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Printed on 100% recyclable paper
manufactured from 30% recycled fibers.
©2021 Arch Capital Group Ltd. All Rights Reserved. 00365-0321
Arch Capital Group Ltd.
2020 Annual Report
Financial Highlights1
GROSS PREMIUMS
WRITTEN2
$9.6B
NET LOSS
RESERVES2
$10.9B
TOTAL
CAPITALIZATION2
$15.8B
TOTAL
ASSETS2
$39.8B
Gross Premiums Written ($M)2
Underwriting Income ($M)2
Net Income ($M)4
$9,632.7
$7,695.6
$1,087.6
$1,594.7
$1,363.9
+25.2%
$481.1
-55.8%
-14.5%
2019
2020
2019
2020
2019
2020
Operating Return on
Average Common Equity1,4
After-tax Operating Income
per Common Share1,4
Book Value per
Common Share3
12.0%
$2.82
$30.31
$26.42
4.8%
$1.36
+14.7%
-720 bps
-51.8%
2019
2020
2019
2020
2019
2020
Book Value per Common Share3
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
f r o m 2 0 0 1
1 5 . 3 %
i z e d G r o w t h R a t e o f
A n n u a l
2001
2002
2003
2004
2005
2006
2007 2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
1 See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comment on Non-GAAP Financial Measures” for discussion of
“non-GAAP financial measure” as defined in Regulation G.
2 Excludes results of Watford Holdings Ltd.
3 Excludes the effects of stock options and restricted stock units outstanding.
4 Available to Arch common shareholders.
2020 Annual Report
Amounts in Millions, Except Percentages and Per Share Amounts
Book value per common share at year-end
Net income available to common shareholders
Per share
Net income return on average common equity
After-tax operating income*
Per share
Operating return on average common equity*
All per share amounts are on a diluted basis.
2020
$30.31
$1,364
$3.32
11.8%
$557
$1.36
4.8%
2019
$26.42
$1,595
$3.87
16.5%
$1,163
$2.82
12.0%
Change
+14.7%
(14.5)%
(14.2)%
(52.1)%
(51.8)%
*See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Comment on Non-GAAP Financial Measures” for a discussion of “non-GAAP
financial measures” as defined in Regulation G. After-tax operating income, which is a non-GAAP measure of financial performance, is defined as net income available to
common shareholders, excluding net realized gains or losses, equity in net income or loss of investment funds accounted for using the equity method, net foreign exchange gains
or losses, transaction costs and other, and net of income taxes. The reconciliation of net income available to common shareholders to after-tax operating income can be found
in the Company’s Annual Report on Form 10-K, filed with the SEC on February 26, 2021, under the caption “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” under the caption “Results of Operations.” A copy of the Form 10-K is available on the Company’s website and accompanies this letter.
To Our Shareholders
By any measure, 2020 was a challenging year for our industry. The COVID-19
pandemic engulfed the world, affecting people’s lives, disrupting businesses
and governments and undermining economic growth. Insurers’ and reinsurers’
financial results were impacted through both their exposure to COVID-19 claims
and the effects of an active catastrophe year. Although our earnings declined
in 2020, we posted an acceptable profit in a difficult year and delivered an
excellent 14.7% growth in book value per share (BVPS) — the 12th consecutive
year of BVPS growth, a significant achievement in the highly cyclical insurance
industry. Growth in BVPS remains our most important measure, as we believe
that increases in this metric over time are a key indicator of long-term value
creation for shareholders.
Our positive results in 2020 are primarily attributable to our diversified business
model and the adaptability, agility and resiliency of our employees. While
adjusting to an entirely new way of working, they supported one another and
delivered creative and valuable solutions to the market in the continued pursuit
of being our clients’ first call.
Over the past several years, while property and casualty rates were generally
depressed, we strategically deployed capital to those lines of business that
provided the best opportunity for earning an appropriate risk-adjusted return.
Recently, as market prices improved in our property casualty segments, we
leaned more heavily into organic growth and supplemented our product offering
through targeted acquisitions that also improved our economies of scale.
Marc Grandisson
Chief Executive Officer
Arch Capital Group Ltd.
1
Arch Capital Group Ltd.
Our 2019 acquisition of Barbican Group Holdings Limited
(Barbican) significantly raised our capacity at Lloyd’s of
London, where we’ve experienced substantial growth and
deepened our focus on third-party capital management.
Meanwhile, we’ve made substantial
in
technology, process improvement and data analytics
to improve our decision-making and ability to share
knowledge with our clients.
investments
In 2020, as property casualty market conditions improved,
we moved quickly to capitalize on the better opportunities
offered by this cyclical shift. Historically, we have seized
upon hardening markets to deliver superior risk-adjusted
returns and accelerate the growth in our BVPS — and
this latest market correction is no different. All told, we
increased our net premiums written by 25.3% in 2020, led
by a 53.3% increase in net premiums in the reinsurance
segment, reflecting a combination of better pricing and
new opportunities.
Our cycle management philosophy is successful because
of our strong and flexible balance sheet, focus on
disciplined underwriting and exceptional team of people.
We have the resources, acumen and scale to continue
to write significantly more business so long as returns
remain attractive. The $1.0 billion public offering of senior
notes we concluded in June, a large portion of which was
deployed to support the growth in our property casualty
operations, is an example of our ability and willingness to
navigate the current environment with vigor.
Financial Results
Arch’s after-tax operating income was $1.36 per share
in 2020, down from $2.82 per share in 2019. Our BVPS
grew substantially to $30.31 from $26.42 in 2019.
All financial results above include our approximately 13% common
equity interest at year-end 2020 in Watford Holdings Ltd. (the
“other” segment). The financial results that follow in this letter
exclude amounts related to the “other” segment, details of which
can be found in Note 12 of our 2020 Form 10-K, included in this
annual report.
Underwriting Results
Underwriting income was $481 million in 2020, down
from $1.1 billion in 2019. The decrease was primarily
attributable to $685 million of catastrophe and COVID-
19-related losses in our property casualty units compared
to $113 million in 2019. Despite an uncertain environment
due to COVID-19, our mortgage segment was a leading
contributor to our bottom line, although generating less
profit than last year.
Investment Results
Investable assets rose to $26.9 billion at the end of 2020
from $22.3 billion a year earlier. Cash flow from operations
was very strong, increasing to $2.7 billion in 2020 from
$1.8 billion in 2019, due primarily to increased premiums
written. In managing the portfolio, we emphasize total
return (net investment income, net realized gains and
losses, changes in unrealized gains and losses, and equity
in the net income or losses of investment funds accounted
for using the equity method), which contributes to BVPS
growth. The total return was 7.77% in 2020 and 7.30%
in 2019.
At the end of 2020, approximately 78% of the portfolio
was invested in fixed maturity and short-term securities
with an average credit quality of “AA/Aa2.” We also
invested a portion of the portfolio in equities and alternative
investments, which contributed to the 2020 total return. The
average effective duration of the overall portfolio remained
relatively short at 3.01 years at December 31, 2020.
The portfolio generated $402 million of net investment
income in 2020, down 17.6% from 2019 on a per-share
basis. This decrease reflected a general decline in interest
rates and credit spreads available in the financial markets.
Over the past two years, the total returns on our investment
portfolio have been excellent, contributing significantly to
our growth in BVPS. However, given that the embedded
book yield on our bond portfolio (which comprises
approximately 70% of our overall portfolio) was 1.56%
2
2020 Annual Report
at December 31, 2020, it will be challenging to match the
returns of the last two years in the near term. To offset some of
the pressure from the current low interest rate environment,
our investment professionals are diligently working to find
investment opportunities that provide incremental returns
without taking on undue risk in the investment portfolio.
Segment Performance
Arch writes specialty, commercial property casualty
insurance and reinsurance primarily from operations
in Bermuda, the United States, Canada, Europe and
the United Kingdom, while mortgage insurance and
reinsurance are written primarily in the United States,
Bermuda, Europe and Australia.
Property casualty insurance: This is our largest segment,
accounting for 46% of the Company’s 2020 net premiums
written. Premium volume was $3.2 billion, increasing
19.7% over 2019. The segment had an underwriting loss in
2020 primarily due to catastrophe losses, although we see
continuing signs of improvement in many of the lines we
operate. Rate momentum remains positive overall, and it’s
important to note that the effects of higher premium rates
can take up to eight quarters to become fully reflected in
underwriting margins.
Property casualty reinsurance: This segment represented
35% of net premiums written in 2020 and was our fastest-
growing business, as net premiums written advanced 53.3%
to $2.5 billion. Like insurance, the segment was significantly
affected by natural catastrophes and COVID-19, which
totaled $413 million in claims for the year. While market
conditions were not uniformly strong, dislocation from
other carriers reducing their capacity created more areas of
opportunity that Arch was well positioned to capitalize on.
Mortgage insurance and reinsurance: With $1.3 billion
of net premiums written, this segment accounted for
19% of the Company’s 2020 premium volume. Although
underwriting profit was lower than in 2019 because of a
spike in COVID-19-related mortgage delinquencies in the
first two quarters, by December 31, 2020, the impact of
pandemic-related uncertainties on the mortgage market
had largely abated and delinquency rates declined. During
the last two quarters of 2020, cure activity exceeded new
notices of default. Overall, the segment performed well
through the pandemic recession as higher housing prices
and a surge in mortgage refinance activity created strong
demand for mortgage insurance — resulting in a record
amount of new insurance written for the year.
Corporate Initiatives
We continue to make significant investments in technology
to improve our ability to manage the Company more
efficiently, better serve our clients and assess and price risk
more effectively.
Key technology initiatives in 2020 included supporting
the remote-working capability for our global workforce,
improving automation and decision-making technologies
within our segments and continuing to enhance our overall
information security posture.
Our data analytics successes included developing Arch’s
Business Intelligence platform and expanding our advanced
analytics across underwriting, claims, operations and
distribution. Additionally, we increased distribution options
for our Insurance Group by entering into new digital
partnerships with InsurTech and digital distribution partners.
In 2020, we agreed to increase our investment in Watford
Holdings Ltd., a specialty insurer and reinsurer where we
serve as Watford’s underwriting manager, to 40%. In
February 2021, we acquired a 29.5% minority stake in
Coface, a global trade credit insurer, after announcing our
intent a year earlier. Coface operates in some 100 countries
and fits both our specialty insurance strategy and our efforts
to further diversify our sources of income.
3
Arch Capital Group Ltd.
We also published our first Environmental, Social and
Governance (ESG) Sustainability Report and corresponding
Sustainability Accounting Standards Board disclosure
document in 2020. These two annual reports represent a
major milestone in Arch’s sustainability and ESG journey
and will be key elements of our ongoing program to
communicate what we do and its value to our stakeholders.
Capital Allocation and Management
We maintain a strong balance sheet to meet our customer
obligations and provide flexibility to write more business
or make acquisitions when opportunities arise. Even after
issuing $1.0 billion of notes in 2020, our ratio of debt and
hybrids to total capital was a conservative 22.1% at year-
end, up slightly from 19.0% in 2019.
We are stewards of the capital entrusted to us and seek to
create shareholder value by dynamically allocating capital
to and within our operating segments. Throughout our
history, this strategy has included returning excess capital
to our shareholders. During 2020, we repurchased 2.9
million shares at an aggregate price of $84 million, helping
us exceed $4.0 billion in total share repurchases since our
share buyback program began.
Arch People
Skilled, motivated people are central to Arch’s success,
and we are extremely proud of the way our employees
adapted quickly to the COVID-19-era workplace. 2020 also
highlighted the importance of strong leadership. It’s critical
that we continue to cultivate a deep, talented management
team as the Company continues to evolve.
Property and Casualty Operations. In his expanded role,
he is responsible for our three operating segments —
Insurance, Reinsurance and Mortgage — and for oversight
of the Company’s Strategy and Innovation team.
Lee Alfrey was promoted to Chief Transformation Officer,
where he is responsible for leading Arch’s capacity
development, strategic growth plan and driving quality
and efficiency to deliver a better experience for Arch’s
customers. Alfrey joined Arch in 2018.
Christy Caragol joined Arch as Senior Vice President, Talent
Management and Diversity and Inclusion (D&I), where she
is responsible for training and development and for steering
the Company’s overall D&I strategy.
Joy Huibonhoa was promoted to Executive Vice President
and Deputy General Counsel, reflecting her increased
responsibility for oversight of corporate compliance.
Huibonhoa joined Arch in 2002.
Insurance
Brian Chiolan was promoted to Executive Vice President,
Healthcare, for Arch Insurance North America. Chiolan
joined Arch Insurance in 2009.
Marilyn Marshall was promoted to Executive Vice President,
Professional Liability, for Arch Insurance North America.
Marshall joined Arch Insurance in 2009.
Randy Paez joined Arch as Chief Information Officer for
Arch Insurance North America.
Corporate
Nicolas Papadopoulo was promoted to President and
Chief Underwriting Officer, effective January 1, 2021.
Papadopoulo joined Arch in 2001 and has advanced
through a series of positions, most recently serving as
Chairman and Chief Executive Officer of Arch Worldwide
Insurance Group and Chief Underwriting Officer for
Regan Shulman was promoted to Executive Vice President
and General Counsel for Arch Insurance North America.
Shulman joined Arch Insurance in 2012.
Sue Srinivasan was promoted to Executive Vice President,
Retail Strategy and Distribution, for Arch Insurance North
America. Srinivasan joined Arch Insurance in 2019.
4
2020 Annual Report
challenges not only for Arch and its team, but also for billions
of people worldwide. Our shareholders should feel confident
knowing the creativity, commitment and resilience of Arch’s
employees were critical factors in our success this past year
and will help drive our future performance.
Finally, we thank you, our shareholders, for your continued
support through your investment in the Company.
Marc Grandisson
Chief Executive Officer
Arch Capital Group Ltd.
5
Simon Williams was promoted to Chief Strategy and
International.
for Arch
Distribution Officer
Williams joined Arch Insurance International in 2018.
Insurance
Mortgage
Alan Tiernan was promoted to Chief Actuary, Global
Mortgage Group. Tiernan joined Arch in 2014.
Reinsurance
Kamran Amin was promoted to Chief Information Officer,
Arch Reinsurance Group. Amin joined Arch Reinsurance
in 2019.
Valandis Elpidorou was promoted to Head of Property and
Casualty, Arch Reinsurance Europe. Elpidorou joined Arch
Reinsurance in 2016.
Megan McCarthy was promoted to Northeast Branch
Manager, Arch Re Facultative. McCarthy joined Arch
Reinsurance in 2007.
Outlook
Our disciplined underwriting approach and diversified
business model again served Arch and its shareholders
well in 2020. We are excited about Arch’s opportunities in
2021 and believe favorable market conditions will sustain
an improved property casualty underwriting environment.
Additionally, the fundamentals of the mortgage market
remain positive, and the demand for mortgage insurance
should endure while mortgage delinquencies continue to
recede from their 2020 highs.
In a year in which many of our clients called upon us
for assistance, we were steadfast in our commitment to
providing support and paying claims. We recognize our
success derives from the patronage of our distributors and
clients, and we remain dedicated to meeting their needs.
We also offer our sincere thanks to each of our 4,500+
employees for a job well done in 2020, a year of unusual
Arch Capital Group Ltd.
Providing Customer-Focused Solutions
Arch Insurance is a global insurer offering superior coverage and service to its clients and brokers. We participate
in specialty lines where the talent and knowledge of our employees are a competitive differentiator. We seek to
provide specialty risk solutions across a wide range of industries from our global network of offices.
Growth and Discipline
Despite the challenges of 2020, the overall story for
Arch Insurance was one of growth. In total, the segment
achieved a 19.7% increase — top among our peer group*
— in net written premiums. In addition to growing written
premiums, our focus on actively managing our portfolio
over the past several years — reducing our exposure in
underperforming lines — resulted in a current accident
year combined ratio (excluding catastrophes) of 95.2%,
down from 100.5% in 2019.
Arch Insurance North America continues to build a
sustainable franchise for today and tomorrow. Our
emphasis on serving specialty middle market accounts for
the past several years is bearing fruit and has provided the
right balance to our large account focused businesses. We
achieved improvement in pricing across all of our lines of
business with particular progress in management liability
and excess and surplus property and casualty. Our diverse
portfolio is well positioned for continued growth in 2021
and beyond.
Insurance
International continued
Arch
integrating
Barbican and the UK Regional business (both acquired
in 2019). Through both these acquired platforms and
existing underwriting operations in the UK, Bermuda and
Australia, we used rapidly improving market conditions to
aggressively expand, with year-over-year growth in gross
written premiums of 47.9%. Throughout 2020, Arch
Insurance International also added new underwriting
capabilities in specialty wholesale lines to enhance the
Company’s future position in the London market.
Innovation and Employee-Led Process
Improvement
Our commitment to listening to our employees’ ideas for
streamlining cumbersome processes and eliminating waste
remains an important aspect of how we operate. An internal
*Peer Group includes: American Financial, Argo
Group, AXIS, Everest, Hanover, Markel, RLI, RSUI
(Alleghany), Selective, W.R. Berkley.
Calendar Year Net Premiums Written ($M)
Specialty Small/Middle Market
Franchise Positions
Wholesale/Large Capacity
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
6
2020 Annual Report
Key Ratios for 2020
Loss Ratio
72.9%
Underwriting Expense Ratio
31.6%
Combined Ratio
104.5%
Professional Lines
Property, Energy, Marine and Aviation
Programs
Construction and National Accounts
Excess and Surplus Casualty
Other
Travel, Accident and Health
Warranty and Lender Solutions
24%
20%
14%
12%
9%
9%
7%
5%
Insurance Net Premiums Written
$3.2B
As of December 31, 2020
initiative to accelerate new product delivery, deemed
“Speed to Market,” has allowed us to decrease the rollout
time of new products and programs by over 50%. Additional
focus on streamlining our claims processes has improved
the overall customer experience by introducing expedited
handling of smaller claims.
Embracing InsurTech through our Digital Partners group
has yielded early success by creating multiyear partnerships
to provide insurance capacity and develop new products.
Becoming a go-to provider of capacity and analytical
capabilities for this growing segment of our industry is an
important part of our long-term growth strategy.
A Focus on Culture
Our year began with the introduction of the Arch Experience
to our global workforce. This ongoing initiative, designed
to instill, exhibit and reinforce the critical behaviors needed
to differentiate Arch in today’s competitive environment,
increased engagement between employees and leadership
while providing opportunities to identify and share the
stories that make Arch Insurance’s culture unique.
The pandemic led to a renewed focus on communication
up and down our organization. From companywide virtual
town halls to smaller regional and departmental meetings,
staying connected was a key to maintaining the confidence
and morale needed to meet our objectives.
An important step for Arch Insurance in 2020 was an
increased focus on Diversity and Inclusion (D&I). Arch
Insurance joined the corporatewide initiative to launch
Employee Networks, which are
formally recognized,
company-supported groups that allow employees to set
and execute annual goals that support Arch’s D&I strategy.
Additionally, based on employee input, we worked with the
Spencer Educational Foundation, a nonprofit funding the
education of tomorrow’s risk management and insurance
leaders, to launch the Arch Insurance Scholars Program.
By creating eight new scholarships over the next four years,
we aim to help students from underrepresented groups who
are pursuing careers in risk management and insurance.
7
Arch Capital Group Ltd.
A Global Leader in Residential Mortgage Credit Risk
Arch’s Global Mortgage Group facilitates sustainable homeownership through the aggregation, management
and syndication of mortgage credit risk worldwide through our insurance, reinsurance and capital markets
businesses in the United States, Europe, Australia and Bermuda. Through these operations, Arch stands
alone as the only globally diversified insurer of mortgage credit risk.
Supporting Sustainable Homeownership
In the United States, our largest market, Arch MI U.S.
provides banks, independent mortgage bankers, credit
unions and Fannie Mae and Freddie Mac (the Government-
Sponsored Enterprises, or GSEs) with the financial security
and credit
to support
insurance protection needed
mortgage lending. By giving qualified borrowers access to
mortgage insurance (MI), we help encourage sustainable
homeownership among a diverse group of individuals and
families. In 2020, we helped over 397,000 borrowers in the
U.S. purchase or refinance a home.
For our Mortgage segment — and the MI market overall
— 2020 began with significant uncertainty about how the
COVID-19 pandemic would affect the world economy,
employment, home purchase activity and borrowers’ ability
to pay their mortgages. As the year progressed, government
and private market forbearance programs stabilized the
industry while historically low mortgage rates served as a
catalyst to push home sales and refinances to record levels.
Despite our employees operating remotely for most of the
year, we produced a record $112 billion of new insurance
written (NIW) at Arch MI U.S., which was 44% above the
previous high mark established in 2019. The NIW produced
in Arch MI U.S., combined with solid performance of
insured loans originated in prior years and contributions
from the Alternative Markets, Credit Risk Transfer and
Services and International businesses enabled the unit to
generate $594 million in underwriting income.
Innovation and Thought Leadership
Arch MI, having introduced the industry’s first risk-based
pricing engine, RateStar, in 2009, is regarded as the
8
Arch MI U.S. only
As of December 31, 2020
4.19%
$70.5
BILLION
Delinquency Rate
Risk-in-Force
Before reinsurance
and risk-sharing
operations.
pacesetter for the industr y when it comes to thought
leadership and innovation. The past year provided ample
opportunities to display both.
industry,
We launched the Arch MI PolicyCast, a biweekly video
podcast that touches on key issues facing the housing
finance
including minority homeownership,
affordable housing and the impact of potential legislation.
Additionally, we continued to publish Arch MI’s Housing and
Mortgage Market Review (HaMMR), which has provided
housing sector forecasts and information on long-term
trends under several names since 2002. Offerings like the
HaMMR and PolicyCast are just two reasons the industry
looks up to Arch MI.
Arch also took a leadership role by restarting the mortgage
insurance-linked notes (MILN) market after it went dormant
in the early part of 2020. Arch MI launched the MILN market
in 2015 through its Bellemeade securitizations, which provide
capital markets investors access to mortgage credit risk
while helping Arch better manage risks. In June 2020, Arch
issued the first mortgage credit risk transfer (CRT) by any
company in the COVID-19 era — effectively jumpstarting
the market for other issuers and enabling Arch to complete
four Bellemeade MILN transactions in 2020, netting over
$1.8 billion of indemnity reinsurance.
In addition to providing thought and market leadership,
we continued to grow our diversified businesses. Our
international segment grew total premiums written by over
12% as we underwrote our first MI policies on our newly
licensed entity in Australia, Arch LMI Pty Ltd. Our Credit Risk
Transfer and Services group underwrote approximately $1.6
billion of GSE CRT limit — leading to the highest annual
volume of GSE CRT booked since the unit’s formation.
A Committed and Engaged Culture
Through it all, the perseverance and commitment of our
employees are what truly made a difference this year.
Sent home essentially overnight, nearly 1,000 employees
embraced change and developed the resilience to thrive
amidst record volume.
Employees in our Greensboro, North Carolina, headquarters
recognized Arch MI as one of the “Best Places to Work”
by the Triad Business Journal for the second consecutive
year. Creating a work environment in which employees
are engaged and respected is a longstanding goal across
all Arch companies — being recognized in the midst of
COVID-19 is a significant accomplishment.
2020 Annual Report
Key Ratios for 2020
Loss Ratio
37.8%
Underwriting Expense Ratio
21.2%
Combined Ratio
59.0%
Supporting Our Communities
During a year in which resources for charitable organizations
were increasingly scarce, Arch MI maintained its historical
giving levels, encouraged our employees to use their two
days of volunteer time off and, importantly, matched
donations to the organizations that our people deemed
most worthy of their support.
Arch MI also answered the call to assist organizations
committed to racial justice by making donations to the NAACP,
the Equal Justice Initiative and the International Civil Rights
Center & Museum. Arch MI partnered with North Carolina
A&T State University — the nation’s largest historically Black
college, which is located in Greensboro — on a scholarship
program designed to provide financial support and real-
world experiences for high-achieving students.
Global Mortgage Group Insurance In Force (IIF) and Underwriting Income
As of December 31, 2020
IIF Mortgage Reinsurance
IIF GSE Credit Risk Sharing and International Insurance
$1,041
IIF U.S. Mortgage Insurance
Underwriting Income $M
$691
$352
8%
20%
$858
$384
7%
21%
$424
7%
27%
$418
6%
25%
$594
72%
72%
69%
66%
$156
$600
$500
$400
$300
$200
B
$
)
F
I
I
(
e
c
r
o
F
n
i
e
c
n
a
r
u
s
n
I
$100
$128
$0
$316
UGC*
$188
59%
8%
18%
15%
$1,200
$1,000
$800
$600
$400
$200
$0
M
$
e
m
o
c
n
I
g
n
i
t
i
r
w
r
e
d
n
U
2016
2017
2018
2019
2020
*The U.S. mortgage platform was established in 2014 and expanded greatly in 2016 through the acquisition of United Guaranty Corporation (UGC) and its subsidiaries.
9
Arch Capital Group Ltd.
Bespoke Solutions for Complex Risks
Arch Re is a leading, diversified reinsurer offering treaty and facultative property, casualty and specialty reinsurance
from locations around the world. We focus on Expanding the Possible for our clients by providing creative ideas
and solutions while serving as a long-term, reliable partner. The bedrock of our offerings remains our specialty
classes. Our team of experienced underwriters is known for engaging with clients and brokers on the most
complex challenges in a volatile risk environment to deliver customized solutions that meet our customers’ needs.
Helping Our Clients Rebuild
Historically, the performance of reinsurers is heavily
impacted by natural catastrophes such as hurricanes,
typhoons, earthquakes and wildfires. For Arch Re, 2020
was particularly challenging from a catastrophe perspective,
with over $400 million in losses related to natural disasters
and COVID-19. Through these events, our clients continued
to rely on Arch’s financial strength and commitment to
fulfill our obligations. Our cedants relied on us to help their
clients rebuild, and — with all of 2020’s challenges — they
looked to us for leadership.
Following years of heavy catastrophe activity, we were able
to flex into the hardening market and grow gross written
premiums by $1.1 billion, a 49.5% increase from 2019.
Our risk management and resilient mix of business resulted
in yet another year of profit in the face of record industry
losses. We posted a 99.5% combined ratio, aligning with
our history of delivering above average performance. Over
the past three years, our combined ratio averaged 96.8%,
outperforming our peers’ average* of 102.0%.
Moving forward, we anticipate overall pricing trends will
continue to push upward due to social inflation concerns, a
series of active catastrophe years and an increased focus on
underwriting profit due to sustained low interest rate yields.
Calendar Year Net Premiums Written by Line ($M)
Other
Marine, Aviation
and Space
Property
Catastrophe
Specialty
Property Excl.
Property
Catastrophe
Casualty
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Reinsurance Segment: Casualty includes executive assurance, professional liability, workers’ compensation, healthcare and other. Specialty includes proportional
motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other. Other includes life, casualty clash and other.
10
2020 Annual Report
Key Ratios for 2020
Loss Ratio
75.3%
Underwriting Expense Ratio
24.2%
Combined Ratio
99.5%
Specialty
Property
Casualty
Property Catastrophe
Marine, Aviation and Space
Other
29%
28%
22%
12%
6%
3%
Reinsurance Net Premiums Written
$2.5B
As of December 31, 2020
Enhancing Our Platform
We embraced the opportunities that surfaced in 2020 to
enhance our expertise and expand our capabilities. In July, we
acquired a majority stake in Precision Marketing Asia Pacific
(PMAP), a firm that provides data-driven marketing and
distribution solutions to banks, insurance companies, retail
groups and affinity partners across the Asia-Pacific region.
This transaction provides Arch Re with increased distribution
opportunities to expand both its life, and accident and health
businesses in an important part of the world.
In addition, we fully integrated new team members from
two 2019 acquisitions into our operations. Colleagues from
Barbican were integral to our success at Lloyd’s and the
global credit and surety employees that joined from Aspen
Re augmented our existing team in Zurich.
Continued Emphasis on Third-Party Capital
Going back to Flatiron Re’s formation in 2005, Arch
Re has championed third-party capital, allowing us to
expand our client and broker relationships by providing
them broader solutions as we leverage our underwriting
expertise and generate fee income. In 2020, we expanded
our platform’s business, team and capabilities to increase
assets under management. In October, we announced
our intent to acquire Watford Holdings Ltd. alongside two
private equity partners. Once complete, this transaction
will provide increased opportunities to advance our third-
party capital strategy and expand into a hardening market.
Investing In Our People
The unique challenges of 2020 helped reveal the true
character of our team. Embracing the concept of “separate
but together,” our teams in Bermuda, Ireland, Switzerland,
the United Kingdom and throughout the United States
worked diligently to provide our clients with the products
and services they needed.
Our substantial investments in technology over the past several
years enabled us to successfully navigate the pandemic —
whether working from home or socially distanced in our
offices. Additionally, our emphasis on data analytics resulted
in several deliverables that enabled our underwriters to
expand their capacity and improve risk selection.
In April 2020, we launched our Diversity and Inclusion
Advisory Committee to provide a forum to examine avenues
to broaden our diversity and generate discussions about
ways to make our Company more open and inclusive. We
remain committed to continuing our practice of investing in
our people to ensure we remain an employer of choice in
an evolving industry.
*Peer Group includes: Aspen Re, AXIS Re, Berkley Re, Chubb Tempest Re, Everest
Re, Partner Re, Renaissance Re, Sirius Re (acquired by Third Point Re in February
2021), Transatlantic.
11
Arch Capital Group Ltd.
Expanding Environmental, Social and Governance
topics
Environmental, Social and Governance (ESG)
present risks and opportunities across our businesses, our
investments and the communities where we live and conduct
business. In 2020, we prioritized meaningful, companywide
ESG integration by focusing on our management of the ESG
topics deemed most relevant to our industry and Company
and published our first Sustainability Report to record our
ESG journey. We are committed to the ongoing integration
of ESG topics, including risk and opportunity management,
within five key areas.
We understand that by investing in the success of Our
People as individuals and professionals, we create long-
term sustainable growth as an organization. Our holistic
approach to human capital management is centered
on providing an unparalleled employee experience. This
enables us to attract and retain a diverse, talented and
innovative workforce and to grow an inclusive culture where
employees are engaged, developed, rewarded and fulfilled.
We support our employees and stakeholders by incorporating
sustainability and responsible, ethical practices within
Our Operations. By actively managing ESG risks and
embedding compliance, transparency, data protection and
resiliency across all areas of our operations, we are well
positioned to protect our people and the customers who
entrust us with their personal information and business.
Arch’s Five ESG Pillars
Across Our Business, we look for areas of opportunity
to manage ESG risks in the interest of our insureds. As a
global (re)insurer, understanding environmental issues in the
context of sensitive sectors allows us to reduce risks and take
advantage of opportunities in our underwriting for the benefit
of our shareholders, customers and other stakeholders. By
focusing on environmental issues through an integrated
approach aligned with our corporate values, we can reduce
such risk exposures and support our core business strategy.
We believe that the incorporation of material, nonfinancial
factors into investment selection has the potential to
enhance long-term investment returns. When it comes
to Our Investments, we consider ESG factors for both
internally managed assets and assets managed for us by
third parties. Additionally, we measure our exposure to
ESG risks at both individual asset classes and total portfolio
levels. Our ESG Aware Policy, approved by our Board of
Directors in 2019, reflects our approach to sustainable
value creation by requiring that we consider ESG factors in
the investment process.
Striving to make a difference by investing in Our
Communities is one of Arch’s core values. While the
COVID-19 pandemic continues to cause hardship across
the globe, it also underscores our commitment to building
stronger, more resilient communities. We demonstrate
our ongoing commitment to community development by
supporting high-impact volunteer work and charitable giving
within our focus areas of health, housing and education.
Our Business
Underwriting
Sustainable
Insurance Products
Our Investments
Responsible Investing
Our Communities
Health
Housing
Education
Our People
Well-Being
Diversity and Inclusion
Learning and Career
Development
Our Operations
Ethics
Risk Management
Privacy and Data
Security
Greenhouse Gas
Reporting
12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2020
Commission File No. 001-16209
ARCH CAPITAL GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda
(State or other jurisdiction of incorporation or organization)
Waterloo House, Ground Floor
100 Pitts Bay Road, Pembroke HM 08, Bermuda
(Address of principal executive offices)
98-0374481
(I.R.S. Employer Identification No.)
(441) 278-9250
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Common Shares, $0.0011 par value per share
Depositary shares, each representing a 1/1,000th interest in a 5.25% Series E preferred share
Depositary shares, each representing a 1/1,000th interest in a 5.45% Series F preferred share
Trading Symbol (s)
ACGL
ACGLP
ACGLO
Name of each exchange on
which registered
NASDAQ Stock Market
NASDAQ Stock Market
NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer ☑ Accelerated Filer ☐ Non-accelerated Filer ☐ Smaller reporting company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the closing price as
reported by the NASDAQ Stock Market as of the last business day of the Registrant’s most recently completed second fiscal quarter, was
approximately $11.3 billion.
As of February 19, 2021, there were 403,014,515 of the registrant’s common shares outstanding.
Portions of Part III and Part IV incorporate by reference our definitive proxy statement for the 2021 annual meeting of shareholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
ARCH CAPITAL GROUP LTD.
TABLE OF CONTENTS
Item
Page
ITEM 1.
ITEM 1A. RISK FACTORS
BUSINESS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART I
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16.
FORM 10-K SUMMARY
PART IV
3
32
47
47
47
47
48
49
50
82
83
160
160
160
161
161
162
162
162
163
174
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. This
report or any other written or oral statements made by or on behalf of us may include forward-looking statements, which reflect
our current views with respect to future events and financial performance. All statements other than statements of historical fact
included in or incorporated by reference in this report are forward-looking statements. Forward-looking statements, for
purposes of the PSLRA or otherwise, can generally be identified by the use of forward-looking terminology such as “may,”
“will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” and similar statements of a future or forward-
looking nature or their negative or variations or similar terminology.
Forward-looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ
materially from those expressed or implied in these statements. Important factors that could cause actual events or results to
differ materially from those indicated in such statements are discussed below and elsewhere in this report and in our periodic
reports filed with the Securities and Exchange Commission (“SEC”), and include:
•
•
•
•
•
•
•
•
•
our ability to successfully implement our business strategy during “soft” as well as “hard” markets;
acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers
and our insureds and reinsureds;
our ability to consummate acquisitions and integrate the business we have acquired or may acquire into our existing
operations;
our ability to maintain or improve our ratings, which may be affected by our ability to raise additional equity or debt
financings, by ratings agencies’ existing or new policies and practices, as well as other factors described herein;
general economic and market conditions (including inflation, interest rates, unemployment, housing prices, foreign currency
exchange rates, prevailing credit terms and the depth and duration of a recession, including those resulting from COVID-19)
and conditions specific to the reinsurance and insurance markets in which we operate;
competition, including increased competition, on the basis of pricing, capacity (including alternative sources of capital),
coverage terms, or other factors;
developments in the world’s financial and capital markets and our access to such markets;
our ability to successfully enhance, integrate and maintain operating procedures (including information technology) to
effectively support our current and new business;
the loss of key personnel;
• material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;
•
•
•
•
•
•
•
•
•
•
accuracy of those estimates and judgments utilized in the preparation of our financial statements, including those related to
revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad
debts, income taxes, contingencies and litigation, and any determination to use the deposit method of accounting;
greater than expected loss ratios on business written by us and adverse development on claim and/or claim expense
liabilities related to business written by our insurance and reinsurance subsidiaries;
the adequacy of the Company’s loss reserves;
severity and/or frequency of losses;
greater frequency or severity of unpredictable natural and man-made catastrophic events;
claims for natural or man-made catastrophic events or severe economic events in our insurance, reinsurance and mortgage
businesses could cause large losses and substantial volatility in our results of operations;
the effect of climate change on our business;
the effect of contagious diseases (including COVID-19) on our business;
acts of terrorism, political unrest and other hostilities or other unforecasted and unpredictable events;
availability to us of reinsurance to manage our gross and net exposures and the cost of such reinsurance;
ARCH CAPITAL
1
2020 FORM 10-K
Table of Contents
•
•
•
•
•
•
•
•
•
•
•
the failure of reinsurers, managing general agents, third party administrators or others to meet their obligations to us;
the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;
our investment performance, including legislative or regulatory developments that may adversely affect the fair value of our
investments;
changes in general economic conditions, including sovereign debt concerns or downgrades of U.S. securities by credit rating
agencies, which could affect our business, financial condition and results of operations;
changes in the method for determining the London Inter-bank Offered Rate (“LIBOR”) and the potential replacement of
LIBOR;
the volatility of our shareholders’ equity from foreign currency fluctuations, which could increase due to us not matching
portions of our projected liabilities in foreign currencies with investments in the same currencies;
changes in accounting principles or policies or in our application of such accounting principles or policies;
changes in the political environment of certain countries in which we operate or underwrite business;
a disruption caused by cyber-attacks or other technology breaches or failures on us or our business partners and service
providers, which could negatively impact our business and/or expose us to litigation;
statutory or regulatory developments, including as to tax matters and insurance and other regulatory matters such as the
adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or
reinsurers and/or changes in regulations or tax laws applicable to us, our subsidiaries, brokers or customers, including the
Tax Cuts and Jobs Act of 2017; and
the other matters set forth under Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and other sections of this Annual Report on Form 10-K, as well as the other factors set
forth in Arch Capital Group Ltd.’s other documents on file with the SEC, and management’s response to any of the
aforementioned factors.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. The foregoing review of important factors should not be construed as
exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. We
undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
ARCH CAPITAL
2
2020 FORM 10-K
Table of Contents
ITEM 1. BUSINESS
PART I
the “Company” refer
As used in this report, references to “we,” “us,” “our,”
“Arch” or
the consolidated
operations of Arch Capital Group Ltd. (“Arch Capital”) and
its subsidiaries. Tabular amounts are in U.S. Dollars in
thousands, except share amounts, unless otherwise noted. We
refer you to Item 1A “Risk Factors” for a discussion of risk
factors relating to our business.
to
OUR COMPANY
General
reinsurance and mortgage
Arch Capital, a publicly listed Bermuda exempted company
with $15.8 billion in capital at December 31, 2020, provides
insurance,
insurance on a
worldwide basis through its wholly owned subsidiaries.
While we are positioned to provide a full range of property,
casualty and mortgage insurance and reinsurance lines, we
focus on writing specialty lines of insurance and reinsurance.
For 2020, we wrote $7.4 billion of net premiums and
reported net income available to Arch common shareholders
of $1.4 billion. Book value per share was $30.31 at
December 31, 2020, compared to $26.42 per share at
December 31, 2019.
Arch Capital’s registered office is located at Clarendon
House, 2 Church Street, Hamilton HM 11, Bermuda
(telephone number: (441) 295-1422), and its principal
executive offices are located at Waterloo House, Ground
Floor, 100 Pitts Bay Road, Pembroke HM 08, Bermuda
(telephone number: (441) 278-9250). Arch Capital makes
available free of charge through its website, located at
www.archcapgroup.com, its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K,
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with, or
furnished to, the SEC. The SEC maintains an Internet site
that contains reports, proxy and information statements, and
other information regarding issuers that file electronically
with the SEC (such as Arch Capital) and the address of that
site is www.sec.gov.
Our History
Arch Capital was formed in September 2000 and became the
sole shareholder of Arch Capital Group (U.S.) Inc. (“Arch-
U.S.”) pursuant to an internal reorganization transaction
completed in November 2000. In October 2001, Arch Capital
launched an underwriting initiative to meet current and future
demand in the global insurance and reinsurance markets that
included the recruitment of new management teams and an
equity capital infusion of $763.2 million which created a
strong capital base that was unencumbered by significant
pre-2002 risks. Since then, we have attracted a proven
management team with extensive industry experience and
continued to build our global underwriting platform for our
insurance,
insurance and
reinsurance businesses.
reinsurance and mortgage
Our insurance underwriting platform initially consisted of our
Bermuda and U.S. operations, followed by the establishment
of our United Kingdom-based carrier, Arch Insurance (UK)
Limited (“Arch Insurance (U.K.)”) in 2004 and Canadian
operations in 2005. In 2009, we established a managing
agency and syndicate at Lloyd’s of London (“Lloyd’s”) and
significantly expanded our U.K. presence in 2019 through the
acquisition of Barbican Group Holdings Limited (“Barbican
Holdings”) and its subsidiaries (collectively, “Barbican”).
Our U.S. platform has grown with the 2018 acquisition of
McNeil & Company, Inc. (“McNeil”), a U.S. nationwide
risk management and program
leader
administration. See “Operations—Insurance Operations” for
further details on our insurance operations.
in specialized
Our reinsurance underwriting platform initially consisted of
Arch Reinsurance Ltd. in Bermuda (“Arch Re Bermuda”)
and Arch Reinsurance Company (“Arch Re U.S.”), our U.S.-
licensed reinsurer. Our reinsurance operations in Europe
began in 2006 in offices in Zurich, Switzerland and the
formation of a Danish underwriting agency in 2007. In
addition to the U.S. reinsurance treaty activities of Arch Re
U.S., we launched our property facultative reinsurance
underwriting operations in 2007, which underwrite in the
U.S., Canada and Europe. In 2008, we formed Arch
Reinsurance Europe Designated Activity Company (“Arch
Re Europe”), our
reinsurance company
Ireland-based
headquartered in Ireland with offices in Switzerland and the
U.K. The acquisition of Barbican in November 2019 also
contributed to our reinsurance operations. See “Operations—
Reinsurance Operations”
further details on our
for
reinsurance operations.
Our mortgage operations include U.S. and international
mortgage insurance and reinsurance operations, as well as
participation in government sponsored enterprise (“GSE”)
credit risk-sharing transactions.
The U.S. mortgage platform was established in 2014 and
expanded greatly in 2016 through the acquisition of United
ARCH CAPITAL
3
2020 FORM 10-K
Table of Contents
Guaranty Corporation (“UGC”) and its subsidiaries from
American International Group, Inc. (“AIG”). Our U.S.
primary mortgage operations provide mortgage insurance
products and services to the U.S. market. These operations
include providers that are also approved as eligible mortgage
insurers by Federal National Mortgage Association (“Fannie
Mae”) and Federal Home Loan Mortgage Corporation
(“Freddie Mac”), each a GSE. The mortgage operations also
include participation in GSE credit risk-sharing transactions
and direct mortgage insurance to U.S. mortgage lenders with
respect to mortgages that lenders intend to retain in portfolio
or include in non-agency securitizations along with mortgage
reinsurance on a global basis. Our European business is
written through our Ireland-based carrier, Arch Insurance
(EU) Designated Activity Company (“Arch Insurance
(EU)”), which commenced in 2014 providing mortgage
insurance products and services to the European and U.K.
markets. In January 2019, Arch LMI Pty Ltd. (“Arch LMI”)
was authorized by the Australian Prudential Regulation
Authority (“APRA”) to write lenders’ mortgage insurance on
a direct basis in Australia. See “Operations—Mortgage
Operations” for further details on our mortgage operations.
is our belief
It
that our underwriting platform, our
experienced management team and our strong capital base
have enabled us to establish a strong presence in the markets
we participate in.
In 2014 we acquired approximately 11% of Watford
Holdings Ltd. Watford Holdings Ltd. is the parent of Watford
Re Ltd., a multi-line Bermuda reinsurance company (together
with Watford Holdings Ltd., “Watford”). In 2017, we
acquired approximately 25% of Premia Holdings Ltd. Premia
Holdings Ltd. is the parent of Premia Reinsurance Ltd., a
multi-line Bermuda reinsurance company (together with
Premia Holdings Ltd., “Premia”). In the 2020 fourth quarter,
we entered into agreements pursuant to which we, together
with certain investment funds managed by Kelso & Company
and certain investment funds managed by Warburg Pincus
LLC, expect to acquire all of the common shares of Watford
Holdings Ltd. in transactions expected to close in the first
half of 2021, subject to customary closing conditions
including
shareholder approval. See
“Operations—Other Operations” for further details on
Watford and Premia.
regulatory and
The board of directors of Arch Capital (the “Board”) has
authorized the investment in Arch Capital’s common shares
through a share repurchase program. Repurchases under the
share repurchase program may be effected from time to time
in open market or privately negotiated transactions through
December 31, 2021. Since the inception of the share
repurchase program in February 2007 through December 31,
2020, Arch Capital has repurchased 389.2 million common
shares for an aggregate purchase price of $4.1 billion. At
December 31, 2020, the total remaining authorization under
the share repurchase program was $916.5 million. The timing
and amount of the repurchase transactions under this program
will depend on a variety of factors, including market
conditions and corporate and regulatory considerations.
Depending upon results of operations, market conditions and
the development of the economy, as well as other factors,
generally we will consider share repurchases on an
opportunistic basis from time to time. During the 2020 fiscal
year, we repurchased 2,850,102 shares for an aggregate
amount of $83.5 million under our share repurchase program.
OPERATIONS
We classify our businesses into three underwriting segments–
insurance, reinsurance and mortgage–and two other operating
segments–‘other’ and corporate (non-underwriting). For an
analysis of our underwriting results by segment, see note 4,
“Segment
financial
statements in Item 8 and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—
Results of Operations.”
to our consolidated
Information,”
COVID-19 Pandemic
The global pandemic resulting from the novel coronavirus
(“COVID-19”) has disrupted the global economy, causing a
significant slowdown in economic activity around the world.
Businesses around the world, including ours, have been
impacted by the restrictions on travel, some business
activities and non-essential services and the reverberations of
severe curtailment of normal activities. We have taken
proactive steps to ensure the health and safety of our
employees with the majority of our 4,500 employees working
from home to maintain business continuity. Our employees
and businesses have adapted to the changing needs of our
clients, customers and business partners. We remain
committed to continuing to carrying on our business
activities without interruption during these challenging times.
Insurance Operations
Our insurance operations are conducted in Bermuda, the
United States, the United Kingdom, Europe, Canada, and
in Bermuda are
Australia. Our
conducted through Arch Insurance (Bermuda), a division of
Arch Re Bermuda, and Alternative Re Limited.
insurance operations
are Arch
Insurance Company
In the U.S., our insurance group’s principal insurance
subsidiaries
(“Arch
Insurance”), Arch Specialty Insurance Company, Arch
Indemnity and Arch Property & Casualty
Insurance
Company (“Arch P&C”). Arch Insurance is an admitted
insurer in 50 states, the District of Columbia, Puerto Rico, the
U.S. Virgin Islands and Guam. Arch Specialty is an approved
excess and surplus lines insurer in 50 states, the District of
ARCH CAPITAL
4
2020 FORM 10-K
Table of Contents
Columbia, Puerto Rico and the U.S. Virgin Islands and an
authorized insurer in one state. Arch Indemnity is an admitted
insurer in 49 states and the District of Columbia. Arch P&C,
which is not currently writing business, is an admitted insurer
in 36 states and the District of Columbia. Our insurance
group also operates McNeil, a specialized risk manager and a
program administrator based in Cortland, New York. The
headquarters for our
insurance group’s U.S. support
operations (excluding underwriting units) are in Jersey City,
New Jersey. The insurance group has offices throughout the
U.S., including five regional offices located in Alpharetta,
Georgia, Chicago, Illinois, New York, New York, San
Francisco, California, Dallas, Texas and additional branch
offices.
Our insurance operations in Canada are conducted through
Arch Insurance Canada Ltd., a Canada domestic company
which is authorized in all Canadian provinces and territories.
Arch Insurance Canada is headquartered in Toronto, Ontario.
In 2019, Arch Insurance (EU), based in Dublin, Ireland,
received authorization from the Central Bank of Ireland
(“CBOI”) to expand its classes of business as part of our plan
to address the U.K.’s departure from the European Union
(“Brexit”). As of January 2020, all of the insurance business
in the European Union (“EU”) previously written by Arch
Insurance (U.K.) is now written through Arch Insurance
(EU). Arch Insurance (EU) has branches in the EU in
Denmark and Italy and outside the EU in the U.K. At the end
of December 2020, Arch Insurance (U.K.) received court
approval in the U.K. to transfer its legacy book of business
written in the European Economic Area (“EEA”) to Arch
Insurance (EU) under Part VII of the U.K. Financial Services
and Markets Act 2000.
We conduct insurance operations on several platforms in the
U.K., including Arch Insurance (U.K.), Lloyd’s syndicates:
Arch Syndicate 2012 (“Arch Syndicate 2012”) and Arch
Syndicate 1955 (“Arch Syndicate 1955”). Arch Managing
Agency Limited (“AMAL”) is the managing agent of Arch
Syndicate 2012 and Arch Syndicate 1955. Our Lloyd’s
syndicates provide us access to Lloyd’s extensive distribution
network and worldwide licenses. AMAL also acts as
managing agent for third party members of Arch Syndicate
1955, which generates fee income. Arch Underwriting at
Lloyd’s (Australia) Pty Ltd, based in Sydney, Australia, is a
Lloyd’s services company which underwrites exclusively for
our Lloyd’s syndicates. With the Barbican acquisition, we
also acquired Castel Underwriting Agencies Limited
(“Castel”) in the U.K. and Castel Underwriting Europe BV in
the Netherlands, giving us
additional underwriting
intermediary capabilities for our underwriting platforms.
Collectively, the U.K. insurance operations are referred to as
“Arch U.K.”. Arch U.K. conducts its operations from
London and other locations in the U.K. Arch Insurance
(U.K.) will be winding down branch offices in other member
states of the EEA following Brexit and the expiration of the
transition period negotiated between the U.K. and the EU
from January 31, 2020 to December 31, 2020.
Strategy. Our insurance group’s strategy is to operate in lines
of business in which underwriting expertise can make a
meaningful difference in operating results. The insurance
group focuses on talent-intensive rather than labor-intensive
business and seeks to operate profitably (on both a gross and
net basis) across all of its product lines. To achieve these
objectives, our insurance group’s operating principles are to:
•
its
that
group
believes
Capitalize on profitable underwriting opportunities. Our
experienced
insurance
management and underwriting teams are positioned to
locate and identify business with attractive risk/reward
characteristics. As profitable underwriting opportunities
are identified, our insurance group will continue to seek
to make additions to its product portfolio in order to take
advantage of market trends. This includes adding
underwriting and other professionals with specific
expertise in specialty lines of insurance.
• Centralize responsibility for underwriting. Our insurance
group consists of a range of product lines. The
underwriting executive in charge of each product line
the underwriting product
oversees all aspects of
development process within such product line. Our
insurance group believes that centralizing the control of
such product line with the respective underwriting
executive allows for close management of underwriting
and creates clear accountability for results. Our U.S.
insurance group has four regional offices, and the
executive
is primarily
the marketing and
responsible for all aspects of
distribution of our insurance group’s products, including
the management of broker and other producer
relationships in such executive’s respective region. In
our non-U.S. offices, a similar philosophy is observed,
with responsibility for the management of each product
line residing with the senior underwriting executive in
charge of such product line.
in charge of each region
• Maintain a disciplined underwriting philosophy. Our
insurance group’s underwriting philosophy is to generate
an underwriting profit through prudent risk selection and
proper pricing. Our insurance group believes that the key
to this approach is adherence to uniform underwriting
standards across all types of business. Our insurance
group’s senior management closely monitors
the
underwriting process.
• Focus on providing superior claims management. Our
insurance group believes that claims handling is an
integral component of credibility in the market for
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insurance products. Therefore, our insurance group
believes that its ability to handle claims expeditiously
and satisfactorily is a key to its success. Our insurance
group employs experienced claims professionals and
also utilizes experienced external claims managers (third
party administrators) where appropriate.
• Promote and utilize an efficient distribution system. Our
insurance group believes that promoting and utilizing a
multi-channel distribution system, provides efficient
access to its broad customer base. Our insurance group
works with select international, national and regional
retail and wholesale brokers and leading managing
general agencies, including McNeil, to distribute our
insurance products. The Arch U.K. Regional Division
expanded our retail distribution network in the U.K.
•
Grow strategic partnerships in stable and niche areas.
Our insurance group aims to build more integrated long-
term alignment with strategic partners offering superior
access
scalable
to niche opportunities, quality
businesses, or lines with reliable defensive qualities.
Our insurance group writes business on both an admitted and
non-admitted basis. Our insurance group focuses on various
specialty
in note 4, “Segment
Information,” to our consolidated financial statements in Item
8.
lines, as described
insurance
Philosophy. Our
Underwriting
group’s
underwriting philosophy is to generate an underwriting profit
(on both a gross and net basis) through prudent risk selection
and proper pricing across all types of business. One key to
this philosophy is the adherence to uniform underwriting
standards across each product line that focuses on the
following:
•
•
•
•
•
•
risk selection;
desired attachment point;
limits and retention management;
due diligence, including financial condition, claims
history, management, and product, class and territorial
exposure;
underwriting authority and appropriate approvals; and
collaborative decision making.
Marketing. Our insurance group’s products are marketed
principally through a group of licensed independent retail and
wholesale brokers. Clients (insureds) are referred to our
insurance group through a large number of international,
national and regional brokers and captive managers who
receive from the insured or insurer a set fee or brokerage
commission usually equal to a percentage of gross premiums.
In the past, our insurance group also entered into contingent
commission arrangements with some brokers that provided
for the payment of additional commissions based on volume
or profitability of business. Currently, some of our contracts
with brokers provide for additional commissions based on
volume. We have also entered into service agreements with
select international brokers that provide access to their
proprietary industry analytics. In general, our insurance
group has no implied or explicit commitments to accept
business from any particular broker and neither brokers nor
any other third parties have the authority to bind our
insurance group, except in the case where underwriting
authority may be delegated contractually to select program
administrators. Such administrators are subject to a due
diligence financial and operational review prior to any such
delegation of authority and ongoing reviews and audits are
carried out as deemed necessary by our insurance group to
assure the continuing integrity of underwriting and related
business operations. See “Risk Factors—Risks Relating to
Our Industry, Business and Operations—We could be
materially adversely affected to the extent that important
third parties with whom we do business do not adequately or
appropriately manage their risks, commit fraud or otherwise
breach obligation owed to us.” For information on major
brokers, see note 18, “Commitments and Contingencies—
Concentrations of Credit Risk,” to our consolidated financial
statements in Item 8.
Risk Management and Reinsurance. In the normal course of
business, our insurance group may cede a portion of its
premium on a quota share or excess of loss basis through
treaty or facultative reinsurance agreements. Reinsurance
arrangements do not relieve our insurance group from its
primary obligations to insureds. Reinsurance recoverables are
recorded as assets, predicated on the reinsurers’ ability to
meet their obligations under the reinsurance agreements. If
the reinsurers are unable to satisfy their obligations under the
agreements, our insurance subsidiaries would be liable for
such defaulted amounts. Our principal insurance subsidiaries,
with oversight by a group-wide reinsurance steering
committee (“RSC”), are selective with regard to reinsurers,
seeking to place reinsurance with only those reinsurers which
meet and maintain specific standards of established criteria
for financial strength. The RSC evaluates the financial
viability of its reinsurers through financial analysis, research
and review of rating agencies’ reports and also monitors
reinsurance recoverables and collateral with unauthorized
reinsurers. The
includes ongoing
qualitative and quantitative assessments of reinsurers,
including a review of the financial stability, appropriate
licensing, reputation, claims paying ability and underwriting
philosophy of each reinsurer. Our insurance group will
continue to evaluate its reinsurance requirements. See note 8,
“Reinsurance,” to our consolidated financial statements in
Item 8.
financial
analysis
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For catastrophe-exposed insurance business, our insurance
group seeks to limit the amount of exposure to catastrophic
losses it assumes through a combination of managing
aggregate limits, underwriting guidelines and reinsurance.
For a discussion of our risk management policies, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Critical Accounting
Policies, Estimates and Recent Accounting Pronouncements
—Ceded Reinsurance” and “Risk Factors—Risks Relating to
Our Industry, Business and Operations—The failure of any
of the loss limitation methods we employ could have a
material adverse effect on our financial condition or results of
operations.”
insurance group’s claims
Claims Management. Our
management function is performed by claims professionals,
as well as experienced external claims managers (third party
administrators), where
to
investigating, evaluating and resolving claims, members of
our
insurance group’s claims departments work with
underwriting professionals as functional teams in order to
develop products and services desired by the group’s clients.
appropriate.
addition
In
Reinsurance Operations
through our
Our reinsurance operations are conducted on a worldwide
basis
reinsurance subsidiaries, Arch Re
Bermuda, Arch Re U.S., Arch Syndicate 2012, Arch
Syndicate 1955 and Arch Re Europe. Arch Re Bermuda is a
registered Class 4 general business insurer and Class C long-
term insurer and is headquartered in Hamilton, Bermuda.
Arch Re U.S. is licensed or is an accredited or otherwise
approved reinsurer in 50 states, the District of Columbia and
Puerto Rico, the provinces of Ontario and Quebec in Canada
with its principal U.S. offices in Morristown, New Jersey.
Treaty operations in Canada are conducted through the
Canadian branch of Arch Re U.S. (“Arch Re Canada”). Arch
Re U.S. is also an admitted insurer in Guam. Our property
facultative reinsurance operations are conducted primarily
through Arch Re U.S. The property facultative reinsurance
operations have offices throughout the U.S., Canada, Europe
and the U.K. Arch Re Europe, licensed and authorized as a
non-life reinsurer and a life reinsurer, is headquartered in
Dublin, Ireland with branch offices outside the EEA in
Zurich and London. AMAL is the managing agent for the
reinsurance operations of Arch Syndicate 1955.
Strategy. Our reinsurance group’s strategy is to capitalize on
financial capacity, experienced management and
our
operational flexibility to offer multiple products through our
operations. The reinsurance group’s operating principles are
to:
•
Actively select and manage risks. Our reinsurance group
only underwrites business that meets certain profitability
criteria, and it emphasizes disciplined underwriting over
premium growth. To this end, our reinsurance group
reinsurance
centralized
maintains
underwriting guidelines and authorities.
control
over
• Maintain flexibility and respond to changing market
conditions. Our reinsurance group’s organizational
structure and philosophy allows it to take advantage of
increases or changes in demand or favorable pricing
trends. Our reinsurance group believes that its existing
platforms in Bermuda, the U.S., U.K., Europe and
Canada, broad underwriting expertise and substantial
capital facilitate adjustments to its mix of business
geographically and by line and type of coverage. Our
reinsurance group believes that this flexibility allows it
to participate in those market opportunities that provide
the greatest potential for underwriting profitability.
• Maintain a low cost structure. Our reinsurance group
believes that maintaining tight control over its staffing
level and operating primarily as a broker market
reinsurer permits it to maintain low operating costs
relative to its capital and premiums.
In
assessments
a proportional
Our reinsurance group writes business on both a proportional
and non-proportional basis and writes both treaty and
facultative business.
reinsurance
arrangement (also known as pro rata reinsurance, quota share
reinsurance or participating reinsurance), the reinsurer shares
a proportional part of the original premiums and losses of the
reinsured. The reinsurer pays the cedent a commission which
is generally based on the cedent’s cost of acquiring the
business being reinsured (including commissions, premium
taxes,
administrative
expenses) and may also include a profit factor. Non-
proportional (or excess of loss) reinsurance indemnifies the
reinsured against all or a specified portion of losses on
underlying insurance policies in excess of a specified
amount, which is called a “retention.” Non-proportional
business is written in layers and a reinsurer or group of
reinsurers accepts a band of coverage up to a specified
amount. The total coverage purchased by the cedent is
referred to as a “program.” Any liability exceeding the upper
limit of the program reverts to the cedent.
and miscellaneous
The reinsurance group’s treaty operations generally seek to
write significant lines on less commoditized classes of
coverage, such as specialty property and casualty reinsurance
treaties. However, with respect to other classes of coverage,
the
such as property catastrophe and casualty clash,
reinsurance group’s
in a
relatively large number of treaties where they believe that
they can underwrite and process the business efficiently. The
reinsurance group’s property facultative operations write
reinsurance on a facultative basis whereby they assume part
of the risk under primarily single insurance contracts.
Facultative reinsurance is typically purchased by ceding
treaty operations participate
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individual risks not covered by
companies for
their
reinsurance treaties, for unusual risks or for amounts in
excess of the limits on their reinsurance treaties.
Our reinsurance group focuses on various specialty lines, as
to our
in note 4, “Segment Information,”
described
consolidated financial statements in Item 8.
market. Such arrangements reduce the effect of individual or
aggregate losses on, and in certain cases may also increase
the underwriting capacity of, our reinsurance group. Our
reinsurance group will continue to evaluate its retrocessional
requirements based on its net appetite for risk. See note 8,
“Reinsurance,” to our consolidated financial statements in
Item 8.
Underwriting Philosophy. Our reinsurance group employs a
disciplined, analytical approach to underwriting reinsurance
risks that is designed to specify an adequate premium for a
given exposure commensurate with the amount of capital it
anticipates placing at risk. A number of our reinsurance
group’s underwriters are also actuaries. It is our reinsurance
group’s belief that employing actuaries on the front-end of
the underwriting process gives it an advantage in evaluating
risks and constructing a high quality book of business.
As part of the underwriting process, our reinsurance group
typically assesses a variety of factors, including:
•
•
•
•
•
adequacy of underlying rates for a specific class of
business and territory;
the reputation of the proposed cedent and the likelihood
of establishing a long-term relationship with the cedent,
the geographic area in which the cedent does business,
together with its catastrophe exposures, and our
aggregate exposures in that area;
historical loss data for the cedent and, where available,
for the industry as a whole in the relevant regions, in
order to compare the cedent’s historical loss experience
to industry averages;
projections of future loss frequency and severity; and
the perceived financial strength of the cedent.
Marketing. Our reinsurance group generally markets its
reinsurance products through brokers, except our property
facultative reinsurance group, which generally deals directly
with the ceding companies. Brokers do not have the authority
to bind our reinsurance group with respect to reinsurance
agreements, nor does our reinsurance group commit in
advance to accept any portion of the business that brokers
submit to them. Our reinsurance group generally pays
brokerage fees to brokers based on negotiated percentages of
the premiums written through such brokers. For information
on major brokers, see note 18, “Commitments and
Contingencies—Concentrations of Credit Risk,” to our
consolidated financial statements in Item 8.
Risk Management and Retrocession. Our reinsurance group
currently purchases a combination of per event excess of
loss, per risk excess of loss, proportional retrocessional
agreements and other structures that are available in the
exposed
catastrophe
For
reinsurance business, our
reinsurance group seeks to limit the amount of exposure it
assumes from any one reinsured and the amount of the
aggregate exposure to catastrophe losses from a single event
in any one geographic zone. For a discussion of our risk
management policies, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—
Critical Accounting Policies, Estimates and Recent
Accounting Pronouncements—Ceded Reinsurance” and
“Risk Factors—Risks Relating to Our Industry, Business and
Operations—The failure of any of the loss limitation methods
we employ could have a material adverse effect on our
financial condition or results of operations.”
Claims Management. Claims management includes the
receipt of initial loss reports, creation of claim files,
determination of whether further investigation is required,
establishment and adjustment of case reserves and payment
of claims. Additionally, audits are conducted for both specific
claims and overall claims procedures at the offices of
selected ceding companies. Our reinsurance group makes use
of outside consultants for claims work from time to time.
Mortgage Operations
Our mortgage operations provide U.S. and international
mortgage insurance and reinsurance operations as well as
participation in GSE credit risk-sharing transactions. Our
mortgage group includes direct mortgage insurance in the
U.S. primarily through Arch Mortgage Insurance Company,
United Guaranty Residential Insurance Company, and Arch
Mortgage Guaranty Company (together, “Arch MI U.S.”);
mortgage reinsurance primarily through Arch Re Bermuda to
mortgage
insurers on both a proportional and non-
proportional basis globally; direct mortgage insurance in the
EEA and U.K. through Arch Insurance (EU), in Australia
through Arch LMI, and in Hong Kong through Arch MI Asia
Limited (“Arch MI Asia”); and participation in various GSE
credit risk-sharing products primarily through Arch Re
Bermuda.
In 2014 we entered the U.S. mortgage insurance marketplace,
underwriting on the Arch Mortgage Insurance Company
platform. Arch Mortgage Insurance Company is licensed and
operates in all 50 states, the District of Columbia and Puerto
Rico. In December 2016, we completed the acquisition of
UGC and its primary operating subsidiary, United Guaranty
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Residential Insurance Company, which is licensed and
operates in all 50 states and the District of Columbia.
•
to maintaining certain ongoing
Arch Mortgage Insurance Company and United Guaranty
Residential Insurance Company have each been approved as
an eligible mortgage insurer by Fannie Mae and Freddie Mac,
subject
requirements
(“eligible mortgage insurer”). Arch Mortgage Guaranty
Company offers direct mortgage insurance to U.S. mortgage
lenders with respect to mortgages that lenders intend to retain
in portfolio or include in non-agency securitizations. Arch
Mortgage Guaranty Company, which is licensed in all 50
states and the District of Columbia, insures mortgages that
are not intended to be sold to the GSEs, and it is therefore not
approved by either GSE as an eligible mortgage insurer.
Arch Insurance (EU) was licensed and authorized by the
CBOI in 2011 to operate on a pan-European basis under the
EU’s freedom of establishment/freedom of services rules.
Arch Underwriters Europe Limited (“Arch Underwriters
Europe”), an Irish company authorized as an insurance and
reinsurance intermediary by the CBOI, acts on behalf of Arch
Insurance (EU) and Arch Re Europe with branch offices in
the EEA in Italy and Finland and outside the EEA in
Switzerland and the U.K. In January 2019, Arch LMI was
authorized by APRA to write lenders’ mortgage insurance.
Arch LMI is headquartered in Sydney, Australia and focuses
on providing direct
insurance and
reinsurance to the Australian market.
lenders’ mortgage
Strategy. The mortgage insurance market operates on a
distinct underwriting cycle, with demand driven mainly by
the housing market and general economic conditions. As a
result, the creation of the mortgage group provides us with a
more diverse revenue stream. Our mortgage group’s strategy
is to capitalize on its financial capacity, mortgage insurance
technology platform, operational flexibility and experienced
management to offer mortgage insurance, reinsurance and
other risk-sharing products in the U.S. and around the world.
Our mortgage group’s operating principles and goals are to:
•
group
Capitalize on profitable underwriting opportunities. Our
mortgage
experienced
management, analytics and underwriting teams are
positioned
identify and evaluate business with
attractive risk/reward characteristics.
believes
that
its
to
• Maintain a disciplined credit risk philosophy. Our
mortgage group’s credit risk philosophy is to generate
underwriting profit
through disciplined credit risk
analysis and proper pricing. Our mortgage group
believes that the key to this approach is maintaining
discipline across all phases of the applicable housing and
mortgage lending cycles.
its
Provide superior and innovative mortgage products and
services. Our mortgage group believes that it can
leverage
financial capacity, experience across
insurance product lines and the mortgage finance
industry, and its analytics and technology to provide
innovative products and superior service. The mortgage
group believes that its delivery of tailored products that
meet the specific, evolving needs of its customers will be
a key to the group’s success.
• Maintain our position as a leading provider of U.S.
mortgage
to our 2014
insurance business. Prior
acquisition, Arch Mortgage Insurance Company was the
leading provider of mortgage insurance products and
services to credit unions in the U.S. We broadened our
customer base into national and regional banks and
mortgage originators while maintaining and increasing
our share of the mortgage insurance credit union market.
With the acquisition of UGC in 2016, a leading provider
of mortgage insurance products and services to national
and regional banks and mortgage originators, we became
a leading provider of U.S. mortgage insurance.
Our mortgage group focuses on the following areas:
•
Direct mortgage insurance in the United States. Under
their monoline insurance licenses, each of Arch’s
eligible mortgage insurers may only offer private
mortgage insurance covering first lien, one-to-four
family residential mortgages. Nearly all of our mortgage
insurance written provides first loss protection on loans
originated by mortgage lenders and sold to the GSEs.
Each GSE’s Congressional charter generally prohibits it
from purchasing a mortgage where the principal balance
of the mortgage is in excess of 80% of the value of the
property securing the mortgage unless the excess portion
of the mortgage is protected against default by lender
recourse, participation or by a qualified insurer. As a
result, such “high loan-to-value mortgages” purchased
by Fannie Mae or Freddie Mac generally are insured
with private mortgage insurance.
Mortgage insurance protects the insured lender, investor
or GSE against loss in the event of a borrower’s default.
If a borrower defaults on mortgage payments, private
mortgage insurance reduces, and may eliminate, losses to
the insured. Private mortgage insurance may also
facilitate the sale of mortgage loans in the secondary
mortgage market because of the credit enhancement it
provides. Our primary U.S. mortgage insurance policies
predominantly cover individual loans and are effective at
the time the loan is originated. We also may enter into
insurance transactions with lenders and investors, under
which we insure a portfolio of loans at or after
origination. Although not currently a significant product,
we may offer mortgage insurance on a “pool” basis in
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the future. Under pool insurance, the mortgage insurer
provides coverage on a group of specified loans,
typically for 100% of all contractual or policy-defined
losses on every loan in the portfolio, subject to an agreed
aggregate loss limit. Pool insurance may be in a first loss
position with respect to loans that do not have primary
mortgage insurance policies, or it may be in a second
loss position, covering losses in excess of those covered
by the primary mortgage insurance policy.
•
•
•
insurance
insurance
in Europe and other
Direct mortgage
countries where we identify profitable underwriting
opportunities. Since 2011, Arch Insurance (EU) has
offered mortgage
to European mortgage
lenders. Arch Insurance (EU)’s mortgage insurance is
primarily purchased by European mortgage lenders in
order to reduce lenders’ credit risk and regulatory capital
requirements associated with the insured mortgages. In
certain European countries, lenders purchase mortgage
insurance to facilitate regulatory compliance with respect
to high loan-to-value residential lending. Arch Insurance
(EU) offers mortgage insurance on both a “flow” basis to
structured
cover new originations
transactions
to cover one or more portfolios of
previously originated residential loans. In Australia,
Arch LMI provides lenders’ mortgage insurance on a
direct basis.
through
and
Reinsurance. Arch Re Bermuda provides quota share
reinsurance covering U.S. and international mortgages.
insurance
traditional mortgage
Other credit risk-sharing products. In addition to
providing
and
reinsurance, we offer various credit risk-sharing products
to government agencies and mortgage lenders. The GSEs
have reduced their exposure to mortgage risk by shifting
it to the private sector, creating opportunities for insurers
to assume additional mortgage risk. In 2013, Arch Re
Bermuda became the first (re)insurance company to
participate in Freddie Mac’s program to transfer certain
credit risk in its single-family portfolio to the private
sector. Since that time, Arch Re Bermuda and its
affiliates have regularly participated in both Fannie Mae
and Freddie Mac single family and multifamily risk
sharing programs.
In 2015 we established Arch Mortgage Risk Transfer PCC
Inc. (“Arch MRT”) a District of Columbia based protected
cell captive insurer, licensed by District of Columbia
Department of Insurance, Securities and Banking as a
mortgage
issues direct mortgage
insurance to the GSEs through incorporated protected cells
and cedes 100% of the risk to GSE approved reinsurers,
including Arch Re U.S. Arch MRT entered into pilot
transactions with both GSEs in 2018 that continued through
2020.
insurer. Arch MRT
In 2019 we established Arch Credit Risk Services (Bermuda)
(“ACRS”) Ltd. ACRS is licensed by the Bermuda Monetary
Authority (“BMA”) as an insurance agent in Bermuda.
ACRS offers mortgage credit assessment and underwriting
advisory services with respect to participation in GSE credit
risk transfer transactions.
Underwriting Philosophy. Our mortgage group believes in a
disciplined, analytical approach to underwriting mortgage
risks by utilizing proprietary and third party models,
including forecasting delinquency and future home price
movements with the goal of ensuring that premiums are
adequate for the risk being insured. Experienced actuaries
and statistical modelers are engaged in analytics to inform the
underwriting process. As part of the underwriting process,
our mortgage group typically assesses a variety of factors,
including the:
•
•
•
•
•
•
ability and willingness of the mortgage borrower to pay
its obligations under the mortgage loan being insured;
characteristics of the mortgage loan being insured and
the value of the collateral securing the mortgage loan;
financial strength, quality of operations and reputation of
the lender originating the mortgage loan;
expected future home price movements which vary by
geography;
projections of future loss frequency and severity; and
adequacy of premium rates.
Sales and Distribution. We employ a sales force located
throughout the U.S. to directly sell mortgage insurance
products and services to our customers, which include
mortgage originators such as mortgage bankers, mortgage
brokers, commercial banks, savings institutions, credit unions
and community banks. Our largest single mortgage insurance
customer (including branches and affiliates) accounted for
5.4% and 4.0% of our gross premiums written for the years
ending December 31, 2020 and 2019, respectively. No other
customer accounted for greater than 3.2% and 3.3% of the
gross premiums written for the years ending December 31,
2020 and 2019, respectively. The percentage of gross
premiums written on our top 10 customers was 22% and
20.8% as of December 31, 2020 and 2019, respectively. In
Europe, Asia, Bermuda and Australia, our products and
services are/or will be distributed on a direct basis and
through brokers. Each country represents a unique set of
opportunities and challenges that require knowledge of
market conditions and client needs to develop effective
solutions.
Risk Management. Exposure to mortgage risk is monitored
globally and managed through underwriting guidelines,
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pricing, reinsurance, utilization of proprietary risk models,
concentration limits and limits on net probable loss resulting
from a severe economic downturn in the housing market. For
a discussion of our
risk management policies, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Critical Accounting
Policies, Estimates and Recent Accounting Pronouncements
—Ceded Reinsurance” and “Risk Factors—Risks Relating to
Our Industry, Business and Operations—The failure of any
of the loss limitation methods we employ could have a
material adverse effect on our financial condition or results of
operations.”
Our mortgage group has ceded a portion of its premium on a
quota share basis through certain reinsurance agreements and
through aggregate excess of loss reinsurance agreements
which provide reinsurance coverage for delinquencies on
portfolios of in-force policies issued between certain periods.
See note 8, “Reinsurance,” to our consolidated financial
statements in Item 8 for further details.
Reinsurance arrangements do not relieve our mortgage group
from its primary obligations to insured parties. Reinsurance
recoverables are recorded as assets, predicated on the
reinsurers’ ability to meet their obligations under the
reinsurance agreements. If the reinsurers are unable to satisfy
the agreements, our mortgage
their obligations under
subsidiaries would be liable for such defaulted amounts. For
our U.S. mortgage insurance business, in addition to utilizing
reinsurance, we have developed a proprietary risk model that
simulates the maximum loss resulting from severe economic
events impacting the housing market. See “Management’s
Discussion and Analysis of Financial Condition and Results
of Operations—Catastrophic Events and Severe Economic
Events.”
Claims Management. With respect to our direct mortgage
insurance business, the claims process generally begins with
notification by the insured or servicer to us of a default on an
insured loan. The insured is generally required to notify us of
a default after the borrower misses two consecutive monthly
payments. Borrowers default for a variety of reasons,
including a reduction of income, unemployment, divorce,
illness, inability to manage credit, rising interest rate levels
and declining home prices. Upon notice of a default, in
certain cases we may coordinate with loan servicers to
facilitate and enhance retention workouts on insured loans.
loan
Retention workouts
modifications and other loan repayment options, which may
enable borrowers to cure mortgage defaults and retain
ownership of their homes. If a retention workout is not viable
for a borrower, our loss on a loan may be mitigated through a
liquidation workout option, including a pre-foreclosure sale
or a deed-in-lieu of foreclosure.
include payment forbearance,
In the U.S., our master policies generally provide that within
60 days of the perfection of a primary insurance claim, we
have the option of:
•
•
•
paying the insurance coverage percentage specified in
the certificate of insurance multiplied by the loss
amount;
in the event the property is sold pursuant to an approved
prearranged sale, paying the lesser of (i) 100% of the
loss amount less the proceeds of sale of the property, or
(ii) the specified coverage percentage multiplied by the
loss amount; or
paying 100% of the loss amount in exchange for the
insured’s conveyance to us of good and marketable title
to the property, with us then selling the property for our
own account.
While we select the claim settlement option that best
mitigates the amount of our claim payment, in the U.S. we
generally pay the coverage percentage multiplied by the loss
amount.
Other Operations
In 2014 we and HPS Investment Partners, LLC (formerly
Highbridge Principal Strategies, LLC) (“HPS”), sponsored
the formation of Watford. Arch Re Bermuda invested $100.0
million in Watford common equity and, as of February 16,
2021, Arch Re Bermuda owned approximately 10.3% of
Watford’s common equity. We also own $35.0 million in
aggregate principal amount of Watford Holdings Ltd’s 6.5%
senior notes and approximately 6.6% of Watford’s preference
shares. Watford’s strategy is to combine a diversified
insurance business with a disciplined
reinsurance and
investment strategy comprised primarily of non-investment
grade credit assets. Watford’s own management and board of
directors are responsible for its results and profitability. Arch
Re Bermuda has appointed two directors to serve on the eight
person board of directors of Watford. In the 2020, fourth
quarter Arch Capital, Watford Holdings Ltd. and Greysbridge
Ltd., a wholly-owned subsidiary of Arch Capital, entered into
an Agreement and Plan of Merger (as amended, the “Merger
Agreement”) pursuant to which, among other things, Arch
Capital agreed to acquire all of the common shares of
Watford Holdings Ltd. not owned by Arch for a cash
purchase price of $35.00 per common share. The transaction
is expected to close in the first half of 2021, subject to
customary closing conditions
including regulatory and
shareholder approval. Arch Capital has assigned its rights
under the Merger Agreement to Greysbridge Holdings Ltd., a
wholly-owned subsidiary of Arch Capital (“Greysbridge”).
Upon closing of the transaction, Watford will be wholly
owned by Greysbridge and Greysbridge will be owned 40%
by Arch Re Bermuda, 30% by certain investment funds
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managed by Kelso & Company and 30% by certain
investment funds managed by Warburg Pincus LLC. See note
12, “Variable Interest Entity and Noncontrolling Interests,” to
our consolidated financial statements in Item 8 for further
details.
In 2017 we and Kelso & Company (“Kelso”) sponsored the
formation of Premia. Premia’s strategy is to reinsure or
acquire companies or reserve portfolios in the non-life
property and casualty insurance and reinsurance run-off
market. Arch Re Bermuda and certain Arch co-investors
invested $100.0 million and acquired approximately 25% of
Premia as well as warrants to purchase additional common
equity. Arch Re Bermuda is providing a 25% quota share
reinsurance treaty on certain business written by Premia, and
subsidiaries of Arch Capital are providing certain
administrative and support services to Premia, in each case
pursuant
to separate multi-year agreements. Arch Re
Bermuda has appointed two directors to serve on the seven
person board of directors of Premia. In the 2019 fourth
quarter, Barbican entered into certain reinsurance and related
transactions with Premia pursuant to which Premia assumed
a transfer of liability for the 2018 and prior years of account
of Barbican as of July 1, 2019. See note 16, “Transactions
with Related Parties,”
financial
statements in Item 8 for further details.
to our consolidated
HUMAN CAPITAL
We have a results-driven culture which relies on our
dedicated, engaged and talented employees. Our business
strategy is focused on delivering specialty products and
solutions to our customers in each of our operating segments,
and our short- and long-term success depends on employee
performance. Therefore, helping our people excel by creating
a meaningful, challenging and fulfilling employee experience
is of paramount importance. Through the global pandemic, a
spirit of agility allowed us to transition virtually overnight to
a home-based employee population. We successfully kept
business operations up and running
through effective
collaboration, communication and resilience. As of February
15, 2021, we had just over 4,500 employees globally,
compared to 4,300 last year, which directly speaks to our
ability to grow and retain our talent in spite of the challenges
we all faced with the pandemic. We have approximately
2,970 employees in North America (U.S., Canada and
Bermuda), 810 employees in Europe and the U.K. and 730
employees in the Philippines and the rest of the world.
Our People and Culture. With colleagues in over 15
countries, we are driven by our common purpose of
“Enabling Possibility” for our customers, our communities
and our fellow employees. Our values of embracing
teamwork, working hard and smart, continually pursuing
innovation and improvement, striving to make a difference,
and exhibiting honesty and integrity in all that we do unite us
in our unrelenting focus on providing service and solutions
that make us a trusted and valued business partner. We use
clearly defined policy and procedural supports such as our
Code of Business Conduct and Compliance and Ethics
training programs to ensure that we are unwavering in our
attention to living our values.
