filings.toolsItem 1. CONSOLIDATED FINANCIAL STATEMENTS
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS
| ARCH CAPITAL | 4 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars and shares in millions)
| (Unaudited) | |||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
| Assets | |||||||||||
| Investments: | |||||||||||
| Fixed maturities available for sale, at fair value (amortized cost: $25,882 and $24,131; net of allowance for credit losses: $27 and $28) | $ | 25,202 | $ | 23,553 | |||||||
| Short-term investments available for sale, at fair value (amortized cost: $2,296 and $2,064; net of allowance for credit losses: $0 and $0) | 2,297 | 2,063 | |||||||||
| Equity securities, at fair value | 1,397 | 1,186 | |||||||||
| Other investments, at fair value | 3,206 | 2,488 | |||||||||
| Investments accounted for using the equity method | 4,983 | 4,566 | |||||||||
| Total investments | 37,085 | 33,856 | |||||||||
| Cash | 1,020 | 917 | |||||||||
| Accrued investment income | 287 | 236 | |||||||||
| Investment in operating affiliates | 1,143 | 1,119 | |||||||||
| Premiums receivable (net of allowance for credit losses: $36 and $34) | 6,268 | 4,644 | |||||||||
| Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses: $20 and $21) | 7,473 | 7,064 | |||||||||
| Contractholder receivables (net of allowance for credit losses: $4 and $3) | 2,016 | 1,814 | |||||||||
| Ceded unearned premiums | 2,981 | 2,170 | |||||||||
| Deferred acquisition costs | 1,635 | 1,531 | |||||||||
| Receivable for securities sold | 116 | 63 | |||||||||
| Goodwill and intangible assets | 725 | 731 | |||||||||
| Other assets | 4,716 | 4,761 | |||||||||
| Total assets | $ | 65,465 | $ | 58,906 | |||||||
| Liabilities | |||||||||||
| Reserve for losses and loss adjustment expenses | $ | 24,466 | $ | 22,752 | |||||||
| Unearned premiums | 10,452 | 8,808 | |||||||||
| Reinsurance balances payable | 2,591 | 2,000 | |||||||||
| Contractholder payables | 2,020 | 1,817 | |||||||||
| Collateral held for insured obligations | 263 | 259 | |||||||||
| Senior notes | 2,727 | 2,726 | |||||||||
| Payable for securities purchased | 410 | 247 | |||||||||
| Other liabilities | 1,871 | 1,942 | |||||||||
| Total liabilities | 44,800 | 40,551 | |||||||||
| Commitments and contingencies (refer to Note 10****) | |||||||||||
| Redeemable noncontrolling interests | — | 2 | |||||||||
| Shareholders' Equity | |||||||||||
| Non-cumulative preferred shares | 830 | 830 | |||||||||
| Common shares ($0.0011 par, shares issued: 595.0 and 591.9) | 1 | 1 | |||||||||
| Additional paid-in capital | 2,443 | 2,327 | |||||||||
| Retained earnings | 22,664 | 20,295 | |||||||||
| Accumulated other comprehensive income (loss), net of deferred income tax | (810) | (676) | |||||||||
| Common shares held in treasury, at cost (shares: 219.0 and 218.5) | (4,463) | (4,424) | |||||||||
| Total shareholders' equity available to Arch | 20,665 | 18,353 | |||||||||
| Total liabilities, noncontrolling interests and shareholders' equity | $ | 65,465 | $ | 58,906 |
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 5 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars and shares in millions, except per share data)
| (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Net premiums earned | $ | 3,565 | $ | 2,965 | 6,987 | 5,848 | |||||||||||||||||
| Net investment income | 364 | 242 | 691 | 441 | |||||||||||||||||||
| Net realized gains (losses) | 122 | (123) | 189 | (106) | |||||||||||||||||||
| Other underwriting income | 3 | 6 | 15 | 16 | |||||||||||||||||||
| Equity in net income (loss) of investment funds accounted for using the equity method | 167 | 69 | 266 | 117 | |||||||||||||||||||
| Other income (loss) | 8 | 3 | 22 | 14 | |||||||||||||||||||
| Total revenues | 4,229 | 3,162 | 8,170 | 6,330 | |||||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Losses and loss adjustment expenses | 1,827 | 1,491 | 3,555 | 2,962 | |||||||||||||||||||
| Acquisition expenses | 633 | 561 | 1,240 | 1,094 | |||||||||||||||||||
| Other operating expenses | 346 | 313 | 709 | 632 | |||||||||||||||||||
| Corporate expenses | 41 | 21 | 94 | 51 | |||||||||||||||||||
| Amortization of intangible assets | 27 | 24 | 48 | 47 | |||||||||||||||||||
| Interest expense | 35 | 33 | 69 | 65 | |||||||||||||||||||
| Net foreign exchange (gains) losses | (1) | 5 | (32) | 23 | |||||||||||||||||||
| Total expenses | 2,908 | 2,448 | 5,683 | 4,874 | |||||||||||||||||||
| Income (loss) before income taxes and income (loss) from operating affiliates | 1,321 | 714 | 2,487 | 1,456 | |||||||||||||||||||
| Income tax (expense) benefit | (97) | (67) | (198) | (131) | |||||||||||||||||||
| Income (loss) from operating affiliates | 45 | 22 | 100 | 61 | |||||||||||||||||||
| Net income (loss) | $ | 1,269 | $ | 669 | $ | 2,389 | $ | 1,386 | |||||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | 2 | — | — | |||||||||||||||||||
| Net income (loss) available to Arch | 1,269 | 671 | 2,389 | 1,386 | |||||||||||||||||||
| Preferred dividends | (10) | (10) | (20) | (20) | |||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 1,259 | $ | 661 | $ | 2,369 | $ | 1,366 | |||||||||||||||
| Net income per common share and common share equivalent | |||||||||||||||||||||||
| Basic | $ | 3.38 | $ | 1.79 | $ | 6.37 | $ | 3.71 | |||||||||||||||
| Diluted | $ | 3.30 | $ | 1.75 | $ | 6.22 | $ | 3.62 | |||||||||||||||
| Weighted average common shares and common share equivalents outstanding | |||||||||||||||||||||||
| Basic | 372.7 | 368.7 | 371.8 | 368.0 | |||||||||||||||||||
| Diluted | 381.6 | 378.4 | 380.9 | 377.8 |
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 6 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in millions)
| (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Comprehensive Income | |||||||||||||||||||||||
| Net income (loss) | $ | 1,269 | $ | 669 | $ | 2,389 | $ | 1,386 | |||||||||||||||
| Other comprehensive income (loss), net of deferred income tax | |||||||||||||||||||||||
| Unrealized appreciation (decline) in value of available-for-sale investments: | |||||||||||||||||||||||
| Unrealized holding gains (losses) arising during period | (26) | (173) | (167) | 72 | |||||||||||||||||||
| Reclassification of net realized (gains) losses, included in net income (loss) | 53 | 149 | 82 | 248 | |||||||||||||||||||
| Foreign currency translation adjustments | (16) | 2 | (49) | 7 | |||||||||||||||||||
| Comprehensive income (loss) | 1,280 | 647 | 2,255 | 1,713 | |||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | 2 | — | — | |||||||||||||||||||
| Comprehensive income (loss) available to Arch | $ | 1,280 | $ | 649 | $ | 2,255 | $ | 1,713 |
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 7 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in millions)
| (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Non-cumulative preferred shares | |||||||||||||||||||||||
| Balance at beginning and end of period | $ | 830 | $ | 830 | $ | 830 | $ | 830 | |||||||||||||||
| Common shares | |||||||||||||||||||||||
| Balance at beginning and end of period | 1 | 1 | 1 | 1 | |||||||||||||||||||
| Additional paid-in capital | |||||||||||||||||||||||
| Balance at beginning of period | 2,401 | 2,260 | 2,327 | 2,211 | |||||||||||||||||||
| Amortization of share-based compensation | 16 | 17 | 84 | 58 | |||||||||||||||||||
| Other changes | 26 | 1 | 32 | 9 | |||||||||||||||||||
| Balance at end of period | 2,443 | 2,278 | 2,443 | 2,278 | |||||||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Balance at beginning of period | 21,405 | 16,597 | 20,295 | 15,892 | |||||||||||||||||||
| Net income (loss) | 1,269 | 669 | 2,389 | 1,386 | |||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | 2 | — | — | |||||||||||||||||||
| Preferred share dividends | (10) | (10) | (20) | (20) | |||||||||||||||||||
| Balance at end of period | 22,664 | 17,258 | 22,664 | 17,258 | |||||||||||||||||||
| Accumulated other comprehensive income (loss), net of deferred income tax | |||||||||||||||||||||||
| Balance at beginning of period | (821) | (1,297) | (676) | (1,646) | |||||||||||||||||||
| Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred income tax: | |||||||||||||||||||||||
| Balance at beginning of period | (677) | (1,168) | (565) | (1,512) | |||||||||||||||||||
| Unrealized holding gains (losses) during period, net of reclassification adjustment | 27 | (24) | (85) | 320 | |||||||||||||||||||
| Balance at end of period | (650) | (1,192) | (650) | (1,192) | |||||||||||||||||||
| Foreign currency translation adjustments, net of deferred income tax: | |||||||||||||||||||||||
| Balance at beginning of period | (144) | (129) | (111) | (134) | |||||||||||||||||||
| Foreign currency translation adjustments | (16) | 2 | (49) | 7 | |||||||||||||||||||
| Balance at end of period | (160) | (127) | (160) | (127) | |||||||||||||||||||
| Balance at end of period | (810) | (1,319) | (810) | (1,319) | |||||||||||||||||||
| Common shares held in treasury, at cost | |||||||||||||||||||||||
| Balance at beginning of period | (4,461) | (4,403) | (4,424) | (4,378) | |||||||||||||||||||
| Shares repurchased for treasury | (2) | (4) | (39) | (29) | |||||||||||||||||||
| Balance at end of period | (4,463) | (4,407) | (4,463) | (4,407) | |||||||||||||||||||
| Total shareholders’ equity | $ | 20,665 | $ | 14,641 | $ | 20,665 | $ | 14,641 |
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 8 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in millions)
| (Unaudited) | |||||||||||
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating Activities | |||||||||||
| Net income (loss) | $ | 2,389 | $ | 1,386 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Net realized (gains) losses | (196) | 110 | |||||||||
| Equity in net (income) or loss of investment funds accounted for using the equity method and other income or loss | (174) | (49) | |||||||||
| Amortization of intangible assets | 48 | 47 | |||||||||
| Share-based compensation | 84 | 58 | |||||||||
| Changes in: | |||||||||||
| Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses recoverable | 1,369 | 1,020 | |||||||||
| Unearned premiums, net of ceded unearned premiums | 879 | 1,004 | |||||||||
| Premiums receivable | (1,682) | (1,648) | |||||||||
| Deferred acquisition costs | (80) | (152) | |||||||||
| Reinsurance balances payable | 616 | 652 | |||||||||
| Deferred income tax assets, net | 45 | 58 | |||||||||
| Other items, net | (216) | (372) | |||||||||
| Net cash provided by operating activities | 3,082 | 2,114 | |||||||||
| Investing Activities | |||||||||||
| Purchases of fixed maturity investments | (14,123) | (8,840) | |||||||||
| Purchases of equity securities | (654) | (104) | |||||||||
| Purchases of other investments | (1,369) | (557) | |||||||||
| Proceeds from sales of fixed maturity investments | 11,220 | 7,079 | |||||||||
| Proceeds from sales of equity securities | 547 | 161 | |||||||||
| Proceeds from sales, redemptions and maturities of other investments | 619 | 201 | |||||||||
| Proceeds from redemptions and maturities of fixed maturity investments | 878 | 368 | |||||||||
| Net settlements of derivative instruments | 12 | 46 | |||||||||
| Net (purchases) sales of short-term investments | (25) | (333) | |||||||||
| Purchases of fixed assets | (26) | (26) | |||||||||
| Other | 3 | 4 | |||||||||
| Net cash used for investing activities | (2,918) | (2,001) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from common shares issued, net | (8) | — | |||||||||
| Change in third party investment in redeemable noncontrolling interests | — | (22) | |||||||||
| Other | — | (3) | |||||||||
| Preferred dividends paid | (20) | (20) | |||||||||
| Net cash used for financing activities | (28) | (45) | |||||||||
| Effects of exchange rate changes on foreign currency cash and restricted cash | (7) | 12 | |||||||||
| Increase (decrease) in cash and restricted cash | 129 | 80 | |||||||||
| Cash and restricted cash, beginning of year | 1,498 | 1,273 | |||||||||
| Cash and restricted cash, end of period | $ | 1,627 | $ | 1,353 | |||||||
| Income taxes paid (received) | 145 | 73 | |||||||||
| Interest paid | 63 | 63 |
See Notes to Consolidated Financial Statements
| ARCH CAPITAL | 9 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Recent Accounting Pronouncements
General
Arch Capital Group Ltd. (“Arch Capital”) is a publicly listed Bermuda exempted company which provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. As used herein, the “Company” means Arch Capital and its subsidiaries.
