	44,675				58.9		43,681				57.6
85.01% to 90.00%	20,565				27.1		20,851				27.5
85.00% and below	3,497				4.6		3,985				5.3
Total	$	75,850			100.0		$	75,806			100.0
Weighted average LTV	93.0		%				92.8		%

Total RIF, net of external reinsurance	$	56,946					$	57,151


ARCH CAPITAL			56			2023 THIRD QUARTER FORM 10-Q


	September 30, 2023					December 31, 2022
Amount			%		Amount			%
Total RIF by State:
California	$	6,235		8.2		$	6,341		8.4
Texas	6,081			8.0		6,151			8.1
North Carolina	3,258			4.3		3,160			4.2
Georgia	3,116			4.1		3,169			4.2
Florida	3,086			4.1		3,268			4.3
Minnesota	3,060			4.0		3,003			4.0
Illinois	2,994			3.9		3,081			4.1
Massachusetts	2,841			3.7		2,809			3.7
Michigan	2,722			3.6		2,618			3.5
Virginia	2,605			3.4		2,656			3.5
Other	39,852			52.5		39,550			52.2
Total	$	75,850		100.0		$	75,806		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)	Nine Months Ended
September 30,
2023				2022
Roll-forward of insured loans in default:
Beginning delinquent number of loans	20,567				27,645
New notices	28,642				26,328
Cures	(29,903)				(33,225)
Paid claims	(662)				(534)

Ending delinquent number of loans (1)	18,644				20,214

Ending number of policies in force (1)	1,129,351				1,168,735

Delinquency rate (1)	1.65		%		1.73		%

Losses:
Number of claims paid	662				534
Total paid claims	$	19,502			$	16,865
Average per claim	$	29.5			$	31.6
Severity (2)	68.8		%		74.3		%
Average case reserve per default (1)	$	21.2			$	27.7

(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 6.6 to 1 at September 30, 2023, compared to 7.2 to 1 at December 31, 2022.

Shareholders’ Equity and Book Value per Share

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


	September 30, 2023		December 31, 2022
Total shareholders’ equity available to Arch	$	15,239	$	12,910
Less preferred shareholders’ equity	830		830
Common shareholders’ equity available to Arch	$	14,409	$	12,080
Common shares and common share equivalents outstanding, net of treasury shares (1)	373.1		370.3
Book value per share	$	38.62	$	32.62

(1)Excludes the effects of 12.7 million and 14.4 million stock options and 0.6 million and 0.6 million restricted stock units outstanding at September 30, 2023 and December 31, 2022, 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 nine months ended September 30, 2023, Arch Capital received dividends of $98 million from Arch Reinsurance Ltd. (“Arch Re Bermuda”), our Bermuda based reinsurer and insurer, which can pay approximately $3.6 billion to Arch Capital during the remainder of 2023 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 at least the next twelve months and thereafter for the foreseeable future, 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. During the 2023 third quarter, Arch Capital and certain of its subsidiaries amended the existing credit agreement. For details on our credit agreement, see note 10, “Commitments and Contingencies” and see note 16, “Subsequent Events ” to our consolidated financial statements.


ARCH CAPITAL			57			2023 THIRD QUARTER FORM 10-Q

Cash Flows

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


	Nine Months Ended
	September 30,
	2023		2022
Total cash provided by (used for):
Operating activities	$	4,084	$	2,834
Investing activities	(3,936)		(2,106)
Financing activities	(52)		(704)
Effects of exchange rate changes on foreign currency cash and restricted cash	(14)		(80)
Increase (decrease) in cash and restricted cash	$	82	$	(56)

Cash provided by operating activities for the nine months ended September 30, 2023 was higher than in the 2022 period. Activity for the nine months ended September 30, 2023 primarily reflected a higher level of premiums collected than in the 2022 period.
Cash used for investing activities for the nine months ended September 30, 2023 was higher than in the 2022 period. Activity for the nine months ended September 30, 2023 reflected higher net purchases than in the 2022 period due in part to strong operating cash flows in 2023.
Cash used for financing activities for the nine months ended September 30, 2023 was lower than in the 2022 period. Activity for the nine months ended September 30, 2023 reflected no repurchases under our share repurchase program, while the 2022 period included $586 million of share repurchases.