A key aspect in top performance is enhancing our overall
diversity while ensuring that we behave inclusively. By better
reflecting the demographics in the markets in which we
operate and embracing a culture of inclusion, we can leverage
all of the best contributions and thinking across our
Company. We are committed to positively impacting our
employees and culture by integrating diversity and inclusion
principles in our operations. In 2020, we launched six
employee networks
to offer employees from various
demographic backgrounds a forum to share ideas, build a
sense of community and give voice to topics of interest and
contribute meaningfully to business outcomes.
Talent Acquisition, Development, Rewards and Retention.
Our employees are our greatest asset, and we maintain a
sharp focus on continuously improving the ways we attract,
develop and retain our high-performing talent. We provide
unique career growth opportunities through a combination of
on-the-job experiences, exposure to top-notch colleagues and
education and training programs designed to accelerate
learning and applying new skills and behaviors. We offer
competitive compensation and comprehensive benefits
packages, including an employee share purchase plan,
parental leave, generous contributions to retirement savings
plans and corporate discounts and programs to support
employee mental and physical well-being. Our Arch Achieve
program has recognized over 360 employees for excellence
since its inception in 2009, with each recipient of this
distinction receiving shares of our common stock as
recognition of their accomplishments.
We also encourage employees to continue their educational
and professional development through student loan payback
assistance and tuition reimbursement plans. To attract the
best talent to our industry, we also offer internship programs
and an Early Career Program with an Underwriting Track
which provides participants with a robust introduction and
real technical skills to build a successful career at Arch. In
addition, we have targeted programs to attract talent that will
diversify our workforce. Experienced professionals at Arch
may participate in manager and leadership development
programs and,
insurance segment
employees, we offer the opportunity to seek a Mortgage
Bankers Association Certified Banker designation.
for our mortgage
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RESERVES
RATINGS
statistical
recognized
internationally
Our ability to underwrite business is affected by the quality
of our claims paying ability and financial strength ratings as
evaluated by independent agencies. Such ratings from third
party
rating
organizations or agencies are instrumental in establishing the
financial security of companies in our industry. We believe
that the primary users of such ratings include commercial and
investment banks, policyholders, brokers, ceding companies
and investors. Insurance ratings are also used by insurance
and reinsurance intermediaries as an important means of
assessing the financial strength and quality of insurers and
reinsurers, and are often an important factor in the decision
by an insured or intermediary of whether to place business
with a particular insurance or reinsurance provider.
The financial strength ratings of our operating insurance and
reinsurance subsidiaries are subject to periodic review as
rating agencies evaluate us to confirm that we continue to
meet their criteria for ratings they have assigned to us. Such
ratings may be revised or revoked at the discretion of such
ratings agencies in response to a variety of factors, including
capital
forms of
capitalization and risk profile. A.M. Best Company (“A.M.
Best”), Fitch Ratings (“Fitch”), Moody’s Investors Service
(“Moody’s”) and Standard & Poor’s (“S&P”) are ratings
agencies which have assigned financial strength and/or issuer
ratings to Arch Capital and/or one or more of its subsidiaries.
adequacy, management,
earnings,
The ratings issued on our companies by these agencies are
announced publicly and are available directly from the
agencies. Our website (www.archcapgroup.com (Investor
Relations-Credit Ratings) contains information about our
is not
ratings, but such
incorporated by reference into this report.
information on our website
Reserves for losses and loss adjustment expenses (“Loss
Reserves”) represent estimates of what the insurer or
reinsurer ultimately expects to pay on claims at a given time,
based on facts and circumstances then known, and it is
probable that the ultimate liability may exceed or be less than
such estimates. Even actuarially sound methods can lead to
subsequent adjustments to reserves that are both significant
and irregular due to the nature of the risks written. Loss
Reserves are inherently subject to uncertainty.
For detail on our Loss Reserves by segment and potential
variability in the reserving process, see the Loss Reserves
section of “Critical Accounting Policies, Estimates and
Recent Accounting Pronouncements” in Item 7. For an
analysis of losses and loss adjustment expenses and a
reconciliation of the beginning and ending Loss Reserves and
information about prior year reserve development, see note 5,
“Reserve for Losses and Loss Adjustment Expenses,” to our
consolidated financial statements in Item 8. For information
on our reserving process, see note 6, “Short Duration
Contracts,” to our consolidated financial statements in Item 8.
Unpaid and paid losses and loss adjustment expenses
recoverable were approximately $4.5 billion at December 31,
2020. For detail on our unpaid and paid losses and loss
adjustment expenses, see the Reinsurance Recoverables
section of “Financial Condition, Reinsurance Recoverables”
in Item 7.
INVESTMENTS
At December 31, 2020, total investable assets held by Arch
were $26.9 billion, excluding the $2.7 billion included in the
‘other’ segment (i.e., attributable to Watford). Our current
investment guidelines and approach stress preservation of
capital, market liquidity and diversification of risk. Our
investments are subject to market-wide risks and fluctuations,
as well as to risks inherent in particular securities. While
maintaining our emphasis on preservation of capital and
liquidity, we expect our portfolio to become more diversified
and, as a result, we may in the future expand into areas which
are not part of our current investment strategy. For detail on
our investments, see the Investable Assets Held by Arch
section of “Financial Condition” in Item 7 and note 9,
“Investment Information,” to our consolidated financial
statements in Item 8.
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COMPETITION
The worldwide reinsurance and insurance businesses are
highly competitive. We compete, and will continue to
compete, with major U.S. and non-U.S. insurers and
reinsurers, some of which have greater financial, marketing
and management resources than we have and longer-term
relationships with insureds and brokers than we have had.
We compete with other insurers and reinsurers primarily on
the basis of overall financial strength, ratings assigned by
independent rating agencies, geographic scope of business,
strength of client relationships, premiums charged, contract
terms and conditions, products and services offered, speed of
claims payment, reputation, employee experience, and
qualifications and local presence. See “Risk Factors—Risks
Relating to Our Industry, Business and Operations—“We
operate in a highly competitive environment, and we may not
be able to compete successfully in our industry.”
insurance and
In our property casualty
reinsurance
businesses, we compete with insurers and reinsurers that
provide specialty property and casualty lines of insurance,
including Alleghany Corporation, American Financial Group,
Inc., American International Group, Inc., AXA XL, AXIS
Capital Holdings Limited, Berkshire Hathaway, Inc., Chubb
Limited, CNA Financial Corp., Everest Re Group Ltd.,
Fairfax Financial Holdings Limited, Hannover Rück SE, The
Hartford Financial Services Group, Inc., Liberty Mutual
Group, Lloyd’s, Markel Corporation, Munich Re Group,
PartnerRe Ltd., RenaissanceRe Holdings Ltd., RLI Corp.,
SCOR, Sompo International, Swiss Reinsurance Company,
Tokio Marine HCC, The Travelers Companies, Inc., W.R.
Berkley Corp. and Zurich Insurance Group.
include
insurers, which
In our U.S. mortgage business, we compete with five active
the mortgage
U.S. mortgage
insurance subsidiaries of Essent Group Ltd., Genworth
Financial Inc., MGIC Investment Corporation, NMI Holdings
Inc. and Radian Group Inc. The private mortgage insurance
industry is highly competitive. Private mortgage insurers
generally compete on the basis of underwriting guidelines,
pricing, terms and conditions, financial strength, product and
service offerings, customer relationships, reputation, the
strength of management, technology, and innovation in the
delivery and servicing of insurance products. Arch MI U.S.
and other private mortgage insurers compete with federal and
state government agencies that sponsor their own mortgage
insurance programs. The private mortgage insurers’ principal
government
Federal Housing
is
Administration (“FHA”) and, to a lesser degree, the U.S.
Department of Veterans Affairs (“VA”). Future changes to
the FHA program, including any reduction to premiums
charged may impact the demand for private mortgage
insurance.
competitor
the
Arch MI U.S. and other private mortgage
insurers
increasingly compete with multi-line reinsurers and capital
markets alternatives to private mortgage insurance. The GSEs
continued their respective mortgage credit risk transfer
(“CRT”) programs including the use of front and back-end
transactions with multiline reinsurers. These transactions
continue to create opportunities for multiline property
casualty reinsurance groups and capital markets participants.
For other U.S. risk sharing products and non-U.S. mortgage
increased
insurance opportunities, we have also seen
competition from well capitalized and highly rated multiline
reinsurers. It is our expectation that the depth and capacity of
competitors from this segment will continue to increase over
the next several years as more residential mortgage credit risk
is borne by private capital.
ENTERPRISE RISK MANAGEMENT
General. Enterprise Risk Management (“ERM”) is a key
element in our philosophy, strategy and culture. We employ
an ERM framework that includes underwriting, reserving,
investment, credit and operational risks. Risk appetite and
exposure limits are set by our executive management team,
reviewed with the Board and its committees and routinely
discussed with business unit management. These limits are
articulated in our risk appetite statement, which details risk
appetite, tolerances and limits for each major risk category,
and are integrated into our operating guidelines. Exposures
are aggregated and monitored periodically by our corporate
risk management team. The reporting, review and approval of
risk management information is integrated into our annual
planning process,
allocation,
reinsurance purchasing strategy and reviewed at insurance
business reviews, reinsurance underwriting meetings and
board level committees.
capital modeling
and
Risk Management Process and Procedures. The following
narrative provides an overview of our risk management
framework and our methodology for identifying, measuring,
managing and reporting on the key risks affecting us. It
outlines our approach to risk identification and assessment
and provides an overview of our risk appetite and tolerance
the following major risks: underwriting
for each of
(insurance) risk including pricing, reserving and catastrophe;
investment including market and liquidity risks; strategic
risk; group risk including governance and capital market risk;
including regulatory,
credit risk; and operational risk,
investor relations (reputational risk), rating agency and
outsourcing risks.
The framework includes details of our risk philosophy and
policies to address the material risks confronting us; and
compliance, approach and procedures to control and or
mitigate these risks. The actions and policies implemented to
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meet our business management and regulatory obligations
form the core of this framework. We have adopted a holistic
approach to risk management by analyzing risk from both a
top-down and bottom-up perspective.
Risk Identification and Assessment. The Finance, Investment
and Risk Committee (“FIR Committee”), Audit Committee
and Underwriting Oversight Committee of the Board oversee
the top-down and bottom-up review of our risks. Given the
nature and scale of our operations, these committees consider
all aforementioned risks within the scope of the assessment.
Arch Capital’s Chief Risk Officer (“CRO”) assists these
committees in the identification and assessment of all key
risks. The CRO is responsible for maintaining Arch Capital’s
risk register and continually reviewing and challenging risk
assessments, including the impact of emerging risks and
significant business developments. Board approval
is
required for any new high level risks or change in inherent or
residual designations.
Risk Monitoring and Control. Arch Capital’s
risk
management framework requires risk owners to monitor key
risks on a continuous basis. The highest residual risks are
actively managed by the FIR Committee. The remaining risks
are managed and monitored at a process level by the risk
owners and/or
the CRO. Risk owners have ultimate
responsibility for the day-to-day management of each
designated risk, reporting to the CRO on the satisfactory
management and control of the risk and timely escalation of
significant issues that may arise in relation to that risk. The
CRO is responsible for overseeing the monitoring of all risks
across the business and for communicating to the relevant
risk owners if she becomes aware of issues, or potential and
actual breaches of risk appetite, relevant to the assigned risks.
A key element of these monitoring activities is the evaluation
of our position relative to risk tolerances and limits approved
by the Board.
Risk Reporting. Quarterly, the CRO compiles the results of
the key risk review process into a report to the FIR
Committee for review and discussion at their quarterly
meeting. The report includes an overview of selected key
risks; a risk dashboard that depicts the status of risk limit and
tolerance metrics; changes in the rating of high level risks in
the Arch Capital risk register; and summaries of our largest
exposures and reinsurance recoverables. If necessary, risk
management matters reviewed at the FIR Committee meeting
are presented for discussion by the Board. The CRO is
responsible for immediately escalating any significant risk
matters to executive management, the FIR Committee and/or
the Board for approval of the required remediation. As part of
our corporate governance, the Board and certain of its
committees hold regular executive sessions with members of
our management team. These sessions are intended to ensure
an open and frank dialogue exists about various forms of risk
across the organization.
Integration. We believe
Implementation and
that an
integrated approach to developing, measuring and reporting
our Own Risk and Solvency Assessment (“ORSA”) is an
integral part of the risk management framework. The ORSA
process provides the link between Arch Capital’s risk profile,
its board-approved risk appetite including approved risk
tolerances and limits, its business strategy and its overall
solvency requirements. The ORSA is the entirety of the
processes and procedures employed to identify, assess,
monitor, manage, and report the short- and long-term risks
we face or may face and to determine the capital necessary to
ensure that our overall solvency needs are met at all times.
The ORSA also makes the link between actual reported
results and the capital assessment.
The ORSA is the basis for risk reporting to the Board and its
committees and acts as a mechanism to embed the risk
management
framework within our decision making
processes and operations. The Board has delegated
responsibility for supervision and oversight of the ORSA to
the FIR Committee. This oversight includes regular reviews
of the ORSA process and output. An ORSA report is
produced at least annually and the results of each assessment
are reported to the Board. The Board actively participates in
the ORSA process by steering how the assessment is
performed and challenging its results. This assessment is also
taken into account when formulating strategic decisions.
The ORSA process and reporting are integral parts of our
business strategy,
into our
tailored specifically
organizational structure and risk management system with
the appropriate techniques in place to assess our overall
solvency needs, taking into consideration the nature, scale
and complexity of the risks inherent in the business.
to fit
business
including
We also take the results of the ORSA into account for our
capital
system of governance,
management,
product
development. The results of the ORSA also contributes to
various strategic decision-making including how best to
optimize capital management, establishing
the most
appropriate premium levels and deciding whether to retain or
transfer risks.
long-term
new
planning
and
For further discussion of our risk management policies, see
the Ceded Reinsurance section of “Critical Accounting
Policies, Estimates and Recent Accounting Pronouncements”
in Item 7.
REGULATION
General
Our insurance and reinsurance subsidiaries are subject to
varying degrees of regulation and supervision in the various
jurisdictions in which they operate. We are subject to
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extensive regulation under applicable statutes in these
countries and any other jurisdictions in which we operate.
The current material regulations under which we operate are
described below. We may become subject in the future to
regulation in new jurisdictions or to additional regulations in
existing jurisdictions.
Bermuda
General. Our Bermuda insurance operating subsidiary, Arch
Re Bermuda, is a Class 4 general business insurer and a Class
C long-term insurer, and is subject to the Insurance Act 1978
of Bermuda and related regulations, as amended (“Insurance
Act”). Among other matters, the Insurance Act imposes
liquidity standards, auditing and
certain solvency and
reporting requirements, the submission of certain period
examinations of its financial conditions and grants the BMA
powers to supervise, investigate, require information and
demand the production of documents and intervene in the
affairs of insurance companies. Significant requirements
include the appointment of an independent auditor, the
appointment of a loss reserve specialist, the appointment of a
principal representative in Bermuda, the filing of annual
Statutory Financial Returns, the filing of annual financial
statements in accordance with U.S. generally accepted
accounting principles (“GAAP”), the filing of an annual
capital and solvency return, compliance with minimum and
enhanced capital requirements, compliance with certain
restrictions on reductions of capital and the payment of
dividends and distributions, compliance with group solvency
and supervision rules, if applicable, and compliance with the
Insurance Code of Conduct (relating to corporate governance,
risk management and internal controls).
Arch Re Bermuda must also comply with a minimum
liquidity ratio and minimum solvency margin in respect of its
general business. The minimum liquidity ratio requires that
the value of relevant assets must not be less than 75% of the
amount of relevant liabilities. The minimum solvency
margin, which varies depending on the class of the insurer, is
determined as a percentage of either net reserves for losses
and loss adjustment expenses (“LAE”) or premiums or
pursuant to a risk-based capital measure. Arch Re Bermuda is
also subject to an enhanced capital requirement (“ECR”)
which is established by reference to either the Bermuda
Solvency Capital Requirement model (“BSCR”) or an
approved internal capital model. The BSCR model is a risk-
based capital model which provides a method for determining
an insurer’s capital requirements (statutory capital and
surplus) by taking into account the risk characteristics of
different aspects of the insurer’s business. The BMA has
established a target capital level for each Class 4 insurer
equal to 120% of its ECR. While a Class 4 insurer is not
currently
its available statutory
economic capital and surplus at this level, the target capital
level serves as an early warning tool for the BMA, and failure
to maintain
required
to maintain statutory capital at least equal to the target capital
level will likely result in increased regulatory oversight. As a
Class C insurer, Arch Re Bermuda is also required to
maintain available statutory economic capital and surplus in
respect of its long-term business at a level equal to or in
excess of its long-term enhanced capital requirement which is
established by reference to either the Class C BSCR model or
an approved internal capital model.
Arch Re Bermuda is prohibited from declaring or paying any
dividends during any financial year if it is in breach of its
general business or long-term business enhanced capital
requirements, minimum solvency margins or its general
business minimum liquidity ratio or if the declaration or
payment of such dividends would cause such a breach. If it
has failed to meet its minimum solvency margins or
minimum liquidity ratio on the last day of any financial year,
Arch Re Bermuda will be prohibited, without the approval of
the BMA, from declaring or paying any dividends during the
next financial year. In addition, Arch Re Bermuda is
prohibited from declaring or paying in any financial year
dividends of more than 25% of its total statutory capital and
surplus (as shown on its previous financial year’s statutory
balance sheet) unless it files (at least seven days before
payment of such dividends) with the BMA an affidavit
stating that it will continue to meet the required margins.
Without the approval of the BMA, Arch Re Bermuda is
prohibited from reducing by 15% or more its total statutory
capital as set out in its previous year’s financial statements
and any application for such approval must include an
affidavit stating that it will continue to meet the required
margins. Without the approval of the BMA, Arch Re
Bermuda is prohibited from reducing by 15% or more its
total statutory capital as set out in its previous year’s financial
statements and any application for such approval must
include an affidavit stating that it will continue to meet the
required margins. Where such an affidavit is filed, it shall be
available for public inspection at the offices of the BMA.
Under the Bermuda Companies Act of 1981, as amended,
Arch Re Bermuda may declare or pay a dividend out of
distributable reserves only if it has reasonable grounds for
believing that it is, or would after the payment be, able to pay
its liabilities as they become due and if the realizable value of
its assets would thereby not be less than its liabilities. The
Insurance Amendment (No. 2) Act 2018 amended the
Insurance Act
the prior payment of
policyholders’ liabilities ahead of general unsecured creditors
in the event of the liquidation or winding up of an insurer.
The amendments provide inter alia that, subject to certain
statutorily preferred debts, the insurance debts of an insurer
must be paid in priority to all other unsecured debts of the
insurer. Insurance debt is defined as a debt to which an
insurer is or may become liable pursuant to an insurance
contract excluding debts owed to an insurer under an
insurance contract where the insurer is the person insured.
to provide for
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Group Supervision. The BMA acts as group supervisor of our
group of insurance and reinsurance companies (“Group”) and
has designated Arch Re Bermuda as the designated insurer
(“Designated Insurer”). As our Group supervisor, the BMA
performs a number of functions including: (i) coordinating
the gathering and dissemination of relevant or essential
information for going concerns and emergency situations,
including the dissemination of information which is of
importance for the supervisory task of other competent
authorities; (ii) carrying out supervisory reviews and
assessments of our Group; (iii) carrying out assessments of
our Group's compliance with the rules on solvency, risk
concentration, intra-group transactions and good governance
procedures; (iv) planning and coordinating through regular
meetings held at least annually (or by other appropriate
means) with other competent authorities, supervisory
activities in respect of our Group; both as a going concern
and
(v) coordinating any
enforcement action that may need to be taken against our
Group or any Group members; and (vi) planning and
coordinating meetings of colleges of supervisors in order to
facilitate the carrying out of these functions. As Designated
Insurer, Arch Re Bermuda is required to facilitate compliance
by our Group with the group insurance solvency and
supervision rules.
in emergency
situations
On an annual basis, the Group is required to file Group
statutory financial statements, a Group statutory financial
return, a Group capital and solvency return, audited Group
financial statements, a Group Solvency Self-Assessment
(“GSSA”), and a financial condition report with the BMA.
The GSSA is designed to document our perspective on the
capital resources necessary to achieve our business strategies
and remain solvent, and to provide the BMA with insights on
our
and
risk management, governance procedures
documentation related to this process. In addition, the
Designated Insurer is required to file quarterly group
financial returns with the BMA. The Group is also required
to maintain available Group statutory economic capital and
surplus in an amount that is at least equal to the group
enhanced capital requirement (“Group ECR”) and the BMA
has established a group target capital level equal to 120% of
the Group ECR.
The BMA maintains supervision over the controllers of all
Bermuda registered insurers, and accordingly, any person
who, directly or indirectly, becomes a holder of at least 10%,
20%, 33% or 50% of our ordinary shares must notify the
BMA in writing within 45 days of becoming such a holder
(or ceasing to be such a holder). The BMA may object to
such a person and require the holder to reduce its holding of
ordinary shares and direct, among other things, that voting
rights attaching
the ordinary shares shall not be
exercisable.
to
to address concerns relating
Economic Substance Act. During 2017, the EU’s Economic
and Financial Affairs Council released a list of non-
cooperative jurisdictions for tax purposes. The stated purpose
of this list, and accompanying report, was to promote good
governance worldwide in order to maximize efforts to
prevent tax fraud and tax evasion. Bermuda was not on the
list of non-cooperative jurisdictions, but was referenced in
the report (along with approximately 40 other jurisdictions)
as having committed
to
economic substance by December 31, 2018. In accordance
with that commitment, Bermuda enacted the Economic
Substance Act 2018 (as amended) of Bermuda and its related
regulations (together, the “ES Act”). The ES Act came into
force on January 1, 2019, and provides that a registered entity
other than an entity which is resident for tax purposes in
certain jurisdictions outside Bermuda (“non-resident entity”)
that carries on as a business any one or more of the “relevant
activities” referred to in the ES Act must comply with
economic substance requirements. The list of “relevant
activities” includes carrying on any one or more of the
following activities: banking, insurance, fund management,
financing, leasing, headquarters, shipping, distribution and
service center, intellectual property and holding entities.
Under the ES Act, if a company is engaged in one or more
“relevant activities”, it is required to maintain a substantial
economic presence in Bermuda and to comply with the
economic substance requirements set forth in the ES Act. A
company will comply with
those economic substance
requirements if it: (a) is managed and directed in Bermuda;
(b) undertakes “core income generating activities” (as may be
prescribed under the ES Act) in Bermuda in respect of the
relevant activity; (c) maintains adequate physical presence in
Bermuda; (d) has adequate full time employees in Bermuda
with suitable qualifications; and (e) incurs adequate operating
expenditure in Bermuda in relation to the relevant activity
undertaken by it.
if
they comply with
Companies that are licensed to and carry on insurance as a
relevant activity are generally considered to operate in
Bermuda with adequate substance, with respect to their
insurance business,
the existing
provisions of (a) the Companies Act 1981 relating to
corporate governance; and (b) the Insurance Act 1978, that
are applicable to the economic substance requirements, and
the Registrar will have regard to such companies’ compliance
with the Insurance Act 1978 (in addition to compliance with
the Companies Act 1981) in his assessment of compliance
with the economic substance requirements. That being said,
such companies are still required to complete and file a
Declaration Form, with the Bermuda Registrar of Companies
and the Registrar will also have regard to the information
provided in that Declaration Form in making his assessment
of compliance with the ES Act.
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United States
and
than
rather
supervision
is designed
investors. Generally,
General. Our U.S. based insurance operating subsidiaries are
subject to extensive governmental regulation and supervision
by the states and jurisdictions in which they are domiciled,
licensed and/or approved to conduct business. The insurance
laws and regulations of the state of domicile have the most
significant impact on operations. We currently have U.S.
insurance and/or reinsurance subsidiaries domiciled
in
Delaware, North Carolina, Missouri, Wisconsin, Kansas and
the District of Columbia and we may acquire insurers
domiciled in other states in the future. State insurance
to protect
regulation
policyholders
state
regulatory authorities have broad regulatory powers over
such matters as licenses, standards of solvency, premium
rates, policy forms, marketing practices, claims practices,
investments, methods of accounting, form and content of
financial statements, certain aspects of governance, ERM,
amounts we are required to hold as reserves for future
payments, minimum capital and surplus requirements, annual
and other report filings and transactions among affiliates. Our
U.S. based subsidiaries are required to file detailed quarterly
and audited annual statutory financial statements with state
insurance regulators. In addition, regulatory authorities
conduct periodic financial, claims and market conduct
examinations. Certain insurance regulatory requirements are
highlighted below. In addition to regulation applicable
generally to U.S. insurance and reinsurance companies, our
U.S. mortgage insurance operations are affected by federal
and state regulation relating to mortgage insurers, mortgage
lenders, and the origination, purchase and sale of residential
mortgages. Arch Insurance (U.K.) is also subject to certain
governmental regulation and supervision in the states where
it writes excess and surplus lines insurance.
Holding Company Regulation. All states have enacted
legislation that regulates insurance holding company systems.
These regulations generally provide that each insurance
company in the system is required to register with the
insurance department of its state of domicile and furnish
information concerning the operations of companies within
the holding company system which may materially affect the
operations, management or financial condition of the insurers
within the system. Notice to the state insurance departments
is required prior to the consummation of certain material
transactions between an insurer and any entity in its holding
company system and certain transactions may not be
consummated without the applicable insurance department’s
prior approval or non-disapproval after receiving notice. The
holding company acts also prohibit any person from directly
or indirectly acquiring control of a U.S. insurance or
reinsurance company unless
that person has filed an
application with specified information with such company’s
domiciliary
the
commissioner’s prior approval. Under most states’ statutes
commissioner
obtained
and
has
acquiring 10% or more of the voting securities of an
insurance company or its parent company is presumptively
considered an acquisition of control of the insurance
company, although such presumption may be rebutted.
State holding company acts and regulations also impose
extensive informational requirements on parents and other
affiliates of licensed insurers or reinsurers with the purpose
of protecting them from enterprise risk, including requiring
an annual enterprise risk report by the ultimate controlling
person identifying the material risks within the insurance
holding company system that could pose enterprise risk to the
licensed companies and requiring a person divesting its
controlling interest to make a confidential advance notice
filing.
In December 2020, the National Association of Insurance
Commissioners (“NAIC”) adopted amendments to the NAIC
Insurance Holding Company System Model Act and Model
Regulation that, when adopted by states, will require the
ultimate controlling person of an insurance holding company
system to file an annual group capital calculation, unless the
ultimate controlling person or its insurance holding company
system is exempt from the filing requirement. The group
capital calculation is designed to assist state insurance
regulators in understanding the financial condition of non-
insurance entities that are part of an insurance holding
company system and
insurance
the degree
companies are supporting those non-insurance entities.
to which
limit
Regulation of Dividends and Other Payments from Insurance
Subsidiaries. The ability of an insurer to pay dividends or
make other distributions is subject to insurance regulatory
limitations of the insurer’s state of domicile. Such laws
generally
the payment of dividends or other
distributions above a specified level. Dividends or other
distributions in excess of such thresholds are “extraordinary”
and are subject to prior notice and approval, or non-
disapproval after receiving notice. In April 2015, the GSEs
published comprehensive, revised requirements, known as
the Private Mortgage Insurer Eligibility Requirements or
“PMIERs.” Arch MI U.S.’ ability to pay dividends is subject
to prior notification and approval through June 30, 2021,
pursuant to the PMIERs guidance related to COVID-19.
Credit for Reinsurance. Arch Re U.S. is subject to insurance
regulation and supervision that is similar to the regulation of
licensed primary insurers. However, except for certain
mandated provisions that must be included in order for a
ceding company to obtain credit for reinsurance ceded, the
terms and conditions of reinsurance agreements generally are
not subject to regulation by any governmental authority.
A primary insurer ordinarily will enter into a reinsurance
agreement to obtain credit for the reinsurance ceded on its
U.S. statutory-basis financial statements. As a result of the
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to
relating
requirements
for
reinsurance, Arch Re U.S. and Arch Re Bermuda are
indirectly subject to certain regulatory requirements imposed
by jurisdictions in which ceding companies are domiciled.
the provision of credit
In general, credit for reinsurance is allowed if the reinsurer is
licensed or “accredited” in the state in which the primary
insurer is domiciled; or if none of the above applies, to the
extent that the reinsurance obligations of the reinsurer are
collateralized appropriately, typically through the posting of a
letter of credit for the benefit of the primary insurer or the
deposit of assets into a trust fund established for the benefit
of the primary insurer. Most states have adopted provisions
of the NAIC Credit for Reinsurance Model Law and
Regulation that allow full credit to U.S. ceding insurers for
reinsurance ceded to reinsurers that have been approved as
“certified
than 100%
collateralization. As of February 2, 2021 Arch Re Bermuda is
approved as a “certified reinsurer” in 39 states.
reinsurers” based upon
less
In April 2018, the U.S. and the EU entered into the Bilateral
Agreement between the United States of America and the
European Union on Prudential Matters Regarding Insurance
and Reinsurance (the “EU-US Covered Agreement”) that,
among other things, would eliminate reinsurance collateral
requirements for qualified U.S. reinsurers operating in the
EU insurance market, and eliminate reinsurance collateral
requirements under U.S. state insurance law for qualified
reinsurers having their head office or domiciled in an EU
member state. In December 2018, the U.S. Secretary of the
Treasury and the U.S. Trade Representative announced that
they had reached agreement with the U.K. on a covered
agreement (“U.K. Covered Agreement”) with terms nearly
identical to the EU Covered Agreement for insurers and
reinsurers operating in the U.K. In 2019, the NAIC adopted
amendments to the Credit for Reinsurance Model Law and
Regulation that would implement the EU-US Covered
Agreement and the U.K. Covered Agreement and eliminate
reinsurance collateral requirements for qualified reinsurers
having their head office or domiciled in other jurisdictions
deemed “Reciprocal Jurisdictions” by the NAIC (although
individual states may reject a Reciprocal Jurisdiction
designation). The NAIC list of Reciprocal Jurisdictions
includes Bermuda, Japan and Switzerland. As of February
23, 2021, the NAIC reports that eighteen states have adopted
the 2019 amendments to the Credit for Reinsurance Model
Law with an additional 18 considering amendments.
Risk Management and ORSA. The NAIC Risk Management
and Own Risk Solvency Assessment Model Act (“ORSA
Model Act”) provides that domestic insurers, or their
insurance group, must regularly conduct an ORSA consistent
with a process comparable to the ORSA Guidance Manual
process. The ORSA Model Act also provides that, no more
than once a year, an insurer’s domiciliary regulator may
request that an insurer submit an ORSA summary report, or
that
together contain
any combination of reports
the
information described in the ORSA Guidance Manual, with
respect to the insurer and/or the insurance group of which it
is a member. States may impose additional internal review
and regulatory filing requirements on licensed insurers and
their parent companies. Nearly all states have enacted the
ORSA Model Act or substantially similar legislation.
impose
that may
regulations
Cybersecurity and Privacy. The NAIC has adopted an
Insurance Data Security Model Law, which, when adopted
by the states, will require insurers, insurance producers and
other entities required to be licensed under state insurance
laws to comply with certain requirements under state
insurance laws, such as developing and maintaining a written
information security program, conducting risk assessments
and overseeing the data security practices of third-party
vendors. A number of states have already adopted versions of
this model law, with more expected to follow. In addition,
certain state insurance regulators are developing or have
developed
regulatory
requirements relating to cybersecurity on insurance and
reinsurance companies (potentially including insurance and
reinsurance companies that are not domiciled, but are
licensed, in the relevant state). Privacy legislation and
regulation has also become an issue of increasing focus of the
federal government and
in many states. In addition,
California Consumer Privacy Act of 2018 (“CCPA”), which
also applies to us, came into effect on January 1, 2020, and
grants California consumers certain rights to, among other
things, access and delete data about them subject to certain
exceptions, as well as a private right of action related to
cybersecurity breaches with statutory penalties. Additionally,
a California ballot initiative known as the California Privacy
Rights Act of 2020 (“CPRA”) passed as part of the
November 2020 ballot and will become fully effective on
January 1, 2023. The CPRA will apply to us and will
substantially amend the CCPA, providing for additional
consumer privacy rights, additional regulatory obligations,
and creating a new privacy focused California regulatory
agency with enforcement authority. A range of new
cybersecurity and privacy laws are also under consideration
in other states, as well as by the federal government.
Risk-Based Capital Requirements. Licensed U.S. property
and casualty insurance and reinsurance companies are subject
to risk-based capital requirements that are designed to assess
capital adequacy and to raise the level of protection that
statutory surplus provides for policyholder obligations. The
risk-based capital model for property and casualty insurance
companies measures three major areas of risk facing property
and casualty insurers: underwriting, which encompasses the
risk of adverse loss developments and inadequate pricing;
declines in asset values arising from credit risk; and declines
in asset values arising from investment risks. An insurer will
be subject to varying degrees of regulatory action depending
on how its statutory surplus compares to its risk-based capital
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calculation. Under the approved formula, an insurer’s total
adjusted capital is compared to its authorized control level
risk-based capital. If this ratio is above a minimum threshold,
no company or regulatory action is necessary. Below this
threshold are four distinct action levels at which an insurer’s
domiciliary state regulator can intervene with increasing
degrees of authority over an insurer as the ratio of surplus to
risk-based capital
requirement decreases. The mildest
regulatory action requires an insurer to submit a plan for
corrective action; the most severe requires an insurer to be
rehabilitated or liquidated.
Our mortgage insurance operations are not currently subject
to state risk-based capital requirements, but rather are subject
to state risk to capital or minimum policyholder position
requirements. The NAIC has established a Mortgage
Guaranty Insurance Working Group which is engaged in
developing changes to the Mortgage Guaranty Insurers
Model Act, including the development of a risk based capital
model unique to mortgage guaranty insurers.
Guaranty Funds. Most states require all admitted insurance
companies to participate in their respective guaranty funds
which cover certain claims against insolvent insurers. Solvent
insurers licensed in these states are required to cover the
losses paid on behalf of insolvent insurers by the guaranty
funds and are generally subject to annual assessments in the
states by the guaranty funds to cover these losses. Mortgage
guaranty insurance, among other lines of business, is
typically exempt from participation in guaranty funds.
is
the
Federal Regulation. Although state regulation
dominant form of regulation for insurance and reinsurance
business, a number of federal laws affect and apply to the
insurance industry. The Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (“Dodd-Frank”) created
the Federal Insurance Office (“FIO”) within the Department
of Treasury, which is not a federal regulator or supervisor of
insurance, but monitors the insurance industry for systemic
risk, administers the Terrorism Risk Insurance Program
(“TRIP”), consults with the states regarding insurance
matters and develops
federal policy on aspects of
international insurance matters. See “Risk Factors—Risks
Relating to Our Industry, Business and Operations—We
could face unanticipated losses from war, terrorism, cyber-
attacks, pandemics and political instability, and these or other
unanticipated losses could have a material adverse effect on
our financial condition and results of operations” for more
information on TRIP. In addition, FIO is authorized to assist
the U.S. Secretary of the Treasury in negotiating “covered
agreements” between the U.S. and one or more foreign
governments or regulatory authorities that address insurance
prudential measures.
Certain other federal laws also directly or indirectly impact
mortgage insurers, including the Real Estate Settlement
Procedures Act of 1974 (“RESPA”), the Homeowners
the Equal Credit
Protection Act of 1998 (“HOPA”),
Opportunity Act, the Fair Housing Act, the Truth In Lending
Act (“TILA”), the Fair Credit Reporting Act of 1970
(“FCRA”), and the Fair Debt Collection Practices Act.
Among other things, these laws and their implementing
regulations prohibit payments for referrals of settlement
service business, require fairness and non-discrimination in
granting or facilitating the granting of credit, govern the
circumstances under which companies may obtain and use
consumer credit information, define the manner in which
companies may pursue collection activities, and require
disclosures of the cost of credit and provide for other
consumer protections.
GSE Eligible Mortgage Insurer Requirements. GSEs impose
requirements on private mortgage insurers so that they may
be eligible to insure loans sold to the GSEs, known as the
PMIERs. The PMIERs apply to our eligible mortgage
insurers, but do not apply to Arch Mortgage Guaranty
Company, which is not GSE-approved. The PMIERs impose
limitations on the type of risk insured, the forms and
insurance policies issued, standards for the geographic and
customer diversification of risk, procedures for claims
handling, acceptable underwriting practices, standards for
certain reinsurance cessions and financial requirements,
among other things. 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, original credit score of performing
loans, and the delinquency status of non-performing loans).
Our eligible mortgage
the PMIERs’
financial requirements as of December 31, 2020.
insurers satisfied
Canada
insurance/reinsurance. The Office of
Arch Insurance Canada and Arch Re Canada are subject to
federal, as well as provincial and territorial, regulation in
Canada in the provinces and territories in which they
underwrite
the
Superintendent of Financial Institutions (“OSFI”) is the
federal regulatory body that, under the Insurance Companies
Act (Canada), prudentially regulates federal Canadian and
non-Canadian
companies
and
operating in Canada. Arch Insurance Canada is licensed to
carry on insurance business by OSFI and in each province
and territory. Arch Re Canada is licensed to carry on
reinsurance business by OSFI and in the provinces of Ontario
and Quebec.
reinsurance
insurance
Under
the Insurance Companies Act (Canada), Arch
Insurance Canada is required to maintain an adequate amount
of capital in Canada, calculated in accordance with a test
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promulgated by OSFI called the Minimum Capital Test, and
Arch Re Canada is required to maintain an adequate margin
of assets over liabilities in Canada, calculated in accordance
with a test promulgated by OSFI called the Branch Adequacy
of Assets Test. OSFI has
implemented a risk-based
methodology for assessing insurance/reinsurance companies
operating in Canada known as its “Supervisory Framework.”
In applying the Supervisory Framework, OSFI considers the
inherent risks of the business and the quality of risk
management for each significant activity of each operating
entity. Under the Insurance Companies Act (Canada),
approval of the Minister of Finance (Canada) is required in
connection with certain acquisitions of shares of, or control
of, Canadian insurance companies such as Arch Insurance
Canada, and notice to and/or approval of OSFI is required in
connection with the payment of dividends by or redemption
of shares by Canadian insurance companies such as Arch
Insurance Canada.
United Kingdom
General. The Prudential Regulation Authority (“PRA”) and
the Financial Conduct Authority (“FCA”) regulate insurance
and reinsurance companies and the FCA regulates firms
carrying on insurance mediation activities operating in the
U.K. both under the Financial Services and Markets Act 2000
(the “FSMA”). In May 2004, Arch Insurance (U.K.) was
granted the relevant permissions for the classes of insurance
business which it underwrites in the U.K. AMAL currently
manages Arch Syndicate 2012 and Arch Syndicate 1955
pursuant to its authorizations by the U.K. regulator and the
Lloyd’s Franchise Board. All U.K. companies are also
subject to a range of statutory provisions, including the laws
and regulations of the Companies Act 2006 (as amended)
(the “U.K. Companies Act”).
The objectives of the PRA are to promote the safety and
soundness of all firms it supervises and to secure an
appropriate degree of protection for policyholders. The
objectives of the FCA are to ensure customers receive
financial services and products that meet their needs, to
promote sound financial systems and markets and to ensure
that firms are stable and resilient with transparent pricing
information and which compete effectively and have the
interests of their customers and the integrity of the market at
the heart of how they run their business. The PRA has
responsibility for the prudential regulation of banks and
insurers, while the FCA has responsibility for the conduct of
business regulation in the wholesale and retail markets. The
PRA and the FCA adopt separate methods of assessing
regulated firms on a periodic basis. Arch Insurance (U.K.)
and AMAL are subject to periodic assessment by the PRA
along with all regulated firms. Arch Insurance (U.K.) and
AMAL are subject to regulation by both the PRA and FCA.
Castel is authorized and regulated by the FCA and is subject
to periodic assessment and review by the FCA.
in relation
including specifying conditions
Lloyd’s Supervision. The operations of AMAL (as managing
agent of Arch Syndicate 2012 and Arch Syndicate 1955) and
each syndicate’s respective corporate members, are subject to
the byelaws and regulations made by (or on behalf of) the
Council of Lloyd’s, and requirements made under those
byelaws. The Council of Lloyd’s, established in 1982 by
Lloyd’s Act 1982, has overall responsibility and control of
Lloyd’s. Those byelaws, regulations and requirements
provide a framework for the regulation of the Lloyd’s
to
market,
underwriting and claims operations of Lloyd’s participants.
Lloyd’s is also subject to the provisions of the FSMA.
Lloyd's is authorized by the PRA and regulated by the PRA
and FCA. Those entities acting within the Lloyd’s market are
required to comply with the requirements of the FSMA and
provisions of the PRA’s or FCA's rules, although the PRA
has delegated certain of its powers, including some of those
relating
to Lloyd’s. Each
corporate member of Lloyd’s is required to contribute a
percentage of the member’s premium income for each year of
account to the Lloyd’s central fund. The Lloyd’s central fund
is available if members of Lloyd’s assets are not sufficient to
meet claims for which the member is liable. Each corporate
member of Lloyd’s, may also be required to contribute to the
central fund by way of a supplement to a callable layer of up
to 3% of the corresponding member’s premium income limit
for the relevant year of account.
to prudential requirements,
Financial Resources. The European solvency framework and
prudential regime for insurers and reinsurers, the Solvency II
Directive 2009/138/EC (“Solvency II”), took effect in full on
January 1, 2016. See “European Union—Insurance and
Reinsurance Regulatory Regime” below for additional
details.
Arch Insurance (U.K.), and the corporate members of Arch
Syndicate 2012 and Arch Syndicate 1955 are currently
required to meet economic risk-based solvency requirements
imposed under Solvency II. Solvency II, together with
European Commission “delegated acts” and guidance issued
by the European Insurance and Occupational Pensions
Authority (“EIOPA”) sets out classification and eligibility
requirements, including the features which capital must
display in order to qualify as regulatory capital. Currently,
the European Commission is undertaking a review of
Solvency II to ensure that the regime remains fit for purpose
of calling upon EIOPA to provide technical advice with
EIOPA publishing its Opinion on December 17, 2020. The
European Commission’s proposal on the review is expected
in the 2021 third quarter.
On January 31, 2020, the U.K. withdrew from the EU with
the terms of Brexit set forth in the Withdrawal Agreement
agreed by the U.K. Parliament and the EU Parliament. At the
expiration of the transition period from January 31, 2020
until December 31, 2020 (the “Transition Period”), during
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which time the U.K. remained in the EU customs union and
single market, the European Union (Withdrawal) Act 2018,
as amended, has
transposed all applicable direct EU
legislation into domestic U.K. law, thus ensuring the
continuing application of Solvency II under the U.K.’s
financial services regulatory regime.
In June 2020, the U.K. government revealed plans to review
Solvency II to ensure that it is properly tailored to take
account the structural features of the U.K. insurance sector,
with HM Treasury publishing a ‘Call for Evidence’ in
October 2020, outlining the motives behind the review and
inviting feedback on various areas, including, amongst
others, the standard formula for capital requirements, the risk
margin, the matching adjustment and reporting requirements.
The results of the review are not expected to be published
until later in 2021.
under
Financial Services Compensation Scheme. The Financial
Services Compensation Scheme (“FSCS”) is a scheme
established
eligible
policyholders of insurance companies who may become
insolvent. The FSCS is funded by the levies that it has the
power to impose on all insurers. Arch Insurance (U.K.) could
be required to pay levies to the FSCS.
compensate
FSMA
to
Restrictions on Acquisition of Control. Under FSMA, the
prior consent of the PRA or FCA, as applicable, is required,
before any person can become a controller or increase its
control over any regulated company,
including Arch
Insurance (U.K.), or over the parent undertaking of any
regulated company. Therefore, the PRA's or FCA's prior
consent, as applicable, is required before any person can
become a controller of Arch Capital. Prior consent is also
required from Lloyd’s before any person can become a
controller or increase its control over a corporate member or
a managing agent or a parent undertaking of a corporate
member or managing agent. A controller is defined for these
purposes as a person who holds (either alone or in concert
with others) 10% or more of the shares or voting power in the
relevant company or its parent undertaking.
they have “profits available
Restrictions on Payment of Dividends. Under English law, all
companies are restricted from declaring a dividend to their
shareholders unless
for
distribution.” The calculation as to whether a company has
sufficient profits is based on its accumulated realized profits
minus its accumulated realized losses. U.K. insurance
regulatory laws do not prohibit the payment of dividends, but
the PRA or FCA, as applicable, requires that insurance
companies, insurance intermediaries and other regulated
entities maintain certain solvency margins and may restrict
the payment of a dividend by Arch Insurance (U.K.), AMAL
or Castel, for example.
European Union Considerations. During the Transition
Period, there was no change in passporting rights for
financial institutions in the U.K. Under our Brexit plan, since
January 2020 nearly all of the EEA insurance business of
Arch Insurance (U.K.) has been conducted by Arch Insurance
(EU). As part of our Brexit planning, and in advance of the
Transition Period expiring, a transfer of the EEA legacy
business
from Arch
Insurance (U.K.) to Arch Insurance (EU) was completed
under Part VII of the U.K. Financial Services and Market Act
2000 at the end of December 2020 (“Part VII Transfer”).
reinsurance)
(excluding
inwards
The U.K. government established a Temporary Permissions
Regime (“TPR”) which came into force with effect from
January 1, 2021, which allows EEA firms such as Arch Re
Europe and Arch Insurance (EU), covered by a passport prior
to that date, who wish to continue carrying out business in
the U.K. in the longer term, to operate in the U.K. for a
limited period while they seek authorization or recognition
from the U.K. regulators. However, no TPR-equivalent
regime is in place for U.K. firms who wish to continue
carrying out business in the EEA. In the absence of a TPR-
equivalent regime for U.K. firms, the ability of U.K. firms
(including, Arch Insurance (U.K.), AMAL and Castel) to
continue doing business in the EEA depends on applicable
EEA state local law and regulation. Similarly, there has been
no decision yet made by the European Commission on
whether or not the U.K.’s financial services regulatory
regime will be granted third-country equivalence for the
purposes of reinsurance, solvency calculation and/or group
supervision under Solvency II. In the absence of such
declarations, EEA firms (and
their respective groups)
carrying out business with U.K. firms will be subject to a
stricter, more complex, set of regulatory and supervisory
requirements. U.K. firms will also be subject to more
stringent requirements in carrying out reinsurance business
with EEA firms.
The long-term implications of Brexit on the Solvency II
framework in the U.K. remain uncertain in relation to the
arrangements that will allow U.K. and EU-established firms
to continue to effectively transact business with each other
and how the future relationship between the two parties will
adversely affected regulated entities. See “Risk Factors—
Risks Relating to Our Industry, Business and Operations—
The U.K.’s Withdrawal from the EU could adversely affect
us.”
On December 24, 2020, the EU and the U.K. agreed the EU-
UK Trade Cooperation Agreement (the “TCA”) which details
the terms of the future cooperation between the U.K. and the
EU. The TCA was signed by both the EU and U.K. on
December 30, 2020, with a provisional effective date of
January 1, 2021. The TCA does not preserve the status of
financial services and as a result, under the provisions of the
institutions (including our Irish
TCA, EEA financial
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operating subsidiaries) have lost their passporting rights into
the U.K. Absent any future agreement between the U.K. and
the EU on the provision of financial services by U.K.
financial institutions into the EU, the post-Brexit status and
rules applicable
to U.K. branches of EEA financial
institutions will be primarily driven by U.K. law and
regulation. See “Risk Factors—Risks Relating
to Our
Industry, Business and Operations—The U.K.’s Withdrawal
from the EU could adversely affect us.”
Ireland
General. The CBOI regulates insurance and reinsurance
companies and intermediaries authorized in Ireland. Our
three Irish operating subsidiaries are Arch Re Europe, Arch
Insurance (EU) and Arch Underwriters Europe. Arch Re
Europe was licensed and authorized by the CBOI as a non-
life reinsurer in October 2008 and as a life reinsurer in
November 2009. Arch Insurance (EU) was licensed and
authorized by the CBOI as a non-life insurer in December
2011. As part of our Brexit plan, Arch Insurance (EU)
received approval from the CBOI to expand the nature of its
business in 2019 commenced writing expanded insurance
lines in the EEA in 2020, and the Part VII Transfer was
completed at the end of December 2020. Arch Underwriters
Europe was registered by the CBOI as an insurance and
reinsurance intermediary in July 2014. Arch Re Europe, Arch
Insurance (EU) and Arch Underwriters Europe are subject to
the supervision of the CBOI and must comply with Irish
insurance acts and regulations as well as with directions and
guidance issued by the CBOI.
Arch Re Europe and Arch Insurance (EU) are required to
comply with Solvency II requirements. See “European Union
—Insurance and Reinsurance Regulatory Regime” below for
additional details. As an intermediary, Arch Underwriters
Europe is subject to a different regulatory regime and is not
subject to solvency capital rules, but must comply with
requirements such as to maintain professional indemnity
insurance and to have directors that are fit and proper. Our
Irish subsidiaries are also subject to the general body of Irish
company laws and regulations including the provisions of the
Companies Act 2014.
Financial Resources. Arch Re Europe and Arch Insurance
(EU) are required to meet economic risk-based solvency
requirements imposed under Solvency II. Solvency II,
together with European Commission “delegated acts” and
guidance issued by EIOPA sets out classification and
eligibility requirements, including the features which capital
must display in order to qualify as regulatory capital.
Restrictions on Acquisitions. Under Irish law, the prior
consent of the CBOI is required before any person can
acquire or increase a qualifying holding in an Irish insurer or
reinsurer, including Arch Insurance (EU) and Arch Re
Europe, or their parent undertakings. A qualifying holding is
defined for these purposes as a direct or indirect holding that
represents 10% or more of the capital of, or voting rights, in
the undertaking or makes it possible to exercise a significant
influence over the management of the undertaking.
Restrictions on Payment of Dividends. Under Irish company
law, Arch Re Europe, Arch Insurance (EU) and Arch
Underwriters Europe are permitted to make distributions only
out of profits available for distribution. A company’s profits
available for distribution are its accumulated, realized profits,
so far as not previously utilized by distribution or
capitalization, less its accumulated, realized losses, so far as
not previously written off in a reduction or reorganization of
capital duly made. Further, the CBOI has powers to intervene
if a dividend payment were to lead to a breach of regulatory
capital requirements.
In response to the COVID-19 pandemic, EIOPA issued a
statement in April 2020 urging (re)insurers to temporarily
suspend all discretionary dividend distributions and share buy
backs aimed at remunerating shareholders, and recommended
a similar prudent approach should be applied to variable
remuneration policies. In December 2020, EIOPA reiterated,
in light of its previous statement in April 2020, the
importance of extreme caution and prudence in relation to
insurance firm's capital management.
looking
forward
satisfactory
On the basis of EIOPA's statement, the CBOI issued
guidance in April 2020 that insurance firms postpone any
payment of dividend distributions or similar transactions until
they can forecast their costs and future revenues with a
greater degree of certainty. The CBOI's position is that if the
board of an insurance firm forms the view that a high level of
certainty has been reached and wishes to make a distribution,
the CBOI expects the firm to engage with their local
supervision team before proceeding with the distribution,
demonstrating
solvency,
liquidity and operational resilience positions in light of the
current environment. Additionally, the CBOI advised in the
same guidance that insurance firms are expected to exercise
similar prudence in respect of any variable remuneration
policies and should consider whether the postponement of
any payments under such variable remuneration policies
would be appropriate in light of the current environment. In
February 2021, the CBOI reiterated its expectations in
relation to distributions by insurance firms, confirming that
between January 1, 2021 and at least until September 30,
2021, it expects that total dividends, share buy-backs and
variable remuneration for material risk-takers of significant
insurance firms should not result in a reduction in solvency
ratio of more than 15 percentage points from the pre-
distribution solvency ratio, and overall distributions should
be significantly lower than in years prior to the COVID-19
pandemic.
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Insurance
European Union Considerations. As Arch Re Europe, Arch
Insurance (EU) and Arch Underwriters Europe are authorized
by the CBOI in Ireland, a Member State of the EU, those
authorizations are recognized throughout the EEA. Subject
only to certain notification and application requirements,
(EU) and Arch
Arch Re Europe, Arch
Underwriters Europe can provide services, or establish a
branch, in any other Member State of the EEA. Although, in
doing so, they may be subject to the laws of such Member
States with respect to the conduct of business in such
Member State, company law registrations and other matters,
they will remain subject
to financial and operational
supervision by the CBOI only. Arch Insurance (EU) has
branches in the following EU countries: Italy and Denmark.
Arch Insurance (EU) also has a branch outside of the EU in
the U.K. Arch Re Underwriting ApS in Denmark (“Arch Re
Denmark”) is an underwriting agency underwriting accident
and health and other reinsurance business for Arch Re
Europe. Arch Re Europe also has two branches outside the
EU in the U.K. and in Switzerland (“Arch Re Europe Swiss
Branch”).
From January 1, 2021, under the provisions of the TCA our
Irish regulated entities have lost their passporting rights into
the U.K. See “Risk Factors—Risks Relating to Our Industry,
Business and Operations—The U.K.’s Withdrawal from the
EU could adversely affect us.”
European Union
Insurance and Reinsurance Regulatory Regime. Solvency II
took effect in full on January 1, 2016. Solvency II imposes
economic risk-based solvency requirements across all EU
Member States and consists of three pillars: Pillar I-
quantitative capital requirements, based on a valuation of the
entire balance sheet; Pillar II-qualitative regulatory review,
which includes governance, internal controls, enterprise risk
management and supervisory review process; and Pillar III-
market discipline, which is accomplished through reporting
of the insurer’s financial condition to regulators and the
public. Solvency
supplemented by European
Commission Delegated Regulation (EU) 2015/35 (the
“Delegated Regulation”), other European Commission
technical standards, and
“delegated acts” and binding
guidelines issued by EIOPA. The Delegated Regulation sets
out more detailed requirements for individual insurance and
reinsurance undertakings, as well as for groups, based on the
overarching provisions of Solvency II, which together make
up the core of the single prudential rulebook for insurance
and reinsurance undertakings in the EU.
II
is
In December 2020, EIOPA provided an opinion to the
European Commission in relation to the review of the
Solvency II regime. This review was initiated by the
European Commission to determine if the Solvency II regime
remains fit for purpose. In its opinion, EIOPA confirms that
the overall Solvency II framework is working well from a
there are no
prudential perspective, suggesting
that
fundamental changes needed but
that a number of
amendments are required to ensure the regime continues as a
well-functioning
regime. The European
Commission will review EIOPA's opinion over the coming
months.
risk-based
institutions have
Following entry into the TCA by the U.K. and the EU, and
the U.K.’s withdrawal from the EU under the provisions of
the TCA, U.K. financial
their
passporting rights into the EU. It is envisaged that there will
be a level of cooperation in relation to financial services,
reflected in a Memorandum of Understanding between the
U.K. and the EU and this is currently expected to be in place
by March 2021. See “Risk Factors—Risks Relating to Our
Industry, Business and Operations—The U.K.’s Withdrawal
from the EU could adversely affect us.”
lost
Arch Re Europe and Arch Insurance (EU), being established
in Ireland and authorized by the CBOI are able, subject to
similar regulatory notifications and there being no objection
from the CBOI and the Member States concerned, to
establish branches and provide reinsurance services, and, in
respect of Arch Insurance (EU), insurance services in all
EEA states.
Solvency II does not prohibit EEA insurers from obtaining
reinsurance from reinsurers licensed outside the EEA, such as
Arch Re Bermuda. As such, and subject to the specific rules
in each Member State, Arch Re Bermuda may do business
from Bermuda with insurers in EEA Member States, but it
may not directly operate its reinsurance business within the
EEA. Article 172 of Solvency II provides that reinsurance
contracts concluded by insurance undertakings in the EEA
with reinsurers having their head office in a country whose
solvency regime has been determined to be equivalent to
Solvency II shall be treated in the same manner as
reinsurance contracts with undertakings
the EEA
authorized under Solvency II. From January 1, 2016,
Bermuda was deemed by the European Commission to be
equivalent for Solvency II purposes. Solvency II also
includes specific measures providing for the supervision of
reinsurance groups. However, as a
insurance and
consequence of the above determination of equivalence,
pursuant to Article 260 of Solvency II, regulators within the
EEA are required to rely on the worldwide group supervision
exercised by the BMA. EIOPA has also indicated that, on a
case by case basis, groups subject to this worldwide
supervision may be exempted from any EEA sub-group
supervision, where this results in more efficient supervision
of the group and does not impair EEA supervisors in respect
of their individual responsibilities.
in
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insurers and
The Insurance Distribution Directive (“IDD”) was published
in February 2016. EEA Member States were required to
transpose the IDD by October 1, 2018. It replaces the
existing Insurance Mediation Directive. The IDD applies to
insurance and reinsurance products
all distributors of
to
reinsurers selling directly
(including
customers) and strengthens the regulatory regime applicable
to distribution activities through increased transparency,
information and conduct requirements. The principal impact
of the IDD is on the insurance market, however, requirements
that apply across insurance and reinsurance include more
specific conditions regarding knowledge and continuing
professional development requirements for those involved in
distribution of (re)insurance products. The IDD continues the
existing ability for intermediaries established in a Member
State of the EU to establish branches and provide services to
all EEA states. Arch Underwriters Europe, being established
in Ireland and authorized by the CBOI, is able, subject to
regulatory notifications and there being no objection from the
CBOI, to establish branches and provide services in all EEA
states.
Impact Assessments
Privacy. The European General Data Protection Regulation
(the “GDPR”) came into effect on May 25, 2018. The GDPR
aims to introduce consistent data protection rules across the
EU and EEA, and its scope extends to certain entities not
established in the EEA if they process personal data or offer
goods or services to, or monitor the behavior of, EEA data
subjects. The GDPR contains a number of requirements
regarding the processing of personal data about individuals,
including mandatory security breach reporting, new and
strengthened individual rights, evidenced data controller
accountability for compliance with the GDPR principles
(including fairness and transparency), maintenance of data
processing activity records and the implementation of
“privacy by design,” including through the completion of
mandatory Data Protection
in
connection with higher risk data processing activities.
Following the end of the Transition Period on December 31,
2020, GDPR was entered into force in the U.K. (the “U.K.
GDPR”). The requirements of the U.K. GDPR are virtually
identical to those of the EU GDPR. After the expiration of
the Transition Period, transfers of personal data from the
U.K. to the EEA are unrestricted and do not require
additional safeguards. Data flows from the EU to the U.K.
remain unrestricted for a six month interim basis from
January 1, 2021, provided the U.K. makes no substantive
changes to its data protection laws. The interim period is
intended to give the European Commission time to carry out
its adequacy assessment of U.K. data protection laws to
determine whether they offer an ‘essentially equivalent’ level
of data protection to that afforded in the EU. If the European
Commission were to grant the U.K. an ‘adequacy decision’
transfers of personal data from the EEA to the U.K. would
continue unrestricted and would not require any additional
safeguards, unless the decision was revoked by the European
the European
Commission. On February 19, 2021,
Commission published a first draft of its "adequacy decision"
and officially launched the process towards the adoption of
the adequacy decision for transfers of personal data to the
United Kingdom from the EU.
Switzerland
In December 2008, Arch Re Europe opened Arch Re Europe
Swiss Branch as a branch office. As Arch Re Europe is
domiciled outside of Switzerland and its activities are limited
to reinsurance, the Arch Re Europe Swiss Branch in
Switzerland is not required to be licensed by the Swiss
insurance regulatory authorities.
In August 2014, Arch Underwriters Europe opened a branch
office in Zurich (“Arch Underwriters Europe Swiss Branch”)
to render reinsurance advisory services to certain group
companies. Arch Underwriters Europe Swiss Branch is
registered with the commercial register of the Canton of
Zurich. Since its activities are limited to advisory services for
reinsurance matters, the Arch Underwriters Europe Swiss
Branch is not required to be licensed by the Swiss insurance
regulatory authorities.
Australia
APRA is an independent statutory authority responsible for
prudential supervision of
institutions across banking,
insurance and superannuation and promotes financial stability
in Australia. Arch LMI was authorized by APRA in January
2019 to conduct monoline lenders’ mortgage insurance
business in Australia. Major regulatory requirements that are
applicable to Arch LMI as an insurance provider in Australia
levels and
include requirements on minimum capital
compliance with corporate governance standards, including
the risk management strategy for our Australian mortgage
insurance business.
Hong Kong
The insurance industry is regulated by Hong Kong Insurance
Authority (“HKIA”), whose principal function is to regulate
and supervise the insurance industry for the promotion of the
general stability of the insurance industry and for the
protection of existing and potential policyholders. Arch MI
Asia is authorized to carry on general business Class 14
(Credit) and Class 16 (Miscellaneous Financial Loss), in or
from Hong Kong.
Major regulatory requirements that are applicable to Arch MI
Asia as a general business insurer include requirements on
minimum paid-up capital, minimum solvency margin and
maintenance of assets in Hong Kong.
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TAX MATTERS
The following summary of the taxation of Arch Capital and
the taxation of our shareholders is based upon current law
and is for general information only. Legislative, judicial or
administrative changes may be forthcoming that could affect
this summary.
The following legal discussion (including and subject to the
matters and qualifications set forth in such summary) of
certain tax considerations (a) under “—Taxation of Arch
Capital—Bermuda” and “—Taxation of Shareholders—
Bermuda” is based upon the advice of Conyers Dill &
Pearman Limited, Hamilton, Bermuda and (b) under “—
Taxation of Arch Capital-United States,” “—Taxation of
Shareholders-United States Taxation,” “—Taxation of Our
U.S. Shareholders” and “—United States Taxation of Non-
U.S. Shareholders” is based upon the advice of Cahill
Gordon & Reindel LLP, New York, New York (the advice of
such
accounting matters,
determinations or conclusions relating to the business or
activities of Arch Capital). The summary is based upon
current law and is for general information only. The tax
treatment of a holder of our common or preferred shares, or
of a person treated as a holder of our shares for U.S. federal
income, state, local or non-U.S. tax purposes, may vary
situation.
the holder’s particular
depending on
Legislative,
or
administrative
interpretations may be forthcoming that could be retroactive
and could affect the tax consequences to us or to holders of
our shares.
firms does not
changes
judicial
include
tax
or
Taxation of Arch Capital
Bermuda. Under current Bermuda law, Arch Capital is not
subject to tax on income or profits, withholding, capital gains
or capital transfers. Arch Capital has obtained from the
Minister of Finance under the Exempted Undertakings Tax
Protection Act 1966 of Bermuda an assurance that, in the
event that Bermuda enacts legislation imposing tax computed
on profits, income, any capital asset, gain or appreciation, or
any tax in the nature of estate duty or inheritance, the
imposition of any such tax shall not be applicable to Arch
Capital or to any of our operations or our shares, debentures
or other obligations until March 31, 2035. We could be
subject to taxes in Bermuda after that date. This assurance
will be subject to the proviso that it is not to be construed so
as to prevent the application of any tax or duty to such
persons as are ordinarily resident in Bermuda (we are not so
currently affected) or to prevent the application of any tax
payable in accordance with the provisions of the Land Tax
Act 1967 of Bermuda or otherwise payable in relation to any
property leased to us or our insurance subsidiary. We pay
annual Bermuda government fees, and our Bermuda
insurance and reinsurance subsidiary pays annual insurance
license fees. In addition, all entities employing individuals in
Bermuda are required to pay a payroll tax and other sundry
taxes payable, directly or
the Bermuda
government.
indirectly,
to
United States. Arch Capital and its non-U.S. subsidiaries
intend to conduct their operations in a manner that will not
cause them to be treated as engaged in a trade or business in
the U.S. and, therefore, will not be required to pay U.S.
federal income taxes (other than U.S. excise taxes on
insurance and reinsurance premium and withholding taxes on
dividends and certain other U.S. source investment income).
However, because definitive identification of activities which
constitute being engaged in a trade or business in the U.S. is
not provided by the Internal Revenue Code of 1986, as
amended (the “Code”), or regulations or court decisions,
there can be no assurance that the U.S. Internal Revenue
Service (“IRS”) will not contend successfully that Arch
Capital or its non-U.S. subsidiaries are or have been engaged
in a trade or business in the U.S. A foreign corporation
deemed to be so engaged would be subject to U.S. federal
income tax, as well as the branch profits tax, on its income,
which is treated as effectively connected with the conduct of
that trade or business unless the corporation is entitled to
relief under the permanent establishment provisions of a tax
treaty. Such income tax, if imposed, would be based on
in a manner
effectively connected
generally analogous to that applied to the income of a
domestic corporation, except that deductions and credits
generally are not permitted unless the foreign corporation has
timely filed a U.S. federal income tax return in accordance
with applicable regulations. Penalties may be assessed for
failure to file tax returns. The 30% branch profits tax is
imposed on net income after subtracting the regular corporate
tax and making certain other adjustments.
income computed
“Treaty”), Arch Capital's Bermuda
Under the income tax treaty between Bermuda and the U.S.
(the
insurance
subsidiaries will be subject to U.S. income tax on any
insurance premium income found to be effectively connected
with a U.S. trade or business only if that trade or business is
conducted through a permanent establishment in the U.S. No
regulations interpreting the Treaty have been issued. While
there can be no assurances, Arch Capital does not believe that
any of its Bermuda insurance subsidiaries has a permanent
establishment in the U.S. Such subsidiaries would not be
entitled to the benefits of the Treaty if (i) 50% or less of Arch
Capital's shares were beneficially owned, directly or
indirectly, by Bermuda residents or U.S. citizens or residents,
or (ii) any such subsidiary's income were used in substantial
part to make disproportionate distributions to, or to meet
certain liabilities to, persons who are not Bermuda residents
or U.S. citizens or residents. While there can be no
assurances, Arch Capital believes that its Bermuda insurance
subsidiaries are eligible for Treaty benefits.
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The Treaty clearly applies to premium income, but may be
construed as not protecting investment income. If Arch
Capital’s Bermuda insurance subsidiaries were considered to
be engaged in a U.S. trade or business and were entitled to
the benefits of the Treaty in general, but the Treaty were not
found to protect investment income, a portion of such
subsidiaries’ investment income could be subject to U.S.
federal income tax.
Non-U.S. insurance companies carrying on an insurance
business within the U.S. have a certain minimum amount of
effectively connected net investment income, determined in
accordance with a formula that depends, in part, on the
amount of U.S. risk insured or reinsured by such companies.
If any of Arch Capital's non-U.S. insurance subsidiaries is
considered to be engaged in the conduct of an insurance
business in the U.S., a significant portion of such company's
investment income could be subject to U.S. federal income
tax.
Non-U.S. corporations not engaged in a trade or business in
the U.S. are nonetheless subject to U.S. income tax on certain
“fixed or determinable annual or periodic gains, profits and
income” derived from sources within the U.S. as enumerated
in Section 881(a) of the Code (such as dividends and certain
interest on investments), subject to exemption under the Code
or reduction by applicable treaties.
The U.S. also imposes an excise tax on insurance and
reinsurance premiums paid to non-U.S. insurers or reinsurers
with respect to risks located in the U.S. The rates of tax,
unless reduced by an applicable U.S. tax treaty, are 4% for
non-life insurance premiums and 1% for life insurance and
all reinsurance premiums.
The Tax Cuts and Jobs Act of 2017 (the “Tax Cuts Act”) was
signed into law by the President of the United States in 2017.
For taxable years beginning after 2017, the Tax Cuts Act
imposes a 10% minimum base erosion and anti-abuse tax
(increased to 12.5% for the 2026 taxable year and the
subsequent taxable years) on the “modified taxable income”
of a U.S. corporation (or a non-U.S. corporation engaged in a
U.S. trade or business) over such corporation’s regular U.S.
federal income tax, reduced by certain tax credits. The
“modified taxable income” of a corporation is determined
without deduction for certain payments by such corporation
to its non-U.S. affiliates (including reinsurance premiums).
Final regulations interpreting the base erosion and anti-abuse
tax were issued in December 2019.
United Kingdom. Our U.K. subsidiaries are companies
incorporated and have their central management and control
in the U.K., and are therefore resident in the U.K. for
corporation tax purposes. As a result, they will be subject to
U.K. corporation tax on their respective profits. The U.K.
branches of Arch Re Europe and Arch Insurance (EU) will be
subject to U.K. corporation tax on the profits (both income
profits and chargeable gains) attributable to each branch. The
rate of U.K. corporation tax for the financial year is 19% on
profits.
Canada. Arch Insurance Canada, a Canadian federal
insurance company, commenced underwriting in 2013. Arch
Re U.S.,
through a branch, commenced underwriting
reinsurance in Canada in January 2015. Arch Insurance
Canada is taxed on its worldwide income. Arch Re U.S. is
taxed on its net business income earned in Canada. The
general federal corporate income tax rate in Canada is
currently 15%. Provincial and territorial corporate income tax
rates are added to the general federal corporate income tax
rate and generally vary between 8% and 16%.
Ireland. Each of Arch Re Europe, Arch Insurance (EU) and
Arch Underwriters Europe is incorporated and resident in
Ireland for corporation tax purposes and will be subject to
Irish corporate tax on its worldwide profits, including the
profits of the branches of Arch Re Europe, Arch Insurance
(EU) and Arch Underwriters Europe. Any creditable foreign
tax payable will be creditable against Arch Re Europe’s Irish
corporate tax liability on the results of Arch Re Europe’s
branches with the same principle applied to Arch Insurance
(EU)’s branches and Arch Underwriters Europe’s branches.
The current rate of Irish corporation tax applicable to such
trading profits is 12.5%.
Switzerland. Arch Re Europe Swiss Branch and Arch
Underwriters Europe Swiss Branch are subject to Swiss
corporation tax on the profit which is allocated to the branch.
The effective tax rate is approximately 21.15% for Swiss
federal, cantonal and communal corporation taxes on the
profit. The effective tax rate of the annual cantonal and
communal capital taxes on the equity which is allocated to
Arch Re Europe Swiss Branch and Arch Underwriters
Europe Swiss Branch is approximately 0.17%.
Denmark. Arch Re Denmark, established as a subsidiary of
Arch Re Bermuda, is subject to Danish corporation taxes on
its profits at a rate of 22% for 2016 and onwards.
Hong Kong. Arch MI Asia is subject to Hong Kong corporate
tax on its assessable profits at a rate of 16.5%. Assessable
profits are the net profits for the basis period, arising in or
derived from Hong Kong.
Australia. Arch LMI, an Australian incorporated and tax
resident company, is subject to Australian corporate tax on its
worldwide profits. The current rate of Australian corporation
tax applicable to such profits is 30%.
Taxation of Shareholders
Bermuda. Currently, there is no Bermuda withholding tax on
dividends paid by us.
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Table of Contents
United States—General. The following summary sets forth
certain U.S. federal income tax considerations related to the
purchase, ownership and disposition of our common shares
and our non-cumulative preferred shares (“preferred shares”).
Unless otherwise stated, this summary deals only with
shareholders (“U.S. holders”) that are U.S. Persons (as
defined below) who hold their common shares and preferred
shares as capital assets and as beneficial owners. The
following discussion is only a general summary of the U.S.
federal income tax matters described herein and does not
purport to address all of the U.S. federal income tax
consequences that may be relevant to a particular shareholder
in light of such shareholder’s specific circumstances. In
addition, the following summary does not describe the U.S.
federal income tax consequences that may be relevant to
certain types of shareholders, such as banks, insurance
companies, regulated investment companies, real estate
investment trusts, financial asset securitization investment
trusts, dealers in securities or traders that adopt a mark-to-
market method of tax accounting, tax exempt entities,
expatriates, U.S. holders that hold our common shares or
preferred shares through a non-U.S. broker or other non-U.S.
intermediary, persons who hold the common shares or
preferred shares as part of a hedging or conversion
transaction or as part of a straddle, who may be subject to
special rules or treatment under the Code or persons required
for U.S. federal income tax purposed to recognize income no
later than such income is reported on such persons’
applicable financial statements. This discussion is based upon
the Code, the Treasury regulations promulgated there under
and any relevant administrative rulings or pronouncements or
judicial decisions, all as in effect on the date of this annual
report and as currently interpreted, and does not take into
account possible changes in such tax laws or interpretations
thereof, which may apply retroactively. This discussion does
not include any description of the tax laws of any state or
local governments within the U.S., or of any foreign
government, that may be applicable to our common shares or
preferred shares or the shareholders. Persons considering
making an investment in the common shares or preferred
shares should consult their own tax advisors concerning the
application of the U.S. federal tax laws to their particular
situations as well as any tax consequences arising under the
laws of any state, local or foreign taxing jurisdiction prior to
making such investment.
If an entity that is treated as a partnership holds our common
shares or preferred shares, the tax treatment of a partner will
generally depend upon the status of the partner and the
activities of the partnership. If you are a partner of a
partnership holding our common shares or preferred shares,
you should consult your tax advisor.
For purposes of this discussion, the term “U.S. Person”
means:
•
•
•
•
•
an individual who is a citizen or resident of the U.S.;
a corporation or entity treated as a corporation created or
organized under the laws of the U.S., any state thereof,
or the District of Columbia;
an estate the income of which is subject to U.S. federal
income taxation regardless of its source;
a trust if either (i) a court within the U.S. is able to
exercise primary supervision over the administration of
such trust and one or more U.S. persons have the
authority to control all substantial decisions of such trust
or (ii) the trust has a valid election in effect to be treated
as a U.S. person for U.S. federal income tax purposes; or
any other person or entity that is treated for U.S. federal
income tax purposes as if it were one of the foregoing.
United States—Taxation of Dividends. The preferred shares
should be properly classified as equity rather than debt for
U.S. federal income tax purposes. Subject to the discussions
below relating to the potential application of the controlled
foreign corporation (“CFC”), “related person insurance
income” (“RPII”) and passive foreign investment companies
(“PFIC”) rules, as defined below, cash distributions, if any,
made with respect to our common shares or preferred shares
will constitute dividends for U.S. federal income tax
purposes to the extent paid out of our current or accumulated
earnings and profits (as computed using U.S. tax principles).
If a U.S. holder of our common shares or our preferred shares
is an individual or other non-corporate holder, dividends
paid, if any, to that holder that constitute qualified dividend
income generally will be taxable at the rate applicable for
long-term capital gains (generally up to 20%), provided that
such person meets a holding period requirement. Generally in
order to meet the holding period requirement, the U.S. Person
must hold the common shares for more than 60 days during
the 121-day period beginning 60 days before the ex-dividend
date and must hold preferred shares for more than 90 days
during the 181-day period beginning 90 days before the ex-
dividend date. Dividends paid, if any, with respect to
common shares or preferred shares generally will be qualified
dividend income, provided the common shares or preferred
shares are readily tradable on an established securities market
in the U.S. in the year in which the shareholder receives the
dividend (which should be the case for shares that are listed
on the NASDAQ Stock Market or the New York Stock
Exchange) and Arch Capital is not considered to be a passive
foreign investment company in either the year of the
distribution or the preceding taxable year. No assurance can
be given that the preferred shares will be considered readily
tradable on an established securities market in the U.S. See
“—Taxation of Our U.S. Shareholders” below.
A U.S. holder that is an individual, estate or a trust that does
not fall into a special class of trusts that is exempt from such
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tax, will be subject to a 3.8% tax on the lesser of (1) the U.S.
holder’s “net investment income” for the relevant taxable
year and (2) the excess of the U.S. holder’s modified adjusted
gross income for the taxable year over a certain threshold
(which in the case of individual will be between $125,000
and $250,000, depending on the individual’s circumstances).
A U.S. holder’s net investment income will generally include
its dividend income and its net gains from the disposition of
our common shares and preferred shares, unless such
dividend income or net gains are derived in the ordinary
course of the conduct of a trade or business (other than a
trade or business that consists of certain passive or trading
activities).
Distributions with respect to the common shares and the
preferred shares will not be eligible for the dividends
received deduction allowed to U.S. corporations under the
Code. To the extent distributions on our common shares and
preferred shares exceed our earnings and profits, they will be
treated first as a return of the U.S. holder's basis in our
common shares and our preferred shares to the extent thereof,
and then as gain from the sale of a capital asset.
United States—Sale, Exchange or Other Disposition. Subject
to the discussions below relating to the potential application
of the CFC, RPII and PFIC rules, holders of common shares
and preferred shares generally will recognize capital gain or
loss for U.S. federal income tax purposes on the sale,
exchange or disposition of common shares or preferred
shares, as applicable.
it
is
(1)
United States—Redemption of Preferred Shares. A
redemption of the preferred shares will be treated under
section 302 of the Code as a dividend if we have sufficient
earnings and profits, unless the redemption satisfies one of
the tests set forth in section 302(b) of the Code enabling the
redemption to be treated as a sale or exchange, subject to the
discussion herein relating to the potential application of the
CFC, RPII and PFIC rules. Under the relevant Code
section 302(b) tests, the redemption should be treated as a
sale or exchange only
substantially
if
disproportionate, (2) constitutes a complete termination of the
holder's stock interest in us or (3) is “not essentially
equivalent to a dividend.” In determining whether any of
these tests are met, shares considered to be owned by the
holder by reason of certain constructive ownership rules set
forth in the Code, as well as shares actually owned, must
generally be taken into account. It may be more difficult for a
U.S. Person who owns, actually or constructively by
operation of the attribution rules, any of our other shares to
satisfy any of the above requirements. The determination as
to whether any of the alternative tests of section 302(b) of the
Code is satisfied with respect to a particular holder of the
preference shares depends on the facts and circumstances as
of the time the determination is made.
Taxation of Our U.S. Shareholders
Controlled Foreign Corporation Rules. We or any of our
non-U.S. subsidiaries will be treated as a CFC with respect to
any taxable year if at any time during such taxable year, one
or more “10% Shareholders” (as defined below) collectively
own more than 50% of us or such non-U.S. subsidiary (as
applicable) by vote or value (taking into account shares
actually owned by such U.S. holder as well as shares
attributed to such U.S. holder under the Code or the
regulations thereunder). For taxable years beginning on or
before December 31, 2017, a 10% Shareholder means any
shareholder who was considered
to own, actually or
constructively, 10% or more of the total combined voting
power of our shares or those of our non-U.S. subsidiaries (as
applicable). Under the Tax Cuts Act, for taxable years
beginning after December 31, 2017, a 10% Shareholder also
includes any shareholder who is considered to own, actually
or constructively, 10% or more of the value of our shares or
those of our non-U.S. subsidiaries (as applicable). As a result,
for taxable years beginning after December 31, 2017, the
voting cut-back limitation contained in our bye-laws that
limits the votes conferred by the Controlled Shares (as
defined in our bye-laws) of any U.S. Person to 9.9% of the
total voting power of all our shares entitled to vote will not
prevent any U.S. holder from being treated as a 10%
Shareholder. Due to the repeal of section 958(b)(4) under the
Tax Cuts Act, all non-U.S. subsidiaries directly or indirectly
owned by Arch Capital are treated as constructively owned
by its US subsidiaries, and therefore are treated as CFCs.
Status as a CFC would not cause us or any of our non-U.S.
subsidiaries to be subject to U.S. federal income tax. Such
status also would have no adverse U.S. federal income tax
consequences for any U.S. holder that is not a 10%
Shareholder with respect to us or any of such non-U.S.
subsidiaries (as applicable). If we or any of our non-U.S.
subsidiaries are or were a CFC with respect to any taxable
year, a U.S. holder that is considered a 10% U.S. Shareholder
would be subject to current U.S. federal income taxation (at
ordinary income tax rates) to the extent of all or a portion of
the undistributed earnings and profits of Arch Capital and our
subsidiaries attributable to “subpart F income” (including
certain insurance premium income and investment income)
or global intangible low-taxed income and may be taxable at
ordinary income tax rates on any gain recognized on a sale or
other disposition (including by way of repurchase or
liquidation) of our common shares or preferred shares to the
extent of the current and accumulated earnings and profits
attributable to such common shares or preferred shares. For
taxable years beginning after December 31, 2017, a helpful
limitation, which provides that a U.S. shareholder would not
be subject to the current inclusion rules of Subpart F for a
taxable year unless the non-U.S. corporation was a CFC for
an uninterrupted period of 30 days or more during such
taxable year, will no longer apply.
ARCH CAPITAL
29
2020 FORM 10-K
Table of Contents
Related Person Insurance Income Rules. Generally, we do
not expect the gross RPII of any of our non-U.S. subsidiaries
to equal or exceed 20% of its gross insurance income in any
taxable year for the foreseeable future (the “RPII 20% gross
income exception”). Consequently, we do not expect any
U.S. person owning common shares or preferred shares to be
required to include in gross income for U.S. federal income
tax purposes RPII income, but there can be no assurance that
this will be the case.
