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

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

The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with our consolidated financial statements included in Item 1 of this report and also our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”). In addition, readers should review “Risk Factors” set forth in Item 1A of Part I of our 2023 Form 10-K and “ITEM 1A—Risk Factors” of this Form 10-Q. All amounts are in millions, except per share amounts, unless otherwise noted.

Arch Capital Group Ltd. (“Arch Capital” and, together with its subsidiaries, “Arch”, “we”, “our” or “us”) is a publicly listed Bermuda exempted company with approximately $23.4 billion in capital at June 30, 2024 and, through operations in Bermuda, the United States, Europe, Canada and Australia, writes insurance, reinsurance and mortgage insurance on a worldwide basis.

Page No.
Current Outlook39
Financial Measures39
Comment on Non-GAAP Financial Measures40
Results of Operations42
Insurance Segment42
Reinsurance Segment45
Mortgage Segment47
Corporate50
Critical Accounting Policies, Estimates and Recent Accounting Pronouncements51
Financial Condition51
Liquidity57
Capital Resources57
Catastrophic and Severe Economic Events59
Market Sensitive Instruments and Risk Management60
ARCH CAPITAL382024 SECOND QUARTER FORM 10-Q

CURRENT OUTLOOK

We reported a strong 2024 second quarter, with $1.3 billion of net income and 6.9% growth in book value per share. Overall, rate changes continued to exceed loss trends in the quarter and absolute returns remained above our long-term targets, positive indicators in our continued efforts to deliver superior results to our shareholders. We continue to execute our cycle management strategy by actively allocating capital to the segments and lines of business with the best risk-adjusted returns, while retaining the flexibility to invest in our platform when we find attractive opportunities.

Our property and casualty underwriting teams continued to lean into attractive market conditions, delivering $475 million of underwriting income and writing $5 billion of gross premiums written, up 12% from the 2023 second quarter.

Our reinsurance segment contributed $366 million of underwriting income in the 2024 second quarter, despite higher frequency of catastrophic events. Due to our view of heightened overall storm risk this year, we chose to not grow our property catastrophe writings at mid-year renewals. While we have significantly expanded our property catastrophe portfolio in recent years, we strive to have the right balance across our overall portfolio. Casualty lines remain an area of interest that we will continue to monitor as we observe rate increases and ongoing reserve development taking place across the industry.

Our insurance segment contributed $109 million of underwriting income in the 2024 second quarter. We found growth opportunities in several lines, including programs business and excess and surplus casualty lines, where rates are improving. Our international insurance unit continues to benefit from its position as a lead underwriter at Lloyd's, where a disciplined market is providing attractive growth opportunities in specialty lines. As the supply and demand for risk more broadly reaches an equilibrium, we continue to selectively seize opportunities with the most attractive risk adjusted returns. On August 1, 2024, our insurance segment completed the acquisition of Allianz’s U.S. MidCorp and Entertainment insurance businesses.

Approximately 70% of our catastrophe losses in the 2024 second quarter were related to U.S. secondary perils with the rest coming from a series of international events. Our peak zone natural catastrophe PML for a 1-in-250 single event exposure to property catastrophe risk remains well below our self-imposed threshold (see “Catastrophic and Severe Economic Events”).

Our mortgage segment continues to deliver a steady level of earnings for our shareholders. New originations remain tempered by high mortgage interest rates. The persistency of our in force U.S. primary mortgage insurance portfolio

remains a healthy 83.3% and the delinquency rate remains low. On June 3, 2024, we completed the acquisition of RMIC Companies, Inc., and its wholly-owned subsidiaries that, together, comprise the run-off mortgage insurance business of Old Republic International Corporation.

FINANCIAL MEASURES

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

Book Value per Share

Book value per share represents total common shareholders’ equity available to Arch divided by the number of common shares outstanding. Management uses growth in book value per share as a key measure of the value generated for our common shareholders each period and believes that book value per share is the key driver of Arch Capital’s share price over time. Book value per share is impacted by, among other factors, our underwriting results, investment returns and share repurchase activity, which has an accretive or dilutive impact on book value per share depending on the purchase price. Book value per share was $52.75 at June 30, 2024, compared to $49.36 at March 31, 2024, and $37.04 at June 30, 2023. The 6.9% increase in book value per share for the 2024 second quarter reflected strong underwriting and investment results.

Operating Return on Average Common Equity

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

ARCH CAPITAL392024 SECOND QUARTER FORM 10-Q

Our annualized net income return on average common equity was 26.3% for the 2024 second quarter, compared to 19.6% for the 2023 second quarter, and 25.4% for the six months ended June 30, 2024, compared to 21.1% for the 2023 period. Our Operating ROAE was 20.5% for the 2024 second quarter, compared to 21.5% for the 2023 second quarter, and 20.5% for the six months ended June 30, 2024, compared to 21.3% for the 2023 period. Operating ROAE for the 2024 periods reflected strong underwriting results along with growth in net investment income.

Total Return on Investments

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

Arch PortfolioBenchmark Return
Pre-tax total return (before investment expenses):
2024 Second Quarter1.33%1.22%
2023 Second Quarter0.56%0.68%
Six Months Ended June 30, 20242.14%2.07%
Six Months Ended June 30, 20233.10%3.33%

Total return for both periods primarily reflected the effects of sustained higher interest rates available in the market, along with growth in invested assets due in part to strong operating cash flows. We continue to maintain a relatively short duration on our portfolio of 2.83 years at June 30, 2024, with average credit ratings of “AA-” from Standard & Poor’s Rating Services (“S&P”) and “Aa3” from Moody’s Investors Service (“Moody’s).

The benchmark return index is a customized combination of indices intended to approximate a target portfolio by asset mix and average credit quality while also matching the approximate estimated duration and currency mix of our insurance and reinsurance liabilities. Although the estimated duration and average credit quality of this index will move as the duration and rating of its constituent securities change, generally we do not adjust the composition of the benchmark return index except to incorporate changes to the mix of liability currencies and durations noted above. The benchmark return index should not be interpreted as

expressing a preference for or aversion to any particular sector or sector weight. The index is intended solely to provide a relatively stable basket of investable indices, unlike many master indices that change based on the size of their constituent indices. At June 30, 2024, the benchmark return index had an estimated duration of 2.51 years and an average credit quality of “A1” by Moody’s.

The benchmark return index included weightings to the following indices:

%
ICE BofA 1-10 Year U.S. Corporate Index27.00
Yield on 3-5 Year U.S. Treasury Index plus 6%17.00
ICE BofA 1-10 Year U.S. Treasury Index15.00
JPM CLOIE Investment Grade6.00
ICE BofA U.S. High Yield Constrained Index6.00
ICE BofA 1-5 Year U.K. Gilt Index5.50
S&P 500 Total Return Index4.75
ICE BofA U.S. ABS & CMBS Index4.50
ICE BofA German Government 1-5 Year Index3.40
ICE BofA German Government 5-7 Year Index0.60
ICE BofA 0-3 Month U.S. Treasury Index3.00
ICE BofA 1-5 Year Canada Government Index2.70
ICE BofA 15+ Year Canada Government Index0.30
ICE BofA 1-5 Year Australia Government Index2.50
ICE BofA U.S. Mortgage Backed Securities Index1.50
ICE BofA 1-5 Year Japan Government Index0.25
Total100.00%

COMMENT ON NON-GAAP FINANCIAL MEASURES

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

ARCH CAPITAL402024 SECOND QUARTER FORM 10-Q

to net income available to Arch common shareholders and annualized net income return on average common equity (the most directly comparable GAAP financial measures) in accordance with Regulation G is included under “Results of Operations” below.

We believe that net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains or losses, transaction costs and other in any particular period are not indicative of the performance of, or trends in, our business. Although net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method and net foreign exchange gains or losses are an integral part of our operations, the decision to realize these items, are independent of the insurance underwriting process and result, in large part, from general economic and financial market conditions. Certain users of our financial information believe that, for many companies, the timing of the realization of investment gains or losses is largely opportunistic. In addition, changes in the allowance for credit losses and net impairment losses recognized in earnings on our investments represent other-than-temporary declines in expected recovery values on securities without actual realization. Furthermore, we exclude net realized gains or losses from the acquisition or disposition of subsidiaries, due to their non-recurring nature, such items are not indicative of the performance of, or trends in, our business performance.