Basis of Presentation
The interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of results on an interim basis. The results of any interim period are not necessarily indicative of the results for a full year or any future periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted; however, management believes that the disclosures are adequate to make the information
presented not misleading. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”), including the Company’s audited consolidated financial statements and related notes.
The Company has reclassified the presentation of certain prior year information to conform to the current presentation. Such reclassifications had no effect on the Company’s net income, comprehensive income, shareholders’ equity or cash flows. All amounts are in millions, except per share amounts, unless otherwise noted.
Recent Accounting Pronouncements
For information regarding additional accounting standards that the Company has not yet adopted, see note 3(t), “Significant Accounting Policies—Recent Accounting Pronouncements,” of the notes to consolidated financial statements in the Company’s 2023 Form 10-K.
2. Share Transactions
Share Repurchases
The Board of Directors of Arch Capital has authorized the investment in Arch Capital’s common shares through a share repurchase program. At June 30, 2024, $1.0 billion of share repurchases were available under the program. Repurchases under the program may be effected from time to time in open market or privately negotiated transactions through December 31, 2024. The timing and amount of the repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.
| ARCH CAPITAL | 10 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) | $ | 1,269 | $ | 669 | $ | 2,389 | $ | 1,386 | |||||||||||||||
| Net (income) loss attributable to noncontrolling interests | — | 2 | — | — | |||||||||||||||||||
| Net income (loss) available to Arch | 1,269 | 671 | 2,389 | 1,386 | |||||||||||||||||||
| Preferred dividends | (10) | (10) | (20) | (20) | |||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 1,259 | $ | 661 | $ | 2,369 | $ | 1,366 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares and common share equivalents outstanding — basic | 372.7 | 368.7 | 371.8 | 368.0 | |||||||||||||||||||
| Effect of dilutive common share equivalents: | |||||||||||||||||||||||
| Nonvested restricted shares | 1.8 | 2.3 | 1.9 | 2.4 | |||||||||||||||||||
| Stock options (1) | 7.1 | 7.4 | 7.2 | 7.4 | |||||||||||||||||||
| Weighted average common shares and common share equivalents outstanding — diluted | 381.6 | 378.4 | 380.9 | 377.8 | |||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Basic | $ | 3.38 | $ | 1.79 | $ | 6.37 | $ | 3.71 | |||||||||||||||
| Diluted | $ | 3.30 | $ | 1.75 | $ | 6.22 | $ | 3.62 |
(1) Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For the 2024 second quarter and 2023 second quarter, the number of stock options excluded were 0.2 million and 0.3 million, respectively. For the six months ended June 30, 2024 and 2023, the number of stock options excluded were 0.4 million and 0.5 million, respectively.
| ARCH CAPITAL | 11 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Segment Information
The Company’s insurance, reinsurance and mortgage segments each have managers who are responsible for the overall profitability of their respective segments and who are directly accountable to the Company’s chief operating decision makers. The Chief Executive Officer, 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 its three underwriting segments based on underwriting income or loss. The Company does not manage its assets by underwriting segment, with the exception of goodwill and intangible assets, and accordingly, investment income is not allocated to each underwriting segment.
The Company determined its reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of the Company’s consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.
The insurance segment consists of the Company’s insurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: construction and national accounts; excess and surplus casualty; professional lines; programs; property, energy, marine and aviation; travel, accident and health; warranty and lenders solutions; and other (consisting of alternative markets, excess workers' compensation and surety business).
The reinsurance segment consists of the Company’s reinsurance underwriting units which offer specialty product lines on a worldwide basis. Product lines include: casualty; marine and aviation; other specialty; property catastrophe; property excluding property catastrophe (losses on a single risk, both excess of loss and pro rata); and other (consisting of life reinsurance, casualty clash and other).
The mortgage segment includes the Company’s U.S. primary mortgage insurance business, investment and services related to U.S. credit-risk transfer (“CRT”) which are predominately with government sponsored enterprises (“GSEs”) and international mortgage insurance and reinsurance operations. Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (combined “Arch MI U.S.”) are approved as eligible mortgage insurers by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a GSE. Arch MI U.S. also includes Arch Mortgage Guaranty Company, which is not a GSE-approved entity.
The Company’s results also include net investment income, net realized gains or losses (which includes realized and unrealized changes in the fair value of equity securities and assets accounted for using the fair value option, realized and unrealized gains or losses on derivative instruments, changes in the allowance for credit losses on financial assets and gains or losses realized from the acquisition or disposition of subsidiaries), equity in net income or loss of investment funds accounted for using the equity method, other income (loss), corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, net foreign exchange gains or losses, income tax items, income or loss from operating affiliates and items related to the Company’s non-cumulative preferred shares.
| ARCH CAPITAL | 12 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of underwriting income or loss to net income available to Arch common shareholders:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| June 30, 2024 | |||||||||||||||||||||||||||||||||||
| Insurance | Reinsurance | Mortgage | Total | ||||||||||||||||||||||||||||||||
| Gross premiums written (1) | $ | 2,102 | $ | 2,941 | $ | 340 | $ | 5,382 | |||||||||||||||||||||||||||
| Premiums ceded (1) | (544) | (994) | (64) | (1,601) | |||||||||||||||||||||||||||||||
| Net premiums written | 1,558 | 1,947 | 276 | 3,781 | |||||||||||||||||||||||||||||||
| Change in unearned premiums | (80) | (167) | 31 | (216) | |||||||||||||||||||||||||||||||
| Net premiums earned | 1,478 | 1,780 | 307 | 3,565 | |||||||||||||||||||||||||||||||
| Other underwriting income (loss) | — | 1 | 2 | 3 | |||||||||||||||||||||||||||||||
| Losses and loss adjustment expenses | (848) | (1,006) | 27 | (1,827) | |||||||||||||||||||||||||||||||
| Acquisition expenses | (288) | (345) | — | (633) | |||||||||||||||||||||||||||||||
| Other operating expenses | (233) | (64) | (49) | (346) | |||||||||||||||||||||||||||||||
| Underwriting income (loss) | $ | 109 | $ | 366 | $ | 287 | 762 | ||||||||||||||||||||||||||||
| Net investment income | 364 | ||||||||||||||||||||||||||||||||||
| Net realized gains (losses) | 122 | ||||||||||||||||||||||||||||||||||
| Equity in net income (loss) of investment funds accounted for using the equity method | 167 | ||||||||||||||||||||||||||||||||||
| Other income (loss) | 8 | ||||||||||||||||||||||||||||||||||
| Corporate expenses (2) | (23) | ||||||||||||||||||||||||||||||||||
| Transaction costs and other (2) | (18) | ||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | (27) | ||||||||||||||||||||||||||||||||||
| Interest expense | (35) | ||||||||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | 1 | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes and income (loss) from operating affiliates | 1,321 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (97) | ||||||||||||||||||||||||||||||||||
| Income (loss) from operating affiliates | 45 | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch | 1,269 | ||||||||||||||||||||||||||||||||||
| Preferred dividends | (10) | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 1,259 | |||||||||||||||||||||||||||||||||
| Underwriting Ratios | |||||||||||||||||||||||||||||||||||
| Loss ratio | 57.3 | % | 56.5 | % | (8.6) | % | 51.2 | % | |||||||||||||||||||||||||||
| Acquisition expense ratio | 19.5 | % | 19.4 | % | 0.1 | % | 17.8 | % | |||||||||||||||||||||||||||
| Other operating expense ratio | 15.8 | % | 3.6 | % | 15.9 | % | 9.7 | % | |||||||||||||||||||||||||||
| Combined ratio | 92.6 | % | 79.5 | % | 7.4 | % | 78.7 | % | |||||||||||||||||||||||||||
| Goodwill and intangible assets | $ | 255 | $ | 114 | $ | 356 | $ | 725 |
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such transactions for each segment does not agree to the total due to eliminations.
(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’
| ARCH CAPITAL | 13 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||||||||||||||
| Insurance | Reinsurance | Mortgage | Total | ||||||||||||||||||||||||||||||||
| Gross premiums written (1) | $ | 1,955 | $ | 2,544 | $ | 347 | $ | 4,845 | |||||||||||||||||||||||||||
| Premiums ceded (1) | (501) | (835) | (82) | (1,417) | |||||||||||||||||||||||||||||||
| Net premiums written | 1,454 | 1,709 | 265 | 3,428 | |||||||||||||||||||||||||||||||
| Change in unearned premiums | (126) | (366) | 29 | (463) | |||||||||||||||||||||||||||||||
| Net premiums earned | 1,328 | 1,343 | 294 | 2,965 | |||||||||||||||||||||||||||||||
| Other underwriting income (loss) | — | 3 | 3 | 6 | |||||||||||||||||||||||||||||||
| Losses and loss adjustment expenses | (761) | (743) | 13 | (1,491) | |||||||||||||||||||||||||||||||
| Acquisition expenses | (264) | (290) | (7) | (561) | |||||||||||||||||||||||||||||||
| Other operating expenses | (195) | (68) | (50) | (313) | |||||||||||||||||||||||||||||||
| Underwriting income (loss) | $ | 108 | $ | 245 | $ | 253 | 606 | ||||||||||||||||||||||||||||
| Net investment income | 242 | ||||||||||||||||||||||||||||||||||
| Net realized gains (losses) | (123) | ||||||||||||||||||||||||||||||||||
| Equity in net income (loss) of investment funds accounted for using the equity method | 69 | ||||||||||||||||||||||||||||||||||
| Other income (loss) | 3 | ||||||||||||||||||||||||||||||||||
| Corporate expenses (2) | (20) | ||||||||||||||||||||||||||||||||||
| Transaction costs and other (2) | (1) | ||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | (24) | ||||||||||||||||||||||||||||||||||
| Interest expense | (33) | ||||||||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | (5) | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes and income (loss) from operating affiliates | 714 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (67) | ||||||||||||||||||||||||||||||||||
| Income (loss) from operating affiliates | 22 | ||||||||||||||||||||||||||||||||||
| Net income (loss) | 669 | ||||||||||||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests | 2 | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch | 671 | ||||||||||||||||||||||||||||||||||
| Preferred dividends | (10) | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 661 | |||||||||||||||||||||||||||||||||
| Underwriting Ratios | |||||||||||||||||||||||||||||||||||
| Loss ratio | 57.3 | % | 55.3 | % | (4.5) | % | 50.3 | % | |||||||||||||||||||||||||||
| Acquisition expense ratio | 19.9 | % | 21.6 | % | 2.4 | % | 18.9 | % | |||||||||||||||||||||||||||
| Other operating expense ratio | 14.7 | % | 5.0 | % | 17.1 | % | 10.6 | % | |||||||||||||||||||||||||||
| Combined ratio | 91.9 | % | 81.9 | % | 15.0 | % | 79.8 | % | |||||||||||||||||||||||||||
| Goodwill and intangible assets | $ | 228 | $ | 146 | $ | 401 | $ | 775 |
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such transactions for each segment does not agree to the total due to eliminations.