Section 953(c)(7) of the Code generally provides that Section
1248 of the Code (which generally would require a U.S.
holder to treat certain gains attributable to the sale, exchange
or disposition of common shares or preferred shares as a
dividend) will apply to the sale or exchange by a U.S.
shareholder of shares in a foreign corporation that is
characterized as a CFC under the RPII rules if the foreign
corporation would be taxed as an insurance company if it
were a domestic corporation, regardless of whether the U.S.
shareholder is a 10% U.S. Shareholder or whether the
corporation qualifies for the RPII 20% gross income
exception. Although existing U.S. Treasury Department
the question,
(“Treasury”) regulations do not address
proposed Treasury regulations issued in April 1991 create
some ambiguity as to whether Section 1248 and the
requirement to file Form 5471 would apply when the foreign
corporation has a foreign insurance subsidiary that is a CFC
for RPII purposes and that would be taxed as an insurance
company if it were a domestic corporation. We believe that
Section 1248 and the requirement to file Form 5471 will not
apply to a less than 10% U.S. Shareholder because Arch
Capital is not directly engaged in the insurance business.
There can be no assurance, however, that the IRS will
interpret the proposed regulations in this manner or that the
Treasury will not take the position that Section 1248 and the
requirement to file Form 5471 will apply to dispositions of
our common shares or our preferred shares.
If the IRS or Treasury were to make Section 1248 and the
Form 5471 filing requirement applicable to the sale of our
shares, we would notify shareholders that Section 1248 of the
Code and the requirement to file Form 5471 will apply to
dispositions of our shares. Thereafter, we would send a notice
after the end of each calendar year to all persons who were
shareholders during the year notifying them that Section
1248 and the requirement to file Form 5471 apply to
dispositions of our shares by U.S. holders. We would attach
to this notice a copy of Form 5471 completed with all our
information and instructions for completing the shareholder
information.
Tax-Exempt Shareholders. Tax-exempt entities may be
required to treat certain Subpart F insurance income,
including RPII, that is includible in income by the tax-exempt
entity as unrelated business taxable income. Prospective
investors that are tax exempt entities are urged to consult
their own tax advisors as to the potential impact of the
unrelated business taxable income provisions of the Code.
Passive Foreign Investment Companies. Sections 1291
through 1298 of the Code contain special rules applicable
with respect to foreign corporations that are PFICs. In
general, a foreign corporation will be a PFIC if 75% or more
of its income constitutes “passive income” or 50% or more of
its assets produce passive income. If we were to be
characterized as a PFIC, U.S. holders would be subject to a
penalty tax at the time of their sale of (or receipt of an
“excess distribution” with respect to) their common shares or
preferred shares. In general, a shareholder receives an
“excess distribution” if the amount of the distribution is more
than 125% of the average distribution with respect to the
shares during the three preceding taxable years (or shorter
period during which the taxpayer held the stock). In general,
the penalty tax is equivalent to an interest charge on taxes
that are deemed due during the period the shareholder owned
the shares, computed by assuming that the excess distribution
or gain (in the case of a sale) with respect to the shares was
taxable in equal portions throughout the holder’s period of
ownership. The interest charge is equal to the applicable rate
imposed on underpayments of U.S. federal income tax for
such period. A U.S. shareholder may avoid some of the
adverse tax consequences of owning shares in a PFIC by
making a qualified electing fund (“QEF”) election. A QEF
election is revocable only with the consent of the IRS and has
the following consequences to a shareholder:
•
•
For any year in which Arch Capital is not a PFIC, no
income tax consequences would result.
For any year in which Arch Capital is a PFIC, the
shareholder would include in its taxable income a
proportionate share of the net ordinary income and net
capital gains of Arch Capital and certain of its non-U.S.
subsidiaries.
For taxable years beginning on or before December 31, 2017,
the determination of whether the active insurance company
exception applies to an insurance company was made on a
case-by-case basis and the analysis was inherently subjective.
Under the Tax Cuts Act, for taxable years beginning after
December 31, 2017, the active insurance company exception
applies only if (i) the company would be taxed as an
insurance company were it a U.S. corporation and (ii) either
(A) loss and loss adjustment expense and certain reserves
constitute more than 25% of the company’s gross assets for
the relevant year or (B) loss and loss adjustment expenses
and certain reserves constitute more than 10% of the
company’s gross assets for the relevant year and, based on
the applicable facts and circumstances, the company is
predominantly engaged in an insurance business and the
failure of the company to satisfy the preceding 25% test is
due solely to run-off related or other specified circumstances
ARCH CAPITAL
30
2020 FORM 10-K
FATCA Withholding. Sections 1471 through 1474 to the
Code, known as the Foreign Account Tax Compliance Act
(“FATCA”), impose a withholding tax of 30% on U.S.-
source interest, dividends and certain other types of income,
which is received by a foreign financial institution (“FFI”),
unless such FFI enters into an agreement with the IRS to
obtain certain information as to the identity of the direct and
indirect owners of accounts in such institution. In addition, a
30% withholding tax may be imposed on the above payments
to certain non-financial foreign entities which do not (i)
certify to each respective withholding agent that they have no
“substantial U.S. owners” (i.e., a U.S. 10% direct or indirect
shareholder), or (ii) provide such withholding agent with the
certain information as to the identity of such substantial U.S.
intergovernmental
owners. The U.S. has entered
agreements to implement FATCA (“IGAs”) with a number of
jurisdictions. Bermuda has signed an IGA with the U.S.
Different rules than those described above may apply under
such an IGA.
into
Although dividends with respect to our common shares or
preferred shares will generally be treated as foreign source
for U.S. federal withholding tax purposes, it is unclear
whether, for FATCA purposes, some or all of our dividends
may be recharacterized as U.S. source dividends. Treasury
regulations addressing this topic have not yet been issued.
Prospective investors are urged to consult their own tax
advisors as to the filing and information requirements that
may be imposed on them in respect of their ownership of our
common share or preferred shares.
Other Tax Laws. Shareholders should consult their own tax
advisors with respect to the applicability to them of the tax
laws of other jurisdictions.
Table of Contents
the
involving
insurance business. The PFIC statutory
provisions contain a look-through rule that states that, for
purposes of determining whether a foreign corporation is a
PFIC, such foreign corporation shall be treated as if it
“received directly its proportionate share of the income” and
as if it “held its proportionate share of the assets” of any other
corporation in which it owns at least 25% of the stock. We
believe that we were not a PFIC for any taxable year
beginning on or before December 31, 2017, or any
subsequent taxable year ending on or before December 31,
2020, and we currently are not expecting to become a PFIC
for any subsequent taxable year. However, due to the
complexity and uncertainty of the PFIC rules and the limited
guidance interpreting them, there can be no assurance that we
have not been a PFIC to date or that we will not become a
PFIC at some time in the future.
the IRS
On December 4, 2020,
issued certain final
regulations (the “2020 final PFIC insurance regulations”) and
revised proposed regulations (the “2020 proposed PFIC
insurance regulations”) regarding the application of the
insurance company exception. While we believe that the
2020 final PFIC insurance regulations and the 2020 proposed
PFIC insurance regulations should not adversely impact the
our ability to satisfy the insurance company exception and
avoid being treated as a PFIC, there can be no assurance that
such exception will in fact apply and/or will continue to
apply at all times in the future. Each U.S. holder should
consult its own tax advisor as to the effects of these rules.
United States Taxation of Non-U.S. Shareholders
Taxation of Dividends. Cash distributions, if any, made with
respect to common shares or preferred shares held by
shareholders who are not U.S. Persons (“Non-U.S. holders”)
generally will not be subject to U.S. withholding tax.
Sale, Exchange or Other Disposition. Non-U.S. holders of
common shares or preferred shares generally will not be
subject to U.S. federal income tax with respect to gain
realized upon the sale, exchange or other disposition of such
shares unless such gain is effectively connected with a U.S.
trade or business of the Non-U.S. holder in the U.S. or such
person is present in the U.S. for 183 days or more in the
taxable year
is realized and certain other
the gain
requirements are satisfied.
Information Reporting and Backup Withholding. Non-U.S.
holders of common shares or preferred shares will not be
subject to U.S. information reporting or backup withholding
with respect to dispositions of common shares effected
through a non-U.S. office of a broker, unless the broker has
certain connections to the U.S. or is a U.S. person. No U.S.
backup withholding will apply to payments of dividends, if
any, on our common shares or our preferred shares.
ARCH CAPITAL
31
2020 FORM 10-K
Table of Contents
ITEM 1A. RISK FACTORS
Set forth below are risk factors relating to our business.
These risks and uncertainties are not the only ones we face.
There may be additional risks that we currently consider not
to be material or of which we are not currently aware, and
any of these risks could cause our actual results to differ
materially from historical or anticipated results. You should
the other
carefully consider
information provided
including our
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our accompanying
consolidated financial statements, as well as the information
under the heading “Cautionary Note Regarding Forward-
Looking Statements” before
in any of our
securities. We may amend, supplement or add to the risk
factors described below from time to time in future reports
filed with the SEC.
risks along with
report,
this
these
in
investing
Risks Relating to Our Industry, Business and Operations
We operate in a highly competitive environment, and we may
not be able to compete successfully in our industry.
The insurance and reinsurance industry is highly competitive.
We compete on an international and regional basis with
major U.S. and non-U.S. insurers and reinsurers, many of
which have greater financial, marketing and management
resources than we do. See “Competition” in Item 1 for details
on our competitors in each of the major segments we operate
in. There has been significant consolidation in the insurance
and reinsurance sector in recent years and we may experience
increased competition as a result of that consolidation, with
consolidated entities having enhanced market power. These
consolidated entities may use their enhanced market power
and broader capital base to negotiate price reductions for
products and services that compete with ours, and we may
experience rate declines and possibly write less business.
Any failure by us to effectively compete could adversely
affect our financial condition and results of operations.
The insurance and reinsurance industry is highly cyclical,
and we may at times experience periods characterized by
excess underwriting capacity and unfavorable premium
rates.
fluctuations
results due
in operating
insurers and reinsurers have experienced
Historically,
to
significant
competition,
frequency of occurrence or severity of
catastrophic events, levels of capacity, general economic
conditions, changes in equity, debt and other investment
markets, changes in legislation, case law and prevailing
concepts of
liability and other factors. Demand for
reinsurance is influenced significantly by the underwriting
results of primary insurers and prevailing general economic
conditions. The supply of insurance and reinsurance is related
to prevailing prices and levels of surplus capacity that, in
turn, may fluctuate in response to changes in rates of return
being realized in the insurance and reinsurance industry on
both underwriting and investment sides. As a result, the
insurance and reinsurance business historically has been a
cyclical industry characterized by periods of intense price
competition due to excessive underwriting capacity as well as
periods when shortages of capacity permitted favorable
premium levels and changes in terms and conditions. Until
recently, the supply of insurance and reinsurance had
increased over the past several years, and may again in the
future, either as a result of capital provided by new entrants
or by the commitment of additional capital by existing
insurers or reinsurers. Continued increases in the supply of
insurance and reinsurance may have consequences for us,
including fewer contracts written, lower premium rates,
increased expenses for customer acquisition and retention,
and less favorable policy terms and conditions.
Claims for natural and man-made catastrophic events could
cause large losses and substantial volatility in our results of
operations and could have a material adverse effect on our
financial position and results of operations.
activity,
including hurricanes,
We have large aggregate exposures to natural and man-made
catastrophic events. Natural catastrophes can be caused by
various events,
including hurricanes, floods, wildfires,
tsunamis, windstorms, earthquakes, hailstorms, tornadoes,
explosions, severe winter weather, fires, droughts and other
natural disasters. The frequency and severity of natural
catastrophe
tsunamis,
tornadoes, floods and droughts, has also been greater in
recent years. 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
workers’ compensation or general liability. In addition to the
nature of the 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. Actual losses from future
catastrophic events may vary materially from estimates due
to the inherent uncertainties in making such determinations
resulting from several factors,
the potential
inaccuracies and inadequacies in the data provided by clients,
brokers and ceding companies, the modeling techniques and
the application of such techniques, the contingent nature of
business interruption exposures, the effects of any resultant
demand surge on claims activity and attendant coverage
issues.
including
The impact of the COVID-19 pandemic and related risks
could materially affect our results of operations, financial
position and/or liquidity.
ARCH CAPITAL
32
2020 FORM 10-K
Table of Contents
future
results of operations and
The COVID-19 pandemic has resulted in a global slowdown
of economic activity, and the magnitude of the impact of the
pandemic and the duration of the disruption and resulting
decline in business activity is still highly uncertain. A
prolonged COVID-19 pandemic could materially and
adversely impact our own employees and operations, as well
as the business operations of third parties with whom we
interact. The COVID-19 pandemic has impacted our results
of operations and could have a significant effect on our
financial
business,
performance. We may experience higher levels of loss and
claims activity in certain lines of business, and our premiums
written and earned could also be adversely affected by a
suppression of global commercial activity that results in a
reduction in insurable assets and other exposure. Conditions
of the financial markets resulting from the virus may also
have a negative effect on the performance of our investment
portfolio. Certain lines of our business may require additional
forms of collateral in the event of a decline in the fair value
of securities and benchmarks to which those repayment
mechanisms are linked. The impact of the pandemic on the
financial markets may also adversely affect our ability to
fund through public or private equity offerings, debt
financings, and through other means at acceptable terms.
Governmental, regulatory and rating actions in response to
the COVID-19 pandemic may adversely affect our financial
performance and our ability to conduct our businesses as we
have in the past.
that seeks
Actions of the federal, state and local government in the U.S.
and other countries where we do business, to address and
mitigate the impact of COVID-19, may adversely affect us.
For example, we are potentially subject to legislative and/or
regulatory action
to retroactively mandate
coverage for losses which our insurance policies were not
designed or priced to cover. There is proposed legislation in
some states to require insurers to cover business interruption
claims retroactively irrespective of terms, exclusions or other
conditions included in the policies that would otherwise
preclude coverage. Some proposed bills would require
policies providing business interruption coverage to cover
losses prospectively for pandemic-related losses. Insurance
regulators in some states will not approve policy exclusions
for losses from COVID-19, viruses or pandemics. In
addition, a number of states have instituted, and other states
are considering instituting, changes designed to effectively
expand workers' compensation coverage by creating
presumptions of compensability of claims for certain types of
workers. Regulatory restrictions or requirements could also
impact pricing, risk selection and our rights and obligations
with respect to our policies and insureds, including our
ability to cancel policies, our ability to increase rates or our
right to collect premiums. Some state regulators have issued
orders to review insurers’ rates to determine whether
premium refunds are required, and regulators in other states
could take similar actions. Many insurers, including us, have
also voluntarily provided, and may further provide, premium
refunds to their customers. It is also possible that changes in
economic conditions and steps taken by federal, state and
local governments in response to COVID-19 could require an
increase in taxes at the federal, state and local levels, which
would adversely impact our results of operations.
We expect that certain mortgage loans may default or enter
forbearance programs that allow borrowers to defer mortgage
payments as borrowers face challenges related to COVID-19.
Defaults related to the pandemic, if not cured, could remain
in our defaulted loan inventory for a protracted period of time
including due to foreclosure moratoria, potentially resulting
in higher frequency (claim rate) and severity (amount of the
claim) for those loans that ultimately result in a claim.
Accordingly, extended or extensive forbearance programs,
foreclosure moratoria and other changes in regulations or
laws may adversely
insurance
operations.
impact our mortgage
the
the applicability of
Under the GSEs’ PMIERs financial requirements, eligible
insurers are required to hold additional risk-based required
assets for delinquent mortgages. However, this amount is
reduced for mortgages backed by a property located in a
FEMA Declared Major Disaster Area, among other
requirements. On June 30, 2020, as amended on September
29, 2020, and December 4, 2020, the GSEs published
guidance clarifying
reduced
delinquent loan charges on loans with their first missed
payments occurring between March 1, 2020 and March 31,
2021 in response to a hardship related to COVID-19.
Additionally, through June 30, 2021, the GSEs have
temporarily required eligible insurers to obtain prior approval
of dividends or entering into any new arrangements or
altering any existing arrangements under tax sharing and
intercompany expense-sharing agreements. In addition, the
rating agencies continually review the financial strength
ratings assigned to the Company and its subsidiaries, and the
ratings are subject to change. The COVID-19 pandemic and
its impact on financial results and condition, could cause one
or more of the rating agencies to downgrade the ratings
assigned to the Company and its subsidiaries. We expect the
pandemic to result in a material increase in new defaults as
borrowers fail to make timely payments on their mortgages,
including as a result of increases in unemployment and
that allow
entering mortgage
borrowers to defer mortgage payments, which may have an
adverse impact on our results or operations. In addition,
defaults related to the pandemic, if not cured, could remain in
our defaulted loan inventory for a protracted period of time
including due to foreclosure moratoria, potentially resulting
in higher frequency (claim rate) and severity (amount of the
claim) for those loans that ultimately result in a claim.
Accordingly, extended or extensive forbearance programs,
forbearance programs
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2020 FORM 10-K
Table of Contents
foreclosure moratoria and other changes in regulations or
laws may adversely impact our mortgage insurance segment.
Climate change, as well as increasing regulation in the area
of climate change, may adversely affect our business,
financial condition and results of operations.
Changing weather patterns and climatic conditions, such as
global warming, have added to the unpredictability and
frequency of natural disasters in certain parts of the world
and created additional uncertainty as to future trends and
exposures. Although the loss experience of catastrophe
insurers and reinsurers has historically been characterized as
low frequency, there is a growing consensus today that
climate change increases the frequency and severity of
extreme weather events and, in recent years, the frequency of
major catastrophes appears to have increased, and may
continue to increase in the future.
Claims for catastrophic events, or an unusual frequency of
smaller losses in a particular period, could expose us to large
losses, cause substantial volatility in our results of operations
and could have a material adverse effect on our ability to
write new business if we are not able to adequately assess
and reserve for the increased frequency and severity of
catastrophes resulting from these environmental factors.
Additionally, catastrophic events could result in increased
credit exposure to reinsurers and other counterparties we
transact business with, declines in the value of investments
we hold and significant disruptions
to our physical
infrastructure, systems and operations. Climate change-
related risks may also specifically adversely impact the value
of the securities that we hold. The effects of climate change
could also lead to increased credit risk of other counterparties
we transact business with, including reinsurers.
income,
Changes in security asset prices may impact the value of our
fixed
real estate and commercial mortgage
investments, resulting in realized or unrealized losses on our
invested assets. These risks are not limited to, but can
include: (i) changes in supply/demand characteristics for
fossil fuels (e.g., coal, oil, natural gas); (ii) advances in low-
carbon technology and renewable energy development; and
(iii) effects of extreme weather events on the physical and
operational exposure of industries and issuers, and the
transition that these companies make towards addressing
climate risk in their own businesses.
However, we cannot predict how legal, regulatory and/or
social responses to concerns around global climate change
may impact our business. We attempt to manage our
exposure to such events through the use of underwriting
controls, risk models, and the purchase of third-party
reinsurance. Underwriting controls can
include more
restrictive underwriting criteria such as higher premiums and
losses retained, and more specifically
deductibles, or
excluded policy risks. Our deductible in connection with a
catastrophic event is determined by market capacity, pricing
conditions and surplus preservation. There can be no
assurance that our reinsurance coverage and other measures
taken will be sufficient to mitigate losses resulting from one
or more catastrophic events. As a result, the occurrence of
one or more catastrophic events and the continuation and
worsening of recent trends could have an adverse effect on
our results of operations and financial condition.
Environmental, Social and Governance and sustainability
have become major topics that encompass a wide range of
issues, including climate change and other environmental
risks. We are also subject to complex and changing laws,
regulation and public policy debates relating to climate
change which are difficult to predict and quantify and may
have an adverse impact on our business. Changes in
regulations relating to climate change or our own leadership
decisions implemented as a result of assessing the impact of
climate change on our business may result in an increase in
the cost of doing business or a decrease in premiums in
certain lines of business.
We could face unanticipated losses from war, terrorism,
cyber-attacks, pandemics and political instability, and these
or other unanticipated losses could have a material adverse
effect on our financial condition and results of operations.
We have substantial exposure to unexpected, large losses
resulting from future man-made catastrophic events, such as
acts of war, acts of terrorism, pandemics similar to the
COVID-19 pandemic and political instability. These risks are
inherently unpredictable. It is difficult to predict the timing of
such events with statistical certainty or estimate the amount
of loss any given occurrence will generate. In certain
instances, we specifically insure and reinsure risks resulting
from acts of terrorism. We may also insure against risk
related to cybersecurity and cyber-attacks. In addition, our
exposure to cyber-attacks includes exposure to ‘silent cyber’
risks, meaning risks and potential losses associated with
policies where cyber risk is not specifically included nor
excluded in the policies. Even in cases where we attempt to
exclude losses from terrorism, cybersecurity and certain other
similar risks from some coverages written by us, we may not
be successful in doing so. Moreover, irrespective of the
clarity and inclusiveness of policy language, there can be no
assurance that a court or arbitration panel will not limit
enforceability of policy language or otherwise issue a ruling
adverse to us. Accordingly, while we believe our reinsurance
programs, together with the coverage provided under the
Terrorism Risk Insurance Act of 2002, as amended (“TRIP”)
are sufficient to reasonably limit our net losses relating to
potential future terrorist attacks, we can offer no assurance
that our available capital will be adequate to cover losses
when they materialize. To the extent that an act of terrorism
is certified by the Secretary of the Treasury and aggregate
ARCH CAPITAL
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2020 FORM 10-K
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industry insured losses resulting from the act of terrorism
exceeds the prescribed program trigger, our U.S. insurance
operations may be covered under TRIP for up to 80% subject
to a mandatory deductible of 20% of our prior year’s direct
earned premium for covered property and liability coverages.
The program trigger for calendar year 2020 and any program
year thereafter is $200 million. If an act (or acts) of terrorism
result in covered losses exceeding the $100 billion annual
limit, insurers with losses exceeding their deductibles will not
be responsible for additional losses. It is not possible to
completely eliminate our exposure
to unforecasted or
unpredictable events, and to the extent that losses from such
risks occur, our financial condition and results of operations
could be materially adversely affected.
Underwriting risks and reserving for losses are based on
probabilities and related modeling, which are subject to
inherent uncertainties.
Our success is dependent upon our ability to assess
accurately the risks associated with the businesses that we
insure and reinsure. We establish reserves for losses and loss
adjustment expenses which represent estimates based on
actuarial and statistical projections, at a given point in time,
of our expectations of the ultimate future settlement and
administration costs of losses incurred. 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. Most or all of these factors are
not directly quantifiable, particularly on a prospective basis,
and the effects of these and unforeseen factors could
negatively impact our ability to accurately assess the risks of
the policies that we write. Changes in the assumptions used
by these models or by management could lead to an increase
in our estimate of ultimate losses in the future. In addition,
the
there may be significant reporting
occurrence of the insured event and the time it is reported to
the insurer and additional lags between the time of reporting
and final settlement of claims. In addition, the estimation of
loss reserves is more difficult during times of adverse
economic and market conditions due to unexpected changes
in behavior of claimants and policyholders, including an
increase in fraudulent reporting of exposures and/or losses,
reduced maintenance of insured properties or increased
frequency of small claims. Changes in the level of inflation
also result in an increased level of uncertainty in our
estimation of loss reserves. As a result, actual losses and loss
adjustment expenses paid can deviate, perhaps substantially,
from
in our financial
statements.
the reserve estimates reflected
lags between
If our loss reserves are determined to be inadequate, we will
be required to increase loss reserves at the time of such
determination with a corresponding reduction in our net
income in the period when the deficiency becomes known. It
is possible that claims in respect of events that have occurred
could exceed our claim reserves and have a material adverse
effect on our results of operations, in a particular period, or
our financial condition in general. As a compounding factor,
although most insurance contracts have policy limits, the
nature of property and casualty insurance and reinsurance is
such that losses and the associated expenses can exceed
policy limits for a variety of reasons and could significantly
exceed the premiums received on the underlying policies,
thereby further adversely affecting our financial condition.
As of December 31, 2020, our consolidated reserves for
unpaid losses and loss adjustment expenses, net of unpaid
losses and loss adjustment expenses recoverable, were
approximately $12.2 billion. Such reserves were established
in accordance with applicable insurance laws and GAAP.
Loss reserves are inherently subject to uncertainty. In
establishing the reserves for losses and loss adjustment
expenses, we have made various assumptions relating to the
pricing of our reinsurance contracts and insurance policies
and have also considered available historical
industry
experience and current industry conditions. Any estimates
and assumptions made as part of the reserving process could
prove to be inaccurate due to several factors, including the
fact that for certain lines of business relatively limited
historical information has been reported to us through
December 31, 2020.
The failure of any of the loss limitation methods we employ
could have a material adverse effect on our financial
condition or results of operations.
the maximum
We seek to limit our loss exposure by writing a number of
our reinsurance contracts on an excess of loss basis, adhering
to maximum limitations on reinsurance written in defined
geographical zones, limiting program size for each client and
prudent underwriting of each program written. In the case of
proportional treaties, we may seek per occurrence limitations
or loss ratio caps to limit the impact of losses from any one or
series of events. In our insurance operations, we seek to limit
our exposure through the purchase of reinsurance. For our
U.S. mortgage insurance business, in addition to utilizing
reinsurance, we have developed a proprietary risk model that
simulates
loss resulting from a severe
economic event impacting the housing market. We also seek
to limit our loss exposure by geographic diversification.
Geographic zone limitations involve significant underwriting
judgments, including the determination of the area of the
zones and the inclusion of a particular policy within a
particular zone’s limits. Various provisions of our policies,
negotiated to limit our risk, such as limitations or exclusions
from coverage or choice of forum, may not be enforceable in
the manner we intend, as it is possible that a court or
regulatory authority could nullify or void an exclusion or
limitation, or legislation could be enacted modifying or
barring the use of these exclusions and limitations. Disputes
relating to coverage and choice of legal forum may also arise.
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Underwriting is inherently a matter of judgment, involving
important assumptions about matters that are inherently
unpredictable and beyond our control, and for which
historical experience and probability analysis may not
provide sufficient guidance. One or more catastrophic events
or severe economic events could result in claims that
substantially exceed our expectations, or the protections set
forth in our policies could be voided, which, in either case,
could have a material adverse effect on our financial
condition or our results of operations, possibly to the extent
of eliminating our shareholders’ equity. In addition, factors
such as global climate change limit the value of historical
experience and therefore further limit the effectiveness of our
loss limitation methods. See “Catastrophic Events and Severe
Economic Events” in Item 7 for further details. Depending on
business opportunities and the mix of business that may
comprise our insurance, reinsurance and mortgage insurance
portfolio, we may seek to adjust our self-imposed limitations
on probable maximum pre-tax loss for catastrophe exposed
business and mortgage default exposed business.
The availability of reinsurance, retrocessional coverage and
capital market transactions to limit our exposure to risks may
be limited, and counterparty credit and other risks associated
with our reinsurance arrangements may result in losses
which could adversely affect our financial condition and
results of operations.
In
addition, our
We manage risk using reinsurance, retrocessional coverage
and capital markets transactions. Our insurance subsidiaries
typically cede a portion of their premiums through pro rata,
excess of loss and facultative reinsurance agreements. Our
reinsurance subsidiaries purchase a limited amount of
retrocessional coverage as part of their aggregate risk
management program.
reinsurance
subsidiaries participate in “common account” retrocessional
arrangements for certain pro rata treaties. Such arrangements
reduce the effect of individual or aggregate losses to all
companies participating on such treaties, including the
reinsurers, such as our reinsurance subsidiaries, and the
ceding company. Economic conditions could also have a
material
to manage our risk
aggregations
reinsurance or capital markets
transactions. The availability and cost of reinsurance and
retrocessional protection is subject to market conditions. As a
result of these factors, we may not be able to successfully
mitigate
retrocessional
risk
arrangements.
impact on our ability
reinsurance and
through
through
Further, we are subject to credit risk with respect to our
reinsurance and retrocessions because the ceding of risk to
reinsurers and retrocessionaires does not relieve us of our
liability to the clients or companies we insure or reinsure. We
monitor the financial condition of our reinsurers and attempt
to place coverages only with carriers we view as substantial
and financially sound. An inability of our reinsurers or
retrocessionaires to meet their obligations to us could have a
material adverse effect on our financial condition and results
of operations. Our losses for a given event or occurrence may
increase if our reinsurers or retrocessionaires dispute or fail
to meet their obligations to us or the reinsurance or
retrocessional protections purchased by us are exhausted or
are otherwise unavailable for any reason. In certain instances,
we also require collateral to mitigate our credit risk to our
reinsurers or retrocessionaires. We are at risk that losses
could exceed the collateral we have obtained. Our failure to
establish adequate reinsurance or retrocessional arrangements
or the failure of our existing reinsurance or retrocessional
arrangements to protect us from overly concentrated risk
exposure could adversely affect our financial condition and
results of operations.
We could be materially adversely affected to the extent that
important third parties with whom we do business do not
adequately or appropriately manage their risks, commit
fraud or otherwise breach obligations owed to us.
For certain lines of our insurance business, we authorize
managing general agents, general agents and other producers
to write business on our behalf within underwriting
authorities prescribed by us. In addition, our mortgage group
delegates the underwriting of a significant percentage of its
primary new insurance written to certain mortgage lenders.
Under this delegated underwriting program, the approved
customer may determine whether mortgage loans meet our
mortgage insurance program guidelines and commit us to
issue mortgage insurance. We rely on the underwriting
controls of these agents to write business within the
underwriting authorities provided by us. Although we have
contractual protections in some instances and we monitor
such business on an ongoing basis, our monitoring efforts
may not be adequate or our agents may exceed their
underwriting authorities or otherwise breach obligations
owed to us. In addition, our agents, our insureds or other
third parties may commit fraud or otherwise breach their
obligations to us. Our financial condition and results of
operations could be materially adversely affected by any one
of these issues.
While we conduct underwriting, financial, claims and
information technology due diligence reviews and apply
rigorous standards in the selection of these counterparties,
there is no assurance they have provided us accurate or
complete information to assess their risk or that they can
manage effectively their own risks. Consequently, we assume
a degree of credit and operational risk of those parties, and a
material failure of their risks may result in material losses or
damage to us.
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Emerging claim and coverage issues, including issues
relating to the COVID-19 pandemic, may adversely affect
our business.
legal,
industry practices and
As
social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge, including
new or expanded theories of liability. These or other changes
could impose new financial obligations on us by extending
coverage beyond our underwriting intent or otherwise require
us to make unplanned modifications to the products and
services that we provide, or cause the delay or cancellation of
products and services that we provide. In some instances,
these changes may not become apparent until sometime after
we have issued insurance or reinsurance contracts that are
affected by the changes. As a result, the full extent of liability
under our insurance or reinsurance contracts may not be
known for many years after a contract is issued. The effects
of unforeseen developments or substantial government
intervention could adversely impact us.
We have exposure to a number of lines of business, such as
trade credit, travel, workers compensation and property that
do not contain a specific pandemic exclusion and/or
explicitly afford business interruption coverage under a
pandemic such as COVID-19.
In May 2020, FCA
commenced court proceedings against a number of insurance
companies, including Arch Insurance (U.K.), to test how
certain business interruption insurance policies respond to
claims arising from COVID-19. The High Court
in
September 2020 handed down its judgment which, found in
favor of policyholders on the majority of the key coverage
issues in the representative sample of policies submitted by
the defendants. Appeals were filed by six insurers, including
Arch Insurance (U.K.), and in January 2021, the Supreme
Court in the U.K. broadly confirmed the High Court’s rulings
on the business wordings. The impact of this case on Arch
Insurance (U.K.)’s results of operations has been modest, but
the larger impact of this “test case” and other litigation which
may flow from it in the U.K. or other jurisdictions where we
offer business interruption cover, cannot be quantified or
predicted with certainty at this time. A prolonged COVID-19
pandemic could trigger further litigation on coverage and
claims issues and potentially result in material and adverse
outcomes and impact our business results. See “Risks
Relating to Our Mortgage Operations” for further details on
our mortgage operations.
Acquisitions, the addition of new lines of insurance or
reinsurance business, expansion into new geographic regions
and/or entering into joint ventures or partnerships expose us
to risks.
We may seek, from time to time, to acquire other companies,
acquire selected blocks of business, expand our business
lines, expand into new geographic regions and/or enter into
joint ventures or partnerships. Such activities expose us to
challenges and risks, including: integrating financial and
operational
reporting systems; establishing satisfactory
budgetary and other financial controls; funding increased
capital needs, overhead expenses or cash flow shortages that
may occur if anticipated sales and revenues are not realized
or are delayed, whether by general economic or market
conditions or unforeseen internal difficulties; obtaining
management personnel required for expanded operations;
obtaining necessary regulatory permissions; and establishing
adequate reserves for any acquired book of business. In
addition, the value of assets acquired may be lower than
expected or may diminish due to credit defaults or changes in
interest rates; the liabilities assumed may be greater than
expected; and assets and liabilities acquired may be subject to
foreign currency exchange rate fluctuation. We may also be
subject to financial exposures in the event that the sellers of
the entities or business we acquire are unable or unwilling to
meet their indemnification, reinsurance and other contractual
obligations to us. Our failure to manage successfully any of
the foregoing challenges and risks may adversely impact our
results of operations.
The U.K.’s Withdrawal from the EU could adversely affect
us.
The U.K. ceased to be a member state of the European Union
in January 2020. Although the EU and U.K. reached a limited
agreement in relation to certain matters, U.K. insurers and
reinsurers no longer have automatic access to EU markets
and vice versa. Our U.K. domiciled entities and our Lloyd’s
syndicates, may no longer “passport” within the EU and. are
now part of the U.K. temporary permissions regime which
allows firms to operate in the U.K. for a limited period while
they seek authorization from the U.K. regulators. While we
have implemented changes in our operations to accommodate
Brexit, the full extent to which our business, operations and
financial condition could be adversely affected by Brexit is
uncertain. The impact of the U.K.’s withdrawal on the U.K.
and European economies and the broader global economy
could be significant, resulting in increased volatility and
potentially lower economic growth and instability in the
financial and foreign exchange markets.
Our information technology systems may be unable to meet
the demands of customers and our workforce.
Our information technology systems service our insurance
portfolios. Accordingly, we are highly dependent on the
effective operation of these systems. While we believe that
the systems are adequate to service our insurance portfolios,
there can be no assurance that they will operate in all
the
manners
functionality required by customers currently or in the future.
intend or possess all of
in which we
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to
In order
Our customers, especially our mortgage insurance customers,
require that we conduct our business in a secure manner,
the Internet or via electronic data
electronically via
transmission. We must continually
invest significant
in establishing and maintaining electronic
resources
integrate
connectivity with customers.
electronically with customers in the mortgage insurance
industry, we require electronic connections between our
systems and those of the industry's largest mortgage servicing
systems and leading loan origination systems. Our mortgage
group currently possesses connectivity with certain of these
external systems, but there is no assurance that such
connectivity is sufficient and we are continually undertaking
new electronic integration efforts with third-party loan
servicing and origination systems. We also rely on electronic
integrations in our insurance operations with third parties and
customers. Our business, financial condition and operating
results may be adversely affected if we do not possess or
timely acquire the requisite set of electronic integrations
necessary to keep pace with the technological demands of
customers.
increased and
The COVID-19 pandemic has placed
unanticipated demands on our IT systems in use by our
customers and our workforce as much of the general
workforce continues to work remotely. Remote working may
increase the risk of cyber security attacks or other data
security incidents. There is no assurance that we will be able
to respond effectively to all of the increased and varied
demands on our IT systems during a prolonged pandemic.
Technology breaches or failures, including, but not limited
to, those resulting from a malicious cyber attack on us or our
business partners and service providers, could disrupt or
otherwise negatively impact our business and/or expose us to
litigation.
information
the electronic
significant portion of
We rely on information technology systems to process,
information,
transmit, store and protect
financial data and proprietary models that are critical to our
business. Furthermore, a
the
communications between our employees and our business
partners and service providers depends on information
technology and electronic information exchange. Like all
companies, our
systems are
vulnerable to data breaches, interruptions or failures due to
events that may be beyond our control, including, but not
limited to, natural disasters, power outages, theft, terrorist
attacks, computer viruses, hackers, errors in usage or through
social engineering or phishing and general technology
failures. Security breaches by third parties could expose us to
the loss or misuse of our information, litigation, financial
losses and potential liability. In addition, cyber incidents that
impact the availability, reliability, speed, accuracy or other
proper functioning of these systems could have a significant
technology
negative impact on our operations and possibly our results. A
cyber incident could also result in a violation of applicable
privacy, data protection or other laws, damage our reputation,
cause a loss of customers, adversely affect our stock price,
cause us to incur remediation costs, increased insurance
premiums, and/or give rise to monetary fines and penalties,
any of which could adversely affect our business.
We outsource certain technology and business process
functions to third parties and may continue do so in the
future. This practice exposes us to increased risks related to
data security, service disruptions or the effectiveness of our
control system, which could result
in monetary and
reputational damage or harm to our competitive position.
A downgrade in our ratings or our inability to obtain a rating
for our operating insurance and reinsurance subsidiaries
may adversely affect our relationships with clients and
brokers and negatively impact sales of our products.
Similar to our competitors, a ratings downgrade or the
potential for such a downgrade, or failure to obtain a
necessary rating, could adversely affect our relationships with
agents, brokers, wholesalers, intermediaries, clients and other
distributors of our existing and new products and services.
Some of the reinsurance agreements assumed by our
reinsurance operations include provisions that a ratings
downgrade or other specified triggering event with respect to
our reinsurance operations, such as a reduction in surplus by
specified amounts during specified periods, provide our
ceding company clients certain rights, including, the right to
terminate the subject reinsurance agreement and/or to require
us to post additional collateral. Any ratings downgrade or
failure to obtain a necessary rating could adversely affect our
ability to compete in our markets, could cause our premiums
and earnings to decrease and could have a material adverse
impact on our financial condition and results of operations. In
some cases, a downgrade in ratings of certain of our
operating subsidiaries may constitute an event of default
under our credit facilities.
We can offer no assurances that our ratings will remain at
their current levels or that any of our ratings which are under
review or watch by ratings agencies will remain unchanged.
It is possible that rating agencies may heighten the level of
scrutiny they apply when analyzing companies in our
industry and may adjust upward the capital and other
requirements employed in their models for maintenance of
certain rating levels. We may need to raise additional funds
through equity or debt financings. Any equity or debt
financing, if available at all, may be on terms that are
unfavorable to us. Equity financings could be dilutive to our
existing shareholders and could result in the issuance of
securities that have rights, preferences and privileges that are
senior to those of our outstanding securities. If we are not
able to obtain adequate capital, our business, results of
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operations and financial condition could be adversely
affected. See “Capital Resources” in Item 7 for further
details.
For further information on our financial strength and/or
in Item 1. For further
issuer ratings, see “Ratings”
information on our letter of credit facilities, see the Letter of
Credit
section of
“Contractual Obligations and Commercial Commitments” in
Item 7.
and Revolving Credit Facilities
Our success will depend on our ability to maintain and
enhance effective operating procedures and internal controls
and our enterprise risk management (“ERM”) program.
to obtain proper
We operate within an ERM framework designed to assess
and monitor our risks. Operational risk and losses can result
from, among other things, fraud, errors, failure to document
internal
transactions properly or
authorization, failure to comply with regulatory requirements,
information technology or information security failures and
failure to train employees appropriately or adequately. We
continuously enhance our operating procedures and internal
controls
to effectively support our business and our
regulatory and reporting requirements. As a result of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that
judgments in decision making can be faulty, and that
breakdowns can occur because of simple error or mistake or
circumvention of controls. There can be no assurance that
any control system will succeed in achieving its stated goals
under all potential future conditions. Any ineffectiveness in
our controls or procedures could have a material adverse
effect on our business. For further information on our ERM
framework, see “Enterprise Risk Management” in Item 1.
We are exposed to credit risk in certain of our business
operations.
In addition to exposure to credit risk related to our
investment portfolio, reinsurance recoverables and reliance
on brokers and other agents, we are exposed to credit risk in
other areas of our business related to policyholders. We are
exposed to credit risk in our insurance group’s surety unit
where we guarantee to a third party that our policyholder will
satisfy certain performance or financial obligations. If our
policyholder defaults, we may suffer losses and be unable to
be reimbursed by our policyholder. We are also exposed to
credit risk from policyholders on smaller deductibles in other
insurance group lines, such as healthcare and excess and
surplus casualty. Although we have not experienced any
material credit losses to date, an increased inability of our
policyholders to meet their obligations to us could have a
material adverse effect on our financial condition and results
of operations. See note 3, “Significant Accounting Policy.”
Our business is subject to applicable laws and regulations
relating to economic trade sanctions and foreign bribery
laws, the violation of which could adversely affect our
operations.
We must comply with all applicable economic sanctions and
anti-bribery laws and regulations of the U.S. and other
foreign jurisdictions where we operate. U.S. laws and
regulations applicable to us and others who provide insurance
and reinsurance include the economic trade sanctions laws
and regulations administered by the Treasury’s Office of
Foreign Assets Control as well as certain laws administered
by the U.S. Department of State. New sanction regimes may
be initiated, or existing sanctions expanded, at any time,
which can immediately impact our business activities. We are
also subject to the U.S. Foreign Corrupt Practices Act and
other anti-bribery laws such as the U.K. Bribery Act that
generally bar corrupt payments or unreasonable gifts to
foreign governments or officials. Although we have policies
and controls in place designed to ensure compliance with
these laws and regulations, it is possible that an employee or
intermediary could fail to comply with applicable laws and
regulations. In such event, we could be exposed to fines,
criminal penalties and other sanctions. Such violations could
limit our ability to conduct business and/or damage our
reputation, resulting in a material adverse effect on our
financial condition and results of operations.
Risks Relating to Financial Markets and Investments
Adverse developments in the financial markets could have a
material adverse effect on our results of operations, financial
position and our businesses, and may also limit our access to
capital; our policyholders, reinsurers and retrocessionaires
may also be affected by such developments, which could
adversely affect their ability to meet their obligations to us.
Adverse developments in the financial markets, such as
disruptions, uncertainty or volatility in the capital and credit
markets, may result in realized and unrealized capital losses
that could have a material adverse effect on our results of
operations, financial position and our businesses, and may
also limit our access to capital required to operate our
business. Depending on market conditions, we could incur
additional realized and unrealized losses on our investment
portfolio in future periods, which could have a material
adverse effect on our results of operations, financial
condition and business. Economic conditions could also have
a material impact on the frequency and severity of claims and
therefore could negatively impact our underwriting returns.
In
and
retrocessionaires may be affected by developments in the
financial markets, which could adversely affect their ability
policyholders,
reinsurers
addition,
our
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to meet their obligations to us. The volatility in the financial
markets could continue to significantly affect our investment
returns, reported results and shareholders’ equity.
The capital requirements of our businesses depend on many
factors, including regulatory and rating agency requirements,
the performance of our investment portfolio, our ability to
write new business successfully, the frequency and severity
of catastrophe events and our ability to establish premium
rates and reserves at levels sufficient to cover losses.
Disruption to the financial markets and the general economic
downturn resulting from COVID-19 may adversely and
materially impact our investments, financial condition and
results of operation.
increases
Disruption in the financial markets and the downturn in
global economic activity resulting from the COVID-19
the
pandemic could adversely and materially affect
performance of our
investment portfolio. Significant,
continued volatility in financial markets, changes in interest
rates,
lack of pricing
in credit spreads, a
transparency, decreased market liquidity, declines in equity
prices and the strengthening or weakening of foreign
currencies against the U.S. Dollar, individually or in tandem,
could have a material adverse effect on our results through
realized losses, impairments and changes in unrealized
positions in our investment portfolio. Furthermore, issuers of
the investments we hold under the equity method of
accounting report their financial information to us one month
to three months following the end of the reporting period.
Accordingly, the adverse impact of any disruptions in global
financial markets on equity method income from these
investments would likely not be reflected in our current
quarter results and would instead be reported in the
subsequent quarter.
Our operating results depend in part on the performance of
our investment portfolio. A significant portion of cash and
invested assets held by Arch consists of fixed maturities
(69.9% as of December 31, 2020). Although our current
investment guidelines and approach stress preservation of
capital, market liquidity and diversification of risk, our
investments are subject to market-wide risks and fluctuations.
In addition, we are subject to risks inherent in particular
securities or
types of securities, as well as sector
concentrations. We may not be able to realize our investment
objectives, which could have a material adverse effect on our
financial results. In the event that we are unsuccessful in
correlating our investment portfolio with our expected
insurance and reinsurance liabilities, we may be forced to
liquidate our investments at times and prices that are not
optimal, which could have a material adverse effect on our
financial results and ability to conduct our business.
Foreign currency exchange rate fluctuation may adversely
affect our financial results.
We write business on a worldwide basis, and our results of
operations may be affected by fluctuations in the value of
currencies other than the U.S. Dollar. The primary foreign
currencies in which we operate are the Euro, the British
Pound Sterling, the Australian Dollar and the Canadian
Dollar. In order to minimize the possibility of losses we may
suffer as a result of our exposure to foreign currency
fluctuations in our net insurance liabilities, we invest in
securities denominated in currencies other than the U.S.
Dollar. In addition, we may replicate investment positions in
foreign currencies using derivative financial instruments.
Changes in the value of investments due to foreign currency
rate movements are reflected as a direct increase or decrease
to shareholders' equity and are not included in the statement
of income.
Uncertainty relating to the determination of LIBOR and the
potential phasing out and replacement of LIBOR after 2021
may adversely affect our cost of capital, net investment
income and mortgage reinsurance costs.
On July 27, 2017, the U.K. Financial Conduct Authority
announced that it intends to end the use of LIBOR after 2021
as the benchmark rate that many banks and issuers use to set
interests in loan documents. Recognizing the need to replace
LIBOR, authorities in the United States convened the
Alternative Reference Rates Committee (“ARRC”) in 2014
to identify a replacement for LIBOR. In 2017, the ARRC
identified the Secured Overnight Financing Rate (“SOFR”) -
a combination of certain overnight repo rates, as its preferred
alternative to LIBOR, and in April 2018, the Federal Reserve
Bank of New York began publishing the SOFR rate. Because
SOFR is an overnight risk-free rate, versus LIBOR which has
various terms and an embedded credit charge, the transition
from LIBOR to SOFR will require adjustments. The
uncertainty of these adjustments, and the timing of when the
transition will occur may adversely affect the value of and
trading market for LIBOR-based securities. Moreover, the
transition to SOFR from LIBOR may adversely affect the
performance of our investment portfolio, our cost of capital
and our cost of issuing Bellemeade mortgage risk transfer
securities. While we have an internal committee focused on
managing the replacement of LIBOR for our investments and
operations, we do not believe that it is possible to predict
how markets will respond to the transition to SOFR, or any
other rate, from LIBOR on new or existing financial
instruments or quantify the potential effect of any such event
on us at this time.
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Our reinsurance subsidiaries may be required to provide
collateral to ceding companies, by applicable regulators,
their contracts or other commercial considerations. Their
ability to conduct business could be significantly and
negatively affected if they are unable to do so.
Arch Re Bermuda is a registered Bermuda insurance
company and is not licensed or admitted as an insurer in any
jurisdiction in the U.S., although Arch Re Bermuda has been
approved as a “certified reinsurer” in certain U.S. states that
allow reduced collateral for reinsurance ceded to such
reinsurers. Arch Re Bermuda's contracts generally require it
to post a letter of credit or provide other security, even in
U.S. states where it has been approved for reduced collateral.
State credit for reinsurance rules also generally provide that
certified reinsurers such as Arch Re Bermuda must provide
100% collateral in the event their certified status is
“terminated” or upon the entry of an order of rehabilitation,
liquidation or conservation against a ceding insurer.
Although, to date, Arch Re Bermuda has not experienced any
difficulties in providing collateral when required, if we are
unable to post security in the form of letters of credit or trust
funds when required, the operations of Arch Re Bermuda
could be significantly and negatively affected.
Risks Relating to Our Mortgage Operations
The ultimate performance of the Arch MI U.S. mortgage
insurance portfolio remains uncertain.
The mix of business in our insured loan portfolio may affect
losses. The presence of multiple higher-risk characteristics in
a loan materially increases the likelihood of a claim on such a
loan unless there are other characteristics to mitigate the risk.
The geographic mix of Arch MI U.S.’s business could
increase losses and harm our financial performance.
Generally, we cannot cancel mortgage insurance coverage or
adjust renewal premiums during the life of a mortgage
insurance policy. As a result, higher than anticipated claims
generally cannot be offset by premium increases on policies
in force or mitigated by our non-renewal or cancellation of
insurance coverage. The premiums charged, and
the
associated investment income, may not be adequate to
compensate us for the risks and costs associated with the
insurance coverage provided to customers. An increase in the
number or size of claims, compared to what we anticipate,
could adversely affect Arch MI U.S.’s results of operations
and financial condition.
The frequency and severity of claims we incur is uncertain
and will depend largely on general economic factors outside
of our control,
in
unemployment, home prices and interest rates in the U.S.
Deteriorating economic conditions in the U.S., potentially
including, among others, changes
to prolonged
recessionary conditions
due
to
COVID-19, could adversely affect the performance of our
U.S. mortgage insurance portfolio and could adversely affect
our results of operations and financial condition.
related
If the volume of low down payment mortgage originations
declines, or if other government housing policies, practices
or regulations change, the amount of mortgage insurance we
write in the U.S. could decline, which would reduce our
mortgage insurance revenues.
The size of the U.S. mortgage insurance market depends in
large part upon the volume of low down payment home
mortgage originations. Factors affecting the volume of low
down payment mortgage originations include, among others:
restrictions on mortgage credit due to stringent underwriting
standards and liquidity issues affecting lenders; changes in
mortgage interest rates and home prices, and other economic
conditions in the U.S. and regional economies; population
trends, including the rate of household formation; and U.S.
government housing policy.
Most recently, on December 10, 2020, the Consumer
Financial Protection Bureau (“CFPB”) issued its final rule
amending the general qualified mortgage (“QM”) definition
and eliminated the exception that all GSEs loans were
deemed QM. The General QM definition in the final rule
differs from the definition of QM applicable to loans sold to
FHA, creating incentives for originators to originate loans
under the FHA program rather than sell loans to the GSEs.
On January 14, 2021, the FHFA as conservator of the GSEs
and the Department of Treasury entered into a letter
agreement that further amended the senior preferred stock
purchase arrangement (“PSPA”). This letter agreement,
among other provisions, imposed restrictions on the amount
of high risk loans that can be purchased by the GSEs. A
decline in the volume of low-down payment home mortgage
originations or purchases by the GSEs could decrease
demand for mortgage insurance, decrease our U.S. new
insurance written and reduce mortgage insurance revenues.
Changes to the role of the GSEs in the U.S. housing market
or to GSE eligibility requirements for mortgage insurers
could negatively impact our results of operations and
financial condition, or reduce our operating flexibility.
Substantially all of Arch MI U.S.’s insurance written has
been for loans sold to the GSEs. The charters of the GSEs
require credit enhancement for low down payment mortgages
in order for such loans to be eligible for purchase or
guarantee by the GSEs. If the charters of the GSEs were
amended to change or eliminate the acceptability of private
mortgage insurance, our mortgage insurance business could
decline significantly.
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The PMIERs apply to Arch Mortgage Insurance Company
and United Guaranty Residential Insurance Company, which
are GSE-approved mortgage insurers (“eligible mortgage
insurers”). The PMIERs impose limitations on the type of
risk insured, the forms and insurance policies issued,
standards for the geographic and customer diversification of
risk, procedures for claims handling, acceptable underwriting
practices, quality assurance, loss mitigation, claims handling,
standards for certain reinsurance cessions and financial
requirements, among other things. The financial requirements
require a 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.
Arch MI U.S.’s minimum required assets under the PMIERs
will be determined, in part, by the particular risk profiles of
the loans it insures. If, absent other changes, Arch MI U.S.’s
mix of business changes to include more loans with higher
loan-to-value ratios or lower credit scores, it will have a
higher minimum required asset amount under the PMIERs
and, accordingly, be required to hold more capital in order to
maintain GSE eligibility. Our eligible mortgage insurers each
satisfied the PMIERs’ financial requirements as of December
31, 2020. While we intend to continue to comply with these
requirements, there can be no assurance that the GSEs will
not change the PMIERs or that Arch Mortgage Insurance
Company or United Guaranty Residential
Insurance
Company will continue as eligible mortgage insurers. If
either or both of the GSEs were to cease to consider Arch
Mortgage
Insurance Company or United Guaranty
Residential Insurance Company as eligible mortgage insurers
and, therefore, cease accepting our mortgage insurance
products, our results of operations and financial condition
would be adversely affected.
The implementation of the Basel III Capital Accord and
FHFA’s Enterprise Capital Rule may adversely affect the use
of mortgage insurance and CRT opportunities.
loan-to-value
With certain exceptions, the Basel III Rules became effective
on January 1, 2014. In December 2017, the Basel Committee
published final revisions to the Basel Capital Accord which is
informally denominated in the U.S. as “Basel IV.” The Basel
Committee expects the new rules to be fully implemented by
January 2027. Under the revised Basel rules, banks using the
standardized approach for credit risk management will
determine the risk-weight for residential mortgages based on
the
loan origination, without
consideration of mortgage insurance. The U.S. regulatory
agencies have not proposed adopting the Basel IV rules on
mortgage capital requirements and could determine that
current U.S. rules are “at least as stringent” as the Basel IV
provisions, and therefore do not need to be modified.
However, if the U.S. regulators decide to adopt the Basel IV
approach, the capital relief benefits of MI would be
diminished, which could adversely affect the demand for
mortgage insurance.
ratio at
Further, a new “Basel-like” risk-based capital rule for the
GSEs was adopted by the FHFA in 2020. The rule requires
the GSEs to hold the greater of the risk-based capital amount
or the leverage ratio. The rule limits the reduction in capital
for CRTs to third parties under the risk-based capital
calculation and disallows any reduction for CRT to the
leverage ratio. By its terms, this rule will become fully
effective only if the GSEs are released from conservatorship,
though the PSPA letter agreement contractually requires
compliance sooner.
If the Enterprise Capital Rule becomes fully implemented
without revision, significantly higher capital requirements for
the GSEs would be mandated and the opportunity for
participating in CRT transactions could be reduced. This,
along with the cap on certain high-risk loans in the PSPA
letter agreement with Treasury, could result in higher GSE
fees and potentially smaller market share for the Enterprises
and could adversely impact the demand for MI policies.
Additionally, the GSEs may amend PMIERs to align the
capital requirements and reduce the recognition of CRT for
eligible insurers. Such changes could require us to contribute
additional capital to Arch MI U.S. in the future and could
negatively impact our results of operations and financial
condition.
Risk Relating to Our Company and Our Shares
Some of the provisions of our bye-laws and our shareholders
agreement may have the effect of hindering, delaying or
preventing third party takeovers or changes in management
initiated by shareholders. These provisions may also prevent
our shareholders from receiving premium prices for their
shares in an unsolicited takeover.
Some provisions of our bye-laws could have the effect of
discouraging unsolicited takeover bids from third parties or
changes in management initiated by shareholders. These
provisions may encourage companies interested in acquiring
us to negotiate in advance with our board of directors, since
the board has the authority to overrule the operation of
several of the limitations.
Among other things, our bye-laws provide: for a classified
board of directors, in which the directors of the class elected
at each annual general meeting holds office for a term of
three years, with the term of each class expiring at successive
annual general meetings of shareholders; that the number of
directors is determined by the board from time to time by a
vote of the majority of our board; that directors may only be
removed for cause, and cause removal shall be deemed to
exist only if the director whose removal is proposed has been
convicted of a felony or been found by a court to be liable for
gross negligence or misconduct in the performance of his or
her duties; that our board has the right to fill vacancies,
including vacancies created by an expansion of the board;
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and for limitations on a shareholder’s right to raise proposals
or nominate directors at general meetings. Our bye-laws
provide that certain provisions which may have anti-takeover
effects may be repealed or altered only with prior board
approval and upon the affirmative vote of holders of shares
representing at least 65% of the total voting power of our
shares entitled generally to vote at an election of directors.
The bye-laws also contain a provision limiting the rights of
any U.S. person (as defined in section 7701(a)(30) of the
Internal Revenue Code of 1986, as amended (the “Code”))
that owns shares of Arch Capital, directly, indirectly or
constructively (within the meaning of section 958 of the
Code), representing more than 9.9% of the voting power of
all shares entitled to vote generally at an election of directors.
The votes conferred by such shares of such U.S. person will
be reduced by whatever amount is necessary so that after any
such reduction the votes conferred by the shares of such
person will constitute 9.9% of the total voting power of all
shares entitled to vote generally at an election of directors.
Notwithstanding this provision, the board may make such
final adjustments to the aggregate number of votes conferred
by the shares of any U.S. person that the board considers fair
and reasonable in all circumstances to ensure that such votes
represent 9.9% of the aggregate voting power of the votes
conferred by all shares of Arch Capital entitled to vote
generally at an election of directors. Arch Capital will assume
that all shareholders (other than specified persons) are U.S.
persons unless we receive assurance satisfactory to us that
they are not U.S. persons.
The bye-laws also provide that the affirmative vote of at least
66 2/3% of the outstanding voting power of our shares
(excluding shares owned by any person (and such person’s
affiliates and associates) that is the owner of 15% or more (a
“15% Holder”) of our outstanding voting shares) shall be
required for various corporate actions, including: merger or
consolidation of the company into a 15% Holder; sale of any
or all of our assets to a 15% Holder; the issuance of voting
these
securities
provisions; provided, however, the super majority vote will
not apply to any transaction approved by the board.
to a 15% Holder; or amendment of
The provisions described above may have the effect of
making more difficult or discouraging unsolicited takeover
bids from third parties. To the extent that these effects occur,
shareholders could be deprived of opportunities to realize
takeover premiums for their shares and the market price of
their shares could be depressed. In addition, these provisions
could also result
incumbent
management.
the entrenchment of
in
There are regulatory limitations on the ownership and
transfer of our common shares.
The jurisdictions where we operate have laws and regulations
that require regulatory approval of a change in control of an
insurer or an insurer's holding company. Where such laws
apply to us, there can be no effective change in our control
unless the person seeking to acquire control has filed a
statement with the regulators and obtained prior approval for
the proposed change. Certain regulators may at any time, by
written notice, object to a person holding shares in an insurer
or an insurer's holding company if it appears to the regulator
that the person is not or is no longer fit and proper to be such
a holder. The regulator may require the shareholder to reduce
its holding in the insurer or an insurer's holding company and
direct, among other things, that such shareholder’s voting
rights attaching to the shares in an insurer or an insurer's
holding company shall not be exercisable.
Arch Capital is a holding company and is dependent on
dividends and other distributions
its operating
subsidiaries.
from
Arch Capital is a holding company whose assets primarily
consist of the shares in our subsidiaries. Generally, Arch
Capital depends on its available cash resources, liquid
investments and dividends or other distributions from
subsidiaries to make payments, including the payment of debt
service obligations and operating expenses it may incur and
any payments of dividends,
redemption amounts or
liquidation amounts with respect to our preferred shares and
common shares, and to fund the share repurchase program.
The ability of our regulated insurance and reinsurance
subsidiaries to pay dividends or make distributions is subject
to legislative constraints and dependent on their ability to
meet applicable regulatory standards. In addition, the ability
of our
to pay
insurance and reinsurance subsidiaries
dividends to Arch Capital and to intermediate parent
companies owned by Arch Capital could be constrained by
from
financial
our dependence on
independent rating agencies. Our ratings from these agencies
depend to a large extent on the capitalization levels of our
insurance and reinsurance subsidiaries.
strength
ratings
General market conditions and unpredictable factors could
adversely affect market prices for our outstanding preferred
shares.
There can be no assurance about the market prices for our
series of preferred shares that are traded publicly. Several
factors, many of which are beyond our control, will influence
the fair value of our preferred shares, including, but not
limited to:
•
•
whether dividends have been declared and are likely to
be declared on any series of our preferred shares from
time to time;
our creditworthiness, financial condition, performance
and prospects;
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2020 FORM 10-K
whether the ratings on any series of our preferred shares
provided by any ratings agency have changed;
holders of such series in the event of a liquidation,
dissolution or winding-up of Arch Capital.
Table of Contents
•
•
•
the market for similar securities; and
economic, financial, geopolitical, regulatory or judicial
events that affect us and/or the insurance or financial
markets generally.
Dividends on our preferred shares are non-cumulative.
Dividends on our preferred shares are non-cumulative and
payable only out of lawfully available funds of Arch Capital
under Bermuda law. Consequently, if Arch Capital's board of
directors (or a duly authorized committee of the board) does
not authorize and declare a dividend for any dividend period
with respect to any series of our preferred shares, holders of
such preferred shares would not be entitled to receive any
such dividend, and such unpaid dividend will not accrue and
will never be payable. Arch Capital will have no obligation to
pay dividends for a dividend period on or after the dividend
payment date for such period if its board of directors (or a
duly authorized committee of the board) has not declared
such dividend before the related dividend payment date; if
dividends on our series E or series F preferred shares are
authorized and declared with respect to any subsequent
dividend period, Arch Capital will be free to pay dividends
on any other series of preferred shares and/or our common
shares. In the past, we have not paid dividends on our
common shares.
Our preferred shares are equity and are subordinate to our
existing and future indebtedness.
Our preferred shares are equity interests and do not constitute
indebtedness. As such, these preferred shares will rank junior
to all of our indebtedness and other non-equity claims with
respect to assets available to satisfy our claims, including in
our liquidation. Our existing and future indebtedness may
restrict payments of dividends on our preferred shares.
Additionally, unlike
indebtedness, where principal and
interest would customarily be payable on specified due dates,
in the case of preferred shares, (1) dividends are payable only
if declared by the board of directors of Arch Capital (or a
duly authorized committee of the board) and (2) as described
under “Risks Relating to Our Company—Arch Capital is a
holding company and is dependent on dividends and other
distributions from its operating subsidiaries,” we are subject
to certain regulatory and other constraints affecting our
ability to pay dividends and make other payments.
We may issue additional securities that rank equally with or
senior to our series E and series F preferred shares without
limitation. The issuance of securities ranking equally with or
senior to our preferred shares may reduce the amount
available for dividends and the amount recoverable by
The voting rights of holders of our preferred shares are
limited.
Holders of our preferred shares have no voting rights with
respect to matters that generally require the approval of
voting shareholders. The limited voting rights of holders of
our preferred shares include the right to vote as a class on
certain fundamental matters that affect the preference or
special rights of our preferred shares as set forth in the
certificate of designations relating to each series of preferred
shares. In addition, if dividends on our series E or series F
preferred shares have not been declared or paid for the
equivalent of six dividend payments, whether or not for
consecutive dividend periods, holders of the outstanding
series E or series F preferred shares will be entitled to vote
for the election of two additional directors to our board of
directors subject to the terms and to the limited extent as set
forth in the certificate of designations relating to such series
of preferred shares.
Risks Relating to Taxation
We and our non-U.S. subsidiaries may become subject to
U.S. federal income taxation and/or the U.S. federal income
increase,
tax
including as a result of changes in tax law.
liabilities of our U.S. subsidiaries may
taxes on
Arch Capital and its non-U.S. subsidiaries intend to operate
their business in a manner that will not cause them to be
treated as engaged in a trade or business in the U.S. and, thus,
will not be required to pay U.S. federal income taxes (other
than U.S. excise
insurance and reinsurance
premiums and withholding taxes on certain U.S. source
investment income) on their income. However, because there
is uncertainty as to the activities which constitute being
engaged in a trade or business in the U.S., there can be no
assurances that the IRS will not contend successfully that
Arch Capital or its non-U.S. subsidiaries are engaged in a
trade or business in the U.S., in which case our shareholders'
equity and earnings could be adversely affected.
Congress has been considering several legislative proposals
intended to eliminate certain perceived tax advantages of
Bermuda and other non-U.S. insurance companies. There is
no assurance that any such legislative proposal will not be
enacted into law and any such enacted law which could
materially increase our income tax liabilities or those of our
subsidiaries.
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The enactment and implementation of the Tax Cuts Act may
have a material and adverse impact on our operations and
financial condition.
Certain provisions in the Tax Cuts Act could have a material
and adverse impact on our financial condition and business
operation. One such provision imposes a 10% minimum base
erosion and anti-abuse tax (increased to 12.5% for the 2026
taxable year and the subsequent taxable years) on the
“modified taxable income” of a U.S. corporation (or a non-
U.S. corporation engaged in a U.S. trade or business) over
such corporation’s regular U.S. federal income tax, reduced
by certain tax credits. The “modified taxable income” of a
corporation is determined without deduction for certain
payments by such corporation to its non-U.S. affiliates
(including reinsurance premiums). Other provisions of the
Tax Cuts Act that could have a material and adverse impact
on us include a provision that defers or disallows a U.S.
corporation’s deduction of interest expense to the extent such
interest expense exceeds a specified percentage of such U.S.
corporation’s “adjusted taxable income” and a provision that
adjusts the manner in which a U.S. property and casualty
insurance company computes its loss reserve.
In addition, there is no assurance that subsequent changes in
tax laws or regulations will not materially and adversely
affect our operations and financial condition.
We may become subject to taxes in Bermuda after March 31,
2035, which may have a material adverse effect on our
results of operations.
Under current Bermuda law, we are not subject to tax on
income, profits, withholding, capital gains or capital
transfers. Furthermore, we have obtained from the Minister
of Finance of Bermuda under the Exempted Undertakings
Tax Protection Act 1966 of Bermuda, an assurance that, in
the event that Bermuda enacts legislation imposing tax
computed on profits, income, any capital asset, gain or
appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of the tax will not be
applicable to us or our operations until March 31, 2035.
Given the limited duration of the Minister of Finance's
assurance we cannot be certain that we will not be subject to
any Bermuda tax after that date, which may have a material
adverse effect on our results of operations. This assurance
does not, however, prevent the imposition of taxes on any
person ordinarily resident in Bermuda or any company in
respect of its ownership of real property or leasehold interests
in Bermuda.
The impact of Bermuda's letter of commitment to the OECD
to eliminate harmful tax practices is uncertain and could
adversely affect our tax status in Bermuda
for Economic Cooperation
The Organization
and
Development (“OECD”) has published reports and launched
a global initiative among member and non-member countries
on measures to limit harmful tax competition. These
measures are largely directed at counteracting the effects of
tax havens and preferential tax regimes in countries around
the world. Bermuda was not listed in the most recent report
as an uncooperative tax haven jurisdiction because it had
previously committed to eliminate harmful tax practices, to
embrace international tax standards for transparency, to
exchange information and to eliminate an environment that
attracts business with no substantial domestic activity. We
are not able to predict what changes will arise from the
commitment or whether such changes will subject us to
additional taxes.
The impact of commitments made by the government of
Bermuda in order to avoid being named on the EU’s list of
non-cooperative tax jurisdictions is uncertain and could have
an adverse effect on our results of operations.
to commitments made by
On December 5, 2017 the Council of the European Union
published its list of non-cooperative jurisdictions for tax
purposes (the “EU Blacklist”). Bermuda was not named on
the EU Blacklist due
its
government to improve certain “substance requirement”
deficiencies that were identified by the EU during the
screening process. This commitment led to the passing of the
Economic Substance Act 2018 (as amended) of Bermuda (the
“ES Act”) in December 2018, which came into force on 1
January 2019. While the the legislation remains subject to
further clarification and interpretation, it is not currently
possible to ascertain the steps required to ensure our
continued compliance with the ES Act and makes it difficult
to predict its future impact. Any entity found to be lacking
adequate economic substance may be fined or ordered by a
court to take action to remedy such failure (or face being
struck off the companies register). As a result, there is a risk
that
substance
requirements under the ES Act could require Arch to enhance
its infrastructure in Bermuda, and this may result in some
additional operational expenditures, increased tax liabilities
and/or compliance costs for Arch.
non-compliance with
economic
its
We may become subject to increased taxation in Bermuda
and other countries as a result of the OECD's plan on “Base
erosion and profit shifting.”
The OECD, with the support of the G20, initiated the “base
erosion and profit shifting” (“BEPS”) project in 2013 in
response to concerns that changes are needed to international
tax laws to address situations where multinationals may pay
little or no tax in certain jurisdictions by shifting profits away
from jurisdictions where the activities creating those profits
may take place. In November 2015, “final reports” were
approved for adoption by the G20 finance ministers. The
final reports provide the basis for international standards for
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corporate taxation that are designed to prevent, among other
things, the artificial shifting of income to tax havens and low-
tax jurisdictions, the erosion of the tax base through interest
deductions on intercompany debt and the artificial avoidance
of permanent establishments (i.e.,
tax nexus with a
jurisdiction).
implement
to adopt and
Legislation
these standards,
including country by country reporting, has been enacted or
is currently under consideration in a number of jurisdictions.
As a result, our income may be taxed in jurisdictions where it
is not currently taxed and at higher rates of tax than currently
taxed, which may substantially increase our effective tax rate.
Also, the continued adoption of these standards may increase
the complexity and costs associated with tax compliance and
adversely affect our financial position and results of
operations.
In May 2019, the OECD published a “Programme of Work,”
divided into two pillars, which is designed to address the tax
challenges created by an increasing digitalized economy.
Pillar One addresses the broader challenge of a digitalized
economy and focuses on the allocation of group profits
among taxing jurisdictions based on a market-based concept
rather than historical “permanent establishment” concepts.
Pillar Two addresses the remaining BEPS risk of profit
shifting to entities in low tax jurisdictions by introducing a
global minimum tax and a proposed tax on base eroding
payments, which would operate through a denial of a
deduction or imposition of source-based taxation (including
withholding tax) on certain payments. In January 2020, the
OECD released a statement excluding most financial services
activities, including insurance activities, from the scope of
the profit reallocation mechanism in Pillar I. The OECD
statement cited the presence of commercial (rather than
consumer) customers as grounds for the carve-out, but also
acknowledged that a “compelling case” could be made that
the consumer-facing business lines of insurance companies
should be excluded from the scope of Pillar I given the
that
impact of regulations and
typically ensure that residual profits are largely realized in
local customer markets. However, the OECD noted that the
proper scope for Pillar I as applied to “unregulated elements
the financial services sector” may require further
of
consideration. To date, the proposal has been written broadly
enough to potentially apply to our activities, and we are
unable to determine at this time when such measures would
be implemented and if so, whether they will be in a form that
whether it would have a material adverse impact on our
operations and results.
licensing requirements
The EU’s review of harmful tax competition could adversely
affect our business, financial condition and results of
operations
to address concerns relating
During 2017, the EU Economic and Financial Affairs
Council (“ECOFIN”) released a list of noncooperative
jurisdictions for tax purposes. The stated aim of this list, and
accompanying report, was to promote good governance
worldwide in order to maximize efforts to prevent tax fraud
and tax evasion. Bermuda was not on the list of non-
cooperative jurisdictions, but did feature in the report (along
jurisdictions) as having
with approximately 40 other
committed
to economic
substance by December 31, 2018. In accordance with that
commitment, Bermuda has enacted the ES Act that came into
force on 1 January 2019, that requires a registered entity
other than an entity which is resident for tax purposes in
certain jurisdictions outside Bermuda (“non-resident entity”)
that carries on as a business any one or more of the “relevant
activities” referred to in the ES Act, , which includes carrying
on an insurance business, to maintain a substantial economic
presence in Bermuda and to satisfy economic substance
that must satisfy economic
requirements. Any entity
substance requirements but fails to do so could face
automatic disclosure to competent authorities in the EU of
the information filed by the entity with the Bermuda
Registrar of Companies in connection with the economic
substance requirements and may also face financial penalties,
restriction or regulation of its business activities and/or may
be struck off as a registered entity in Bermuda.
At present, the impact of these new economic substance
requirements is unclear, and it is impossible to predict the
nature and effect of these requirements on us. As the
legislation is new and remains subject to further clarification
and interpretation, it is not currently possible to ascertain the
precise impact of the ES Act. Compliance with economic
substance requirements may increase the complexity and
costs of carrying on our business and adversely affect our
financial condition and results of operations.
Application of the EU Anti-Tax Avoidance Directives
As part of the BEPS project, the EU Council adopted on 12
July 2016 Council Directive (EU) 2016/1164 (“ATAD I”), as
amended by Council Directive (EU) 2017/952 (“ATAD II”,
together with ATAD I, “ATAD”), to provide for minimum
standard across EU Member States for tackling aggressive
tax planning involving hybrid tax mismatches and interest
deductibility. ATAD I was required to be transposed into
domestic Member State law with effect from January 1,
2019, whilst ATAD II was required to be transposed into
domestic Member State law with effect from January 1, 2020
(with an exception in respect of reverse hybrid mismatch
provisions, which will take effect on January 1, 2022). The
full impact of the application of ATAD is not yet clear.
However, ATAD could result in increased tax liabilities and/
or compliance costs and administrative burden for us.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease office space in Bermuda where our principal offices are located. Our insurance group leases space for offices in the
U.S., Canada, Bermuda, U.K., Europe and Australia. Our reinsurance group leases space for offices in the U.S., Bermuda, U.K.,
Europe, Canada and Dubai. Our mortgage group leases space for offices in the U.S., Hong Kong and Australia. We believe that
the above described office space is adequate for our needs. However, as we continue to develop our business, we may open
additional office locations in 2021.
ITEM 3. LEGAL PROCEEDINGS
We, in common with the insurance industry in general, are subject to litigation and arbitration in the normal course of our
business. As of December 31, 2020, we were not a party to any litigation or arbitration which is expected by management to
have a material adverse effect on our results of operations and financial condition and liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
HOLDERS
As of February 19, 2021, and based on information provided to us by our transfer agent and proxy solicitor, there were 893
holders of record of our common shares (NASDAQ: ACGL) and approximately 86,000 beneficial holders of our common
shares.
The following table summarizes our purchases of common shares for the 2020 fourth quarter:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
10/1/2020-10/31/2020
11/1/2020-11/30/2020
12/1/2020-12/31/2020
Total
Issuer Purchases of Common Shares
Average Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet be
Purchased Under the
Plan or Programs (2)
31.01
31.28
32.93
32.07
—
—
—
—
$
$
$
$
924,514
920,548
916,528
916,528
Total Number of
Shares Purchased (1)
451
142,559
131,476
274,486
$
$
$
$
(1) Includes repurchases by Arch Capital of shares, from time to time, from employees in order to facilitate the payment of withholding
taxes on restricted shares granted and the exercise of stock appreciation rights. We purchased these shares at their fair market value, as
determined by reference to the closing price of our common shares on the day the restricted shares vested or the stock appreciation rights
were exercised.
(2) Remaining amount available at December 31, 2020 under Arch Capital’s share repurchase authorization, under which repurchases may
be effected from time to time in open market or privately negotiated transactions through December 31, 2021.
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48
2020 FORM 10-K
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PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on our common shares for each of the last five years
through December 31, 2020 to the cumulative total return, assuming reinvestment of dividends, of (1) S&P 500 Composite
Stock Index (“S&P 500 Index”) and (2) the S&P 500 Property & Casualty Insurance Index. The share price performance
presented below is not necessarily indicative of future results.
CUMULATIVE TOTAL SHAREHOLDER RETURN (1)(2)(3)
Base Period
Company Name/Index
l Arch Capital Group Ltd.
n S&P 500 Index
p S&P 500 Property & Casualty Insurance Index
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
$100.00
$123.71
$130.14
$114.92
$184.47
$155.14
$100.00
$111.96
$136.40
$130.42
$171.49
$203.04
$100.00
$115.71
$141.61
$134.97
$169.88
$181.70
(1)
(2)
(3)
Stock price appreciation plus dividends.
The above graph assumes that the value of the investment was $100 on December 31, 2015.
This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the
Securities Act of 1933 or the Securities and Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
ITEM 6. SELECTED FINANCIAL DATA
Part II, Item 6 is no longer required as the Company has adopted certain provisions within the amendments to Regulation S-K
that eliminate Item 301.
ARCH CAPITAL
49
2020 FORM 10-K
Arch Capital Group Ltd.S&P 500 IndexS&P 500 Property & Casualty Insurance Index12/31/1512/31/1612/31/1712/31/1812/31/1912/31/20$50.00$100.00$150.00$200.00$250.00
Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial
condition and results of operations for the year ended
December 31, 2020 and 2019. Comparisons between 2019
and 2018 have been omitted from this Form 10-K, but may
be found in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II,
Item 7 of the Company's Annual Report on Form 10-K year
ended December 31, 2019 filed with the SEC. This
discussion and analysis contains forward-looking statements
which involve inherent risks and uncertainties. All statements
other than statements of historical fact are forward-looking
statements. These statements are based on our current
assessment of risks and uncertainties. Actual results may
differ materially from those expressed or implied in these
statements and, therefore, undue reliance should not be
placed on them. Important factors that could cause actual
events or results to differ materially from those indicated in
such statements are discussed in this report, including the
sections entitled “Cautionary Note Regarding Forward-
Looking Statements,” and “Risk Factors.”
This discussion and analysis should be read in conjunction
with our audited consolidated financial statements and notes
thereto presented under Item 8. Tabular amounts are in U.S.
Dollars in thousands, except share amounts, unless otherwise
noted.
GENERAL
Overview
Arch Capital Group Ltd. (“Arch Capital” and, together with
its subsidiaries, “we” or “us”) is a publicly listed Bermuda
exempted company with approximately $15.8 billion in
capital at December 31, 2020 and, through operations in
Bermuda, the United States, United Kingdom, Europe,
Canada, Australia and Hong Kong, writes specialty lines of
property and casualty insurance and reinsurance, as well as
mortgage insurance and reinsurance, on a worldwide basis. It
is our belief that our underwriting platform, our experienced
management team and our strong capital base have enabled
us to establish a strong presence in the insurance and
reinsurance markets.
The worldwide property casualty insurance and reinsurance
industry is highly competitive and has traditionally been
subject to an underwriting cycle in which a hard market (high
premium rates, restrictive underwriting standards, as well as
terms and conditions, and underwriting gains) is eventually
followed by a soft market (low premium rates, relaxed
underwriting standards, as well as broader terms and
conditions, and underwriting
losses). Property casualty
market conditions may affect, among other things, the
demand for our products, our ability to increase premium
rates, the terms and conditions of the insurance policies we
write, changes in the products offered by us or changes in our
business strategy.
The financial results of the property casualty insurance and
reinsurance industry are influenced by factors such as the
frequency and/or severity of claims and losses, including
natural disasters or other catastrophic events, variations in
interest rates and financial markets, changes in the legal,
regulatory and judicial environments, inflationary pressures
and general economic conditions. These factors influence,
among other things, the demand for insurance or reinsurance,
the supply of which is generally related to the total capital of
competitors in the market.
Mortgage insurance and reinsurance is subject to similar
cycles to property casualty except that they have historically
been more dependent on macroeconomic conditions.
Current Outlook
In keeping with our longstanding underwriting approach, we
look for acceptable books of business to underwrite without
sacrificing discipline. We continue to write a portion of our
overall book in catastrophe-exposed business, which has the
potential to increase the volatility of our operating results.
From an operating perspective, our 2020 results reflected the
benefits of rate improvements as all three of our underwriting
segments are seeing attractive opportunities to grow at
acceptable rates of return. We know from experience that this
is an opportune time to significantly expand our participation
into this hardening market. As such, we raised an additional
$1.0 billion of capital in the form of long-term senior notes at
the end of June 2020 and continue to deploy capital to those
lines that provide the best expected returns.
Rate improvements in 2020 have enabled us to continue to
expand writings in our property casualty segments as risk
adjusted returns are increasingly achieved. In the insurance
segment, our renewal rate changes increased approximately
12% in the 2020 fourth quarter and we believe that this trend
of increasing rates will continue through 2021.
COVID-19 has continued to significantly impact social and
economic activity in the U.S. and global markets. We are
committed to the safety of our employees, including
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50
2020 FORM 10-K
Table of Contents
restricting travel and instituting an extensive work from home
policy. These actions have helped prevent a major disruption
to our clients and operations. The impact of the spread of
COVID-19 has changed some of our outlook for 2021, but
we are navigating this period with a strong capital base. The
extent to which COVID-19 impacts our business, results of
operations and financial results depends on numerous
evolving factors including, but not limited to, the magnitude
and duration of COVID-19, the extent to which it will impact
macroeconomic conditions, the speed of the anticipated
recovery and governmental, business and individual reactions
to the pandemic. Given the continuing evolution of the
COVID-19 outbreak and the response to curb its spread
including the release of vaccines, we continue to not be able
to estimate the future effects of the COVID-19 outbreak to
our results of operations, financial condition, or liquidity.