The use of the equity method on certain of our investments is driven by the ownership structure of such funds (either limited partnerships or limited liability companies). In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our proportionate share of the net income or loss of the funds (which include changes in the market value of the underlying securities in the funds). This method of accounting is different from the way that we account for our other investments and the timing of the recognition of equity in net income or loss of investment funds accounted for using the equity method may differ from gains or losses in the future upon sale or maturity of such investments.

Transaction costs and other include advisory, financing, legal, severance, incentive compensation and other transaction costs related to acquisitions. We believe that transaction costs and other, due to their non-recurring nature, are not indicative of the performance of, or trends in, our business performance.

We believe that showing net income available to Arch common shareholders exclusive of the items referred to above reflects the underlying fundamentals of our business since we evaluate the performance of and manage our business to produce an underwriting profit. In addition to presenting the net income available to Arch common shareholders, we believe that this presentation enables

investors and other users of our financial information to analyze our performance in a manner similar to how management analyzes performance. We also believe that this measure follows industry practice and, therefore, allows the users of financial information to compare our performance with our industry peer group. We believe that the equity analysts and certain rating agencies which follow us and the insurance industry as a whole generally exclude these items from their analyses for the same reasons.

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

We measure segment performance for our three underwriting segments based on underwriting income or loss. We do not manage our assets by underwriting segment, with the exception of goodwill and intangibles and, accordingly, investment income and other non-underwriting related items are not allocated to each underwriting segment.

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

Total return on investments includes investment income, equity in net income or loss of investment funds accounted for using the equity method, net realized gains or losses (excluding changes in the allowance for credit losses on non-investment related financial assets) and the change in unrealized gains or losses generated by Arch’s investment portfolio. Total return is calculated on a pre-tax basis and before investment expenses, and reflects the effect of

ARCH CAPITAL412024 SECOND QUARTER FORM 10-Q

financial market conditions along with foreign currency fluctuations. In addition, total return incorporates the timing of investment returns during the periods. There is no directly comparable GAAP financial measure for total return. Management uses total return on investments as a key measure of the return generated to Arch common shareholders, and compares the return generated by our investment portfolio against benchmark returns during the periods.

RESULTS OF OPERATIONS

The following table summarizes our consolidated financial data, including a reconciliation of net income or loss available to Arch common shareholders to after-tax operating income or loss available to Arch common shareholders. See “Comment on Non-GAAP Financial Measures.”

Three Months EndedSix Months Ended
June 30,June 30,
2024202320242023
Net income available to Arch common shareholders$1,259$661$2,369$1,366
Net realized (gains) losses (1)(122)123(189)106
Equity in net (income) loss of investment funds accounted for using the equity method(167)(69)(266)(117)
Net foreign exchange (gains) losses(1)6(32)24
Transaction costs and other182251
Income tax expense (benefit) (2)(6)37—
After-tax operating income available to Arch common shareholders$981$726$1,914$1,380
Beginning common shareholders’ equity$18,525$13,158$17,523$12,080
Ending common shareholders’ equity19,83513,81119,83513,811
Average common shareholders’ equity$19,180$13,485$18,679$12,946
Annualized net income return on average common equity %26.319.625.421.1
Annualized operating return on average common equity %20.521.520.521.3

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

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

Segment Information

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

We determined our reportable segments using the management approach described in accounting guidance regarding disclosures about segments of an enterprise and related information. The accounting policies of the segments are the same as those used for the preparation of our consolidated financial statements. Intersegment business is allocated to the segment accountable for the underwriting results.

Insurance Segment

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

Three Months Ended June 30,
20242023% Change
Gross premiums written$2,102$1,9557.5
Premiums ceded(544)(501)
Net premiums written1,5581,4547.2
Change in unearned premiums(80)(126)
Net premiums earned1,4781,32811.3
Losses and loss adjustment expenses(848)(761)
Acquisition expenses(288)(264)
Other operating expenses(233)(195)
Underwriting income (loss)$109$1080.9
Underwriting Ratios% Point Change
Loss ratio57.3%57.3%—
Acquisition expense ratio19.5%19.9%(0.4)
Other operating expense ratio15.8%14.7%1.1
Combined ratio92.6%91.9%0.7
ARCH CAPITAL422024 SECOND QUARTER FORM 10-Q
Six Months Ended June 30,
20242023% Change
Gross premiums written$4,228$3,9347.5
Premiums ceded(1,128)(1,043)
Net premiums written3,1002,8917.2
Change in unearned premiums(171)(306)
Net premiums earned2,9292,58513.3
Losses and loss adjustment expenses(1,702)(1,464)
Acquisition expenses(564)(509)
Other operating expenses(468)(390)
Underwriting income (loss)$195$222(12.2)
Underwriting Ratios% Point Change
Loss ratio58.1%56.6%1.5
Acquisition expense ratio19.2%19.7%(0.5)
Other operating expense ratio16.0%15.1%0.9
Combined ratio93.3%91.4%1.9

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

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

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

Professional lines: directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity and other financial related coverages for corporate, private equity, venture capital, real estate investment trust, limited partnership, financial institution and not-for-profit clients of all sizes, cyber insurance, and medical professional and general liability insurance coverages for the healthcare industry. The business is predominately written on a claims-made basis.

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

Property, energy, marine and aviation: primary and excess general property insurance coverages, including catastrophe-exposed property coverage, for commercial clients. Coverages for marine include hull, cargo, war, specie and liability. Aviation, stand-alone terrorism and political risks

are also offered. Coverage may be provided for operational and construction risk.

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

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

Other: includes alternative market risks (including captive insurance programs), excess workers’ compensation and employer’s liability insurance coverages for qualified self-insured groups, associations and trusts, and contract, commercial and transactional surety coverages.

Premiums Written.

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

Three Months Ended June 30,
20242023
Amount%Amount%
Professional lines$34522.1$34223.5
Property, energy, marine and aviation34222.032022.0
Programs24215.521014.4
Excess and surplus casualty16210.41359.3
Construction and national accounts16010.31449.9
Travel, accident and health1328.51268.7
Warranty and lenders solutions422.7422.9
Other1338.51359.3
Total$1,558100.0$1,454100.0

2024 Second Quarter versus 2023 Period. Gross premiums written by the insurance segment in the 2024 second quarter were 7.5% higher than in the 2023 second quarter, while net premiums written were 7.2% higher. Growth in net premiums written reflected increases in most lines of business due in part to new business opportunities and rate changes.

ARCH CAPITAL432024 SECOND QUARTER FORM 10-Q
Six Months Ended June 30,
20242023
Amount%Amount%
Professional lines$71423.0$67023.2
Property, energy, marine and aviation65321.159520.6
Programs42913.835112.1
Excess and surplus casualty31010.02669.2
Construction and national accounts33910.931711.0
Travel, accident and health31110.030610.6
Warranty and lenders solutions812.61314.5
Other2638.52558.8
Total$3,100100.0$2,891100.0

Six Months Ended June 30, 2024 versus 2023 period. Gross premiums written by the insurance segment for the six months ended June 30, 2024 were 7.5% higher than in the 2023 period, while net premiums written were 7.2% higher than in the 2023 period. Growth in net premiums written reflected increases in most lines of business due in part to new business opportunities and rate changes.

Net Premiums Earned.

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

Three Months Ended June 30,
20242023
Amount%Amount%
Professional lines$34723.5$35526.7
Property, energy, marine and aviation30320.523717.8
Programs19813.416212.2
Excess and surplus casualty1349.11168.7
Construction and national accounts15810.713310.0
Travel, accident and health15310.414711.1
Warranty and lenders solutions473.2493.7
Other1389.31299.7
Total$1,478100.0$1,328100.0
Six Months Ended June 30,
20242023
Amount%Amount%
Professional lines$69423.7$70427.2
Property, energy, marine and aviation60420.646417.9
Programs39313.430611.8
Excess and surplus casualty2689.12278.8
Construction and national accounts31510.825910.0
Travel, accident and health2869.827510.6
Warranty and lenders solutions963.3993.8
Other2739.32519.7
Total$2,929100.0$2,585100.0

Net premiums written are primarily earned on a pro rata basis over the terms of the policies for all products, usually 12 months. Net premiums earned reflect changes in net premiums written over the previous five quarters. Net premiums earned for the 2024 second quarter were 11.3% higher than in the 2023 second quarter while net premiums earned for the six months ended June 30, 2024 were 13.3% higher than in the 2023 period.