(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’
| ARCH CAPITAL | 14 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| June 30, 2024 | |||||||||||||||||||||||||||||||||||
| Insurance | Reinsurance | Mortgage | Total | ||||||||||||||||||||||||||||||||
| Gross premiums written (1) | $ | 4,228 | $ | 6,408 | $ | 681 | $ | 11,315 | |||||||||||||||||||||||||||
| Premiums ceded (1) | (1,128) | (2,195) | (128) | (3,449) | |||||||||||||||||||||||||||||||
| Net premiums written | 3,100 | 4,213 | 553 | 7,866 | |||||||||||||||||||||||||||||||
| Change in unearned premiums | (171) | (767) | 59 | (879) | |||||||||||||||||||||||||||||||
| Net premiums earned | 2,929 | 3,446 | 612 | 6,987 | |||||||||||||||||||||||||||||||
| Other underwriting income (loss) | — | 3 | 12 | 15 | |||||||||||||||||||||||||||||||
| Losses and loss adjustment expenses | (1,702) | (1,889) | 36 | (3,555) | |||||||||||||||||||||||||||||||
| Acquisition expenses | (564) | (676) | — | (1,240) | |||||||||||||||||||||||||||||||
| Other operating expenses | (468) | (139) | (102) | (709) | |||||||||||||||||||||||||||||||
| Underwriting income (loss) | $ | 195 | $ | 745 | $ | 558 | 1,498 | ||||||||||||||||||||||||||||
| Net investment income | 691 | ||||||||||||||||||||||||||||||||||
| Net realized gains (losses) | 189 | ||||||||||||||||||||||||||||||||||
| Equity in net income (loss) of investment funds accounted for using the equity method | 266 | ||||||||||||||||||||||||||||||||||
| Other income (loss) | 22 | ||||||||||||||||||||||||||||||||||
| Corporate expenses (2) | (69) | ||||||||||||||||||||||||||||||||||
| Transaction costs and other (2) | (25) | ||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | (48) | ||||||||||||||||||||||||||||||||||
| Interest expense | (69) | ||||||||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | 32 | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes and income (loss) from operating affiliates | 2,487 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (198) | ||||||||||||||||||||||||||||||||||
| Income (loss) from operating affiliates | 100 | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch | 2,389 | ||||||||||||||||||||||||||||||||||
| Preferred dividends | (20) | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 2,369 | |||||||||||||||||||||||||||||||||
| Underwriting Ratios | |||||||||||||||||||||||||||||||||||
| Loss ratio | 58.1 | % | 54.8 | % | (5.8) | % | 50.9 | % | |||||||||||||||||||||||||||
| Acquisition expense ratio | 19.2 | % | 19.6 | % | 0.1 | % | 17.7 | % | |||||||||||||||||||||||||||
| Other operating expense ratio | 16.0 | % | 4.0 | % | 16.7 | % | 10.1 | % | |||||||||||||||||||||||||||
| Combined ratio | 93.3 | % | 78.4 | % | 11.0 | % | 78.7 | % | |||||||||||||||||||||||||||
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such transactions for each segment does not agree to the total due to eliminations.
(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’
| ARCH CAPITAL | 15 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||||||||||||||
| Insurance | Reinsurance | Mortgage | Total | ||||||||||||||||||||||||||||||||
| Gross premiums written (1) | $ | 3,934 | $ | 5,004 | $ | 690 | $ | 9,625 | |||||||||||||||||||||||||||
| Premiums ceded (1) | (1,043) | (1,569) | (164) | (2,773) | |||||||||||||||||||||||||||||||
| Net premiums written | 2,891 | 3,435 | 526 | 6,852 | |||||||||||||||||||||||||||||||
| Change in unearned premiums | (306) | (762) | 64 | (1,004) | |||||||||||||||||||||||||||||||
| Net premiums earned | 2,585 | 2,673 | 590 | 5,848 | |||||||||||||||||||||||||||||||
| Other underwriting income (loss) | — | 7 | 9 | 16 | |||||||||||||||||||||||||||||||
| Losses and loss adjustment expenses | (1,464) | (1,509) | 11 | (2,962) | |||||||||||||||||||||||||||||||
| Acquisition expenses | (509) | (571) | (14) | (1,094) | |||||||||||||||||||||||||||||||
| Other operating expenses | (390) | (142) | (100) | (632) | |||||||||||||||||||||||||||||||
| Underwriting income (loss) | $ | 222 | $ | 458 | $ | 496 | 1,176 | ||||||||||||||||||||||||||||
| Net investment income | 441 | ||||||||||||||||||||||||||||||||||
| Net realized gains (losses) | (106) | ||||||||||||||||||||||||||||||||||
| Equity in net income (loss) of investment funds accounted for using the equity method | 117 | ||||||||||||||||||||||||||||||||||
| Other income (loss) | 14 | ||||||||||||||||||||||||||||||||||
| Corporate expenses (2) | (49) | ||||||||||||||||||||||||||||||||||
| Transaction costs and other (2) | (2) | ||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | (47) | ||||||||||||||||||||||||||||||||||
| Interest expense | (65) | ||||||||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | (23) | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes and income (loss) from operating affiliates | 1,456 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (131) | ||||||||||||||||||||||||||||||||||
| Income (loss) from operating affiliates | 61 | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch | 1,386 | ||||||||||||||||||||||||||||||||||
| Preferred dividends | (20) | ||||||||||||||||||||||||||||||||||
| Net income (loss) available to Arch common shareholders | $ | 1,366 | |||||||||||||||||||||||||||||||||
| Underwriting Ratios | |||||||||||||||||||||||||||||||||||
| Loss ratio | 56.6 | % | 56.5 | % | (1.9) | % | 50.6 | % | |||||||||||||||||||||||||||
| Acquisition expense ratio | 19.7 | % | 21.3 | % | 2.4 | % | 18.7 | % | |||||||||||||||||||||||||||
| Other operating expense ratio | 15.1 | % | 5.3 | % | 17.0 | % | 10.8 | % | |||||||||||||||||||||||||||
| Combined ratio | 91.4 | % | 83.1 | % | 17.5 | % | 80.1 | % | |||||||||||||||||||||||||||
(1) Certain assumed and ceded amounts related to intersegment transactions are included in individual segment results. Accordingly, the sum of such transactions for each segment does not agree to the total due to eliminations.
(2) Certain expenses have been excluded from ‘corporate expenses’ and reflected in ‘transaction costs and other.’
| ARCH CAPITAL | 16 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Reserve for Losses and Loss Adjustment Expenses
The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and ending reserve for losses and loss adjustment expenses:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Reserve for losses and loss adjustment expenses at beginning of period | $ | 23,705 | $ | 20,758 | $ | 22,752 | $ | 20,032 | |||||||||||||||
| Unpaid losses and loss adjustment expenses recoverable | 7,069 | 6,347 | 6,690 | 6,280 | |||||||||||||||||||
| Net reserve for losses and loss adjustment expenses at beginning of period | 16,636 | 14,411 | 16,062 | 13,752 | |||||||||||||||||||
| Net incurred losses and loss adjustment expenses relating to losses occurring in: | |||||||||||||||||||||||
| Current year | 1,948 | 1,612 | 3,800 | 3,219 | |||||||||||||||||||
| Prior years | (121) | (121) | (245) | (257) | |||||||||||||||||||
| Total net incurred losses and loss adjustment expenses | 1,827 | 1,491 | 3,555 | 2,962 | |||||||||||||||||||
| Net losses and loss adjustment expense reserves of acquired business (1) | 50 | — | 50 | — | |||||||||||||||||||
| Net foreign exchange (gains) losses and other | (10) | 44 | (94) | 99 | |||||||||||||||||||
| Net paid losses and loss adjustment expenses relating to losses occurring in: | |||||||||||||||||||||||
| Current year | (193) | (215) | (285) | (355) | |||||||||||||||||||
| Prior years | (927) | (857) | (1,905) | (1,584) | |||||||||||||||||||
| Total net paid losses and loss adjustment expenses | (1,120) | (1,072) | (2,190) | (1,939) | |||||||||||||||||||
| Net reserve for losses and loss adjustment expenses at end of period | 17,383 | 14,874 | 17,383 | 14,874 | |||||||||||||||||||
| Unpaid losses and loss adjustment expenses recoverable | 7,083 | 6,394 | 7,083 | 6,394 | |||||||||||||||||||
| Reserve for losses and loss adjustment expenses at end of period | $ | 24,466 | $ | 21,268 | $ | 24,466 | $ | 21,268 |
(1) The 2024 second quarter amount related to the acquisition of RMIC Companies, Inc., and its wholly-owned subsidiaries (“RMIC”) that, together, comprise the run-off mortgage insurance business of Old Republic International Corporation.
Development on Prior Year Loss Reserves
2024 Second Quarter
During the 2024 second quarter, the Company recorded net favorable development on prior year loss reserves of $121 million, which consisted of $5 million from the insurance segment, $34 million from the reinsurance segment and $82 million from the mortgage segment.
The insurance segment’s net favorable development of $5 million, or 0.3 loss ratio points, for the 2024 second quarter consisted of $45 million of net favorable development in short-tailed lines and $40 million of net adverse development in medium and long-tailed lines. Net favorable development in short-tailed lines included $36 million of favorable development in property (excluding marine), primarily from the 2022 and 2023 accident years (i.e., the year in which a loss occurred), and $8 million of favorable development related to travel and accident business, primarily from the 2023 accident year. Net adverse development in medium and long tailed lines included $52 million of adverse development in marine business, primarily from the 2022 accident year, and $9 million of adverse development in programs business, primarily from the 2022 and 2023 accident years, partially
offset by $20 million of net favorable development in surety business, primarily from the 2007 and 2021 to 2023 accident years.
The reinsurance segment’s net favorable development of $34 million, or 1.9 loss ratio points, for the 2024 second quarter consisted of $51 million of net favorable development in short-tailed lines and $17 million of net adverse development in medium and long-tailed lines. Net favorable development in short-tailed lines included $30 million of favorable development related to property other than property catastrophe business, primarily from the 2022 and 2023 underwriting years (i.e., all premiums and losses attributable to contracts having an inception or renewal date within the given 12 month period), and $18 million of favorable development from property catastrophe business, primarily from the 2021 to 2023 underwriting years. Net adverse development in medium and long-tailed lines reflected $14 million of adverse development in casualty business, primarily from the 2011, 2017, 2020 and 2021 underwriting years.
| ARCH CAPITAL | 17 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The mortgage segment’s net favorable development was $82 million, or 26.9 loss ratio points, for the 2024 second quarter. Such amounts were primarily related to reductions on reserves for delinquent loans associated with the U.S. first lien portfolio from the 2023 accident year. The Company’s credit risk transfer and international businesses also contributed to the favorable development.
2023 Second Quarter
During the 2023 second quarter, the Company recorded net favorable development on prior year loss reserves of $121 million, which consisted of $12 million from the insurance segment, $29 million from the reinsurance segment and $80 million from the mortgage segment.