For
the 2020 period, we recorded $272 million for
COVID-19 losses across our property casualty segments. We
continue to have limited information to accurately quantify
our potential exposure to the pandemic in certain areas but
have established IBNR reserves for occurrences based on
policy terms and conditions including limits, sub-limits, and
deductibles. These reserves were recorded across a number of
lines of business, such as trade credit, travel, workers
compensation and property where we have limited exposure
to policies that do not contain a specific pandemic exclusion
and/or explicitly afford business interruption coverage under
a pandemic. Given the unusual circumstances and breadth of
the pandemic, we have classified COVID-19 losses as a
catastrophe.
For our U.S. primary mortgage operations,
reported
delinquencies were 4.19% at December 31, 2020, compared
to 4.69% at September 30, 2020. Delinquencies continue to
be better than our expectations at the beginning of the
COVID-19 pandemic. However, delinquency rates remain at
elevated levels, reflecting the impact of the recession and
forbearance programs under the CARES Act (including any
extensions) to borrowers experiencing a hardship during
COVID-19. Forbearance allows for mortgage payments to be
suspended for up to 18 months along with a suspension of
foreclosures and evictions. See “Results of Operations—
Mortgage Segment” for further details on our mortgage
operations.
Record mortgage originations fueled by low mortgage rates
are continuing to create surges in both purchase and
refinancing activity. There remains significant uncertainty on
the economy’s health and the lack of a full understanding on
how COVID-19 may impact individual borrowers and, as
such, caution is warranted on predicting how this will
ultimately affect our results of operations.
We believe that delinquency rates could increase in the future
from the current level, as additional borrowers may request
forbearance on their mortgage loans under the CARES Act.
We would record loss reserves on these delinquencies which
would result in elevated levels of incurred losses over the
coming quarters. Over time, we would expect many of these
delinquencies to cure and revert back to performing loans as
the economy returns to a less-stressed state. At this time, we
do not have enough visibility to predictably forecast the rate
at which forbearance delinquencies will be reported to us,
cure or ultimately turn into claims on an annual, let alone a
that
quarterly basis. We are cautiously optimistic
delinquencies will continue to cure as vaccines enable
economies to reopen. Record home purchases in the U.S. in
2020 supported a 5% price appreciation nationwide while
historically
interest rates accelerated housing and
refinancing demand. Our outlook for continued growth in
2021 remains positive. For further discussion of the potential
impacts of COVID-19, see “ITEM 1A—Risk Factors”.
low
transfer programs
We remain committed to providing solutions across many
offerings as the marketplace evolves, including the mortgage
credit risk
initiated by government
sponsored enterprises, or “GSEs.” In addition, we enter into
aggregate excess of loss mortgage reinsurance agreements
with various
reinsurance companies
domiciled in Bermuda (the Bellemeade Agreements) and
issue mortgage
increasing our
protection for mortgage tail risk. The Bellemeade structures
provide approximately $4.0 billion of aggregate reinsurance
coverage.
special purpose
linked notes,
insurance
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
and
common
Book value per share represents total common shareholders’
equity available to Arch divided by the number of common
shares
equivalents outstanding.
share
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
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 $30.31 at December 31, 2020, a 14.7%
increase from $26.42 at December 31, 2019. The growth in
2020 reflected strong underwriting results and investment
returns.
is
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2020 FORM 10-K
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Operating Return on Average Common Equity
income available
Operating return on average common equity (“Operating
ROAE”) represents annualized after-tax operating income
available to Arch common shareholders divided by average
common shareholders’ equity available to Arch during the
to Arch
period. After-tax operating
common shareholders, a “non-GAAP measure” as defined in
the SEC rules, represents net income available to Arch
common shareholders, excluding net realized gains or losses,
equity in net income or loss of investments accounted for
using the equity method, net foreign exchange gains or losses
and transaction costs and other, net of income taxes.
Management uses Operating ROAE as a key measure of the
to Arch common shareholders. See
return generated
“Comment on Non-GAAP Financial Measures.” Our
Operating ROAE was 4.8% for 2020, compared to 12.0% for
2019. The lower Operating ROAE for 2020 reflected impact
of elevated catastrophic activity including COVID-19 on
underwriting results and lower investment income than in the
2019 periods.
Total Return on Investments
Total return on investments includes investment income,
equity in net income or loss of investments accounted for
using the equity method, net realized gains and losses and the
change in unrealized gains and losses generated by Arch’s
investment portfolio. Total return is calculated on a pre-tax
basis and before investment expenses excluding amounts
reflected in the ‘other’ segment, and reflects the effect of
financial market conditions along with foreign currency
fluctuations. Management uses total return on investments as
a key measure of the return generated to Arch common
shareholders on the capital held in the business, and
compares the return generated by our investment portfolio
against benchmark returns which we measured our portfolio
against during the periods.
The following table summarizes the pre-tax total return
(before investment expenses) of investment held by Arch
compared to the benchmark return (both based in U.S.
Dollars) against which we measured our portfolio during the
periods:
Pre-tax total return (before investment
expenses):
Year Ended December 31, 2020
Year Ended December 31, 2019
Arch
Portfolio (1)
Benchmark
Return
7.77 %
7.30 %
7.16 %
7.39 %
(1) Our investment expenses were approximately 0.31% and 0.33%,
respectively, of average invested assets in 2020 and 2019.
Total return for our investment portfolio outperformed the
benchmark return index in 2020 and reflected the impact of
lower interest rates on our fixed income portfolio. The
duration of our investment portfolio decreased to 3.01 years
at year-end, reflecting our ongoing positioning of the
portfolio towards shorter-term and high credit opportunities,
as we expect the yield curve may steepen over the coming
quarters.
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
interpreted as
expressing a preference for or aversion to any particular
sector or sector weight. The index is intended solely to
provide, unlike many master indices that change based on the
size of their constituent indices, a relatively stable basket of
investable indices. At December 31, 2020, the benchmark
return index had an average credit quality of “Aa3” by
Moody’s, an estimated duration of 3.02 years.
index should not be
The benchmark return index included weightings to the
following indices:
ICE BoAML 1-10 Year A - AAA U.S. Corporate Index
ICE BoAML 1-5 Year U.S. Treasury Index
MSCI ACWI Net Total Return USD Index
ICE BoAML 3-5 Year Fixed Rate Asset Backed Securities Index
S&P Leveraged Loan Total Return Index
Bloomberg Barclays CMBS Invest Grade Aaa Total Return
Index
ICE BoAML 1-10 Year BBB U.S. Corporate Index
ICE BoAML U.S. Mortgage Backed Securities Index
ICE BoAML 1-5 Year U.K. Gilt Index
ICE BoAML German Government 1-10 Year Index
ICE BoAML 0-3 Month U.S. Treasury Bill Index
ICE BoAML 1-10 Year U.S. Municipal Securities Index
ICE BoAML 5-10 Year U.S. Treasury Index
ICE BoAML 1-5 Year Australia Government Index
ICE BoAML U.S. High Yield Constrained Index
ICE BoAML 1-5 Year Canada Government Index
Bloomberg Barclays Global High Yield Total Return Index
Hedge Fund Research HFRX ED Distressed Restructuring Index
(Flagship Funds)
Dow Jones Global ex-US Select Real Estate Securities Total
Return Net Index
FTSE Nareit All Mortgage Capped Index Total Return USD
Bloomberg Barclays CMBS: Erisa Eligible Unhedged USD
ICE BoAML 20+ Year Canada Government Index
%
21.00 %
15.00
8.60
7.00
5.20
5.00
4.00
4.00
4.00
3.50
3.25
3.00
3.00
2.75
2.50
2.00
1.50
1.50
0.90
0.90
0.90
0.50
Total
100.00 %
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52
2020 FORM 10-K
Table of Contents
COMMENT ON NON-GAAP FINANCIAL MEASURES
Throughout this filing, we present our operations in the way
we believe will be the most meaningful and useful to
investors, analysts, rating agencies and others who use our
financial information in evaluating the performance of our
company. This presentation includes the use of after-tax
operating income available to Arch common shareholders,
which is defined as net income available to Arch common
shareholders, excluding net realized gains or losses, equity in
net income or loss of investments accounted for using the
equity method, net foreign exchange gains or losses,
transaction costs and other and income taxes, and the use of
annualized operating return on average common equity. The
presentation of after-tax operating income available to Arch
common shareholders and annualized operating return on
average common equity are non-GAAP financial measures as
defined in Regulation G. The reconciliation of such measures
to net income available to Arch common shareholders and
annualized 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 investments accounted for using the equity
method, net foreign exchange gains or losses and 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
investments accounted for using the equity method and net
foreign exchange gains or losses are an integral part of our
operations, the decision to realize investment gains or losses,
the recognition of the change in the carrying value of
investments accounted for using the fair value option in net
realized gains or losses, the recognition of net impairment
losses, the recognition of equity in net income or loss of
investments accounted for using the equity method and the
losses are
recognition of foreign exchange gains or
independent of the insurance underwriting process and result,
in large part, from general economic and financial market
conditions. Furthermore, certain users of our financial
information believe that, for many companies, the timing of
the realization of investment gains or losses is largely
opportunistic. In addition, changes in allowance for credit
losses and net impairment losses recognized in earnings on
the Company’s investments represent other-than-temporary
declines in expected recovery values on securities without
actual realization. The use of the equity method on certain of
our investments in certain funds that invest in fixed maturity
securities is driven by the ownership structure of such funds
(either limited partnerships or limited liability companies). In
applying the equity method, these investments are initially
recorded at cost and are subsequently adjusted based on our
proportionate share of the net income or loss of the funds
(which include changes in the market value of the underlying
securities in the funds). This method of accounting is
different from the way we account for our other fixed
maturity securities and the timing of the recognition of equity
in net income or loss of investments accounted for using the
equity method may differ from gains or losses in the future
upon sale or maturity of such investments. Transaction costs
and other include advisory, financing, legal, severance,
incentive compensation and other transaction costs related to
acquisitions. We believe that transaction costs and other, due
to their non-recurring nature, are not indicative of the
performance of, or trends in, our business performance. Due
to these reasons, we exclude net realized gains or losses,
equity in net income or loss of investments accounted for
using the equity method, net foreign exchange gains or losses
and transaction costs and other from the calculation of after-
tax operating
common
shareholders.
to Arch
available
income
income available
We believe that showing net income available to Arch
common shareholders exclusive of the items referred to
above reflects the underlying fundamentals of our business
since we evaluate the performance of and manage our
business to produce an underwriting profit. In addition to
presenting net
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.
includes
information
Our segment
the presentation of
consolidated underwriting income or loss and a subtotal of
underwriting income or loss before the contribution from the
the pre-tax
‘other’ segment. Such measures represent
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
individual underwriting operations.
Underwriting income or loss does not incorporate items
included in our corporate (non-underwriting) segment. While
these measures are presented
in note 4, “Segment
Information,” to our consolidated financial statements in Item
8, they are considered non-GAAP financial measures when
presented elsewhere on a consolidated basis. The
reconciliations of underwriting income or loss to income
before income taxes (the most directly comparable GAAP
financial measure) on a consolidated basis and a subtotal
in
before
the contribution from
the ‘other’ segment,
to our
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53
2020 FORM 10-K
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accordance with Regulation G, is shown in note 4, “Segment
Information,” to our consolidated financial statements in Item
8.
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 intangible assets, and, accordingly,
investment income and other non-underwriting related items
are not allocated to each underwriting segment. For the
‘other’ segment, performance is measured based on net
income or loss.
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
to Arch common
return generated
shareholders on the capital held in the business, and
compares the return generated by our investment portfolio
against benchmark returns which we measured our portfolio
against during the periods.
the
RESULTS OF OPERATIONS
income or
loss before
Along with consolidated underwriting income, we provide a
the
subtotal of underwriting
contribution from the ‘other’ segment. Pursuant to generally
accepted accounting principles, Watford is considered a
variable interest entity and we concluded that we are the
primary beneficiary of Watford. As such, we consolidate the
results of Watford in our consolidated financial statements,
although we only own approximately 13% of Watford’s
common equity as of December 31, 2020. Watford has its
own management and board of directors that is responsible
for its results and profitability. In addition, we do not
guarantee or provide credit support for Watford. Since
Watford is an independent company, the assets of Watford
can be used only to settle obligations of Watford and Watford
is solely responsible for its own liabilities and commitments.
Our financial exposure to Watford is limited to our
investment in Watford’s senior notes, common and preferred
shares and counterparty credit risk (mitigated by collateral)
arising from reinsurance transactions. We believe that
presenting certain information excluding the ‘other’ segment
enables investors and other users of our financial information
to analyze our performance in a manner similar to how our
management analyzes performance.
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 investments accounted for
using the equity method, net realized gains and losses and the
change in unrealized gains and losses generated by Arch’s
investment portfolio. Total return is calculated on a pre-tax
basis and before investment expenses, excludes amounts
reflected in the ‘other’ segment, and reflects the effect of
financial market conditions along with foreign currency
The following table summarizes our consolidated financial
data, including a reconciliation of net income available to
Arch common shareholders to after-tax operating income
available to Arch common shareholders. Each line item
reflects the impact of our percentage ownership of Watford’s
common equity during such period.
Net income available to Arch common
shareholders
Net realized (gains) losses
Equity in net (income) loss of investments
accounted for using the equity method
Net foreign exchange (gains) losses
Transaction costs and other
Income tax expense (benefit) (1)
Year Ended December 31,
2020
2019
$ 1,363,909 $ 1,594,707
(814,808)
(349,848)
(146,693)
(123,672)
80,591
9,964
64,145
10,732
14,444
16,276
After-tax operating income available to Arch
common shareholders
$ 557,108 $ 1,162,639
Beginning common shareholders’ equity
$ 10,717,371 $ 8,659,827
Ending common shareholders’ equity
12,325,886
10,717,371
Average common shareholders’ equity
$ 11,521,629 $ 9,688,599
Annualized return on average common equity
%
Annualized operating return on average
common equity %
11.8
4.8
16.5
12.0
(1)
Income tax on net realized gains or losses, equity in net income or loss
of investments 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.
Results in all periods presented reflected the impact of
current insurance and reinsurance market conditions and the
impact of low interest yields on our investment portfolio.
Segment Information
We classify our businesses into three underwriting segments
— insurance, reinsurance and mortgage — and two other
operating segments — corporate (non-underwriting) and
‘other.’ Our insurance, reinsurance and mortgage segments
each have managers who are responsible for the overall
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54
2020 FORM 10-K
Table of Contents
profitability of their respective segments and who are directly
accountable to our chief operating decision makers, the Chief
Executive Officer of Arch Capital, Chief Financial Officer
and Treasurer of Arch Capital and the President and Chief
Underwriting Officer of Arch Capital. The chief operating
decision makers do not assess performance, measure return
on equity or make resource allocation decisions on a line of
business basis. Management measures segment performance
for our three underwriting segments based on underwriting
income or loss. We do not manage our assets by underwriting
segment, with the exception of goodwill and intangible
assets, and, accordingly, investment income is not allocated
to each underwriting segment.
segments using
the
reportable
We determined our
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:
2020
$ 4,688,562
Gross premiums written
(1,525,655)
Premiums ceded
Net premiums written
3,162,907
Change in unearned premiums (291,487)
2,871,420
Net premiums earned
(31)
Other underwriting income
Year Ended December 31,
2019
$ 3,907,993
(1,266,267)
2,641,726
(244,646)
2,397,080
—
% Change
20.0
19.7
19.8
Losses and loss adjustment
expenses
Acquisition expenses
Other operating expenses
Underwriting income (loss)
(2,092,453)
(418,483)
(489,153)
$ (128,700)
(1,615,475)
(361,614)
(454,770)
$ (34,779)
Premiums Written.
The following tables set forth our insurance segment’s net
premiums written by major line of business:
Year Ended December 31,
2020
2019
Amount
%
Amount
%
$
619,034
743,486
437,973
19.6
23.5
13.8
$
368,120
534,323
426,535
13.9
20.2
16.1
364,104
11.5
369,202
14.0
297,330
9.4
228,023
8.6
212,974
156,119
331,887
6.7
4.9
10.5
305,170
111,708
298,645
11.6
4.2
11.3
Property, energy,
marine and aviation
Professional Lines
Programs
Construction and
national accounts
Excess and surplus
casualty
Travel, accident and
health
Lenders products
Other
Total
$ 3,162,907
100.0
$ 2,641,726
100.0
Net premiums written by the insurance segment were 19.7%
higher in 2020 than in 2019. The higher level of net
premiums written reflected increases across most lines of
business, due in part to new business opportunities, rate
increases and growth in existing accounts, partially offset by
a decrease in travel business, reflecting the ongoing impact of
the COVID-19 global pandemic.
Net Premiums Earned.
The following tables set forth our insurance segment’s net
premiums earned by major line of business:
Year Ended December 31,
2020
2019
Amount
%
Amount
%
Property, energy,
marine and aviation
Professional Lines
$
517,247
655,872
18.0
22.8
$
298,966
499,224
12.5
20.8
(270.1)
Programs
432,854
15.1
414,103
17.3
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
72.9 %
14.6 %
17.0 %
104.5 %
% Point
Change
67.4 %
15.1 %
19.0 %
101.5 %
5.5
(0.5)
(2.0)
3.0
segment
insurance
consists of our
insurance
The
underwriting units which offer specialty product lines on a
worldwide basis, as described
in note 4, “Segment
Information,” to our consolidated financial statements in Item
8.
Construction and
national accounts
Excess and surplus
casualty
Travel, accident and
health
Lenders products
Other
Total
387,934
13.5
325,687
13.6
270,620
190,944
114,687
301,262
9.4
6.6
4.0
10.5
200,615
8.4
305,085
66,079
287,321
12.7
2.8
12.0
$ 2,871,420
100.0
$ 2,397,080
100.0
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Losses and Loss Adjustment Expenses.
Reinsurance Segment
The table below shows the components of the insurance
segment’s loss ratio:
The following tables set forth our reinsurance segment’s
underwriting results:
Current year
Prior period reserve development
Loss ratio
Current Year Loss Ratio.
Year Ended December 31,
2020
2019
73.2 %
(0.3) %
72.9 %
68.1 %
(0.7) %
67.4 %
The insurance segment’s current year loss ratio was 5.1
points higher in 2020 than in 2019. The 2020 loss ratio
included 9.5 points of current year catastrophic event activity,
including 4.1 points for exposure related to COVID-19,
compared to 1.4 points in 2019. The balance of the change in
the 2020 loss ratio resulted, in part, from the effect of rate
increases, changes in mix of business and the level of
attritional losses.
Prior Period Reserve Development.
The insurance segment’s net favorable development was $7.8
million, or 0.3 points, for 2020, compared to $15.8 million,
or 0.7 points, for 2019. See note 5, “Reserve for Losses and
Loss Adjustment Expenses,” to our consolidated financial
statements in Item 8 for information about the insurance
segment’s prior year reserve development.
2020
$ 3,472,086
Gross premiums written
(1,014,716)
Premiums ceded
Net premiums written
2,457,370
Change in unearned premiums (295,141)
2,162,229
Net premiums earned
Year Ended December 31,
2019
$ 2,323,223
(720,500)
1,602,723
(136,334)
1,466,389
% Change
49.5
53.3
47.5
Other underwriting income
(loss)
Losses and loss adjustment
expenses
Acquisition expenses
Other operating expenses
Underwriting income
4,454
6,444
(1,628,320)
(354,048)
(168,011)
$ 16,304
(1,011,329)
(239,032)
(141,484)
$ 80,988
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
75.3 %
16.4 %
7.8 %
99.5 %
69.0 %
16.3 %
9.6 %
94.9 %
(79.9)
% Point
Change
6.3
0.1
(1.8)
4.6
The reinsurance segment consists of our reinsurance
underwriting units which offer specialty product lines on a
in note 4, “Segment
worldwide basis, as described
Information,” to our consolidated financial statements in Item
8.
Underwriting Expenses.
Premiums Written.
The insurance segment’s underwriting expense ratio was
31.6% in 2020, compared to 34.1% in 2019, with the
decrease primarily primarily due to growth in net premiums
earned.
The following tables set forth our reinsurance segment’s net
premiums written by major line of business:
Year Ended December 31,
2020
2019
Amount
%
Amount
%
Property excluding
property catastrophe
Property catastrophe
Other Specialty
Casualty
Marine and aviation
Other
Total
$
697,086
286,210
709,308
542,319
141,414
81,033
$ 2,457,370
28.4
11.6
28.9
22.1
5.8
3.3
100.0
$
403,320
110,643
466,977
510,374
53,679
57,730
$ 1,602,723
25.2
6.9
29.1
31.8
3.3
3.6
100.0
Gross premiums written by the reinsurance segment in 2020
were 49.5% higher than in 2019, while net premiums written
were 53.3% higher than in 2019. The growth in net premiums
written reflected
lines of business,
primarily due to growth in existing accounts, new business,
and rate increases.
increases
in most
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Net Premiums Earned.
Underwriting Expenses.
The following tables set forth our reinsurance segment’s net
premiums earned by major line of business:
The underwriting expense ratio for the reinsurance segment
was 24.2% in 2020, compared to 25.9% in 2019, reflecting
growth in net premiums earned.
Year Ended December 31,
2020
2019
Amount
%
Amount
%
Mortgage Segment
Property excluding
property catastrophe
Property catastrophe
Other Specialty
Casualty
Marine and aviation
Other
Total
$
562,208
237,736
626,409
549,056
109,624
77,196
$ 2,162,229
26.0
11.0
29.0
25.4
5.1
3.6
100.0
$
362,841
90,934
478,517
429,288
48,274
56,535
$ 1,466,389
24.7
6.2
32.6
29.3
3.3
3.9
100.0
Net premiums earned in 2020 were 47.5% higher than in
2019, reflecting changes in net premiums written over the
previous five quarters, including the mix and type of business
written.
Other Underwriting Income (Loss).
Our mortgage operations include U.S. and international
mortgage insurance and reinsurance operations as well as
participation in GSE credit risk-sharing transactions. Our
mortgage group includes direct mortgage insurance in the
U.S. primarily through Arch Mortgage Insurance Company,
United Guaranty Residential Insurance Company and Arch
Mortgage Guaranty Company (together, “Arch MI U.S.”);
mortgage reinsurance through Arch Re Bermuda to mortgage
insurers on both a proportional and non-proportional basis
globally; direct mortgage insurance in Europe through Arch
Insurance (EU) and in Hong Kong through Arch MI Asia; in
Australia through Arch LMI; and participation in various
GSE credit risk-sharing products primarily through Arch Re
Bermuda.
Other underwriting income in 2020 was $4.5 million,
compared to $6.4 million in 2019.
The following tables set forth our mortgage segment’s
underwriting results.
Year Ended December 31,
2019
$ 1,466,265
(204,509)
1,261,756
2020
$ 1,473,999
(194,149)
1,279,850
% Change
0.5
Gross premiums written
Premiums ceded
Net premiums written
Change in unearned
premiums
Net premiums earned
Other underwriting income
Losses and loss adjustment
expenses
Acquisition expenses
Other operating expenses
Underwriting income
118,085
1,397,935
20,316
104,584
1,366,340
16,005
(528,344)
(134,240)
(162,202)
$ 593,465
(53,513)
(134,319)
(153,092)
$ 1,041,421
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
37.8 %
9.6 %
11.6 %
59.0 %
3.9 %
9.8 %
11.2 %
24.9 %
1.4
2.3
(43.0)
% Point
Change
33.9
(0.2)
0.4
34.1
Losses and Loss Adjustment Expenses.
The table below shows the components of the reinsurance
segment’s loss ratio:
Current year
Prior period reserve development
Loss ratio
Current Year Loss Ratio.
Year Ended December 31,
2020
2019
81.5 %
(6.2) %
75.3 %
72.2 %
(3.2) %
69.0 %
including 7.2 points for exposure related
The reinsurance segment’s current year loss ratio was 9.3
points higher in 2020 than in 2019. The 2020 loss ratio
included 20.1 points for current year catastrophic event
activity,
to
COVID-19, compared to 5.7 points in 2019, primarily related
to Hurricane Dorian and Typhoons Hagibis and Faxai. The
balance of the change in the 2020 current year loss ratio
resulted, in part, from the effect of rate increases, changes in
mix of business and the level of attritional losses.
Prior Period Reserve Development.
The reinsurance segment’s net favorable development was
$134.0 million, or 6.2 points, for 2020, compared to $46.4
million, or 3.2 points, for 2019, See note 5, “Reserve for
Losses and Loss Adjustment Expenses,” to our consolidated
financial statements in Item 8 for information about the
reinsurance segment’s prior year reserve development.
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Premiums Written.
Losses and Loss Adjustment Expenses.
The following table sets forth our mortgage segment’s net
premiums written by underwriting location (i.e., where the
business is underwritten):
The table below shows the components of the mortgage
segment’s loss ratio:
Year Ended December 31,
2020
2019
Current year
Prior period reserve development
Loss ratio
Year Ended December 31,
2020
2019
39.2 %
(1.4) %
37.8 %
13.1 %
(9.2) %
3.9 %
Net premiums written by underwriting
location
United States
Other
Total
$ 1,021,950 $ 1,032,868
228,888
$ 1,279,850 $ 1,261,756
257,900
Gross premiums written by the mortgage segment in 2020
were 0.5% higher than in 2019. Net premiums written for
2020 were 1.4% higher than in the 2019 period primarily
reflecting growth in Australian single premium mortgage
insurance, partially offset by a lower level of U.S. primary
mortgage insurance in force on monthly premium policies.
The persistency rate of the primary portfolio of mortgage
loans of Arch MI U.S. was 58.7% at December 31, 2020
compared to 75.7% at December 31, 2019, with the decrease
primarily reflecting a higher level of refinancing activity. 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.
Net Premiums Earned.
The following table sets forth our mortgage segment’s net
premiums earned by underwriting location (i.e., where the
business is underwritten):
Net premiums earned by underwriting
location
United States
Other
Total
Year Ended December 31,
2020
2019
$ 1,158,563 $ 1,134,849
231,491
$ 1,397,935 $ 1,366,340
239,372
Net premiums earned for 2020 were 2.3% higher than in
2019, primarily reflecting a higher level of single premiums
earned as a result of policy terminations due to mortgage
refinance activity.
Other Underwriting Income.
Other underwriting income, which is due in part to GSE risk-
sharing
accounting
treatment was $20.3 million for 2020, compared to $16.0
million for 2019.
receiving derivative
transactions
Unlike property and casualty business for which we estimate
ultimate losses on premiums earned, losses on mortgage
insurance business are only recorded at the time a borrower is
delinquent on their mortgage, in accordance with primary
mortgage insurance industry practice. Because our primary
mortgage insurance reserving process does not take into
account the impact of future losses from loans that are not
delinquent, mortgage insurance loss reserves are not an
estimate of ultimate losses. In addition to establishing loss
reserves for delinquent loans, under GAAP, we are required
to establish a premium deficiency reserve for our mortgage
insurance products if the amount of expected future losses
and maintenance costs exceeds expected future premiums,
existing reserves and the anticipated investment income for
such product. We assess the need for a premium deficiency
reserve on a quarterly basis and perform a full analysis
annually. No such reserve was established during 2020 and
2019.
Current Year Loss Ratio.
The mortgage segment’s current year loss ratio was 26.1
points higher in 2020 compared to 2019. The percentage of
loans in default on U.S. primary mortgage insurance
increased from 1.54% at December 31, 2019 to 4.19% at
December 31, 2020.
Incurred losses for the 2020 periods reflected elevated
delinquency rates due, in part, to financial stress from the
COVID-19 pandemic. Segregating estimated losses due to
COVID-19 from the overall mortgage segment estimated
losses would
the number of
delinquencies specifically attributable to COVID-19. As this
exercise cannot be performed accurately, the Company is not
reporting COVID-19 provisions separately from its overall
loss provisions.
require knowledge of
We insure mortgages for homes in areas that have been
impacted by catastrophic events. Generally, mortgage
insurance losses occur only when a credit event occurs and,
following a physical damage event, when the home is
restored to pre-storm condition. Our ultimate claims exposure
will depend on the number of delinquency notices received
and the ultimate claim rate related to such notices. In the
event of natural disasters, cure rates are influenced by the
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Table of Contents
adequacy of homeowners and flood insurance carried on a
related property, and a borrower's access to aid from
government entities and private organizations, in addition to
other factors which generally impact cure rates in unaffected
areas.
investment income yields were calculated based on amortized
cost. Yields on future investment income may vary based on
financial market conditions, investment allocation decisions
and other factors.
Corporate Expenses.
Prior Period Reserve Development.
The mortgage segment’s net favorable development was
$19.0 million, or 1.4 points, for 2020, compared to $125.2
million, or 9.2 points, for 2019. See note 5, “Reserve for
Losses and Loss Adjustment Expenses,” to our consolidated
financial statements in Item 8 for information about the
mortgage segment’s prior year reserve development.
Underwriting Expenses.
The underwriting expense ratio for the mortgage segment
was 21.2% for 2020, in line with 21.0% for 2019.
Corporate (Non-Underwriting) Segment
The corporate (non-underwriting) segment results include net
investment income, other income (loss), corporate expenses,
transaction costs and other, amortization of intangible assets,
interest expense,
to our non-cumulative
preferred shares, net realized gains or losses, equity in net
income or loss of investments accounted for using the equity
method, net foreign exchange gains or losses and income
taxes. Such amounts exclude the results of the ‘other’
segment.
items related
Net Investment Income.
Corporate expenses were $68.5 million for 2020, compared
to $65.7 million for 2019. Such amounts primarily represent
certain holding company costs necessary to support our
worldwide operations and costs associated with operating as
a publicly traded company.
Transaction Costs and Other.
Transaction costs and other were $9.5 million for 2020,
compared to $14.4 million for 2019. Amounts in both periods
are primarily related to acquisition activity.
Amortization of Intangible Assets.
Amortization of intangible assets for 2020 was $69.0 million,
compared to $82.1 million for 2019 . Amounts in 2020 and
to amortization of finite-lived
2019 primarily related
intangible assets related to our 2016 acquisition of United
Guaranty Corporation.
Interest Expense.
Interest expense was $120.2 million for 2020, compared to
$93.7 million for 2019. Interest expense primarily reflects
amounts related to our outstanding senior notes. The higher
level of interest expense mainly resulted from the issuance of
$1.0 billion of 3.635% senior notes in June 2020.
The components of net investment income were derived from
the following sources:
Net Realized Gains (Losses).
Fixed maturities
Equity securities
Short-term investments
Other (1)
Gross investment income
Investment expenses (2)
Year Ended December 31,
2020
2019
$
358,804 $
440,824
28,007
6,573
77,951
471,335
(69,427)
13,455
14,642
86,440
555,361
(64,294)
Net investment income
$
401,908 $
491,067
(1) Amounts include dividends and other distributions on investment
funds, term loan investments, funds held balances, cash balances and
other.
Investment expenses were approximately 0.31% of average invested
assets for 2020, compared to 0.33% for 2019.
(2)
The pre-tax investment income yield was 1.78% for 2020,
compared to 2.52% for 2019. The lower level of net
investment income for 2020 compared to 2019 reflected
lower yields available in the financial markets. The pre-tax
We recorded net realized gains of $813.8 million for 2020,
compared to net realized gains of $348.0 million for 2019.
Currently, our portfolio is actively managed to maximize
total return within certain guidelines. The effect of financial
market movements on the investment portfolio will directly
impact net realized gains and losses as the portfolio is
adjusted and rebalanced. Net realized gains or losses from the
sale of fixed maturities primarily results from our decisions
to reduce credit exposure, to change duration targets, to
rebalance our portfolios or due
relative value
determinations.
to
Net realized gains or losses also include realized and
unrealized contract gains and losses on our derivative
instruments, changes in the fair value of assets accounted for
using the fair value option and in the fair value of equities,
along with changes in the allowance for credit losses on
financial assets and net impairment losses recognized in
earnings. See note 9, “Investment Information—Net Realized
Gains (Losses),” to our consolidated financial statements for
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2020 FORM 10-K
CRITICAL ACCOUNTING POLICIES, ESTIMATES
AND RECENT ACCOUNTING PRONOUNCEMENTS
and other
recognition,
The preparation of consolidated financial statements in
accordance with GAAP requires us to make many estimates
and judgments that affect the reported amounts of assets,
liabilities (including reserves), revenues and expenses, and
related disclosures of contingent liabilities. On an ongoing
basis, we evaluate our estimates, including those related to
reserves,
insurance
revenue
reinsurance recoverables, allowance for current expected
credit losses, investment valuations, goodwill and intangible
assets, bad debts, income taxes, contingencies and litigation.
We base our estimates on historical experience, where
possible, and on various other assumptions that we believe to
be reasonable under the circumstances, which form the basis
for our judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results will differ from these estimates and such
differences may be material. We believe that the following
critical accounting policies affect significant estimates used
in the preparation of our consolidated financial statements.
Loss Reserves
losses and
to establish reserves for
We are required by applicable insurance laws and regulations
loss
and GAAP
adjustment expenses, or Loss Reserves, that arise from the
business we underwrite. Loss Reserves for our insurance,
reinsurance and mortgage operations are balance sheet
liabilities representing estimates of future amounts required
to pay losses and loss adjustment expenses for insured or
reinsured events which have occurred at or before the balance
sheet date. Loss Reserves do not reflect contingency reserve
allowances to account for future loss occurrences. Losses
arising from future events will be estimated and recognized at
the time the losses are incurred and could be substantial. See
note 6, “Short Duration Contracts,” to our consolidated
financial statements in Item 8 for additional information on
our reserving process.
Table of Contents
additional information. See note 9, “Investment Information
to our consolidated
—Allowance for Credit Losses,”
financial statements for additional information.
Equity in Net Income (Loss) of Investments Accounted for
Using the Equity Method.
We recorded $146.7 million of equity in net income related
to investments accounted for using the equity method for
2020, compared to $123.7 million for 2019. Investments
accounted for using the equity method totaled $2.0 billion at
December 31, 2020, compared
to $1.7 billion at
December 31, 2019. See note 9, “Investment Information—
Equity in Net Income (Loss) of Investments Accounted For
Using the Equity Method,” to our consolidated financial
statements in Item 8 for additional information.
Net Foreign Exchange Gains or Losses.
Net foreign exchange losses for 2020 were $80.2 million,
compared to net foreign exchange losses for 2019 of $9.3
million. Amounts in such 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 before income taxes
resulted in an expense of 7.4% for 2020, compared to an
expense of 8.7% for 2019. Our effective tax rate fluctuates
from year to year consistent with the relative mix of income
or loss reported by jurisdiction and the varying tax rates in
each jurisdiction.
See note 15, “Income Taxes,” to our consolidated financial
statements in Item 8 for a reconciliation of the difference
between the provision for income taxes and the expected tax
provision at the weighted average statutory tax rate for 2020
and 2019.
Other Segment
The ‘other’ segment includes the results of Watford. Pursuant
to generally accepted accounting principles (“GAAP”),
Watford is considered a variable interest entity and we
concluded that we are the primary beneficiary of Watford. As
such, we consolidate
in our
consolidated financial statements, although we only own
approximately 13% of Watford’s common equity as of
December 31, 2020. See note 12, “Variable Interest Entity
and Noncontrolling Interests,” and note 4, “Segment
Information,” to our consolidated financial statements in Item
8 for additional information.
the results of Watford
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2020 FORM 10-K
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At December 31, 2020 and 2019, our Loss Reserves, net of
unpaid losses and loss adjustment expenses recoverable, by
type and by operating segment were as follows:
At December 31, 2020 and 2019, the reinsurance segment’s
Loss Reserves by major line of business, net of unpaid losses
and loss adjustment expenses recoverable, were as follows:
Insurance segment:
Case reserves
IBNR reserves
Total net reserves
Reinsurance segment:
Case reserves
Additional case reserves
IBNR reserves
Total net reserves
Mortgage segment:
Case reserves
IBNR reserves
Total net reserves
Other segment:
Case reserves
Additional case reserves
IBNR reserves
Total net reserves
Total:
Case reserves
Additional case reserves
IBNR reserves
Total net reserves
December 31,
2020
2019
$ 2,051,640 $ 1,601,627
3,403,051
5,004,678
3,889,823
5,941,463
1,560,523
280,472
2,253,953
4,094,948
631,921
271,702
903,623
566,587
32,321
660,132
1,259,040
1,273,523
166,251
1,835,993
3,275,767
266,030
157,712
423,742
478,036
29,059
597,910
1,105,005
Casualty (1)
Other specialty (2)
Property excluding property catastrophe (3)
Marine and aviation
Property catastrophe
Other (4)
Total net reserves
December 31,
2020
2019
$ 1,995,849 $ 1,796,073
649,309
471,775
160,930
113,565
84,115
$ 4,094,948 $ 3,275,767
917,178
594,033
204,205
268,858
114,825
(1)
(2)
(3)
(4)
Includes executive assurance, professional
compensation, excess motor, healthcare and other.
Includes non-excess motor, surety, accident and health, workers’
compensation catastrophe, agriculture, trade credit and other.
Includes property facultative business.
Includes life, casualty clash and other.
liability, workers’
At December 31, 2020 and 2019, the mortgage segment’s
Loss Reserves by major line of business, net of unpaid losses
and loss adjustment expenses recoverable, were as follows:
4,810,671
312,793
7,075,610
3,619,216
195,310
5,994,666
$ 12,199,074 $ 9,809,192
U.S. primary mortgage insurance (1)
Other
Total net reserves
December 31,
2020
649,748 $
253,875
903,623 $
2019
278,689
145,053
423,742
$
$
At December 31, 2020 and 2019, the insurance segment’s
Loss Reserves by major line of business, net of unpaid losses
and loss adjustment expenses recoverable, were as follows:
(1) At December 31, 2020, 27.7% of total net reserves represent policy
years 2010 and prior and the remainder from later policy years. At
December 31, 2019, 58.2% of total net reserves represent policy years
2010 and prior and the remainder from later policy years.
Professional lines (1)
Construction and national accounts
Excess and surplus casualty (2)
Programs
Property, energy, marine and aviation
Travel, accident and health
Lenders products
Other (3)
Total net reserves
December 31,
2020
2019
$ 1,482,820 $ 1,322,969
1,248,750
564,254
571,926
371,822
109,613
28,233
787,111
$ 5,941,463 $ 5,004,678
1,395,067
816,495
699,354
517,692
98,910
48,946
882,179
(1)
(2)
(3)
Includes professional liability, executive assurance and healthcare
business.
Includes casualty and contract binding business.
Includes alternative markets, excess workers’ compensation and surety
business.
Potential Variability in Loss Reserves
The tables below summarize the effect of reasonably likely
scenarios on the key actuarial assumptions used to estimate
our Loss Reserves, net of unpaid losses and loss adjustment
expenses recoverable, at December 31, 2020 by underwriting
segment (excluding the ‘other’ segment). The scenarios
shown in the tables summarize the effect of (i) changes to the
expected loss ratio selections used at December 31, 2020,
which represent loss ratio point increases or decreases to the
expected loss ratios used, and (ii) changes to the loss
development patterns used in our reserving process at
December 31, 2020, which represent claims reporting that is
either slower or faster than the reporting patterns used. We
believe that the illustrated sensitivities are indicative of the
potential variability inherent in the estimation process of
those parameters. The results show the impact of varying
each key actuarial assumption using the chosen sensitivity on
our IBNR reserves, on a net basis and across all accident
years.
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2020 FORM 10-K
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INSURANCE SEGMENT
Reserving lines selected assumptions:
Property, energy, marine and aviation
Third party occurrence business
Third party claims-made business
Multi-line and other specialty
Higher
Expected Loss
Ratios
Slower Loss
Development
Patterns
5 points
3 months
10
10
10
6
6
6
Increase (decrease) in Loss Reserves:
Property, energy, marine and aviation
Third party occurrence business
Third party claims-made business
Multi-line and other specialty
$
36,369 $
283,179
120,367
134,517
51,268
148,656
135,996
157,928
INSURANCE SEGMENT
Reserving lines selected assumptions:
Property, energy, marine and aviation
Third party occurrence business
Third party claims-made business
Multi-line and other specialty
Lower
Expected Loss
Ratios
Faster Loss
Development
Patterns
(5) points
(3) months
(10)
(10)
(10)
(6)
(6)
(6)
Increase (decrease) in Loss Reserves:
Property, energy, marine and aviation
Third party occurrence business
Third party claims-made business
Multi-line and other specialty
$
(36,369) $
(282,830)
(119,319)
(131,395)
(31,443)
(130,607)
(103,301)
(114,712)
REINSURANCE SEGMENT
Reserving lines selected assumptions:
Casualty
Other specialty
Property excluding property catastrophe
Property catastrophe
Marine and aviation
Other
Higher
Expected Loss
Ratios
Slower Loss
Development
Patterns
10 points
6 months
5
5
5
5
5
3
3
3
3
3
Increase (decrease) in Loss Reserves:
Casualty
Other specialty
$
Property excluding property catastrophe
Property catastrophe
Marine and aviation
Other
141,847 $
72,488
21,611
16,492
10,005
6,844
170,356
46,210
52,793
26,950
15,780
5,357
REINSURANCE SEGMENT
Reserving lines selected assumptions:
Casualty
Other specialty
Property excluding property catastrophe
Property catastrophe
Marine and aviation
Other
Increase (decrease) in Loss Reserves:
Casualty
Other specialty
Lower
Expected Loss
Ratios
Faster Loss
Development
Patterns
(10) points
(6) months
(5)
(5)
(5)
(5)
(5)
(3)
(3)
(3)
(3)
(3)
$
(141,847) $
(72,488)
(133,152)
(72,373)
Property excluding property catastrophe
Property catastrophe
Marine and aviation
Other
(21,611)
(16,492)
(10,043)
(6,844)
(48,999)
(17,277)
(15,519)
(5,005)
It is not necessarily appropriate to sum the total impact for a
specific factor or the total impact for a specific business
category as
the business categories are not perfectly
correlated. In addition, the potential variability shown in the
tables above are reasonably likely scenarios of changes in our
key assumptions at December 31, 2020 and are not meant to
be a “best case” or “worst case” series of outcomes and,
therefore, it is possible that future variations may be more or
less than the amounts set forth above.
For our mortgage segment, we considered the sensitivity of
loss reserve estimates at December 31, 2020 by assessing the
potential changes resulting from a parallel shift in severity
and default to claim rate. For example, assuming all other
factors remain constant, for every one percentage point
change in primary claim severity (which we estimate to be
29% of the unpaid principal balance at December 31, 2020),
we estimated that our loss reserves would change by
approximately $30.0 million at December 31, 2020. For
every one percentage point change in our primary net default
to claim rate (which we estimate to be approximately 20% at
December 31, 2020), we estimated a $45.0 million change in
our loss reserves at December 31, 2020.
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2020 FORM 10-K
$5,941,463
$4,094,948
$903,623
$10,940,034
Risk In Force (RIF) (3):
Table of Contents
Simulation Results
In order to illustrate the potential volatility in our Loss
Reserves, we used a Monte Carlo simulation approach to
simulate a range of results based on various probabilities.
Both the probabilities and related modeling are subject to
inherent uncertainties. The simulation relies on a significant
number of assumptions, such as the potential for multiple
entities to react similarly to external events, and includes
other statistical assumptions. The simulation results shown
for each segment do not add to the total simulation results, as
the individual segment simulation results do not reflect the
diversification effects across our segments.
At December 31, 2020, our recorded Loss Reserves by
underwriting segment, net of unpaid
loss
adjustment expenses recoverable, and the results of the
simulation were as follows:
losses and
Insurance
Segment
Reinsurance
Segment
Mortgage
Segment
Total
Loss
Reserves (1)
Simulation
results:
90th
percentile (2)
10th
percentile (3)
$7,181,065
$5,038,203
$1,081,713
$12,683,107
$4,734,118
$3,251,451
$738,596
$9,246,934
(1) Net of reinsurance recoverables. Excludes amounts reflected in the
‘other’ segment.
(2) Simulation results indicate that a 90% probability exists that the net
reserves for losses and loss adjustment expenses will not exceed the
indicated amount.
(3) Simulation results indicate that a 10% probability exists that the net
reserves for losses and loss adjustment expenses will be at or below the
indicated amount.
For informational purposes, based on the total simulation
results, a change in our Loss Reserves to the amount
indicated at the 90th percentile would result in a decrease in
income before income taxes of approximately $1.7 billion, or
$4.25 per diluted share, while a change in our Loss Reserves
to the amount indicated at the 10th percentile would result in
an increase in income before income taxes of approximately
$1.7 billion, or $4.13 per diluted share. The simulation results
noted above are informational only, and no assurance can be
given that our ultimate losses will not be significantly
different than the simulation results shown above, and such
differences could directly and significantly impact earnings
favorably or unfavorably in the period they are determined.
We do not have significant exposure to pre-2002 liabilities,
long-tail
such as asbestos-related
trend
is difficult
liabilities. It
information for certain liability/casualty coverages for which
the claim-tail may be especially long, as claims are often
reported and ultimately paid or settled years, or even decades,
illnesses and other
to provide meaningful
after the related loss events occur. Any estimates and
assumptions made as part of the reserving process could
prove to be inaccurate due to several factors, including the
fact that for certain lines of business relatively limited
historical information has been reported to us through
December 31, 2020.
Mortgage Operations Supplemental Information
The mortgage segment’s insurance in force (“IIF”) and risk
in force (“RIF”) were as follows at December 31, 2020 and
2019:
(U.S. Dollars in millions)
December 31,
2020
2019
Amount
%
Amount
%
Insurance In Force (IIF) (1):
U.S. primary mortgage
insurance
Mortgage reinsurance
Other (2)
Total
$ 280,579
31,220
111,740
$ 423,539
66.2 $ 287,150
26,768
7.4
26.4
104,346
100.0 $ 418,264
68.7
6.4
24.9
100.0
U.S. primary mortgage
insurance
Mortgage reinsurance
Other (2)
Total
$
$
70,522
2,226
5,146
77,894
90.5 $
2.9
6.6
100.0 $
73,388
2,129
4,380
79,897
91.9
2.7
5.5
100.0
(1) Represents the aggregate dollar amount of each insured mortgage
(2)
loan’s current principal balance.
Includes participation in GSE credit risk-sharing transactions and
international insurance business.
(3) Represents the aggregate 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 credit risk-sharing or
reinsurance transactions.
The insurance in force and risk in force for our U.S. primary
mortgage insurance business by policy year were as follows
at December 31, 2020:
(U.S. Dollars in
millions)
IIF
RIF
Delinquency
Amount
%
Amount
%
Rate (1)
Policy year:
2010 and prior $ 13,684
904
2011
3,651
2012
7,546
2013
8,261
2014
15,032
2015
24,958
2016
24,748
2017
27,304
2018
48,304
2019
106,187
2020
$ 280,579
Total
3,088
4.9 $
239
0.3
992
1.3
2,107
2.7
2,273
2.9
4,048
5.4
6,648
8.9
6,413
8.8
6,918
9.7
12,001
17.2
37.8
25,795
100.0 $ 70,522
4.4
0.3
1.4
3.0
3.2
5.7
9.4
9.1
9.8
17.0
36.6
100.0
11.78 %
3.97 %
2.98 %
3.30 %
4.06 %
3.72 %
4.77 %
5.52 %
6.76 %
4.61 %
0.76 %
4.19 %
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2020 FORM 10-K
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(1) Represents the ending percentage of loans in default.
(U.S. Dollars in millions)
The insurance in force and risk in force for our U.S. primary
mortgage insurance business by policy year were as follows
at December 31, 2019:
(U.S. Dollars in
millions)
IIF
RIF
Delinquency
Amount
%
Amount
%
Rate (1)
Policy year:
2010 and prior $ 17,251
1,678
2011
6,293
2012
12,276
2013
13,714
2014
25,788
2015
40,898
2016
43,896
2017
51,776
2018
6.0 $
0.6
2.2
4.3
4.8
9.0
14.2
15.3
18.0
3,990
464
1,753
3,433
3,778
6,880
10,670
11,262
13,086
2019
Total
73,580
$ 287,150
25.6
18,072
100.0 $ 73,388
5.4
0.6
2.4
4.7
5.1
9.4
14.5
15.3
17.8
24.6
100.0
8.79 %
1.59 %
0.89 %
0.99 %
1.16 %
0.87 %
1.03 %
1.00 %
0.86 %
0.14 %
1.54 %
December 31,
2020
2019
Amount
%
Amount
%
$
$
5,636
5,261
3,632
2,959
2,762
2,622
2,526
2,520
2,464
2,220
37,920
70,522
8.0 $
7.5
5.2
4.2
3.9
3.7
3.6
3.6
3.5
3.1
53.8
100.0 $
5,678
5,187
3,887
2,753
2,616
2,470
2,881
2,514
2,432
2,474
40,496
73,388
7.7
7.1
5.3
3.8
3.6
3.4
3.9
3.4
3.3
3.4
55.2
100.0
Total RIF by State:
Texas
California
Florida
Georgia
Illinois
North Carolina
Virginia
Minnesota
Massachusetts
Washington
Others
Total
The following table provides supplemental disclosures for
our U.S. primary mortgage insurance business related to
the years ended
loss metrics for
loans and
insured
December 31, 2020 and 2019:
(1) Represents the ending percentage of loans in default.
The following tables provide supplemental disclosures on
risk in force for our U.S. primary mortgage insurance
business at December 31, 2020 and 2019:
(U.S. Dollars in millions)
December 31,
2020
2019
(U.S. Dollars in thousands, except loan
and claim count)
Rollforward of insured loans in default:
Beginning delinquent number of loans
New notices
Cures
Paid claims
Amount
%
Amount
%
Ending delinquent number of loans (1)
Year Ended December 31,
2020
2019
20,163
102,324
(68,691)
(1,562)
52,234
20,665
39,017
(36,601)
(2,918)
20,163
Credit quality (FICO):
>=740
680-739
620-679
<620
Total
$ 40,774
24,498
4,837
413
$ 70,522
57.8 $ 42,301
25,240
34.7
5,444
6.9
403
0.6
100.0 $ 73,388
57.6
34.4
7.4
0.5
100.0
Weighted average FICO
score
743
743
Loan-to-Value (LTV):
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
85.00% and below
Total
$
8,643
37,877
20,013
3,989
$ 70,522
12.3 $
53.7
28.4
5.7
9,064
40,136
20,890
3,298
100.0 $ 73,388
12.4
54.7
28.5
4.5
100.0
Weighted average LTV
92.8 %
93.0 %
Total RIF, net of
external reinsurance
$ 56,658
$ 58,512
Ending number of policies in force (1)
1,245,771
1,307,884
Delinquency rate (1)
4.19 %
1.54 %
Losses:
Number of claims paid
Total paid claims
Average per claim
Severity (2)
Average reserve per default (in
thousands) (1)
1,562
64,903
41.6
92.4 %
2,918
$ 116,854
40.0
$
96.0 %
12.6
$
13.3
$
$
$
(1)
(2)
Includes first lien primary and pool policies.
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 9.3 to
1 at December 31, 2020, compared to 12.0 to 1 at
December 31, 2019.
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2020 FORM 10-K
Table of Contents
Ceded Reinsurance
reinsurance
agreements. Our
In the normal course of business, our insurance and mortgage
insurance operations cede a portion of their premium on a
quota share or excess of loss basis through treaty or
reinsurance
facultative
operations also obtain reinsurance whereby another reinsurer
contractually agrees to indemnify it for all or a portion of the
reinsurance risks underwritten by our reinsurance operations.
Such arrangements, where one reinsurer provides reinsurance
to another reinsurer, are usually referred to as “retrocessional
reinsurance” arrangements. In addition, our reinsurance
subsidiaries participate in “common account” retrocessional
arrangements for certain pro rata treaties. Such arrangements
reduce the effect of individual or aggregate losses to all
companies participating on such treaties, including the
reinsurers, such as our reinsurance operations, and the ceding
company. Reinsurance recoverables are recorded as assets,
predicated on the reinsurers’ ability to meet their obligations
under the reinsurance agreements. If the reinsurers are unable
to satisfy their obligations under the agreements, our
insurance or reinsurance operations would be liable for such
defaulted amounts.
The availability and cost of reinsurance and retrocessional
protection is subject to market conditions, which are beyond
our control. Although we believe that our insurance and
reinsurance operations have been successful in obtaining
adequate reinsurance and retrocessional protection, it is not
certain that they will be able to continue to obtain adequate
protection at cost effective levels. As a result of such market
conditions and other factors, our insurance, reinsurance and
mortgage operations may not be able to successfully mitigate
risk through reinsurance and retrocessional arrangements and
may lead to increased volatility in our results of operations in
future periods. See “Risk Factors—Risks Relating to Our
Industry, Business and Operations—The failure of any of the
loss limitation methods we employ could have a material
adverse effect on our financial condition or results of
operations.”
Effective January 1, 2021, our insurance operations had in
effect a reinsurance program which provided coverage for
certain property-catastrophe related losses equal to $276
million in excess of various retentions per occurrence.
For purposes of managing risk, we reinsure a portion of our
exposures, paying to reinsurers a part of the premiums
received on the policies we write, and we may also use
retrocessional protection. On a consolidated basis, ceded
premiums written represented 26.3% of gross premiums
written for 2020, compared to 25.8% for 2019. We monitor
the financial condition of our reinsurers and attempt to place
coverages only with substantial, financially sound carriers. If
the financial condition of our reinsurers or retrocessionaires
deteriorates, resulting in an impairment of their ability to
make payments, we will provide for probable losses resulting
from our inability to collect amounts due from such parties,
as appropriate. We evaluate the credit worthiness of all the
reinsurers to which we cede business. We report reinsurance
recoverables net of an allowance for expected credit loss. The
allowance is based upon our ongoing review of amounts
outstanding,
the financial condition of our reinsurers,
amounts and form of collateral obtained and other relevant
factors. A ratings based probability-of-default and loss-given-
default methodology is used to estimate the allowance for
expected credit loss. See “Risk Factors—Risks Relating to
Our Industry, Business and Operations—We are exposed to
credit risk in certain of our business operations” and
“Financial Condition, Liquidity and Capital Resources” for
further details.
Premium Revenues and Related Expenses
Insurance premiums written are generally recorded at the
policy inception and are primarily earned on a pro rata basis
over the terms of the policies for all products, usually 12
months. Premiums written include estimates in our insurance
operations’ programs, specialty lines, collateral protection
business and for participation in involuntary pools. Such
premium estimates are derived from multiple sources which
include the historical experience of the underlying business,
information.
similar business and available
Unearned premium reserves represent
the portion of
premiums written that relates to the unexpired terms of in-
force insurance policies.
industry
Reinsurance premiums written include amounts reported by
brokers and ceding companies, supplemented by our own
estimates of premiums where reports have not been received.
The determination of premium estimates requires a review of
our experience with the ceding companies, familiarity with
each market, the timing of the reported information, an
analysis and understanding of the characteristics of each line
of business, and management’s judgment of the impact of
various factors, including premium or loss trends, on the
volume of business written and ceded to us. On an ongoing
basis, our underwriters review the amounts reported by these
third parties for reasonableness based on their experience and
knowledge of the subject class of business, taking into
account our historical experience with the brokers or ceding
companies. In addition, reinsurance contracts under which we
assume business generally contain specific provisions which
allow us to perform audits of the ceding company to ensure
compliance with the terms and conditions of the contract,
including accurate and timely reporting of information. Based
on a review of all available information, management
establishes premium estimates where reports have not been
received. Premium estimates are updated when new
information
is received and differences between such
estimates and actual amounts are recorded in the period in
which estimates are changed or the actual amounts are
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2020 FORM 10-K
Table of Contents
determined. Premiums written are recorded based on the type
of contracts we write. Premiums on our excess of loss and
pro rata reinsurance contracts are estimated when the
business is underwritten. For excess of loss contracts,
premiums are recorded as written based on the terms of the
contract. Estimates of premiums written under pro rata
contracts are recorded in the period in which the underlying
risks incept and are based on information provided by the
brokers and the ceding companies. For multi-year reinsurance
treaties which are payable in annual installments, generally,
only the initial annual installment is included as premiums
written at policy inception due to the ability of the reinsured
to commute or cancel coverage during the term of the policy.
The remaining annual installments are included as premiums
written at each successive anniversary date within the multi-
year term.
reinstated
Reinstatement premiums for our insurance and reinsurance
operations are recognized at the time a loss event occurs,
where coverage limits for the remaining life of the contract
are
terms.
Reinstatement premiums, if obligatory, are fully earned when
recognized. The accrual of reinstatement premiums is based
on an estimate of losses and loss adjustment expenses, which
reflects management’s judgment, as described above in “—
Loss Reserves.”
pre-defined
contract
under
The amount of reinsurance premium estimates included in
premiums receivable and the amount of related acquisition
expenses by
follows at
type of business were as
December 31, 2020:
Other specialty
Casualty
Property excluding
property catastrophe
Marine and aviation
Property catastrophe
Other
Total
Gross
Amount
December 31, 2020
Acquisition
Expenses
Net
Amount
$ 285,738 $
125,675
(82,226) $ 203,512
91,518
(34,157)
132,553
84,648
20,053
62,473
90,281
62,351
16,767
56,615
$ 711,140 $ (190,096) $ 521,044
(42,272)
(22,297)
(3,286)
(5,858)
Premium estimates are reviewed by management at least
quarterly. Such review includes a comparison of actual
reported premiums to expected ultimate premiums along with
a review of the aging and collection of premium estimates.
Based on management’s review, the appropriateness of the
premium estimates is evaluated, and any adjustment to these
estimates is recorded in the period in which it becomes
known. Adjustments to premium estimates could be material
and such adjustments could directly and significantly impact
earnings favorably or unfavorably in the period they are
determined because the estimated premium may be fully or
substantially earned.
A significant portion of amounts included as premiums
receivable, which represent estimated premiums written, net
of commissions, are not currently due based on the terms of
the underlying contracts. Based on currently available
information, we report premiums receivable net of an
allowance for expected credit loss. We monitor credit risk
associated with premiums receivable through our ongoing
review of amounts outstanding, aging of the receivable,
historical data and counterparty financial strength measures.
Reinsurance premiums assumed, irrespective of the class of
business, are generally earned on a pro rata basis over the
terms of the underlying policies or reinsurance contracts.
Contracts and policies written on a “losses occurring” basis
cover claims that may occur during the term of the contract
or policy, which is typically 12 months. Accordingly, the
premium is earned evenly over the term. Contracts which are
written on a “risks attaching” basis cover claims which attach
to the underlying insurance policies written during the terms
of such contracts. Premiums earned on such contracts usually
extend beyond the original term of the reinsurance contract,
typically resulting in recognition of premiums earned over a
24-month period.
Certain of our reinsurance contracts include provisions that
adjust premiums or acquisition expenses based upon the
experience under the contracts. Premiums written and earned,
as well as related acquisition expenses, are recorded based
upon the projected experience under such contracts.
Retroactive reinsurance reimburses a ceding company for
liabilities incurred as a result of past insurable events covered
by the underlying policies reinsured. In certain instances,
reinsurance contracts cover losses both on a prospective basis
and on a retroactive basis and, accordingly, we bifurcate the
prospective and retrospective elements of these reinsurance
contracts and accounts for each element separately where
practical. Underwriting income generated in connection with
retroactive reinsurance contracts is deferred and amortized
into income over the settlement period while losses are
charged to income immediately. Subsequent changes in
estimated amount or timing of cash flows under such
retroactive reinsurance contracts are accounted for by
adjusting the previously deferred amount to the balance that
would have existed had the revised estimate been available at
the
transaction, with a
corresponding charge or credit to income.
the reinsurance
inception of
Mortgage guaranty insurance policies are contracts that are
generally non-cancelable by the insurer, are renewable at a
fixed price, and provide for payment of premiums on a
monthly, annual or single basis. Upon renewal, we are not
able to re-underwrite or re-price our policies. Consistent with
industry accounting practices, premiums written on a
monthly basis are earned as coverage is provided. Premiums
written on an annual basis are amortized on a monthly pro
ARCH CAPITAL
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2020 FORM 10-K
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rata basis over the year of coverage. Primary mortgage
insurance premiums written on policies covering more than
one year are referred to as single premiums. A portion of the
revenue from single premiums is recognized in premiums
earned in the current period, and the remaining portion is
deferred as unearned premiums and earned over the estimated
expiration of risk of the policy. If single premium policies
related to insured loans are canceled for any reason and the
policy is a non-refundable product, the remaining unearned
premium related to each canceled policy is recognized as
earned premium upon notification of the cancellation.
Unearned premiums represent the portion of premiums
written that is applicable to the estimated unexpired risk of
insured loans. A portion of premium payments may be
refundable if the insured cancels coverage, which generally
occurs when the loan is repaid, the loan amortizes to a
sufficiently low amount to trigger a lender permitted or
legally required cancellation, or the value of the property has
increased sufficiently in accordance with the terms of the
contract. Premium refunds reduce premiums earned in the
consolidated statements of income. Generally, only unearned
premiums are refundable.
Acquisition costs that are directly related and incremental to
the successful acquisition or renewal of business are deferred
and amortized based on the type of contract. For property and
casualty
insurance and reinsurance contracts, deferred
acquisition costs are amortized over the period in which the
related premiums are earned. Consistent with mortgage
insurance industry accounting practice, amortization of
acquisition costs related to the mortgage insurance contracts
for each underwriting year’s book of business is recorded in
proportion to estimated gross profits. Estimated gross profits
are comprised of earned premiums and losses and loss
adjustment expenses. For each underwriting year, we
estimate the rate of amortization to reflect actual experience
and any changes to persistency or loss development.
Acquisition expenses and other expenses related to our
underwriting operations that vary with, and are directly
related to, the successful acquisition or renewal of business
are deferred and amortized based on the type of contract. Our
insurance and reinsurance operations capitalize incremental
direct external costs that result from acquiring a contract but
do not capitalize salaries, benefits and other
internal
underwriting costs. For our mortgage insurance operations,
which include a substantial direct sales force, both external
and certain internal direct costs are deferred and amortized.
Deferred acquisition costs are carried at their estimated
realizable value and take into account anticipated losses and
loss adjustment expenses, based on historical and current
experience, and anticipated investment income.
A premium deficiency occurs if the sum of anticipated losses
and loss adjustment expenses, unamortized acquisition costs
and maintenance costs and anticipated investment income
exceed unearned premiums. A premium deficiency reserve
(“PDR”) is recorded by charging any unamortized acquisition
costs to expense to the extent required in order to eliminate
the deficiency.
the premium deficiency exceeds
unamortized acquisition costs then a liability is accrued for
the excess deficiency.
If
interest
income. Evaluating
To assess the need for a PDR on our mortgage exposures, we
develop loss projections based on modeled loan defaults
related to our current policies in force. This projection is
based on recent trends in default experience, severity and
rates of defaulted loans moving to claim, as well as recent
trends in the rate at which loans are prepaid, and incorporates
the expected
anticipated
profitability of our existing mortgage insurance business and
the need for a PDR for our mortgage business involves
significant reliance upon assumptions and estimates with
regard to the likelihood, magnitude and timing of potential
losses and premium revenues. The models, assumptions and
estimates we use to evaluate the need for a PDR may prove to
be inaccurate, especially during an extended economic
downturn or a period of extreme market volatility and
uncertainty.
No premium deficiency charges were recorded by us during
2020 and 2019.
Fair Value Measurements
We review our securities measured at fair value and discuss
the proper classification of such investments with investment
advisors and others. See note 10, “Fair Value,” to our
consolidated financial statements in Item 8 for a summary of
our financial assets and liabilities measured at fair value at
December 31, 2020 by valuation hierarchy.
Reclassifications
We have reclassified the presentation of certain prior year
information to conform to the current presentation. Such
reclassifications had no effect on our net
income,
shareholders’ equity or cash flows.
Significant Accounting Pronouncements
For all other significant accounting policies see note 3,
“Significant Accounting Policies” and note 3-(r), “Recent
Accounting Pronouncements” to our consolidated financial
in Item 8 for disclosures concerning our
statements
companies significant accounting policies and
recent
accounting pronouncements.
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FINANCIAL CONDITION
Investable Assets
At December 31, 2020, total investable assets held by Arch
were $26.9 billion, excluding the $2.7 billion included in the
‘other’ segment (i.e., attributable to Watford).
Investable Assets Held by Arch
The Finance, Investment and Risk Committee (“FIR”) of our
board of directors establishes our investment policies and sets
the parameters for creating guidelines for our investment
managers. The FIR reviews the implementation of the
investment strategy on a regular basis. Our current approach
stresses preservation of capital, market
liquidity and
diversification of risk. While maintaining our emphasis on
preservation of capital and liquidity, we expect our portfolio
to become more diversified and, as a result, we may expand
into areas which are not currently part of our investment
strategy. Our Chief Investment Officer administers the
investment portfolio, oversees our investment managers and
formulates investment strategy in conjunction with the FIR.
The following table summarizes the fair value of investable
assets held by Arch (i.e., excluding the ‘other’ segment):
Investable assets (1):
December 31, 2020
Fixed maturities (2)
Short-term investments (2)
Cash
Equity securities (2)
Other investments
Other investable assets (3)
Investments accounted for using the equity
method
Securities transactions entered into but not
settled at the balance sheet date
Total investable assets held by Arch
Average effective duration (in years)
Average S&P/Moody’s credit ratings (4)
Embedded book yield (5)
December 31, 2019
Fixed maturities (2)
Short-term investments (2)
Cash
Equity securities (2)
Other investments
Investments accounted for using the equity
method
Securities transactions entered into but not
settled at the balance sheet date
Total investable assets held by Arch
Average effective duration (in years)
Average S&P/Moody’s credit ratings (4)
Embedded book yield (5)
Estimated
Fair Value
% of
Total
$ 18,771,296
2,063,240
694,997
1,436,104
1,480,347
500,000
2,047,889
69.9
7.7
2.6
5.3
5.5
1.9
7.6
(137,578)
$ 26,856,295
(0.5)
100.0
3.01
AA/Aa2
1.56 %
$ 16,894,021
1,004,257
623,793
827,842
1,336,920
1,660,396
75.8
4.5
2.8
3.7
6.0
7.5
(61,553)
$ 22,285,676
(0.3)
100.0
3.40
AA/Aa2
2.55 %
(1)
(2)
In securities lending transactions, we receive collateral in excess of the
fair value of the securities pledged. For purposes of this table, we have
excluded the collateral received under securities lending, at fair value
and included the securities pledged under securities lending, at fair
value.
Includes investments carried as available for sale, at fair value and at
fair value under the fair value option.
(3) Participation interests in a receivable of a reverse repurchase
agreement.
(4) Average credit ratings on our investment portfolio on securities with
ratings by Standard & Poor’s Rating Services (“S&P”) and Moody’s
Investors Service (“Moody’s”).
(5) Before investment expenses.
At December 31, 2020, approximately $19.2 billion, or 71%,
of total investable assets held by Arch were internally
managed, compared
to $15.8 billion, or 71%, at
December 31, 2019.
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Table of Contents
The following table summarizes our fixed maturities and
fixed maturities pledged under securities lending agreements
(“Fixed Maturities”) by type:
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:
Estimated
Fair Value
Gross
Unrealized
Losses
% of
Total Gross
Unrealized
Losses
Severity of gross
unrealized losses:
December 31, 2020
0-10%
10-20%
20-30%
Greater than 30%
$ 3,583,981 $
95,495
1,061
1,249
Total
$ 3,681,786 $
December 31, 2019
0-10%
10-20%
20-30%
Greater than 30%
$ 4,136,798 $
12,405
830
315
Total
$ 4,150,348 $
(55,542)
(12,183)
(406)
(1,785)
(69,916)
(49,072)
(1,796)
(273)
(363)
(51,504)
79.4
17.4
0.6
2.6
100.0
95.3
3.5
0.5
0.7
100.0
The following table summarizes our top ten exposures to
fixed income corporate issuers by fair value at December 31,
2020, excluding guaranteed amounts and covered bonds:
Bank of America Corporation
JPMorgan Chase & Co.
Wells Fargo & Company
Nestlé S.A.
Citigroup Inc.
Morgan Stanley
Johnson & Johnson
Apple Inc.
The Goldman Sachs Group, Inc.
Comcast Corporation
Total
Estimated
Fair Value
Credit
Rating (1)
$
323,808
275,040
264,035
213,454
187,920
178,906
156,579
152,573
129,030
115,407
$ 1,996,752
A-/A2
A-/A2
BBB+/A2
AA-/Aa3
BBB+/A3
BBB+/A2
AAA/Aaa
AA+/Aa1
BBB+/A3
A-/A3
(1)
Average credit ratings as assigned by S&P and Moody’s,
respectively.
December 31, 2020
Corporate bonds
Mortgage backed securities
Municipal bonds
Commercial mortgage backed securities
U.S. government and government agencies
Non-U.S. government securities
Asset backed securities
Total
December 31, 2019
Corporate bonds
Mortgage backed securities
Municipal bonds
Commercial mortgage backed securities
U.S. government and government agencies
Non-U.S. government securities
Asset backed securities
Total
Estimated
Fair Value
% of
Total
$ 8,039,745
616,619
492,734
390,990
5,354,863
2,310,157
1,566,188
$ 18,771,296
$ 6,561,354
541,800
880,119
734,244
4,632,947
1,995,813
1,547,744
$ 16,894,021
42.8
3.3
2.6
2.1
28.5
12.3
8.3
100.0
38.8
3.2
5.2
4.3
27.4
11.8
9.2
100.0
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.
December 31, 2020
U.S. government and gov’t agencies (1)
AAA
AA
A
BBB
BB
B
Lower than B
Not rated
Total
December 31, 2019
U.S. government and gov’t agencies (1)
AAA
AA
A
BBB
BB
B
Lower than B
Not rated
Total
Estimated
Fair Value
% of
Total
$ 5,963,758
3,117,046
2,063,738
3,760,280
2,699,201
574,189
268,095
54,795
270,194
$ 18,771,296
$ 5,215,489
3,392,341
2,115,828
3,849,458
1,495,467
355,803
216,663
56,865
196,107
$ 16,894,021
31.8
16.6
11.0
20.0
14.4
3.1
1.4
0.3
1.4
100.0
30.9
20.1
12.5
22.8
8.9
2.1
1.3
0.3
1.2
100.0
(1)
Includes U.S. government-sponsored agency mortgage backed
securities and agency commercial mortgage backed securities.
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2020 FORM 10-K
The following table summarizes our investments accounted
for using the equity method, by strategy:
December 31,
Credit related funds
Equities
Real estate
Lending
Private equity
Infrastructure
Energy
Total
$
2020
740,060 $
343,058
258,518
179,629
235,289
175,882
115,453
2019
428,437
293,686
246,851
202,690
144,983
235,033
108,716
$ 2,047,889 $ 1,660,396
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 11,
“Derivative Instruments,” to our consolidated financial
statements in Item 8 for additional disclosures concerning
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 10, “Fair Value,”
to our consolidated financial
statements in Item 8 for a summary of our financial assets
and liabilities measured at fair value at December 31, 2020
and 2019 segregated by level in the fair value hierarchy.
Investable Assets in the ‘Other’ Segment
Investable assets in the ‘other’ segment are managed by
Watford. The board of directors of Watford establishes their
investment policies and guidelines.
Table of Contents
The following table provides information on our structured
residential mortgage-backed
securities, which
securities (RMBS), commercial mortgage-backed securities
(CMBS) and asset backed securities (“ABS”):
include
Agencies
Investment
Grade
Below
Investment
Grade
Total
Dec. 31, 2020
RMBS
CMBS
ABS
Total
Dec. 31, 2019
RMBS
CMBS
ABS
Total
4,102 $
$ 584,499 $
24,396
—
28,018 $ 616,619
390,990
24,103
1,566,188
163,051
$ 608,895 $ 1,749,730 $ 215,172 $ 2,573,797
342,491
1,403,137
7,770 $
$ 503,929 $
78,612
—
30,101 $ 541,800
734,244
26,208
1,547,744
64,295
$ 582,541 $ 2,120,643 $ 120,604 $ 2,823,788
629,424
1,483,449
The following table summarizes our equity securities, which
include investments in exchange traded funds:
Equities (1)
Exchange traded funds
Fixed income (2)
Equity and other (3)
Total
December 31,
2020
676,437 $
2019
375,067
$
341,139
418,528
7,237
445,538
$ 1,436,104 $
827,842
(1) Primarily in consumer non-cyclical, consumer cyclical, technology,
communications and industrial stocks at December 31, 2020.
(2) Primarily in corporate and MBS at December 31, 2020.
(3) Primarily in foreign equities, utilities, large and mid cap stocks at
December 31, 2020.
The following table summarizes our other investments and
other investable assets:
Term loan investments
Lending
Credit related funds
Energy
Investment grade fixed income
Infrastructure
Private equity
Real estate
Total fair value option
Other investable assets
December 31,
2020
2019
380,193
572,636
90,780
65,813
138,646
165,516
48,750
18,013
1,480,347
500,000
264,083
602,841
123,020
97,402
151,594
61,786
18,915
17,279
1,336,920
—
Total other investments
$ 1,980,347 $ 1,336,920
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The following table summarizes investable assets in the
‘other’ segment:
Reserves for Losses and Loss Adjustment Expenses
December 31,
2020
2019
$
851,538 $ 1,092,396
416,592
455,163
329,303
418,690
59,799
64,994
1,898,090
1,790,385
613,503
52,410
211,451
(21,679)
706,875
65,337
102,437
(66,257)
11,542
(1,893)
We establish reserves for losses and LAE (“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. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—
Critical Accounting Policies, Estimates and Recent
Accounting Pronouncements—Loss Reserves” and see Item
1“Business—Reserves” for further details.
$ 2,657,612 $ 2,704,589
Shareholders’ Equity and Book Value per Share
Investments accounted for using the fair
value option:
Other investments
Fixed maturities
Short-term investments
Equity securities
Total
Fixed maturities available for sale, at fair
value
Equity securities
Cash
Securities sold but not yet purchased
Securities transactions entered into but
not settled at the balance sheet date
Total investable assets included in ‘other’
segment
Reinsurance Recoverables
The following table details our reinsurance recoverables at
December 31, 2020:
Lloyd’s syndicates (2)
Hannover Rück SE
Swiss Reinsurance America Corporation
Everest Reinsurance Company
Partner Reinsurance Company of the U.S.
XL Re
Liberty Mutual Insurance Company
Munich Reinsurance America, Inc.
Berkley Insurance Company
Transatlantic Reinsurance Company
Odyssey Re
All other -- “A-” or better
All other -- not rated (3)
Total
A.M. Best
Rating (1)
A
A+
A+
A+
A+
A+
A
A+
A+
A+
A
% of
Total
5.5
5.1
4.9
4.5
3.4
3.3
3.2
3.1
2.5
2.5
1.9
24.0
36.1
100.0
(1) The financial strength ratings are as of February 11, 2021 and were
assigned by A.M. Best based on its opinion of the insurer’s financial
strength as of such date. An explanation of the ratings listed in the table
follows: the rating of “A+” is designated “Superior”; and the “A”
rating is designated “Excellent.”
(2) The A.M. Best group rating of “A” (Excellent) has been applied to all
Lloyd’s syndicates.
(3) Over 94% of such amount is collateralized through reinsurance trusts,
funds withheld arrangements, letters of credit or other.
See note 8, “Reinsurance,” to our consolidated financial
statements in Item 8 for further details.
Total shareholders’ equity available to Arch was $13.1
billion at December 31, 2020, compared to $11.5 billion at
December 31, 2019. The increase in 2020 primarily reflected
the impact of investment returns, partially offset by the
impact of a higher level of catastrophic activity (including
COVID-19) on underwriting returns.
The following table presents the calculation of book value
per share:
(U.S. dollars in thousands, except share
data)
December 31,
2020
2019
Total shareholders’ equity available to
Arch
Less preferred shareholders’ equity
$ 13,105,886 $ 11,497,371
780,000
780,000
Common shareholders’ equity available to
Arch
$ 12,325,886 $ 10,717,371
Common shares and common share
equivalents outstanding, net of treasury
shares (1)
Book value per share
406,720,642
405,619,201
$
30.31 $
26.42
(1) Excludes the effects of 17,839,333 and 18,853,018 stock options and
1,153,784 and 1,586,779 restricted stock and performance units
outstanding at December 31, 2020 and 2019, respectively.
LIQUIDITY
Our liquidity and capital resources were not materially
impacted by COVID-19 during the 2020 period. We raised
an additional $1.0 billion of capital in the form of long-term
senior notes at the end of June 2020. For further discussion of
our risks related to our potential future impacts of COVID-19
on our liquidity and capital resources, see “ITEM 1A—Risk
Factors”.
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This section does not include information specific to
Watford. We do not guarantee or provide credit support for
Watford, and our financial exposure to Watford is limited to
our investment in Watford’s senior notes, common and
preferred shares and counterparty credit risk (mitigated by
transactions with
collateral) arising
Watford.
reinsurance
from
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.
In 2020, Arch Capital received dividends of $221.6 million
from Arch Re Bermuda, our Bermuda-based reinsurer and
insurer which can pay approximately $3.8 billion to Arch
Capital in 2021 without providing an affidavit to the
Bermuda Monetary Authority (“BMA”).
received
Our insurance and reinsurance operations provide liquidity in
that premiums are
in advance, sometimes
substantially in advance, of the time losses are paid. The
period of time from the occurrence of a claim through the
settlement of the liability may extend many years into the
future. Sources of
include cash flows from
operations, financing arrangements or routine sales of
investments.
liquidity
As part of our investment strategy, we seek to establish a
level of cash and highly liquid short-term and intermediate-
term securities which, combined with expected cash flow, is
believed by us to be adequate to meet our foreseeable
payment obligations. However, due to the nature of our
operations, cash flows are affected by claim payments that
may comprise large payments on a limited number of claims
and which can fluctuate from year to year. We believe that
our liquid investments and cash flow will provide us with
sufficient liquidity in order to meet our claim payment
obligations. However, the timing and amounts of actual claim
payments related to recorded Loss Reserves vary based on
many factors, including large individual losses, changes in
the legal environment, as well as general market conditions.
The ultimate amount of the claim payments could differ
materially from our estimated amounts. Certain lines of
business written by us, such as excess casualty, have loss
experience characterized as low frequency and high severity.
The foregoing may result in significant variability in loss
payment patterns. The impact of this variability can be
exacerbated by the fact that the timing of the receipt of
reinsurance recoverables owed to us may be slower than
anticipated by us. Therefore, the irregular timing of claim
payments can create significant variations in cash flows from
operations between periods and may require us to utilize
other sources of liquidity to make these payments, which
may include the sale of investments or utilization of existing
or new credit facilities or capital market transactions. If the
source of liquidity is the sale of investments, we may be
forced to sell such investments at a loss, which may be
material.
We expect that our liquidity needs, including our anticipated
insurance obligations and operating and capital expenditure
needs, for the next twelve months, at a minimum, 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.
Dividend Restrictions
Arch Capital has no material restrictions on its ability to
make distributions to shareholders. However, the ability of
our regulated insurance and reinsurance subsidiaries to pay
dividends or make distributions or other payments to us is
limited by the applicable local laws and relevant regulations
of the various countries and states in which we operate. See
note 25, “Statutory Information,”
to our consolidated
financial statements in Item 8 for additional information on
dividend restrictions.
The payment of dividends from Arch Re Bermuda is, under
certain circumstances, limited under Bermuda law, which
requires our Bermuda operating subsidiary to maintain
certain measures of solvency and liquidity.
Our U.S. insurance and reinsurance subsidiaries are subject
to insurance laws and regulations in the jurisdictions in which
they operate. The ability of our regulated
insurance
subsidiaries to pay dividends or make distributions is
dependent on their ability to meet applicable regulatory
standards. These regulations include restrictions that limit the
amount of dividends or other distributions, such as loans or
cash advances, available to shareholders without prior
approval of the insurance regulatory authorities. Each state
requires prior regulatory approval of any payment of
extraordinary dividends.
We also have insurance subsidiaries that are the parent
company for other insurance subsidiaries, which means that
dividends and other distributions will be subject to multiple
layers of regulations in order for our insurance subsidiaries to
be able to dividend funds to Arch Capital. The inability of the
subsidiaries of Arch Capital to pay dividends and other
permitted distributions could have a material adverse effect
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on Arch Capital’s cash requirements and our ability to make
principal, interest and dividend payments on the senior notes,
preferred shares and common shares.