Losses and Loss Adjustment Expenses.

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

Three Months EndedSix Months Ended
June 30,June 30,
2024202320242023
Current year57.6%58.2%58.6%57.5%
Prior period reserve development(0.3)%(0.9)%(0.5)%(0.9)%
Loss ratio57.3%57.3%58.1%56.6%

Current Year Loss Ratio.

2024 Second Quarter versus 2023 Period. The insurance segment’s current year loss ratio in the 2024 second quarter was 0.6 points lower than in the 2023 second quarter. The 2024 second quarter loss ratio reflected 2.0 points of current year catastrophic activity, spread across a series of global events, compared to 2.7 points of catastrophic activity for the 2023 second quarter. The current year loss ratio for the 2024 second quarter also reflected the impact of rate increases and changes in mix of business.

Six Months Ended June 30, 2024 versus 2023 Period. The insurance segment’s current year loss ratio for the six months ended June 30, 2024 was 1.1 points higher than in the 2023 period and reflected 1.9 points of current year catastrophic activity, spread across series of global events, compared to 2.1 points in the 2023 period. The current year loss ratio for the 2024 period included activity related to the Baltimore bridge collapse and also reflected the impact of rate increases and changes in mix of business.

ARCH CAPITAL442024 SECOND QUARTER FORM 10-Q

Prior Period Reserve Development.

The insurance segment’s net favorable development was $5 million, or 0.3 points, for the 2024 second quarter, compared to $12 million, or 0.9 points, for the 2023 second quarter, and $15 million, or 0.5 points, for the six months ended June 30, 2024, compared to $24 million, or 0.9 points, for the 2023 period. See note 5, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements for information about the insurance segment’s prior year reserve development.

Underwriting Expenses.

2024 Second Quarter versus 2023 Period. The insurance segment’s underwriting expense ratio was 35.3% in the 2024 second quarter, compared to 34.6% in the 2023 second quarter, with the increase reflecting a higher level of aggregate operating expenses.

Six Months Ended June 30, 2024 versus 2023 period. The insurance segment’s underwriting expense ratio was 35.2% for the six months ended June 30, 2024, compared to 34.8% for the 2023 period, with the increase reflecting a higher level of aggregate operating expenses.

Reinsurance Segment

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

Three Months Ended June 30,
20242023% Change
Gross premiums written$2,941$2,54415.6
Premiums ceded(994)(835)
Net premiums written1,9471,70913.9
Change in unearned premiums(167)(366)
Net premiums earned1,7801,34332.5
Other underwriting income (loss)13
Losses and loss adjustment expenses(1,006)(743)
Acquisition expenses(345)(290)
Other operating expenses(64)(68)
Underwriting income (loss)$366$24549.4
Underwriting Ratios% Point Change
Loss ratio56.5%55.3%1.2
Acquisition expense ratio19.4%21.6%(2.2)
Other operating expense ratio3.6%5.0%(1.4)
Combined ratio79.5%81.9%(2.4)
Six Months Ended June 30,
20242023% Change
Gross premiums written$6,408$5,00428.1
Premiums ceded(2,195)(1,569)
Net premiums written4,2133,43522.6
Change in unearned premiums(767)(762)
Net premiums earned3,4462,67328.9
Other underwriting income (loss)37
Losses and loss adjustment expenses(1,889)(1,509)
Acquisition expenses(676)(571)
Other operating expenses(139)(142)
Underwriting income (loss)$745$45862.7
Underwriting Ratios% Point Change
Loss ratio54.8%56.5%(1.7)
Acquisition expense ratio19.6%21.3%(1.7)
Other operating expense ratio4.0%5.3%(1.3)
Combined ratio78.4%83.1%(4.7)

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

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

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

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

Property catastrophe: provides protection for most types of catastrophic losses, including hurricane, earthquake, flood, tornado, hail and fire, and for other perils on a case-by-case basis. Excess of loss coverages are triggered when aggregate losses and loss adjustment expense from a single occurrence or aggregation of losses from a covered peril exceed the retention specified in the contract.

ARCH CAPITAL452024 SECOND QUARTER FORM 10-Q

Property excluding property catastrophe: provides coverage for personal lines and/or commercial property exposures and principally covers buildings, structures, equipment and contents. The primary perils in this business include fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is assumed on either a treaty basis or facultative basis.

Other: primarily includes life reinsurance business.

Premiums Written.

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

Three Months Ended June 30,
20242023
Amount%Amount%
Property excluding property catastrophe$58530.0$45726.7
Other specialty53927.747928.0
Property catastrophe47224.246927.4
Casualty26113.423113.5
Marine and aviation593.0553.2
Other311.6181.1
Total$1,947100.0$1,709100.0

2024 Second Quarter versus 2023 Period. Gross premiums written by the reinsurance segment in the 2024 second quarter were 15.6% higher than in the 2023 second quarter, while net premiums written were 13.9% higher. The growth in net premiums written reflected increases in all lines of business due in part to rate increases, new business opportunities and growth in existing accounts.

Six Months Ended June 30,
20242023
Amount%Amount%
Property excluding property catastrophe$1,15227.3$90326.3
Other specialty1,37932.71,09832.0
Property catastrophe82219.572621.1
Casualty60414.351415.0
Marine and aviation1884.51544.5
Other681.6401.2
Total$4,213100.0$3,435100.0

Six Months Ended June 30, 2024 versus 2023 period. Gross premiums written by the reinsurance segment for the six months ended June 30, 2024 were 28.1% higher than in the 2023 period, while net premiums written were 22.6% higher than in the 2023 period. The growth in net premiums written reflected increases in all lines of business due in part to rate increases, new business opportunities and growth in existing accounts.

Net Premiums Earned.

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

Three Months Ended June 30,
20242023
Amount%Amount%
Property excluding property catastrophe$52029.2$35826.7
Other specialty65937.048336.0
Property catastrophe24613.816912.6
Casualty26915.125819.2
Marine and aviation603.4564.2
Other261.5191.4
Total$1,780100.0$1,343100.0
Six Months Ended June 30,
20242023
Amount%Amount%
Property excluding property catastrophe$1,00629.2$71226.6
Other specialty1,24636.299437.2
Property catastrophe48013.930811.5
Casualty51615.051119.1
Marine and aviation1343.91074.0
Other641.9411.5
Total$3,446100.0$2,673100.0

Net premiums written, irrespective of the class of business, are generally earned on a pro rata basis over the terms of the underlying policies or reinsurance contracts. Net premiums earned reflect changes in net premiums written over the previous five quarters. Net premiums earned for the 2024 second quarter were 32.5% higher than in the 2023 second quarter, while net premiums earned for the six months ended June 30, 2024 were 28.9% higher than in the 2023 period.

Other Underwriting Income (Loss).

Other underwriting income for the 2024 second quarter was $1 million, compared to $3 million for the 2023 second quarter, and $3 million for the six months ended June 30, 2024, compared to $7 million for the 2023 period.

Losses and Loss Adjustment Expenses.

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

Three Months EndedSix Months Ended
June 30,June 30,
2024202320242023
Current year58.4%57.5%57.0%59.5%
Prior period reserve development(1.9)%(2.2)%(2.2)%(3.0)%
Loss ratio56.5%55.3%54.8%56.5%
ARCH CAPITAL462024 SECOND QUARTER FORM 10-Q

Current Year Loss Ratio.

2024 Second Quarter versus 2023 Period. The reinsurance segment’s current year loss ratio in the 2024 second quarter was 0.9 points higher than in the 2023 second quarter. The 2024 second quarter loss ratio reflected 10.0 points of current year catastrophic activity, spread across a series of global events, compared to 6.7 points of catastrophic activity in the 2023 second quarter. The current year loss ratio for the 2024 second quarter also reflected the impact of rate increases and changes in mix of business.