The insurance segment’s net favorable development of $12 million, or 0.9 loss ratio points, for the 2023 second quarter consisted of $30 million of net favorable development in short-tailed and long-tailed lines and $18 million of net adverse development in medium-tailed lines. Net favorable development in short-tailed lines included $16 million of favorable development in property (excluding marine), primarily from the 2022 accident year, and $7 million of favorable development in warranty and lenders solutions, primarily from the 2022 accident year. Net favorable development in long-tailed lines included $6 million of favorable development in executive assurance business, primarily from the 2016 and 2021 accident years. Net adverse development in medium-tailed lines included $8 million of adverse development in programs business, primarily from 2020 accident year, $5 million of adverse development in professional liability, across multiple accident years, and $4 million of adverse development in marine business, primarily from the 2022 accident year.
The reinsurance segment’s net favorable development of $29 million, or 2.2 loss ratio points, for the 2023 second quarter consisted of $51 million of net favorable development in short-tailed and medium-tailed lines and $22 million of net adverse development in long-tailed lines. Net favorable development in short-tailed lines included $23 million of favorable development related to property other than property catastrophe business, primarily from the 2021 underwriting year, and $21 million of favorable development related to other specialty and other short-tailed lines, primarily from the 2020 and 2021 underwriting years. Net favorable development in medium-tailed lines included $7 million in marine and aviation lines, primarily from the 2019 to 2022 underwriting years. Net adverse development in long-tailed lines reflected $22 million of adverse development in casualty business, primarily from the 2013 to 2019 underwriting years.
The mortgage segment’s net favorable development was $80 million, or 27.2 loss ratio points, for the 2023 second quarter. Such amounts were primarily related to reductions on reserves for delinquent loans associated with the U.S. first lien portfolio from the 2020 to 2022 accident years. The Company’s credit risk transfer and international businesses also contributed to the favorable development.
Six Months Ended June 30, 2024
During the six months ended June 30, 2024, the Company recorded net favorable development on prior year loss reserves of $245 million, which consisted of $15 million from the insurance segment, $74 million from the reinsurance segment and $156 million from the mortgage segment.
The insurance segment’s net favorable development of $15 million, or 0.5 loss ratio points, for the 2024 period consisted of $74 million of net favorable development in short-tailed lines and $59 million of net adverse development in medium and long-tailed lines. Net favorable development in short-tailed lines reflected $54 million of favorable development in property (excluding marine), primarily from the 2022 and 2023 accident years, and $18 million of favorable development related to travel and accident business, primarily from the 2021 to 2023 accident years. Net adverse development in medium-tailed lines included $69 million of adverse development in marine business, primarily from the 2022 accident year, and $17 million of adverse development in programs business, primarily from the 2020 to 2023 accident years. Such amounts were partially offset by $25 million of favorable development in surety business, primarily from 2007 and 2022 accident years.
The reinsurance segment’s net favorable development of $74 million, or 2.2 loss ratio points, for the 2024 period consisted of $95 million of net favorable development from short tailed lines, partially offset by $21 million of net adverse development from medium and long-tailed lines. Net favorable development in short-tailed lines reflected $51 million of favorable development from property other than property catastrophe business, primarily from the 2022 and 2023 underwriting years, $37 million of favorable development from other specialty business, primarily from the 2021 and 2022 underwriting years, and $10 million of favorable development from property catastrophe, primarily from the 2020 to 2022 underwriting years. Net adverse development in medium-tailed lines included $5 million of adverse development in marine and aviation lines, primarily from the 2023 underwriting year, while net adverse development in long-tailed lines included $17 million of adverse development in casualty, primarily from the 2017 and prior underwriting years.
| ARCH CAPITAL | 18 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The mortgage segment’s net favorable development was $156 million, or 25.6 loss ratio points, for the 2024 period, with the largest contributor being reserve releases associated with the U.S. first lien portfolio from the 2022 and 2023 accident years. The Company’s credit risk transfer and international businesses also contributed to the favorable development.
Six Months Ended June 30, 2023
During the six months ended June 30, 2023, the Company recorded net favorable development on prior year loss reserves of $257 million, which consisted of $24 million from the insurance segment, $82 million from the reinsurance segment, $151 million from the mortgage segment.
The insurance segment’s net favorable development of $24 million, or 0.9 loss ratio points, for the 2023 period consisted of $55 million of net favorable development in short and long-tailed lines and $31 million of net adverse development in medium-tailed lines. Net favorable development in short-tailed lines reflected $25 million of favorable development in property (excluding marine), primarily from the 2022 accident year, and $14 million of favorable development related to warranty and lenders solutions business, primarily from the 2022 accident year. Net favorable development in long-tailed lines included $16 million of favorable development in executive assurance business, primarily from the 2019 to 2022 accident years, and $5 million of favorable development in alternative markets business, primarily from 2021 and prior accident years, partially offset by $5 million of adverse development in healthcare, primarily from the 2018 and 2021 accident years. Net adverse development in medium-tailed lines included $24 million of adverse development in professional liability business, primarily from the 2017 and 2020 accident years, and $6 million of adverse development in programs business, primarily from the 2020 accident year.
The reinsurance segment’s net favorable development of $82 million, or 3.0 loss ratio points, for the 2023 period consisted of $103 million of net favorable development from short and medium-tailed lines, partially offset by $21 million of net adverse development from long-tailed lines. Net favorable development in short-tailed lines reflected $46 million of favorable development from property other than property catastrophe business, primarily from the 2018 to 2022 underwriting years, $7 million of favorable development from property catastrophe, primarily from the 2019 underwriting year, $27 million from other specialty business, primarily from the 2021 underwriting year, and $13 million of favorable development from other lines of business, primarily from the 2020 underwriting year. Net favorable development in medium-tailed lines included $9 million in marine and aviation lines, primarily from the 2016 to 2021 underwriting years. Net adverse development in
long-tailed lines primarily reflected $19 million in casualty, primarily from the 2013 to 2019 underwriting years.
The mortgage segment’s net favorable development was $151 million, or 25.6 loss ratio points, for the 2023 period, with the largest contributor being reserve releases associated with the U.S. first lien portfolio from the 2020 to 2022 accident years. The Company’s credit risk transfer, international, second lien and student loan businesses also contributed to the favorable development.
6. Allowance for Expected Credit Losses
Premiums Receivable
The following table provides a roll forward of the allowance for expected credit losses of the Company’s premium receivables:
| Premium Receivables, Net of Allowance | Allowance for Expected Credit Losses | ||||||||||
| Three Months Ended June 30, 2024 | |||||||||||
| Balance at beginning of period | $ | 5,765 | $ | 32 | |||||||
| Change for provision of expected credit losses (1) | $ | 4 | |||||||||
| Balance at end of period | $ | 6,268 | $ | 36 | |||||||
| Three Months Ended June 30, 2023 | |||||||||||
| Balance at beginning of period | $ | 4,513 | $ | 36 | |||||||
| Change for provision of expected credit losses (1) | $ | (2) | |||||||||
| Balance at end of period | $ | 5,296 | $ | 34 | |||||||
| Six Months Ended June 30, 2024 | |||||||||||
| Balance at beginning of period | $ | 4,644 | $ | 34 | |||||||
| Change for provision of expected credit losses (1) | 2 | ||||||||||
| Balance at end of period | $ | 6,268 | $ | 36 | |||||||
| Six Months Ended June 30, 2023 | |||||||||||
| Balance at beginning of period | $ | 3,625 | $ | 35 | |||||||
| Change for provision of expected credit losses (1) | (1) | ||||||||||
| Balance at end of period | $ | 5,296 | $ | 34 |
(1)Amounts deemed uncollectible are written-off in operating expenses. For the 2024 second quarter and 2023 second quarter, amounts written off were nil and $1 million, respectively. For the six months ended June 30, 2024 and 2023 period, amounts written off were nil and $2 million, respectively.
| ARCH CAPITAL | 19 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Reinsurance Recoverables
The following table provides a roll forward of the allowance for expected credit losses of the Company’s reinsurance recoverables:
| Reinsurance Recoverables, Net of Allowance | Allowance for Expected Credit Losses | |||||||||||||
| Three Months Ended June 30, 2024 | ||||||||||||||
| Balance at beginning of period | $ | 7,509 | $ | 16 | ||||||||||
| Change for provision of expected credit losses | 4 | |||||||||||||
| Balance at end of period | $ | 7,473 | $ | 20 | ||||||||||
| Three Months Ended June 30, 2023 | ||||||||||||||
| Balance at beginning of period | $ | 6,612 | $ | 21 | ||||||||||
| Change for provision of expected credit losses | 1 | |||||||||||||
| Balance at end of period | $ | 6,717 | $ | 22 | ||||||||||
| Six Months Ended June 30, 2024 | ||||||||||||||
| Balance at beginning of period | $ | 7,064 | $ | 21 | ||||||||||
| Change for provision of expected credit losses | (1) | |||||||||||||
| Balance at end of period | $ | 7,473 | $ | 20 | ||||||||||
| Six Months Ended June 30, 2023 | ||||||||||||||
| Balance at beginning of period | $ | 6,564 | $ | 22 | ||||||||||
| Change for provision of expected credit losses | — | |||||||||||||
| Balance at end of period | $ | 6,717 | $ | 22 |
The following table summarizes the Company’s reinsurance recoverables on paid and unpaid losses (not including ceded unearned premiums):
| June 30, | December 31 | ||||||||||
| 2024 | 2023 | ||||||||||
| Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses | $ | 7,473 | $ | 7,064 | |||||||
| % due from carriers with A.M. Best rating of “A-” or better | 66.5 | % | 66.8 | % | |||||||
| % due from all other rated carriers | 0.0 | % | 0.1 | % | |||||||
| % due from all other carriers with no A.M. Best rating (1) | 33.5 | % | 33.1 | % | |||||||
| Largest balance due from any one carrier as % of total shareholders’ equity | 6.9 | % | 7.2 | % |
(1) At June 30, 2024 and December 31, 2023 over 94% and 95% of such amount were collateralized through reinsurance trusts, funds withheld arrangements, letters of credit or other, respectively.