In addition to meeting applicable regulatory standards, the
ability of our insurance and reinsurance subsidiaries to pay
dividends is also constrained by our dependence on the
financial strength ratings of our insurance and reinsurance
subsidiaries from independent rating agencies. The ratings
from these agencies depend to a large extent on the
insurance and reinsurance
capitalization
subsidiaries. We believe that Arch Capital has sufficient cash
resources and available dividend capacity to service its
indebtedness and other current outstanding obligations.
levels of our
Restricted Assets
insurance,
reinsurance and mortgage
Our
insurance
subsidiaries are required to maintain assets on deposit, which
primarily consist of fixed maturities, with various regulatory
authorities to support their operations. The assets on deposit
are available to settle insurance and reinsurance liabilities to
third parties. Our insurance and reinsurance subsidiaries
maintain assets in trust accounts as collateral for insurance
and reinsurance transactions with affiliated companies and
also have investments in segregated portfolios primarily to
provide collateral or guarantees for letters of credit to third
parties. At December 31, 2020 and 2019, such amounts
approximated $7.7 billion and $6.8 billion, respectively,
excluding amounts related to the ‘other’ segment.
Our investments in certain securities, including certain fixed
income and structured securities, investments in funds
accounted for using the equity method, other alternative
investments and investments in ventures such as Watford and
others may be illiquid due to contractual provisions or
investment market conditions. If we require significant
amounts of cash on short notice in excess of anticipated cash
requirements, then we may have difficulty selling these
investments in a timely manner or may be forced to sell or
terminate
them at unfavorable values. Our unfunded
investment commitments totaled approximately $2.1 billion
at December 31, 2020 and are callable by our investment
managers. The
investment
commitments is uncertain and may require us to access cash
on short notice.
the funding of
timing of
Cash Flows
The following table summarizes our cash flows from
operating,
investing and financing activities, excluding
amounts related to the ‘other’ segment:
Year Ended December 31,
2020
2019
Total cash provided by (used for):
Operating activities
Investing activities
Financing activities
$ 2,705,054 $ 1,810,060
(1,689,640)
(3,301,816)
3,663
856,771
Effects of exchange rate changes on foreign
currency cash
Increase (decrease) in cash
17,822
277,831 $
16,063
140,146
$
•
Cash provided by operating activities for 2020 was
higher than in 2019, primarily reflected a higher level of
premiums collected than in the 2019 period.
•
Cash used for investing activities for 2020 was
higher than in 2019, reflecting a higher level of securities
purchased, and the investing of proceeds from our issuance
of senior notes.
•
Cash provided by financing activities for 2020 was
higher than in 2019, primarily reflected the issuance of $1.0
billion of senior notes. Cash flows also reflected $83.5
million of repurchases under our share repurchase program.
Investments
At December 31, 2020, our investable assets were $26.9
billion, excluding the $2.7 billion of investable assets related
to the ‘other’ segment. The primary goals of our asset
liability management process are to satisfy the insurance
liabilities, manage the interest rate risk embedded in those
insurance liabilities and maintain sufficient liquidity to cover
fluctuations in projected liability cash flows, including debt
service obligations. Generally, the expected principal and
interest payments produced by our fixed income portfolio
adequately fund the estimated runoff of our insurance
reserves. Although this is not an exact cash flow match in
each period, the substantial degree by which the fair value of
the fixed income portfolio exceeds the expected present value
of the net insurance liabilities, as well as the positive cash
flow from newly sold policies and the large amount of high
quality liquid bonds, provide assurance of our ability to fund
the payment of claims and to service our outstanding debt
without having to sell securities at distressed prices or access
credit facilities. Please refer to Item 1A “Risk Factors” for a
discussion of other risks relating to our business and
investment portfolio.
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CAPITAL RESOURCES
This section does not include information specific to
Watford. We do not guarantee or provide credit support for
Watford, and our financial exposure to Watford is limited to
our investment in Watford’s senior notes, common and
preferred shares and counterparty credit risk (mitigated by
collateral) arising
transactions with
Watford.
reinsurance
from
The following table provides an analysis of our capital
structure:
(U.S. dollars in thousands, except
share data)
Senior notes
December 31,
2020
2019
$ 2,723,423 $ 1,734,209
Shareholders’ equity available to Arch:
Series E non-cumulative preferred shares
Series F non-cumulative preferred shares
Common shareholders’ equity
Total
450,000
330,000
450,000
330,000
12,325,886
10,717,371
$ 13,105,886 $ 11,497,371
Total capital available to Arch
$ 15,829,309 $ 13,231,580
Debt to total capital (%)
Preferred to total capital (%)
Debt and preferred to total capital (%)
17.2
4.9
22.1
13.1
5.9
19.0
On June 30, 2020, Arch Capital issued $1.0 billion of 30 year
senior notes. The net proceeds of the offering were
contributed to Arch Re Bermuda to support our underwriting
operations.
In November 2020, Arch Capital, Arch-U.S. and Arch
Finance filed a universal shelf registration statement with the
SEC. This registration statement allows for the possible
future offer and sale by us of various types of securities,
including unsecured debt securities, preference shares,
common shares, warrants, share purchase contracts and units
and depositary shares. The shelf registration statement
enables us to efficiently access the public debt and/or equity
capital markets in order to meet our future capital needs. The
shelf registration statement also allows selling shareholders
to resell common shares that they own in one or more
offerings from time to time. We will not receive any proceeds
from any shares offered by the selling shareholders.
Capital Adequacy
We monitor our capital adequacy on a regular basis and will
seek to adjust our capital base (up or down) according to the
needs of our business. The future capital requirements of our
business will depend on many factors, including our ability to
write new business successfully and to establish premium
rates and reserves at levels sufficient to cover losses. Our
ability to underwrite is largely dependent upon the quality of
our claims paying and financial strength ratings as evaluated
by independent rating agencies. In particular, we require (1)
sufficient capital to maintain our financial strength ratings, as
issued by several ratings agencies, at a level considered
necessary by management to enable our key operating
subsidiaries to compete; (2) sufficient capital to enable our
underwriting subsidiaries to meet the capital adequacy tests
performed by statutory agencies in the U.S. and other key
markets; and (3) our non-U.S. operating companies are
required to post letters of credit and other forms of collateral
that are necessary for them to operate as they are “non-
admitted” under U.S. state insurance regulations.
In addition, Arch MI U.S. is required to maintain compliance
with the GSEs requirements, known as 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 as of December 31, 2020 with a PMIER
to 161% at
sufficiency
December 31, 2019.
ratio of 173%, compared
As part of our capital management program, we may seek to
raise additional capital or may seek to return capital to our
shareholders through share repurchases, cash dividends or
other methods (or a combination of such methods). Any such
determination will be at the discretion of our board of
directors and will be dependent upon our profits, financial
requirements and other factors, including legal restrictions,
rating agency requirements and such other factors as our
board of directors deems relevant.
To the extent that our existing capital is insufficient to fund
our future operating requirements or maintain such ratings,
we may need to raise additional funds through financings or
limit our growth. We can provide no assurance that, if
needed, we would be able to obtain additional funds through
financing on satisfactory terms or at all. Any adverse
developments in the financial markets, such as disruptions,
uncertainty or volatility in the capital and credit markets, may
result in realized and unrealized capital losses that could have
a material adverse effect on our results of operations,
financial position and our businesses, and may also limit our
access to capital required to operate our business. In addition
to common share capital, we depend on external sources of
finance to support our underwriting activities, which can be
in the form (or any combination) of debt securities,
preference shares, common equity and bank credit facilities
providing loans and/or letters of credit.
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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 U.S.-based
insurance, reinsurance and mortgage insurance subsidiaries
have entered into separate reinsurance arrangements with
Arch Re Bermuda covering individual lines of business. The
reinsurance agreements between our U.S.-based property
casualty insurance and reinsurance subsidiaries and Arch Re
Bermuda were canceled on a cutoff basis as of January 1,
2018. As a result, the level of subject business ceded to Arch
Re Bermuda was substantially lower beginning in 2018 than
in prior periods. In 2019, certain reinsurance agreements
between our insurance and reinsurance subsidiaries were
reinstated.
Except as described in the above paragraph, or where express
reinsurance, guarantee or other financial support contractual
arrangements are in place, each of Arch Capital’s subsidiaries
or affiliates is solely responsible for its own liabilities and
commitments (and no other Arch Capital subsidiary or
affiliate is so responsible). Any reinsurance arrangements,
contractual
guarantees
arrangements that are in place are solely for the benefit of the
Arch Capital subsidiary or affiliate involved and third parties
(creditors or insureds of such entity) are not express
beneficiaries of such arrangements.
financial
support
other
or
Share Repurchase Program
The board of directors of Arch Capital has authorized the
investment in Arch Capital’s common shares through a share
repurchase program. Since the inception of the share
repurchase program through December 31, 2020, Arch
Capital has
repurchased approximately 389.2 million
common shares for an aggregate purchase price of $4.1
billion. At December 31, 2020, $916.5 million of share
repurchases were available under the program. Repurchases
under the program may be effected from time to time in open
through
market or privately negotiated
December 31, 2021. The
the
repurchase transactions under this program will depend on a
variety of
the
development of the economy, corporate and regulatory
considerations. We will continue to monitor our share price
and, depending upon results of operations, market conditions
and the development of the economy, as well as other factors,
we will consider share repurchases on an opportunistic basis.
See note 27, “Subsequent Events”.
including market conditions,
timing and amount of
transactions
factors,
GUARANTOR INFORMATION
The below table provides a description of our senior notes
payable at December 31, 2020, excluding amounts
attributable to the ‘other’ segment (i.e., Watford):
Issuer/Due
Arch Capital:
May 1, 2034
June 30, 2050
Arch-U.S.:
Nov. 1, 2043 (1)
Arch Finance:
Dec. 15, 2026 (1)
Dec. 15, 2046 (1)
Total
Interest
(Fixed)
Principal
Amount
Carrying
Amount
7.350 % $
3.635 %
300,000 $
1,000,000
297,367
988,500
5.144 %
500,000
494,944
4.011 %
5.031 %
500,000
450,000
497,211
445,402
$ 2,750,000 $ 2,723,424
(1) Fully and unconditionally guaranteed by Arch Capital.
Our senior notes were issued by Arch Capital, Arch Capital
Group (U.S.) Inc. (“Arch-U.S.”) and Arch Capital Finance
LLC (“Arch Finance”). Arch-U.S.
is a wholly-owned
subsidiary of Arch Capital and Arch Finance is a wholly-
owned finance subsidiary of Arch-U.S. Our 2034 senior
notes and 2050 senior notes issued by Arch Capital are
unsecured and unsubordinated obligations of Arch Capital
and ranked equally with all of its existing and future
unsecured and unsubordinated indebtedness. The 2043 senior
notes issued by Arch-U.S. are unsecured and unsubordinated
obligations of Arch-U.S. and Arch Capital and rank equally
and ratably with the other unsecured and unsubordinated
indebtedness of Arch-U.S. and Arch Capital. The 2026 senior
notes and 2046 senior notes issued by Arch Finance are
unsecured and unsubordinated obligations of Arch Finance
and Arch Capital and rank equally and ratably with the other
unsecured and unsubordinated indebtedness of Arch Finance
and Arch Capital.
Arch Capital and Arch-U.S. are each holding companies and,
accordingly, they conduct substantially all of their operations
through their operating subsidiaries. Arch Finance is a wholly
owned subsidiary of Arch U.S. MI Holdings Inc., a U.S.
holding company. As a result, Arch Capital, Arch-U.S. and
Arch Finance's cash flows and their ability to service their
debt depends upon
their operating
subsidiaries and on their ability to distribute the earnings,
loans or other payments from such subsidiaries to Arch
Capital, Arch-U.S. and Arch Finance, respectively.
the earnings of
See note 19, “Debt and Financing Arrangements,” to our
consolidated financial statements in Item 8 for additional
disclosures concerning our senior notes and revolving credit
agreement borrowings. For additional information on our
preferred shares, see note 21, “Shareholders’ Equity,” to our
consolidated financial statements in Item 8.
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During 2020 and 2019, we made interest payments of $110.5 million and $98.7 million respectively, related to our senior notes
and other financing arrangements.
The following tables present condensed financial information for Arch Capital (parent guarantor) and Arch-U.S. (subsidiary
issuer):
December 31, 2020
December 31, 2019
Arch Capital
Arch-U.S.
Arch Capital
Arch-U.S.
Assets
Total investments
Cash
Investments in subsidiaries
Due from subsidiaries and affiliates
Other assets
Total assets
Liabilities
Senior notes
Due to subsidiaries and affiliates
Other liabilities
Total liabilities
Shareholders' Equity
Total shareholders' equity available to Arch
Total shareholders' equity
$
42 $
172 $
692,606
54,518
4,347,806
200,635
32,187
$ 14,415,023 $ 5,849,739 $ 11,825,494 $ 5,327,752
396,547 $
11,368
5,205,904
201,515
34,405
18,113
11,786,861
17
20,461
18,932
14,377,529
—
18,390
1,285,867
—
23,270
1,309,137
494,944
586,805
41,876
1,123,625
297,254
—
30,869
328,123
494,831
536,805
33,267
1,064,903
13,105,886
13,105,886
4,726,114
4,726,114
11,497,371
11,497,371
4,262,849
4,262,849
Total liabilities and shareholders' equity
$ 14,415,023 $ 5,849,739 $ 11,825,494 $ 5,327,752
Revenues
Net investment income
Net realized gains (losses)
Equity in net income (loss) of investments accounted for using the equity method
Other income (loss)
Total revenues
Expenses
Corporate expenses
Interest expense
Net foreign exchange (gains) losses
Total expenses
Income (loss) before income taxes
Income tax (expense) benefit
Income (loss) before equity in net income of subsidiaries
Equity in net income of subsidiaries
Net income available to Arch
Preferred dividends
Net income available to Arch common shareholders
Year Ended
Year Ended
December 31, 2020
December 31, 2019
Arch
Capital
Arch-U.S.
Arch
Capital
Arch-U.S.
$
53 $ 18,084 $
212 $ 14,270
(2,110)
—
(437)
26,096
2,507
—
(2,494)
46,687
—
—
(762)
(550)
65,566
40,445
3
7,227
47,566
—
62,701
22,154
1
25,313
779
—
40,362
7,221
47,951
—
106,014
54,793
84,856
55,172
(108,508)
(8,106)
(85,406)
(14,810)
—
2,689
—
3,696
(108,508)
(5,417)
(85,406)
(11,114)
1,514,029
330,589
1,721,725
564,657
1,405,521
325,172
1,636,319
553,543
(41,612)
—
(41,612)
—
$ 1,363,909 $ 325,172 $ 1,594,707 $ 553,543
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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
This section does not include information specific to Watford. We do not guarantee or provide credit support for Watford, and
our financial exposure to Watford is limited to our investment in Watford’s senior notes, common and preferred shares and
counterparty credit risk (mitigated by collateral) arising from reinsurance transactions with Watford.
Contractual Obligations
The following table provides an analysis of our contractual commitments at December 31, 2020:
Payment due by period
Total
2021
2022 and
2023
2024 and
2025
Thereafter
Operating activities
Estimated gross payments for losses and loss adjustment expenses (1)
Deposit accounting liabilities (2)
Contractholder payables (3)
Operating lease obligations
Purchase obligations
Investing activities
Unfunded investment commitments (4)
Financing activities
Securities lending payable (5)
Senior notes (including interest payments)
Financing lease obligations
Total contractual obligations and commitments
$ 14,994,345 $ 4,068,858 $ 4,785,334 $ 2,322,283 $ 3,817,870
3,679
397,339
31,318
852
10,570
1,995,562
152,309
72,995
5,390
634,430
32,309
33,437
385
277,803
32,497
8,204
1,116
685,990
56,185
30,502
2,146,521
2,146,521
—
—
—
301,089
5,417,148
2,016
—
4,783,075
—
$ 25,092,555 $ 7,350,865 $ 5,812,756 $ 2,894,801 $ 9,034,133
—
253,629
—
—
253,629
—
301,089
126,815
2,016
(1) The estimated expected contractual commitments related to the reserves for losses and loss adjustment expenses are presented on a gross basis (i.e., not
reflecting any corresponding reinsurance recoverable amounts that would be due to us). It should be noted that until a claim has been presented to us,
determined to be valid, quantified and settled, there is no known obligation on an individual transaction basis, and while estimable in the aggregate, the
timing and amount contain significant uncertainty.
(2) The estimated expected contractual commitments related to deposit accounting liabilities have been estimated using projected cash flows from the
underlying contracts. It should be noted that, due to the nature of such liabilities, the timing and amount contain significant uncertainty.
(3) Certain insurance policies written by our insurance operations feature large deductibles, primarily in construction and national accounts lines. Under such
contracts, we are obligated to pay the claimant for the full amount of the claim and are subsequently reimbursed by the policyholder for the deductible
amount. In the event we are unable to collect from the policyholder, we would be liable for such defaulted amounts.
(4) Unfunded investment commitments are callable by our investment managers. We have assumed that such investments will be funded in the next year but
the funding may occur over a longer period of time, due to market conditions and other factors.
(5) As part of our securities lending program, we loan securities to third parties and receive collateral in the form of cash or securities. Such collateral is due
back to the third parties at the close of the securities lending transactions, a majority of which is overnight and continuous by nature.
Letter of Credit and Revolving Credit Facilities
In the normal course of its operations, the Company enters
into agreements with financial institutions to obtain secured
and unsecured credit facilities.
On December 17, 2019 Arch Capital and certain of its
subsidiaries entered into an $750.0 million five-year credit
facility (the “Credit Facility”) with a syndication of lenders.
The Credit Facility consists of a $250.0 million secured
facility for letters of credit (the “Secured Facility”) and a
$500.0 million unsecured facility for revolving loans and
letters of credit (the “Unsecured Facility”). Obligations of
each borrower under the Secured Facility for letters of credit
are secured by cash and eligible securities of such borrower
held in collateral accounts. Commitments under the Credit
Facility may be increased up to, but not exceeding, an
aggregate of $1.3 billion. Arch Capital has a one-time option
to convert any or all outstanding revolving loans of Arch
Capital and/or Arch-U.S. to term loans with the same terms
as the revolving loans except that any prepayments may not
be re-borrowed. Arch-U.S. guarantees the obligations of
Arch Capital, and Arch Capital guarantees the obligations of
Arch-U.S. Borrowings of revolving loans may be made at a
variable rate based on LIBOR or an alternative base rate at
the option of Arch Capital. Arch Capital and its lenders may
agree on a LIBOR successor rate at the appropriate time to
address the replacement of LIBOR. Secured letters of credit
are available for issuance on behalf of Arch Capital insurance
and reinsurance subsidiaries. The Credit Facility is structured
such that each party that requests a letter of credit or
borrowing does so only for itself and for only its own
obligations.
The Credit Facility contains certain restrictive covenants
customary for facilities of this type, including restrictions on
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indebtedness, consolidated tangible net worth, minimum
shareholders’ equity levels and minimum financial strength
ratings. Arch Capital and its subsidiaries which are party to
the agreement were in compliance with all covenants
contained therein at December 31, 2020.
See note 19, “Debt and Financing Arrangements,” to our
consolidated financial statements in Item 8 for additional
disclosures concerning our senior notes and revolving credit
agreement borrowings.
The ratings issued on our companies by these agencies are
announced publicly and are available directly from the
agencies. Our Internet site (www.archcapgroup.com, under
Credit Ratings) contains information about our ratings, but
such information on our website is not incorporated by
reference into this report.
CATASTROPHIC EVENTS AND SEVERE
ECONOMIC EVENTS
RATINGS
statistical
recognized
internationally
Our ability to underwrite business is affected by the quality
of our claims paying ability and financial strength ratings as
evaluated by independent agencies. Such ratings from third
party
rating
organizations or agencies are instrumental in establishing the
financial security of companies in our industry. We believe
that the primary users of such ratings include commercial and
investment banks, policyholders, brokers, ceding companies
and investors. Insurance ratings are also used by insurance
and reinsurance intermediaries as an important means of
assessing the financial strength and quality of insurers and
reinsurers, and are often an important factor in the decision
by an insured or intermediary of whether to place business
reinsurance provider.
with a particular
Periodically, rating agencies evaluate us to confirm that we
continue to meet their criteria for the ratings assigned to us
by them. S&P, Moody’s, A.M. Best Company and Fitch
Ratings are ratings agencies which have assigned financial
strength ratings to one or more of Arch Capital’s subsidiaries.
insurance or
If we are not able to obtain adequate capital, our business,
results of operations and financial condition could be
adversely affected, which could include, among other things,
the following possible outcomes: (1) potential downgrades in
the financial strength ratings assigned by ratings agencies to
our operating subsidiaries, which could place those operating
subsidiaries at a competitive disadvantage compared to
higher-rated competitors; (2) reductions in the amount of
business that our operating subsidiaries are able to write in
order to meet capital adequacy-based tests enforced by
statutory agencies; and (3) any resultant ratings downgrades
could, among other things, affect our ability to write business
and increase the cost of bank credit and letters of credit. In
addition, under certain of
the reinsurance agreements
assumed by our reinsurance operations, upon the occurrence
of a ratings downgrade or other specified triggering event
with respect to our reinsurance operations, such as a
reduction in surplus by specified amounts during specified
periods, our ceding company clients may be provided with
certain rights, including, among other things, the right to
terminate the subject reinsurance agreement and/or to require
that our reinsurance operations post additional collateral.
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.
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.
to
exposure
completely
eliminate our
We have substantial exposure to unexpected, large losses
resulting from future man-made catastrophic events, such as
acts of war, acts of terrorism and political instability. These
risks are inherently unpredictable. It is difficult to predict the
timing of such events with statistical certainty or estimate the
amount of loss any given occurrence will generate. It is not
to
possible
unforecasted or unpredictable events and, to the extent that
losses from such risks occur, our financial condition and
results of operations could be materially adversely affected.
Therefore, claims for natural and man-made catastrophic
events could expose us to large losses and cause substantial
volatility in our results of operations, which could cause the
value of our common shares to fluctuate widely. In certain
instances, we specifically insure and reinsure risks resulting
from terrorism. Even in cases where we attempt to exclude
losses from terrorism and certain other similar risks from
some coverages written by us, we may not be successful in
the clarity and
doing so. Moreover,
inclusiveness of policy language, there can be no assurance
that a court or arbitration panel will limit enforceability of
policy language or otherwise issue a ruling adverse to us.
irrespective of
We seek to limit our loss exposure by writing a number of
our reinsurance contracts on an excess of loss basis, adhering
to maximum limitations on reinsurance written in defined
geographical zones, limiting program size for each client and
prudent underwriting of each program written. In the case of
proportional treaties, we may seek per occurrence limitations
or loss ratio caps to limit the impact of losses from any one or
series of events. In our insurance operations, we seek to limit
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our exposure through the purchase of reinsurance. We cannot
be certain that any of these loss limitation methods will be
effective. We also seek to limit our loss exposure by
geographic diversification. Geographic zone
limitations
involve significant underwriting judgments, including the
determination of the area of the zones and the inclusion of a
particular policy within a particular zone's limits. There can
be no assurance that various provisions of our policies, such
as limitations or exclusions from coverage or choice of
forum, will be enforceable in the manner we intend. Disputes
relating to coverage and choice of legal forum may also arise.
Underwriting is inherently a matter of judgment, involving
important assumptions about matters that are inherently
unpredictable and beyond our control, and for which
historical experience and probability analysis may not
provide sufficient guidance. One or more catastrophic or
other events could result in claims that substantially exceed
our expectations, which could have a material adverse effect
on our financial condition or our results of operations,
possibly to the extent of eliminating our shareholders' equity.
For our natural catastrophe exposed business, we seek to
limit the amount of exposure we will assume from any one
insured or reinsured and the amount of the exposure to
catastrophe losses from a single event in any geographic
zone. We monitor our exposure to catastrophic events,
including earthquake and wind and periodically reevaluate
the estimated probable maximum pre-tax loss for such
exposures. Our estimated probable maximum pre-tax loss is
determined through the use of modeling techniques, but such
estimate does not represent our total potential loss for such
exposures.
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 January 1, 2021,
our modeled peak zone catastrophe exposure is a windstorm
affecting the Florida Tri-County, with a net probable
maximum pre-tax
loss of $860 million, followed by
windstorms affecting Northeastern U.S. and the Gulf of
Mexico with net probable maximum pre-tax losses of $775
million and $689 million, respectively. Our exposures to
other perils, such as U.S. earthquake and international events,
were less than the exposures arising from U.S. windstorms
and hurricanes in both periods. As of January 1, 2021, our
modeled peak zone earthquake exposure (San Francisco area
earthquake) represented approximately 65% of our peak zone
catastrophe exposure, and our modeled peak zone
international exposure (U.K. 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,
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.
levels and
income
Currently, we seek to limit our modeled RDS loss from a
severe economic event to approximately 25% of total
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 January 1, 2021, our modeled
RDS loss was 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
25% of our tangible shareholders’ equity from one or more
catastrophic events or severe economic events due to several
factors, including 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
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Factors—Risks Relating to Our Industry, Business and
Operations” Depending on business opportunities and the
mix of business that may comprise our insurance, reinsurance
and mortgage portfolios, we may seek to adjust our self-
imposed limitations on probable maximum pre-tax loss for
catastrophe exposed business and mortgage default exposed
business. See “—Critical Accounting Policies, Estimates and
Recent Accounting Pronouncements—Ceded Reinsurance”
for a discussion of our catastrophe reinsurance programs.
OFF-BALANCE SHEET ARRANGEMENTS
interest entities
We have entered into various aggregate excess of loss
reinsurance agreements with various special purpose
reinsurance companies domiciled in Bermuda. These are
special purpose variable
that are not
consolidated in our financial results because we do not have
the unilateral power to direct those activities that are
significant to its economic performance. As of December 31,
2020, our estimated off-balance sheet maximum exposure to
loss from such entities was $56.3 million. See note 12,
“Variable Interest Entity and Noncontrolling Interests,” to
our consolidated financial statements in Item 8 for additional
information.
MARKET SENSITIVE INSTRUMENTS AND RISK
MANAGEMENT
Our investment results are subject to a variety of risks,
including risks related to changes in the business, financial
condition or results of operations of the entities in which we
invest, as well as changes in general economic conditions and
overall market conditions. We are also exposed to potential
loss from various market risks, including changes in equity
prices, interest rates and foreign currency exchange rates.
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 December 31, 2020. Market risk represents
the risk of changes in the fair value of a financial instrument
and consists of several components, including liquidity, basis
and price risks.
The sensitivity analysis performed as of December 31, 2020
presents hypothetical losses in cash flows, earnings and fair
values of market sensitive instruments which were held by us
on December 31, 2020 and are sensitive to changes in interest
rates and equity security prices. This risk management
discussion and the estimated amounts generated from the
following sensitivity analysis represent forward-looking
statements of market risk assuming certain adverse market
conditions occur. Actual results in the future may differ
to actual
materially from
these projected results due
developments in the global financial markets. The analysis
methods used by us to assess and mitigate risk should not be
considered projections of future events of losses.
We have not included Watford in the following analyses as
we do not guarantee or provide credit support for Watford,
and our financial exposure to Watford is limited to our
investment in Watford’s senior notes, common and preferred
shares and counterparty credit risk (mitigated by collateral)
arising from the reinsurance transactions.
The focus of the SEC’s market risk rules is on price risk. For
purposes of specific risk analysis, we employ 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. The financial instruments included
in the following sensitivity analysis consist of all of our
investments and cash.
Investment Market Risk
investment
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, fixed maturities pledged under securities lending
agreements, short-term investments and certain of our other
investments, equity
funds
securities and
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 investment portfolio at December 31, 2020 and 2019:
(U.S. dollars in
billions)
Dec. 31, 2020
Interest Rate Shift in Basis Points
-100
-50
-
+50
+100
Total fair value
$ 25.82
$ 25.44
$ 25.07
$ 24.69
$ 24.31
Change from base
3.0 %
1.5 %
(1.5) %
(3.0) %
Change in
unrealized value
Dec. 31, 2019
$ 0.75
$ 0.38
$ (0.38)
$ (0.75)
Total fair value
$ 21.54
$ 21.19
$ 20.83
$ 20.48
$ 20.13
Change from base
3.4 %
1.7 %
(1.7) %
(3.4) %
Change in
unrealized value
$ 0.71
$ 0.35
$ (0.35)
$ (0.71)
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In addition, we consider
the effect of credit spread
movements on the market value of our Fixed Income
Securities and the corresponding change in unrealized value.
As credit spreads widen, the fair value of our Fixed Income
Securities falls, and the converse is also true. In periods
where the spreads on our Fixed Income Securities are much
higher than their historical average due to short-term market
dislocations, a parallel shift in credit spread levels would
result in a much more pronounced change in unrealized
value.
The following table summarizes the effect that an immediate,
parallel shift in credit spreads in a static interest rate
environment would have had on
the portfolio at
December 31, 2020 and 2019:
(U.S. dollars in
billions)
Dec. 31, 2020
Credit Spread Shift in Percentage
-100
-50
-
+50
+100
Total fair value
$ 25.54
$ 25.32
$ 25.07
$ 24.82
$ 24.59
Change from base
1.9 %
1.0 %
(1.0) %
(1.9) %
Change in
unrealized value
Dec. 31, 2019
$ 0.48
$ 0.25
$ (0.25)
$ (0.48)
Total fair value
$ 21.19
$ 21.02
$ 20.83
$ 20.65
$ 20.48
Change from base
1.7 %
0.9 %
(0.9) %
(1.7) %
Change in
unrealized value
$ 0.35
$ 0.19
$ (0.19)
$ (0.35)
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
December 31, 2020, our portfolio’s VaR was estimated to be
4.30%, compared to an estimated 3.19% at December 31,
2019.
Equity Securities. At December 31, 2020 and 2019, the fair
value of our investments in equity securities (excluding
securities included in Fixed Income Securities above) totaled
$1.1 billion and $820.6 million,
respectively. These
investments are exposed to price risk, which is the potential
loss arising from decreases in fair value. An immediate
hypothetical 10% decline in the value of each position would
reduce the fair value of such investments by approximately
$109.5 million and $82.1 million at December 31, 2020 and
2019, respectively, and would have decreased book value per
share by approximately $0.27 and $0.20, respectively. An
immediate hypothetical 10% increase in the value of each
position would increase the fair value of such investments by
approximately $109.5 million and $82.1 million at
December 31, 2020 and 2019, respectively, and would have
increased book value per share by approximately $0.27 and
$0.20, respectively.
Investment-Related Derivatives. At December 31, 2020, the
notional value of all derivative instruments (excluding to-be-
announced mortgage backed securities which are included in
the fixed income securities analysis above and foreign
currency forward contracts which are included in the foreign
currency exchange risk analysis below) was $8.6 billion,
compared to $8.0 billion at December 31, 2019. If the
underlying exposure of each investment-related derivative
held at December 31, 2020 depreciated by 100 basis points, it
would have resulted in a reduction in net income of
approximately $85.7 million, and a decrease in book value
per share of $0.21, compared to $80.4 million and $0.20,
respectively, on
investment-related derivatives held at
December 31, 2019. If the underlying exposure of each
investment-related derivative held at December 31, 2020
appreciated by 100 basis points, it would have resulted in an
increase in net income of approximately $85.7 million, and
an increase in book value per share of $0.21, compared to
$80.4 million and $0.20, respectively, on investment-related
derivatives held at December 31, 2019. See note 11,
“Derivative Instruments,” to our consolidated financial
statements in Item 8 for additional disclosures concerning
derivatives.
For further discussion on investment activity, please refer to
“—Financial Condition, Liquidity and Capital Resources—
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 11, “Derivative Instruments,”
to our consolidated financial statements in Item 8 for
additional information.
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The following table provides a summary of our net foreign
currency exchange exposures, as well as foreign currency
derivatives in place to manage these exposures:
(U.S. dollars in thousands, except
per share data)
December 31,
2020
December 31,
2019
Net assets (liabilities), denominated in
foreign currencies, excluding
shareholders’ equity and derivatives
Shareholders’ equity denominated in
foreign currencies (1)
Net foreign currency forward contracts
outstanding (2)
$
(309,968) $
265,501
695,355
744,690
1,108,161
81,731
Net exposures denominated in foreign
currencies
$ 1,493,548 $ 1,091,922
Pre-tax impact of a hypothetical 10%
appreciation of the U.S. Dollar against
foreign currencies:
Shareholders’ equity
Book value per share
$
$
(149,355) $
(0.37) $
(109,192)
(0.27)
Pre-tax impact of a hypothetical 10%
decline of the U.S. Dollar against foreign
currencies:
Shareholders’ equity
Book value per share
$
$
149,355 $
0.37 $
109,192
0.27
(1)
(2)
Represents capital contributions held in the foreign currencies of our
operating units.
Represents the net notional value of outstanding foreign currency
forward contracts.
the Company’s exposure
Although the Company generally attempts to match the
currency of its projected liabilities with investments in the
same currencies, from time to time the Company may elect to
over or underweight one or more currencies, which could
increase
to foreign currency
fluctuations and increase the volatility of the Company’s
shareholders’ equity. Historical observations indicate a low
probability that all foreign currency exchange rates would
shift against the U.S. Dollar in the same direction and at the
same time and, accordingly, the actual effect of foreign
currency rate movements may differ materially from the
amounts set forth above. For further discussion on foreign
exchange activity, please refer to “—Results of Operations.”
Effects of Inflation
We do not believe that inflation has had a material effect on
our consolidated results of operations, except insofar as
inflation may affect our reserves for losses and loss
adjustment expenses and interest rates. The potential exists,
after a catastrophe loss, for the development of inflationary
pressures in a local economy. The anticipated effects of
inflation on us are considered in our catastrophe loss models.
The actual effects of inflation on our results cannot be
accurately known until claims are ultimately settled.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information appearing above under the subheading “Market Sensitive Instruments and Risk
Management” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,”
which information is hereby incorporated by reference.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page No.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
At December 31, 2020 and December 31, 2019
Consolidated Statements of Income
For the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows
For the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Note 1 - General
Note 2 - Businesses Acquired
Note 3 - Significant Accounting Policies
Note 4 - Segment Information
Note 5 - Reserve for Losses and Loss Adjustment Expenses
Note 6 - Short Duration Contracts
Note 7 - Allowance for Expected Credit Losses
Note 8 - Reinsurance
Note 9 - Investment Information
Note 10 - Fair Value
Note 11 - Derivative Instruments
Note 12 - VIE and Noncontrolling Interests
Note 13 - Other Comprehensive Income (Loss)
Note 14 - Earnings Per Common Share
Note 15 - Income Taxes
Note 16 - Transactions with Related Parties
Note 17 - Leases
Note 18 - Commitments and Contingencies
Note 19 - Debt and Financing Arrangements
Note 20 - Goodwill and Intangible Assets
Note 21 - Shareholders’ Equity
Note 22 - Share-Based Compensation
Note 23 - Retirement Plans
Note 24 - Legal Proceedings
Note 25 - Statutory Information
Note 26 - Unaudited Condensed Quarterly Financial Information
Note 27 - Subsequent Event
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87
88
89
90
91
91
91
100
107
109
123
123
125
130
137
138
141
143
143
146
147
147
148
150
151
153
155
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156
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159
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Arch Capital Group Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Arch Capital Group Ltd. and its subsidiaries (the
“Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, of comprehensive income,
of changes in shareholders’ equity, and of cash flows for each of the three years in the period ended December 31, 2020,
including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively
referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial
reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in Management's Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Reserve for Losses and Loss Adjustment Expenses
As described in Notes 3, 5 and 6 to the consolidated financial statements, the reserve for losses and loss adjustment expenses
represents estimates of future amounts required to pay losses and loss adjustment expenses for insured or reinsured events
which have occurred at or before the balance sheet date. As of December 31, 2020, the Company’s total reserve for losses and
loss adjustment expenses was $16.5 billion. For the insurance and reinsurance segments, management estimates ultimate losses
and loss adjustment expenses using various generally accepted actuarial methods applied to known losses and other relevant
information. Ultimate losses and loss adjustment expenses are generally determined by extrapolation of claim emergence and
settlement patterns observed in the past that can reasonably be expected to persist into the future. Management makes a number
of key assumptions in their reserving process, including estimating loss development patterns and expected loss ratios. For the
mortgage segment, the lead actuarial methodology used by management is a frequency-severity method based on the inventory
of pending delinquencies. The assumptions of frequency and severity reflect judgments based on historical data and experience.
The principal considerations for our determination that performing procedures relating to the valuation of the reserve for losses
and loss adjustment expenses is a critical audit matter are (i) the significant judgment by management when developing their
estimate, which in turn led to a high degree of auditor subjectivity and judgment in performing procedures related to the
valuation of the reserve for losses and loss adjustment expenses, (ii) the significant auditor effort and judgment in evaluating
audit evidence related to the aforementioned key actuarial methods and key assumptions, and (iii) the audit effort included the
involvement of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the
audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
valuation of the reserve for losses and loss adjustment expenses, including controls over the selection of key actuarial methods
and development of key assumptions. These procedures also included, among others, the involvement of professionals with
specialized skill and knowledge to assist in performing one or a combination of procedures, including (i) developing an
independent estimate, on a test basis, of the reserve for losses and loss adjustment expenses, and comparing the independent
estimate to management’s actuarially determined reserve for losses and loss adjustment expenses to evaluate the reasonableness
of the reserve for losses and loss adjustment expenses and (ii) evaluating the appropriateness of the actuarial methods and
reasonableness of the assumptions, related to loss development patterns, expected loss ratios, frequency, and severity used by
management to determine the Company’s reserve for losses and loss adjustment expenses. Developing the independent estimate
and evaluating the appropriateness of the key methods and reasonableness of the key assumptions related to loss development
patterns, expected loss ratios, frequency and severity, as applicable, involved testing the completeness and accuracy of
historical data provided by management.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 2021
We have served as the Company’s or its predecessor’s auditor since 1995.
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Assets
Investments:
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
December 31,
2020
2019
Fixed maturities available for sale, at fair value (amortized cost: $18,143,305 and $16,598,808; net of allowance for
credit losses: $2,397 at December 31, 2020)
$
18,717,825 $
16,894,526
Short-term investments available for sale, at fair value (amortized cost: $1,924,292 and $957,283; net of allowance
for credit losses: $0 at December 31, 2020)
Collateral received under securities lending, at fair value (amortized cost: $301,089 and $388,366)
Equity securities, at fair value
Other investments (portion measured at fair value: $3,824,796 and $3,663,477)
Investments accounted for using the equity method
Total investments
Cash
Accrued investment income
Securities pledged under securities lending, at fair value (amortized cost: $294,493 and $378,738)
Premiums receivable (net of allowance for credit losses: $37,781 and $21,003)
Reinsurance recoverable on unpaid and paid losses and loss adjustment expenses (net of allowance for credit losses:
$11,636 and $1,364)
Contractholder receivables (net of allowance for credit losses: $8,638 and $0)
Ceded unearned premiums
Deferred acquisition costs
Receivable for securities sold
Goodwill and intangible assets
Other assets
Total assets
Liabilities
Reserve for losses and loss adjustment expenses
Unearned premiums
Reinsurance balances payable
Contractholder payables
Collateral held for insured obligations
Senior notes
Revolving credit agreement borrowings
Securities lending payable
Payable for securities purchased
Other liabilities
Total liabilities
Commitments and Contingencies
Redeemable noncontrolling interests
Shareholders’ Equity
Non-cumulative preferred shares
Common shares ($0.0011 par, shares issued: 579,000,841 and 574,617,195)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of deferred income tax
Common shares held in treasury, at cost (shares: 172,280,199 and 168,997,994)
Total shareholders' equity available to Arch
Non-redeemable noncontrolling interests
Total shareholders' equity
Total liabilities, noncontrolling interests and shareholders' equity
1,924,922
301,096
1,444,830
4,324,796
2,047,889
28,761,358
906,448
103,299
294,912
956,546
388,376
838,925
3,663,477
1,660,396
24,402,246
726,230
117,937
379,868
2,064,586
1,778,717
4,500,802
4,346,816
1,986,924
1,234,075
790,708
92,743
692,863
1,853,579
43,282,297 $
16,513,929 $
4,838,965
683,263
1,995,562
215,581
2,861,113
155,687
301,089
218,779
1,510,888
29,294,856
2,119,460
1,234,683
633,400
24,133
738,083
1,383,788
37,885,361
13,891,842
4,339,549
667,072
2,119,460
206,698
1,871,626
484,287
388,366
87,579
1,513,330
25,569,809
58,548
55,404
780,000
643
1,977,794
12,362,463
488,895
(2,503,909)
13,105,886
823,007
13,928,893
43,282,297 $
780,000
638
1,889,683
11,021,006
212,091
(2,406,047)
11,497,371
762,777
12,260,148
37,885,361
$
$
$
See Notes to Consolidated Financial Statements
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data)
Revenues
Net premiums earned
Net investment income
Net realized gains (losses)
Other underwriting income
Equity in net income of investments accounted for using the equity method
Other income (loss)
Total revenues
Expenses
Losses and loss adjustment expenses
Acquisition expenses
Other operating expenses
Corporate expenses
Amortization of intangible assets
Interest expense
Net foreign exchange losses (gains)
Total expenses
Income before income taxes
Income taxes:
Current tax expense (benefit)
Deferred tax expense (benefit)
Income tax expense
Net income
Net (income) loss attributable to noncontrolling interests
Net income available to Arch
Preferred dividends
Loss on redemption of preferred shares
Net income available to Arch common shareholders
Net income per common share and common share equivalent
Basic
Diluted
Year Ended December 31,
2020
2019
2018
$
6,991,935 $
519,608
823,460
26,784
146,693
16,795
8,525,275
5,786,498 $
627,738
363,198
24,861
123,672
2,233
6,928,200
4,689,599
1,004,842
875,176
81,988
69,031
143,456
83,634
6,947,726
3,133,452
840,945
800,997
80,111
82,104
120,872
20,609
5,079,090
5,231,975
563,633
(408,173)
15,073
45,641
2,419
5,450,568
2,890,106
805,135
677,809
78,994
105,670
120,484
(69,402)
4,608,796
1,577,549
1,849,110
841,772
197,662
(85,824)
111,838
144,361
11,449
155,810
$
1,465,711 $
(60,190)
1,405,521
(41,612)
—
1,693,300 $
(56,981)
1,636,319
(41,612)
—
$
1,363,909 $
1,594,707 $
85,863
28,088
113,951
727,821
30,150
757,971
(41,645)
(2,710)
713,616
$
$
3.38 $
3.32 $
3.97 $
3.87 $
1.76
1.73
Weighted average common shares and common share equivalents outstanding
Basic
Diluted
403,062,179
410,259,455
401,802,815
411,609,478
404,347,621
412,906,478
See Notes to Consolidated Financial Statements
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)
Comprehensive Income
Net income
Other comprehensive income (loss), net of deferred income tax
Unrealized appreciation (decline) in value of available-for-sale investments:
Unrealized holding gains (losses) arising during year
Reclassification of net realized (gains) losses, included in net income
Foreign currency translation adjustments
Comprehensive income
Net (income) loss attributable to noncontrolling interests
Other comprehensive (income) loss attributable to noncontrolling interests
Comprehensive income available to Arch
$
Year Ended December 31,
2020
2019
2018
$
1,465,711 $
1,693,300 $
727,821
678,717
(426,187)
33,336
1,751,577
(60,190)
(9,062)
1,682,325 $
500,771
(118,941)
18,110
2,093,240
(56,981)
(9,130)
2,027,129 $
(270,057)
144,573
(24,830)
577,507
30,150
3,346
611,003
See Notes to Consolidated Financial Statements
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. dollars in thousands)
Year Ended December 31,
2020
2019
2018
Non-cumulative preferred shares
Balance at beginning of year
Preferred shares issued
Preferred shares redeemed
Balance at end of year
Convertible non-voting common equivalent preferred shares
Balance at beginning of year
Preferred shares converted to common shares
Balance at end of year
Common shares
Balance at beginning of year
Common shares issued, net
Balance at end of year
Additional paid-in capital
Balance at beginning of year
Preferred shares converted to common shares
Amortization of share-based compensation
Other changes
Balance at end of year
Retained earnings
Balance at beginning of year
Cumulative effect of an accounting change
Balance at beginning of year, as adjusted
Net income
Net (income) loss attributable to noncontrolling interests
Preferred share dividends
Loss on redemption of preferred shares
Balance at end of year
Accumulated other comprehensive income (loss)
Balance at beginning of year
Unrealized appreciation (decline) in value of available-for-sale investments, net of deferred
income tax:
Balance at beginning of year
Cumulative effect of an accounting change
Balance at beginning of year, as adjusted
Unrealized holding gains (losses) during period, net of reclassification adjustment
Unrealized holding gains (losses) during period attributable to noncontrolling interests
Balance at end of year
Foreign currency translation adjustments, net of deferred income tax:
Balance at beginning of year
Foreign currency translation adjustments
Foreign currency translation adjustments attributable to noncontrolling interests
Balance at end of year
Balance at end of year
Common shares held in treasury, at cost
Balance at beginning of year
Shares repurchased for treasury
Balance at end of year
Total shareholders’ equity available to Arch
Non-redeemable noncontrolling interests
Total shareholders’ equity
$
780,000 $
—
—
780,000
780,000 $
—
—
780,000
—
—
—
638
5
643
1,889,683
—
70,535
17,576
1,977,794
11,021,006
(22,452)
10,998,554
1,465,711
(60,190)
(41,612)
—
12,362,463
—
—
—
634
4
638
1,793,781
—
64,152
31,750
1,889,683
9,426,299
—
9,426,299
1,693,300
(56,981)
(41,612)
—
11,021,006
872,555
—
(92,555)
780,000
489,627
(489,627)
—
611
23
634
1,230,617
489,608
55,920
17,636
1,793,781
8,562,889
149,794
8,712,683
727,821
30,150
(41,645)
(2,710)
9,426,299
212,091
(178,720)
118,044
258,486
—
258,486
252,530
(9,721)
501,295
(46,395)
33,336
659
(12,400)
488,895
(114,178)
—
(114,178)
381,830
(9,166)
258,486
(64,542)
18,110
37
(46,395)
212,091
(2,406,047)
(97,862)
(2,503,909)
(2,382,167)
(23,880)
(2,406,047)
13,105,886
823,007
13,928,893 $
11,497,371
762,777
12,260,148 $
$
157,400
(149,794)
7,606
(125,484)
3,700
(114,178)
(39,356)
(24,830)
(356)
(64,542)
(178,720)
(2,077,741)
(304,426)
(2,382,167)
9,439,827
791,560
10,231,387
See Notes to Consolidated Financial Statements
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses
Equity in net income or loss of investments accounted for using the
equity method and other income or loss
Amortization of intangible assets
Share-based compensation
Changes in:
Reserve for losses and loss adjustment expenses, net of unpaid losses and loss adjustment expenses
recoverable
Unearned premiums, net of ceded unearned premiums
Premiums receivable
Deferred acquisition costs
Reinsurance balances payable
Other items, net
Net cash provided by operating activities
Investing Activities
Purchases of fixed maturity investments
Purchases of equity securities
Purchases of other investments
Proceeds from sales of fixed maturity investments
Proceeds from sales of equity securities
Proceeds from sales, redemptions and maturities of other investments
Proceeds from redemptions and maturities of fixed maturity investments
Net settlements of derivative instruments
Net (purchases) sales of short-term investments
Change in cash collateral related to securities lending
Purchases of fixed assets
Other
Net cash provided by (used for) investing activities
Financing Activities
Redemption of preferred shares
Purchases of common shares under share repurchase program
Proceeds from common shares issued, net
Proceeds from borrowings
Repayments of borrowings
Change in cash collateral related to securities lending
Change in third party investment in non-redeemable noncontrolling interests
Change in third party investment in redeemable noncontrolling interests
Dividends paid to redeemable noncontrolling interests
Other
Preferred dividends paid
Net cash provided by (used for) financing activities
Year Ended December 31,
2020
2019
2018
$
1,465,711 $
1,693,300 $
727,821
(844,625)
(377,967)
390,379
(47,951)
69,031
71,262
(14,013)
82,104
66,417
36,694
105,670
55,776
2,113,827
445,781
(318,643)
(143,948)
65,950
10,110
2,886,505
(39,765,277)
(1,595,010)
(1,808,727)
37,949,346
1,147,264
1,029,578
871,134
179,006
(1,029,681)
81,210
(39,872)
(62,197)
(3,043,226)
—
(83,472)
1,876
1,018,793
(359,000)
(81,210)
(2,867)
—
(4,945)
73,715
(41,612)
521,278
489,981
252,569
(237,752)
(47,260)
182,132
(41,052)
2,048,459
(30,053,777)
(811,967)
(1,470,545)
28,595,865
429,818
1,209,559
643,265
59,982
39,833
(62,193)
(37,837)
(348,486)
(1,806,483)
—
(2,871)
6,203
200,083
(49,182)
62,193
(75,056)
(161,882)
(12,515)
(6,023)
(41,612)
(80,662)
243,734
114,772
(211,296)
(37,847)
73,438
60,181
1,559,322
(33,327,660)
(1,001,149)
(2,014,622)
31,513,271
1,118,445
1,561,958
892,755
44,699
485,473
180,883
(29,809)
21,736
(554,020)
(92,555)
(282,762)
(7,608)
218,259
(576,401)
(180,883)
—
—
(17,989)
(7,226)
(41,645)
(988,810)
(19,133)
(2,641)
727,284
724,643
(980)
119,775
Effects of exchange rate changes on foreign currency cash and restricted cash
22,289
17,741
Increase (decrease) in cash and restricted cash
Cash and restricted cash, beginning of year
Cash and restricted cash, end of year
Income taxes paid (received)
Interest paid
386,846
903,698
1,290,544 $
179,055
724,643
903,698 $
202,940 $
133,491 $
109,463 $
126,945 $
$
$
$
See Notes to Consolidated Financial Statements
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1. General
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Arch Capital Group Ltd. (“Arch Capital”) is a publicly listed
Bermuda exempted company which provides insurance,
reinsurance and mortgage insurance on a worldwide basis
through its wholly owned subsidiaries.
As used herein, the “Company” means Arch Capital and its
subsidiaries. Similarly, “Common Shares” means
the
shares of Arch Capital. The Company’s
common
consolidated financial statements include the results of
Watford Holdings Ltd., and its wholly owned subsidiaries
(“Watford”). See note 12, “Variable Interest Entity and
Noncontrolling Interests”.
2. Business Acquired
Barbican Group Holdings Limited
On November 29, 2019, the Company closed the acquisition
of Barbican Group Holdings Limited and its subsidiaries
(collectively, “Barbican”).
The Ardonagh Group
the Company’s U.K.
On January 1, 2019,
insurance
operations entered into a transaction with The Ardonagh
Group to acquire renewal rights for a U.K. commercial lines
book of business, consisting of commercial property,
casualty, motor, professional liability, personal accident and
travel business.
McNeil
On December 6, 2018, the Company closed the acquisition of
McNeil & Co. (“McNeil”), a nationwide leader in specialized
risk management and insurance programs headquartered in
Cortland, New York.
3.
Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in
the United States of America (“GAAP”) and include the
accounts of Arch Capital and its subsidiaries, including Arch
Reinsurance Ltd. (“Arch Re Bermuda”), Arch Reinsurance
Company (“Arch Re U.S.”), Arch Capital Group (U.S.) Inc.
(“Arch-U.S.”), Arch Insurance Company, Arch Specialty
Insurance Company, Arch Property & Casualty Insurance
Insurance
Company
Company, Arch Insurance Canada Ltd. (“Arch Insurance
Canada”), Arch Reinsurance Europe Designated Activity
Company (“Arch Re Europe”), Arch Mortgage Insurance
(“Arch P&C”), Arch
Indemnity
Company (“AMIC”), Arch Mortgage Guaranty Company,
Insurance Company
United Guaranty Residential
(“UGRIC”), Arch Insurance (EU) Designated Activity
Company (“Arch Insurance (EU)”), Arch Insurance (UK)
Limited (“Arch Insurance (U.K.)”), Lloyd’s of London
syndicate: Arch Syndicate 2012 (“Arch Syndicate 2012”) and
Arch Syndicate 1955 (“Arch Syndicate 1955”) and Watford.
All significant intercompany transactions and balances have
been eliminated in consolidation.
requires management
The preparation of financial statements in conformity with
GAAP
to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ materially from those estimates and
assumptions. The Company’s principal estimates include:
•
•
•
•
•
•
•
The reserve for losses and loss adjustment expenses;
Reinsurance recoverable on unpaid and paid losses and
loss adjustment expenses, including the provision for
uncollectible amounts;
Estimates of written and earned premiums;
The valuation of the investment portfolio and assessment
of allowance for credit losses;
The valuation of purchased intangible assets;
The assessment of goodwill and intangible assets for
impairment; and
The valuation of deferred tax assets.
The Company has reclassified the presentation of certain
prior year information to conform to the current presentation.
Such reclassifications had no effect on the Company’s net
income, shareholders’ equity or cash flows.
(b) Premium Revenues and Related Expenses
Insurance premiums written are generally
Insurance.
recorded at the policy inception and are primarily earned on a
pro rata basis over the terms of the policies for all products,
usually 12 months. Premiums written include estimates that
the
are derived from multiple sources which
historical experience of the underlying business, similar
business and available
information. Unearned
industry
premium reserves represent the portion of premiums written
that relates to the unexpired terms of in-force insurance
policies.
include
Reinsurance. Reinsurance premiums written include amounts
reported by brokers and ceding companies, supplemented by
the Company’s own estimates of premiums where reports
have not been received. The determination of premium
estimates requires a review of the Company’s experience
with the ceding companies, familiarity with each market, the
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the reported
timing of
information, an analysis and
understanding of the characteristics of each line of business,
and management’s judgment of the impact of various factors,
including premium or loss trends, on the volume of business
written and ceded to the Company. On an ongoing basis, the
Company’s underwriters review the amounts reported by
these
their
third parties for reasonableness based on
experience and knowledge of the subject class of business,
taking into account the Company’s historical experience with
the brokers or ceding companies. In addition, reinsurance
contracts under which the Company assumes business
generally contain specific provisions which allow
the
Company to perform audits of the ceding company to ensure
compliance with the terms and conditions of the contract,
including accurate and timely reporting of information. Based
on a review of all available information, management
establishes premium estimates where reports have not been
received. Premium estimates are updated when new
is received and differences between such
information
estimates and actual amounts are recorded in the period in
which estimates are changed or the actual amounts are
determined.
the Company writes. Premiums on
Reinsurance premiums written are recorded based on the type
of contracts
the
Company’s excess of loss and pro rata reinsurance contracts
are estimated when the business is underwritten. For excess
of loss contracts, premiums are recorded as written based on
the terms of the contract. Estimates of premiums written
under pro rata contracts are recorded in the period in which
the underlying risks are expected to incept and are based on
information provided by
the ceding
companies. For multi-year reinsurance treaties which are
payable in annual installments, generally, only the initial
annual installment is included as premiums written at policy
inception due to the ability of the reinsured to commute or
cancel coverage during the term of the policy. The remaining
annual installments are included as premiums written at each
successive anniversary date within the multi-year term.
the brokers and
Reinsurance 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.
Contracts and policies written on a “losses occurring” basis
cover claims that may occur during the term of the contract
or policy, which is typically 12 months. Accordingly, the
premium is earned evenly over the term. Contracts which are
written on a “risks attaching” basis cover claims which attach
to the underlying insurance policies written during the terms
of such contracts. Premiums earned on such contracts usually
extend beyond the original term of the reinsurance contract,
typically resulting in recognition of premiums earned over a
24-month period. Certain of the Company’s reinsurance
contracts
that adjust premiums or
acquisition expenses based upon the experience under the
contracts. Premiums written and earned, as well as related
include provisions
acquisition expenses, are recorded based upon the projected
experience under such contracts.
traditional
reinsurance. Under
The Company also writes certain reinsurance business that is
intended to provide insurers with risk management solutions
these
that complement
contracts, the Company assumes a measured amount of
insurance risk in exchange for an anticipated margin, which
is typically lower than on traditional reinsurance contracts.
The terms and conditions of these contracts may include
additional or return premiums based on loss experience, loss
corridors, sublimits and caps. Examples of such business
include aggregate stop-loss coverages, financial quota share
coverages and multi-year retrospectively rated excess of loss
coverages. If these contracts are deemed to transfer risk, they
are accounted for as reinsurance. Otherwise, such contracts
are accounted for under the deposit method.
insurance policies are
Mortgage. Mortgage guaranty
contracts that are generally non-cancelable by the insurer, are
renewable at a fixed price, and provide for payment of
premiums on a monthly, annual or single basis. Upon
renewal, the Company is not able to re-underwrite or re-price
its policies. Consistent with industry accounting practices,
premiums written on a monthly basis are earned as coverage
is provided. Premiums written on an annual basis are
amortized on a monthly pro rata basis over the year of
coverage. Primary mortgage insurance premiums written on
policies covering more than one year are referred to as single
premiums. A portion of the revenue from single premiums is
recognized in premiums earned in the current period, and the
remaining portion is deferred as unearned premiums and
earned over the estimated expiration of risk of the policy. If
single premium policies related to insured loans are canceled
due to repayment by the borrower and the policy is a non-
refundable product, the remaining unearned premium related
to each canceled policy is recognized as earned premium
upon notification of the cancellation.
Reinstatement premiums for the Company’s insurance and
reinsurance operations are recognized at the time a loss event
occurs, where coverage limits for the remaining life of the
contract are reinstated under pre-defined contract terms.
Reinstatement premiums, if obligatory, are fully earned when
recognized. The accrual of reinstatement premiums is based
on an estimate of losses and loss adjustment expenses, which
reflects management’s judgment.
Premium estimates are reviewed by management at least
quarterly. Such review includes a comparison of actual
reported premiums to expected ultimate premiums along with
a review of the aging and collection of premium estimates.
Based on management’s review, the appropriateness of the
premium estimates is evaluated, and any adjustment to these
estimates is recorded in the period in which it becomes
known. Adjustments to premium estimates could be material
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and such adjustments could directly and significantly impact
earnings favorably or unfavorably in the period they are
determined because the estimated premium may be fully or
substantially earned. A significant portion of amounts
included as premiums receivable, which represent estimated
premiums written, net of commissions, are not currently due
based on the terms of the underlying contracts.
Unearned premiums represent the portion of premiums
written that is applicable to the estimated unexpired risk of
insured loans. A portion of premium payments may be
refundable if the insured cancels coverage, which generally
occurs when the loan is repaid, the loan amortizes to a
sufficiently low amount to trigger a lender permitted or
legally required cancellation, or the value of the property has
increased sufficiently in accordance with the terms of the
contract. Premium refunds reduce premiums earned in the
consolidated statements of income. Generally, only unearned
premiums are refundable.
through
Premiums receivable
include amounts receivable from
agents, brokers and insured that are both currently due and
amounts not yet due on insurance, reinsurance and mortgage
insurance policies. Premiums
receivable balances are
reported net of an allowance for expected credit losses. The
Company monitors credit risk associated with premiums
review of amounts
its ongoing
receivable
outstanding, aging of the receivable, historical loss data, and
counterparty financial strength measures. The allowance also
includes estimated uncollectible amounts related to dispute
risk. In certain instances, credit risk may be reduced by the
Company’s right to offset loss obligations or unearned
premiums against premiums receivable. Any allowance for
credit losses is charged to net realized gains (losses) in the
period the receivable is recorded and revised in subsequent
periods to reflect changes in the Company’s estimate of
expected credit losses. See note 7, “Allowance for Expected
Credit Losses” for additional information.
insurance and
Acquisition Costs. Acquisition costs that are directly related
and incremental to the successful acquisition or renewal of
business are deferred and amortized based on the type of
contract. The Company’s
reinsurance
operations capitalize incremental direct external costs that
result from acquiring a contract but do not capitalize salaries,
benefits and other internal underwriting costs. For the
Company’s mortgage insurance operations, which include a
substantial direct sales force, both external and certain
internal direct costs are deferred and amortized. For property
and casualty insurance and reinsurance contracts, deferred
acquisition costs are amortized over the period in which the
related premiums are earned. Consistent with mortgage
insurance industry accounting practice, amortization of
acquisition costs related to the mortgage insurance contracts
for each underwriting year’s book of business is recorded in
proportion to estimated gross profits. Estimated gross profits
are comprised of earned premiums and losses and loss
the
adjustment expenses. For each underwriting year,
Company estimates the rate of amortization to reflect actual
experience and any changes
loss
development.
to persistency or
Deferred acquisition costs are carried at their estimated
realizable value and take into account anticipated losses and
loss adjustment expenses, based on historical and current
experience, and anticipated investment income.
A premium deficiency occurs if the sum of anticipated losses
and loss adjustment expenses, unamortized acquisition costs
and maintenance costs exceed unearned premiums (including
investment
expected future premiums) and anticipated
income. A premium deficiency reserve (“PDR”) is recorded
by charging any unamortized acquisition costs to expense to
the extent required in order to eliminate the deficiency. If the
premium deficiency exceeds unamortized acquisition costs
then a liability is accrued for the excess deficiency.
To assess the need for a PDR on mortgage exposures, the
Company develops loss projections based on modeled loan
defaults related to its current policies in force. This projection
is based on recent trends in default experience, severity and
rates of defaulted loans moving to claim, as well as recent
trends in the rate at which loans are prepaid, and incorporates
the expected
anticipated
profitability of the Company’s existing mortgage insurance
business and the need for a PDR for its mortgage business
involves significant reliance upon assumptions and estimates
with regard to the likelihood, magnitude and timing of
potential losses and premium revenues.
income. Evaluating
interest
No premium deficiency charges were recorded by the
Company during 2020, 2019 or 2018.
(c) Deposit Accounting
in
exercises
judgment
significant
Certain assumed reinsurance contracts that are deemed not to
transfer insurance risk, are accounted for using the deposit
method of accounting. However, it is possible that the
Company could incur financial losses on such contracts.
Management
the
assumptions used in determining whether assumed contracts
should be accounted for as reinsurance contracts or deposit
contracts. For those contracts that contain only significant
underwriting risk, the estimated profit margin is deferred and
amortized over the contract period and such amount is
included in the Company’s underwriting results. When the
estimated profit margin is explicit, the margin is reflected as
other underwriting income and any adverse financial results
on such contracts are reflected as incurred losses. When the
estimated profit margin is implicit, the margin is reflected as
an offset to paid losses and any adverse financial results on
such contracts are reflected as incurred losses. Additional
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judgments are required when applying the accounting
guidance with respect to the revenue recognition criteria for
contracts deemed to transfer only significant underwriting
risk. For those contracts that contain only significant timing
risk, an accretion rate is established at inception of the
contract based on actuarial estimates whereby the deposit
accounting liability is increased to the estimated amount
payable over the contract term. The accretion on the deposit
is based on the expected rate of return required to fund the
the
expected
Company reassesses the estimated ultimate liability and the
related expected rate of return. The accretion of the deposit
accounting liability as well as changes to the estimated
ultimate liability and the accretion rate would be reflected as
part of interest expense in the Company’s results of
operations. Any negative accretion in a deposit accounting
liability is shown in other underwriting income in the
Company’s results of operations.
future payment obligations. Periodically
Under some of these contracts, the ceding company retains
the related assets on a funds-held basis. Such amounts are
included in “Other assets” on the Company’s balance sheet.
Interest income produced by those assets are recorded as part
of net investment income in the Company's results of
operations.
(d) Retroactive Reinsurance
Retroactive reinsurance reimburses a ceding company for
liabilities incurred as a result of past insurable events covered
by the underlying policies reinsured. In certain instances,
reinsurance contracts cover losses both on a prospective basis
and on a retroactive basis and, accordingly, the Company
bifurcates the prospective and retrospective elements of these
reinsurance contracts and accounts for each element
separately where practical. Underwriting income generated in
connection with retroactive reinsurance contracts is deferred
and amortized into income over the settlement period while
losses are charged to income immediately. Subsequent
changes in estimated amount or timing of cash flows under
such retroactive reinsurance contracts are accounted for by
adjusting the previously deferred amount to the balance that
would have existed had the revised estimate been available at
transaction, with a
the
corresponding charge or credit to income.
the reinsurance
inception of
(e) Reinsurance Ceded
In the normal course of business, the Company purchases
reinsurance to increase capacity and to limit the impact of
individual losses and events on its underwriting results by
reinsuring certain
insurance
enterprises or reinsurers. The Company uses pro rata, excess
of loss and facultative reinsurance contracts. Reinsurance
ceding commissions that represent a recovery of acquisition
costs are recognized as a reduction to acquisition costs while
levels of risk with other
the Company's
the remaining portion
is deferred. The accompanying
consolidated statement of income reflects premiums and
losses and loss adjustment expenses and acquisition costs, net
of reinsurance ceded. See note 8, “Reinsurance” for
information on
reinsurance usage.
Reinsurance premiums ceded and unpaid losses and loss
adjustment expenses recoverable are estimated in a manner
consistent with that of the original policies issued and the
terms of the reinsurance contracts. If the reinsurers are unable
to satisfy their obligations under the agreements, the
Company’s insurance or reinsurance subsidiaries would be
liable for such defaulted amounts.
reports
Reinsurance recoverables are recorded as assets, predicated
on the reinsurers’ ability to meet their obligations under the
reinsurance agreements. In certain instances, the Company
obtains collateral, including letters of credit and trust
accounts to further reduce the credit exposure on its
its
recoverables. The Company
reinsurance
reinsurance recoverables net of an allowance for expected
credit loss. The allowance is based upon the Company’s
ongoing review of amounts outstanding,
the financial
condition of its reinsurers, amounts and form of collateral
obtained and other relevant factors. A ratings based
probability-of-default and loss-given-default methodology is
used to estimate the allowance for expected credit loss. Any
allowance for credit losses is charged to net realized gains
(losses) in the period the recoverable is recorded and revised
in subsequent periods to reflect changes in the Company’s
estimate of expected credit losses. See note 7, “Allowance for
Expected Credit Losses” for additional information.
(f) Cash
Cash includes cash equivalents, which are investments with
original maturities of three months or less which are not part
of the investment portfolio.
(g) Restricted Cash
Restricted cash represents amounts held for the benefit of
third parties and is legally or contractually restricted as to
withdrawal or usage by the Company. Such amounts are
included in “Other assets” on the Company’s balance sheet.
(h) Investments
short-term
investments and
The Company currently classifies substantially all of its fixed
investments as
maturity
“available for sale” and, accordingly, they are carried at
estimated fair value (also known as fair value) with the
changes in fair value recorded as an unrealized gain or loss
component of accumulated other comprehensive income in
shareholders’ equity. The fair value of fixed maturity
securities and equity securities is generally determined from
quotations received from nationally recognized pricing
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
services, or when such prices are not available, by reference
indications. Short-term
to broker or underwriter bid
investments comprise securities due to mature within one
year of the date of issue. Short-term investments include
certain cash equivalents which are part of investment
portfolios under the management of external and internal
investment managers.
The Company enters into securities lending agreements with
financial institutions to enhance investment income whereby
it loans certain of its securities to third parties, primarily
major brokerage firms, for short periods of time through a
lending agent. Such securities have been reclassified as
“Securities pledged under securities lending, at fair value.”
The Company maintains legal control over the securities it
lends, retains the earnings and cash flows associated with the
loaned securities and receives a fee from the borrower for the
temporary use of the securities. Collateral received is
required at a rate of 102% or greater of the fair value of the
loaned securities including accrued investment income and is
monitored and maintained by the lending agent. Such
collateral is reflected as “Collateral received under securities
lending, at fair value.”
The Company’s investment portfolio includes certain funds
that, due to their ownership structure, are accounted for by
the Company using the equity method. In applying the equity
method, these investments are initially recorded at cost and
are subsequently adjusted based on
the Company’s
proportionate share of the net income or loss of the funds
(which include changes in the fair value of the underlying
securities in the funds). Such investments are generally
recorded on a one to three month lag based on the availability
of reports from the investment funds. Changes in the carrying
value of such investments are recorded in net income as
“Equity in net income (loss) of investments accounted for
using the equity method.” As such, fluctuations in the
carrying value of the investments accounted for using the
equity method may increase the volatility of the Company’s
reported results of operations.
The Company’s
includes equity
investment portfolio
securities that are accounted for at fair value. Such holdings
primarily include publicly traded common stocks. Dividend
income on equities is reflected in net investment income.
Changes in fair value on equity securities are included in
“Net realized gains (losses)” in the consolidated statement of
income.
The Company elected to carry certain fixed maturity
securities, equity securities and other investments at fair
value under the fair value option afforded by accounting
guidance regarding the fair value option for financial assets
and liabilities. The fair value for certain of the Company’s
other investments are determined using net asset values
(“NAVs”) as advised by external fund managers. The NAV
is based on the fund manager’s valuation of the underlying
holdings in accordance with the fund’s governing documents.
Changes in fair value of investments accounted for using the
fair value option are included in “Net realized gains (losses).”
The primary reasons for electing the fair value option were to
address simplification and cost-benefit considerations.
as
treated
collateralized
The Company invests in reverse repurchase agreements that
are generally
receivables.
Receivables for reverse repurchase agreements are reflected
in “Other investments” in the Company's consolidated
balance sheet and may be short or long-term investments
depending on their terms. These agreements are recorded at
their contracted resale amount plus accrued interest, other
than those that are accounted for at fair value. In reverse
repurchase transactions, the Company obtains an interest in
the purchased assets that are received as collateral.
The Company invests in limited partner interests and shares
of limited liability companies. Such amounts are included in
investments accounted for using the equity method and other
investments. These investments can often have characteristics
of a variable interest entity (“VIE”). A VIE refers to entities
that have characteristics such as (i) insufficient equity at risk
to allow the entity to finance its activities without additional
financial support or (ii) instances where the equity investors,
as a group, do not have the characteristic of a controlling
financial interest. If the Company is determined to be the
primary beneficiary, it is required to consolidate the VIE. The
primary beneficiary is defined as the variable interest holder
that is determined to have the controlling financial interest as
a result of having both (i) the power to direct the activities of
a VIE
the economic
performance of the VIE and (ii) the obligation to absorb
losses or right to receive benefits from the VIE that could
potentially be significant to the VIE. At inception of the VIE
as well as on an ongoing basis, the Company determines
whether it is the primary beneficiary based on an analysis of
the Company’s level of involvement in the VIE, the
contractual terms, and the overall structure of the VIE. The
Company's maximum exposure to loss with respect to these
investments is limited to the investment carrying amounts
reported in the Company's consolidated balance sheet and
any unfunded commitment.
that most significantly
impact
The Company conducts a periodic review to identify and
evaluate credit based impairments related to the Company’s
investments. The Company derives
available for sale
estimated credit losses by comparing expected future cash
flows to be collected to the amortized cost of the security.
Estimates of expected future cash flows consider among
other things, macroeconomic conditions as well as the
financial condition, near-term and long-term prospects for the
issuer, and the likelihood of the recoverability of principal
and interest. Effective January 1, 2020, credit losses are
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recognized through an allowance account subject to reversal,
rather than a reduction in amortized cost. Declines in value
attributable to factors other than credit are reported in other
comprehensive income while the allowance for credit loss is
charged to net realized gains (losses).
For available for sale investments that the Company intends
to sell or for which it is more likely than not that the
Company would be required to sell before an anticipated
recovery in value, the full amount of the impairment is
included in net realized gains (losses). The new cost basis of
the investment is the previous amortized cost basis reduced
by the impairment recognized in net realized gains (losses).
The new cost basis is not adjusted for any subsequent
recoveries in fair value.
The Company reports accrued investment income separately
from investment balances and has elected not to measure an
allowance for credit losses for accrued investment income.
Any uncollectible accrued interest income is written off in
the period it is deemed uncollectible.
judgment and
impaired required
Prior to January 1, 2020, the Company performed quarterly
reviews of its investments to determine whether declines in
fair value below the cost basis were considered other-than-
temporary in accordance with applicable accounting guidance
regarding the recognition and presentation of OTTI. The
process of determining whether a security was other-than-
temporarily
involved
analyzing many factors. These factors included (i) an analysis
of the liquidity, business prospects and overall financial
condition of the issuer, (ii) the time period in which there was
a significant decline in value, (iii) the significance of the
decline and (iv) the analysis of specific credit events. When
there were credit-related
losses associated with debt
securities for which the Company did not have an intent to
sell and it was more likely than not that it would not be
required to sell the security before recovery of its cost basis,
the amount of the OTTI related to a credit loss was
recognized in earnings and the amount of the OTTI related to
other factors (e.g., interest rates, market conditions, etc.) was
recorded as a component of other comprehensive income
(loss). The amount of the credit loss of an impaired debt
security was the difference between the amortized cost and
the greater of (i) the present value of expected future cash
flows and (ii) the fair value of the security. In instances
where no credit loss existed but it was more likely than not
that the Company would have to sell the debt security prior to
the anticipated recovery, the decline in fair value below
amortized cost was recognized as an OTTI in earnings. In
periods after the recognition of an OTTI on debt securities,
the Company accounted for such securities as if they had
been purchased on the measurement date of the OTTI at an
amortized cost basis equal to the previous amortized cost
basis less the OTTI recognized in earnings. For debt
securities for which OTTI were recognized in earnings, the
difference between the new amortized cost basis and the cash
flows expected to be collected would be accreted or
amortized
income. See note 9,
“Investment Information” for additional information.
investment
into net
Net investment income includes interest and dividend income
together with amortization of market premiums and discounts
and is net of investment management and custody fees.
Anticipated prepayments and expected maturities are used in
applying the interest method for certain investments such as
mortgage and other asset-backed securities. When actual
prepayments
anticipated
significantly
prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The
net investment in such securities is adjusted to the amount
that would have existed had the new effective yield been
applied since
the security. Such
adjustments, if any, are included in net investment income
when determined.
the acquisition of
differ
from
losses realized on
the sale of
Investment gains or
investments, except for certain fund
investments, are
determined on a first-in, first-out basis and are reflected in
net income. Investment gains or losses realized on the sale of
certain fund investments are determined on an average cost
basis. Unrealized appreciation or decline in the value of
available for sale securities, which are carried at fair value, is
excluded from net income and recorded as a separate
component of accumulated other comprehensive income, net
of applicable deferred income tax.
(i) Derivative Instruments
recognizes all derivative
The Company
instruments,
including embedded derivative instruments, at fair value in
its consolidated balance sheets. The Company employs the
use of derivative instruments within its operations to mitigate
risks arising from assets and liabilities held in foreign
currencies as well as part of its overall investment strategy.
For such instruments, changes in assets and liabilities
measured at fair value are recorded as “Net realized gains” in
the consolidated statements of income. In addition, the
Company’s derivative instruments include amounts related to
underwriting activities where an insurance or reinsurance
contract meets the accounting definition of a derivative
instrument. For such contracts, changes in fair value are
reflected in “Other underwriting income” in the consolidated
statements of income as the underlying contract originates
from the Company’s underwriting operations. For the periods
ended 2020, 2019, and 2018, the Company did not designate
any derivative instruments as hedges under the relevant
accounting guidance. See note 11, “Derivative Instruments”
for additional information.
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(j) Reserves for Losses and Loss Adjustment Expenses
information derived by
Insurance and Reinsurance. The reserve for losses and loss
adjustment expenses consists of estimates of unpaid reported
losses and loss adjustment expenses and estimates for losses
incurred but not reported. The reserve for unpaid reported
losses and
loss adjustment expenses, established by
management based on reports from ceding companies and
claims from insureds, excludes estimates of amounts related
to losses under high deductible policies, and represents the
estimated ultimate cost of events or conditions that have been
reported to or specifically identified by the Company. Such
reserves are supplemented by management’s estimates of
reserves for losses incurred for which reports or claims have
not been received. The Company’s reserves are based on a
combination of reserving methods,
incorporating both
Company and industry loss development patterns. The
Company selects the initial expected loss and loss adjustment
its
expense ratios based on
underwriters and actuaries during the initial pricing of the
business, supplemented by industry data where appropriate.
Such ratios consider, among other things, rate changes and
changes in terms and conditions that have been observed in
the market. These estimates are reviewed regularly and, as
experience develops and new information becomes known,
the reserves are adjusted as necessary. Such adjustments, if
any, are reflected in income in the period in which they are
determined. As actual loss information has been reported, the
Company has developed its own loss experience and its
reserving methods include other actuarial techniques. Over
time, such techniques have been given further weight in its
reserving process based on the continuing maturation of the
Company’s reserves. Inherent in the estimates of ultimate
losses and loss adjustment expenses are expected trends in
claims severity and frequency and other factors which may
vary significantly as claims are settled. Accordingly, ultimate
losses and loss adjustment expenses may differ materially
from the amounts recorded in the accompanying consolidated
financial statements. Losses and loss adjustment expenses are
recorded on an undiscounted basis, except for excess
workers’ compensation and employers’ liability business
written by the Company’s insurance operations.
Mortgage. The reserves for mortgage guaranty insurance
losses and loss adjustment expenses are the estimated claim
settlement costs on notices of delinquency that have been
received by the Company, as well as loan delinquencies that
have been incurred but have not been reported by the lenders.
Consistent with primary mortgage
industry
accounting practice, the Company does not establish loss
reserves for future claims on insured loans that are not
currently delinquent (defined as two or more payments in
arrears). The Company establishes loss reserves on a case-by-
case basis when insured loans are reported delinquent using
estimated claim rates and average claim sizes for each cohort,
net of any salvage recoverable. The Company also reserves
insurance
for delinquencies that have occurred but have not yet been
reported to the Company prior to the close of an accounting
period. To determine this reserve, the Company estimates the
number of delinquencies not yet reported using historical
information regarding late reported delinquencies and applies
estimated claim rates and claim sizes for the estimated
delinquencies not yet reported.
The establishment of reserves across
the Company’s
segments is an inherently uncertain process, are necessarily
based on estimates, and the ultimate net cost may vary from
such estimates. The methods for making such estimates and
for establishing the resulting liability are reviewed and
updated using the most current information available. Any
resulting adjustments, which may be material, are reflected in
current operations.
(k) Contractholder Receivables and Payables and Collateral
Held for Insured Obligations
the full amount of
the claim. The Company
Certain insurance policies written by the Company’s U.S.
insurance operations feature large deductibles, primarily in its
construction and national accounts line of business. Under
such contracts, the Company is obligated to pay the claimant
for
is
subsequently reimbursed by the policy holder for the
deductible amount. These amounts are included on a gross
basis in the consolidated balance sheet as contractholder
payables and contractholder receivables. In the event that the
Company is unable to collect from the policyholder, the
Company would be liable for such defaulted amounts.
Collateral, primarily in the form of letters of credit, cash and
trusts, is obtained from the policyholder to mitigate the
Company’s credit risk. In the instances where the Company
receives collateral in the form of cash, the Company reflects
it in “Collateral held for insured obligations.”
probability-of-default
Contractholder receivables are reported net of an allowance
for expected credit losses. The allowance is based upon the
Company’s ongoing review of amounts outstanding, changes
in policyholder credit standing, amounts and form of
collateral obtained, and other relevant factors. A ratings
based
loss-given-default
methodology is used to estimate the allowance for expected
credit losses. Any allowance for credit losses is charged to
net realized gains (losses) in the period the receivable is
recorded and revised in subsequent periods to reflect changes
in the Company’s estimate of expected credit losses. See note
7, “Allowance for Expected Credit Losses” for additional
information.
and
(l) Foreign Exchange
Assets and liabilities of foreign operations whose functional
currency is not the U.S. Dollar are translated at the prevailing
exchange rates at each balance sheet date. Revenues and
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expenses of such foreign operations are translated at average
exchange rates during the year. The net effect of the
translation adjustments for foreign operations is included in
accumulated other comprehensive income, net of applicable
deferred income tax. Monetary assets and liabilities, such as
premiums receivable and the reserve for losses and loss
adjustment expenses, denominated in foreign currencies are
revalued at the exchange rate in effect at the balance sheet
date with the resulting foreign exchange gains and losses
included in net income. Accounts that are classified as non-
monetary, such as deferred acquisition costs and the unearned
premium reserves, are not revalued. In the case of foreign
currency denominated fixed maturity securities which are
classified as “available for sale,” the change in exchange
rates between the local currency in which the investments are
denominated and the Company’s functional currency at each
balance sheet date is included in unrealized appreciation or
decline in value of securities, a component of accumulated
other comprehensive income, net of applicable deferred
income tax.