CAPITAL RESOURCES

The following table provides an analysis of our capital structure:


	September 30, 2023		December 31, 2022







Senior notes	$	2,726	$	2,725

Shareholders’ equity available to Arch:

Series F non-cumulative preferred shares	$	330	$	330
Series G non-cumulative preferred shares	500		500
Common shareholders’ equity	14,409		12,080
Total	$	15,239	$	12,910

Total capital available to Arch	$	17,965	$	15,635



Debt to total capital (%)	15.2		17.4
Preferred to total capital (%)	4.6		5.3
Debt and preferred to total capital (%)	19.8		22.7

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

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 with an estimated PMIER sufficiency ratio of 245% at September 30, 2023, compared to 236% at December 31, 2022.

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 September 30, 2023:


	Interest		Principal		Carrying
Issuer/Due	(Fixed)		Amount		Amount
Arch Capital:
May 1, 2034	7.350	%	$	300	$	298
June 30, 2050	3.635	%	1,000		989
Arch-U.S.:
Nov. 1, 2043 (1)	5.144	%	500		495
Arch Finance:
Dec. 15, 2026 (1)	4.011	%	500		498
Dec. 15, 2046 (1)	5.031	%	450		446
Total			$	2,750	$	2,726

(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 CAPITAL			58			2023 THIRD QUARTER FORM 10-Q

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):


	September 30, 2023
	Arch Capital		Arch-U.S.
Assets
Total investments	$	3	$	86
Cash	8		6

Investment in operating affiliates	4		—
Due from subsidiaries and affiliates	—		—






Other assets	21		32
Total assets	$	36	$	124

Liabilities






Senior notes	1,287		495

Due to subsidiaries and affiliates	—		1,018
Other liabilities	42		45
Total liabilities	$	1,329	$	1,558

Non-cumulative preferred shares	$	830	—


	December 31, 2022
		Arch Capital		Arch-U.S.
Assets
Total investments		$	7	$	79
Cash		11		10

Investment in operating affiliates		5		—
Due from subsidiaries and affiliates		2		—






Other assets		18		30
Total assets		$	43	$	119

Liabilities






Senior notes		1,287		495

Due to subsidiaries and affiliates		—		991
Other liabilities		37		37
Total liabilities		$	1,324	$	1,523

Non-cumulative preferred shares		$	830	—


	Nine Months Ended

	September 30, 2023
	Arch Capital	Arch-U.S.
Revenues

Net investment income		$	2	$	3



Equity in net income (loss) of investments accounted for using the equity method		—		(3)

Total revenues		2		—

Expenses



Corporate expenses		67		8

Interest expense		44		57

Total expenses		111		65

Income (loss) before income taxes and income (loss) from operating affiliates		(109)		(65)
Income tax (expense) benefit		—		15

Income (loss) from operating affiliates		(1)		—


Net income available to Arch		(110)		(50)
Preferred dividends		(30)		—

Net income (loss) available to Arch common shareholders		$	(140)	$	(50)



			Year Ended
	December 31, 2022
		Arch Capital	Arch-U.S.

Revenues

Net investment income			2		1



Equity in net income (loss) of investments accounted for using the equity method			—		10

Total revenues			2		11

Expenses



Corporate expenses			86		13

Interest expense			59		48

Total expenses			145		61

Income (loss) before income taxes and income (loss) from operating affiliates			(143)		(50)
Income tax (expense) benefit			—		10

Income (loss) from operating affiliates			(1)		—


Net income available to Arch			(144)		(40)
Preferred dividends			(41)		—

Net income (loss) available to Arch common shareholders			$	(185)	$	(40)


ARCH CAPITAL			59			2023 THIRD QUARTER FORM 10-Q

CATASTROPHIC 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 October 1, 2023, our modeled peak zone catastrophe exposure was a windstorm affecting the Florida Tri-County regions, with a net probable maximum pre-tax loss of $1.47 billion, followed by windstorms affecting the Northeastern U.S. regions and the Gulf of Mexico with net probable maximum pre-tax losses of $1.41 billion and $1.35 billion, 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 October 1, 2023, our modeled peak zone earthquake exposure (San Francisco earthquake) represented approximately 57% 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 October 1, 2023, our modeled RDS loss was approximately 10% 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 2022 Form 10-K.