Contractholder Receivables
The following table provides a roll forward of the allowance for expected credit losses of the Company’s contractholder receivables:
| Contract-holder Receivables, Net of Allowance | Allowance for Expected Credit Losses | |||||||||||||
| Three Months Ended June 30, 2024 | ||||||||||||||
| Balance at beginning of period | $ | 1,907 | $ | 3 | ||||||||||
| Change for provision of expected credit losses | 1 | |||||||||||||
| Balance at end of period | $ | 2,016 | $ | 4 | ||||||||||
| Three Months Ended June 30, 2023 | ||||||||||||||
| Balance at beginning of period | $ | 1,750 | $ | 2 | ||||||||||
| Change for provision of expected credit losses | 1 | |||||||||||||
| Balance at end of period | 1,761 | $ | 3 | |||||||||||
| Six Months Ended June 30, 2024 | ||||||||||||||
| Balance at beginning of period | $ | 1,814 | $ | 3 | ||||||||||
| Change for provision of expected credit losses | 1 | |||||||||||||
| Balance at end of period | $ | 2,016 | $ | 4 | ||||||||||
| Six Months Ended June 30, 2023 | ||||||||||||||
| Balance at beginning of period | $ | 1,731 | $ | 3 | ||||||||||
| Change for provision of expected credit losses | — | |||||||||||||
| Balance at end of period | 1,761 | $ | 3 |
| ARCH CAPITAL | 20 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. Investment Information
Available For Sale Investments
The following table summarizes the fair value and cost or amortized cost of the Company’s securities classified as available for sale:
| Estimated Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Expected Credit Losses | Cost or Amortized Cost | |||||||||||||||||||||||||||||||
| June 30, 2024 | |||||||||||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 12,043 | $ | 84 | $ | (430) | $ | (16) | $ | 12,405 | |||||||||||||||||||||||||
| U.S. government and government agencies | 5,287 | 10 | (106) | — | 5,383 | ||||||||||||||||||||||||||||||
| Asset backed securities | 2,800 | 20 | (35) | (8) | 2,823 | ||||||||||||||||||||||||||||||
| Non-U.S. government securities | 2,487 | 21 | (110) | (1) | 2,577 | ||||||||||||||||||||||||||||||
| Commercial mortgage backed securities | 1,160 | 3 | (26) | (2) | 1,185 | ||||||||||||||||||||||||||||||
| Residential mortgage backed securities | 1,186 | 4 | (71) | — | 1,253 | ||||||||||||||||||||||||||||||
| Municipal bonds | 239 | 1 | (18) | — | 256 | ||||||||||||||||||||||||||||||
| Total | 25,202 | 143 | (796) | (27) | 25,882 | ||||||||||||||||||||||||||||||
| Short-term investments | 2,297 | 2 | (1) | — | 2,296 | ||||||||||||||||||||||||||||||
| Total | $ | 27,499 | $ | 145 | $ | (797) | $ | (27) | $ | 28,178 | |||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 10,855 | $ | 157 | $ | (464) | $ | (20) | $ | 11,182 | |||||||||||||||||||||||||
| U.S. government and government agencies | 5,814 | 63 | (86) | — | 5,837 | ||||||||||||||||||||||||||||||
| Asset backed securities | 2,250 | 11 | (55) | (5) | 2,299 | ||||||||||||||||||||||||||||||
| Non-U.S. government securities | 2,062 | 33 | (100) | (1) | 2,130 | ||||||||||||||||||||||||||||||
| Commercial mortgage backed securities | 1,213 | 3 | (34) | (2) | 1,246 | ||||||||||||||||||||||||||||||
| Residential mortgage backed securities | 1,103 | 7 | (66) | — | 1,162 | ||||||||||||||||||||||||||||||
| Municipal bonds | 256 | 1 | (20) | — | 275 | ||||||||||||||||||||||||||||||
| Total | 23,553 | 275 | (825) | (28) | 24,131 | ||||||||||||||||||||||||||||||
| Short-term investments | 2,063 | 1 | (2) | — | 2,064 | ||||||||||||||||||||||||||||||
| Total | $ | 25,616 | $ | 276 | $ | (827) | $ | (28) | $ | 26,195 |
| ARCH CAPITAL | 21 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||
| June 30, 2024 | |||||||||||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 4,542 | $ | (65) | $ | 4,006 | $ | (365) | $ | 8,548 | $ | (430) | |||||||||||||||||||||||
| U.S. government and government agencies | 3,251 | (36) | 763 | (70) | 4,014 | (106) | |||||||||||||||||||||||||||||
| Non-U.S. government securities | 1,131 | (12) | 813 | (98) | 1,944 | (110) | |||||||||||||||||||||||||||||
| Residential mortgage backed securities | 236 | (3) | 547 | (68) | 783 | (71) | |||||||||||||||||||||||||||||
| Asset backed securities | 104 | (1) | 494 | (34) | 598 | (35) | |||||||||||||||||||||||||||||
| Commercial mortgage backed securities | 187 | (1) | 773 | (25) | 960 | (26) | |||||||||||||||||||||||||||||
| Municipal bonds | 22 | — | 181 | (18) | 203 | (18) | |||||||||||||||||||||||||||||
| Total | 9,473 | (118) | 7,577 | (678) | 17,050 | (796) | |||||||||||||||||||||||||||||
| Short-term investments | 377 | (1) | — | — | 377 | (1) | |||||||||||||||||||||||||||||
| Total | $ | 9,850 | $ | (119) | $ | 7,577 | $ | (678) | $ | 17,427 | $ | (797) | |||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 1,559 | $ | (45) | $ | 4,959 | $ | (419) | $ | 6,518 | $ | (464) | |||||||||||||||||||||||
| U.S. government and government agencies | 1,066 | (10) | 941 | (76) | 2,007 | (86) | |||||||||||||||||||||||||||||
| Non-U.S. government securities | 365 | (4) | 897 | (96) | 1,262 | (100) | |||||||||||||||||||||||||||||
| Residential mortgage backed securities | 221 | (3) | 522 | (63) | 743 | (66) | |||||||||||||||||||||||||||||
| Asset backed securities | 234 | (1) | 1,112 | (54) | 1,346 | (55) | |||||||||||||||||||||||||||||
| Commercial mortgage backed securities | 100 | (1) | 909 | (33) | 1,009 | (34) | |||||||||||||||||||||||||||||
| Municipal bonds | 20 | (1) | 215 | (19) | 235 | (20) | |||||||||||||||||||||||||||||
| Total | 3,565 | (65) | 9,555 | (760) | 13,120 | (825) | |||||||||||||||||||||||||||||
| Short-term investments | 302 | (2) | — | — | 302 | (2) | |||||||||||||||||||||||||||||
| Total | $ | 3,867 | $ | (67) | $ | 9,555 | $ | (760) | $ | 13,422 | $ | (827) |
At June 30, 2024, on a lot level basis, approximately 9,510 security lots out of a total of approximately 18,390 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $5 million. At December 31, 2023, on a lot level basis, approximately 7,100 security lots out of a total of approximately 15,720 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity portfolio was $6 million.
The contractual maturities of the Company’s fixed maturities are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| June 30, 2024 | December 31, 2023 | |||||||||||||||||||||||||
| Maturity | Estimated Fair Value | Amortized Cost | Estimated Fair Value | Amortized Cost | ||||||||||||||||||||||
| Due in one year or less | $ | 600 | $ | 618 | $ | 480 | $ | 499 | ||||||||||||||||||
| Due after one year through five years | 13,426 | 13,711 | 12,924 | 13,101 | ||||||||||||||||||||||
| Due after five years through 10 years | 5,673 | 5,899 | 5,249 | 5,450 | ||||||||||||||||||||||
| Due after 10 years | 357 | 393 | 334 | 374 | ||||||||||||||||||||||
| 20,056 | 20,621 | 18,987 | 19,424 | |||||||||||||||||||||||
| Residential mortgage backed securities | 1,186 | 1,253 | 1,103 | 1,162 | ||||||||||||||||||||||
| Commercial mortgage backed securities | 1,160 | 1,185 | 1,213 | 1,246 | ||||||||||||||||||||||
| Asset backed securities | 2,800 | 2,823 | 2,250 | 2,299 | ||||||||||||||||||||||
| Total | $ | 25,202 | $ | 25,882 | $ | 23,553 | $ | 24,131 |
| ARCH CAPITAL | 22 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Equity Securities, at Fair Value
At June 30, 2024, the Company held $1.4 billion of equity securities, at fair value, compared to $1.2 billion at December 31, 2023. Such holdings include publicly traded common stocks primarily in the consumer cyclical and non-cyclical, technology, communication and financial sectors and exchange-traded funds in fixed income, equity and other sectors.
Other Investments, at Fair Value
The following table summarizes the Company’s other investments:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Other investments | $ | 2,189 | $ | 1,777 | |||||||
| Fixed maturities | 973 | 683 | |||||||||
| Short term investments | 37 | 21 | |||||||||
| Equity securities | 7 | 7 | |||||||||
| Total | $ | 3,206 | $ | 2,488 |
The following table summarizes the Company’s other investments, as detailed in the previous table, by strategy:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Lending | $ | 401 | $ | 427 | |||||||
| Investment grade fixed income | 848 | 754 | |||||||||
| Term loan investments | 599 | 272 | |||||||||
| Private equity | 208 | 182 | |||||||||
| Credit related funds | 114 | 124 | |||||||||
| Energy | 19 | 18 | |||||||||
| Total | $ | 2,189 | $ | 1,777 |
Net Investment Income
The components of net investment income were derived from the following sources:
| June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Three Months Ended | |||||||||||
| Fixed maturities | $ | 306 | $ | 214 | |||||||
| Short term investments | 35 | 15 | |||||||||
| Equity securities | 10 | 6 | |||||||||
| Other (1) | 35 | 25 | |||||||||
| Gross investment income | 386 | 260 | |||||||||
| Investment expenses | (22) | (18) | |||||||||
| Net investment income | $ | 364 | $ | 242 | |||||||
| Six Months Ended | |||||||||||
| Fixed maturities | $ | 586 | $ | 402 | |||||||
| Short term investments | 64 | 29 | |||||||||
| Equity securities | 18 | 10 | |||||||||
| Other (1) | 68 | 38 | |||||||||
| Gross investment income | 736 | 479 | |||||||||
| Investment expenses | (45) | (38) | |||||||||
| Net investment income | $ | 691 | $ | 441 |
(1) Amounts include dividends and other distributions on investment funds, term loan investments, funds held balances, cash balances and other items.
| ARCH CAPITAL | 23 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net Realized Gains (Losses)
Net realized gains (losses), which include changes in the allowance for credit losses on financial assets and net impairment losses recognized in earnings were as follows:
| June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Three Months Ended | |||||||||||
| Available for sale securities: | |||||||||||
| Gross gains on investment sales | $ | 13 | $ | 22 | |||||||
| Gross losses on investment sales | (77) | (169) | |||||||||
| Change in fair value of assets and liabilities accounted for using the fair value option: | |||||||||||
| Fixed maturities | (4) | (2) | |||||||||
| Other investments | (28) | 5 | |||||||||
| Equity securities, at fair value: | |||||||||||
| Net realized gains (losses) on sales during the period | 5 | 17 | |||||||||
| Net unrealized gains (losses) on equity securities still held at reporting date | 7 | 25 | |||||||||
| Allowance for credit losses: | |||||||||||
| Investments related | 4 | (7) | |||||||||
| Underwriting related | (3) | (1) | |||||||||
| Derivative instruments (1) | 1 | (15) | |||||||||
| Other (2) | 204 | 2 | |||||||||
| Net realized gains (losses) | $ | 122 | $ | (123) | |||||||
| Six Months Ended | |||||||||||
| Available for sale securities: | |||||||||||
| Gross gains on investment sales | $ | 63 | $ | 39 | |||||||
| Gross losses on investment sales | (155) | (280) | |||||||||
| Change in fair value of assets and liabilities accounted for using the fair value option: | |||||||||||
| Fixed maturities | (2) | 4 | |||||||||
| Other investments | (30) | 14 | |||||||||
| Equity securities | — | 1 | |||||||||
| Equity securities, at fair value: | |||||||||||
| Net realized gains (losses) on sales during the period | 16 | 36 | |||||||||
| Net unrealized gains (losses) on equity securities still held at reporting date | 89 | 63 | |||||||||
| Allowance for credit losses: | |||||||||||
| Investments related | (2) | (23) | |||||||||
| Underwriting related | (2) | (1) | |||||||||
| Derivative instruments (1) | (9) | 41 | |||||||||
| Other (2) | 221 | — | |||||||||
| Net realized gains (losses) | $ | 189 | $ | (106) |
(1) See note 9 for information on the Company’s derivative instruments.
(2) Amounts include benefits from the sale of Castel Underwriting Agencies Limited. and the acquisition of RMIC.
Investments Accounted For Using the Equity Method
The following table summarizes the Company’s investments accounted for using the equity method, by strategy:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Private equity | $ | 1,562 | $ | 1,175 | |||||||
| Credit related funds | 1,350 | 1,258 | |||||||||
| Real estate | 693 | 666 | |||||||||
| Lending | 483 | 597 | |||||||||
| Fixed income | 339 | 277 | |||||||||
| Infrastructure | 320 | 320 | |||||||||
| Equities | 162 | 178 | |||||||||
| Energy | 74 | 95 | |||||||||
| Total | $ | 4,983 | $ | 4,566 |
Certain of the Company’s other investments are in investment funds for which the Company has the option to redeem at agreed upon values as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investments in investment funds may be redeemed daily, monthly, quarterly or on other terms. Two common redemption restrictions which may impact the Company’s ability to redeem these investment funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the investment fund’s net assets which may otherwise hinder the general partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. If the investment funds are eligible to be redeemed, the time to redeem such fund can take weeks or months following the notification.