Six Months Ended June 30, 2024 versus 2023 Period. The reinsurance segment’s current year loss ratio for the six months ended June 30, 2024 was 2.5 points lower than in the 2023 period and reflected 6.1 points of current year catastrophic activity, consistent with 6.1 points in the 2023 period. The current year loss ratio for the 2024 period included activity related to the Baltimore bridge collapse and also reflected the impact of rate increases and changes in mix of business.

Prior Period Reserve Development.

The reinsurance segment’s net favorable development was $34 million, or 1.9 points, for the 2024 second quarter, compared to $29 million, or 2.2 points, for the 2023 second quarter, and $74 million, or 2.2 points, for the six months ended June 30, 2024, compared to $82 million, or 3.0 points, for the 2023 period. See note 5, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements for information about the reinsurance segment’s prior year reserve development.

Underwriting Expenses.

2024 Second Quarter versus 2023 Period. The underwriting expense ratio for the reinsurance segment was 23.0% in the 2024 second quarter, compared to 26.6% in the 2023 second quarter, with the decrease primarily due to a lower acquisition expense ratio and the beneficial effect of growth in net premiums earned.

Six Months Ended June 30, 2024 versus 2023 period. The underwriting expense ratio for the reinsurance segment was 23.6% for the six months ended June 30, 2024, compared to 26.6% for the 2023 period, with the decrease primarily due to a lower acquisition expense ratio and the beneficial effect of growth in net premiums earned.

Mortgage Segment

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

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

Three Months Ended June 30,
20242023% Change
Gross premiums written$340$347(2.0)
Premiums ceded(64)(82)
Net premiums written2762654.2
Change in unearned premiums3129
Net premiums earned3072944.4
Other underwriting income23
Losses and loss adjustment expenses2713
Acquisition expenses—(7)
Other operating expenses(49)(50)
Underwriting income$287$25313.4
Underwriting Ratios% Point Change
Loss ratio(8.6)%(4.5)%(4.1)
Acquisition expense ratio0.1%2.4%(2.3)
Other operating expense ratio15.9%17.1%(1.2)
Combined ratio7.4%15.0%(7.6)
Six Months Ended June 30,
20242023% Change
Gross premiums written$681$690(1.3)
Premiums ceded(128)(164)
Net premiums written5535265.1
Change in unearned premiums5964
Net premiums earned6125903.7
Other underwriting income129
Losses and loss adjustment expenses3611
Acquisition expenses—(14)
Other operating expenses(102)(100)
Underwriting income$558$49612.5
Underwriting Ratios% Point Change
Loss ratio(5.8)%(1.9)%(3.9)
Acquisition expense ratio0.1%2.4%(2.3)
Other operating expense ratio16.7%17.0%(0.3)
Combined ratio11.0%17.5%(6.5)
ARCH CAPITAL472024 SECOND QUARTER FORM 10-Q

Premiums Written.

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

Three Months Ended June 30,
20242023
Amount%Amount%
U.S. primary mortgage insurance$20172.8$18670.2
U.S. credit risk transfer (CRT) and other5118.55420.4
International mortgage insurance/ reinsurance248.7259.4
Total$276100.0$265100.0

2024 Second Quarter versus 2023 Period. Gross premiums written by the mortgage segment in the 2024 second quarter were 2.0% lower than in the 2023 second quarter, while net premiums written were 4.2% higher. The increase in net premiums written in the 2024 second quarter primarily reflected a lower level of Bellemeade premiums ceded, due in part to the termination of certain Bellemeade agreements in the 2023 fourth quarter.

Six Months Ended June 30,
20242023
Amount%Amount%
U.S. primary mortgage insurance$40372.9$37270.7
U.S. credit risk transfer (CRT) and other10719.310720.3
International mortgage insurance/ reinsurance437.8478.9
Total$553100.0$526100.0

Six Months Ended June 30, 2024 versus 2023 Period. Gross premiums written by the mortgage segment for the six months ended June 30, 2024 were 1.3% lower than in the 2023 period, while net premiums written for the six months ended June 30, 2024 were 5.1% higher than in the 2023 period. The increase in net premiums written in the 2024 period primarily reflected a lower level of Bellemeade premiums ceded, due in part to the termination of certain Bellemeade agreements in the 2023 fourth quarter.

The persistency rate was 83.3% for the Arch MI U.S. portfolio of primary mortgage insurance policies at June 30, 2024, compared to 83.0% at June 30, 2023. The persistency rate represents the percentage of mortgage insurance in force at the beginning of a 12-month period that remains in force at the end of such period.

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

Three Months Ended June 30,
20242023
Amount%Amount%
Total new insurance written (NIW) (1)$13,799$12,292
Credit quality (FICO):
>=740$9,72670.5$8,15166.3
680-7393,64126.43,83231.2
620-6794303.13082.5
<62020.010.0
Total$13,799100.0$12,292100.0
Loan-to-value (LTV):
95.01% and above$1,0147.3$6355.2
90.01% to 95.00%7,23452.46,85555.8
85.01% to 90.00%4,04729.33,51628.6
85.00% and below1,50410.91,28610.5
Total$13,799100.0$12,292100.0
Monthly vs. single:
Monthly$12,76492.5$11,87096.6
Single1,0357.54223.4
Total$13,799100.0$12,292100.0
Purchase vs. refinance:
Purchase$13,58898.5$12,06398.1
Refinance2111.52291.9
Total$13,799100.0$12,292100.0

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

Six Months Ended June 30,
20242023
Amount%Amount%
Total new insurance written (NIW) (1)$23,135$22,686
Credit quality (FICO):
>=740$16,09069.5$14,82365.3
680-7396,30127.27,32232.3
620-6797413.25372.4
<62030.040.0
Total$23,135100.0$22,686100.0
Loan-to-value (LTV):
95.01% and above$1,5566.7$1,1545.1
90.01% to 95.00%12,47453.912,89856.9
85.01% to 90.00%6,67128.86,28827.7
85.01% and below2,43410.52,34610.3
Total$23,135100.0$22,686100.0
Monthly vs. single:
Monthly$21,68093.7$21,97696.9
Single1,4556.37103.1
Total$23,135100.0$22,686100.0
Purchase vs. refinance:
Purchase$22,75598.4$22,26498.1
Refinance3801.64221.9
Total$23,135100.0$22,686100.0

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

ARCH CAPITAL482024 SECOND QUARTER FORM 10-Q

Net Premiums Earned.

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

Three Months Ended June 30,
20242023
Amount%Amount%
U.S. primary mortgage insurance$20968.1$19466.0
U.S. credit risk transfer (CRT) and other5116.65418.4
International mortgage insurance/ reinsurance4715.34615.6
Total$307100.0$294100.0

2024 Second Quarter versus 2023 Period. Net premiums earned for the 2024 second quarter were 4.4% higher than in the 2023 second quarter. The increase in net premiums earned in the 2024 second quarter primarily reflected a lower level of Bellemeade premiums ceded, due in part to the termination of certain Bellemeade agreements in the 2023 fourth quarter.

Six Months Ended June 30,
20242023
Amount%Amount%
U.S. primary mortgage insurance$41567.8$39066.1
U.S. credit risk transfer (CRT) and other10717.510718.1
International mortgage insurance/ reinsurance9014.79315.8
Total$612100.0$590100.0

Six Months Ended June 30, 2024 versus 2023 Period. For the six months ended June 30, 2024, net premiums earned were 3.7% higher than in the 2023 period. The increase in net premiums earned in the 2024 period primarily reflected a lower level of Bellemeade premiums ceded, due in part to the termination of certain Bellemeade agreements in the 2023 fourth quarter.

Other Underwriting Income (Loss).

Other underwriting income, which is primarily related to GSE credit risk-sharing transactions, was $2 million for the 2024 second quarter, compared to $3 million for the 2023 second quarter.

Losses and Loss Adjustment Expenses.

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

Three Months EndedSix Months Ended
June 30,June 30,
2024202320242023
Current year18.3%22.7%19.8%23.7%
Prior period reserve development(26.9)%(27.2)%(25.6)%(25.6)%
Loss ratio(8.6)%(4.5)%(5.8)%(1.9)%

Current Year Loss Ratio.

2024 Second Quarter versus 2023 Period. The mortgage segment’s current year loss ratio was 4.4 points lower in the 2024 second quarter than in the 2023 second quarter. The lower current year loss ratio for the 2024 second quarter reflected a decrease in estimated claim rates, partially offset by slightly higher new delinquencies.