ARCH CAPITAL			60			2023 THIRD QUARTER FORM 10-Q

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 September 30, 2023. 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 September 30, 2023 that affect the quantitative and qualitative disclosures presented in our 2022 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.

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
September 30, 2023
Total fair value	$	31.2			$	30.7			$	30.3		$	29.8			$	29.4
Change from base	3.0		%		1.5		%					(1.5)		%		(2.9)		%
Change in unrealized value	$	0.9			$	0.5						$	(0.5)			$	(0.9)

December 31, 2022
Total fair value	$	27.2			$	26.8			$	26.4		$	26.0			$	25.7
Change from base	2.9		%		1.4		%					(1.4)		%		(2.7)		%
Change in unrealized value	$	0.8			$	0.4						$	(0.4)			$	(0.7)

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
September 30, 2023
Total fair value	$	31.5			$	30.9			$	30.3		$	29.7			$	29.0
Change from base	4.0		%		2.0		%					(2.0)		%		(4.0)		%
Change in unrealized value	$	1.2			$	0.6						$	(0.6)			$	(1.2)

December 31, 2022
Total fair value	$	27.5			$	26.9			$	26.4		$	25.9			$	25.3
Change from base	4.1		%		2.0		%					(2.0)		%		(4.1)		%
Change in unrealized value	$	1.1			$	0.5						$	(0.5)			$	(1.1)

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 September 30, 2023, our portfolio’s 95th percentile VaR was estimated to be 7.4%, compared to an estimated 8.8% at December 31, 2022. 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 September 30, 2023 and December 31, 2022, the fair value of our investments in equity securities and certain investments accounted for using the equity method with underlying equity strategies totaled $766 million and $791 million, 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


ARCH CAPITAL			61			2023 THIRD QUARTER FORM 10-Q

value of such investments by approximately $77 million and $79 million at September 30, 2023 and December 31, 2022, respectively, and would have decreased book value per share by approximately $0.21 and $0.21, respectively. An immediate hypothetical 10% increase in the value of each position would increase the fair value of such investments by approximately $77 million and $79 million at September 30, 2023 and December 31, 2022, respectively, and would have increased book value per share by approximately $0.21 and $0.21, respectively.

Investment-Related Derivatives. At September 30, 2023, the notional value of all derivative instruments (excluding foreign currency forward contracts which are included in the foreign currency exchange risk analysis below) was $4.7 billion, compared to $6.6 billion at December 31, 2022. If the underlying exposure of each investment-related derivative held at September 30, 2023 depreciated by 100 basis points, it would have resulted in a reduction in net income of approximately $47 million, and a decrease in book value per share of approximately $0.13 per share, compared to $66 million and $0.18 per share, respectively, on investment-related derivatives held at December 31, 2022. If the underlying exposure of each investment-related derivative held at September 30, 2023 appreciated by 100 basis points, it would have resulted in an increase in net income of approximately $47 million, and an increase in book value per share of approximately $0.13 per share, compared to $66 million and $0.18 per share, respectively, on investment-related derivatives held at December 31, 2022. 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.”

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:


	September 30, 2023		December 31, 2022
Net assets (liabilities), denominated in foreign currencies, excluding shareholders’ equity and derivatives	$	(409)	$	(396)
Shareholders’ equity denominated in foreign currencies (1)	1,084		1,056
Net foreign currency forward contracts outstanding (2)	4		312
Net exposures denominated in foreign currencies	$	679	$	972

Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies:
Shareholders’ equity	$	(68)	$	(97)
Book value per share	$	(0.18)	$	(0.26)

Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies:
Shareholders’ equity	$	68	$	97
Book value per share	$	0.18	$	0.26

(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

General economic inflation has increased in recent quarters and may continue to remain at elevated levels for an extended period of time. The potential also exists, after a catastrophe loss or pandemic events like COVID-19, for the development of inflationary pressures in a local economy. This may have a material effect on the adequacy of our reserves for losses and loss adjustment expenses, especially in longer-tailed lines of business, and on the market value of our investment portfolio through rising interest rates. The anticipated effects of inflation are considered in our pricing models, reserving processes and exposure management, across all lines of business and types of loss including natural catastrophe events. The actual effects of inflation on our results cannot be accurately known until claims are ultimately settled and will vary by the specific type of inflation affecting each line of business.


ARCH CAPITAL			62			2023 THIRD QUARTER FORM 10-Q

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