Limited Partnership Interests
In the normal course of its activities, the Company invests in limited partnerships as part of its overall investment strategy. Such amounts are included in ‘investments accounted for using the equity method’ and ‘investments accounted for using the fair value option.’ The Company has determined that it is not required to consolidate these investments because it is not the primary beneficiary of the funds. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment.
| ARCH CAPITAL | 24 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes investments in limited partnership interests where the Company has a variable interest by balance sheet line item:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Investments accounted for using the equity method (1) | $ | 4,983 | $ | 4,566 | |||||||
| Investments accounted for using the fair value option (2) | 82 | 114 | |||||||||
| Total | $ | 5,065 | $ | 4,680 |
(1) Aggregate unfunded commitments were $3.5 billion at June 30, 2024, compared with $3.4 billion at December 31, 2023.
(2) Aggregate unfunded commitments were $21 million at June 30, 2024, compared to $32 million at December 31, 2023.
Equity in Net Income (Loss) of Investment Funds Accounted for Using the Equity Method
Income from investment funds accounted for using the equity method for the 2024 second quarter was $167 million, compared to $69 million for the 2023 second quarter and an income of $266 million for the six months ended June 30, 2024, compared to income of $117 million for six months ended June 30, 2023. In applying the equity method, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds.
Investments in Operating Affiliates
Investments in which the Company has significant influence over the operating and financial policies are classified as ‘investments in operating affiliates’ on the Company’s balance sheets and are accounted for under the equity method. Such investments primarily include the Company’s investment in Coface SA (“Coface”), Greysbridge Holdings Ltd., (“Greysbridge”) and Premia Holdings Ltd. Investments in Coface and Premia Holdings Ltd. are generally recorded on a three month lag, while the Company’s investment in Greysbridge is not recorded on a lag.
As of June 30, 2024, the Company owned approximately 29.9% of the issued shares of Coface, or 30% excluding treasury shares, with a carrying value of $543 million, compared to $570 million at December 31, 2023.
As of June 30, 2024, the Company owned 40% of Greysbridge with a carrying value of $484 million, compared to $430 million at December 31, 2023.
Income from operating affiliates for the 2024 second quarter was $45 million, compared to $22 million for the 2023 second quarter and income of $100 million for the six months ended June 30, 2024, compared to income of $61 million for six months ended June 30, 2023
See note 15 for information on Company’s transactions with related parties.
| ARCH CAPITAL | 25 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Allowance for Expected Credit Losses
The following table provides a roll forward of the allowance for expected credit losses of the Company’s securities classified as available for sale:
| Structured Securities (1) | Corporate Bonds | Non-U.S. Government Securities | Total | |||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2024 | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 7 | $ | 24 | $ | 1 | $ | 32 | ||||||||||||||||||||||||||||||
| Additions for current-period provision for expected credit losses | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Additions (reductions) for previously recognized expected credit losses | 3 | (6) | — | (3) | ||||||||||||||||||||||||||||||||||
| Reductions due to disposals | — | (2) | — | (2) | ||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 10 | $ | 16 | $ | 1 | $ | 27 | ||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 8 | $ | 45 | $ | 3 | $ | 56 | ||||||||||||||||||||||||||||||
| Additions for current-period provision for expected credit losses | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Additions (reductions) for previously recognized expected credit losses | — | 6 | — | 6 | ||||||||||||||||||||||||||||||||||
| Reductions due to disposals | — | (1) | — | (1) | ||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 8 | $ | 50 | $ | 3 | $ | 61 | ||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2024 | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 7 | $ | 20 | $ | 1 | $ | 28 | ||||||||||||||||||||||||||||||
| Additions for current-period provision for expected credit losses | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Additions (reductions) for previously recognized expected credit losses | 3 | (1) | — | 2 | ||||||||||||||||||||||||||||||||||
| Reductions due to disposals | — | (3) | — | (3) | ||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 10 | $ | 16 | $ | 1 | $ | 27 | ||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 9 | $ | 30 | $ | 2 | $ | 41 | ||||||||||||||||||||||||||||||
| Additions for current-period provision for expected credit losses | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||
| Additions (reductions) for previously recognized expected credit losses | (1) | 21 | 1 | 21 | ||||||||||||||||||||||||||||||||||
| Reductions due to disposals | — | (2) | — | (2) | ||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 8 | $ | 50 | $ | 3 | $ | 61 |
(1) Includes asset backed securities, residential mortgage backed securities and commercial mortgage backed securities.
| ARCH CAPITAL | 26 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Restricted Assets
The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its underwriting operations. The Company’s subsidiaries maintain assets in trust accounts as collateral for transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See note 18, “Commitments and Contingencies,” of the notes to consolidated financial statements in the Company’s 2023 Form 10-K.
The following table details the value of the Company’s restricted assets:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Assets used for collateral or guarantees: | |||||||||||
| Affiliated transactions | $ | 5,092 | $ | 4,854 | |||||||
| Third party agreements | 2,778 | 2,869 | |||||||||
| Deposits with U.S. regulatory authorities | 849 | 833 | |||||||||
| Other (1) | 1,367 | 1,376 | |||||||||
| Total restricted assets | $ | 10,086 | $ | 9,932 |
(1) Primarily includes Funds at Lloyds, deposits with non-U.S. regulatory authorities and other restricted assets.
Reconciliation of Cash and Restricted Cash
The following table details reconciliation of cash and restricted cash within the Consolidated Balance Sheets:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Cash | $ | 1,020 | $ | 917 | |||||||
| Restricted cash (included in ‘other assets’) | 607 | 581 | |||||||||
| Cash and restricted cash | $ | 1,627 | $ | 1,498 |
| ARCH CAPITAL | 27 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. Fair Value
Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement (Level 1 being the highest priority and Level 3 being the lowest priority).
The levels in the hierarchy are defined as follows:
| Level 1: | Inputs to the valuation methodology are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets | |||||||
| Level 2: | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument | |||||||
| Level 3: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement |
Following is a description of the valuation methodologies used for securities measured at fair value, as well as the general classification of such securities pursuant to the valuation hierarchy. The Company reviews its securities measured at fair value and discusses the proper classification of such investments with investment advisers and others.
The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity investments. To validate the techniques or models used by pricing sources, the Company's review process includes, but
is not limited to: (i) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (ii) a review of the average number of prices obtained in the pricing process and the range of resulting fair values; (iii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; (iv) a comparison of the fair value estimates to the Company’s knowledge of the current market; (v) a comparison of the pricing services' fair values to other pricing services' fair values for the same investments; and (vi) periodic back-testing, which includes randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates from the pricing service. A price source hierarchy was maintained in order to determine which price source would be used (i.e., a price obtained from a pricing service with more seniority in the hierarchy will be used over a less senior one in all cases). The hierarchy prioritizes pricing services based on availability and reliability and assigns the highest priority to index providers. Based on the above review, the Company will challenge any prices for a security or portfolio which are considered not to be representative of fair value. The Company did not adjust any of the prices obtained from the independent pricing sources at June 30, 2024.
In certain circumstances, when fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Such quotes are subject to the validation procedures noted above. Where quotes are unavailable, fair value is determined by the Investment Manager using quantitative and qualitative assessments such as internally modeled values. Of the $32.3 billion of financial assets and liabilities measured at fair value at June 30, 2024, approximately $73 million, or 0.2%, were priced using non-binding broker-dealer quotes or modeled valuations. Of the $29.6 billion of financial assets and liabilities measured at fair value at December 31, 2023, approximately $14 million, or 0.0%, were priced using non-binding broker-dealer quotes or modeled valuations.
Fixed maturities
The Company uses the market approach valuation technique to estimate the fair value of its fixed maturity securities, when possible. The market approach includes obtaining prices from independent pricing services, such as index providers and pricing vendors, as well as to a lesser extent quotes from broker-dealers. The independent pricing sources obtain market quotations and actual transaction prices for securities that have quoted prices in active markets. Each source has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing source uses observable market inputs
| ARCH CAPITAL | 28 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.
The following describes the significant inputs generally used to determine the fair value of the Company’s fixed maturity securities by asset class:
U.S. government and government agencies – valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The Company determined that all U.S. Treasuries would be classified as Level 1 securities due to observed levels of trading activity, the high number of strongly correlated pricing quotes received on U.S. Treasuries and other factors. The fair values of U.S. government agency securities are generally determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.
Corporate bonds – valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. As the significant inputs used in the pricing process for corporate bonds are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
Municipal bonds – valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.
Residential mortgage-backed securities – valuations provided by independent pricing services, substantially all through pricing vendors and index providers with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the expected average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review
prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2. A small number of securities are included in Level 3 due to a low level of transparency on the inputs used in the pricing process.
Commercial mortgage-backed securities – valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for commercial mortgage-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.
Non-U.S. government securities – valuations provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally based on international indices or valuation models which include daily observed yield curves, cross-currency basis index spreads and country credit spreads. As the significant inputs used in the pricing process for non-U.S. government securities are observable market inputs, the fair value of these securities are classified within Level 2.
Asset-backed securities – valuations provided by independent pricing services, substantially all through index providers and pricing vendors with a small amount through broker-dealers. The fair values of these securities are generally determined through the use of pricing models (including Option Adjusted Spread) which use spreads to determine the appropriate average life of the securities. These spreads are generally obtained from the new issue market, secondary trading and from broker-dealers who trade in the relevant security market. The pricing services also review prepayment speeds and other indicators, when applicable. As the significant inputs used in the pricing process for asset-backed securities are observable market inputs, the fair value of these securities are classified within Level 2.
| ARCH CAPITAL | 29 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Equity securities
The Company determined that exchange-traded equity securities would be included in Level 1 as their fair values are based on quoted market prices in active markets. Certain equity securities are included in Level 2 of the valuation hierarchy as the significant inputs used in the pricing process for such securities are observable market inputs. Other equity securities are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these securities are unobservable, the fair value of such securities are classified as Level 3.
Other investments
The Company’s other investments include term loan investments for which fair values are estimated by using quoted prices of term loan investments with similar characteristics, pricing models or matrix pricing. Such investments are generally classified within Level 2. The fair values for certain of the Company’s other investments are determined using net asset values as advised by external fund managers. The net asset value is based on the fund manager’s valuation of the underlying holdings in accordance with the fund’s governing documents. In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. A small number of securities are included in Level 3 due to the lack of an available independent price source for such securities.
Derivative instruments
The Company’s futures contracts, foreign currency forward contracts, interest rate swaps and other derivatives trade in the over-the-counter derivative market. The Company uses the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used in the pricing process for these derivative instruments are observable market inputs, the fair value of these securities are classified within Level 2.
Short-term investments
The Company determined that certain of its short-term investments held in highly liquid money market-type funds, Treasury bills and commercial paper would be included in Level 1 as their fair values are based on quoted market prices in active markets. The fair values of certain short-term investments are generally determined using the spread above the risk-free yield curve and are classified within Level 2. Other short-term investments are included in Level 3 due to the lack of an available independent price source for such securities. As the significant inputs used to price these short-term securities are unobservable, the fair value of such securities are classified as Level 3.