(m) Income Taxes
Deferred income taxes reflect the expected future tax
consequences of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. A
valuation allowance is recorded if it is more likely than not
that some or all of a deferred tax asset may not be realized.
The Company considers future taxable income and feasible
tax planning strategies in assessing the need for a valuation
allowance. In the event the Company determines that it will
not be able to realize all or part of its deferred income tax
assets in the future, an adjustment to the deferred income tax
assets would be charged to income in the period in which
such determination is made. In addition, if the Company
subsequently assesses that the valuation allowance is no
longer needed, a benefit would be recorded to income in the
period in which such determination is made. See note 15,
“Income Taxes” for additional information.
The Company recognizes a tax benefit where it concludes
that it is more likely than not that the tax benefit will be
sustained on audit by the taxing authority based solely on the
technical merits of the associated tax position. If the
recognition threshold is met, the Company recognizes a tax
benefit measured at the largest amount of the tax benefit that,
in the Company’s judgment, is greater than 50% likely to be
realized. The Company records interest and penalties related
to unrecognized tax benefits in the provision for income
taxes.
(n) Share-Based Payment Arrangements
The Company applies a fair value based measurement
share-based payment
for
method
in accounting
its
The
criteria.
performance
arrangements with eligible employees and directors.
Compensation expense is estimated based on the fair value of
the award at the grant date and is recognized in net income
over the requisite service period with a corresponding
increase in shareholders’ equity. No value is attributed to
awards that employees forfeit because they fail to satisfy
vesting conditions. The Company’s (i) time-based awards
generally vest over a three year period with one-third vesting
on the first, second and third anniversaries of the grant date
and (ii) performance-based awards cliff vest after each three
year performance period based on achievement of the
specified
share-based
compensation expense associated with awards that have
graded vesting features and vest based on service conditions
only is calculated on a straight-line basis over the requisite
service period for the entire award. Compensation expense
recognized in connection with performance awards is based
on the achievement of the specified performance and service
conditions. The final measure of compensation expense
recognized over the requisite service period reflects the final
performance outcome. During
recognition period
compensation expense is accrued based on the performance
condition that is probable of achievement. For awards
granted to retirement-eligible employees where no service is
required for the employee to retain the award, the grant date
fair value is immediately recognized as compensation
expense at the grant date because the employee is able to
retain the award without continuing to provide service. For
employees near
retirement eligibility, attribution of
compensation cost is over the period from the grant date to
the retirement eligibility date. These charges had no impact
on the Company’s cash flows or total shareholders’ equity.
See note 22, “Share-Based Compensation” for information
relating to the Company’s share-based payment awards.
the
(o) Guaranty Fund and Other Related Assessments
Liabilities for guaranty fund and other related assessments in
the Company’s insurance and reinsurance operations are
accrued when the Company receives notice that an amount is
payable, or earlier if a reasonable estimate of the assessment
can be made.
(p) Treasury Shares
Treasury shares are common shares purchased by the
Company and not subsequently canceled. These shares are
recorded at cost and result in a reduction of the Company’s
shareholders’ equity in its Consolidated Balance Sheets.
(q) Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an
acquisition over the fair value of the net assets acquired and
is assigned to the applicable reporting unit at acquisition.
Goodwill is evaluated for impairment on an annual basis.
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Impairment tests may be performed more frequently if the
facts and circumstances indicate a possible impairment. In
performing impairment tests, the Company may first assess
qualitative factors to determine whether it is more likely than
not (that is, more than a 50% probability) that the fair value
of a reporting unit exceeds its carrying amount as a basis for
determining whether it is necessary to perform goodwill
impairment test described in the accounting guidance.
Indefinite-lived intangible assets, such as insurance licenses
are evaluated for impairment similar to goodwill. Finite-lived
intangible assets and liabilities include the value of acquired
insurance and reinsurance contracts, which are estimated
based on the present value of future expected cash flows and
amortized in proportion to the estimated profits expected to
be realized. Other finite-lived intangible assets, including
customer lists, trade name and IT platforms, are amortized
over their useful lives. Finite-lived intangible assets and
indicators of
liabilities are periodically reviewed for
impairment. An impairment is recognized when the carrying
amount is not recoverable from its undiscounted cash flows
and is measured as the difference between the carrying
amount and fair value.
If goodwill or intangible assets are impaired, such assets are
written down to their fair values with the related expense
recorded in the Company’s results of operations.
(r) Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted
the
The Company adopted ASU 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework - Changes
for Fair Value
to
the Disclosure Requirements
disclosure
Measurement.” The ASU modifies
requirements on fair value measurement as part of the
disclosure framework project with the objective to improve
the effectiveness of disclosures in the notes to the financial
statements. The amendments in this update allow for removal
of (1) the amount and reasons for transfer between Level 1
and Level 2 of the fair value hierarchy; (2) the policy for
transfers between levels; and (3) the valuation processes for
Level 3 fair value measurements. The adoption of this
guidance did not have a material effect on the Company’s
consolidated financial statements.
The Company adopted ASU 2018-15, “Intangibles -
Goodwill and Other - Internal Use Software (Subtopic
350-40).” This ASU aligns the requirements for capitalizing
certain implementation costs incurred in a cloud computing
arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or
obtain
software. The guidance provides
flexibility in adoption, allowing for either retrospective
adjustment or prospective adjustment for all implementation
internal-use
costs incurred after the date of adoption. The Company
adopted this guidance prospectively. The adoption of this
guidance did not have a material effect on the Company’s
consolidated financial statements.
The Company adopted ASU 2020-09, “Debt (Topic 470):
Amendments to SEC Paragraphs Pursuant to SEC Release
No. 33-10762.” This ASU aligns the SEC release issued in
March 2020 amending Rule 3-10 of Regulation S-X
regarding financial disclosure requirements for registered
debt offerings involving subsidiaries as either issuers or
guarantors and affiliates whose securities are pledged as
collateral. This new guidance narrows the circumstances that
require separate financial statements of subsidiary issuers and
the alternative disclosures
guarantors and streamlines
required in lieu of those statements. The amendment is
effective on January 4, 2021 with early adoption permitted.
The Company elected to apply the amended requirements for
the quarter ended March 31, 2020, and is no longer providing
condensed consolidating financial information that resulted
from the registered debt obligations of its subsidiaries, Arch
Capital Group (U.S.) Inc. and Arch Capital Finance LLC.,
that were disclosed in Note 26 of the financial statements in
the Company’s 2019 Form 10-K.
including
reinsurance
The Company adopted ASU 2016-13, “Financial Instruments
- Credit Losses (Topic 326).” The ASU applies a new credit
loss model (current expected credit losses) for determining
credit related impairments for financial instruments measured
at amortized cost,
recoverable,
contractholder receivables, and premiums receivable, and
requires an entity to estimate its lifetime “expected credit
loss” and record an allowance that, when deducted from the
amortized cost basis of the financial asset, presents the net
amount expected to be collected on the financial asset. The
estimate of expected credit losses should consider historical
information, current information, as well as reasonable and
supportable forecasts, including estimates of prepayments.
The ASU also amends the previous other-than-temporary
impairment model for available-for-sale debt securities by
requiring the recognition of impairments relating to credit
losses through an allowance account and limits the amount of
credit loss to the difference between a security’s amortized
cost basis and its fair value. In addition, the length of time a
security has been in an unrealized loss position will no longer
impact the determination of whether a credit loss exists.
The Company adopted the ASU for the quarter ending March
31, 2020 by recognizing an after-tax cumulative effect
adjustment of $22.5 million to the opening balance of
retained earnings as of January 1, 2020. The cumulative
effect adjustment decreased retained earnings and increased
the allowance for credit losses.
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Recently Issued Accounting Standards Not Yet Adopted
intraperiod
ASU 2019-12, “Simplifying the Accounting for Income
Taxes,” was issued in December 2019. This ASU eliminates
certain exceptions for recognizing deferred
taxes for
tax allocation and
investments, performing
calculating income taxes in interim periods. The ASU also
clarifies the accounting for transactions that result in a step-
up in the tax basis of goodwill. The ASU is effective for
fiscal years beginning after December 15, 2020 and interim
periods within those fiscal years with early adoption
permitted. The Company is currently evaluating the impact of
the new guidance on its consolidated financial statements and
does not expect this guidance to have a material effect on the
Company’s consolidated financial statements.
President and Chief Underwriting Officer of Arch Capital.
The chief operating decision makers do not assess
performance, measure return on equity or make resource
allocation decisions on a line of business basis. Management
measures segment performance for its three underwriting
segments based on underwriting income or loss. The
Company does not manage its assets by underwriting
segment, with the exception of goodwill and intangible
assets, and, accordingly, investment income is not allocated
to each underwriting segment.
The insurance segment consists of the Company’s insurance
underwriting units which offer specialty product lines on a
worldwide basis. Product lines include:
to
ASU 2020-04, “Facilitation of the Effects of Reference Rate
Reform on Financial Reporting,” was issued in March 2020.
This ASU provides optional expedients and exceptions for
applying GAAP
investments, derivatives, or other
transactions that reference the London Interbank Offered
Rate (LIBOR) or another reference rate expected to be
discontinued because of reference rate reform. Along with
the optional expedients, the amendments include a general
principle
to consider contract
modifications due to reference reform to be an event that
does not require contract re-measurement at the modification
date or reassessment of a previous accounting determination.
This standard may be elected over time through December
31, 2022 as reference rate reform activities occur. The
Company is currently evaluating the impact of the new
guidance on its consolidated financial statements and does
not expect this guidance to have a material effect on the
Company’s consolidated financial statements.
that permits an entity
4. Segment Information
The Company classifies its businesses into three underwriting
segments — insurance, reinsurance and mortgage — and two
other operating segments — ‘other’ and corporate (non-
underwriting). The Company determined
its reportable
segments using the management approach described in
accounting guidance regarding disclosures about segments of
an enterprise and related information. The accounting
policies of the segments are the same as those used for the
preparation of
financial
statements. Intersegment business is allocated to the segment
accountable for the underwriting results.
the Company’s consolidated
insurance,
The Company’s
reinsurance and mortgage
segments each have managers who are responsible for the
overall profitability of their respective segments and who are
directly accountable to the Company’s chief operating
decision makers, the Chief Executive Officer of Arch Capital,
Chief Financial Officer and Treasurer of Arch Capital and the
•
•
•
•
•
•
Construction and national accounts: primary and
excess casualty coverages to middle and large accounts
in the construction industry and a wide range of
products for middle and large national accounts,
specializing in loss sensitive primary casualty insurance
programs (including
large deductible, self-insured
retention and retrospectively rated programs).
Excess and surplus casualty: primary and excess
casualty insurance coverages, including middle market
energy business, and contract binding, which primarily
provides casualty coverage through a network of
appointed agents to small and medium risks.
products:
protection,
collateral
service contract
debt
Lenders
cancellation and
reimbursement
products to banks, credit unions, automotive dealerships
and original equipment manufacturers and other
specialty programs that pertain to automotive lending
and leasing.
fiduciary
Professional lines: directors’ and officers’ liability,
errors and omissions liability, employment practices
liability,
crime, professional
liability,
indemnity and other financial related coverages for
corporate, private equity, venture capital, real estate
investment
financial
institution and not-for-profit clients of all sizes and
medical professional and general liability insurance
coverages for the healthcare industry. The business is
predominately written on a claims-made basis.
partnership,
limited
trust,
Programs: primarily package policies, underwriting
workers’ compensation and umbrella liability business
in support of desirable package programs, targeting
program managers with unique expertise and niche
products offering general
commercial
automobile, inland marine and property business with
minimal catastrophe exposure.
liability,
Property, energy, marine and aviation: primary and
excess general property insurance coverages, including
catastrophe-exposed property coverage, for commercial
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clients. Coverages for marine include hull, war, specie
and liability. Aviation and stand-alone terrorism are
also offered.
of loss basis when aggregate losses and loss adjustment
expense from a single occurrence of a covered peril
exceed the retention specified in the contract.
•
•
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.
insurance
Other: includes alternative market risks (including
excess workers’
captive
programs),
compensation and employer’s
insurance
liability
coverages for qualified self-insured groups, associations
and
trusts, and contract and commercial surety
coverages, including contract bonds (payment and
performance bonds) primarily for medium and large
contractors and commercial surety bonds for Fortune
1000 companies and smaller
transaction business
programs.
•
•
Property excluding property catastrophe: provides
coverage for both personal lines and commercial
property exposures and principally covers buildings,
structures, equipment and contents. The primary perils
in this business include fire, explosion, collapse, riot,
vandalism, wind,
tornado, flood and earthquake.
Business is assumed on both a proportional and excess
of loss basis. In addition, facultative business is written
which focuses on commercial property risks on an
excess of loss basis.
Other. includes life reinsurance business on both a
proportional and non-proportional basis, casualty clash
business and, in limited instances, non-traditional
business which is intended to provide insurers with risk
traditional
management solutions
reinsurance.
that complement
the Company’s
The reinsurance segment consists of
reinsurance underwriting units which offer specialty product
lines on a worldwide basis. Product lines include:
•
•
•
•
Casualty: provides coverage to ceding company clients
on third party liability and workers’ compensation
exposures from ceding company clients, primarily on a
treaty basis. Exposures
include, among others,
executive assurance, professional liability, workers’
compensation, excess and umbrella liability, excess
motor and healthcare business.
Marine and aviation: provides coverage for energy,
hull, cargo, specie, liability and transit, and aviation
business, including airline and general aviation risks.
Business written may also include space business,
which includes coverages for satellite assembly, launch
and operation for commercial space programs.
Other specialty: provides coverage to ceding company
clients for proportional motor and other lines including
surety, accident and health, workers’ compensation
catastrophe, agriculture, trade credit and political risk.
Property catastrophe: provides protection for most
catastrophic losses that are covered in the underlying
policies written by reinsureds, including hurricane,
earthquake, flood, tornado, hail and fire, and coverage
for other perils on a case-by-case basis. Property
catastrophe reinsurance provides coverage on an excess
The mortgage segment includes the Company’s U.S. and
international mortgage insurance and reinsurance operations
as well as government sponsored enterprise (“GSE”) credit-
risk sharing transactions. AMIC and UGRIC (components of
“Arch MI U.S.”) are approved as eligible mortgage insurers
by Federal National Mortgage Association (“Fannie Mae”)
and Federal Home Loan Mortgage Corporation (“Freddie
Mac”), each a government sponsored enterprise, or “GSE.”.
Arch MI U.S. also includes Arch Mortgage Guaranty
Company, which is not a GSE-approved entity.
The corporate (non-underwriting) segment results include net
investment income, other income (loss), other expenses
incurred by the Company, interest expense, net realized gains
or losses, net impairment losses included in earnings, equity
in net income or loss of investments accounted for using the
equity method, net foreign exchange gains or losses,
transaction costs and other, income taxes and items related to
the Company’s non-cumulative preferred shares. Such
amounts exclude the results of the ‘other’ segment. The
‘other’ segment includes the results of Watford (see note 12,
“Variable Interest Entity and Noncontrolling Interests”).
Watford has its own management and board of directors that
is responsible for the overall profitability of the ‘other’
segment. For the ‘other’ segment, performance is measured
based on net income or loss.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the Company’s underwriting income or loss by segment, together with a reconciliation of
underwriting income or loss to net income available to Arch common shareholders, summary information regarding net
premiums written and earned by major line of business and net premiums written by location:
Gross premiums written (1)
Premiums ceded
Net premiums written
Change in unearned premiums
Net premiums earned
Other underwriting income (loss)
Losses and loss adjustment expenses
Acquisition expenses
Other operating expenses
Underwriting income (loss)
Net investment income
Net realized gains (losses)
Equity in net income (loss) of investments
accounted for using the equity method
Other income (loss)
Corporate expenses
Transaction costs and other
Amortization of intangible assets
Interest expense
Net foreign exchange gains (losses)
Income (loss) before income taxes
Income tax expense
Net income (loss)
Amounts attributable to redeemable
noncontrolling interests
Amounts attributable to nonredeemable
noncontrolling interests
Net income (loss) available to Arch
Preferred dividends
Net income (loss) available to Arch common
shareholders
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
Insurance
$ 4,688,562
(1,525,655)
3,162,907
(291,487)
2,871,420
(31)
(2,092,453)
(418,483)
(489,153)
(128,700)
$
Year Ended December 31, 2020
Reinsurance
$ 3,472,086
(1,014,716)
2,457,370
(295,141)
2,162,229
4,454
(1,628,320)
(354,048)
(168,011)
16,304
$
Mortgage
$ 1,473,999
(194,149)
1,279,850
118,085
1,397,935
20,316
(528,344)
(134,240)
(162,202)
593,465
$
Sub-Total
$ 9,632,691
(2,732,564)
6,900,127
(468,543)
6,431,584
24,739
(4,249,117)
(906,771)
(819,366)
481,069
$
Other
728,546
(190,957)
537,589
22,762
560,351
2,045
(440,482)
(98,071)
(55,810)
(31,967)
Total
$ 10,088,068
(2,650,352)
7,437,716
(445,781)
6,991,935
26,784
(4,689,599)
(1,004,842)
(875,176)
449,102
401,908
813,781
117,700
9,679
519,608
823,460
146,693
16,795
(68,492)
(9,456)
(69,031)
(120,214)
(80,161)
1,512,892
(111,812)
1,401,080
—
—
—
(4,040)
—
(23,242)
(3,473)
64,657
(26)
64,631
146,693
16,795
(68,492)
(13,496)
(69,031)
(143,456)
(83,634)
1,577,549
(111,838)
1,465,711
(2,997)
(4,117)
(7,114)
—
1,398,083
(41,612)
(53,076)
7,438
—
(53,076)
1,405,521
(41,612)
$ 1,356,471
$
7,438
$
1,363,909
72.9 %
14.6 %
17.0 %
104.5 %
75.3 %
16.4 %
7.8 %
99.5 %
37.8 %
9.6 %
11.6 %
59.0 %
66.1 %
14.1 %
12.7 %
92.9 %
78.6 %
17.5 %
10.0 %
106.1 %
67.1 %
14.4 %
12.5 %
94.0 %
Goodwill and intangible assets
$
280,978
$
18,963
$
385,272
$
685,213
$
7,650
$
692,863
Total investable assets
Total assets
Total liabilities
$ 26,856,295
39,791,983
26,789,149
$ 2,657,612
3,490,314
2,505,707
$ 29,513,907
43,282,297
29,294,856
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross
premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment
transactions in the total.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross premiums written (1)
Premiums ceded
Net premiums written
Change in unearned premiums
Net premiums earned
Other underwriting income
Losses and loss adjustment expenses
Acquisition expenses, net
Other operating expenses
Underwriting income (loss)
Net investment income
Net realized gains (losses)
Equity in net income (loss) of investments
accounted for using the equity method
Other income (loss)
Corporate expenses
Transaction costs and other
Amortization of intangible assets
Interest expense
Net foreign exchange gains (losses)
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Amounts attributable to redeemable
noncontrolling interests
Amounts attributable to nonredeemable
noncontrolling interests
Net income (loss) available to Arch
Preferred dividends
Net income (loss) available to Arch common
shareholders
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
Insurance
$ 3,907,993
(1,266,267)
2,641,726
(244,646)
2,397,080
—
(1,615,475)
(361,614)
(454,770)
(34,779)
$
Reinsurance
$ 2,323,223
(720,500)
1,602,723
(136,334)
1,466,389
6,444
(1,011,329)
(239,032)
(141,484)
80,988
$
Year Ended December 31, 2019
Mortgage
$ 1,466,265
(204,509)
1,261,756
104,584
1,366,340
16,005
(53,513)
(134,319)
(153,092)
$ 1,041,421
Sub-Total
$ 7,695,645
(2,189,440)
5,506,205
(276,396)
5,229,809
22,449
(2,680,317)
(734,965)
(749,346)
1,087,630
$
Other
754,881
(222,019)
532,862
23,827
556,689
2,412
(453,135)
(105,980)
(51,651)
(51,665)
Total
$ 8,138,960
(2,099,893)
6,039,067
(252,569)
5,786,498
24,861
(3,133,452)
(840,945)
(800,997)
1,035,965
491,067
348,037
136,671
15,161
627,738
363,198
123,672
2,233
(65,667)
(14,444)
(82,104)
(93,735)
(9,252)
1,787,437
(155,790)
1,631,647
—
—
—
—
—
(27,137)
(11,357)
61,673
(20)
61,653
123,672
2,233
(65,667)
(14,444)
(82,104)
(120,872)
(20,609)
1,849,110
(155,810)
1,693,300
—
(16,909)
(16,909)
—
1,631,647
(41,612)
(40,072)
4,672
—
(40,072)
1,636,319
(41,612)
$ 1,590,035
$
4,672
$ 1,594,707
67.4 %
15.1 %
19.0 %
101.5 %
69.0 %
16.3 %
9.6 %
94.9 %
3.9 %
9.8 %
11.2 %
24.9 %
51.3 %
14.1 %
14.3 %
79.7 %
81.4 %
19.0 %
9.3 %
109.7 %
54.2 %
14.5 %
13.8 %
82.5 %
Goodwill and intangible assets
$
289,021
$
2,516
$
438,896
$
730,433
$
7,650
$
738,083
Total investable assets
Total assets
Total liabilities
$ 22,285,676
34,374,468
22,977,636
$ 2,704,589
3,510,893
2,592,173
$ 24,990,265
37,885,361
25,569,809
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross
premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment
transactions in the total.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross premiums written (1)
Premiums ceded
Net premiums written
Change in unearned premiums
Net premiums earned
Other underwriting income
Losses and loss adjustment expenses
Acquisition expenses, net
Other operating expenses
Underwriting income (loss)
Net investment income
Net realized gains (losses)
Equity in net income (loss) of investments
accounted for using the equity method
Other income (loss)
Corporate expenses
Transaction costs and other
Amortization of intangible assets
Interest expense
Net foreign exchange gains (losses)
Income (loss) before income taxes
Income tax benefit
Net income
Amounts attributable to redeemable
noncontrolling interests
Amounts attributable to nonredeemable
noncontrolling interests
Net income (loss) available to Arch
Preferred dividends
Loss on redemption of preferred shares
Net income (loss) available to Arch common
shareholders
Underwriting Ratios
Loss ratio
Acquisition expense ratio
Other operating expense ratio
Combined ratio
Insurance
$ 3,262,332
(1,050,207)
2,212,125
(6,464)
2,205,661
—
(1,520,680)
(349,702)
(364,138)
(28,859)
$
Reinsurance
$ 1,912,522
(539,950)
1,372,572
(111,356)
1,261,216
(682)
(846,882)
(211,280)
(133,350)
69,022
$
$
Year Ended December 31, 2018
Mortgage
$ 1,360,708
(202,833)
1,157,875
28,361
1,186,236
13,033
(81,289)
(118,595)
(142,432)
856,953
$
Sub-Total
$ 6,534,423
(1,791,851)
4,742,572
(89,459)
4,653,113
12,351
(2,448,851)
(679,577)
(639,920)
897,116
437,958
(287,258)
45,641
2,419
(58,608)
(11,386)
(105,670)
(101,019)
58,711
877,904
(113,924)
763,980
Other
735,015
(130,840)
604,175
(25,313)
578,862
2,722
(441,255)
(125,558)
(37,889)
(23,118)
125,675
(120,915)
—
—
—
(9,000)
—
(19,465)
10,691
(36,132)
(27)
(36,159)
Total
$ 6,961,004
(1,614,257)
5,346,747
(114,772)
5,231,975
15,073
(2,890,106)
(805,135)
(677,809)
873,998
563,633
(408,173)
45,641
2,419
(58,608)
(20,386)
(105,670)
(120,484)
69,402
841,772
(113,951)
727,821
—
(18,357)
(18,357)
—
763,980
(41,645)
(2,710)
48,507
(6,009)
—
—
48,507
757,971
(41,645)
(2,710)
$
719,625
$
(6,009)
$
713,616
68.9 %
15.9 %
16.5 %
101.3 %
67.1 %
16.8 %
10.6 %
94.5 %
6.9 %
10.0 %
12.0 %
28.9 %
52.6 %
14.6 %
13.8 %
81.0 %
76.2 %
21.7 %
6.5 %
104.4 %
55.2 %
15.4 %
13.0 %
83.6 %
Goodwill and intangible assets
$
114,012
$
—
$
513,258
$
627,270
$
7,650
$
634,920
Total investable assets
Total assets
Total liabilities
$ 19,566,861
28,845,473
19,518,395
$ 2,757,663
3,372,856
2,262,255
$ 22,324,524
32,218,329
21,780,650
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions. Accordingly, the sum of gross
premiums written for each segment does not agree to the total gross premiums written as shown in the table above due to the elimination of intersegment
transactions in the total.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide summary information regarding net premiums earned by major line of business and net premiums
written by underwriting location:
INSURANCE SEGMENT
Net premiums earned (1)
Property, energy, marine and aviation
Professional Lines (2)
Programs
Construction and national accounts
Excess and surplus casualty (3)
Travel, accident and health
Lenders products
Other (4)
Total
Net premiums written by underwriting location (1)
United States
Europe
Other
Total
2020
Year Ended December 31,
2019
2018
$
517,247 $
655,872
432,854
387,934
270,620
190,944
114,687
301,262
298,966 $
499,224
414,103
325,687
200,615
305,085
66,079
287,321
$
2,871,420 $
2,397,080 $
205,069
458,425
389,186
322,440
172,424
297,147
94,248
266,722
2,205,661
$
2,158,415 $
1,983,476 $
856,572
147,920
3,162,907 $
559,214
99,036
2,641,726 $
$
1,736,651
401,974
73,500
2,212,125
Insurance segment results include premiums assumed through intersegment transactions and exclude premiums ceded through intersegment transactions.
(1)
(2) Includes professional liability, executive assurance and healthcare business.
(3)
(4)
Includes casualty and contract binding business.
Includes alternative markets, excess workers' compensation and surety business.
REINSURANCE SEGMENT
Net premiums earned (1)
Property excluding property catastrophe
Property catastrophe
Other Specialty (2)
Casualty (3)
Marine and aviation
Other (4)
Total
Net premiums written by underwriting location (1)
United States
Bermuda
Europe and other
Total
2020
Year Ended December 31,
2019
2018
$
$
$
562,208 $
237,736
626,409
549,056
109,624
77,196
2,162,229 $
362,841 $
90,934
478,517
429,288
48,274
56,535
1,466,389 $
687,622 $
1,001,990
767,758
529,943 $
578,618
494,162
$
2,457,370 $
1,602,723 $
287,788
75,249
474,568
347,034
39,238
37,339
1,261,216
413,550
487,523
471,499
1,372,572
(1) Reinsurance segment results include premiums assumed through intersegment transactions and exclude premiums ceded through intersegment
transactions.
Includes proportional motor, surety, accident and health, workers’ compensation catastrophe, agriculture, trade credit and other.
Includes executive assurance, professional liability, workers’ compensation, excess motor, healthcare and other.
Includes life, casualty clash and other.
(2)
(3)
(4)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MORTGAGE SEGMENT
Net premiums earned by underwriting location
United States
Other
Total
Net premiums written by underwriting location
United States
Other
Total
OTHER SEGMENT
Net premiums earned (1)
Casualty (2)
Other specialty (3)
Property catastrophe
Property excluding property catastrophe
Marine and aviation
Other (4)
Total
Net premiums written by underwriting location (1)
United States
Europe
Bermuda
Total
Year Ended December 31,
2019
2018
2020
1,158,563 $
239,372
1,397,935 $
1,134,849 $
231,491
1,366,340 $
1,009,765
176,471
1,186,236
1,021,950 $
257,900
1,279,850 $
1,032,868 $
228,888
1,261,756 $
948,323
209,552
1,157,875
Year Ended December 31,
2019
2018
2020
245,272 $
186,717
23,037
1,130
429
103,766
560,351 $
246,894 $
185,547
13,399
3,503
—
107,346
556,689 $
115,471 $
97,753
324,365
537,589 $
127,176 $
52,065
353,621
532,862 $
277,589
204,485
10,998
2,802
—
82,988
578,862
49,800
91,635
462,740
604,175
$
$
$
$
$
$
$
$
(1) Other segment results include premiums assumed through intersegment transactions and exclude premiums ceded through intersegment transactions.
(2)
(3)
(4)
Includes professional liability, excess motor, programs and other.
Includes proportional motor and other.
Includes mortgage, US programs and other.
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5. Reserve for Losses and Loss Adjustment Expenses
The following table represents an analysis of losses and loss adjustment expenses and a reconciliation of the beginning and
ending reserve for losses and loss adjustment expenses:
Reserve for losses and loss adjustment expenses at beginning of year
Unpaid losses and loss adjustment expenses recoverable
Net reserve for losses and loss adjustment expenses at beginning of year
Net incurred losses and loss adjustment expenses relating to losses occurring in:
Current year
Prior years
Total net incurred losses and loss adjustment expenses
2020
13,891,842 $
Year Ended December 31,
2019
11,853,297 $
$
4,082,650
9,809,192
2,814,291
9,039,006
2018
11,383,792
2,464,910
8,918,882
4,851,051
(161,452)
4,689,599
3,297,037
(163,585)
3,133,452
3,162,818
(272,712)
2,890,106
Net losses and loss adjustment expense reserves of acquired business (1)
—
209,486
—
Retroactive reinsurance transactions
182,210
(225,500)
(420,404)
Foreign exchange (gains) losses and other
179,190
36,003
(143,414)
Net paid losses and loss adjustment expenses relating to losses occurring in:
Current year
Prior years
Total net paid losses and loss adjustment expenses
Net reserve for losses and loss adjustment expenses at end of year
Unpaid losses and loss adjustment expenses recoverable
Reserve for losses and loss adjustment expenses at end of year
(1)
Primarily related to the acquisition of Barbican. See Note 2.
Development on Prior Year Loss Reserves
Year Ended December 31, 2020
During 2020, the Company recorded estimated net favorable
development on prior year loss reserves of $161.5 million,
which consisted of net favorable development of $7.8 million
from the insurance segment, $134.0 million from the
reinsurance segment, $19.0 million from the mortgage
segment, and $0.7 million from the ‘other’ segment.
from medium-tailed
The insurance segment’s net favorable development of $7.8
million, or 0.3 points of net earned premium, consisted of
$83.0 million of net favorable development in short-tailed
and long-tailed lines partially offset by $75.2 million of net
adverse development
lines. Net
favorable development of $33.6 million in short-tailed lines
reflected $21.6 million of favorable development from
property (excluding marine), primarily from the 2015 to 2018
accident years, (i.e., the year in which a loss occurred) and
$8.4 million of favorable development on travel and accident,
primarily from the 2019 accident year. Net favorable
development of $49.4 million in long-tailed lines included
$38.8 million of favorable development related to other
(661,529)
(1,999,588)
(2,661,117)
(621,202)
(1,762,053)
(2,383,255)
12,199,074
4,314,855
9,809,192
4,082,650
$
16,513,929 $
13,891,842 $
(524,048)
(1,682,116)
(2,206,164)
9,039,006
2,814,291
11,853,297
business, including alternative markets and excess workers’
compensation, across all accident years, and $9.3 million of
favorable development related to construction business. Net
lines reflected
adverse development
$37.9 million of adverse development in surety business,
primarily from the 2019 accident year, $23.1 million in
contract binding business, primarily from the 2016 to 2019
accident years, and $16.0 million in program business,
primarily from the 2016 to 2019 accident years.
in medium-tailed
The reinsurance segment’s net favorable development of
$134.0 million, or 6.2 points of net earned premium,
consisted of $155.9 million of net favorable development
from short-tailed and medium-tailed lines, partially offset by
$21.9 million of net adverse development from long-tailed
lines. Net favorable development of $144.0 million in short-
tailed lines reflected $87.7 million related to property
catastrophe and property other than property catastrophe
business, primarily from the 2015 to 2019 underwriting years
(i.e., losses attributable to contracts having an inception or
renewal date within the given twelve-month period), and
$53.6 million from other specialty lines, across most
underwriting years. The net reduction of loss estimates for
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the reinsurance segment’s short-tailed lines primarily resulted
from varying levels of reported and paid claims activity than
previously anticipated which led to decreases in certain loss
ratio selections during 2020. Adverse development in long-
tailed lines reflected an increase in casualty reserves,
primarily from the 2012 to 2015 underwriting years.
The mortgage segment’s net favorable development of $19.0
million, or 1.4 points of net earned premium, included
$16.2 million of favorable development on U.S. primary
insurance business. Such development was
mortgage
primarily driven by subrogation recoveries on second lien
business and student loan business.
Year Ended December 31, 2019
During 2019, the Company recorded estimated net favorable
development on prior year loss reserves of $163.6 million,
favorable development of
which consisted of net
$15.8 million from the insurance segment, $46.4 million
from the reinsurance segment and $125.2 million from the
mortgage segment, partially offset by $23.8 million of net
adverse development from the ‘other’ segment.
The insurance segment’s net favorable development of
$15.8 million, or 0.7 points of net earned premium, consisted
of $54.9 million of net favorable development from short-
tailed lines and $39.1 million of net adverse development
from medium-tailed and long-tailed lines. Net favorable
development in short-tailed lines primarily resulted from
lenders products and property (including special risk other
than marine) reserves across all accident years, partially
offset by net adverse development in travel business,
primarily from
the 2018 accident year. Net adverse
development in medium-tailed and long-tailed lines of
$39.1 million was primarily due to net adverse development
of $33.6 million in contract binding business, primarily from
the 2013 to 2017 accident years, and $30.1 million in
programs, primarily from the 2014 and 2018 accident years.
Such amounts were partially offset by net favorable
development of $19.3 million
liability
business, primarily from the 2013 to 2016 accident years, and
$15.8 million in surety business, primarily from the 2014 to
2016 accident years.
in professional
The reinsurance segment’s net favorable development of
$46.4 million, or 3.2 points of net earned premium, consisted
of $70.5 million of net favorable development from short-
tailed lines and $16.0 million of net favorable development
from medium-tailed lines, partially offset by $40.1 million of
net adverse development from long-tailed lines. Favorable
development in short-tailed lines included $33.7 million from
property catastrophe and property other than property
catastrophe reserves, primarily from the 2017 and 2018
underwriting years and $40.8 million in other specialty,
primarily from 2016 to 2018 underwriting years. The net
reduction of loss estimates for the reinsurance segment’s
short-tailed lines primarily resulted from varying levels of
reported and paid claims activity than previously anticipated
which led to decreases in certain loss ratio selections during
2019. Net favorable development of $16.0 million in
medium-tailed lines included reductions in marine and
aviation reserves, primarily from
to 2017
underwriting years. Net adverse development in long-tailed
lines of $40.1 million was primarily due to net adverse
development of $44.5 million in casualty business, primarily
from the 2013 to 2018 underwriting years.
the 2011
The mortgage segment’s net favorable development of
$125.2 million, or 9.2 points of net earned premium, included
$117.1 million of favorable development on U.S. primary
mortgage
insurance business. Such development was
primarily driven by lower than expected claim rates on first
lien business and subrogation recoveries on second lien
business.
Year Ended December 31, 2018
During 2018, the Company recorded estimated net favorable
development on prior year loss reserves of $272.7 million,
which consisted of $24.4 million from the insurance segment,
$138.5 million from the reinsurance segment, $107.6 million
from the mortgage segment and $2.2 million from the ‘other’
segment.
The insurance segment’s net favorable development of
$24.4 million, or 1.1 points of net earned premium, consisted
of $48.4 million of net favorable development from short-
tailed lines and $26.3 million of net favorable development
from long-tailed lines, partially offset by $50.3 million of net
adverse development from medium-tailed lines. Favorable
development in short-tailed lines predominantly consisted of
$50.1 million of net favorable development in property lines,
primarily from the 2010 to 2017 accident years, partially
offset by $5.0 million of adverse development on travel,
accident and health business from the 2013 to 2017 accident
years. Net favorable development in long-tailed lines of
$26.3 million included $19.7 million of net favorable
development on executive assurance business, primarily from
the 2015 accident year, and $1.4 million of net favorable
development in casualty business, primarily from the 2009 to
2015 accident years. Net adverse development in medium
tailed lines of $50.3 million was primarily due to net adverse
development in contract binding business for accident years
2013 to 2017.
The reinsurance segment’s net favorable development of
$138.5 million, or 11.0 points of net earned premium,
consisted of $110.4 million from short-tailed lines and $28.1
million from medium-tailed and long-tailed lines. Favorable
development in short-tailed lines included $80.8 million from
property catastrophe and property other than property
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catastrophe reserves, primarily from the 2008 to 2017
underwriting years. The net reduction of loss estimates for
the reinsurance segment’s short-tailed lines primarily resulted
from varying levels of reported and paid claims activity than
previously anticipated which led to decreases in certain loss
ratio selections during 2018. Net favorable development of
$28.1 million in medium-tailed and long-tailed lines included
reductions in casualty reserves of $12.5 million, primarily
from the 2002 to 2010 underwriting years, and in marine and
aviation reserves of $15.6 million, spread across most
underwriting years.
The mortgage segment’s net favorable development of
$107.6 million, or 9.1 points of net earned premium, included
$103.4 million of favorable development on U.S. primary
mortgage
insurance business. Such development was
primarily driven by lower than expected claim rates on first
lien business and subrogation recoveries on second lien
business.
Retroactive Reinsurance Transactions
In 2020, the Company entered into a reinsurance-to-close
agreement related to a third party arrangement covering the
2017 and prior years of account for certain London syndicate
business. In 2019, the Company entered into a retroactive
reinsurance transaction with third party reinsurer to reinsure
run-off liabilities associated with certain U.S. insurance
exposures, which was commuted in 2020. In 2018, the
Company entered into a retroactive reinsurance transaction
with third party reinsurers to reinsure run-off liabilities
associated with certain U.S. insurance exposures.
6. Short Duration Contracts
The Company’s reserves for losses and loss adjustment
expenses primarily relate to short-duration contracts with
various characteristics (e.g., type of coverage, geography,
claims duration). The Company considered such information
in determining the level of disaggregation for disclosures
related to its short-duration contracts, as detailed in the table
below:
Reportable
segment
Insurance
Level of
disaggregation
Included lines of business
Property energy,
marine and aviation
Property energy, marine and
aviation
Third party
occurrence business
Third party claims-
made business
Multi-line and other
specialty
Excess and surplus casualty
(excluding contract binding);
construction and national
accounts; and other (including
alternative market risks, excess
workers’ compensation and
employer’s liability insurance
coverages)
Professional lines
Programs; contract binding (part
of excess and surplus casualty);
travel, accident and health;
lenders products; and other
(contract and commercial surety
coverages)
Reinsurance
Casualty
Casualty
Property catastrophe
Property catastrophe
Property excluding
property catastrophe
Property excluding property
catastrophe
Marine and aviation Marine and aviation
Other specialty
Other specialty
Mortgage
Direct mortgage
insurance in the U.S.
Mortgage insurance on U.S.
primary exposures
The Company determined the following to be insignificant
for disclosure purposes: (i) amounts included in the ‘other’
segment (i.e., Watford) as described in note 12, “Variable
Interest Entity and Noncontrolling Interests”; (ii) certain
mortgage business, including non-U.S. primary business,
second lien and student loan exposures, global mortgage
reinsurance and participation in various GSE credit risk-
sharing products, (iii) certain reinsurance business, including
casualty clash and non-traditional lines and (iv) amounts
associated with Barbican’s reserves for underwriting years
2018 and prior. Such amounts are included as reconciling
items.
The Company is required to establish reserves for losses and
loss adjustment expenses (“Loss Reserves”) that arise from
the business the Company underwrites. Loss Reserves for the
insurance, reinsurance and mortgage segments represent
estimates of future amounts required to pay losses and loss
adjustment expenses for insured or reinsured events which
have occurred at or before the balance sheet date. Loss
Reserves do not reflect contingency reserve allowances to
account for future loss occurrences. Losses arising from
future events will be estimated and recognized at the time the
losses are incurred and could be substantial.
Insurance Segment
Loss Reserves for the insurance segment are comprised of
estimated amounts for (1) reported losses (“case reserves”)
and (2) incurred but not reported losses (“IBNR reserves”).
Generally, claims personnel determine whether to establish a
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case reserve for the estimated amount of the ultimate
settlement of individual claims. The estimate reflects the
judgment of claims personnel based on general corporate
reserving practices, the experience and knowledge of such
personnel regarding the nature and value of the specific type
of claim and, where appropriate, advice of counsel. The
Company also contracts with a number of outside third party
administrators in the claims process who, in certain cases,
have limited authority to establish case reserves. The work of
such administrators is reviewed and monitored by our claims
personnel. Loss Reserves are also established to provide for
loss adjustment expenses and represent the estimated expense
of settling claims, including legal and other fees and the
general expenses of administering the claims adjustment
process. Periodically, adjustments to the case reserves may be
made as additional information is reported or payments are
made. IBNR reserves are established to provide for incurred
claims which have not yet been reported at the balance sheet
date as well as to adjust for any projected variance in case
reserving. Actuaries estimate ultimate
loss
adjustment expenses using various generally accepted
actuarial methods applied to known losses and other relevant
information. Like case reserves, IBNR reserves are adjusted
as additional information becomes known or payments are
made. The process of estimating reserves
involves a
considerable degree of judgment by management and, as of
any given date, is inherently uncertain.
losses and
Ultimate losses and loss adjustment expenses are generally
determined by extrapolation of claim emergence and
settlement patterns observed in the past that can reasonably
be expected to persist into the future. In forecasting ultimate
losses and loss adjustment expenses with respect to any line
of business, past experience with respect to that line of
business is the primary resource, developed through both
industry and company experience, but cannot be relied upon
in isolation. Uncertainties in estimating ultimate losses and
loss adjustment expenses are magnified by the length of the
time lag between when a claim actually occurs and when it is
reported and settled. This time lag is sometimes referred to as
the “claim-tail.” During this period additional facts regarding
coverages written in prior accident years, as well as about
actual claims and trends, may become known and, as a result,
may lead to adjustments of the related Loss Reserves. If the
Company determines that an adjustment is appropriate, the
adjustment is recorded in the accounting period in which
such determination is made. Accordingly, should Loss
Reserves need to be increased or decreased in the future from
amounts currently established, future results of operations
would be negatively or positively impacted respectively. The
Company authorizes managing general agents, general agents
and other producers to write program business on the
Company’s behalf within prescribed underwriting authorities.
This delegated authority process
introduces additional
complexity to the actuarial determination of unpaid future
losses and loss adjustment expenses. In order to monitor
adherence to the underwriting guidelines given to such
parties, the Company periodically performs underwriting and
claims due diligence reviews.
for
insureds and administer
In determining ultimate losses and loss adjustment expenses,
the cost to indemnify claimants, provide needed legal defense
and other services
the
investigation and adjustment of claims are considered. These
claim costs are influenced by many factors that change over
time, such as expanded coverage definitions as a result of
new court decisions, inflation in costs to repair or replace
damaged property, inflation in the cost of medical services
and legislated changes in statutory benefits, as well as by the
particular, unique facts that pertain to each claim. As a result,
the rate at which claims arose in the past and the costs to
settle them may not always be representative of what will
occur in the future. The factors influencing changes in claim
isolate or quantify and
to
costs are often difficult
developments in paid and incurred losses from historical
trends are frequently subject to multiple and conflicting
interpretations. Changes in coverage terms or claims handling
future experience and/or
practices may also cause
development patterns to vary from the past. A key objective
of actuaries in developing estimates of ultimate losses and
loss adjustment expenses, and resulting IBNR reserves, is to
identify aberrations and systemic changes occurring within
historical experience and adjust for them so that the future
can be projected more reliably. Because of the factors
previously discussed, this process requires the substantial use
of informed judgment and is inherently uncertain.
Although Loss Reserves are initially determined based on
underwriting and pricing analyses, the Company’s insurance
segment applies several generally accepted actuarial
methods, as discussed below, on a quarterly basis to evaluate
the Loss Reserves, in addition to the expected loss method, in
particular for Loss Reserves from more mature accident years
(the year in which a loss occurred). Each quarter, as part of
the reserving process, the segments’ actuaries reaffirm that
the assumptions used in the reserving process continue to
form a sound basis for the projection of liabilities. If actual
loss activity differs substantially from expectations based on
historical information, an adjustment to Loss Reserves may
be supported. The Company places more or less reliance on a
particular actuarial method based on
facts and
circumstances at the time the estimates of Loss Reserves are
made.
the
These methods generally fall into one of the following
categories or are hybrids of one or more of the following
categories:
•
Expected loss methods - these methods are based on the
assumption that ultimate losses vary proportionately with
premiums. Expected loss and loss adjustment expense
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•
•
typically developed based upon
ratios are
the
information derived by underwriters and actuaries during
the initial pricing of the business, supplemented by
industry data available from organizations, such as
statistical bureaus and consulting
firms, where
appropriate. These ratios consider, among other things,
rate increases and changes in terms and conditions that
have been observed in the market. Expected loss
methods are useful for estimating ultimate losses and
loss adjustment expenses in the early years of long-tailed
lines of business, when little or no paid or incurred loss
information is available, and is commonly applied when
limited loss experience exists for a company.
Historical incurred loss development methods - these
methods assume that the ratio of losses in one period to
losses in an earlier period will remain constant in the
future. These methods use incurred losses (i.e., the sum
of cumulative historical loss payments plus outstanding
case reserves) over discrete periods of time to estimate
future losses. Historical incurred loss development
methods may be preferable to historical paid loss
development methods because they explicitly take into
account open cases and the claims adjusters’ evaluations
of the cost to settle all known claims. However,
historical incurred loss development methods necessarily
assume that case reserving practices are consistently
applied over time. Therefore, when there have been
significant changes in how case reserves are established,
using incurred loss data to project ultimate losses may be
less reliable than other methods.
incurred
like historical
Historical paid loss development methods - these
methods,
loss development
methods, assume that the ratio of losses in one period to
losses in an earlier period will remain constant. These
methods use historical loss payments over discrete
periods of time to estimate future losses and necessarily
assume that factors that have affected paid losses in the
past, such as inflation or the effects of litigation, will
remain constant in the future. Because historical paid
loss development methods do not use incurred losses to
estimate ultimate losses, they may be more reliable than
the other methods that use incurred losses in situations
where there are significant changes in how incurred
losses are established by a company’s claims adjusters.
However, historical paid loss development methods are
more leveraged (meaning that small changes in payments
have a larger impact on estimates of ultimate losses) than
actuarial methods that use incurred losses because
cumulative loss payments take much longer to equal the
expected ultimate
incurred
amounts. In addition, and for similar reasons, historical
paid loss development methods are often slow to react to
situations when new or different factors arise than those
that have affected paid losses in the past.
than cumulative
losses
•
•
•
•
Adjusted historical paid and incurred loss development
methods - these methods take traditional historical paid
and incurred loss development methods and adjust them
for the estimated impact of changes from the past in
factors such as inflation, the speed of claim payments or
the adequacy of case reserves. Adjusted historical paid
and incurred loss development methods are often more
reliable methods of predicting ultimate losses in periods
of significant change, provided the actuaries can develop
methods to reasonably quantify the impact of changes.
As such, these methods utilize more judgment than
historical paid and incurred loss development methods.
Bornhuetter-Ferguson (“B-F”) paid and incurred loss
methods - these methods utilize actual paid and incurred
losses and expected patterns of paid and incurred losses,
taking the initial expected ultimate losses into account to
determine an estimate of expected ultimate losses. The
B-F paid and incurred loss methods are useful when
there are few reported claims and a relatively less stable
pattern of reported losses.
Frequency-Severity methods - These methods utilize
actual paid and incurred claim experience, but break the
data down into its component pieces: claim counts, often
expressed as a ratio to exposure or premium (frequency),
and average claim size (severity). The component pieces
are projected to an ultimate level and multiplied together
to result in an estimate of ultimate loss. These methods
are especially useful when the severity of claims can be
confined to a relatively stable range of estimated
ultimate average claim value.
Additional analyses - other methodologies are often used
in the reserving process for specific types of claims or
events, such as catastrophic or other specific major
events. These include vendor catastrophe models, which
are typically used in the estimation of Loss Reserves at
the early stage of known catastrophic events before
information has been reported to an insurer or reinsurer.
In the initial reserving process for short-tail insurance lines
(consisting of property, energy, marine and aviation and
other exposures including travel, accident and health and
lenders products), the Company relies on a combination of
the reserving methods discussed above. For catastrophe-
exposed business, the reserving process also includes the
usage of catastrophe models for known events and a heavy
reliance on analysis of individual catastrophic events and
management judgment. The development of losses on short-
tail business can be unstable, especially for policies
characterized by high severity, low frequency losses. As time
passes, for a given accident year, additional weight is given
to the paid and incurred B-F loss development methods and
eventually
loss
the historical paid and
development methods in the reserving process. The Company
incurred
to
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including
that historical paid and
makes a number of key assumptions in their reserving
reported
process,
development patterns are stable, catastrophe models provide
useful information about our exposure to catastrophic events
that have occurred and underwriters’ judgment as to potential
loss exposures can be relied on. The expected loss ratios used
in the initial reserving process for short-tail business have
varied over time due to changes in pricing, reinsurance
structure, estimates of catastrophe losses, policy changes
(such as attachment points, class and limits) and geographical
distribution. As losses in short-tail lines are reported
relatively quickly, expected loss ratios are selected for the
current accident year based upon actual attritional loss ratios
for earlier accident years, adjusted for rate changes, inflation,
changes in reinsurance programs and expected attritional
losses based on modeling. Furthermore, ultimate losses for
short-tail business are known in a reasonably short period of
time.
In the initial reserving process for medium-tail and long-tail
insurance lines (consisting of third party occurrence business,
third party claims made business, and other exposures
including surety, programs and contract binding exposures),
the Company primarily relies on the expected loss method.
The development of the Company’s medium-tail and long-
tail business may be unstable, especially if there are high
severity major events, as a portion of the Company’s casualty
business is in high excess layers. As time passes, for a given
accident year, additional weight is given to the paid and
incurred B-F loss development methods and historical paid
and incurred loss development methods in the reserving
process. The Company makes a number of key assumptions
in reserving for medium-tail and long-tail lines, including
that the pricing loss ratio is the best estimate of the ultimate
loss ratio at the time the policy is entered into, that the loss
industry
development patterns, which are based on a combination of
loss development patterns and
company and
adjusted to reflect differences in the insurance segment’s mix
of business, are reasonable and that claims personnel and
underwriters analyses of our exposure to major events are
assumed to be the best estimate of exposure to the known
claims on those events. The expected loss ratios used in the
initial reserving process for medium-tail and long-tail
business for recent accident years have varied over time, in
some cases significantly, from earlier accident years. As the
credibility of historical experience for earlier accident years
increases, the experience from these accident years will be
given a greater weighting in the actuarial analysis to
determine future accident year expected loss ratios, adjusted
for changes in pricing, loss trends, terms and conditions and
reinsurance structure.
In 2018, the Company entered into a loss portfolio transfer
and adverse development cover reinsurance agreement
accounted for as retroactive reinsurance. The agreement
transfers Loss Reserves and future favorable or adverse
development on certain runoff programs, within multi-line
third party
and other specialty business, and certain
occurrence business (the “Covered Lines”). As incurred
losses and allocated loss adjustment expenses for the Covered
Lines are ceded to the reinsurer, the Company is not exposed
to changes in the amount, timing and uncertainty of cash
flows arising from the Covered Lines. To avoid distortion,
the incurred losses and allocated loss adjustment expenses
and cumulative paid losses and loss adjustment expenses for
the Covered Lines are excluded entirely from the tables
below. Reinsurance recoverables at December 31, 2020
included $153.1 million
reinsurance
agreement.
related
this
to
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The following tables present information on the insurance segment’s short-duration insurance contracts:
Property, energy, marine and aviation ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2020
Total of IBNR
liabilities plus
expected
development on
reported claims
689
$
931
809
4,206
5,249
882
9,327
14,784
20,553
168,463
Cumulative
number of
reported
claims
4,219
4,269
4,278
3,930
4,618
6,389
6,752
5,347
6,051
16,980
Accident
year
2011
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
unaudited
2017
unaudited
2018
unaudited
2019
unaudited
2020
$ 269,739
$ 272,897
$ 231,841
$ 220,231
$ 210,926
$ 207,814
$ 200,918
$ 201,198
$ 197,833
$ 196,436
Year ended December 31,
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$ 34,478
232,500
231,742
205,098
198,837
196,405
192,406
190,192
178,039
158,718
156,344
148,800
143,046
134,620
133,544
128,301
148,185
145,765
147,315
136,096
132,209
134,234
112,333
109,799
103,944
102,469
97,809
104,139
100,986
105,330
100,147
280,695
246,272
235,932
180,981
186,030
179,056
177,673
126,968
134,937
91,788
96,127
230,421
173,693
178,564
359,394
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 200,473
$ 142,231
$ 167,867
$ 202,347
$ 197,720
$ 198,626
$ 99,724
Total
$ 1,766,001
$ 195,245
$ 195,347
20,522
92,855
138,431
161,255
166,965
179,371
180,734
172,611
32,239
84,759
110,548
119,791
121,922
125,156
123,036
25,859
53,669
23,567
77,804
64,916
24,728
84,103
76,299
83,321
87,721
86,214
98,420
98,463
87,887
97,218
30,219
139,854
195,518
30,026
102,285
26,130
173,460
124,369
115,293
86,207
94,703
211,694
134,858
105,380
55,619
All outstanding liabilities before 2011, net of reinsurance
23,517
Liabilities for losses and loss adjustment expenses, net of reinsurance
$ 492,588
Total
1,296,930
Third party occurrence business ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2020
2011
unaudited
$ 234,068
2012
unaudited
$ 240,669
241,062
2013
unaudited
$ 254,181
262,718
282,968
2014
unaudited
$ 258,784
268,365
296,839
329,809
Year ended December 31,
2015
unaudited
$ 252,615
271,035
306,751
335,720
358,858
2016
unaudited
$ 253,976
257,418
301,789
338,623
391,666
389,623
2017
unaudited
$ 247,052
252,822
281,786
342,868
398,670
394,281
417,183
2018
unaudited
$ 239,676
242,930
274,391
339,495
391,904
405,889
417,748
430,216
$
7,020
$ 25,276
6,966
$ 43,479
30,824
6,845
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 113,502
83,328
71,370
40,263
11,119
$ 73,448
58,444
29,230
9,209
$ 134,622
108,252
101,196
71,519
44,542
11,689
$ 152,756
129,572
122,120
112,591
88,443
41,938
13,396
$ 160,609
143,177
149,098
161,993
139,403
87,565
52,323
17,002
2019
unaudited
$ 234,782
243,484
272,528
343,995
391,231
399,394
422,441
452,975
456,059
Total
$ 172,940
154,282
164,187
191,168
181,566
136,793
99,827
63,798
18,392
Accident
year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
35,138
$
50,208
60,720
77,547
107,083
142,000
195,684
248,271
318,622
524,473
Cumulative
number of
reported
claims
70,924
65,495
66,685
74,964
77,257
76,765
82,267
74,789
80,934
67,541
2020
$ 235,073
241,378
269,437
342,731
382,518
374,728
412,318
450,736
487,224
606,827
$ 3,802,970
$ 181,505
162,202
174,700
211,503
211,573
164,573
135,025
115,076
73,120
24,439
1,453,716
209,031
$ 2,558,285
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Third party claims-made business ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2020
2011
unaudited
$ 287,607
2012
unaudited
$ 330,898
317,360
2013
unaudited
$ 322,274
319,961
301,715
2014
unaudited
$ 317,074
318,161
320,387
264,354
Year ended December 31,
2015
unaudited
$ 322,934
313,622
324,167
279,544
258,817
2016
unaudited
$ 301,240
291,010
320,284
298,715
277,437
275,119
2017
unaudited
$ 288,038
275,388
294,465
278,706
276,328
291,377
270,523
2018
unaudited
$ 289,974
277,388
290,961
281,513
259,902
308,195
285,993
272,844
$ 13,740
$ 72,365
17,709
$ 130,424
69,020
19,015
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 208,665
164,605
137,890
63,296
9,061
$ 175,139
121,112
87,408
13,815
$ 228,450
190,200
179,302
129,502
52,019
10,547
$ 240,267
209,097
197,907
172,835
100,048
68,178
9,289
$ 254,300
227,179
217,030
207,640
126,452
127,229
67,572
12,255
2019
unaudited
$ 291,477
284,875
281,751
297,485
255,276
314,515
311,980
314,412
289,463
Total
$ 269,579
251,078
238,798
229,512
174,108
158,159
113,047
68,300
12,387
Accident
year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
4,594
$
13,772
15,306
29,279
29,255
61,156
82,537
123,386
186,452
327,587
Cumulative
number of
reported
claims
11,762
14,760
14,543
13,935
13,817
15,734
15,923
14,988
18,871
21,538
2020
$ 290,124
285,236
271,262
291,729
252,329
321,850
308,401
319,956
317,668
383,914
$ 3,042,469
$ 276,887
255,098
245,504
243,338
193,130
205,514
143,149
118,184
65,345
17,098
1,763,247
97,957
$ 1,377,179
Multi-line and other specialty ($000’s except claim count) (1)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2020
2011
unaudited
$ 183,081
2012
unaudited
$ 188,766
253,525
2013
unaudited
$ 182,979
264,217
274,361
2014
unaudited
$ 176,545
258,467
283,112
349,754
Year ended December 31,
2015
unaudited
$ 172,649
256,106
274,483
373,978
398,755
2016
unaudited
$ 172,403
255,277
281,697
370,442
418,761
482,653
2017
unaudited
$ 168,888
247,050
271,687
387,082
420,642
504,586
551,688
2018
unaudited
$ 170,350
247,279
275,386
398,240
443,258
514,650
579,217
570,069
$ 51,312
$ 103,372
78,337
$ 117,927
165,836
86,791
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 148,049
209,124
185,611
206,444
142,009
$ 136,686
190,064
152,773
109,236
$ 151,710
222,929
222,086
255,332
250,360
181,415
$ 157,199
231,776
237,898
306,411
304,197
323,681
187,606
$ 159,526
232,987
251,698
341,580
350,781
382,805
363,275
214,475
2019
unaudited
$ 170,091
244,191
273,177
410,366
456,329
516,239
578,341
621,534
613,638
Total
$ 162,460
236,282
257,744
367,026
380,818
425,642
419,454
399,852
213,950
Accident
year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
1,790
$
2,551
4,661
12,232
18,596
28,282
45,947
74,894
134,996
403,044
Cumulative
number of
reported
claims
44,989
55,512
72,323
111,727
151,598
177,931
221,643
247,622
234,383
117,814
2020
$ 166,577
244,246
270,853
418,512
471,865
537,591
615,833
629,299
667,415
654,302
$ 4,676,493
$ 162,995
239,244
260,374
380,041
409,455
464,774
480,336
464,970
397,104
174,862
3,434,155
31,453
$ 1,273,791
(1) In 2019, the Company entered into a loss portfolio transfer agreement, which transferred reserves associated with certain multi-line business for accident years 2017 and prior
to a third party. This loss portfolio transfer agreement was commuted in 2020, therefore the complete history of the subject business is now included in the multi-line triangles above.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by
age, net of reinsurance, as of December 31, 2020:
Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
18.6 %
3.2 %
4.5 %
30.8 %
41.7 %
9.2 %
18.7 %
27.7 %
19.6 %
11.3 %
18.4 %
10.5 %
7.8 %
11.6 %
12.9 %
10.4 %
3.9 %
11.3 %
12.2 %
6.7 %
3.3 %
8.8 %
7.1 %
4.6 %
2.3 %
6.2 %
5.8 %
2.3 %
(1.0) %
3.9 %
5.2 %
1.2 %
(0.6) %
4.3 %
3.3 %
1.5 %
0.1 %
3.6 %
2.5 %
0.3 %
Property, energy, marine and aviation
Third party occurrence business
Third party claims-made business
Multi-line and other specialty
Reinsurance Segment
the amount of
reserves based upon
Loss Reserves for the Company’s reinsurance segment are
comprised of (1) case reserves, (2) additional case reserves
(“ACRs”) and (3) IBNR reserves. The Company receives
reports of claims notices from ceding companies and records
case
reserves
recommended by the ceding company. Case reserves may be
supplemented by ACRs, which may be estimated by the
Company’s claims personnel ahead of official notification
from the ceding company, or when judgment regarding the
size or severity of the known event differs from the ceding
company. In certain instances, the Company establishes
ACRs even when the ceding company does not report any
liability on a known event. In addition, specific claim
information reported by ceding companies or obtained
through claim audits can alert the Company to emerging
trends such as changing legal interpretations of coverage and
liability, claims from unexpected sources or classes of
business, and significant changes in the frequency or severity
of individual claims. Such information is often used in the
process of estimating IBNR reserves. IBNR reserves are
established to provide for incurred claims which have not yet
been reported at the balance sheet date as well as to adjust for
any projected variance in case reserving. Actuaries estimate
ultimate losses and loss adjustment expenses using various
generally accepted actuarial methods applied to known losses
and other relevant information. Like case reserves, IBNR
reserves are adjusted as additional information becomes
known or payments are made. The process of estimating Loss
Reserves involves a considerable degree of judgment by
management and, as of any given date, is inherently
uncertain.
The estimation of Loss Reserves for the reinsurance segment
is subject to the same risk factors as the estimation of Loss
Reserves for the insurance segment. In addition, the inherent
uncertainties of estimating such reserves are even greater for
reinsurers, due primarily to the following factors: (1) the
claim-tail for reinsurers is generally longer because claims
are first reported to the ceding company and then to the
reinsurer through one or more intermediaries, (2) the reliance
on premium estimates, where reports have not been received
from the ceding company, in the reserving process, (3) the
potential for writing a number of reinsurance contracts with
different ceding companies with the same exposure to a
single loss event, (4) the diversity of loss development
patterns among different types of reinsurance contracts, (5)
the ceding companies for
the necessary reliance on
information regarding reported claims and (6) the differing
reserving practices among ceding companies.
Ultimate losses and loss adjustment expenses are generally
determined by extrapolation of claim emergence and
settlement patterns observed in the past that can reasonably
be expected to persist into the future.As with the insurance
segment, the process of estimating Loss Reserves for the
reinsurance segment involves a considerable degree of
judgment by management and, as of any given date, is
inherently uncertain. As discussed above, such uncertainty is
greater for reinsurers compared to insurers. As a result, our
reinsurance operations obtain information from numerous
sources to assist in the process. Pricing actuaries from the
reinsurance
to
understanding and analyzing a ceding company’s operations
and loss history during the underwriting of the business,
using a combination of ceding company and industry
statistics. Such statistics normally include historical premium
and loss data by class of business, individual claim
information for larger claims, distributions of insurance limits
provided, loss reporting and payment patterns, and rate
change history. This analysis is used to project expected loss
ratios for each treaty during the upcoming contract period.
segment devote
considerable
effort
As mentioned above, there can be a considerable time lag
from the time a claim is reported to a ceding company to the
time it is reported to the reinsurer. The lag can be several
years in some cases and may be attributed to a number of
reasons, including the time it takes to investigate a claim,
delays associated with the litigation process, the deterioration
in a claimant’s physical condition many years after an
accident occurs, the case reserving approach of the ceding
company, etc. In the reserving process, the Company
assumes that such lags are predictable, on average, over time
and therefore the lags are contemplated in the loss reporting
patterns used in their actuarial methods. This means that the
reinsurance segment must rely on estimates for a longer
period of time than does an insurance company. Backlogs in
the recording of assumed reinsurance can also complicate the
accuracy of loss reserve estimation. As of December 31,
2020 there were no significant backlogs related to the
processing of assumed reinsurance information at our
reinsurance operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reinsurance segment relies heavily on information
reported by ceding companies, as discussed above. In order
to determine
the accuracy and completeness of such
information, underwriters, actuaries, and claims personnel
often perform audits of ceding companies and regularly
review information received from ceding companies for
unusual or unexpected results. Material findings are usually
discussed with
the ceding companies. The Company
sometimes encounters situations where they determine that a
claim presentation from a ceding company is not in
accordance with contract terms. In these situations, the
Company attempts to resolve the dispute with the ceding
company. Most situations are resolved amicably and without
the need for litigation or arbitration. However, in the
infrequent situations where a resolution is not possible, the
Company will vigorously defend its position in such disputes.
Although Loss Reserves are initially determined based on
underwriting and pricing analysis, the Company applies
several generally accepted actuarial methods, as discussed
above, on a quarterly basis to evaluate its Loss Reserves in
addition to the expected loss method, in particular for
reserves from more mature underwriting years (the year in
which business is underwritten). Each quarter, as part of the
reserving process, the Company’s actuaries reaffirm that the
assumptions used in the reserving process continue to form a
sound basis for projection of liabilities. If actual loss activity
differs substantially from expectations based on historical
information, an adjustment to Loss Reserves may be
supported. Estimated Loss Reserves for more mature
underwriting years are now based more on actual loss activity
and historical patterns than on the initial assumptions based
on pricing indications. More recent underwriting years rely
more heavily on internal pricing assumptions. The Company
places more or less reliance on a particular actuarial method
based on the facts and circumstances at the time the estimates
of Loss Reserves are made.
In the initial reserving process for short-tail reinsurance lines
(consisting of property excluding property catastrophe and
property catastrophe exposures), the Company relies on a
combination of the reserving methods discussed above. For
known catastrophic events,
the reserving process also
includes the usage of catastrophe models and a heavy
reliance on analysis which includes ceding company inquiries
and management judgment. The development of property
losses may be unstable, especially where there is high
catastrophic exposure, may be characterized by high severity,
low frequency losses for excess and catastrophe-exposed
business and may be highly correlated across contracts. As
time passes, for a given underwriting year, additional weight
is given to the paid and incurred B-F loss development
methods and historical paid and incurred loss development
to potential
methods in the reserving process. The Company makes a
number of key assumptions in reserving for short-tail lines,
including that historical paid and reported development
patterns are stable, catastrophe models provide useful
information about our exposure to catastrophic events that
have occurred and our underwriters’ judgment and guidance
received from ceding companies as
loss
exposures may be relied on. The expected loss ratios used in
the initial reserving process for property exposures have
varied over time due to changes in pricing, reinsurance
terms and
structure, estimates of catastrophe
conditions and geographical distribution. As
in
losses
property lines are reported relatively quickly, expected loss
ratios are selected for
the current underwriting year
incorporating the experience for earlier underwriting years,
adjusted for rate changes, inflation, changes in reinsurance
programs, expectations about present and future market
conditions and expected attritional losses based on modeling.
Due to the short-tail nature of property business, reported
loss experience emerges quickly and ultimate losses are
known in a reasonably short period of time.
losses,
to
is given
relies on
incurred B-F
In the initial reserving process for medium-tail and long-tail
reinsurance lines (consisting of casualty, other specialty,
marine and aviation and other exposures), the Company
primarily
loss method. The
the expected
development of medium-tail and long-tail business may be
unstable, especially if there are high severity major events,
with business written on an excess of loss basis typically
having a longer tail than business written on a pro rata basis.
As time passes, for a given underwriting year, additional
weight
loss
the paid and
development methods and eventually to the historical paid
and incurred loss development methods in the reserving
process. Our reinsurance operations make a number of key
assumptions in reserving for medium-tail and long-tail lines,
including that the pricing loss ratio is the best estimate of the
ultimate loss ratio at the time the contract is entered into,
historical paid and reported development patterns are stable
and claims personnel and underwriters’ analyses of our
exposure to major events are our best estimate of our
exposure to the known claims on those events. The expected
loss ratios used in our reinsurance operations’ initial
reserving process for medium-tail and long-tail contracts
have varied over time due to changes in pricing, terms and
conditions and reinsurance structure. As the credibility of
historical experience for earlier underwriting years increases,
the experience from these underwriting years is used in the
actuarial analysis to determine future underwriting year
expected loss ratios, adjusted for changes in pricing, loss
trends, terms and conditions and reinsurance structure.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present information on the reinsurance segment’s short-duration insurance contracts:
Casualty ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2020
2011
unaudited
$ 152,359
2012
unaudited
$ 155,796
145,770
2013
unaudited
$ 149,799
143,950
168,738
2014
unaudited
$ 145,259
139,762
161,993
219,506
Year ended December 31,
2015
unaudited
$ 141,023
127,563
157,804
224,801
225,908
2016
unaudited
$ 138,257
117,551
151,340
222,220
224,525
217,499
2017
unaudited
$ 132,142
111,938
139,221
236,505
233,644
229,862
268,353
2018
unaudited
$ 129,307
120,655
137,591
233,033
240,886
254,032
253,959
282,010
$
2,353
$ 11,509
1,371
$ 21,684
8,637
2,549
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 55,027
25,738
23,209
16,160
4,490
$ 38,998
14,875
10,050
3,962
$ 64,486
36,809
43,263
40,949
20,340
5,763
$ 71,457
48,109
54,797
63,636
47,381
25,720
6,441
$ 76,722
59,877
63,415
91,366
71,231
51,822
29,414
7,588
2019
unaudited
$ 130,769
123,884
133,857
242,792
244,861
268,880
269,434
296,507
338,581
Total
$ 82,728
70,308
71,150
114,798
97,007
86,989
59,377
31,118
15,824
Accident
year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
16,905
$
28,208
37,566
48,039
63,133
65,394
79,858
81,666
178,981
333,679
Cumulative
number of
reported
claims
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2020
$ 126,543
122,312
137,978
243,067
251,747
275,966
297,998
286,944
347,126
393,328
$ 2,483,009
$
87,463
76,287
77,089
135,101
120,889
114,096
108,591
106,454
57,682
17,822
901,474
303,572
$ 1,885,107
Property catastrophe ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2020
2011
unaudited
$ 215,493
2012
unaudited
$ 195,232
150,570
2013
unaudited
$ 176,170
123,288
69,044
2014
unaudited
$ 162,993
108,787
49,507
46,774
Year ended December 31,
2015
unaudited
$ 159,174
102,254
37,714
32,188
34,895
2016
unaudited
$ 158,465
99,998
33,143
26,438
19,282
26,671
2017
unaudited
$ 156,150
99,178
30,567
23,491
12,724
19,556
82,521
2018
unaudited
$ 152,082
97,143
29,848
21,671
6,643
15,313
49,340
75,309
$ 63,175
$ 89,042
25,850
$ 122,060
70,843
12,283
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 143,141
90,834
24,911
20,635
(3,161)
$ 137,400
83,929
19,701
13,702
$ 145,774
92,993
26,953
19,293
(1,825)
(6,752)
$ 147,929
94,122
28,859
20,170
2,660
2,646
30,173
$ 148,338
94,732
29,117
19,786
2,959
3,057
30,224
25,505
2019
unaudited
$ 150,971
97,252
28,910
20,957
4,746
11,487
46,354
63,106
51,202
Total
$ 148,929
95,419
29,119
19,993
2,537
4,515
34,534
14,232
3,878
Accident
year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
—
$
132
(132)
(10)
67
1,302
87
5,855
9,545
50,368
Cumulative
number of
reported
claims
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2020
$ 150,459
96,637
29,060
20,845
4,102
9,027
32,747
44,448
35,789
273,069
$ 696,183
$ 148,403
95,521
29,846
20,146
2,630
3,803
24,209
26,189
17,393
53,495
421,635
1,624
$ 276,172
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property excluding property catastrophe ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2020
2011
unaudited
$ 208,318
2012
unaudited
$ 180,624
156,980
2013
unaudited
$ 168,122
122,552
116,130
2014
unaudited
$ 164,414
124,408
77,474
144,299
Year ended December 31,
2015
unaudited
$ 160,264
119,838
71,100
118,056
215,856
2016
unaudited
$ 158,952
115,425
66,669
99,891
189,735
178,103
2017
unaudited
$ 156,647
113,201
64,950
91,272
185,288
147,154
262,387
2018
unaudited
$ 155,606
111,722
64,162
88,994
189,702
139,032
245,333
223,917
$ 47,949
$ 122,137
26,158
$ 142,081
78,416
26,068
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 148,684
102,445
50,208
63,144
75,725
$ 146,626
93,752
43,068
23,641
$ 149,788
103,452
53,389
72,133
119,578
33,418
$ 150,028
104,091
54,202
77,098
150,207
96,174
25,807
$ 150,302
103,274
56,090
78,753
161,447
99,954
118,658
29,724
2019
unaudited
$ 154,261
109,122
62,949
84,679
188,992
138,008
231,062
241,754
219,130
Total
$ 151,322
103,216
61,601
79,146
166,632
105,486
148,638
108,263
43,809
Accident
year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
801
$
251
770
2,063
12,275
15,986
17,528
18,520
32,266
167,596
Cumulative
number of
reported
claims
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2020
$ 152,753
103,596
63,769
82,899
177,928
141,789
223,442
238,162
209,696
387,907
$ 1,781,941
$ 150,417
103,076
62,591
79,009
160,271
113,336
156,523
153,599
125,698
102,474
1,206,994
6,125
$ 581,072
Marine and aviation ($000’s)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2020
2011
unaudited
$ 39,359
2012
unaudited
$ 32,956
59,117
2013
unaudited
$ 35,889
58,956
39,538
2014
unaudited
$ 32,436
55,172
38,509
31,333
Year ended December 31,
2015
unaudited
$ 28,811
52,428
37,545
29,576
34,066
2016
unaudited
$ 27,213
51,223
36,101
27,763
37,875
27,409
2017
unaudited
$ 27,264
49,865
35,993
26,059
31,953
22,804
28,868
2018
unaudited
$ 24,871
46,183
35,248
24,050
31,910
23,622
26,407
28,355
$
4,421
$ 12,122
2,664
$ 16,530
11,480
5,109
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 15,959
33,428
19,075
8,221
11
$ 19,235
27,623
14,330
4,373
$ 16,634
35,174
22,111
11,872
13,476
(7,300)
$ 21,988
36,379
23,135
12,748
19,120
(1,655)
1,659
$ 21,911
37,871
24,427
14,939
20,971
552
6,546
2,006
2019
unaudited
$ 23,792
43,165
34,806
23,695
30,964
19,344
23,878
26,395
49,466
Total
$ 21,973
38,164
24,804
15,376
22,773
3,292
9,372
7,087
11,015
Accident
year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
1,317
$
2,228
5,039
5,044
4,738
8,230
6,783
7,490
17,208
58,896
Cumulative
number of
reported
claims
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2020
$
23,517
41,316
31,087
22,347
28,618
17,029
20,853
24,957
55,921
84,238
$ 349,883
$
21,979
38,257
24,520
16,253
22,456
5,900
11,037
11,384
21,930
9,339
183,055
16,534
$ 183,362
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incurred losses and allocated loss adjustment expenses, net of reinsurance
December 31, 2020
2011
unaudited
$ 115,554
2012
unaudited
$ 100,395
231,531
2013
unaudited
$ 96,117
219,627
259,594
2014
unaudited
$ 94,512
209,355
232,427
283,138
Year ended December 31,
2015
unaudited
$ 92,703
203,114
222,046
263,653
217,666
2016
unaudited
$ 91,334
200,945
218,354
265,417
208,927
231,160
2017
unaudited
$ 90,727
203,898
219,314
258,595
207,220
228,501
282,024
2018
unaudited
$ 88,820
202,085
216,861
253,373
204,179
222,788
271,084
338,298
$ 29,717
$ 59,715
47,484
$ 72,298
126,138
58,962
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
$ 80,642
161,073
149,617
151,115
56,438
$ 77,018
149,753
122,813
71,006
$ 82,468
169,096
166,100
187,560
118,770
67,730
$ 84,815
173,202
175,892
201,189
143,690
143,624
76,847
$ 85,960
177,742
181,279
207,965
150,969
168,425
171,632
75,395
2019
unaudited
$ 89,163
196,309
216,579
255,341
204,458
217,054
260,051
334,567
378,545
Total
$ 85,643
179,614
188,746
219,234
160,243
180,542
201,378
211,954
84,416
Accident
year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Total of IBNR
liabilities plus
expected
development on
reported claims
1,058
$
4,635
10,351
15,127
19,996
18,179
40,904
53,316
80,438
259,496
Cumulative
number of
reported
claims
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2020
$
87,648
187,908
210,455
250,825
201,046
223,777
259,041
326,027
358,997
551,374
$ 2,657,098
$
85,854
179,943
189,147
221,978
168,314
192,947
209,005
243,257
167,055
101,559
1,759,059
8,956
$ 906,995
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by
age, net of reinsurance, as of December 31, 2020:
Casualty
Property catastrophe
Property excluding property catastrophe
Marine and aviation
Other specialty
Mortgage Segment
Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
2.4 %
20.5 %
26.4 %
6.5 %
26.9 %
7.2 %
30.2 %
39.5 %
27.2 %
33.9 %
11.2 %
25.1 %
12.8 %
19.1 %
12.3 %
12.2 %
2.9 %
5.2 %
10.0 %
5.2 %
10.3 %
(1.2) %
2.3 %
4.2 %
4.3 %
8.4 %
1.4 %
0.2 %
2.2 %
3.1 %
7.3 %
0.7 %
2.0 %
7.9 %
2.4 %
5.7 %
1.2 %
0.6 %
(0.2) %
0.8 %
4.8 %
0.2 %
0.3 %
0.2 %
(0.1) %
3.7 %
(0.3) %
(0.6) %
— %
0.2 %
The Company’s mortgage segment includes (1) direct
mortgage insurance in the U.S., (2) direct mortgage insurance
in Europe, (3) global mortgage reinsurance and (4)
participation in various GSE credit risk-sharing products. The
latter three categories along with second lien and student loan
exposures are excluded on the basis of insignificance for the
purposes of presenting disclosures related to short duration
contracts.
For direct mortgage insurance business, the Company
establishes case reserves for loans that have been reported as
delinquent by loan servicers as well as those that are
delinquent but not reported (IBNR reserves). The Company’s
U.S. mortgage insurance operations also reserve for the
expenses of adjusting claims related to these delinquencies.
The trigger that creates a case reserve estimate is that an
insured loan is reported to us as being two payments in
arrears. The actuarial reviews and documentation created in
the reserving process are completed in accordance with
standards. The
generally accepted actuarial
selected
assumptions reflect actuarial judgment based on the analysis
of historical data and experience combined with information
concerning
judicial,
regulatory and other influences on ultimate claim settlements.
current underwriting,
economic,
Because the reserving process requires the Company to
forecast future conditions, it is inherently uncertain and
requires significant judgment and estimation. The use of
different estimates would result in the establishment of
different reserve levels. Additionally, changes in estimates
are likely to occur from period to period as economic
conditions change, and the ultimate liability may vary
significantly from the estimates used. Major risk factors
include (but are not limited to) changes in home prices and
borrower equity, which can limit the borrower’s ability to sell
the property and satisfy the outstanding loan balance, and
changes in unemployment, which can affect the borrower’s
income and ability to make mortgage payments. The unique
nature of the COVID-19 pandemic, with no historical
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
precedent, adds further uncertainty
estimates.
to current reserve
The lead actuarial methodology used by the Company is a
frequency-severity method based on the inventory of pending
delinquencies. Each month the loan servicers report the
delinquency status of each insured loan. Using the frequency-
severity method allows the Company to take advantage of its
knowledge of the number of delinquent loans and the
coverage provided (“risk size”) on those loans by directly
relating the reserves to these amounts. The delinquencies are
grouped into homogeneous cohorts for analysis, reflecting
product type and age of delinquency. A claim rate is then
developed for each cohort which represents the frequency
with which the delinquencies become claims. The claim
frequency rates are based on an analysis of the patterns of
emerging cure counts and claim counts, the foreclosure status
of the pending delinquencies, the product and geographical
mix of the delinquencies and our view of future economic
and claim conditions, which include trends in home prices
and unemployment. Claim rates can vary materially by age of
delinquency, depending on the mix of delinquencies and
economic conditions.
Claim size severity estimates are determined by examining
the risk sizes on the delinquent loans and estimating the
portion of risk that will be paid, as well as any expenses. This
is done based on a review of historical development patterns,
an assessment of economic conditions and the level of equity
the borrowers may have in their homes, as well as
considering economic conditions and
loss mitigation
opportunities. Mortgage insurance is generally not subject to
large claim sizes, as with some other lines of insurance. A
claim size over $250,000 is rare, and this helps reduce the
volatility of claim size estimates.
The claim rate and claim size assumptions generate case
reserves for the population of reported delinquencies. The
reserve for unreported delinquencies (included in IBNR
reserves) is estimated by looking at historical patterns of
reporting. Claim rates and claim sizes can then be assigned to
estimated unreported delinquencies using assumptions made
in the establishment of case reserves.