Six Months Ended June 30, 2024 versus 2023 Period. The mortgage segment’s current year loss ratio was 3.9 points lower for the six months ended June 30, 2024 than for the 2023 period. The lower current year loss ratio for the 2024 period reflected a decrease in estimated claim rates, partially offset by slightly higher new delinquencies.

Prior Period Reserve Development.

The mortgage segment’s net favorable development was $82 million, or 26.9 points, for the 2024 second quarter, compared to $80 million, or 27.2 points, for the 2023 second quarter, and $156 million, or 25.6 points, for the six months ended June 30, 2024, compared to $151 million, or 25.6 points, for the 2023 period. See note 5, “Reserve for Losses and Loss Adjustment Expenses,” to our consolidated financial statements for information about the mortgage segment’s prior year reserve development.

Underwriting Expenses.

2024 Second Quarter versus 2023 Period. The underwriting expense ratio for the mortgage segment was 16.0% in the 2024 second quarter, compared to 19.5% in the 2023 second quarter. The decrease was primarily due to a higher level of ceding and profit commissions on U.S. primary business, along with a higher level of net premiums earned.

Six Months Ended June 30, 2024 versus 2023 period. The underwriting expense ratio for the mortgage segment was 16.8% for the six months ended June 30, 2024, compared to 19.4% for the 2023 period. The decrease was primarily due to a higher level of ceding and profit commissions on U.S. primary business, along with a higher level of net premiums earned.

ARCH CAPITAL492024 SECOND QUARTER FORM 10-Q

Corporate

The Company’s corporate results include net investment income, net realized gains or losses (which includes realized and unrealized changes in the fair value of equity securities and assets accounted for using the fair value option, realized and unrealized gains 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 investments accounted for using the equity method, other income or loss, corporate expenses, transaction costs and other, amortization of intangible assets, interest expense, net foreign exchange gains or losses, income taxes, income from operating affiliates and items related to our non-cumulative preferred shares.

Net Investment Income.

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

Three Months EndedSix Months Ended
June 30,June 30,
2024202320242023
Fixed maturities$306$214$586$402
Short-term investments35156429
Equity securities1061810
Other (1)35256838
Gross investment income386260736479
Investment expenses (2)(22)(18)(45)(38)
Net investment income$364$242$691441

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

(2) Investment expenses were approximately 0.26% of average invested assets for the 2024 second quarter, consistent with 0.26% for the 2023 second quarter, and 0.27% for the six months ended June 30, 2024, compared to 0.26% for the 2023 period.

The higher level of net investment income for the 2024 periods was primarily related to higher yields available in the financial market. The pre-tax investment income yield, calculated based on amortized cost and on an annualized basis, was 4.39% for the 2024 second quarter, compared to 3.50% for the 2023 second quarter, and 4.36% for the six months ended June 30, 2024, compared to 3.33% for the 2023 period. Net cash flow from operating activities contributed $3.1 billion for the six months ended June 30, 2024, which has grown our invested asset base and contributed to the increase in net investment income.

Corporate Expenses.

Corporate expenses were $23 million for the 2024 second quarter, compared to $20 million for the 2023 second quarter, and $69 million for the six months ended June 30, 2024, compared to $49 million for the 2023 period. Such amounts primarily represent certain holding company costs necessary to support our worldwide operations and costs associated with operating as a publicly traded company. The increase in corporate expenses was primarily due to higher incentive compensation costs.

Transaction Costs and Other.

Transaction costs and other for the 2024 second quarter was $18 million, compared to $1 million for the 2023 second quarter, and $25 million for the six months ended June 30, 2024, compared to $2 million for the 2023 period. The amounts in both periods primarily related to our acquisition activity.

Other Income or Losses.

Other income for the 2024 second quarter was $8 million, compared to $3 million for the 2023 second quarter, and $22 million for the six months ended June 30, 2024, compared to $14 million for the 2023 period. Amounts in both periods primarily reflect changes in the cash surrender value of our investment in corporate-owned life insurance.

Amortization of Intangible Assets.

Amortization of intangible assets for the 2024 second quarter was $27 million, compared to $24 million for the 2023 second quarter, and $48 million for the six months ended June 30, 2024, compared to $47 million for the 2023 period. Amounts in both periods primarily attributed to amortization of finite-lived intangible assets.

Interest Expense.

Interest expense was $35 million for the 2024 second quarter, compared to $33 million for the 2023 second quarter, and $69 million for the six months ended June 30, 2024, compared to $65 million for the 2023 period. Interest expense primarily reflects amounts related to our outstanding senior notes.

ARCH CAPITAL502024 SECOND QUARTER FORM 10-Q

Net Realized Gains or Losses.

Net realized gains for the 2024 second quarter were $122 million, compared to net realized losses of $123 million for the 2023 second quarter. Net realized gains were $189 million for the six months ended June 30, 2024, compared to net realized losses of $106 million for the 2023 period. Amounts in both periods reflected sales of investments as well as the impact of financial market movements on the Company’s equity securities and investments accounted for under the fair value option method. Net realized gains for the 2024 second quarter also include benefits related to both the sale of, and acquisition of subsidiaries. Currently, our portfolio is actively managed to maximize total return within certain guidelines. The effect of financial market movements on the investment portfolio will directly impact net realized gains or losses as the portfolio is adjusted and rebalanced. Net realized gains or losses from the sale of fixed maturities primarily results from our decisions to reduce credit exposure, to change duration targets, to rebalance our portfolios or due to relative value determinations.

Net realized gains or losses also include realized and unrealized 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 See note 7, “Investment Information—Net Realized Gains (Losses)” and note 7, “Investment Information—Allowance for Expected Credit Losses,” to our consolidated financial statements for additional information.

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

Equity in net income of investment funds accounted for using the equity method was $167 million in the 2024 second quarter, compared to $69 million for the 2023 second quarter, and $266 million for the six months ended June 30, 2024, compared to $117 million for the 2023 period. Such investments are generally recorded on a one to three month lag based on the availability of reports from the investment funds. Investment funds accounted for using the equity method totaled $5.0 billion at June 30, 2024, compared to $4.6 billion at December 31, 2023. See note 7, “Investment Information—Investments Accounted For Using the Equity Method,” to our consolidated financial statements for additional information.

Net Foreign Exchange Gains or Losses.

Net foreign exchange gains for the 2024 second quarter were $1 million, compared to losses of $5 million for the 2023 second quarter. Net foreign exchange gains for the six months ended June 30, 2024 were $32 million, compared to losses of $23 million for the 2023 period. Amounts in both

periods were primarily unrealized and resulted from the effects of revaluing our net insurance liabilities required to be settled in foreign currencies at each balance sheet date.

Income Tax Expense.

Our income tax provision on income or loss before income taxes, including income or loss from operating affiliates, resulted in an expense of 7.1% for the 2024 second quarter, compared to an expense of 9.2% for the 2023 second quarter, and an expense of 7.7% for the six months ended June 30, 2024, compared to an expense of 8.6% for the 2023 period. See note 13, “Income Taxes” to our consolidated financial statements for additional information.

Income or Losses from Operating Affiliates.

Income from operating affiliates for 2024 second quarter was $45 million, compared to income of $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 the 2023 period. See note 7, “Investment Information—Investments in Operating Affiliates,” to our consolidated financial statements for additional information.

CRITICAL ACCOUNTING POLICIES,

ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS

Critical accounting policies, estimates and recent accounting pronouncements are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2023 Form 10-K, updated where applicable in the notes accompanying our consolidated financial statements, including note 1, “Basis of Presentation and Recent Accounting Pronouncements.”

FINANCIAL CONDITION

Investable Assets Held by Arch

At June 30, 2024, approximately $23.3 billion, or 62%, of total investable assets held by Arch were internally managed, compared to $21.9 billion, or 63%, at December 31, 2023. See note 7, “Investment Information” to our consolidated financial statements for additional information.

June 30, 2024December 31, 2023
Average effective duration (in years)2.832.91
Average S&P/Moody’s credit ratings (1)AA-/Aa3AA-/Aa3

(1)Average credit ratings on our investment portfolio on securities with ratings assigned by S&P and Moody’s.