Residential mortgage loans
The Company’s residential mortgage loans (included in ‘other assets’ in the consolidated balance sheets) include amounts related to the Company’s whole mortgage loan purchase and sell program. Fair values of residential mortgage loans are generally determined based on market prices. As significant inputs used in pricing process for these residential mortgage loans are observable market inputs, the fair value of these securities are classified within Level 2.
Other liabilities
The Company’s other liabilities include contingent and deferred consideration liabilities related to the Company’s acquisitions. Contingent consideration liabilities are remeasured at fair value at each balance sheet date with changes in fair value recognized in ‘net realized gains (losses).’ To determine the fair value of contingent consideration liabilities, the Company estimates the future payments using an income approach based on modeled inputs which include a weighted average cost of capital. Deferred consideration liabilities are measured at fair value on the transaction date. The Company determined that contingent and deferred consideration liabilities would be included within Level 3.
| ARCH CAPITAL | 30 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the Company’s financial assets and liabilities measured at fair value by level at June 30, 2024:
| Estimated Fair Value Measurements Using: | |||||||||||||||||||||||
| Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets measured at fair value: | |||||||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| Corporate bonds | $ | 12,043 | $ | — | $ | 11,883 | $ | 160 | |||||||||||||||
| U.S. government and government agencies | 5,287 | 5,274 | 13 | — | |||||||||||||||||||
| Asset backed securities | 2,800 | — | 2,800 | — | |||||||||||||||||||
| Non-U.S. government securities | 2,487 | — | 2,487 | — | |||||||||||||||||||
| Commercial mortgage backed securities | 1,160 | — | 1,160 | — | |||||||||||||||||||
| Residential mortgage backed securities | 1,186 | — | 1,186 | — | |||||||||||||||||||
| Municipal bonds | 239 | — | 239 | — | |||||||||||||||||||
| Total | 25,202 | 5,274 | 19,768 | 160 | |||||||||||||||||||
| Short-term investments | 2,297 | 2,095 | 105 | 97 | |||||||||||||||||||
| Equity securities, at fair value | 1,397 | 1,363 | 28 | 6 | |||||||||||||||||||
| Derivative instruments (2) | 116 | — | 116 | — | |||||||||||||||||||
| Residential mortgage loans | 2 | — | 2 | — | |||||||||||||||||||
| Fair value option: | |||||||||||||||||||||||
| Corporate bonds | 952 | — | 952 | — | |||||||||||||||||||
| Non-U.S. government bonds | 10 | — | 10 | — | |||||||||||||||||||
| Asset backed securities | — | — | — | — | |||||||||||||||||||
| U.S. government and government agencies | 11 | 11 | — | — | |||||||||||||||||||
| Short-term investments | 37 | 2 | 21 | 14 | |||||||||||||||||||
| Equity securities | 7 | 3 | — | 4 | |||||||||||||||||||
| Other investments | 679 | — | 535 | 144 | |||||||||||||||||||
| Other investments measured at net asset value (1) | 1,510 | ||||||||||||||||||||||
| Total | 3,206 | 16 | 1,518 | 162 | |||||||||||||||||||
| Total assets measured at fair value | $ | 32,220 | $ | 8,748 | $ | 21,537 | $ | 425 | |||||||||||||||
| Liabilities measured at fair value: | |||||||||||||||||||||||
| Other liabilities | $ | (35) | $ | — | $ | — | $ | (35) | |||||||||||||||
| Derivative instruments (2) | (60) | — | (60) | — | |||||||||||||||||||
| Total liabilities measured at fair value | $ | (95) | $ | — | $ | (60) | $ | (35) |
(1) In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
(2) See note 9.
| ARCH CAPITAL | 31 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31, 2023:
| Estimated Fair Value Measurements Using: | |||||||||||||||||||||||
| Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Assets measured at fair value: | |||||||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||
| Fixed maturities: | |||||||||||||||||||||||
| Corporate bonds | $ | 10,855 | $ | — | $ | 10,708 | $ | 147 | |||||||||||||||
| U.S. government and government agencies | 5,814 | 5,792 | 22 | — | |||||||||||||||||||
| Asset backed securities | 2,250 | — | 2,250 | — | |||||||||||||||||||
| Non-U.S. government securities | 2,062 | — | 2,062 | — | |||||||||||||||||||
| Commercial mortgage backed securities | 1,213 | — | 1,213 | — | |||||||||||||||||||
| Residential mortgage backed securities | 1,103 | — | 1,103 | — | |||||||||||||||||||
| Municipal bonds | 256 | — | 256 | — | |||||||||||||||||||
| Total | 23,553 | 5,792 | 17,614 | 147 | |||||||||||||||||||
| Short-term investments | 2,063 | 1,786 | 193 | 84 | |||||||||||||||||||
| Equity securities, at fair value | 1,186 | 1,151 | 30 | 5 | |||||||||||||||||||
| Derivative instruments (2) | 197 | — | 197 | — | |||||||||||||||||||
| Residential mortgage loans | 2 | — | 2 | — | |||||||||||||||||||
| Fair value option: | |||||||||||||||||||||||
| Corporate bonds | 662 | — | 662 | — | |||||||||||||||||||
| Non-U.S. government bonds | 6 | — | 6 | — | |||||||||||||||||||
| Asset backed securities | 2 | — | 2 | — | |||||||||||||||||||
| U.S. government and government agencies | 13 | 13 | — | — | |||||||||||||||||||
| Short-term investments | 21 | — | 11 | 10 | |||||||||||||||||||
| Equity securities | 7 | 3 | — | 4 | |||||||||||||||||||
| Other investments | 316 | — | 210 | 106 | |||||||||||||||||||
| Other investments measured at net asset value (1) | 1,461 | ||||||||||||||||||||||
| Total | 2,488 | 16 | 891 | 120 | |||||||||||||||||||
| Total assets measured at fair value | $ | 29,489 | $ | 8,745 | $ | 18,927 | $ | 356 | |||||||||||||||
| Liabilities measured at fair value: | |||||||||||||||||||||||
| Other liabilities | $ | (22) | $ | — | $ | — | $ | (22) | |||||||||||||||
| Derivative instruments (2) | (119) | — | (119) | — | |||||||||||||||||||
| Total liabilities measured at fair value | $ | (141) | $ | — | $ | (119) | $ | (22) |
(1) In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
(2) See note 9.
| ARCH CAPITAL | 32 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities measured at fair value on a recurring basis using Level 3 inputs:
| Assets | Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| s | Available For Sale | Fair Value Option | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate Bonds | Short-term Investments | Other Investments | Short-term Investments | Equity Securities | Equity Securities | Other Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 160 | $ | 97 | $ | 126 | $ | 17 | $ | 4 | $ | 5 | $ | (22) | |||||||||||||||||||||||||||||||||||||||
| Total gains or (losses) (realized/unrealized) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Included in earnings (1) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Included in other comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Purchases, issuances, sales and settlements | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases | — | — | 30 | 3 | — | 1 | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuances | — | — | — | — | — | — | (13) | ||||||||||||||||||||||||||||||||||||||||||||||
| Sales | — | — | (2) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | — | — | (10) | (6) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Transfers in and/or out of Level 3 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 160 | $ | 97 | $ | 144 | $ | 14 | $ | 4 | $ | 6 | $ | (35) | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 69 | $ | — | $ | 46 | $ | — | $ | 4 | $ | 5 | $ | (14) | |||||||||||||||||||||||||||||||||||||||
| Total gains or (losses) (realized/unrealized) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Included in earnings (1) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Included in other comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Purchases, issuances, sales and settlements | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases | 43 | — | 40 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuances | — | — | — | — | — | — | (5) | ||||||||||||||||||||||||||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | (12) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Transfers in and/or out of Level 3 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 100 | $ | — | $ | 86 | $ | — | $ | 4 | $ | 5 | $ | (19) | |||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 147 | $ | 84 | $ | 106 | $ | 10 | $ | 4 | $ | 5 | $ | (22) | |||||||||||||||||||||||||||||||||||||||
| Total gains or (losses) (realized/unrealized) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Included in earnings (1) | — | — | (4) | — | — | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||
| Included in other comprehensive income | 2 | 1 | — | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||
| Purchases, issuances, sales and settlements | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases | 98 | 12 | 60 | 10 | — | 1 | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuances | — | — | — | — | — | — | (13) | ||||||||||||||||||||||||||||||||||||||||||||||
| Sales | — | — | (2) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | (87) | — | (16) | (6) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Transfers in and/or out of Level 3 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 160 | $ | 97 | $ | 144 | $ | 14 | $ | 4 | $ | 6 | $ | (35) | |||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 121 | $ | — | $ | 33 | $ | — | $ | 4 | $ | 4 | $ | (14) | |||||||||||||||||||||||||||||||||||||||
| Total gains or (losses) (realized/unrealized) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Included in earnings (1) | 1 | — | (1) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Included in other comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Purchases, issuances, sales and settlements | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases | 43 | — | 58 | — | — | 1 | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuances | — | — | — | — | — | — | (5) | ||||||||||||||||||||||||||||||||||||||||||||||
| Sales | — | — | (4) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Settlements | (65) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Transfers in and/or out of Level 3 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | 100 | $ | — | $ | 86 | $ | — | $ | 4 | $ | 5 | $ | (19) |
(1) Gains or losses were included in net realized gains (losses).
| ARCH CAPITAL | 33 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Financial Instruments Disclosed, But Not Carried, At Fair Value
The Company uses various financial instruments in the normal course of its business. The carrying values of cash, accrued investment income, receivable for securities sold, certain other assets, payable for securities purchased and certain other liabilities approximated their fair values at June 30, 2024, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
At June 30, 2024, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.7 billion and had a fair value of $2.4 billion. At December 31, 2023, the Company’s senior notes were carried at their cost, net of debt issuance costs, of $2.7 billion and had a fair value of $2.5 billion. The fair values of the senior notes were obtained from a third party pricing service and are based on observable market inputs. As such, the fair values of the senior notes are classified within Level 2.
9. Derivative Instruments
The Company’s investment strategy allows for the use of derivative instruments. The Company’s derivative instruments are recorded on its consolidated balance sheets at fair value. The Company utilizes exchange traded U.S. Treasury note, Eurodollar and other futures contracts and commodity futures to manage portfolio duration or replicate investment positions in its portfolios and the Company routinely utilizes foreign currency forward contracts, currency options, index futures contracts and other derivatives as part of its total return objective. In addition, certain of the Company’s investments are managed in portfolios which incorporate the use of foreign currency forward contracts which are intended to provide an economic hedge against foreign currency movements.
From time to time, the Company purchases to-be-announced mortgage backed securities (“TBAs”) as part of its investment strategy. TBAs represent commitments to purchase a future issuance of agency mortgage backed securities. For the period between purchase of a TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative. The Company purchases TBAs in both long and short positions to enhance investment performance and as part of its overall investment strategy.
The following table summarizes information on the fair values and notional values of the Company’s derivative instruments:
| Estimated Fair Value | |||||||||||||||||
| Asset Derivatives (1) | Liability Derivatives (1) | Notional Value (2) | |||||||||||||||
| June 30, 2024 | |||||||||||||||||
| Futures contracts | $ | 68 | $ | (11) | $ | 3,395 | |||||||||||
| Foreign currency forward contracts | 8 | (12) | 1,281 | ||||||||||||||
| Other (3) | 40 | (37) | 420 | ||||||||||||||
| Total | $ | 116 | $ | (60) | |||||||||||||
| December 31, 2023 | |||||||||||||||||
| Futures contracts | $ | 139 | $ | (61) | $ | 3,746 | |||||||||||
| Foreign currency forward contracts | 27 | (32) | 1,224 | ||||||||||||||
| Other (3) | 31 | (26) | 512 | ||||||||||||||
| Total | $ | 197 | $ | (119) |
(1) The fair value of asset derivatives are included in ‘other assets’ and the fair value of liability derivatives are included in ‘other liabilities.’