Mortgage insurance Loss Reserves are short-tail, in the sense
that the vast majority of delinquencies are resolved within
two years of being reported. Due to the forbearances and
foreclosure moratoriums associated with COVID-19,
settlement timelines may be extended. While reserves are
initially analyzed by reserve cohort, as described above, they
are also rolled up by underwriting year to ensure that reserve
assumptions are consistent with the performance of the
underwriting year. The accuracy of prior reserve assumptions
is also checked in hindsight to determine if adjustments to the
assumptions are needed.
Loss Reserves for the Company’s mortgage reinsurance
business and GSE credit-risk sharing
transactions are
comprised of case reserves and IBNR reserves. The
Company’s mortgage reinsurance operations receive reports
of delinquent
loans and claims notices from ceding
companies and record case reserves based upon the amount
of reserves recommended by the ceding company. In
addition, specific claim and delinquency information reported
by ceding companies is used in the process of estimating
IBNR reserves.
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The tables below include the acquired business of United Guaranty Corporation (“UGC”) (including UGRIC), across all
periods presented. Consistent with prior practice, the Company provides accident years 2012 and forward in the disclosures
below. The following table presents information on the mortgage segment’s short-duration insurance contracts:
Direct mortgage insurance business in the U.S. ($000’s except claim count)
Incurred losses and allocated loss adjustment expenses, net of reinsurance
Year ended December 31,
Accident
year
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
unaudited
2017
unaudited
2018
unaudited
2019
unaudited
2020
2012
2013
2014
2015
2016
2017
2018
2019
2020
2012
2013
2014
2015
2016
2017
2018
2019
2020
$
520,835
$
480,592
$
475,317
$
469,238
$
467,296
$
459,467
$
458,065
$
456,286
$
456,331
469,311
419,668
316,095
411,793
297,151
222,790
405,809
279,434
197,238
183,556
395,693
266,027
198,001
170,532
179,376
393,149
265,992
194,677
148,715
132,220
132,318
390,987
261,091
189,235
140,608
107,255
96,357
108,424
391,062
262,682
190,913
142,392
108,181
89,120
119,253
420,003
Total
$ 2,179,937
Cumulative paid losses and allocated loss adjustment expenses, net of reinsurance
(106,065)
186,605
41,447
327,605
203,957
20,099
395,695
308,956
129,159
16,159
426,024
353,189
201,925
92,431
11,462
441,577
373,909
233,879
151,222
72,201
8,622
448,151
382,200
247,038
171,337
113,357
48,112
3,966
452,348
386,853
254,175
180,321
127,286
78,650
31,478
2,899
453,587
387,894
256,285
183,472
131,161
87,317
50,135
20,105
1,040
1,570,996
December 31, 2020
Total of
IBNR
liabilities plus
expected
development
on reported
claims
5
3
7
4
7
630
1,281
2,921
15,879
Cumulative
number of
paid claims
15,083
9,471
6,290
4,543
3,411
2,429
1,512
566
32
All outstanding liabilities before 2012, net of reinsurance
14,504
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
623,445
The following table presents the average annual percentage payout of incurred losses and allocated loss adjustment expenses by
age, net of reinsurance, as of December 31, 2020:
Average annual percentage payout of incurred losses and allocated loss adjustment expenses by age, net of reinsurance
U.S. Primary
3.0 %
39.0 %
27.8 %
11.1 %
4.9 %
2.5 %
1.1 %
0.6 %
0.3 %
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Other Segment
Loss Reserves for the ‘other’ segment (i.e., Watford) are
comprised of case reserves, ACRs and IBNR reserves. For all
business assumed by Watford,
the Company acts as
reinsurance underwriting manager, provides actuarial and
risk management services and recommends a level of Loss
Reserves to Watford. The Company does not guarantee or
provide credit support for Watford, and the Company’s
financial exposure to Watford is limited to its investment in
Watford’s common and preferred shares and counterparty
the
credit risk (mitigated by collateral) arising from
reinsurance transactions. The estimation of Loss Reserves for
Watford is subject to the same risk factors as the estimation
of Loss Reserves for the Company’s insurance, reinsurance
and mortgage segments as described earlier. Watford
performs its own reserve reviews and sets its reserves
the Company
independently. As noted previously,
determined
the ‘other’ segment are
that amounts
insignificant for the purposes of these footnote disclosures.
in
For the year ended December 31, 2020, the Company did not
make any significant changes in its methodologies or
assumptions as described above (a)
the
presented amounts of IBNR reserves, (b) for expected
development on case reserves.
to determine
The Company measures claim frequency information on an
individual claim count basis. Claim counts are provided for
insurance and mortgage segments, where reliable
the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
individual
information is available. For insurance business, any claim
which is reported to the Company is included in the count,
even if it is subsequently settled without liability to the
Company. The Company does not include claim count
information for losses from U.S. insurance pool business
is unavailable and
where
impracticable
to obtain. For mortgage business, only
delinquencies which subsequently become claims are
included in the claim count. For reinsurance business, claim
counts are not provided. A significant amount of the
Company’s reinsurance business is written on a proportional
basis, for which individual loss information is typically
unavailable and impracticable to obtain.
information
loss
For the year ended December 31, 2020, the Company did not
make any significant changes in its methodologies or
assumptions as described above to calculate the cumulative
claim frequency.
The following table represents a reconciliation of the
disclosures of net incurred and paid loss development tables
to the reserve for losses and loss adjustment expenses at
December 31, 2020:
Net outstanding liabilities
Insurance
Property, energy, marine and aviation
Third party occurrence business
Third party claims-made business
Multi-line and other specialty
Reinsurance
Casualty
Property catastrophe
Property excluding property catastrophe
Marine and aviation
Other specialty
Mortgage
U.S. primary
Other short duration lines not included in disclosures (1)
Total for short duration lines
Unpaid losses and loss adjustment expenses recoverable
Insurance
Property, energy, marine and aviation
Third party occurrence business
Third party claims-made business
Multi-line and other specialty
Reinsurance
Casualty
Property catastrophe
Property excluding property catastrophe
Marine and aviation
Other specialty
Mortgage
U.S. primary
Other short duration lines not included in disclosures (2)
Intercompany eliminations
Total for short duration lines
Lines other than short duration
Discounting
Unallocated claims adjustment expenses
December 31,
2020
$
492,588
2,558,285
1,377,179
1,273,791
1,885,107
276,172
581,072
183,362
906,995
623,445
1,765,397
11,923,393
331,817
1,272,034
808,238
246,915
536,809
266,946
70,108
63,781
317,011
52,016
1,090,486
(718,507)
4,337,654
75,369
(23,326)
200,839
252,882
Total gross reserves for losses and loss adjustment
expenses
$ 16,513,929
(1)
(2)
Includes net outstanding liabilities of $1.2 billion for the ‘other’ segment.
Includes unpaid loss and loss adjustment expenses recoverable of $153.1
million related to the loss portfolio transfer reinsurance agreement.
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7. Allowance for Expected Credit Losses
Premiums Receivable
The following table provides a roll forward of the allowance
for expected credit losses of the Company’s premium
receivables:
December 31, 2020
Premium
Receivables,
Net of
Allowance
Allowance for
Expected
Credit Losses
Balance at beginning of period
$
1,778,717 $
21,003
Cumulative effect of accounting
change (1)
Change for provision of expected
credit losses (2)
Balance at end of period
$
2,064,586 $
6,539
10,239
37,781
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses
(Topic 326)” See note 3.
(2) Amounts deemed uncollectible are written-off in operating expenses. For
the 2020 period, amounts written off totaled $2.8 million.
Reinsurance Recoverables
financially
The Company monitors the financial condition of its
reinsurers and attempts to place coverages only with
substantial,
the
Company has not experienced any material credit losses to
date, an inability of its reinsurers or retrocessionaires to meet
their obligations to it over the relevant exposure periods for
any reason could have a material adverse effect on its
financial condition and results of operations.
sound carriers. Although
The following table summarizes the Company’s reinsurance
recoverables on paid and unpaid losses (not including ceded
unearned premiums) at December 31, 2020 and 2019:
Reinsurance recoverable on unpaid and
paid losses and loss adjustment expenses
% due from carriers with A.M. Best rating
of “A-” or better
% due from all other carriers with no A.M.
Best rating (1)
Largest balance due from any one carrier
as % of total shareholders’ equity
December 31,
2020
2019
$ 4,500,802
$ 4,346,816
63.9 %
61.2 %
36.1 %
38.8 %
1.8 %
1.7 %
(1) Over 94% of such amount is collateralized through reinsurance trusts,
funds withheld arrangements, letters of credit or other.
Contractholder Receivables
The following table provides a roll forward of the allowance
for expected credit losses of the Company’s contractholder
receivables:
December 31, 2020
Contractholder
Receivables,
Net of
Allowance
Allowance for
Expected
Credit Losses
Balance at beginning of period
$
2,119,460 $
0
Cumulative effect of accounting
change (1)
Change for provision of expected
credit losses
Balance at end of period
$
1,986,924 $
6,663
1,975
8,638
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses
(Topic 326)” See note 3.
The following table provides a roll forward of the allowance
for expected credit losses of the Company’s reinsurance
recoverables:
8. Reinsurance
December 31, 2020
Reinsurance
Recoverables,
Net of
Allowance
Allowance for
Expected
Credit Losses
Balance at beginning of period
$
4,346,816 $
1,364
Cumulative effect of accounting
change (1)
Change for provision of expected
credit losses
Balance at end of period
$
4,500,802 $
12,010
(1,738)
11,636
(1) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses
(Topic 326)” See note 3.
In the normal course of business, the Company’s insurance
subsidiaries cede a portion of their premium through pro rata
and excess of loss reinsurance agreements on a treaty or
facultative basis. The Company’s reinsurance subsidiaries
participate in “common account” retrocessional arrangements
for certain pro rata treaties. Such arrangements reduce the
effect of individual or aggregate losses to all companies
participating on such treaties, including the reinsurers, such
as the Company’s reinsurance subsidiaries, and the ceding
company.
reinsurance
subsidiaries may purchase retrocessional coverage as part of
their risk management program. The Company’s mortgage
subsidiaries cede a portion of their premium through quota
share arrangements and enter into various aggregate excess of
loss mortgage reinsurance agreements with various special
purpose reinsurance companies. Reinsurance recoverables are
recorded as assets, predicated on the reinsurers’ ability to
meet their obligations under the reinsurance agreements. If
the reinsurers are unable to satisfy their obligations under the
the Company’s
addition,
In
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agreements,
subsidiaries would be liable for such defaulted amounts.
the Company’s
insurance or
reinsurance
The effects of reinsurance on the Company’s written and
earned premiums and losses and loss adjustment expenses
with unaffiliated reinsurers were as follows:
Year Ended December 31,
2019
2018
2020
Premiums Written
Direct
Assumed
Ceded
Net
Premiums Earned
Direct
Assumed
Ceded
Net
Losses and Loss
Adjustment Expenses
Direct
Assumed
Ceded
Net
$ 6,553,910 $ 5,681,523 $ 4,838,902
2,122,102
(1,614,257)
$ 7,437,716 $ 6,039,067 $ 5,346,747
3,534,158
(2,650,352)
2,457,437
(2,099,893)
$ 6,361,451 $ 5,447,829 $ 4,799,842
1,988,038
(1,555,905)
$ 6,991,935 $ 5,786,498 $ 5,231,975
2,337,950
(1,999,281)
3,213,873
(2,583,389)
$ 4,392,392 $ 2,953,072 $ 2,472,133
1,307,317
(889,344)
$ 4,689,599 $ 3,133,452 $ 2,890,106
2,204,323
(1,907,116)
1,602,528
(1,422,148)
Bellemeade Re
The Company has entered into various aggregate excess of
loss mortgage reinsurance agreements with various special
purpose reinsurance companies domiciled in Bermuda (the
“Bellemeade Agreements”). For the respective coverage
periods, the Company will retain the first layer of the
respective aggregate
the special purpose
losses and
reinsurance companies will provide second layer coverage up
to the outstanding coverage amount. The Company will then
retain losses in excess of the outstanding coverage limit. The
aggregate excess of loss reinsurance coverage decreases over
a ten-year period as the underlying covered mortgages
amortize.
The following table summarizes the respective coverages and
retentions at December 31, 2020:
December 31, 2020
Current
Coverage
Initial
Coverage at
Issuance
Remaining
Retention,
Net
125,953
123,690
305,606
129,874
116,530
162,457
181,036
118,102
754,782
239,278
171,580
147,466
$ 5,909,497 $ 3,967,473 $ 2,576,354
145,573
250,095
108,395
302,563
219,256
398,316
528,084
468,737
308,458
449,167
451,816
337,013
368,114
374,460
653,278
506,110
341,790
621,022
700,920
577,267
528,540
449,167
451,816
337,013
Bellemeade 2017-1 Ltd. (1)
Bellemeade 2018-1 Ltd. (2)
Bellemeade 2018-2 Ltd. (3)
Bellemeade 2018-3 Ltd. (4)
Bellemeade 2019-1 Ltd. (5)
Bellemeade 2019-2 Ltd. (6)
Bellemeade 2019-3 Ltd. (7)
Bellemeade 2019-4 Ltd. (8)
Bellemeade 2020-1 Ltd. (9)
Bellemeade 2020-2 Ltd. (10)
Bellemeade 2020-3 Ltd. (11)
Bellemeade 2020-4 Ltd. (12)
Total
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Issued in October 2017, covering in-force policies issued between
January 1, 2017 and June 30, 2017.
Issued in April 2018, covering in-force policies issued between July 1,
2017 and December 31, 2017.
Issued in August 2018, covering in-force policies issued between April
1, 2013 and December 31, 2015.
Issued in October 2018, covering in-force policies issued between
January 1, 2018 and June 30, 2018.
Issued in March 2019, covering in-force policies primarily issued
between 2005 to 2008 under United Guaranty Residential Insurance
Company (“UGRIC”); as well as policies issued through 2015 under
both UGRIC and Arch Mortgage Insurance Company.
Issued in April 2019, covering in-force policies issued between July 1,
2018 and December 31, 2018.
Issued in July 2019, covering in-force policies issued in 2016.
Issued in October 2019, covering in-force policies issued between
January 1, 2019 and June 30, 2019.
(9) Issued in June 2020, covering in-force policies issued between July 1,
2019 and December 31, 2019. $450 million was directly funded by
Bellemeade 2020-1 Ltd. with an additional $79 million of capacity
provided directly to Arch MI U.S. by a separate panel of reinsurers.
(10) Issued in September 2020, covering in-force policies issued between
January 1, 2020 and May 31, 2020. $423 million was directly funded
by Bellemeade 2020-2 Ltd. with an additional $26 million of capacity
provided directly to Arch MI U.S. by a separate panel of reinsurers.
(11) Issued in November 2020, covering in-force policies issued between
June 1, 2020 and August 31, 2020. $418 million was directly funded by
Bellemeade 2020-3 Ltd. with an additional $34 million of capacity
provided directly to Arch MI U.S. by a separate panel of reinsurers.
(12) Issued in December 2020, covering in-force policies issued between
July 1, 2019 and December 31, 2019. $321 million was directly funded
by Bellemeade 2020-4 Ltd. with an additional $16 million of capacity
provided directly to Arch MI U.S. by a separate panel of reinsurers.
See Note 12, “Variable Interest Entity and Noncontrolling
Interests.”
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9.
Investment Information
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2020, total investable assets of $29.5 billion included $26.9 billion held by the Company and $2.7 billion
attributable to Watford.
Available For Sale Investments
The following table summarizes the fair value and cost or amortized cost of the Company’s securities classified as available for
sale:
December 31, 2020
Fixed maturities (1):
Corporate bonds
Mortgage backed securities
Municipal bonds
Commercial mortgage backed securities
U.S. government and government agencies
Non-U.S. government securities
Asset backed securities
Total
Short-term investments
Total
December 31, 2019
Fixed maturities (1):
Corporate bonds
Mortgage backed securities
Municipal bonds
Commercial mortgage backed securities
U.S. government and government agencies
Non-U.S. government securities
Asset backed securities
Total
Short-term investments
Total
Estimated
Fair
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for
Expected Credit
Losses (2)
Cost or
Amortized
Cost
$
$
$
$
7,856,571 $
630,001
494,522
389,900
5,557,077
2,433,733
1,634,804
18,996,608
1,924,922
20,921,530 $
6,406,591 $
562,309
881,926
733,108
4,916,592
2,078,757
1,683,753
17,263,036
956,546
18,219,582 $
414,247 $
8,939
27,291
8,722
22,612
153,891
19,225
654,927
2,693
657,620 $
191,889 $
9,669
24,628
14,951
36,600
48,549
24,017
350,303
811
351,114 $
(34,388) $
(5,028)
(3,835)
(2,954)
(12,611)
(8,060)
(10,715)
(77,591)
(2,063)
(79,654) $
(12,793)
(931)
(2,213)
(2,330)
(10,134)
(20,330)
(4,724)
(53,455)
(1,548)
(55,003)
(896) $
(278)
(11)
(122)
—
—
(1,090)
(2,397)
—
(2,397) $
7,477,608
626,368
471,077
384,254
5,547,076
2,287,902
1,627,384
18,421,669
1,924,292
20,345,961
$
$
6,227,495
553,571
859,511
720,487
4,890,126
2,050,538
1,664,460
16,966,188
957,283
17,923,471
(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the
Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair
value. See “—Securities Lending Agreements.”
(2) Effective January 1, 2020, the Company adopted ASU 2016-13 and as a result any credit impairment losses on the Company’s available-for-sale
investments are recorded as an allowance, subject to reversal. See note 3.
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross
unrealized loss by length of time the security has been in a continual unrealized loss position:
Less than 12 Months
12 Months or More
Total
Estimated
Fair
Value
Gross
Unrealized
Losses
Estimated
Fair
Value
Gross
Unrealized
Losses
Estimated
Fair
Value
Gross
Unrealized
Losses
December 31, 2020
Fixed maturities (1):
Corporate bonds
Mortgage backed securities
Municipal bonds
Commercial mortgage backed securities
U.S. government and government agencies
Non-U.S. government securities
Asset backed securities
Total
Short-term investments
Total
December 31, 2019
Fixed maturities (1):
Corporate bonds
Mortgage backed securities
Municipal bonds
Commercial mortgage backed securities
U.S. government and government agencies
Non-U.S. government securities
Asset backed securities
Total
Short-term investments
Total
$
$
$
$
747,442 $
284,619
67,937
126,624
1,285,907
543,844
634,470
3,690,843
97,920
3,788,763 $
(33,086) $
(4,788)
(3,835)
(2,916)
(12,611)
(7,658)
(9,110)
(74,004)
(2,063)
(76,067) $
3,934 $
3,637
—
2,655
—
2,441
57,737
70,404
—
70,404 $
(1,302) $
(240)
—
(38)
—
(402)
(1,605)
(3,587)
—
(3,587) $
751,376 $
288,256
67,937
129,279
1,285,907
546,285
692,207
3,761,247
97,920
3,859,167 $
675,131 $
102,887
220,296
147,290
1,373,127
1,224,243
441,522
4,184,496
95,777
4,280,273 $
(12,350) $
(927)
(2,213)
(2,302)
(10,089)
(20,163)
(3,334)
(51,378)
(1,548)
(52,926) $
37,671 $
203
—
2,683
32,058
37,610
48,313
158,538
—
158,538 $
(443) $
(4)
—
(28)
(45)
(167)
(1,390)
(2,077)
—
(2,077) $
712,802 $
103,090
220,296
149,973
1,405,185
1,261,853
489,835
4,343,034
95,777
4,438,811 $
(34,388)
(5,028)
(3,835)
(2,954)
(12,611)
(8,060)
(10,715)
(77,591)
(2,063)
(79,654)
(12,793)
(931)
(2,213)
(2,330)
(10,134)
(20,330)
(4,724)
(53,455)
(1,548)
(55,003)
(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the
Company has excluded the collateral received and reinvested and included the fixed maturities pledged. See “—Securities Lending Agreements.”
At December 31, 2020, on a lot level basis, approximately 2,320 security lots out of a total of approximately 11,180 security
lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity
portfolio was $0.9 million. The Company believes that such securities were temporarily impaired at December 31, 2020. At
December 31, 2019, on a lot level basis, approximately 2,230 security lots out of a total of approximately 9,590 security lots
were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company’s fixed maturity
portfolio was $0.9 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The contractual maturities of the Company’s fixed maturities and fixed maturities pledged under securities lending agreements
are shown in the following table. Expected maturities, which are management’s best estimates, will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Maturity
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Mortgage backed securities
Commercial mortgage backed securities
Asset backed securities
Total (1)
December 31, 2020
December 31, 2019
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
$
348,200 $
339,951 $
428,659 $
10,629,959
4,881,564
482,180
16,341,903
630,001
389,900
1,634,804
18,996,608 $
10,340,819
4,654,754
448,139
15,783,663
626,368
384,254
1,627,384
18,421,669 $
10,126,403
3,317,535
411,269
14,283,866
562,309
733,108
1,683,753
17,263,036 $
$
423,617
9,996,206
3,219,567
388,280
14,027,670
553,571
720,487
1,664,460
16,966,188
(1)
In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities pledged. For purposes of this table, the
Company has excluded the collateral received and reinvested and included the fixed maturities pledged. See “—Securities Lending Agreements.”
Securities Lending Agreements
The Company enters into securities lending agreements with financial institutions to enhance investment income whereby it
loans certain of its securities to third parties, primarily major brokerage firms, for short periods of time through a lending agent.
The Company maintains legal control over the securities it lends (shown as ‘Securities pledged under securities lending, at fair
value’ on the Company’s balance sheet), retains the earnings and cash flows associated with the loaned securities and receives a
fee from the borrower for the temporary use of the securities. An indemnification agreement with the lending agent protects the
Company in the event a borrower becomes insolvent or fails to return any of the securities on loan to the Company.
The Company receives collateral (shown as ‘Collateral received under securities lending, at fair value’ on the Company’s
balance sheet) in the form of cash or U.S. government and government agency securities. At December 31, 2020, the fair value
of the cash collateral received on securities lending was nil and the fair value of security collateral received was $301.1 million.
At December 31, 2019, the fair value of the cash collateral received on securities lending was $81.2 million and the fair value of
security collateral received was $307.2 million.
The Company’s securities lending transactions were accounted for as secured borrowings with significant investment categories
as follows:
Remaining Contractual Maturity of the Agreements
Overnight and
Continuous
Less than 30
Days
30-90 Days
90 Days or
More
Total
December 31, 2020
U.S. government and government agencies
$
142,317 $
— $
139,290 $
— $
281,607
Corporate bonds
Equity securities
Total
3,021
16,461
—
—
—
—
—
—
3,021
16,461
$
161,799 $
— $
139,290 $
— $
301,089
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 11
Amounts related to securities lending not included in offsetting disclosure in Note 11
—
$
301,089
December 31, 2019
U.S. government and government agencies
Corporate bonds
Equity securities
Total
$
240,332 $
— $
115,973 $
— $
356,305
2,570
29,491
—
—
—
—
—
—
2,570
29,491
$
272,393 $
— $
115,973 $
— $
388,366
Gross amount of recognized liabilities for securities lending in offsetting disclosure in Note 11
Amounts related to securities lending not included in offsetting disclosure in Note 11
—
$
388,366
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Securities, at Fair Value
At December 31, 2020, the Company held $1.4 billion of
equity securities, at fair value, compared to $838.9 million at
December 31, 2019. Pursuant to applicable accounting
guidance, changes in fair value on equity securities are
recorded through net income effective January 1, 2018.
Other Investments
The following table summarizes the Company’s other
investments and other investable assets:
Fixed maturities
Other investments
Short-term investments
Equity securities
Investments accounted for using the fair
value option
Other investable assets (1)
Total other investments
December 31,
$
2020
843,354
2,331,885
557,008
92,549
$
2019
754,452
2,429,316
377,014
102,695
3,824,796
3,663,477
500,000
—
$ 4,324,796
$ 3,663,477
(1) Participation interests in a receivable of a reverse repurchase agreement.
The following table summarizes the Company’s other
investments, as detailed in the previous table, by strategy:
Term loan investments
Lending
Credit related funds
Energy
Investment grade fixed income
Infrastructure
Private equity
Real estate
Total
December 31,
2020
1,231,731
572,636
90,780
65,813
138,646
165,516
48,750
18,013
2019
1,326,018
602,841
123,020
97,402
151,594
61,786
49,376
17,279
$ 2,331,885 $ 2,429,316
Investments Accounted For Using the Equity Method
The following table summarizes the Company’s investments
accounted for using the equity method, by strategy:
December 31,
Credit related funds
Equities
Real estate
Lending
Private equity
Infrastructure
Energy
Total
$
2020
740,060 $
343,058
258,518
179,629
235,289
175,882
115,453
2019
428,437
293,686
246,851
202,690
144,983
235,033
108,716
$ 2,047,889 $ 1,660,396
In applying the equity method, investments are initially
recorded at cost and are subsequently adjusted based on the
Company’s proportionate share of the net income or loss of
the funds (which include changes in the fair value of the
underlying securities in the funds). Such investments are
generally recorded on a one to three month lag based on the
availability of reports from the investment funds.
A summary of financial information for the Company’s
investment funds accounted for using the equity method is as
follows:
Invested assets
Total assets
Total liabilities
Net assets
Total revenues
Total expenses
Net income (loss)
December 31,
2020
2019
$ 44,131,377 $ 26,383,370
28,039,181
49,078,464
3,595,695
6,054,189
$ 43,024,275 $ 24,443,486
2020
Year Ended December 31,
2019
164,669 $ 4,565,354
528,762
1,135,602
(364,093) $ 3,429,752
2018
$ 5,762,098 $
1,656,029
$ 4,106,069 $
Certain of the Company’s other investments and investments
accounted for using the equity method are in investment
funds for which the Company has the option to redeem at
agreed upon values as described in each investment fund’s
subscription agreement. Depending on the terms of the
various subscription agreements, investments in investment
funds may be redeemed daily, monthly, quarterly or on other
terms. Two common redemption restrictions which may
impact the Company’s ability to redeem these investment
funds are gates and lockups. A gate is a suspension of
redemptions which may be implemented by the general
partner or investment manager of the fund in order to defer,
in whole or in part, the redemption request in the event the
aggregate amount of
requests exceeds a
redemption
predetermined percentage of the investment fund's net assets
the general partner or
which may otherwise hinder
investment manager's ability to liquidate holdings in an
orderly fashion in order to generate the cash necessary to
fund extraordinarily large redemption payouts. A lockup
is
period
contractually required to hold the security before having the
ability to redeem. If the investment funds are eligible to be
redeemed, the time to redeem such fund can take weeks or
months following the notification.
initial amount of
time an
investor
the
is
Limited Partnership Interests
In the normal course of its activities, the Company invests in
limited partnerships as part of its overall investment strategy.
Such amounts are included in ‘investments accounted for
using the equity method’ and ‘investments accounted for
using the fair value option.’ The Company determined that
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
limited partnership
these
interests represented variable
interests in the funds because the general partner did not have
a significant interest in the funds. The Company’s maximum
exposure to loss with respect to these investments is limited
to
the
investment carrying amounts reported
Company’s consolidated balance sheet and any unfunded
commitment.
the
in
The following table summarizes investments in limited
partnership interests where the Company has a variable
interest by balance sheet item:
December 31,
2020
2019
Investments accounted for using the equity
method (1)
Investments accounted for using the fair
value option (2)
Total
$ 2,047,889 $ 1,660,396
184,720
188,283
$ 2,232,609 $ 1,848,679
(1) Aggregate unfunded commitments were $1.8 billion at December 31,
2020, compared to $1.4 billion at December 31, 2019.
(2) Aggregate unfunded commitments were $35.6 million at December 31,
2020, compared to $41.7 million at December 31, 2019.
Net Investment Income
The components of net investment income were derived from
the following sources:
$
Fixed maturities
Term loans
Equity securities
Short-term investments
Other (1)
Gross investment income
Investment expenses
Net investment income
$
Year Ended December 31,
2019
505,399 $
98,949
15,857
15,820
80,618
716,643
(88,905)
627,738 $
2020
412,481 $
84,149
28,958
10,840
72,395
608,823
(89,215)
519,608 $
2018
470,912
87,926
13,154
18,793
64,942
655,727
(92,094)
563,633
(1)
Includes income distributions from investment funds and other items.
Net Realized Gains (Losses)
Net realized gains (losses) were as follows:
Year Ended December 31,
2019
2018
2020
Available for sale securities:
Gross gains on investment
sales
Gross losses on investment
sales
Change in fair value of assets
and liabilities accounted for
using the fair value option:
Fixed maturities
Other investments
Equity securities
Short-term investments
Equity securities, at fair value
(1):
Net realized gains (losses) on
securities sold
Net unrealized gains (losses)
on equity securities still held
at reporting date
Allowance for credit losses:(3)
Investments related
Underwriting related
Net impairment losses
Derivative instruments (2)
Other
$ 595,941 $ 235,655 $
69,299
(117,282)
(104,612)
(223,123)
15,881
13,656
14,629
2,279
41,910
(35,734)
15,869
3,801
(90,898)
(90,778)
(5,984)
(461)
26,849
11,313
(40,117)
102,394
97,768
(22,828)
(3,597)
(10,007)
(533)
179,675
3,575
—
—
(3,165)
119,741
(19,348)
—
—
(2,829)
15,636
(16,090)
Net realized gains (losses)
$ 823,460 $ 363,198 $ (408,173)
(1) Effective January 1, 2018, changes in fair value on equity securities are
recorded through net income.
(2) See Note 11 for information on the Company’s derivative instruments.
(3) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses
(Topic 326)” See note 3.
Equity in Net Income (Loss) of Investments Accounted For
Using the Equity Method
The Company recorded equity in net income related to
investments accounted for using the equity method of $146.7
million for 2020, compared to $123.7 million for 2019 and
$45.6 million for 2018. In applying the equity method,
investments are
recorded at cost and are
subsequently adjusted based on the Company’s proportionate
share of the net income or loss of the funds (which include
changes in the market value of the underlying securities in
the funds). Such investments are generally recorded on a one
to three month lag based on the availability of reports from
the investment funds.
initially
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Expected Credit Losses
The following table provides a roll forward of the allowance for expected credit losses of the Company’s securities classified as
available for sale:
Balance at beginning of period
Cumulative effect of accounting change (2)
Additions for current-period provision for expected credit losses
Additions (reductions) for previously recognized expected credit losses
Reductions due to disposals
Write-offs charged against the allowance
Balance at end of period
Year Ended December 31, 2020
Structured
Securities (1)
Municipal
Bonds
Corporate
Bonds
Total
$
— $
— $
— $
517
2,942
(1,398)
(571)
—
—
67
6
(62)
—
117
7,644
(5,638)
(1,227)
—
—
634
10,653
(7,030)
(1,860)
—
$
1,490 $
11 $
896 $
2,397
Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
(1)
(2) Adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)” See note 3.
Restricted Assets
The Company is required to maintain assets on deposit,
which primarily consist of fixed maturities, with various
regulatory authorities to support its underwriting operations.
The Company’s subsidiaries maintain assets in trust accounts
as collateral for transactions with affiliated companies and
also have investments in segregated portfolios primarily to
provide collateral or guarantees for letters of credit to third
parties
The following table details the value of the Company’s
restricted assets:
Assets used for collateral or guarantees:
Affiliated transactions
Third party agreements
Deposits with U.S. regulatory authorities
Deposits with non-U.S. regulatory
authorities
Total restricted assets
December 31,
2020
2019
$ 4,643,334 $ 4,526,761
2,278,248
797,371
3,083,324
827,552
179,099
119,238
$ 8,733,309 $ 7,721,618
In addition, Watford maintains a secured credit facility to
provide borrowing capacity for investment purposes and a
total return swap agreement and maintains assets pledged as
collateral for such purposes. The Company does not
guarantee or provide credit support for Watford, and the
Company’s financial exposure to Watford is limited to its
investment in Watford’s senior notes, common and preferred
shares and counterparty credit risk (mitigated by collateral)
arising from reinsurance transactions. As of December 31,
2020 and December 31, 2019, Watford held $954.6 million
and $1.0 billion,
to
collateralize the credit facility mentioned above.
in pledged assets
respectively,
Reconciliation of Cash and Restricted Cash
The following table details reconciliation of cash and
restricted cash within the Consolidated Balance Sheets:
December 31,
2019
$ 906,448 $ 726,230 $ 646,556
2018
2020
384,096
78,087
$ 1,290,544 $ 903,698 $ 724,643
177,468
Cash
Restricted cash (included in
‘other assets’)
Cash and restricted cash
10. Fair Value
Accounting guidance regarding fair value measurements
addresses how companies should measure fair value when
they are required to use a fair value measure for recognition
or disclosure purposes under GAAP and provides a common
definition of fair value to be used throughout GAAP. It
defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly fashion
between market participants at the measurement date. In
addition, it establishes a three-level valuation hierarchy for
the disclosure of fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date.
The level in the hierarchy within which a given fair value
measurement falls is determined based on the lowest level
input that is significant to the measurement (Level 1 being
the highest priority and Level 3 being the lowest priority).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The levels in the hierarchy are defined as follows:
Level 1:
Level 2:
Level 3:
to
Inputs
the valuation methodology are
observable inputs that reflect quoted prices
(unadjusted) for identical assets or liabilities in
active markets
Inputs to the valuation methodology include
quoted prices for similar assets and liabilities in
active markets, and inputs that are observable
for the asset or liability, either directly or
indirectly, for substantially the full term of the
financial instrument
to
Inputs
the valuation methodology are
unobservable and significant to the fair value
measurement
Following is a description of the valuation methodologies
used for securities measured at fair value, as well as the
general classification of such securities pursuant to the
valuation hierarchy. The Company reviews its securities
measured at fair value and discusses the proper classification
of such investments with investment advisers and others.
to provide
The Company determines the existence of an active market
based on its judgment as to whether transactions for the
financial instrument occur in such market with sufficient
frequency and volume
reliable pricing
information. The independent pricing sources obtain market
quotations and actual transaction prices for securities that
have quoted prices in active markets. The Company uses
quoted values and other data provided by nationally
recognized independent pricing sources as inputs into its
process for determining fair values of its fixed maturity
investments. To validate the techniques or models used by
pricing sources, the Company's review process includes, but
is not limited to: (i) quantitative analysis (e.g., comparing the
quarterly return for each managed portfolio to its target
benchmark, with significant differences
identified and
investigated); (ii) a review of the prices obtained in the
pricing process and the range of resulting fair values; (iii)
initial and ongoing evaluation of methodologies used by
outside parties to calculate fair value; (iv) a comparison of
the fair value estimates to the Company’s knowledge of the
current market; (v) a comparison of the pricing services' fair
values to other pricing services' fair values for the same
investments; and (vi) periodic back-testing, which includes
randomly selecting purchased or sold securities and
comparing the executed prices to the fair value estimates
from the pricing service. A price source hierarchy was
maintained in order to determine which price source would
be used (i.e., a price obtained from a pricing service with
more seniority in the hierarchy will be used over a less senior
one in all cases). The hierarchy prioritizes pricing services
based on availability and reliability and assigns the highest
priority to index providers. Based on the above review, the
Company will challenge any prices for a security or portfolio
which are considered not to be representative of fair value.
in
In certain circumstances, when fair values are unavailable
from these independent pricing sources, quotes are obtained
the
from broker-dealers who are active
directly
corresponding markets. Such quotes are subject to the
validation procedures noted above. Of the $26.5 billion of
financial assets and liabilities measured at fair value at
December 31, 2020, approximately $150.1 million, or 0.6%,
were priced using non-binding broker-dealer quotes. Of the
$22.9 billion of financial assets and liabilities measured at
fair value at December 31, 2019, approximately $179.6
million, or 0.8%, were priced using non-binding broker-
dealer quotes.
Fixed maturities
The Company uses the market approach valuation technique
to estimate the fair value of its fixed maturity securities,
when possible. The market approach includes obtaining
prices from independent pricing services, such as index
providers and pricing vendors, as well as to a lesser extent
quotes from broker-dealers. The independent pricing sources
obtain market quotations and actual transaction prices for
securities that have quoted prices in active markets. Each
source has its own proprietary method for determining the
fair value of securities that are not actively traded. In general,
these methods involve the use of “matrix pricing” in which
the independent pricing source uses observable market inputs
including, but not limited to, investment yields, credit risks
and spreads, benchmarking of like securities, broker-dealer
quotes, reported trades and sector groupings to determine a
reasonable fair value. The following describes the significant
inputs generally used to determine the fair value of the
Company’s fixed maturity securities by asset class:
•
U.S. government and government agencies —
valuations provided by independent pricing services, with all
prices provided through index providers and pricing vendors.
The Company determined that all U.S. Treasuries would be
classified as Level 1 securities due to observed levels of
trading activity, the high number of strongly correlated
pricing quotes received on U.S. Treasuries and other factors.
The fair values of U.S. government agency securities are
generally determined using the spread above the risk-free
yield curve. As the yields for the risk-free yield curve and the
spreads for these securities are observable market inputs, the
fair values of U.S. government agency securities are
classified within Level 2.
•
Corporate bonds — valuations provided by
independent pricing services, substantially all through index
providers and pricing vendors with a small amount through
broker-dealers. The fair values of these securities are
generally determined using the spread above the risk-free
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yield curve. These spreads are generally obtained from the
new issue market, secondary trading and from broker-dealers
who trade in the relevant security market. As the significant
inputs used in the pricing process for corporate bonds are
observable market inputs, the fair value of these securities are
classified within Level 2.
•
Mortgage-backed securities — valuations provided
by independent pricing services, substantially all through
pricing vendors and index providers with a small amount
through broker-dealers. The fair values of these securities are
generally determined through the use of pricing models
(including Option Adjusted Spread) which use spreads to
determine the expected average life of the securities. These
spreads are generally obtained from the new issue market,
secondary trading and from broker-dealers who trade in the
relevant security market. The pricing services also review
prepayment speeds and other indicators, when applicable. As
the significant inputs used in the pricing process for
mortgage-backed securities are observable market inputs, the
fair value of these securities are classified within Level 2.
•
Municipal bonds — valuations provided by
independent pricing services, with all prices provided
through index providers and pricing vendors. The fair values
of these securities are generally determined using spreads
obtained from broker-dealers who trade in the relevant
security market, trade prices and the new issue market. As the
significant inputs used in the pricing process for municipal
bonds are observable market inputs, the fair value of these
securities are classified within Level 2.
Commercial mortgage-backed
securities —
•
valuations provided by
independent pricing services,
substantially all through index providers and pricing vendors
with a small amount through broker-dealers. The fair values
of these securities are generally determined through the use
of pricing models which use spreads to determine the
appropriate average life of the securities. These spreads are
generally obtained from the new issue market, secondary
trading and from broker-dealers who trade in the relevant
security market. As the significant inputs used in the pricing
process for commercial mortgage-backed securities are
observable market inputs, the fair value of these securities are
classified within Level 2.
•
Non-U.S. government securities — valuations
provided by independent pricing services, with all prices
provided through index providers and pricing vendors. The
fair values of these securities are generally based on
international indices or valuation models which include daily
observed yield curves, cross-currency basis index spreads
and country credit spreads. As the significant inputs used in
the pricing process for non-U.S. government securities are
observable market inputs, the fair value of these securities are
classified within Level 2.
•
Asset-backed securities — valuations provided by
independent pricing services, substantially all through index
providers and pricing vendors with a small amount through
broker-dealers. The fair values of these securities are
generally determined through the use of pricing models
(including Option Adjusted Spread) which use spreads to
determine the appropriate average life of the securities. These
spreads are generally obtained from the new issue market,
secondary trading and from broker-dealers who trade in the
relevant security market. As the significant inputs used in the
pricing process for asset-backed securities are observable
market inputs, the fair value of these securities are classified
within Level 2. A small number of securities are included in
Level 3 due to a low level of transparency on the inputs used
in the pricing process.
Equity securities
The Company determined
that exchange-traded equity
securities would be included in Level 1 as their fair values
are based on quoted market prices in active markets. Other
equity securities are included in Level 2 of the valuation
hierarchy. A small number of securities are included in Level
3 due to the lack of an available independent price source for
such securities. As the significant inputs used to price these
securities are unobservable, the fair value of such securities
are classified as Level 3.
Other investments
The Company determined that exchange-traded investments
would be included in Level 1 as their fair values are based on
quoted market prices in active markets. Other investments
also include term loan investments for which fair values are
estimated by using quoted prices of term loan investments
with similar characteristics, pricing models or matrix pricing.
Such investments are generally classified within Level 2. A
small number of securities are included in Level 3 due to the
lack of an available independent price source for such
securities.
Derivative instruments
The Company’s futures contracts, foreign currency forward
contracts, interest rate swaps and other derivatives trade in
the over-the-counter derivative market. The Company uses
the market approach valuation technique to estimate the fair
value for these derivatives based on significant observable
market inputs from third party pricing vendors, non-binding
broker-dealer quotes and/or recent trading activity. As the
significant inputs used in the pricing process for these
derivative instruments are observable market inputs, the fair
value of these securities are classified within Level 2.
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Short-term investments
Contingent consideration liabilities
The Company determined that certain of its short-term
investments held in highly liquid money market-type funds,
Treasury bills and commercial paper would be included in
Level 1 as their fair values are based on quoted market prices
in active markets. The fair values of other short-term
investments are generally determined using the spread above
the risk-free yield curve and are classified within Level 2.
liabilities (included
the consolidated balance sheets)
in ‘other
Contingent consideration
liabilities’
include
in
amounts related to the Company’s 2014 acquisition of CMG
Mortgage Insurance Company and its affiliated mortgage
insurance companies (the “CMG Entities”) and other
acquisitions. Such amounts are remeasured at fair value at
each balance sheet date with changes in fair value recognized
in ‘net realized gains (losses).’ To determine the fair value of
contingent consideration liabilities, the Company estimates
future payments using an income approach based on modeled
inputs which include a weighted average cost of capital. The
Company determined that contingent consideration liabilities
would be included within Level 3.
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The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31,
2020:
Fair Value Measurement Using:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Estimated
Fair Value
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds
Mortgage backed securities
Municipal bonds
Commercial mortgage backed securities
U.S. government and government agencies
Non-U.S. government securities
Asset backed securities
Total
Short-term investments
Equity securities, at fair value
Derivative instruments (4)
Fair value option:
Corporate bonds
Non-U.S. government bonds
Mortgage backed securities
Commercial mortgage backed securities
Asset backed securities
U.S. government and government agencies
Short-term investments
Equity securities
Other investments
Other investments measured at net asset value (2)
Total
$
7,856,571 $
630,001
494,522
389,900
5,557,077
2,433,733
1,634,804
18,996,608
— $
—
—
—
5,463,356
—
—
5,463,356
7,856,558 $
630,001
494,522
389,900
93,721
2,433,733
1,631,378
13,529,813
1,924,922
1,920,565
1,460,959
1,401,653
4,357
17,291
177,383
—
177,383
651,294
35,263
3,282
1,090
152,151
274
557,008
92,549
1,134,229
1,197,656
3,824,796
—
—
—
—
—
164
420,131
23,373
51,149
650,309
35,263
3,282
1,090
152,151
110
136,877
188
1,015,977
494,817
1,995,247
137,076
13
—
—
—
—
—
3,426
3,439
—
42,015
—
985
—
—
—
—
—
—
68,988
67,103
Total assets measured at fair value
$
26,384,668 $
9,280,391 $
15,724,091 $
182,530
Liabilities measured at fair value:
Contingent consideration liabilities
Securities sold but not yet purchased (3)
Derivative instruments (4)
Total liabilities measured at fair value
$
(461) $
(21,679)
(108,705)
$
(130,845) $
— $
—
—
— $
— $
(21,679)
(108,705)
(130,384) $
(461)
—
—
(461)
(1)
(2)
(3)
(4)
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the
Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair
value. See Note 9.
In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its
equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit
reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the
Company’s consolidated balance sheets.
See Note 11.
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The following table presents the Company’s financial assets and liabilities measured at fair value by level at December 31,
2019:
Assets measured at fair value (1):
Available for sale securities:
Fixed maturities:
Corporate bonds
Mortgage backed securities
Municipal bonds
Commercial mortgage backed securities
U.S. government and government agencies
Non-U.S. government securities
Asset backed securities
Total
Equity securities, at fair value
Short-term investments
Derivative instruments (4)
Fair value option:
Corporate bonds
Non-U.S. government bonds
Mortgage backed securities
Municipal bonds
Commercial mortgage backed securities
Asset backed securities
U.S. government and government agencies
Short-term investments
Equity securities
Other investments
Other investments measured at net asset value (2)
Total
Fair Value Measurement Using:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Estimated
Fair Value
$
$
6,406,591
562,309
881,926
733,108
4,916,592
2,078,757
1,683,753
17,263,036
850,283
956,546
48,946
488,402
50,465
11,947
377
1,134
200,163
1,962
377,014
102,697
1,418,273
1,011,043
3,663,477
$
—
—
—
—
4,805,581
—
—
4,805,581
789,596
904,804
—
—
—
—
—
—
—
1,852
333,320
43,962
53,287
$
6,397,740
562,055
881,926
733,108
111,011
2,078,757
1,678,791
12,443,388
4,798
51,742
48,946
487,470
50,465
11,947
377
1,134
200,163
110
43,694
641
1,296,169
8,851
254
—
—
—
—
4,962
14,067
55,889
—
—
932
—
—
—
—
—
—
—
58,094
68,817
432,421
2,092,170
127,843
Total assets measured at fair value
$
22,782,288
$
6,932,402
$
14,641,044
$
197,799
Liabilities measured at fair value:
Contingent consideration liabilities
Securities sold but not yet purchased (3)
Derivative instruments (4)
Total liabilities measured at fair value
$
$
(7,998) $
(66,257)
(39,750)
(114,005) $
—
—
—
—
$
$
$
—
(66,257)
(39,750)
(106,007) $
(7,998)
—
—
(7,998)
(1)
(2)
(3)
(4)
In securities lending transactions, the Company receives collateral in excess of the fair value of the securities pledged. For purposes of this table, the
Company has excluded the collateral received under securities lending, at fair value and included the securities pledged under securities lending, at fair
value. See Note 9.
In accordance with applicable accounting guidance, certain investments that are measured at fair value using the net asset value per share (or its
equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit
reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
Represents the Company’s obligations to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the
Company’s consolidated balance sheets.
See Note 11.
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The following table presents a reconciliation of the beginning and ending balances for all financial assets and liabilities
measured at fair value on a recurring basis using Level 3 inputs for 2020 and 2019:
Available For Sale
Fair Value Option
Fair Value
Assets
Liabilities
Structured
Securities
(1)
Corporate
Bonds
Corporate
Bonds
Other
Investments
Equity
Securities
Equity
Securities
Contingent
Consideration
Liabilities
Year Ended December 31, 2020
Balance at beginning of year
$
5,216
$
8,851
$
932
$
68,817
$
58,094
$
55,889
$
(7,998)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)
Included in other comprehensive
income
Purchases, issuances, sales and settlements
Purchases
Issuances
Sales
Settlements
Transfers in and/or out of Level 3
—
(5,865)
(13)
(314)
10,894
8,214
(72)
(169)
397
—
—
—
—
—
—
(1,413)
(208)
(1,462)
(1,908)
—
66
—
—
—
—
—
52,449
—
(56,833)
—
2,984
—
—
—
—
—
—
—
4,030
—
(26,118)
—
—
—
—
—
—
7,609
—
(461)
Balance at end of year
$
3,426
$
13
$
985
$
67,103
$
68,988
$
42,015
$
Year Ended December 31, 2019
Balance at beginning of year
$
313
$
8,141
$
5,758
$
62,705
$
—
$
—
$
(66,665)
Total gains or (losses) (realized/unrealized)
Included in earnings (2)
Included in other comprehensive
income
Purchases, issuances, sales and settlements
Purchases
Issuances
Sales
Settlements
Transfers in and/or out of Level 3
1,760
2
(162)
(8,119)
1,949
(3,418)
(1,478)
3
—
—
(1,757)
(552)
5,449
(267)
881
—
—
(1,766)
1,860
—
—
—
(28,583)
—
23,919
—
3,746
—
(20,495)
(600)
31,580
—
—
—
—
—
56,145
—
36,077
—
(27,982)
—
51,212
—
—
(548)
—
60,693
—
Balance at end of year
$
5,216
$
8,851
$
932
$
68,817
$
58,094
$
55,889
$
(7,998)
Includes asset backed securities, mortgage backed securities and commercial mortgage backed securities.
(1)
(2) Gains or losses were included in net realized gains (losses).
Financial Instruments Disclosed, But Not Carried, At Fair
Value
market inputs. As such, the fair value of the senior notes is
classified within Level 2.
The Company uses various financial instruments in the
normal course of its business. The carrying values of cash,
accrued investment income, receivable for securities sold,
certain other assets, payable for securities purchased and
certain other liabilities approximated their fair values at
December 31, 2020, due to their respective short maturities.
As these financial instruments are not actively traded, their
respective fair values are classified within Level 2.
At December 31, 2020, the Company’s senior notes were
carried at their cost, net of debt issuance costs, of $2.9 billion
and had a fair value of $3.7 billion. At December 31, 2019,
the Company’s senior notes were carried at their cost, net of
debt issuance costs, of $1.9 billion and had a fair value of
$2.3 billion. The fair values of the senior notes were obtained
from a third party pricing service and are based on observable
Fair Value Measurements on a Non-Recurring Basis
The Company measures the fair value of certain assets on a
non-recurring basis, generally quarterly, annually, or when
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. These assets
include investments accounted for using the equity method,
certain other investments, goodwill and intangible assets, and
long-lived assets. The Company uses a variety of techniques
to measure the fair value of these assets when appropriate, as
described below:
Investments accounted for using the equity method. When the
Company determines that the carrying value of these assets
may not be recoverable, the Company records the assets at
fair value with the loss recognized in income. In such cases,
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the Company measures the fair value of these assets using the
techniques discussed above in “—Fair Value Measurements
on a Recurring Basis.”
The following table summarizes information on the fair
values and notional values of the Company’s derivative
instruments:
Goodwill and Intangible Assets. The Company tests goodwill
and intangible assets for impairment whenever events or
changes in circumstances indicate the carrying amount may
not be recoverable. When the Company determines goodwill
and intangible assets may be impaired, the Company uses
techniques including discounted expected future cash flows,
to measure fair value.
Long-Lived Assets. The Company tests its long-lived assets
for impairment whenever events or changes in circumstances
indicate the carrying amount of a long-lived asset may not be
recoverable.
11. Derivative Instruments
The Company’s investment strategy allows for the use of
derivative
derivative
instruments. The Company’s
instruments are recorded on its consolidated balance sheets at
fair value. The Company utilizes exchange traded U.S.
Treasury note, Eurodollar and other futures contracts and
commodity futures to manage portfolio duration or replicate
investment positions in its portfolios and the Company
forward contracts,
foreign currency
routinely utilizes
currency options,
futures contracts and other
index
derivatives as part of its total return objective. In addition,
certain of the Company’s investments are managed in
portfolios which incorporate the use of foreign currency
forward contracts which are intended to provide an economic
hedge against foreign currency movements.
to-be-announced
the Company purchases
In addition,
its
mortgage backed securities (“TBAs”) as part of
investment strategy. TBAs
to
represent commitments
purchase a future issuance of agency mortgage backed
securities. For the period between purchase of a TBA and
issuance of the underlying security, the Company’s position
is accounted for as a derivative. The Company purchases
TBAs in both long and short positions to enhance investment
performance and as part of its overall investment strategy.
Estimated Fair Value
Asset
Derivatives
Liability
Derivatives
Notional
Value (1)
December 31, 2020
Futures contracts (2)
$
11,046 $
(4,496) $ 3,099,796
Foreign currency forward
contracts (2)
TBAs (3)
Other (2)
Total
December 31, 2019
52,716
—
(6,202)
1,656,729
—
—
113,621
(98,007)
5,763,919
$
177,383 $
(108,705)
Futures contracts (2)
$
10,065 $
(13,722) $ 4,104,559
Foreign currency forward
contracts (2)
TBAs (3)
Other (2)
Total
5,352
55,010
33,529
(5,327)
—
686,878
53,229
(20,701)
4,356,300
$
103,956 $
(39,750)
(1) Represents the absolute notional value of all outstanding contracts,
consisting of long and short positions.
(2) The fair value of asset derivatives are included in ‘other assets’ and the
fair value of liability derivatives are included in ‘other liabilities.’
(3) The fair value of TBAs are included in ‘fixed maturities available for
sale, at fair value.’
The Company did not hold any derivatives which were
designated as hedging instruments at December 31, 2020 or
2019.
The Company’s derivative instruments can be traded under
master netting agreements, which establish terms that apply
to all derivative transactions with a counterparty. In the event
of a bankruptcy or other stipulated event of default, such
agreements provide that the non-defaulting party may elect to
terminate all outstanding derivative transactions, in which
case all individual derivative positions (loss or gain) with a
counterparty are closed out and netted and replaced with
a single amount, usually referred to as the termination
amount, which is expressed in a single currency. The
resulting single net amount, where positive, is payable to the
party “in-the-money” regardless of whether or not it is the
defaulting party, unless the parties have agreed that only the
non-defaulting party is entitled to receive a termination
payment where the net amount is positive and is in its favor.
At December 31, 2020, $138.8 million and $93.0 million,
respectively, of asset derivatives and liability derivatives
were subject to a master netting agreement compared to
at
and $37.8 million,
$97.8 million
December 31, 2019. The remaining derivatives included in
the table above were not subject to a master netting
agreement.
respectively,
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risk (mitigated by collateral) arising from the reinsurance
transactions.
In the 2020 fourth quarter, Arch Capital, Watford Holdings
Ltd. and Greysbridge Ltd., a wholly-owned subsidiary of
Arch Capital, entered into an Agreement and Plan of Merger
(as amended, the “Merger Agreement”) pursuant to which,
among other things, Arch Capital agreed to acquire all of the
common shares of Watford Holdings Ltd. not owned by Arch
for a cash purchase price of $35.00 per common share. Arch
Capital has assigned its rights under the Merger Agreement
to Greysbridge Holdings Ltd., a wholly-owned subsidiary of
Arch Capital (“Greysbridge”). The transaction is expected to
close in the first half of 2021 and remains subject to
customary closing conditions, including regulatory and
shareholder approvals. Upon closing of the transaction,
Watford will be wholly owned by Greysbridge and
Greysbridge will be owned 40% by Arch Re Bermuda, 30%
by certain investment funds managed by Kelso & Company
and 30% by certain investment funds managed by Warburg
Pincus LLC.
Realized and unrealized contract gains and losses on the
Company’s derivative instruments are reflected in net
realized gains (losses) in the consolidated statements of
income, as summarized in the following table:
Derivatives not designated
as hedging instruments
Net realized gains (losses):
Year Ended December 31,
2020
2019
2018
Futures contracts
$ 114,987 $ 114,123 $
48,443
Foreign currency forward
contracts
TBAs
Other
Total
49,974
1,129
13,585
(9,499)
(21,770)
463
(133)
14,654
(10,904)
$ 179,675 $ 119,741 $
15,636
12. Variable Interest Entity and Noncontrolling Interests
Watford Holdings Ltd.
In March 2014, Watford raised approximately $1.1 billion of
capital consisting of $907.3 million in common equity
($895.6 million net of issuance costs) and $226.6 million in
preference equity ($219.2 million net of issuance costs and
discount). The Company
invested $100.0 million and
acquired 2,500,000 common shares. Watford’s common
shares are listed on the Nasdaq Select Global Market under
the ticker symbol “WTRE”. As of December 31, 2020, the
Company owned
approximately 13% of Watford’s
outstanding common equity and, as of February 16, 2021,
Arch Re Bermuda owned approximately 10.3% of Watford’s
common equity.
Subsidiaries of the Company act as Watford’s reinsurance
and insurance underwriting managers. HPS Investment
Partners, LLC (“HPS”) manages Watford’s non-investment
grade credit portfolios, and the Company manages Watford’s
investment grade portfolios, each under separate long term
services
and Nicolas
Papadopoulo, both officers of the Company, serve on the
board of directors of Watford.
agreements. Maamoun Rajeh
The Company concluded that Watford is a VIE and that the
Company is the primary beneficiary. The Company includes
the results of Watford in its consolidated financial statements.
The Company concluded that Watford should be reflected in
a separate operating segment (‘other’) and provides the
income statement and total investable assets, total assets and
total liabilities of Watford within Note 4.
Because Watford is an independent company, the assets of
Watford can be used only to settle obligations of Watford and
Watford is solely responsible for its own liabilities and
commitments. The Company’s financial exposure to Watford
is limited to its investment in Watford’s senior notes,
common shares and preferred shares and counterparty credit
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the carrying amount and
balance sheet caption in which the assets and liabilities of
Watford are reported:
December 31,
2020
2019
is recorded in the consolidated statements of income in ‘net
(income) loss attributable to noncontrolling interests.’
The following table sets forth activity in the non-redeemable
noncontrolling interests:
Assets
Investments accounted for using the fair
value option (1)
Fixed maturities available for sale, at fair
value
Equity securities, at fair value
Cash
Accrued investment income
Premiums receivable
Reinsurance recoverable on unpaid and
paid losses and LAE
Ceded unearned premiums
Deferred acquisition costs, net
Receivable for securities sold
Goodwill and intangible assets
Other assets
Total assets of consolidated VIE
$
$
1,790,385 $
1,898,091
Balance, beginning of year
December 31,
2020
2019
$ 762,777 $ 791,560
655,249
52,410
211,451
14,679
224,377
745,708
65,338
102,437
14,025
273,657
286,590
122,339
53,705
37,423
7,650
75,801
3,532,059 $
170,973
132,577
64,044
16,287
7,650
60,070
3,550,857
Additional paid in capital attributable to
noncontrolling interests
1,334
(2,929)
Repurchases attributable to non-redeemable
noncontrolling interests (1)
Amounts attributable to noncontrolling interests
(2,867)
(75,056)
53,076
40,072
Other amounts attributable to noncontrolling
interests
Other comprehensive (income) loss attributable
to noncontrolling interests
Balance, end of year
(375)
—
9,062
9,130
$ 823,007 $ 762,777
(1) During 2020 and 2019, Watford’s board of directors authorized the
investment in Watford’s common shares through a share repurchase
program.
Liabilities
Redeemable noncontrolling interests
Reserves for losses and loss adjustment
expenses
$
1,519,583 $
1,263,628
Unearned premiums
Reinsurance balances payable
Revolving credit agreement borrowings
Senior notes
Payable for securities purchased
Other liabilities
407,714
63,269
155,687
172,689
25,881
193,494
438,907
77,066
484,287
172,418
18,180
171,714
Total liabilities of consolidated VIE
$
2,538,317 $
2,626,200
Redeemable noncontrolling interests
$
52,398 $
52,305
(1) Included in “other investments” on the Company’s balance sheet.
The following table summarizes Watford’s cash flow from
operating, investing and financing activities.
Year Ended December 31,
2019
2018
2020
Total cash provided by (used for):
Operating activities
Investing activities
Financing activities
181,736
258,589
(335,776)
239,284
(140,620)
(61,433)
229,315
(285,281)
(2,406)
Non-redeemable noncontrolling interests
The Company accounts for the portion of Watford’s common
equity attributable to third party investors in the shareholders’
equity section of its consolidated balance sheets. The
noncontrolling ownership in Watford’s common shares was
approximately 87% at December 31, 2020. The portion of
Watford’s income or loss attributable to third party investors
The Company accounts for redeemable noncontrolling
interests in the mezzanine section of its consolidated balance
sheets in accordance with applicable accounting guidance.
Such redeemable noncontrolling interests primarily relate to
the Watford Preference Shares issued in late March 2014
with a par value of $0.01 per share and a liquidation
preference of $25.00 per share. The Watford Preference
Shares were issued at a discounted amount of $24.50 per
share. Holders of the Watford Preference Shares will be
entitled to receive, if declared by Watford’s board, quarterly
cash dividends on the last day of March, June, September,
and December. Dividends accrued from the closing date to
June 30, 2019 at a fixed rate of 8.5% per annum. From June
30, 2019 and subsequent, dividends will accrue based on a
floating rate equal to the 3 month U.S. dollar LIBOR (with a
1% floor) plus a margin based on the difference between the
fixed rate and the 5 year mid swap rate to the floating rate.
Preferred dividends, including the accretion of the discount
and issuance costs, are included in ‘net (income) loss
attributable to noncontrolling interests’ in the Company’s
consolidated statements of income. Because the redemption
features are not solely within the control of Watford, the
Company accounts for
the redeemable noncontrolling
interests in the Watford Preference Shares in the mezzanine
section of its consolidated balance sheets.
issued and outstanding preference
On August 1, 2019, Watford redeemed 6,919,998 of its
9,065,200
shares
(“Watford Preference Shares”) at a total redemption price of
$25.19748 per share, inclusive of all declared and unpaid
dividends. The Company received $11.5 million pursuant to
the redemption of Watford Preference Shares.
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred dividends on the Watford Preference Shares,
including the accretion of the discount and issuance costs,
was $4.4 million for 2020, compared to $17.8 million for
2019 and $19.6 million for 2018.
The following table sets forth activity in the redeemable
noncontrolling interests:
Balance, beginning of year
Redemption of noncontrolling
interests
Accretion of preference share
issuance costs
Other
Balance, end of year
December 31,
2019
$ 55,404 $ 206,292 $ 205,922
2020
2018
—
(157,709)
—
93
3,051
370
—
$ 58,548 $ 55,404 $ 206,292
244
6,577
The portion of income or loss attributable to third party
investors is recorded in the consolidated statements of
income in ‘net (income) loss attributable to noncontrolling
interests’ as summarized in the table below:
December 31,
2019
2020
2018
Amounts attributable to non-
redeemable noncontrolling interests
Amounts attributable to redeemable
noncontrolling interests
Net (income) loss attributable to
noncontrolling interests
$ (53,076) $ (40,072) $ 48,507
(7,114)
(16,909)
(18,357)
$ (60,190) $ (56,981) $ 30,150
Bellemeade Re
The Company has entered into various aggregate excess of
loss mortgage reinsurance agreements with various special
purpose reinsurance companies domiciled in Bermuda (the
Bellemeade Agreements). At the time the Bellemeade
Agreements were entered into, the applicability of the
accounting guidance that addresses VIEs was evaluated. As a
result of the evaluation of the Bellemeade Agreements, the
Company concluded that these entities are VIEs. However,
given that the ceding insurers do not have the unilateral
power to direct those activities that are significant to their
economic performance, the Company does not consolidate
such entities in its consolidated financial statements.
the
table presents
total assets of
The following
the
Bellemeade entities, as well as the Company’s maximum
exposure to loss associated with these VIEs, calculated as the
maximum historical observable spread between the one
month LIBOR, the basis for the contractual payments to bond
holders, and short term invested trust asset yields.
Bellemeade Entities
(Issue Date)
Total VIE
Assets
Maximum Exposure to Loss
On-
Balance
Sheet
(Asset)
Liability
Off-
Balance
Sheet
Total
Dec 31, 2020
Bellemeade 2017-1
Ltd. (Oct-17)
Bellemeade 2018-1
Ltd. (Apr-18)
Bellemeade 2018-2
Ltd. (Aug-18)
Bellemeade 2018-3
Ltd. (Oct-18)
Bellemeade 2019-1
Ltd. (Mar-19)
Bellemeade 2019-2
Ltd. (Apr-19)
Bellemeade 2019-3
Ltd. (Jul-19)
Bellemeade 2019-4
Ltd. (Oct-19)
Bellemeade 2020-1
Ltd. (Jun-20) (1)
Bellemeade 2020-2
Ltd. (Sep-20) (2)
Bellemeade 2020-3
Ltd. (Nov-20) (3)
Bellemeade 2020-4
Ltd. (Dec-20) (4)
Total
Dec 31, 2019
Bellemeade 2017-1
Ltd. (Oct-17)
Bellemeade 2018-1
Ltd. (Apr-18)
Bellemeade 2018-2
Ltd. (Aug-18)
Bellemeade 2018-3
Ltd. (Oct-18)
Bellemeade 2019-1
Ltd. (Mar-19)
Bellemeade 2019-2
Ltd. (Apr-19)
Bellemeade 2019-3
Ltd. (Jul-19)
Bellemeade 2019-4
Ltd. (Oct-19)
$
145,573 $
(245) $
844 $
599
250,095
(903)
2,245
1,342
108,395
(138)
280
142
302,563
(1,320)
3,262
1,942
219,256
(1,361)
8,461
7,100
398,316
(730)
5,201
4,471
528,084
(861)
5,079
4,218
468,737
(890)
6,676
5,786
275,068
(178)
1,012
834
423,420
(556)
6,839
6,283
418,158
(631)
9,605
8,974
321,393
(156)
6,816
6,660
$ 3,859,058 $
(7,969) $ 56,320 $ 48,351
$
216,429 $
(442) $
2,794 $
2,352
328,482
(1,574)
5,757
4,183
437,009
(877)
2,524
1,647
426,806
(1,113)
3,937
2,824
257,358
(226)
3,027
2,801
525,959
(78)
2,579
2,501
656,523
(585)
9,273
8,688
577,267
(302)
12,193
11,891
Total
$ 3,425,833 $
(5,197) $ 42,084 $ 36,887
(1) An additional $79 million capacity was provided directly to Arch MI U.S. by a
separate panel of reinsurers and is not reflected in this table.
(2) An additional $26 million capacity was provided directly to Arch MI U.S. by a
separate panel of reinsurers and is not reflected in this table.
(3) An additional $34 million capacity was provided directly to Arch MI U.S. by a
separate panel of reinsurers and is not reflected in this table.
(4) An additional $16 million capacity was provided directly to Arch MI U.S. by a
separate panel of reinsurers and is not reflected in this table.
See Note 8, “Reinsurance.”
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Other Comprehensive Income (Loss)
The following table presents the changes in each component of AOCI, net of noncontrolling interests:
Year Ended December 31, 2020
Beginning balance
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive income (loss)
Ending balance
Year Ended December 31, 2019
Beginning balance
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive income (loss)
Ending balance
Year Ended December 31, 2018
Beginning balance
Cumulative effect of an accounting change
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive income (loss)
Ending balance
Unrealized
Appreciation on
Available-For-Sale
Investments
Foreign Currency
Translation
Adjustments
Total
$
$
$
$
$
$
258,486 $
668,996
(426,187)
242,809
501,295 $
(114,178) $
491,605
(118,941)
372,664
258,486 $
157,400 $
(149,794)
(266,357)
144,573
(121,784)
(114,178) $
(46,395) $
33,995
—
33,995
(12,400) $
(64,542) $
18,147
—
18,147
(46,395) $
(39,356) $
—
(25,186)
—
(25,186)
(64,542) $
212,091
702,991
(426,187)
276,804
488,895
(178,720)
509,752
(118,941)
390,811
212,091
118,044
(149,794)
(291,543)
144,573
(146,970)
(178,720)
The following tables present details about amounts reclassified from accumulated other comprehensive income and the tax
effects allocated to each component of other comprehensive income (loss):
Details About
AOCI Components
Consolidated Statement of Income
Line Item That Includes
Reclassification
Amounts Reclassified from AOCI
Year Ended December 31,
2020
2019
2018
Unrealized appreciation on available-for-sale investments
Net realized gains (losses)
Provision for credit losses
Other-than-temporary impairment losses
Total before tax
Income tax (expense) benefit
Net of tax
$
478,659 $
131,043 $
(153,822)
(3,597)
(533)
474,529
(48,342)
426,187 $
$
(3,165)
127,878
(8,937)
118,941 $
(2,829)
(156,651)
12,078
(144,573)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following are the related tax effects allocated to each component of other comprehensive income (loss):
Year Ended December 31, 2020
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period
Less reclassification of net realized gains (losses) included in net income
Foreign currency translation adjustments
Other comprehensive income (loss)
Year Ended December 31, 2019
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period
Less reclassification of net realized gains (losses) included in net income
Foreign currency translation adjustments
Other comprehensive income (loss)
Year Ended December 31, 2018
Unrealized appreciation (decline) in value of investments:
Unrealized holding gains (losses) arising during period
Less reclassification of net realized gains (losses) included in net income
Foreign currency translation adjustments
Other comprehensive income (loss)
Before Tax
Amount
Tax Expense
(Benefit)
Net of Tax
Amount
$
$
$
$
$
$
754,572
$
75,855
$
474,529
33,706
48,342
370
313,749
$
27,883
$
562,576
$
61,805
$
127,878
18,463
8,937
353
453,161
$
53,221
$
678,717
426,187
33,336
285,866
500,771
118,941
18,110
399,940
(294,267) $
(24,210) $
(156,651)
(25,006)
(12,078)
(176)
(162,622) $
(12,308) $
(270,057)
(144,573)
(24,830)
(150,314)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Earnings Per Common Share
The calculation of basic earnings per common share is computed by dividing income available to Arch common shareholders
by the weighted average number of Common Shares and common share equivalents outstanding. The following table sets forth
the computation of basic and diluted earnings per common share:
2020
Year Ended December 31,
2019
2018
Numerator:
Net income
Amounts attributable to noncontrolling interests
Net income available to Arch
Preferred dividends
Loss on redemption of preferred shares
$
1,465,711 $
(60,190)
1,405,521
(41,612)
1,693,300 $
(56,981)
1,636,319
(41,612)
—
—
Net income available to Arch common shareholders
$
1,363,909 $
1,594,707 $
727,821
30,150
757,971
(41,645)
(2,710)
713,616
Denominator:
Weighted average common shares outstanding
Series D preferred securities (1)
Weighted average common shares outstanding – basic
Effect of dilutive common share equivalents:
Nonvested restricted shares
Stock options (2)
Weighted average common shares and common share equivalents outstanding – diluted
Earnings per common share:
Basic
Diluted
403,062,179
—
403,062,179
1,682,309
5,514,967
410,259,455
401,802,815
—
401,802,815
1,673,770
8,132,893
411,609,478
401,036,376
3,311,245
404,347,621
1,474,207
7,084,650
412,906,478
$
$
3.38 $
3.32 $
3.97 $
3.87 $
1.76
1.73
(1) The company has determined that, based on a review of the terms, features and rights of the Company’s non-voting common equivalent preferred shares
compared to the rights of the Company’s common shareholders, the underlying common shares that the convertible securities convert to were common
share equivalents at the time of their issuance.
(2) Certain stock options were not included in the computation of diluted earnings per share where the exercise price of the stock options exceeded the
average market price and would have been anti-dilutive or where, when applying the treasury stock method to in-the-money options, the sum of the
proceeds, including unrecognized compensation, exceeded the average market price and would have been anti-dilutive. For 2020, 2019 and 2018, the
number of stock options excluded were 2,249,821, 1,302,017 and 5,673,821, respectively.
15. Income Taxes
Arch Capital is incorporated under the laws of Bermuda and,
under current Bermuda law, is not obligated to pay any taxes
in Bermuda based upon income or capital gains. The
Company has received a written undertaking from the
Minister of Finance in Bermuda under the Exempted
Undertakings Tax Protection Act 1966 that, in the event that
any legislation is enacted in Bermuda imposing any tax
computed on profits, income, gain or appreciation on any
capital asset, or any tax in the nature of estate duty or
inheritance tax, such tax will not be applicable to Arch
Capital or any of its operations until March 31, 2035. This
undertaking does not, however, prevent the imposition of
taxes on any person ordinarily resident in Bermuda or any
company in respect of its ownership of real property or
leasehold interests in Bermuda.
Arch Capital and its non-U.S. subsidiaries will be subject to
U.S. federal income tax only to the extent that they derive
U.S. source income that is subject to U.S. withholding tax or
income that is effectively connected with the conduct of a
trade or business within the U.S. and is not exempt from U.S.
tax under an applicable income tax treaty with the U.S. Arch
Capital and its non-U.S. subsidiaries will be subject to a
withholding tax on dividends from U.S. investments and
interest from certain U.S. payors (subject to reduction by any
applicable income tax treaty). Arch Capital and its non-U.S.
subsidiaries intend to conduct their operations in a manner
that will not cause them to be treated as engaged in a trade or
business in the United States and, therefore, will not be
required to pay U.S. federal income taxes (other than U.S.
excise taxes on insurance and reinsurance premium and
withholding taxes on dividends and certain other U.S. source
investment income). However, because there is uncertainty as
to the activities which constitute being engaged in a trade or
business within the United States, there can be no assurances
that the U.S. Internal Revenue Service will not contend
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the difference between the provision for
income taxes and the expected tax provision at the weighted
average tax rate follows:
Year Ended December 31,
2019
2018
2020
Expected income tax expense
(benefit) computed on pre-tax
income at weighted average income
tax rate
Addition (reduction) in income tax
expense (benefit) resulting from:
$ 111,947 $ 149,799 $ 91,529
Tax-exempt investment income
(1,824)
(3,091)
(4,790)
Meals and entertainment
547
1,134
1,060
State taxes, net of U.S. federal tax
benefit
Foreign branch taxes
Prior year adjustment
5,027
2,094
3,983
Foreign exchange gains & losses
(1,736)
Changes in applicable tax rate
Dividend withholding taxes
Change in valuation allowance
Contingent consideration
—
7,105
13,190
9
3,314
1,231
632
436
—
6,510
1,628
190
2,086
5,428
(2,522)
1,293
(128)
6,594
18,396
740
Share based compensation
(2,533)
(6,592)
(5,356)
Intercompany loan write-off
Other
(22,083)
(3,888)
—
619
—
(379)
Income tax expense (benefit)
$ 111,838 $ 155,810 $ 113,951
The effect of a change in tax laws or rates on deferred taxes
assets and liabilities is recognized in income in the period in
which such change is enacted.
Deferred income tax assets and liabilities reflect temporary
differences based on enacted tax rates between the carrying
amounts of assets and liabilities for financial reporting and
income tax purposes.
successfully that Arch Capital or its non-U.S. subsidiaries are
engaged in a trade or business in the United States. If Arch
Capital or any of its non-U.S. subsidiaries were subject to
U.S. income tax, Arch Capital’s shareholders’ equity and
earnings could be materially adversely affected. Arch Capital
has subsidiaries and branches that operate in various
jurisdictions around the world that are subject to tax in the
jurisdictions
they operate. The significant
jurisdictions in which Arch Capital’s subsidiaries and
branches are subject to tax are the United States, United
Kingdom, Ireland, Canada, Switzerland, Australia and
Denmark.
in which
The components of income taxes attributable to operations
were as follows:
Year Ended December 31,
2019
2018
2020
Current expense (benefit):
United States
Non-U.S.
Deferred expense (benefit):
United States
Non-U.S.
Income tax expense
$ 181,571 $ 139,407 $
16,091
197,662
4,954
144,361
73,078
12,785
85,863
(89,170)
3,346
(85,824)
19,544
8,544
28,088
$ 111,838 $ 155,810 $ 113,951
11,849
(400)
11,449
The Company’s income or loss before income taxes was
earned in the following jurisdictions:
Year Ended December 31,
2019
2018
2020
Income (Loss) Before Income Taxes:
Bermuda
United States
Other
Total
$ 1,114,117 $ 1,122,952 $
409,893
53,539
701,480
24,678
$ 1,577,549 $ 1,849,110 $
388,492
440,823
12,457
841,772
The expected tax provision computed on pre-tax income or
loss at the weighted average tax rate has been calculated as
the sum of the pre-tax income in each jurisdiction multiplied
by that jurisdiction’s applicable statutory tax rate. The 2020
applicable statutory tax rates by jurisdiction were as follows:
Bermuda (0.0%), United States (21.0 %), United Kingdom
(19.0 %), Ireland (12.5 %), Denmark (22.0 %), Canada (26.5
%), Gibraltar (10.0 %), Australia (30.0 %), Hong Kong (16.5
%) and the Netherlands (16.5 %).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company’s deferred income
tax assets and liabilities were as follows:
At December 31, 2020, the Company’s net operating loss
carryforwards and tax credits were as follows:
December 31,
2020
2019
Year Ended December 31,
2020
Expiration
$ 67,142 $ 30,836
United Kingdom
$
237,277 No expiration
Operating Loss Carryforwards
Deferred income tax assets:
Net operating loss
Uncrystallized losses
AMT credit carryforward
Discounting of net loss reserves
Net unearned premium reserve
Compensation liabilities
Foreign tax credit carryforward
Interest expense
Goodwill and intangible assets
Bad debt reserves
Lease liability
Net unrealized foreign exchange gains
Other, net
2,926
—
74,247
66,368
27,351
19,160
622
14,450
1,864
23,604
165
1,725
1,565
1,323
52,582
64,269
21,693
9,521
—
11,644
5,983
26,438
598
206
Deferred tax assets before valuation allowance
299,624
226,658
Valuation allowance
(88,255)
(48,219)
Deferred tax assets net of valuation allowance
211,369
178,439
Deferred income tax liabilities:
Depreciation and amortization
Deposit accounting liability
Contingency reserve
Deferred policy acquisition costs
Net unrealized appreciation of investments
Right-of-use asset
Other, net
(495)
(1,751)
(1,215)
(2,169)
(64,593)
(132,831)
(42,045)
(66,681)
(29,847)
(38,764)
(19,239)
(23,416)
(843)
(3,680)
Total deferred tax liabilities
(195,647)
(231,922)
Net deferred income tax assets (liabilities)
$ 15,722 $ (53,483)
likely
to more
The Company provides a valuation allowance to reduce
certain deferred tax assets to an amount which management
expects
than not be realized. As of
December 31, 2020, the Company’s valuation allowance was
$88.3 million, compared to $48.2 million at December 31,
2019. The valuation allowance in both periods was primarily
attributable to valuation allowance on the Company’s U.K.
Canadian and Australian operations and certain other
deferred tax assets relating to loss carryforwards that have a
limited use.
Ireland
Australia
Hong Kong
Denmark
United States (1)
Tax Credits
U.K. foreign tax credits
U.S. refundable AMT credits
11,336 No expiration
37,995 No expiration
21,094 No expiration
23 No expiration
27,425 2029 - 2038
19,160 No expiration
0 No expiration
(1) On January 30, 2014, the Company’s U.S. mortgage operations
underwent an ownership change for U.S. federal income tax purposes as a
result of the Company’s acquisition of the CMG Entities. As a result of this
ownership change, a limitation has been imposed upon the utilization of
approximately $8.3 million of the Company’s existing U.S. net operating
loss carryforwards. Utilization is limited to approximately $0.6 million per
year in accordance with Section 382 of the Internal Revenue Code of 1986
as amended (“the Code”).
The Company’s U.S. mortgage operations are eligible for a
tax deduction, subject to certain limitations, under Section
832(e) of the Code for amounts required by state law or
regulation to be set aside in statutory contingency reserves.
The deduction is allowed only to the extent that the Company
purchases non-interest bearing U.S. Mortgage Guaranty Tax
and Loss Bonds (“T&L Bonds”) issued by the U.S. Treasury
Department in an amount equal to the tax benefit derived
from deducting any portion of the statutory contingency
reserves. T&L Bonds are reflected in ‘other assets’ on the
Company’s balance sheet and totaled approximately $88.1
million at December 31, 2020, compared to $207.0 million at
December 31, 2019.
Deferred income tax liabilities have not been accrued with
respect to the undistributed earnings of the Company's U.S.,
U.K. and Ireland subsidiaries as it is the Company’s intention
that all such earnings will be indefinitely reinvested. If the
earnings were to be distributed, as dividends or otherwise,
such amounts may be subject to withholding tax in the
jurisdiction of the paying entity. The Company no longer
intends to indefinitely reinvest earnings from the Company's
Canada subsidiary, however, no income or withholding taxes
have been accrued as the Canada subsidiary does not have
positive cumulative earnings and profits and therefore a
distribution from this particular subsidiary would not be
subject to income taxes or withholding taxes. Potential tax
implications of repatriation from the Company’s unremitted
earnings that are indefinitely reinvested are driven by facts at
the time of distribution. Therefore it is not practicable to
estimate the income tax liabilities that might be incurred if
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
such earnings were remitted. Distributions from the U.K. or
Ireland would not be subject to withholding tax and no
deferred income tax liability would need to be accrued.
The Company recognizes interest and penalties relating to
unrecognized tax benefits in the provision for income taxes.