ARCH CAPITAL512024 SECOND QUARTER FORM 10-Q

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

Estimated Fair Value% of Total
June 30, 2024
U.S. government and gov’t agencies (1)$6,04123.1
AAA4,59917.6
AA2,5079.6
A4,85418.5
BBB6,14423.5
BB9793.7
B5212.0
Lower than B290.1
Not rated5011.9
Total$26,175100.0
December 31, 2023
U.S. government and gov’t agencies (1)$6,49326.8
AAA4,30517.8
AA2,1658.9
A4,62919.1
BBB5,05820.9
BB6982.9
B3891.6
Lower than B150.1
Not rated4842.0
Total$24,236100.0

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

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

Severity of gross unrealized losses:Estimated Fair ValueGross Unrealized Losses% of Total Gross Unrealized Losses
June 30, 2024
0-10%$14,648$(375)47.1
10-20%2,204(355)44.6
20-30%165(48)6.0
Greater than 30%33(18)2.3
Total$17,050$(796)100.0
December 31, 2023
0-10%$10,696$(410)49.7
10-20%2,282(367)44.5
20-30%116(35)4.2
Greater than 30%26(13)1.6
Total$13,120$(825)100.0

The following table summarizes our top ten exposures to fixed income corporate issuers by fair value at June 30, 2024, excluding guaranteed amounts and covered bonds:

Estimated Fair ValueCredit Rating (1)
JPMorgan Chase & Co.$373A-/A1
Morgan Stanley341A-/A1
Bank of America Corporation296A-/A1
The Goldman Sachs Group, Inc.276A-/A2
Citigroup Inc.242BBB+/A3
Blue Owl Capital Inc.208BBB-/Baa3
Ford Motor Company203BBB-/Ba1
Blackstone Inc.180BBB/Baa3
Hyundai Motor Company178BBB+/A3
General Motors Company135BBB/Baa2
Total$2,432

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

ARCH CAPITAL522024 SECOND QUARTER FORM 10-Q

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

AgenciesInvestment GradeBelow Investment GradeTotal
June 30, 2024
RMBS$736$450$—$1,186
CMBS71,079741,160
ABS—2,6541462,800
Total$743$4,183$220$5,146
December 31, 2023
RMBS$658$445$—$1,103
CMBS71,126801,213
ABS—2,1431072,250
Total$665$3,714$187$4,566

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

June 30, 2024December 31, 2023
Equities (1)$979$739
Exchange traded funds
Fixed income (2)228285
Equity and other (3)197169
Total$1,404$1,193

(1)Primarily in technology, consumer non-cyclical, communications, financial and industrial sectors at June 30, 2024.

(2)Primarily in corporate exposures at June 30, 2024.

(3)Primarily in financials, consumer staples, industrials and energy sectors at June 30, 2024.

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

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

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

Accounting guidance regarding fair value measurements addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. See note 8, “Fair Value,” to our consolidated financial statements for a summary of our financial assets and liabilities measured at fair value, segregated by level in the fair value hierarchy.

Reinsurance

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

Three Months EndedSix Months Ended
June 30,June 30,
2024202320242023
Premiums written:
Direct$2,521$2,373$5,007$4,731
Assumed2,8612,4726,3084,894
Ceded(1,601)(1,417)(3,449)(2,773)
Net$3,781$3,428$7,866$6,852
Premiums earned:
Direct$2,417$2,229$4,758$4,383
Assumed2,4831,8174,8583,591
Ceded(1,335)(1,081)(2,629)(2,126)
Net$3,565$2,965$6,987$5,848
Losses and LAE:
Direct$1,200$1,161$2,599$2,232
Assumed1,1969202,4601,917
Ceded(569)(590)(1,504)(1,187)
Net$1,827$1,491$3,555$2,962

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

Bellemeade Re

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

ARCH CAPITAL532024 SECOND QUARTER FORM 10-Q

The following table summarizes the respective coverages and retentions at June 30, 2024:

Bellemeade Entities (Issue Date)Initial Coverage at IssuanceCurrent CoverageRemaining Retention, Net
2021-3 Ltd. (1)639499135
2022-1 Ltd. (2)317250142
2022-2 Ltd. (3)327327203
2023-1 Ltd. (4)233233181
Total$1,516$1,309$661

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

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

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

(4) Issued in October 2023, covering in-force policies issued between January 1, 2023 and September 30, 2023. $186 million was directly funded by Bellemeade Re 2023-1 Ltd. via insurance-linked notes, with an additional $47 million capacity provided directly to Arch MI U.S. by a separate panel of reinsurers.

Reserve for Losses and Loss Adjustment Expenses

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

At June 30, 2024 and December 31, 2023, our Loss Reserves, net of unpaid losses and loss adjustment expenses recoverable, by type and by operating segment were as follows:

June 30, 2024December 31, 2023
Insurance segment:
Case reserves$2,728$2,730
IBNR reserves6,1235,626
Total net reserves8,8518,356
Reinsurance segment:
Case reserves2,5202,447
Additional case reserves628484
IBNR reserves4,8714,260
Total net reserves8,0197,191
Mortgage segment:
Case reserves337323
IBNR reserves176192
Total net reserves513515
Total:
Case reserves5,5855,500
Additional case reserves628484
IBNR reserves11,17010,078
Total net reserves$17,383$16,062

At June 30, 2024 and December 31, 2023, the insurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

June 30, 2024December 31, 2023
Insurance segment:
Professional lines$2,576$2,451
Construction and national accounts1,7411,693
Excess and surplus casualty1,050975
Programs1,011929
Property, energy, marine and aviation950836
Travel, accident and health151144
Warranty and lenders solutions5565
Other1,3171,263
Total net reserves$8,851$8,356

At June 30, 2024 and December 31, 2023, the reinsurance segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

June 30, 2024December 31, 2023
Reinsurance segment:
Casualty$2,900$2,725
Other specialty2,5032,125
Property excluding property catastrophe1,4081,243
Property catastrophe651585
Marine and aviation426359
Other131154
Total net reserves$8,019$7,191
ARCH CAPITAL542024 SECOND QUARTER FORM 10-Q

At June 30, 2024 and December 31, 2023, the mortgage segment’s Loss Reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:

June 30, 2024December 31, 2023
Mortgage segment:
U.S. primary mortgage insurance (1)$330$324
U.S. credit risk transfer (CRT) and other96100
International mortgage insurance/ reinsurance8791
Total net reserves$513$515

(1) At June 30, 2024, 40.0% of total net reserves represents policy years 2014 and prior and the remainder from later policy years. At December 31, 2023, 31.0% of total net reserves represent policy years 2014 and prior and the remainder from later policy years.

Mortgage Operations Supplemental Information

On June 3, 2024, we completed 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. The acquired business had been in runoff since 2011 and represented $3.6 billion of insurance in force at June 30, 2024.

The mortgage segment’s insurance in force (“IIF”) and risk in force (“RIF”) were as follows at June 30, 2024 and December 31, 2023:

June 30, 2024December 31, 2023
Amount%Amount%
Insurance In Force (IIF) (1):
U.S. primary mortgage insurance$292,51257.0$290,76457.1
U.S. credit risk transfer (CRT) and other151,43729.5149,09829.3
International mortgage insurance/reinsurance68,98613.469,47313.6
Total$512,935100.0$509,335100.0
Risk In Force (RIF) (2):
U.S. primary mortgage insurance$76,35184.6$75,52784.6
U.S. credit risk transfer (CRT) and other6,2066.96,1566.9
International mortgage insurance/reinsurance7,6668.57,5628.5
Total$90,223100.0$89,245100.0

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

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

The IIF and RIF for our U.S. primary mortgage insurance business by policy year were as follows at June 30, 2024:

IIFRIFDelinquency
Amount%Amount%Rate (1)
Policy year:
2014 and prior$16,0185.5$4,0725.36.49%
20153,9381.31,0271.31.94%
20166,5892.31,7592.32.40%
20176,5632.21,7532.32.96%
20187,8142.72,0302.73.66%
201914,2144.93,7164.92.38%
202045,09015.411,99815.71.17%
202169,36723.718,18223.81.15%
202260,87320.816,01521.01.04%
202339,44913.510,14613.30.56%
202422,5977.75,6537.40.08%
Total$292,512100.0$76,351100.01.82%