(2) Represents the absolute notional value of all outstanding contracts, consisting of long and short positions.
(3) Includes swaps, options and other derivatives contracts.
The Company did not hold any derivatives which were designated as hedging instruments at June 30, 2024 or December 31, 2023.
The Company’s derivative instruments can be traded under master netting agreements, which establish terms that apply to all derivative transactions with a counterparty. In the event of a bankruptcy or other stipulated event of default, such agreements provide that the non-defaulting party may elect to terminate all outstanding derivative transactions, in which case all individual derivative positions (loss or gain) with a counterparty are closed out and netted and replaced with a single amount, usually referred to as the termination amount, which is expressed in a single currency. The resulting single net amount, where positive, is payable to the party “in-the-money” regardless of whether or not it is the defaulting party,
unless the parties have agreed that only the non-defaulting party is entitled to receive a termination payment where the net amount is positive and is in its favor. Contractual close-out netting reduces derivatives credit exposure from gross to net exposure.
At June 30, 2024, asset derivatives and liability derivatives of $116 million and $60 million, respectively, were subject to a master netting agreement, compared to $197 million and $119 million, respectively, at December 31, 2023.
| ARCH CAPITAL | 34 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Realized and unrealized contract gains or losses on the Company’s derivative instruments are reflected in ‘net realized gains (losses)’ in the consolidated statements of income, as summarized in the following table:
| Derivatives not designated as | June 30, | |||||||||||||
| hedging instruments: | 2024 | 2023 | ||||||||||||
| Three Months Ended | ||||||||||||||
| Net realized gains (losses): | ||||||||||||||
| Futures contracts | $ | (3) | $ | (25) | ||||||||||
| Foreign currency forward contracts | 2 | 15 | ||||||||||||
| Other (1) | 2 | (5) | ||||||||||||
| Total | $ | 1 | $ | (15) | ||||||||||
| Six Months Ended | ||||||||||||||
| Net realized gains (losses): | ||||||||||||||
| Futures contracts | $ | (17) | $ | 14 | ||||||||||
| Foreign currency forward contracts | 1 | 24 | ||||||||||||
| Other (1) | 7 | 3 | ||||||||||||
| Total | $ | (9) | $ | 41 |
(1) Includes realized gains or losses on swaps, options and other derivatives contracts.
10. Commitments and Contingencies
Investment Commitments
The Company’s investment commitments, which are primarily related to agreements entered into by the Company to invest in funds and separately managed accounts when called upon, were approximately $3.7 billion at June 30, 2024, compared to $3.6 billion at December 31, 2023.
Interest Paid
Interest paid on the Company’s senior notes and other borrowings was $63 million for the six months ended June 30, 2024, consistent with $63 million for the 2023 period.
11. Variable Interest Entities
Bellemeade Re
The Company has entered into aggregate excess of loss mortgage reinsurance agreements with various special purpose reinsurance companies domiciled in Bermuda (the “Bellemeade Agreements”). At the time the Bellemeade Agreements were entered into, the applicability of the accounting guidance that addresses VIEs was evaluated. As a result of the evaluation of the Bellemeade Agreements, the Company concluded that these entities are VIEs. However, given that the ceding insurers do not have the unilateral power to direct those activities that are significant to their economic performance, the Company does not consolidate such entities in its consolidated financial statements. The reinsurance premium paid in regard to the Bellemeade Agreements is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of the period by the coupon rate, which is the SOFR plus a contractual risk margin, less the actual investment income collected during the preceding month on the assets included in the underlying reinsurance trusts. In the event the assets included in the underlying reinsurance trusts became severely impaired or worthless and the special purpose reinsurance companies were unable to meet their future obligations, the Company’s mortgage insurance subsidiaries would be liable to fulfill claim payments to policyholders. The Company’s maximum exposure to loss associated with these VIEs is determined as the amount of mortgage insurance claim payments on the insured policies, net of aggregate reinsurance payments previously received, up to the full aggregate excess of loss reinsurance coverage amounts.
The following table summarizes the total assets of the Bellemeade entities:
| June 30, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bellemeade Entities (Issue Date) | Total VIE Assets | Coverage Remaining from Reinsurers (1) | Total VIE Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019-1 Ltd. (Mar-19) | $ | — | $ | — | $ | 71 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019-3 Ltd. (Jul-19) | — | — | 99 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021-3 Ltd. (Sep-21) | 395 | 104 | 429 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022-1 Ltd. (Jan-22) | 230 | 20 | 256 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022-2 Ltd. (Sep-22) | 201 | 126 | 201 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023-1 Ltd. (Oct-23) | 186 | 47 | 186 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,012 | $ | 297 | $ | 1,242 | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Coverage from a separate panel of reinsurers remaining at June 30, 2024.
| ARCH CAPITAL | 35 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12. Other Comprehensive Income (Loss)
The following tables present details about amounts reclassified from accumulated other comprehensive income and the tax effects allocated to each component of other comprehensive income (loss):
| Amounts Reclassified from AOCI | ||||||||||||||||||||||||||||||||
| Consolidated Statement of Income | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||
| Details About | Line Item That Includes | June 30, | June 30, | |||||||||||||||||||||||||||||
| AOCI Components | Reclassification | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||
| Unrealized appreciation (decline) on available-for-sale investments | ||||||||||||||||||||||||||||||||
| Net realized gains (losses) | $ | (64) | $ | (147) | $ | (92) | $ | (241) | ||||||||||||||||||||||||
| Provision for credit losses | 4 | (7) | (2) | (23) | ||||||||||||||||||||||||||||
| Total before tax | (60) | (154) | (94) | (264) | ||||||||||||||||||||||||||||
| Income tax (expense) benefit | 7 | 5 | 12 | 16 | ||||||||||||||||||||||||||||
| Net of tax | $ | (53) | $ | (149) | $ | (82) | $ | (248) |
| Before Tax Amount | Tax Expense (Benefit) | Net of Tax Amount | |||||||||||||||
| Three Months Ended June 30, 2024 | |||||||||||||||||
| Unrealized appreciation (decline) in value of investments: | |||||||||||||||||
| Unrealized holding gains (losses) arising during period | $ | (36) | $ | (10) | $ | (26) | |||||||||||
| Less reclassification of net realized gains (losses) included in net income | (60) | (7) | (53) | ||||||||||||||
| Foreign currency translation adjustments | (16) | — | (16) | ||||||||||||||
| Other comprehensive income (loss) | $ | 8 | $ | (3) | $ | 11 | |||||||||||
| Three Months Ended June 30, 2023 | |||||||||||||||||
| Unrealized appreciation (decline) in value of investments: | |||||||||||||||||
| Unrealized holding gains (losses) arising during period | $ | (204) | $ | (31) | $ | (173) | |||||||||||
| Less reclassification of net realized gains (losses) included in net income | (154) | (5) | (149) | ||||||||||||||
| Foreign currency translation adjustments | 2 | — | 2 | ||||||||||||||
| Other comprehensive income (loss) | $ | (48) | $ | (26) | $ | (22) | |||||||||||
| Six Months Ended June 30, 2024 | |||||||||||||||||
| Unrealized appreciation (decline) in value of investments: | |||||||||||||||||
| Unrealized holding gains (losses) arising during period | $ | (187) | $ | (20) | $ | (167) | |||||||||||
| Less reclassification of net realized gains (losses) included in net income | (94) | (12) | (82) | ||||||||||||||
| Foreign currency translation adjustments | (49) | — | (49) | ||||||||||||||
| Other comprehensive income (loss) | $ | (142) | $ | (8) | $ | (134) | |||||||||||
| Six Months Ended June 30, 2023 | |||||||||||||||||
| Unrealized appreciation (decline) in value of investments: | |||||||||||||||||
| Unrealized holding gains (losses) arising during period | $ | 77 | $ | 5 | $ | 72 | |||||||||||
| Less reclassification of net realized gains (losses) included in net income | (264) | (16) | (248) | ||||||||||||||
| Foreign currency translation adjustments | 7 | — | 7 | ||||||||||||||
| Other comprehensive income (loss) | $ | 348 | $ | 21 | $ | 327 |
| ARCH CAPITAL | 36 | 2024 SECOND QUARTER FORM 10-Q |
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13. Income Taxes
The Company’s income tax provision on income before income taxes, including income (loss) from operating affiliates, resulted in an effective tax rate of 7.7% for the six months ended June 30, 2024, compared to 8.6% for the six months ended June 30, 2023. The Company’s effective tax rate, which is based upon the expected annual effective tax rate, may fluctuate from period to period based on the relative mix of income or loss reported by jurisdiction and the varying tax rates in each jurisdiction.
The Company had a net deferred tax asset of $1.6 billion at June 30, 2024, consistent with a net deferred tax asset of $1.6 billion at December 31, 2023. In addition, the Company paid $145 million of income taxes for the six months ended June 30, 2024, compared to $73 million of income taxes paid for the six months ended June 30, 2023.
14. Legal Proceedings
The Company, in common with the insurance industry in general, is subject to litigation and arbitration in the normal course of its business. As of June 30, 2024, the Company was not a party to any litigation or arbitration which is expected by management to have a material adverse effect on the Company’s results of operations and financial condition and liquidity.
15. Transactions with Related Parties
Premia Reinsurance Ltd. is a multi-line Bermuda reinsurance company (and its affiliates together with Premia Holdings Ltd., “Premia”). The Company has entered into certain reinsurance transactions with Premia. For the six months ended June 30, 2024, the Company recorded an immaterial amount of net premiums written and earned, compared to $75 million for the six months ended June 30, 2023. At June 30, 2024, the Company recorded a funds held asset from Premia of $140 million, compared to $158 million at December 31, 2023.
Somers Group Holdings Ltd. and its wholly owned subsidiaries (collectively, “Somers”) are wholly owned by Greysbridge. The Company has entered into certain reinsurance transactions with Somers. For the six months ended June 30, 2024, the Company’s net premiums written was reduced by $428 million, compared to $314 million for the six months ended June 30, 2023. In addition, Somers paid certain acquisition costs and administrative fees to the Company. At June 30, 2024, the Company recorded a reinsurance recoverable on unpaid and paid losses from Somers of $1.4 billion and a reinsurance balance payable to Somers of $542 million, compared to $1.3 billion and $475 million, respectively, at December 31, 2023.
16. Subsequent Events
Business Acquired
On August 1, 2024, the Company announced that it has completed the acquisition of Allianz’s U.S Middle Market Property & Casualty Insurance and U.S. Entertainment Property and Casualty Insurance Business written by Fireman’s Fund Insurance Company, an affiliate of Allianz (“FFIC”), and its subsidiaries (together with FFIC, collectively, the “Business Entities”), in each case, relating to relevant policies with accident years 2016 and onwards (collectively, the “Business”), as well as certain assets of Allianz and its affiliates related to the Business. In connection with the acquisition of the Business, affiliates of the Company also entered into certain reinsurance agreements relating to the Business and the Business Entities and other agreements providing for administration and other services for the Business Entities by affiliates of the Company for the applicable policies being reinsured following the closing. Aggregate cash consideration for the transaction was $450 million. The new business acquired will be included within the Company’s insurance segment.
Due to the limited time between the closing date of the acquisition and the Company's filing of this Quarterly Report on Form 10-Q for the period ended June 30, 2024, the initial accounting for the business combination is incomplete. As a result, at this time the Company is unable to disclose certain information including the provisional amounts recognized as of the acquisition date for fair value of consideration transferred, each major class of assets acquired and liabilities assumed, and goodwill.
| ARCH CAPITAL | 37 | 2024 SECOND QUARTER FORM 10-Q |
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