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

The IIF and RIF for our U.S. primary mortgage insurance business by policy year were as follows at December 31, 2023:

IIFRIFDelinquency
Amount%Amount%Rate (1)
Policy year:
2014 and prior$13,3014.6$3,3874.56.01%
20154,6911.61,2441.61.98%
20167,5252.62,0252.72.50%
20177,6002.62,0232.73.13%
20188,5122.92,2072.94.04%
201915,7675.44,0745.42.40%
202051,34917.713,35717.71.17%
202176,66726.419,81226.21.12%
202263,89922.016,75522.20.89%
202341,45314.310,64314.10.26%
Total$290,764100.0$75,527100.01.74%

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

ARCH CAPITAL552024 SECOND QUARTER FORM 10-Q

The following tables provide supplemental disclosures on risk in force for our U.S. primary mortgage insurance business at June 30, 2024 and December 31, 2023:

June 30, 2024December 31, 2023
Amount%Amount%
Credit quality (FICO):
>=740$47,19061.8$46,79662.0
680-73925,05332.824,99033.1
620-6793,7354.93,4974.6
<6203730.52440.3
Total$76,351100.0$75,527100.0
Weighted average FICO score747748
Loan-to-value (LTV):
95.01% and above$7,3849.7$7,0679.4
90.01% to 95.00%45,33159.444,66959.1
85.01% to 90.00%20,66827.120,49027.1
85.00% and below2,9683.93,3014.4
Total$76,351100.0$75,527100.0
Weighted average LTV93.1%93.0%
Total RIF, net of external reinsurance$58,920$58,146
June 30, 2024December 31, 2023
Amount%Amount%
Total RIF by State:
California$6,1108.0$6,1628.2
Texas5,8037.65,9727.9
North Carolina3,3204.33,2484.3
Minnesota3,1104.13,0694.1
Georgia3,0994.13,0814.1
Illinois3,0864.02,9864.0
Florida2,9433.93,0074.0
Massachusetts2,8913.82,8583.8
Michigan2,8523.72,7733.7
Virginia2,5963.42,5783.4
Other40,54153.139,79352.7
Total$76,351100.0$75,527100.0

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

(U.S. Dollars in thousands, except policy, loan and claim count)Six Months Ended
June 30,
20242023
Roll-forward of insured loans in default:
Beginning delinquent number of loans19,45720,567
New notices20,43418,504
Cures(21,423)(20,358)
Paid claims(571)(427)
Acquired delinquent loans (1)2,525—
Ending delinquent number of loans (2)20,42218,286
Ending number of policies in force (2)1,123,6981,138,681
Delinquency rate (2)1.82%1.61%
Losses:
Number of claims paid571427
Total paid claims$18,342$12,900
Average per claim$32.1$30.2
Severity (3)67.8%71.5%
Average case reserve per default (2)$17.1$23.1

(1)Represents delinquent loans related to the acquisition of RMIC.

(2)Includes first lien primary and pool policies.

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

The risk to capital ratio, which represents total current (non-delinquent) risk in force, net of reinsurance, divided by total statutory capital, for Arch MI U.S. was approximately 7.4 to 1 at June 30, 2024, compared to 7.3 to 1 at December 31, 2023.

Shareholders’ Equity and Book Value per Share

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

June 30, 2024December 31, 2023
Total shareholders’ equity available to Arch$20,665$18,353
Less preferred shareholders’ equity830830
Common shareholders’ equity available to Arch$19,835$17,523
Common shares and common share equivalents outstanding, net of treasury shares (1)376.0373.3
Book value per share$52.75$46.94

(1)Excludes the effects of 10.9 million and 12.5 million stock options and 0.4 million and 0.4 million restricted stock units outstanding at June 30, 2024 and December 31, 2023, respectively.

ARCH CAPITAL562024 SECOND QUARTER FORM 10-Q

LIQUIDITY

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

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

For the six months ended June 30, 2024, Arch Capital received dividends of $119 million from Arch Reinsurance Ltd. (“Arch Re Bermuda”), our Bermuda based reinsurer and insurer, which can pay approximately $4.7 billion to Arch Capital during the remainder of 2024 without providing an affidavit to the Bermuda Monetary Authority.

We expect that our liquidity needs, including our anticipated (re)insurance obligations and operating and capital expenditure needs, for the next 12 months and for the foreseeable future thereafter, will be met by funds generated from underwriting activities and investment income, as well as by our balance of cash, short-term investments, proceeds on the sale or maturity of our investments, and our credit facilities.

Cash Flows

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

Six Months Ended
June 30,
20242023
Total cash provided by (used for):
Operating activities$3,082$2,114
Investing activities(2,918)(2,001)
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 provided by operating activities for the six months ended June 30, 2024 was higher than in the 2023 period. Activity for the six months ended June 30, 2024 primarily reflected a higher level of premiums collected than in the 2023 period.

  • Cash used for investing activities for the six months ended June 30, 2024 was higher than in the 2023 period. Activity for the six months ended June 30, 2024 reflected higher net purchases than in the 2023 period due in part to the investment of operating cash flows.

  • Cash used for financing activities for the six months ended June 30, 2024 was lower than in the 2023 period, reflecting common share activity.

CAPITAL RESOURCES

The following table provides an analysis of our capital structure:

June 30, 2024December 31, 2023
Senior notes$2,727$2,726
Shareholders’ equity available to Arch:
Series F non-cumulative preferred shares$330$330
Series G non-cumulative preferred shares500500
Common shareholders’ equity19,83517,523
Total$20,665$18,353
Total capital available to Arch$23,392$21,079
Debt to total capital (%)11.712.9
Preferred to total capital (%)3.53.9
Debt and preferred to total capital (%)15.216.9

Arch MI U.S. is required to maintain compliance with the GSEs requirements, known as the Private Mortgage Insurer Eligibility Requirements or “PMIERs.” The financial requirements require an eligible mortgage insurer’s available assets, which generally include only the most liquid assets of an insurer, to meet or exceed “minimum required assets” as of each quarter end. Minimum required assets are calculated from PMIERs tables with several risk dimensions (including origination year, original loan-to-value and original credit score of performing loans, and the delinquency status of non-performing loans) and are subject to a minimum amount. Arch MI U.S. satisfied the PMIERs’ financial requirements with an estimated PMIER sufficiency ratio of 196% at June 30, 2024, compared to 213% at December 31, 2023.

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

ARCH CAPITAL572024 SECOND QUARTER FORM 10-Q

GUARANTOR INFORMATION

The below table provides a description of our senior notes payable at June 30, 2024:

InterestPrincipalCarrying
Issuer/Due(Fixed)AmountAmount
Arch Capital:
May 1, 20347.350%$300$298
June 30, 20503.635%1,000989
Arch-U.S.:
Nov. 1, 2043 (1)5.144%500495
Arch Finance:
Dec. 15, 2026 (1)4.011%500499
Dec. 15, 2046 (1)5.031%450446
Total$2,750$2,727

(1)Fully and unconditionally guaranteed by Arch Capital.

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

Arch-U.S. and Arch Finance depend on their available cash resources, liquid investments and dividends or other distributions from their subsidiaries or affiliates to make payments, including the payment of debt service obligations and operating expenses they may incur.

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

June 30, 2024
Arch CapitalArch-U.S.
Assets
Total investments$16$250
Cash205
Investment in operating affiliates4—
Due from subsidiaries and affiliates11—
Other assets5660
Total assets$107$315
Liabilities
Senior notes1,287495
Due to subsidiaries and affiliates51,008
Other liabilities3050
Total liabilities$1,322$1,553
Non-cumulative preferred shares$830—
December 31, 2023
Arch CapitalArch-U.S.
Assets
Total investments$17$145
Cash95
Investment in operating affiliates4—
Due from subsidiaries and affiliates——
Other assets5856
Total assets$88$206
Liabilities
Senior notes1,287495
Due to subsidiaries and affiliates—993
Other liabilities3842
Total liabilities$1,325$1,530
Non-cumulative preferred shares$830—
ARCH CAPITAL582024 SECOND QUARTER FORM 10-Q
Six Months EndedYear Ended
June 30, 2024December 31, 2023
Arch CapitalArch-U.S.Arch CapitalArch-U.S.
Revenues
Net investment income$1$4$2$4
Net realized gains (losses)(4)———
Equity in net income (loss) of investments accounted for using the equity method—(2)—(2)
Total revenues(3)222
Expenses
Corporate expenses675939
Interest expense29135926
Interest expense (intercompany)—25—51
Total expenses964315286
Income (loss) before income taxes and income (loss) from operating affiliates(99)(41)(150)(84)
Income tax (expense) benefit—64119
Income (loss) from operating affiliates(1)—(1)—
Net income available to Arch(100)(35)(110)(65)
Preferred dividends(20)—(40)—
Net income (loss) available to Arch common shareholders$(120)$(35)$(150)$(65)

CATASTROPHIC AND SEVERE ECONOMIC EVENTS

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

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

equity available to Arch less goodwill and intangible assets). We reserve the right to change this threshold at any time.

Based on in-force exposure estimated as of July 1, 2024, our modeled peak zone catastrophe exposure was a windstorm affecting the Florida Tri-County regions, with a net probable maximum pre-tax loss of $1.6 billion, or 8% of tangible shareholders’ equity available to Arch, followed by windstorms affecting the Northeastern U.S. regions and the Gulf of Mexico with net probable maximum pre-tax losses of $1.4 billion and $1.3 billion, respectively. Our exposures to other perils, such as U.S. earthquake and international events, were less than the exposures arising from U.S. windstorms and hurricanes. As of July 1, 2024, our modeled peak zone earthquake exposure (San Francisco earthquake) represented approximately 58% of our peak zone catastrophe exposure, and our modeled peak zone international exposure (Germany windstorm) was substantially less than both our peak zone windstorm and earthquake exposures.

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

Currently, we seek to limit our modeled RDS loss from a severe economic event to approximately 25% of tangible shareholders’ equity available to Arch. We reserve the right to change this threshold at any time. Based on in-force exposure estimated as of July 1, 2024, our modeled RDS loss was approximately $1.3 billion, or 6% of tangible shareholders’ equity available to Arch.

Net probable maximum loss estimates are net of expected reinsurance recoveries, before income tax and before excess reinsurance reinstatement premiums. RDS loss estimates are net of expected reinsurance recoveries and before income tax. Catastrophe loss estimates are reflective of the zone indicated and not the entire portfolio. Since hurricanes and windstorms can affect more than one zone and make multiple landfalls, our catastrophe loss estimates include clash estimates from other zones. Our catastrophe loss estimates and RDS loss estimates do not represent our maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates. There can be no assurances that we will not suffer pre-tax losses greater than

ARCH CAPITAL592024 SECOND QUARTER FORM 10-Q

25% of our tangible shareholders’ equity from one or more catastrophic events or severe economic events due to several factors. These factors include the inherent uncertainties in estimating the frequency and severity of such events and the margin of error in making such determinations resulting from potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques and the application of such techniques or as a result of a decision to change the percentage of shareholders' equity exposed to a single catastrophic event or severe economic event. In addition, actual losses may increase if our reinsurers fail to meet their obligations to us or the reinsurance protections purchased by us are exhausted or are otherwise unavailable. See “Risk Factors—Risks Relating to Our Industry” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Catastrophic Events and Severe Economic Events” in our 2023 Form 10-K.

MARKET SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

In accordance with the SEC’s Financial Reporting Release No. 48, we performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of our financial instruments as of June 30, 2024. Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of several components, including liquidity, basis and price risks.

An analysis of material changes in market risk exposures at June 30, 2024 that affect the quantitative and qualitative disclosures presented in our 2023 Form 10-K (see section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Sensitive Instruments and Risk Management”) were as follows:

Investment Market Risk

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

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

(U.S. dollars in billions)Interest Rate Shift in Basis Points
-100-50—+50+100
June 30, 2024
Total fair value$36.6$36.0$35.5$35.0$34.5
Change from base2.9%1.4%(1.4)%(2.8)%
Change in unrealized value$1.0$0.5$(0.5)$(1.0)
December 31, 2023
Total fair value$33.6$33.1$32.7$32.2$31.7
Change from base3.0%1.5%(1.4)%(2.8)%
Change in unrealized value$1.0$0.5$(0.5)$(0.9)

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

ARCH CAPITAL602024 SECOND QUARTER FORM 10-Q

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

(U.S. dollars in billions)Credit Spread Shift in Percentage Points
-100-50—+50+100
June 30, 2024
Total fair value$36.8$36.2$35.5$34.9$34.3
Change from base3.5%1.8%(1.8)%(3.5)%
Change in unrealized value$1.2$0.6$(0.6)$(1.2)
December 31, 2023
Total fair value$33.8$33.2$32.7$32.1$31.5
Change from base3.4%1.7%(1.7)%(3.4)%
Change in unrealized value$1.1$0.6$(0.6)$(1.1)

Another method that attempts to measure portfolio risk is Value-at-Risk (“VaR”). VaR measures the worst expected loss under normal market conditions over a specific time interval at a given confidence level. The 1-year 95th percentile parametric VaR reported herein estimates that 95% of the time, the portfolio loss in a one-year horizon would be less than or equal to the calculated number, stated as a percentage of the measured portfolio’s initial value. The VaR is a variance-covariance based estimate, based on linear sensitivities of a portfolio to a broad set of systematic market risk factors and idiosyncratic risk factors mapped to the portfolio exposures. The relationships between the risk factors are estimated using historical data, and the most recent data points are generally given more weight. As of June 30, 2024, our portfolio’s 95th percentile VaR was estimated to be 6.5%, compared to an estimated 7.8% at December 31, 2023. In periods where the volatility of the risk factors mapped to our portfolio’s exposures is higher due to market conditions, the resulting VaR is higher than in other periods.

Equity Securities. At June 30, 2024 and December 31, 2023, the fair value of our investments in equity securities and certain investments accounted for using the equity method with underlying equity strategies totaled $1.2 billion and $1.0 billion, respectively. These investments are exposed to price risk, which is the potential loss arising from decreases in fair value. An immediate hypothetical 10% decline in the value of each position would reduce the fair value of such investments by approximately $125 million and $101 million at June 30, 2024 and December 31, 2023, respectively, and would have decreased book value per share by approximately $0.33 and $0.27, respectively. An immediate hypothetical 10% increase in the value of each position would increase the fair value of such investments by approximately $125 million and $101 million at June 30, 2024 and December 31, 2023, respectively, and would have increased book value per share by approximately $0.33 and $0.27, respectively.

Investment-Related Derivatives. At June 30, 2024, the notional value of all derivative instruments (excluding foreign currency forward contracts which are included in the foreign currency exchange risk analysis below) was $3.8 billion, compared to $4.2 billion at December 31, 2023. If the underlying exposure of each investment-related derivative held at June 30, 2024 depreciated by 100 basis points, it would have resulted in a reduction in net income of approximately $38 million, and a decrease in book value per share of approximately $0.10 per share, compared to $42 million and $0.11 per share, respectively, on investment-related derivatives held at December 31, 2023. If the underlying exposure of each investment-related derivative held at June 30, 2024 appreciated by 100 basis points, it would have resulted in an increase in net income of approximately $38 million, and an increase in book value per share of approximately $0.10 per share, compared to $42 million and $0.11 per share, respectively, on investment-related derivatives held at December 31, 2023. See note 9, “Derivative Instruments,” to our consolidated financial statements for additional disclosures concerning derivatives.

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

Foreign Currency Exchange Risk

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

ARCH CAPITAL612024 SECOND QUARTER FORM 10-Q

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

June 30, 2024December 31, 2023
Net assets (liabilities), denominated in foreign currencies, excluding shareholders’ equity and derivatives$(387)$(300)
Shareholders’ equity denominated in foreign currencies (1)1,1411,158
Net foreign currency forward contracts outstanding (2)269246
Net exposures denominated in foreign currencies$1,023$1,104
Pre-tax impact of a hypothetical 10% appreciation of the U.S. Dollar against foreign currencies:
Shareholders’ equity$(102)$(110)
Book value per share$(0.27)$(0.30)
Pre-tax impact of a hypothetical 10% decline of the U.S. Dollar against foreign currencies:
Shareholders’ equity$102$110
Book value per share$0.27$0.30

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

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

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

Effects of Inflation

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

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