As of December 31, 2020, the Company’s total unrecognized
tax benefits, including interest and penalties, were $2.0
million. If recognized, the full amount of the unrecognized
tax benefit would impact the consolidated effective tax rate.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
December 31,
2020
2019
Balance at beginning of year
$
2,008 $
2,008
Additions based on tax positions related to the
current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Balance at end of year
—
—
—
—
—
—
—
—
$
2,008 $
2,008
The Company or its subsidiaries or branches files income tax
returns in the U.S. federal jurisdiction and various state, local
and foreign jurisdictions. The following table details open tax
years that are potentially subject to examination by local tax
authorities, in the following major jurisdictions:
Jurisdiction
United States
United Kingdom
Ireland
Canada
Switzerland
Denmark
Australia
Tax Years
2015-2020
2019-2020
2016-2020
2016-2020
2017-2020
2016-2020
2016-2020
As of December 31, 2020, the Company’s current income tax
payable (included in “Other liabilities”) was $9.2 million.
16. Transactions with Related Parties
In 2017, the Company acquired approximately 25% of
Premia Holdings Ltd. Premia Holdings Ltd. is the parent of
Premia Reinsurance Ltd., a multi-line Bermuda reinsurance
company (together with Premia Holdings Ltd., “Premia”).
Premia’s strategy is to reinsure or acquire companies or
reserve portfolios in the non-life property and casualty
insurance and reinsurance run-off market. Arch Re Bermuda
and certain Arch co-investors invested $100.0 million and
acquired approximately 25% of Premia as well as warrants to
purchase additional common equity. Arch has appointed two
directors to serve on the seven person board of directors of
Premia. Arch Re Bermuda is providing a 25% quota share
reinsurance treaty on certain business written by Premia.
In the 2019 fourth quarter, Barbican entered into certain
reinsurance and related transactions with Premia pursuant to
which Premia assumed a transfer of liability for the 2018 and
prior years of account of Barbican as of July 1, 2019.
Barbican recorded reinsurance recoverable on unpaid and
paid losses and funds held liability of $199.8 million and
$149.6 million, respectively at December 31, 2020, compared
to $177.7 million and $180.0 million, respectively, at
December 31, 2019.
In the 2020 fourth quarter, Arch Capital and Arch Re
Bermuda entered into agreements pursuant to which Arch Re
Bermuda, together with certain co-investors, expect to
acquire all of the common shares of Watford Holdings Ltd,
subject to customary closing conditions including regulatory
and shareholder approval. See note 12, “Variable Interest
Entity and Noncontrolling Interests.”
Certain directors and executive officers of the Company own
common and preference shares of Watford. See note 12,
“Variable Interest Entity and Noncontrolling Interests,” for
information about Watford.
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17. Leases
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the ordinary course of business, the Company renews and
enters into new leases for office property and equipment. At
the lease inception date, the Company determines whether a
contract contains a lease and its classification as a finance or
operating lease. Primarily all of the Company’s leases are
classified as operating leases. The Company’s operating
leases have remaining lease terms of up to 10 years, some of
which include options to extend the lease term. The Company
considers these options when determining the lease term and
measuring its lease liability and right-of-use asset. In
addition, the Company’s lease agreements do not contain any
material residual value guarantees or material restrictive
covenants.
Short-term operating leases with an initial term of twelve
months or less were excluded on the Company's consolidated
balance sheet and represent an inconsequential amount of
operating lease expense.
As most leases do not provide an implicit rate, the Company
uses its incremental borrowing rate based on the information
available at the lease commencement date in determining the
present value of lease payments.
Additional information regarding the Company’s operating
leases is as follows:
Operating lease costs
Cash payments included in the
measurement of lease liabilities
reported in operating cash flows
Right-of-use assets obtained in
exchange for new lease liabilities
Right-of-use assets (1)
Operating lease liability (1)
December 31,
2020
31,826
30,365
12,060
115,911
136,015
$
$
$
$
$
2019
30,478
27,521
7,445
131,661
150,519
$
$
$
$
$
Weighted average discount rate
3.9 %
3.9 %
Weighted average remaining lease
term
5.8 years
6.4 years
(1) The right-of-use assets are included in ‘other assets’ while the
operating lease liability is included in ‘other liabilities.’
The following table presents the contractual maturities of the
Company's operating lease liabilities at December 31, 2020:
Years Ending December 31,
2021
2022
2023
2024
2025
2026 and thereafter
Total undiscounted lease liability
Less: present value adjustment
Operating lease liability
$
32,309
30,357
25,828
19,480
13,017
31,318
152,309
(16,294)
136,015
All of these leases are for the rental of office space, with
expiration terms that range from 2021 to 2030. Rental
expense was approximately $31.8 million, $30.5 million and
$27.6 million for 2020, 2019 and 2018, respectively.
At December 31, 2020, the Company has entered into certain
financing lease agreements. The future lease payments for the
Company’s financing leases are expected to be $2.1 million
for 2021.
18. Commitments and Contingencies
Concentrations of Credit Risk
The creditworthiness of a counterparty is evaluated by the
Company, taking into account credit ratings assigned by
independent agencies. The credit approval process involves
an assessment of factors, including, among others, the
counterparty, country and industry credit exposure limits.
Collateral may be required, at the discretion of the Company,
on certain transactions based on the creditworthiness of the
counterparty.
losses and
The areas where significant concentrations of credit risk may
exist include unpaid losses and loss adjustment expenses
recoverable, contractholder receivables, ceded unearned
premiums, paid
loss adjustment expenses
recoverable net of reinsurance balances payable, investments
and cash and cash equivalent balances. A credit exposure
exists with respect to reinsurance recoverables as they may
become uncollectible. The Company manages its credit risk
in its reinsurance relationships by transacting with reinsurers
that it considers financially sound and, if necessary, the
Company may hold collateral in the form of funds, trust
accounts and/or irrevocable letters of credit. This collateral
can be drawn on for amounts that remain unpaid beyond
specified time periods on an individual reinsurer basis. In
addition, certain insurance policies written by the Company’s
insurance operations feature large deductibles, primarily in its
construction and national accounts lines of business. Under
such contracts, the Company is obligated to pay the claimant
is
for
the claim. The Company
the full amount of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the policyholder for
subsequently reimbursed by
the
deductible amount. These amounts are included on a gross
basis in the consolidated balance sheet in contractholder
payables and contractholder receivables, respectively. In the
event that the Company is unable to collect from the
liable for such
policyholder,
defaulted amounts. Collateral, primarily in the form of letters
of credit, cash and trusts, is obtained from the policyholder to
mitigate the Company’s credit risk. In the instances where the
company receives collateral in the form of cash, the
Company records a related liability in “Collateral held for
insured obligations.”
the Company would be
In addition, the Company underwrites a significant amount of
its business through brokers and a credit risk exists should
any of these brokers be unable to fulfill their contractual
obligations with respect to the payments of insurance and
reinsurance balances owed to the Company. The following
table summarizes the percentage of the Company’s gross
premiums written generated from or placed by the largest
brokers:
Broker
Marsh & McLennan Companies
and its subsidiaries
Aon Corporation and its
subsidiaries
Year Ended December 31,
2020
2019
2018
13.3 %
9.6 %
9.3 %
12.0 %
12.2 %
11.4 %
No other broker and no one insured or reinsured accounted
for more than 10% of gross premiums written for 2020, 2019
and 2018.
The Company’s available for sale investment portfolio is
managed in accordance with guidelines that have been
tailored to meet specific investment strategies, including
standards of diversification, which limit the allowable
holdings of any single issue. There were no investments in
any entity in excess of 10% of the Company’s shareholders’
equity at December 31, 2020 other than investments issued or
guaranteed by the United States government or its agencies.
Investment Commitments
investment commitments, which are
The Company’s
primarily related to agreements entered into by the Company
to invest in funds and separately managed accounts when
called upon, were approximately $2.1 billion and $1.7 billion
at December 31, 2020 and 2019, respectively.
Purchase Obligations
The Company has also entered into certain agreements which
commit the Company to purchase goods or services,
primarily related to software and computerized systems. Such
purchase obligations were approximately $73.0 million and
$55.6 million at December 31, 2020 and 2019, respectively.
Employment and Other Arrangements
At December 31, 2020, the Company has entered into
employment agreements with certain of its executive officers.
Such employment arrangements provide for compensation in
the form of base salary, annual bonus, share-based awards,
participation in the Company’s employee benefit programs
and the reimbursements of expenses.
19. Debt and Financing Arrangements
The Company’s senior notes payable at December 31, 2020
and 2019 were as follows:
2034 notes (1)
2043 notes (2)
2026 notes (3)
2046 notes (4)
2050 notes (5)
Watford notes (6)
Carrying Amount at
December 31,
Principal
Amount
Interest
(Fixed)
300,000
7.350 %
500,000
5.144 %
500,000
4.011 %
5.031 %
450,000
3.635 % 1,000,000
140,000
6.500 %
2019
2020
297,254
297,367
494,831
494,944
496,806
497,211
445,317
445,402
—
988,500
137,418
137,689
$ 2,890,000 $ 2,861,113 $ 1,871,626
(1) Senior notes of Arch Capital issued on May 4, 2004 and due May 1, 2034
(“2034 notes”).
(2) Senior notes of Arch-U.S., a wholly-owned subsidiary of Arch Capital,
issued on December 13, 2013 and due November 1, 2043 (“2043 notes”),
fully and unconditionally guaranteed by Arch Capital.
(3) Senior notes of Arch Capital Finance LLC (“Arch Finance”), a wholly-
owned finance subsidiary of Arch Capital, issued on December 8, 2016 and
due December 15, 2026 (“2026 notes”), fully and unconditionally
guaranteed by Arch Capital.
(4) Senior notes of Arch Finance issued on December 8, 2016 and due
December 15, 2046 (“2046 notes”), fully and unconditionally guaranteed by
Arch Capital
(5) Senior notes of Arch Capital issued on June 30, 2020 and due June 30,
2050.
(6) Senior notes of Watford issued on July 2, 2019 and due July 2, 2029,
reflecting the elimination of amounts owned by Arch-U.S.
The 2034 notes are Arch Capital’s senior unsecured
obligations and rank equally with all of its existing and future
senior unsecured indebtedness. Interest payments on the 2034
notes are due on May 1st and November 1st of each year.
Arch Capital may redeem the 2034 notes at any time and
from time to time, in whole or in part, at a “make-whole”
redemption price.
ratably with
The 2043 notes are unsecured and unsubordinated obligations
of Arch-U.S. and Arch Capital, respectively, and rank
equally and
the other unsecured and
unsubordinated indebtedness of Arch-U.S. and Arch Capital,
respectively. Interest payments on the 2043 notes are due on
May 1st and November 1st of each year. Arch-U.S. may
redeem the 2043 notes at any time and from time to time, in
whole or in part, at a “make-whole” redemption price.
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ratably with
The 2026 notes are unsecured and unsubordinated obligations
of Arch Finance and Arch Capital, respectively, and rank
equally and
the other unsecured and
unsubordinated indebtedness of Arch Finance and Arch
Capital, respectively. Interest payments on the 2026 notes are
due on June 15th and December 15th of each year. Arch
Finance may redeem the 2026 notes at any time and from
time to time, in whole or in part, at a “make-whole”
redemption price.
ratably with
The 2046 notes are unsecured and unsubordinated obligations
of Arch Finance and Arch Capital, respectively, and rank
equally and
the other unsecured and
unsubordinated indebtedness of Arch Finance and Arch
Capital, respectively. Interest payments on the 2046 notes are
due on June 15th and December 15th of each year. Arch
Finance may redeem the 2046 notes at any time and from
time to time, in whole or in part, at a “make-whole”
redemption price.
On June 30, 2020, Arch Capital completed a public offering
of $1.0 billion aggregate principal amount of its 3.635%
senior notes with a scheduled maturity of June 30, 2050 (the
“2050 notes”). The 2050 notes are Arch Capital’s senior
unsecured obligations and rank equally with all of its existing
and future senior unsecured indebtedness. Interest payments
on the 2050 notes are due semi-annually in arrears on June 30
and December 30, beginning on December 30, 2020, to
holders of record on the preceding June 15 or December 15,
as the case may be. Interest will be calculated on the basis of
a 360-day year of twelve 30-day months. Subject to
conditions of redemption, Arch Capital may redeem the 2050
notes at any time and from time to time prior to December
30, 2049, in whole or in part, at a redemption price equal to
the “make-whole” redemption price, plus accrued and unpaid
interest thereon to, but excluding, the redemption date.
On July 2, 2019, Watford completed an offering of $175.0
million in aggregate principal amount of its 6.5% senior
notes, due July 2, 2029 (“Watford Senior Notes”). Interest on
the Watford Senior Notes will be paid semi-annually in
arrears on each January 2 and July 2, commencing January 2,
2020. The $172.3 million net proceeds from the offering
were used to redeem a portion of Watford Preference Shares.
The Company purchased $35.0 million in aggregate principal
amount of the Watford Senior Notes.
Letter of Credit and Revolving Credit Facilities
In the normal course of its operations, the Company enters
into agreements with financial institutions to obtain secured
and unsecured credit facilities.
On December 17, 2019, Arch Capital and certain of its
subsidiaries entered into a $750.0 million five-year credit
facility (the “Credit Facility”) with a syndication of lenders.
The Credit Facility consists of a $250.0 million secured
facility for letters of credit (the “Secured Facility”) and a
$500.0 million unsecured facility for revolving loans and
letters of credit (the “Unsecured Facility”). Obligations of
each borrower under the Secured Facility for letters of credit
are secured by cash and eligible securities of such borrower
held in collateral accounts. Commitments under the Credit
Facility may be increased up to, but not exceeding, an
aggregate of $1.3 billion. Arch Capital has a one-time option
to convert any or all outstanding revolving loans of Arch
Capital and/or Arch-U.S. to term loans with the same terms
as the revolving loans except that any prepayments may not
be re-borrowed. Arch-U.S. guarantees the obligations of
Arch Capital, and Arch Capital guarantees the obligations of
Arch-U.S. Borrowings of revolving loans may be made at a
variable rate based on LIBOR or an alternative base rate at
the option of Arch Capital. Arch Capital and its lenders may
agree on a LIBOR successor rate at the appropriate time to
address the replacement of LIBOR. Secured letters of credit
are available for issuance on behalf of certain Arch Capital
subsidiaries. The Credit Facility is structured such that each
party that requests a letter of credit or borrowing does so only
for itself and its own obligations.
The Credit Facility contains certain restrictive covenants
customary for facilities of this type, including restrictions on
indebtedness, consolidated tangible net worth, minimum
shareholders’ equity levels and minimum financial strength
ratings. Arch Capital and its subsidiaries which are party to
the agreement were in compliance with all covenants
contained therein at December 31, 2020.
Commitments under the Credit Facility will expire on
December 17, 2024, and all loans then outstanding must be
repaid. Letters of credit issued under the Unsecured Facility
will not have an expiration date later than December 17,
2025.
Under the $250.0 million secured letter of credit facility,
Arch Capital’s subsidiaries had $218.4 million of letters of
credit outstanding and remaining capacity of $31.6 million at
December 31, 2020. In addition, certain of Arch Capital’s
subsidiaries had outstanding secured and unsecured letters of
credit of $250.0 million and $26.2 million respectively,
which were issued in the normal course of business.
When issued, all secured letters of credit are secured by a
portion of the investment portfolio. At December 31, 2020,
these letters of credit were secured by investments with a fair
value of $262.4 million.
Watford has access to a $100 million secured letter of credit
facility expiring on May 16, 2021, a $50 million unsecured
letter of credit facility which auto extends on September 17,
2021 and a $440 million secured credit facility expiring on
November 30, 2021 that provides for borrowings and the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issuance of letters of credit not to exceed $220 million.
Borrowings of revolving loans may be made by Watford at a
variable rate based on LIBOR or an alternative base rate at
the option of Watford. At December 31, 2020, Watford had
$126.0 million in outstanding letters of credit under the
facilities and $155.7 million of borrowings outstanding under
the secured credit facility, backed by Watford’s investment
portfolio. Watford was in compliance with all covenants
contained in these credit facilities at December 31, 2020. The
Company does not guarantee or provide credit support for
Watford, and the Company’s financial exposure to Watford is
limited to its investment in Watford’s senior notes, common
and preferred shares and counterparty credit risk (mitigated
by collateral) arising from the reinsurance transactions.
The Company’s outstanding revolving credit agreement
borrowings were as follows:
Arch Capital
Watford
Total
Year Ended December 31,
2020
2019
$
$
— $
155,687
155,687 $
—
484,287
484,287
20. Goodwill and Intangible Assets
The following table shows an analysis of goodwill and
intangible assets:
Intangible
assets
(indefinite
life)
Intangible
assets (finite
life)
Total
Goodwill
$ 249,620 $ 61,874 $ 323,426 $ 634,920
74,780
24,431
82,482
181,693
—
—
—
(82,104)
(82,104)
(1,000)
—
(1,000)
2,151
606
1,817
4,574
326,551
85,911
325,621
738,083
—
—
—
—
—
—
39,178
39,178
(69,031)
(69,031)
—
—
(11,922)
(6,692)
3,247
(15,367)
$ 314,629 $ 79,219 $ 299,015 $ 692,863
$ 318,043 $ 77,896 $ 784,921 $ 1,180,860
—
—
(489,828)
(489,828)
(3,414)
1,323
3,922
1,831
$ 314,629 $ 79,219 $ 299,015 $ 692,863
Net balance at
Dec. 31, 2018
Acquisitions
Amortization
Impairment (1)
Foreign currency
movements and
other adjustments
Net balance at
Dec. 31, 2019
Acquisitions (2)
Amortization
Impairment
Foreign currency
movements and
other adjustments
Net balance at
Dec. 31, 2020
Gross balance at
Dec. 31, 2020
Accumulated
amortization
Foreign currency
movements and
other adjustments
Net balance at
Dec. 31, 2020
(1) The impairment to the indefinite-lived intangible assets during the
year ended December 31, 2019 of $1.0 million related to insurance
licenses from the acquisition of UGC.
(2) Certain amounts for the Company’s 2020 acquisitions are considered
provisional.
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The following table presents the components of goodwill and
intangible assets:
did not result in the recognition of impairment losses for
2020 and 2019.
Gross
Balance
Accumulated
Amortization
Foreign
Currency
Translation
Adjustment
and Other
21. Shareholders’ Equity
Net
Balance
Authorized and Issued
$ 451,505 $
(381,349) $
284 $ 70,440
The authorized share capital of Arch Capital consists of 1.8
billion Common Shares, par value of $0.0011 per share, and
50 million Preferred Shares, par value of $0.01 per share.
52,674
(44,347)
60
8,387
Common Shares
Dec. 31, 2020
Acquired
insurance
contracts
Operating
platform
Distribution
relationships
Goodwill
Insurance
licenses
Syndicate
capacity
Unfavorable
service contract
Other
Total
Dec. 31, 2019
Acquired
insurance
contracts
Operating
platform
Distribution
relationships
Goodwill
Insurance
licenses
Syndicate
capacity
Unfavorable
service contract
Other
Total
285,141
318,043
55,981
21,915
(9,533)
5,134
(71,383)
3,450
217,208
—
—
—
(3,414)
314,629
—
55,981
1,324
23,239
9,147
(1,896)
—
127
(386)
3,365
$ 1,180,860 $
(489,828) $
1,831 $ 692,863
$ 452,470 $
(336,559) $
310 $ 116,221
52,674
(39,571)
(259)
12,844
243,838
331,448
63,390
21,915
(9,533)
5,134
(50,542)
212
193,508
—
—
—
(4,897)
326,551
—
63,390
605
22,520
8,657
(1,279)
—
70
(876)
3,925
$ 1,161,336 $
(419,294) $
(3,959) $ 738,083
The estimated remaining amortization expense for the
Company’s intangible assets with finite lives is as follows:
2021
2022
2023
2024
2025
2026 and thereafter
Total
$
$
56,269
42,211
40,014
34,985
19,919
105,617
299,015
The estimated remaining useful lives of these assets range
from one to sixteen years at December 31, 2020.
Other than the impairments described above, the Company’s
annual impairment reviews for goodwill and intangible assets
The following table presents a roll-forward of changes in
Arch Capital’s issued and outstanding Common Shares:
Year Ended December 31,
2019
2018
2020
Common Shares:
Shares issued and
outstanding, beginning
of year
574,617,195
570,737,283
549,872,226
Shares issued (1)
2,646,164
2,835,994
2,757,506
Conversion of Series D
preferred shares (2)
Restricted shares issued,
net of cancellations
Shares issued and
outstanding, end of year
Common shares in
treasury, end of year
Shares issued and
outstanding, end of year
—
—
17,022,600
1,737,482
1,043,918
1,084,951
579,000,841
574,617,195
570,737,283
(172,280,199)
(168,997,994)
(168,282,449)
406,720,642
405,619,201
402,454,834
(1)
(2)
Includes shares issued from the exercise of stock options and stock
appreciation rights, the vesting of restricted share units and shares
issued from the employee share purchase plan.
Such shares represent common shares that were issued upon
conversion of the non-voting common equivalent preference shares
issued in connection with the AIG acquisition.
Three-For-One Common Share Split
In May 2018, shareholders approved a proposal to amend the
memorandum of association by sub-dividing the authorized
common shares of Arch Capital to effect a three-for-one split
of Arch Capital’s common shares. The share split changed
the Company’s authorized common shares to 1.8 billion
common shares (600 million previously), with a par value of
$.0011 per share ($.0033 previously). Information pertaining
to the composition of the Company’s shareholders’ equity
accounts, shares and earnings per share has been retroactively
restated in the accompanying financial statements and notes
to the consolidated financial statements to reflect the share
split.
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Share Repurchase Program
The board of directors of Arch Capital has authorized the
investment in Arch Capital’s common shares through a share
repurchase program. At December 31, 2020, $916.5 million
of share repurchases were available under the program.
Repurchases under the program may be effected from time to
time in open market or privately negotiated transactions
through December 31, 2021. The timing and amount of the
repurchase transactions under this program will depend on a
variety of factors, including market conditions and corporate
and regulatory considerations. See note 27, “Subsequent
Events”.
Repurchases of Arch Capital’s common shares in connection
with the share repurchase plan and other share-based
transactions were held in the treasury under the cost method,
and the cost of the common shares acquired is included in
‘Common shares held in treasury, at cost.’ At December 31,
2020, Arch Capital held 172.3 million shares for an aggregate
cost of $2.5 billion in treasury, at cost.
The Company’s repurchases under the share repurchase
program were as follows:
Year Ended December 31,
2019
2018
2020
Aggregate cost of shares
repurchased
$
83,472 $
2,871 $
282,762
Shares repurchased
2,850,102
110,598
10,559,850
Average price per share
repurchased
$
29.29 $
25.96 $
26.78
Since the inception of the share repurchase program through
December 31, 2020, Arch Capital has
repurchased
approximately 389.2 million common shares for an aggregate
purchase price of $4.1 billion.
Convertible Non-Voting Common Equivalent Preferred
Shares
On December 31, 2016, the Company completed the
acquisition of all of the outstanding shares of capital stock of
UGC. Based upon a formula set forth in the Stock Purchase
Agreement, AIG received 1,276,282 of Arch Capital’s Series
D convertible non-voting common equivalent preferred
shares (“Series D Preferred Shares”). Each Series D Preferred
Share converts to 10 shares of Arch Capital fully paid non-
assessable common stock.
The Company determined, based on a review of the terms
features and rights of the Series D preferred shares compared
to the rights of the Company’s common shareholders, the
underlying 38,288,460 common shares that the convertible
securities convert to were common share equivalents at the
time of their issuance.
In June 2017, Arch Capital completed an underwritten public
secondary offering of 21,265,860 common shares by AIG
following transfer of 708,862 Series D Preferred Shares. In
March 2018, Arch Capital completed an underwritten public
secondary offering of 17,022,600 common shares by AIG
following transfer of 567,420 Series D Preferred Shares.
Proceeds from the sale of common shares pursuant to the
public offering were received by AIG. At December 31, 2020
and 2018, no Series D Preferred Shares were outstanding.
Series F Preferred Shares
In August 2017 and November 2017, Arch Capital completed
combined $330 million of underwritten public offerings
($230 million in August 2017 and $100 million in November
2017) of 13.2 million depositary shares (the “Series F
Depositary Shares”), each of which represents a 1/1,000th
interest in a share of its 5.45% Non-Cumulative Preferred
Shares, Series F, with a $0.01 par value and $25,000
liquidation preference per share
to $25
liquidation preference per Series F Depositary Share) (the
“Series F Preferred Shares”). Each Series F Depositary Share,
evidenced by a depositary receipt, entitles the holder, through
the depositary, to a proportional fractional interest in all
rights and preferences of the Series F Preferred Shares
represented thereby (including any dividend, liquidation,
redemption and voting rights).
(equivalent
Holders of Series F Preferred Shares will be entitled to
receive dividend payments only when, as and if declared by
our board of directors or a duly authorized committee of the
board. Any such dividends will be payable from, and
including, the date of original issue on a noncumulative basis,
quarterly in arrears on the last day of March, June, September
and December of each year, at an annual rate of 5.45%.
the Series F Preferred Shares are not
Dividends on
cumulative. The Company will be restricted from paying
dividends on or repurchasing its common shares unless
certain dividend payments are made on the Series F Preferred
Shares.
Except in specified circumstances relating to certain tax or
corporate events, the Series F Preferred Shares are not
redeemable prior to August 17, 2022 (the fifth anniversary of
the issue date). On and after that date, the Series F Preferred
Shares will be redeemable at the Company’s option, in whole
or in part, at a redemption price of $25,000 per share of the
Series F Preferred Shares (equivalent to $25 per depositary
share), plus any declared and unpaid dividends, without
accumulation of any undeclared dividends to, but excluding,
the redemption date. The Series F Depositary Shares will be
redeemed if and to the extent the related Series F Preferred
Shares are redeemed by the Company. Neither the Series F
Depositary Shares nor the Series F Preferred Shares have a
stated maturity, nor will they be subject to any sinking fund
or mandatory redemption. The Series F Preferred Shares are
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
not convertible into any other securities. The Series F
Preferred Shares will not have voting rights, except under
limited circumstances. The net proceeds from the Series F
Preferred Share offerings were used
the
Company’s outstanding 6.75% Series C Non-Cumulative
Preferred Shares.
redeem
to
Series E Preferred Shares
On September 29, 2016, Arch Capital completed a $450
million underwritten public offering of 18.0 million
depositary shares (the “Series E Depositary Shares”), each of
which represents a 1/1,000th interest in a share of its 5.25%
Non-Cumulative Preferred Shares, Series E, with a $0.01 par
liquidation preference per share
value and $25,000
(equivalent to $25 liquidation preference per Series E
Depositary Share) (the “Series E Preferred Shares”). Each
Series E Depositary Share, evidenced by a depositary receipt,
entitles the holder, through the depositary, to a proportional
fractional interest in all rights and preferences of the Series E
Preferred Shares
(including any
represented
dividend, liquidation, redemption and voting rights).
thereby
Holders of Series E Preferred Shares will be entitled to
receive dividend payments only when, as and if declared by
our board of directors or a duly authorized committee of the
board. Any such dividends will be payable from, and
including, the date of original issue on a non-cumulative
basis, quarterly in arrears on the last day of March, June,
September and December of each year, at an annual rate of
5.25%. Dividends on the Series E Preferred Shares are not
cumulative. The Company will be restricted from paying
dividends on or repurchasing its common shares unless
certain dividend payments are made on the Series E preferred
shares.
(the
to September 29, 2021
Except in specified circumstances relating to certain tax or
corporate events, the Series E Preferred Shares are not
redeemable prior
fifth
anniversary of the issue date). On and after that date, the
Series E Preferred Shares will be redeemable at the
Company’s option, in whole or in part, at a redemption price
of $25,000 per share of the Series E Preferred Shares
(equivalent to $25 per Series E Depositary Share), plus any
declared and unpaid dividends, without accumulation of any
undeclared dividends to, but excluding, the redemption date.
The Series E Depositary Shares will be redeemed if and to
the extent the related Series E Preferred Shares are redeemed
by the Company. Neither the Series E Depositary Shares nor
the Series E Preferred Shares have a stated maturity, nor will
they be subject to any sinking fund or mandatory redemption.
The Series E Preferred Shares are not convertible into any
other securities. The Series E Preferred Shares will not have
voting rights, except under limited circumstances.
Series C Preferred Shares
On January 2, 2018, Arch Capital redeemed all outstanding
6.75% Series C non-cumulative preferred shares. The
preferred shares were redeemed at a redemption price equal
to $25 per share, plus all declared and unpaid dividends to
(but excluding) the redemption date. In accordance with
GAAP, following the redemption, original issuance costs
related to such shares have been removed from additional
paid-in capital and recorded as a “loss on redemption of
preferred shares.” Such adjustment had no impact on total
shareholders’ equity or cash flows.
22. Share-Based Compensation
Long Term Incentive and Share Award Plans
The Company utilizes share-based compensation plans for
officers, other employees and directors of Arch Capital and
its subsidiaries
to provide competitive compensation
opportunities, to encourage long-term service, to recognize
individual contributions and
reward achievement of
performance goals and to promote the creation of long-term
value for shareholders by aligning the interests of such
persons with those of shareholders.
for
the
issuance of
The 2018 Long-Term Incentive and Share Award Plan (the
“2018 Plan”) became effective as of May 9, 2018 following
approval by shareholders of the Company. The 2018 Plan
provides
restricted stock units,
performance units, restricted shares, performance shares,
stock options and stock appreciation rights and other equity-
based awards to our employees and directors. The 2018 Plan
authorizes the issuance of 34,500,000 common shares and
will terminate as to future awards on February 28, 2028. At
December 31, 2020, 17,284,108 shares are available for
future issuance.
The 2015 Long Term Incentive and Share Award Plan (the
(“2015 Plan”) authorizes the issuance of 12,900,000 common
shares and became effective as of May 7, 2015 following
approval by shareholders of the Company. The 2015 Plan
provides for the issuance of share-based awards to our
employees and directors and will terminate as to future
awards on February 26, 2025. At December 31, 2020,
555,759 shares are available for future issuance.
The 2012 Long Term Incentive and Share Award Plan (the
“2012 Plan”) became effective as of May 9, 2012 following
approval by shareholders of the Company. The 2012 Plan
authorizes the issuance of 22,301,772 common shares and
will terminate as to future awards on February 28, 2022. At
December 31, 2020, 502,994 shares are available for grant
under the 2012 Plan.
Upon shareholder approval on May 6, 2016, the Amended
and Restated Arch Capital Group Ltd. 2007 Employee Share
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Plan (the “ESPP”) became effective and a total of
4,689,777 common shares were reserved for issuance. The
purpose of the ESPP is to give employees of Arch Capital
and its subsidiaries an opportunity to purchase common
shares through payroll deductions, thereby encouraging
employees to share in the economic growth and success of
Arch Capital and its subsidiaries. The ESPP is designed to
qualify as an “employee share purchase plan” under Section
423 of the Code. At December 31, 2020, 2,267,676 shares
remain available for issuance.
Stock Options and Stock Appreciation Rights
The Company generally issues stock options and SARs to
eligible employees, with exercise prices equal to the fair
market values of the Company’s Common Shares on the
grant dates. Such grants generally vest over a three year
period with one-third vesting on the first, second and third
anniversaries of the grant date.
The grant date fair value is determined using the Black-
Scholes option valuation model. The expected
life
assumption is based on an expected term analysis, which
incorporates the Company’s historical exercise experience.
Expected volatility
the Company’s daily
historical trading data of its common shares. The table below
summarizes the assumptions used.
is based on
Dividend yield
Expected volatility
Risk free interest rate
Expected option life
Year Ended December 31,
2019
2018
2020
— %
16.6 %
1.2 %
6.0 years
— %
18.1 %
2.5 %
6.0 years
— %
21.3 %
2.8 %
6.0 years
A summary of stock option and SAR activity under the
Company’s Long Term Incentive and Share Award Plans
during 2020 is presented below:
Year Ended December 31, 2020
The aggregate intrinsic value of stock options and SARs
exercised represents the difference between the exercise price
of the stock options and SARs and the closing market price
of the Company’s common shares on the exercise dates.
During 2020, the Company received proceeds of $5.0 million
from the exercise of stock options and recognized a tax
benefit of $3.0 million from the exercise of stock options and
SARs.
Year Ended December 31,
2019
2018
2020
Weighted average grant date
fair value
Aggregate intrinsic value of
Options/SARs exercised
$
$
8.14
59,723
$
$
7.90
51,350
$
$
7.50
43,468
Restricted Common Shares and Restricted Units
The Company also issues restricted share and unit awards to
eligible employees and directors, for which the fair value is
equal to the fair market values of the Company’s Common
Shares on the grant dates. Restricted share and unit awards
generally vest over a three year period with one-third vesting
on the first, second and third anniversaries of the grant date.
A summary of restricted share and restricted unit activity
under the Company’s Long Term Incentive and Share Award
Plans for 2020 is presented below:
Unvested Shares:
Unvested balance, beginning of year
Granted
Vested
Forfeited
Restricted
Common
Shares
Restricted
Unit
Awards
1,045,921
1,328,033
(697,090)
(41,019)
1,563,012
207,297
(620,905)
(27,685)
Unvested balance, end of year
1,635,845
1,121,719
Weighted Average Grant Date Fair
Value:
Unvested balance, beginning of year
$
$
$
$
$
31.02 $
37.58 $
30.86 $
33.91 $
36.34 $
30.07
37.32
29.99
30.76
31.43
Number of
Options /
SARs
Weighted
Average
Exercise
Price
Weighted
Average
Contractual
Term
Aggregate
Intrinsic
Value
Granted
Vested
Forfeited
Unvested balance, end of year
Outstanding,
beginning of
year
18,853,018 $
Granted
1,121,833 $
Exercised
(1,981,216) $
20.94
42.34
10.92
Forfeited or
expired
Outstanding,
end of year
Exercisable,
end of year
(154,302) $
30.13
17,839,333 $
23.32
4.74
$ 234,659
15,132,810 $
21.30
4.10
$ 223,908
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the weighted average grant date
fair value of restricted shares and restricted unit awards
granted and the aggregate fair value of restricted shares and
unit awards vesting in each year.
Year Ended December 31,
2019
2018
2020
Restricted shares and restricted
unit awards granted
Weighted average grant date fair
value
Aggregate fair value of vested
restricted share and unit awards
1,535,330
1,195,741
1,563,287
$
37.55 $
32.89 $
26.86
$
39,703 $
46,262 $
39,898
The aggregate intrinsic value of restricted units outstanding at
December 31, 2020 was $40.5 million.
Performance Awards
The Company also issues performance share and unit awards
(“performance awards”) to eligible employees, which are
the achievement of pre-established
earned based on
threshold,
three-year
target and maximum goals over
performance periods. Final payouts depend on the level of
achievement along with each employees continued service
through the vest date. The grant date fair value of the
performance awards is measured using a Monte Carlo
the assumptions
simulation model, which
summarized in the table below. Expected volatility is based
on the Company’s daily historical trading data of its common
shares. The cumulative compensation expense recognized
and unrecognized as of any reporting period date represents
the adjusted estimate of performance shares and units that
will ultimately be awarded, valued at their original grant date
fair values.
incorporated
Expected volatility
Risk free interest rate
Year Ended December 31,
2019
2018
2020
18.1 %
1.1 %
17.1 %
2.5 %
16.2 %
2.6 %
Performance
Shares
Performance
Units
Unvested Shares:
Unvested balance, beginning of year
Granted
Vested
Forfeited
Unvested balance, end of year
Weighted Average Grant Date
Fair Value:
Unvested balance, beginning of year $
Granted
Vested
Forfeited
Unvested balance, end of year
$
$
$
$
1,400,914
548,906
—
(98,438)
1,851,382
30.29 $
44.17 $
— $
30.01 $
34.42 $
23,767
8,298
—
—
32,065
29.75
44.17
—
—
33.48
The following table presents the weighted average grant date
fair values of performance awards granted.
Year Ended December 31,
2019
2018
2020
Performance awards
557,204
696,360
743,513
Weighted average grant date fair
value
$
44.17 $
36.05 $
24.77
The issuance of share-based awards and amortization thereon
has no effect on the Company’s consolidated shareholders’
equity.
Share-Based Compensation Expense
The following tables present pre-tax and after-tax share-
based compensation expense recognized as well as the
unrecognized compensation cost associated with unvested
awards and the weighted average period over which it is
expected to be recognized.
Year Ended December 31,
2019
2018
2020
Pre-Tax
Stock options and SARs
Restricted share and unit awards
Performance awards
ESPP
Total
After-Tax
Stock options and SARs
Restricted share and unit awards
Performance awards
ESPP
Total
$
$
$
$
11,744 $
41,284
14,729
2,135
69,892 $
12,866 $
38,988
8,949
3,045
63,848 $
16,272
34,025
4,414
1,224
55,935
10,388 $
34,599
13,380
1,978
60,345 $
11,450 $
32,999
8,295
2,758
55,502 $
14,894
29,044
4,127
1,114
49,179
December 31, 2020
Stock
Options and
SARs
Restricted
Common
Shares and
Units
Performance
Common
Shares and
Units
$
9,333 $
52,726 $
9,450
1.02
1.48
0.66
Unrecognized
compensation cost related
to unvested awards
Weighted average
recognition period (years)
23. Retirement Plans
For purposes of providing employees with retirement
benefits,
the Company maintains defined contribution
retirement plans. Contributions are based on the participants’
eligible compensation. For 2020, 2019 and 2018, the
Company expensed $52.0 million, $44.8 million and $40.8
million, respectively, related to these retirement plans.
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24. Legal Proceedings
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company, in common with the insurance industry in
general, is subject to litigation and arbitration in the normal
course of its business. As of December 31, 2020, the
Company was not a party to any litigation or arbitration
which is expected by management to have a material adverse
effect on the Company’s results of operations and financial
condition and liquidity.
25. Statutory Information
The Company’s insurance and reinsurance subsidiaries are
subject to insurance and/or reinsurance laws and regulations
in the jurisdictions in which they operate. These regulations
include certain restrictions on the amount of dividends or
other distributions available to shareholders without prior
approval of the insurance regulatory authorities.
The actual and required statutory capital and surplus for the
Company’s principal operating subsidiaries at December 31,
2020 and 2019:
Actual capital and surplus (1):
Bermuda
Ireland
United States
United Kingdom
Canada
Required capital and surplus:
Bermuda
Ireland
United States
United Kingdom
Canada
December 31,
2020
2019
$ 16,193,415 $ 13,511,729
721,439
4,440,848
748,276
61,351
883,337
4,904,840
967,440
64,286
$ 6,431,413 $ 5,492,968
542,703
1,697,640
349,328
32,763
701,161
1,644,324
601,662
37,441
(1)
Such amounts include ownership interests in affiliated insurance and
reinsurance subsidiaries.
the
respective
There were no state-prescribed or permitted regulatory
accounting practices for any of the Company’s insurance or
reinsurance entities that resulted in reported statutory surplus
that differed from that which would have been reported under
the prescribed practices of
regulatory
authorities, including the National Association of Insurance
Commissioners. The differences between statutory financial
statements and statements prepared in accordance with
GAAP vary by jurisdiction, however, with the primary
differences being that statutory financial statements may not
reflect deferred acquisition costs, certain net deferred tax
assets, goodwill and intangible assets, unrealized appreciation
or depreciation on debt securities and certain unauthorized
reinsurance recoverables and include contingency reserves.
The statutory net income (loss) for the Company’s principal
operating subsidiaries for 2020, 2019 and 2018 was as
follows:
Year Ended December 31,
2019
2018
2020
$ 1,665,261 $ 1,876,416 $
919,554
18,397
143,271
4,078
(1,049)
26,367
481,188
(17,423)
(1,023)
29,223
292,831
(18,467)
2,525
Statutory net income
(loss):
Bermuda
Ireland
United States
United Kingdom
Canada
Bermuda
The Company has two Bermuda based subsidiaries: Arch Re
Bermuda, a Class 4 general business insurer and Class C
long-term insurer, and Watford, a Class 4 general business
insurer. Under the Bermuda Insurance Act 1978 (the
“Insurance Act”), these subsidiaries are required to maintain
minimum statutory capital and surplus equal to the greater of
a minimum solvency margin and the enhanced capital
requirement as determined by the Bermuda Monetary
Authority (“BMA”). The enhanced capital requirement is
calculated based on
the Bermuda Solvency Capital
Requirement model, a risk-based model that takes into
account the risk characteristics of different aspects of the
company’s business. At December 31, 2020 and 2019, all
such requirements were met.
The ability of these subsidiaries to pay dividends is limited
under Bermuda law and regulations. Under the Insurance
Act, Arch Re Bermuda is restricted with respect to the
payment of dividends. Arch Re Bermuda is prohibited from
declaring or paying in any financial year dividends of more
than 25% of its total statutory capital and surplus (as shown
on its previous financial year’s statutory balance sheet) unless
it files, at least seven days before payment of such dividends,
with the BMA an affidavit stating that it will continue to
meet the required margins following the declaration of those
dividends. Accordingly, Arch Re Bermuda can pay
approximately $3.8 billion to Arch Capital during 2021
without providing an affidavit to the BMA.
Ireland
The Company has three Irish subsidiaries: Arch Re Europe,
an authorized life and non-life reinsurer, Arch Insurance
(EU), an authorized non-life insurer and Arch Underwriting
Europe, a registered insurance and reinsurance intermediary.
Irish authorized reinsurers and insurers, such as Arch Re
Europe, Arch Insurance (EU) and Irish intermediaries, such
as Arch Underwriters Europe, are also subject to the general
body of Irish laws and regulations including the provisions of
the Companies Act 2014. As part of the Company’s Brexit
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plan, Arch Insurance (EU) received approval from the
Central Bank of Ireland (“CBOI”) to expand the nature of its
business in 2019 commenced writing insurance lines in the
European Economic Area in 2020, and the Part VII Transfer
was completed at the end of December 2020. Arch Re
Europe, Arch Insurance (EU) and Arch Underwriters Europe
are subject to the supervision of the CBOI and must comply
with Irish insurance acts and regulations as well as with
directions and guidance issued by the CBOI. Arch Re Europe
and Arch Insurance (EU) are required to maintain a minimum
level of capital. At December 31, 2020 and 2019, these
requirements were met.
The amount of dividends these subsidiaries are permitted to
declare is limited to accumulated, realized profits, so far as
not previously utilized by distribution or capitalization, less
its accumulated, realized losses, so far as not previously
written off in a reduction or reorganization of capital duly
made. The solvency and capital requirements must still be
met following any distribution. Dividends or distributions, if
any, made by Arch Re Europe would result in an increase in
available capital at Arch Re Bermuda.
United States
The Company’s U.S. insurance and reinsurance subsidiaries
are subject to insurance laws and regulations in the
jurisdictions in which they operate. The ability of the
Company’s regulated insurance subsidiaries to pay dividends
or make distributions is dependent on their ability to meet
applicable regulatory standards. These regulations include
restrictions that limit the amount of dividends or other
distributions, such as loans or cash advances, available to
shareholders without prior approval of
insurance
regulatory authorities.
the
Dividends or distributions, if any, made by Arch Re U.S.
would result in an increase in available capital at Arch-U.S.,
the Company’s U.S. holding company. Arch Re U.S. can
declare a maximum of approximately $147.6 million of
dividends during 2021 subject to the approval of the
Commissioner of the Delaware Department of Insurance.
certain
ongoing
requirements
AMIC and UGRIC have each been approved as an eligible
mortgage insurer by Fannie Mae and Freddie Mac, subject to
maintaining
(“eligible
mortgage insurers”). In April 2015, the GSEs published
comprehensive, revised requirements, known as the Private
Mortgage Insurer Eligibility Requirements or “PMIERs.” As
clarified and revised by the Guidance Letters issued by the
GSEs in December 2016 and March 2017, the PMIERs apply
to the Company’s eligible mortgage insurers, but do not
apply to Arch Mortgage Guaranty Company, which is not
GSE-approved.
The amount of assets required to satisfy the revised financial
requirements of the PMIERs at any point in time will be
affected by many
including macro-economic
conditions, the size and composition of our eligible mortgage
insurers’ mortgage insurance portfolio at the point in time,
and the amount of risk ceded to reinsurers that may be
deducted in our calculation of “minimum required assets.”
factors,
regulators,
the Wisconsin Office of
The Company’s U.S. mortgage insurance subsidiaries are
subject to detailed regulation by their domiciliary and
the
primary
Commissioner of Insurance (“Wisconsin OCI”) for Arch
Mortgage Insurance Company and Arch Mortgage Guaranty
Company, the North Carolina Department of Insurance (“NC
DOI”) for United Guaranty Residential Insurance Company,
and by state insurance departments in each state in which
they are licensed. As mandated by state insurance laws,
mortgage
insurers are generally mono-line companies
restricted to writing a single type of insurance business, such
as mortgage insurance business. Each company is subject to
either Wisconsin or North Carolina statutory requirements as
to payment of dividends. Generally, both Wisconsin and
North Carolina law precludes any dividend before giving at
least 30 days’ notice to the Wisconsin OCI or NC DOI, as
applicable, and prohibits paying any dividend unless it is fair
and reasonable to do so. In addition, the state regulators and
the GSEs limit or restrict our eligible mortgage insurers’
ability to pay stockholder dividends or otherwise return
capital to shareholders. Under respective states law, our U.S.
mortgage
subsidiaries can declare a maximum of
approximately $143.1 million of ordinary dividends in 2021,
however, dividend capacity is limited by the respective
companies unassigned surplus amounts. In certain instances,
approval by the GSEs would be required for dividends or
other forms of return of capital to shareholders due to the
the minimum
requirements under PMIERs,
required assets imposed on our eligible mortgage insurers by
the GSEs. Such dividend would result in an increase in
available capital at Arch U.S. MI Holdings Inc., a subsidiary
of Arch-U.S. The ability of the Company’s U.S. mortgage
insurance subsidiaries to pay dividends is subject to prior
notifications and approval through June 30, 2021, pursuant
the GSEs’ PMIERs guidance related to COVID-19.
including
Mortgage insurance companies licensed in Wisconsin or
North Carolina are required to establish contingency loss
reserves for purposes of statutory accounting in an amount
equal to at least 50% of net earned premiums. These amounts
generally cannot be withdrawn for a period of 10 years and
are separate liabilities for statutory accounting purposes,
which affects the ability to pay dividends. However, with
prior regulatory approval, a mortgage insurance company
may make early withdrawals from the contingency reserve
when incurred losses exceed 35% of net premiums earned in
a calendar year.
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under Wisconsin and North Carolina law, as well as that of
14 other states, a mortgage insurer must maintain a minimum
amount of statutory capital relative to its risk in force in order
for the mortgage insurer to continue to write new business.
While formulations of minimum capital vary in certain
jurisdictions, the most common measure applied allows for a
maximum risk-to-capital ratio of 25 to 1. Wisconsin and
North Carolina both require a mortgage insurer to maintain a
“minimum policyholder position” calculated in accordance
with their respective regulations. Policyholders' position
consists primarily of statutory policyholders' surplus plus the
statutory contingency reserve, less ceded reinsurance. While
the statutory contingency reserve is reported as a liability on
the statutory balance sheet,
ratio
calculations, it is included as capital for purposes of statutory
capital.
risk-to-capital
for
United Kingdom
The Prudential Regulation Authority (“PRA”) and the
Financial Conduct Authority (“FCA”) regulate insurance and
reinsurance companies and the FCA regulates firms carrying
on insurance mediation activities operating in the U.K., both
under the Financial Services and Markets Act 2000. The
Company’s U.K. insurance operations are conducted through
Arch Insurance (U.K.), Lloyds syndicates: Arch Syndicate
2012 and Arch Syndicate 1955. Arch Managing Agency
Limited (“AMAL”) is the managing agent of Arch Syndicate
2012 and Arch Syndicate 1955. Arch Syndicate 2012 and
Arch Syndicate 1955 provide access to Lloyd’s extensive
distribution network and worldwide licenses. AMAL also
acts as managing agent for third party members of Arch
Syndicate 1955. All U.K. companies are also subject to a
range of statutory provisions, including the laws and
regulations of the Companies Acts 2006 (as amended) (the
“U.K. Companies Acts”).
Arch Insurance (U.K.) and AMAL must maintain a margin of
solvency at all times under the Solvency II Directive from the
European Insurance and Occupational Pensions Authority.
The regulations stipulate that insurers are required to
maintain the minimum capital requirement and solvency
capital requirement at all times. At December 31, 2020 and
2019, our subsidiaries were in compliance with these
requirements.
As corporate members of Lloyd’s, AMAL (as managing
agent of Arch Syndicate 2012 and Arch Syndicate 1955) and
each syndicate’s respective corporate members are subject to
the oversight of the Council of Lloyd’s. The capital required
to support a Syndicate’s underwriting capacity, or funds at
Lloyd’s, is assessed annually and is determined by Lloyd’s in
accordance with the capital adequacy rules established by the
PRA. The Company has provided capital to support the
underwriting of Arch Syndicate 2012 and Arch Syndicate
1955 in the form of pledged assets provided by Arch Re
Bermuda. The amount which the Company provides as funds
at Lloyd’s is not available for distribution to the Company for
the payment of dividends. Lloyd’s is supervised by the PRA
and required to implement certain rules prescribed by the
PRA under the Lloyd’s Act of 1982 regarding the operation
of the Lloyd’s market. With respect to managing agents and
corporate members, Lloyd’s prescribes certain minimum
standards relating to management and control, solvency and
requirements and monitors managing agents’
other
compliance with such standards.
Under U.K. law, all U.K. companies are restricted from
declaring a dividend to their shareholders unless they have
“profits available for distribution.” The calculation as to
whether a company has sufficient profits is based on its
accumulated realized profits minus its accumulated realized
losses. U.K. insurance regulatory laws do not prohibit the
payment of dividends, but the PRA or FCA, as applicable,
requires
insurance
intermediaries maintain certain solvency margins and may
restrict the payment of a dividend by Arch Insurance (U.K.)
and AMAL.
companies
insurance
that
and
Canada
Arch Insurance Canada and the Canadian branch of Arch Re
U.S. (“Arch Re Canada”) are subject to federal, as well as
provincial and territorial, regulation in Canada. The Office of
the Superintendent of Financial Institutions (“OSFI”) is the
federal regulatory body that, under the Insurance Companies
Act (Canada), regulates federal Canadian and non-Canadian
insurance companies operating in Canada. Arch Insurance
Canada and Arch Re Canada are subject to regulation in the
provinces and territories in which they underwrite insurance/
reinsurance, and the primary goal of insurance/reinsurance
regulation at the provincial and territorial levels is to govern
the market conduct of insurance/reinsurance companies. Arch
Insurance Canada is licensed to carry on insurance business
by OSFI and in each province and territory. Arch Re Canada
is licensed to carry-on reinsurance business by OSFI and in
the provinces of Ontario and Quebec.
Under
the Insurance Companies Act (Canada), Arch
Insurance Canada is required to maintain an adequate amount
of capital in Canada, calculated in accordance with a test
promulgated by OSFI called the Minimum Capital Test
(“MCT”), and Arch Re Canada is required to maintain an
in Canada,
adequate margin of assets over
calculated in accordance with a test promulgated by OSFI
called the Branch Adequacy of Assets Test. Dividends or
distributions, if any, made by Arch Insurance Canada would
result in an increase in available capital at Arch Insurance
Company (see “—United States” section).
liabilities
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ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26. Unaudited Condensed Quarterly Financial Information
The following table summarizes the 2020 and 2019 unaudited condensed quarterly financial information:
Year Ended December 31, 2020
Net premiums written
Net premiums earned
Net investment income
Net realized gains (losses)
Underwriting income (loss)
Net income (loss) attributable to Arch
Preferred dividends
Net income (loss) available to Arch common shareholders
Net income (loss) per common share -- basic
Net income (loss) per common share -- diluted
Year Ended December 31, 2019
Net premiums written
Net premiums earned
Net investment income
Net realized gains (losses)
Underwriting income (loss)
Net income (loss) attributable to Arch
Preferred dividends
Net income (loss) available to Arch common shareholders
Net income (loss) per common share -- basic
Net income (loss) per common share -- diluted
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
$
$
$
$
$
1,758,015 $
1,811,045
114,458
353,333
220,987
543,544
(10,403)
533,141
1.32 $
1.30 $
1,455,453 $
1,515,882
154,263
40,830
251,421
326,384
(10,403)
315,981
0.78 $
0.76 $
1,874,144 $
1,771,092
128,512
280,499
96,604
419,039
(10,403)
408,636
1.01 $
1.00 $
1,613,457 $
1,438,023
161,488
61,355
231,262
392,453
(10,403)
382,050
0.95 $
0.92 $
1,668,311 $
1,665,354
131,485
556,588
(22,539)
298,821
(10,403)
288,418
0.72 $
0.71 $
1,444,898 $
1,463,727
155,038
120,757
293,134
468,954
(10,403)
458,551
1.14 $
1.12 $
2,137,246
1,744,444
145,153
(366,960)
154,050
144,117
(10,403)
133,714
0.33
0.32
1,525,259
1,368,866
156,949
140,256
260,148
448,528
(10,403)
438,125
1.09
1.07
27. Subsequent Events
Reinsurance to Close
Coface
On February 10, 2021, the Company announced that it had
completed the share purchase agreement with Natixis to
purchase a 29.5% stake in Coface, a France-based leader in
the global trade credit insurance market. The consideration
paid was €9.95 per share, or an aggregate €453 million
including related fees. In connection with our minority stake
in Coface, the Company has four representatives on the
Coface Board of Directors.
As part of the Company’s acquisition of Barbican, on
February 18, 2021, the Company entered into an agreement
with Premia Managing Agency Limited for the Reinsurance
to Close (“RITC”) of Syndicate 1955’s 2018 underwriting
year of account
into Premia Syndicate 1884’s 2021
underwriting year of account. The RITC covers legacy
business underwritten by Syndicate 1955 on the underwriting
2018 and prior years of account and under the agreement,
approximately $380 million of net liabilities transferred to
Syndicate 1884, with an effective date of January 1, 2021.
Share Repurchases
Texas Winter Storm
From January 1 to February 24, 2021, the Company
repurchased approximately 4.6 million common shares for an
aggregate purchase price of $154.9 million. At February 24,
2021 approximately $761.6 million of repurchases were
available under the share repurchase program.
In February 2021, a winter storm struck Texas and other parts
of the southern U.S., resulting in significant insured losses. It
is too early to reasonably estimate losses for this recent event
given the significant unknowns, the early stage of the damage
assessment process and the unusual nature of the event.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the filing of this Form 10-K, our
management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation, as of
December 31, 2020, for the purposes set forth in the
applicable rules under the Securities and Exchange Act of
1934, as amended (the “Exchange Act”). Based on that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures
are effective.
We continue to enhance our operating procedures and
internal controls (including information technology initiatives
and controls over financial reporting) to effectively support
our business and our regulatory and reporting requirements.
Our management does not expect that our disclosure controls
or our internal controls will prevent all errors and all fraud. A
control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. As a result of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that
judgments in decision making can be faulty, and that
breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual
acts of some persons or by collusion of two or more people.
The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate
the degree of
because of changes
in conditions, or
ITEM 9B. OTHER INFORMATION
None.
compliance with the policies or procedures may deteriorate.
As a result of the inherent limitations in a cost-effective
control system, misstatement due to error or fraud may occur
and not be detected. Accordingly, our disclosure controls and
procedures are designed to provide reasonable, not absolute,
assurance that the disclosure controls and procedures are met.
Management’s Annual Report on Internal Control Over
Financial Reporting
internal control over
is responsible for establishing and
Our management
maintaining adequate
financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act. Our management assessed
the
effectiveness of our internal control over financial reporting
as of December 31, 2020. In making this assessment,
management used the criteria set forth by the Committee of
Sponsoring Organizations
the Treadway
(COSO) of
Commission
in Internal Control-Integrated Framework
(2013).
Based on our assessment, management determined that, as of
December 31, 2020, our internal control over financial
reporting was effective. The effectiveness of our internal
control over financial reporting as of December 31, 2020 has
been
an
audited by PricewaterhouseCoopers LLP,
independent registered public accounting firm, as stated in
their report included in Item 8.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial
reporting that occurred in connection with our evaluation
required pursuant to Rules 13a-15 and 15d-15 under the
Exchange Act during the fiscal quarter ended December 31,
2020 that have materially affected, or are reasonably likely to
materially affect, internal control over financial reporting.
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Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by
reference from the information to be included in our
definitive proxy statement (“Proxy Statement”) for our
annual meeting of shareholders to be held in 2021, which we
intend to file with the SEC pursuant to Regulation 14A no
later than 120 days after the end of the Company’s fiscal year
which ended on December 31, 2020. Copies of our code of
ethics applicable to our chief executive officer, chief
financial officer and principal accounting officer or controller
are available free of charge to investors upon written request
addressed to the attention of Arch Capital’s corporate
secretary, Waterloo House, 100 Pitts Bay Road, Pembroke
HM 08, Bermuda. In addition, our code of ethics and certain
other basic corporate documents, including the charters of
our
and
nominating committee are posted on our website.
compensation
committee,
committee
audit
If any substantive amendments are made to the code of ethics
or if there is a grant of a waiver, including any implicit
waiver, we will disclose the nature of such amendment or
waiver on our website or in a report on Form 8-K, to the
extent required by applicable law or the rules and regulations
of any exchange applicable to us. Our website address is
intended to be an inactive, textual reference only and none of
the material on our website is incorporated by reference into
this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference from the information to be included in the Proxy
Statement which we intend to file pursuant to Regulation
14A with the SEC no later than 120 days after the end of the
Company’s fiscal year ended on December 31, 2020, which
Proxy Statement is incorporated by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Other than the information set forth below, the information required by this item is incorporated by reference from the
information to be included in the Proxy Statement which we intend to file pursuant to Regulation 14A with the SEC no later
than 120 days after the end of the Company’s fiscal year ended on December 31, 2020, which Proxy Statement is incorporated
by reference.
The following information is as of December 31, 2020:
Column A
Column B
Column C
Number of Securities to
be Issued Upon Exercise
of Outstanding Stock
Options(1), Warrants
and Rights
Weighted-Average
Exercise Price of
Outstanding
Stock Options(1),
Warrants and Rights ($)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column A)
18,993,117
—
18,993,117
$
$
23.32
—
23.32
20,610,537
—
20,610,537 (2)
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
________________________
(1)
(2)
Includes all vested and unvested stock options outstanding of 17,839,333 and restricted stock and performance units outstanding of 1,153,784. The
weighted average exercise price does not take into account restricted stock units. In addition, the weighted average remaining contractual life of the
Company's outstanding exercisable stock options and SARs at December 31, 2020 was 4.7 years.
Includes 2,267,676 common shares remaining available for future issuance under our Employee Share Purchase Plan and 18,342,861 common shares
remaining available for future issuance under our equity compensation plans. Shares available for future issuance under our equity compensation plans
may be issued in the form of stock options, SARs, restricted shares, restricted share units payable in common shares or cash, share awards in lieu of cash
awards, dividend equivalents, performance shares and performance units and other share-based awards. In addition, 5,381,100 common shares, or 26.1%
of the 20,610,537 common shares remaining available for future issuance may be issued in connection with full value awards (i.e., awards other than
stock options or SARs).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated by reference from the information to be included in the Proxy Statement
which we intend to file pursuant to Regulation 14A with the SEC no later than 120 days after the end of the Company’s fiscal
year ended on December 31, 2020, which Proxy Statement is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the information to be included in our Proxy Statement
which we intend to file pursuant to Regulation 14A with the SEC no later than 120 days after the end of the Company’s fiscal
year ended on December 31, 2020, which Proxy Statement is incorporated by reference.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1.
Financial Statements
Included in Part II – see Item 8 of this report.
2.
Financial Statement Schedules
II. Condensed Financial Information of Registrant
As of December 31, 2020 and 2019, and for the years ended December 31, 2020, 2019 and 2018
III. Supplementary Insurance Information
For the years ended December 31, 2020, 2019 and 2018
IV. Reinsurance
For the years ended December 31, 2020, 2019 and 2018
VI. Supplementary Information for Property and Casualty Insurance Underwriters
For the years ended December 31, 2020, 2019 and 2018
Page No.
169
172
173
174
Schedules other than those listed above are omitted for the reason that they are not applicable or the information is provided in
Item 8 of this report.
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Table of Contents
3. Exhibits
Exhibit
Number
1.1
2.1
2.2
3.1
3.2
3.3
4.1.1
4.1.2
4.2.1
4.2.2
4.2.3
4.3.1
4.3.2
4.3.3
4.4.1
4.4.2
4.4.3
4.5.1
4.5.2
4.6.1
4.6.2
4.7.1
4.7.2
4.8
10.2.1
10.2.2
10.3.1
10.3.2
10.3.3
10.3.4
10.3.5
10.4.1
Exhibit Description
Purchase Agreement, dated as of June 23, 2020, by and among Arch Capital Group
Ltd., and Wells Fargo Securities, LLC, BofA Securities, Inc., Credit Suisse
Securities (USA) LLC, J.P. Morgan Securities LLC, and Lloyds Securities Inc., as
representatives of the underwriters named therein.
Agreement and Plan of Merger among Arch Capital Group Ltd., Greysbridge Ltd.
and Watford Holdings Ltd., dated October 9, 2020.
Amendment No. 1 to Agreement and Plan of Merger among Arch Capital Group
Ltd., Greysbridge Ltd., and Watford Holdings Ltd., dated November 2, 2020.
Memorandum of Association of ACGL
Bye-Laws of ACGL
ACGL Certificate of Deposit of Memorandum of Increase of Share Capital
Certificate of Designations of Series E Non-Cumulative Preferred Shares
Certificate of Designations of Series F Non-Cumulative Preferred Shares
Form
8-K
8-K
8-K
S-4
10-Q
10-K
8-K
8-K
Specimen Common Share Certificate
10-K405
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
Specimen Series E Non-Cumulative Preferred Share Certificate
Specimen Series F Non-Cumulative Preferred Share Certificate
Indenture, dated as of May 4, 2004, between ACGL, as issuer, and The Bank of
New York Mellon, as successor trustee to JPMorgan Chase Bank, N.A. (formerly
JPMorgan Chase Bank) (“JPMCB”), as trustee
First Supplemental Indenture, dated as of May 4, 2004, between ACGL, as issuer,
and JPMCB, as trustee
Second Supplemental Indenture, dated as of June 30, 2020, by and between Arch
Capital Group Ltd. and The Bank of New York Mellon (including the form of
Global Notes for the Notes).
Indenture, dated as of December 13, 2013, among Arch Capital Group (U.S.) Inc.
(“Arch U.S.”), as issuer, ACGL, as guarantor, and The Bank of New York Mellon
(“BNYM”), as trustee
First Supplemental Indenture, dated as of December 13, 2013, among Arch U.S., as
issuer, ACGL, as guarantor, and BNYM, as trustee
Second Supplemental Indenture, dated as of May 10, 2018, among Arch Capital
Finance LLC, as issuer, ACGL, as guarantor, and BNYM, as trustee
Deposit Agreement, dated September 29, 2016, between ACGL, as issuer, and
American Stock Transfer & Trust Company, LLC (“AST”), as depositary, registrar
and transfer agent and as dividend disbursing agent and redemption agent, and the
holders from time to time of the depositary receipts
Deposit Agreement, dated August 17, 2017, between ACGL, as issuer, and AST,
as depositary, registrar and transfer agent and as dividend disbursing agent and
redemption agent, and the holders from time to time of the depositary receipts
Form of Depositary Receipt, dated September 29, 2016
Form of Depositary Receipt, dated August 17, 2017
Indenture, dated as of December 8, 2016, among Arch Capital Finance LLC, as
issuer, ACGL, as guarantor, and BNYM, as trustee
First Supplemental Indenture, dated as of December 8, 2016, among Arch Capital
Finance LLC, as issuer, ACGL, as guarantor, and BNYM, as trustee
Description of Securities
Third Amended and Restated ACGL Incentive Compensation Plan†
First Amendment to Third Amended and Restated ACGL Incentive Compensation
Plan†
ACGL 2007 Long Term Incentive and Share Award Plan†
ACGL 2012 Long Term Incentive and Share Award Plan†
ACGL 2015 Long Term Incentive and Share Award Plan†
ACGL 2018 Long Term Incentive and Share Award Plan†
ACGL Amended and Restated 2007 Employee Share Purchase Plan†
Form of Restricted Share Agreement, dated as of May 13, 2015, between ACGL
and each of, Marc Grandisson, W. Preston Hutchings, Nicolas Papadopoulo,
Maamoun Rajeh and Louis T. Petrillo†
Incorporated by Reference
Original
Number
1.1
Date Filed
June 24, 2020
Filed
Herewith
2.1
2.1
3.1
3
3.3
4.1
4.1
4.1
4.2
4.2
4.1
October 14, 2020
November 2, 2020
September 8, 2000
August 5, 2016
February 28, 2011
September 29, 2016
August 17, 2017
April 2, 2001
September 29, 2016
August 17, 2017
June 30, 2020
99.3
May 7, 2004
4.2
4.1
4.2
4.1
4.3
4.3
4.4
4.4
4.1
4.2
June 30, 2020
December 13, 2013
December 13, 2013
May 15, 2018
September 29, 2016
August 17, 2017
September 29, 2016
August 17, 2017
December 9, 2016
December 9, 2016
February 28, 2020
August 5, 2016
May 5, 2017
April 3, 2007
March 27, 2012
March 26, 2015
March 28, 2018
March 23, 2016
10-K
10-Q
10-Q
4.7
10.7
10.1
DEF 14A
DEF 14A
DEF 14A
DEF 14A
DEF 14A
10-Q
10.2
August 7, 2015
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Table of Contents
10.4.2
10.4.3
10.4.4
10.4.5
10.4.6
10.4.7
10.5
10.6.1
10.6.2
10.6.3
10.6.4
10.6.5
10.6.6
10.6.7
10.7.1
10.7.2
10.7.3
10.7.4
10.7.5
10.7.6
10.7.7
10.7.8
10.7.9
10.7.10
10.7.11
10.7.12
10.7.13
Form of Restricted Share Agreement, dated as of May 13, 2016, between ACGL
and each of Marc Grandisson, W. Preston Hutchings, Nicolas Papadopoulo,
Maamoun Rajeh and Louis T. Petrillo†
Form of Restricted Share Agreement, dated as of May 4, 2017, between ACGL and
each of the Non-Employee Directors of ACGL†
Form of Restricted Share Agreement, dated as of May 8, 2017, between ACGL and
each of Marc Grandisson, W. Preston Hutchings, Nicolas Papadopoulo, Maamoun
Rajeh and Louis T. Petrillo†
Form of Restricted Share Agreement, dated as of September 19, 2017, between
ACGL and each of Nicolas Papadopoulo and Maamoun Rajeh†
Form of Restricted Share Agreement for Named Executive Officers and certain
Executive Officers of ACGL and subsidiaries†
Form of Restricted Share Agreement between ACGL and each of the Non-
Employee Directors of ACGL†
Form of Performance Restricted Share Agreement for Named Executive Officers
and certain Executive Officers of ACGL and subsidiaries†
Form of Non-Qualified Stock Option Agreement, dated as of May 13, 2015,
between ACGL and each of Marc Grandisson and W. Preston Hutchings†
Form of Non-Qualified Stock Option Agreement, dated as of May 13, 2016,
between ACGL and each of Marc Grandisson, W. Preston Hutchings, Nicolas
Papadopoulo, Maamoun Rajeh and Louis T. Petrillo†
Form of Non-Qualified Stock Option Agreement, dated as of May 8, 2017,
between ACGL and each of Marc Grandisson, W. Preston Hutchings, Nicolas
Papadopoulo, Maamoun Rajeh and Louis T. Petrillo†
10-Q
10.2
August 5, 2016
10-Q
10-Q
10.3
10.4
August 4, 2017
August 4, 2017
10-K
10.4.13
February 28, 2018
10-Q
10-Q
10-Q
10-Q
10.3
10.6
10.5
10.3
August 8, 2018
August 8, 2018
August 8, 2018
August 7, 2015
10-Q
10.3
August 5, 2016
10-Q
10.5
August 4, 2017
Non-Qualified Stock Option Agreement, dated as of September 19, 2017, between
ACGL and Maamoun Rajeh†
10-K
10.5.6
February 28, 2018
Non-Qualified Stock Option Agreement, dated as of September 19, 2017, between
ACGL and Nicolas Papadopoulo†
10-K
10.5.7
February 28, 2018
Form of Non-Qualified Stock Option Agreement for Named Executive Officers
and certain Executive Officers of ACGL and subsidiaries†
Non-Qualified Stock Option Agreement, dated as of April 9, 2018, between ACGL
and Marc Grandisson†
Form of Share Appreciation Right Agreement, dated as of May 9, 2008, between
ACGL and each of, John D. Vollaro, Marc Grandisson, W. Preston Hutchings and
Louis T. Petrillo†
Form of Share Appreciation Right Agreement, dated as of May 6, 2009, between
ACGL and each of Marc Grandisson, W. Preston Hutchings and John D. Vollaro†
Form of Share Appreciation Right Agreement, dated as of May 5, 2010, between
ACGL and each of Marc Grandisson, W. Preston Hutchings and Louis T. Petrillo†
Share Appreciation Right Agreement, dated as of May 6, 2011, between ACGL
and Marc Grandisson†
Share Appreciation Right Agreement, dated as of May 6, 2011, between ACGL
and W. Preston Hutchings†
Share Appreciation Right Agreement, dated as of May 6, 2011, between ACGL
and Louis T. Petrillo†
Share Appreciation Right Agreement, dated as of May 6, 2011, between ACGL
and Maamoun Rajeh†
Share Appreciation Right Agreement, dated as of May 9, 2012 between ACGL and
Maamoun Rajeh†
Form of Share Appreciation Right Agreement, dated as of May 9, 2012, between
ACGL and each of Marc Grandisson, W. Preston Hutchings and Louis T. Petrillo†
Share Appreciation Right Agreement, dated as of July 1, 2012 between ACGL and
Maamoun Rajeh†
Form of Share Appreciation Right Agreement, dated as of November 12, 2012,
between ACGL and each of Marc Grandisson, W. Preston Hutchings, Maamoun
Rajeh and Louis T. Petrillo†
Form of Share Appreciation Right Agreement, dated as of May 9, 2013, between
ACGL and each of Marc Grandisson, W. Preston Hutchings, Maamoun Rajeh and
Louis T. Petrillo†
Form of Share Appreciation Right Agreement, dated as of May 13, 2014, between
ACGL and each of Marc Grandisson, W. Preston Hutchings, Maamoun Rajeh and
Louis T. Petrillo†
10-Q
10-Q
10-Q
10-K
10-Q
10-Q
10-Q
10.4
10.5
10.1
August 8, 2018
May 9, 2018
November 10, 2008
10.12.4
February 26, 2010
10.4
10.7
10.9
November 8, 2010
November 8, 2011
November 8, 2011
10-Q
10.12
November 8, 2011
10-Q
10-Q
10-Q
10-Q
10-Q
10.1
10.2
10.3
10.4
10.3
November 3, 2017
November 3, 2017
November 9, 2012
November 3, 2017
August 9, 2013
10-Q
10.2
November 8, 2013
10-Q
10.3
August 8, 2014
10.7.14
Share Appreciation Right Agreement, dated as of July 1, 2014, between ACGL and
Maamoun Rajeh†
10-Q
10.15
November 3, 2017
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Table of Contents
10.7.15
Share Appreciation Right Agreement, dated as of November 6, 2014, between
ACGL and Marc Grandisson†
Employment Agreement, dated as of October 27, 2008, between ACGL and John
D. Vollaro†
Amendment to Employment Agreement, dated February 27, 2015, between ACGL
and John D. Vollaro†
Second Amendment to Employment Agreement, dated as of January 1, 2018,
between ACGL and John D. Vollaro†
Employment Agreement, dated as of February 1, 2018, between ACGL and W.
Preston Hutchings†
Amendment to Employment Agreement, dated November 2, 2020, between ACGL
and W. Preston Hutchings†
Employment Agreement, dated as of September 19, 2017 between ACGL and
Maamoun Rajeh†
10.2
10.1
10.1
10.1
10.2
May 8, 2015
October 28, 2008
May 8, 2015
May 9, 2018
August 8, 2018
10-Q
8-K
10-Q
10-Q
10-Q
10-K
10-Q
10.26
November 3, 2017
Employment Agreement, dated as of September 19, 2017 between ACGL and
Nicholas Papadopoulo†
10-Q
10.27
November 3, 2017
Employment Agreement, dated as of May 25, 2018, between ACGL and François
Morin†
8-K/A
10.1
July 26, 2018
Employment Agreement, dated as of April 9, 2018, between ACGL and Marc
Grandisson†
8-K/A
10.1
April 11, 2018
Employment Agreement, dated as of November 13, 2018, between Arch Capital
Services Inc. and Louis Petrillo†
10-K
10.16
February 28, 2019
Employment Agreement dated as of October 1,2019 between Arch Capital Group
Ltd. and David Gansberg †
Arch U.S. Executive Supplemental Non-Qualified Savings and Retirement Plan†
Third Amended and Restated Credit Agreement, dated as of December 17,2019,
by and among ACGL, certain of its subsidiaries as subsidiary borrowers, Bank of
America, N.A., as Administrative Agent, Fronting Bank and L/C Administrator,
and the lenders party thereto
10-K
10-K
8-K
10.16
February 28, 2020
10.24
10.1
March 2, 2009
December 18, 2019
10.8.1
10.8.2
10.8.3
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Voting and Support Agreement among Watford Holdings Ltd., Arch Reinsurance
Ltd. and Gulf Reinsurance Ltd. dated October 9, 2020.
8-K
10.1
October 14, 2020
21
23
24
31.1
31.2
32.1
32.2
101
104
Subsidiaries of Registrant
Consent of PricewaterhouseCoopers LLP
Power of Attorney
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
The following financial information from ACGL’s Annual Report on Form 10-K for
the year ended December 31, 2020 formatted in Inline XBRL: (i) Consolidated
Balance Sheets at December 31, 2020 and 2019; (ii) Consolidated Statements of
Income for the years ended December 31, 2020, 2019 and 2018; (iii) Consolidated
Statements of Comprehensive Income for the years ended December 31, 2020, 2019
and 2018; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the
years ended December 31, 2020, 2019 and 2018; (v) Consolidated Statements of Cash
Flows for the years ended December 31, 2020, 2019 and 2018; and (vi) Notes to
Consolidated Financial Statements
Cove Page Interactive Data File (embedded within the Inline XBRL document)
† Management contract or compensatory plan or arrangement.
X
X
X
X
X
X
X
X
X
ARCH CAPITAL
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Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ARCH CAPITAL GROUP LTD.
(Registrant)
By:
/s/ Marc Grandisson
Name: Marc Grandisson
Title:
Chief Executive Officer (Principal Executive Officer)
February 26, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Marc Grandisson
Marc Grandisson
/s/ François Morin
François Morin
Chief Executive Officer (Principal Executive Officer)
February 26, 2021
Executive Vice President and Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) and Treasurer
February 26, 2021
*
John M. Pasquesi
Chairman of the Board
*
John L. Bunce, Jr.
Director
*
Eric W. Doppstadt
Director
*
Laurie S. Goodman
Director
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
ARCH CAPITAL
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Table of Contents
Name
*
Title
Date
Moira Kilcoyne
Director
February 26, 2021
*
Louis J. Paglia
Director
*
Brian S. Posner
Director
*
Eugene S. Sunshine
Director
*
John D. Vollaro
Director
*
Thomas R. Watjen
Director
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
___________________
*
By François Morin, as attorney-in-fact and agent, pursuant to a power of attorney, a copy of which has been filed with the
Securities and Exchange Commission as Exhibit 24 to this report.
/s/ François Morin
Name:
François Morin
Attorney-in-Fact
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Table of Contents
SCHEDULE II
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(U.S. dollars in thousands)
Balance Sheet
(Parent Company Only)
Assets
Total investments
Cash
Investments in subsidiaries
Due from subsidiaries and affiliates
Other assets
Total assets
Liabilities
Senior notes
Due to subsidiaries and affiliates
Other liabilities
Total liabilities
Shareholders' Equity
Non-cumulative preferred shares
Common shares ($0.0011 par, shares issued: 579,000,841 and 574,617,195)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of deferred income tax
Common shares held in treasury, at cost (shares: 172,280,199 and 168,997,994)
Total shareholders' equity
Total liabilities and shareholders' equity
December 31,
2020
2019
$
172 $
18,932
42
18,113
14,377,529
11,786,861
—
18,390
17
20,461
$
14,415,023 $
11,825,494
$
1,285,867 $
297,254
—
23,270
1,309,137
—
30,869
328,123
780,000
643
1,977,794
12,362,463
488,895
780,000
638
1,889,683
11,021,006
212,091
(2,503,909)
(2,406,047)
$
$
13,105,886 $
11,497,371
14,415,023 $
11,825,494
The financial information for the parent company (Arch Capital Group Ltd.) should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.
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Table of Contents
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(U.S. dollars in thousands)
Statement of Income
(Parent Company Only)
SCHEDULE II
(continued)
Revenues
Net investment income
Net realized gains (losses)
Other income (loss)
Total revenues
Expenses
Corporate expenses
Interest expense
Net foreign exchange (gains) losses
Total expenses
Income (loss) before income taxes
Income tax (expense) benefit
Income (loss) before equity in net income of subsidiaries
Equity in net income of subsidiaries
Net income available to Arch
Preferred dividends
Loss on redemption of preferred shares
Year Ended
December 31,
2020
2019
2018
$
53 $
212 $
(2,110)
(437)
(2,494)
65,566
40,445
3
106,014
—
(762)
(550)
62,701
22,154
1
84,856
49
29
1,918
1,996
64,279
22,147
30
86,456
(108,508)
(85,406)
(84,460)
—
—
(108,508)
(85,406)
1,514,029
1,405,521
1,721,725
1,636,319
(41,612)
(41,612)
—
—
—
(84,460)
842,431
757,971
(41,645)
(2,710)
Net income available to Arch common shareholders
$
1,363,909 $
1,594,707 $
713,616
The financial information for the parent company (Arch Capital Group Ltd.) should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.
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Table of Contents
SCHEDULE II
(continued)
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(U.S. dollars in thousands)
Statement of Cash Flows
(Parent Company Only)
Operating Activities:
Net Cash Provided By Operating Activities
Investing Activities:
Net (purchases) sales of short-term investments
Capital contributed to subsidiaries
Purchase of fixed assets
Other
Net Cash Used For Investing Activities
Financing Activities:
Purchases of common shares under share repurchase program
Proceeds from common shares issued, net
Redemption of preferred shares
Proceeds from borrowings
Preferred dividends paid
Net Cash Used For Financing Activities
Increase (decrease) in cash and restricted cash
Cash and restricted cash, beginning of year
Cash and restricted cash, end of period
Year Ended
December 31,
2020
2019
2018
$
124,751 $
52,487 $
324,319
(130)
(988,975)
(15)
—
(989,120)
(83,472)
1,876
—
988,393
(41,612)
865,185
816
18,144
61
(2,121)
(162)
—
(2,222)
(2,871)
6,203
—
—
(41,612)
(38,280)
11,985
6,159
$
18,960 $
18,144 $
96,476
—
(110)
(4)
96,362
(282,762)
(7,608)
(92,555)
—
(41,645)
(424,570)
(3,889)
10,048
6,159
The financial information for the parent company (Arch Capital Group Ltd.) should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.
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Table of Contents
SCHEDULE III
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(U.S. dollars in thousands)
Deferred
Acquisition
Costs
Reserves for
Losses and
Loss
Adjustment
Expenses
Unearned
Premiums
Net
Premiums
Earned
Net
Investment
Income (1)
Net Losses
and Loss
Adjustment
Expenses
Incurred
Amortization
of Deferred
Acquisition
Costs
Other
Operating
Expenses (2)
Net
Premiums
Written
$254,833
278,422
203,748
53,705
$790,708
$8,989,930
5,027,742
976,673
1,519,583
$16,513,928
$2,334,225
1,356,983
740,043
407,714
$4,838,965
$2,871,420
2,162,229
1,397,935
560,351
$6,991,935
NM $2,092,453
1,628,320
NM
528,344
NM
440,482
NM
NM $4,689,599
$418,483
354,048
134,240
98,071
$1,004,842
$489,153
168,011
162,202
55,810
$875,176
$3,162,907
2,457,370
1,279,850
537,589
$7,437,716
$188,684
197,856
182,816
64,044
$633,400
$7,900,328
4,270,013
457,872
1,263,629
$13,891,842
$1,991,496
971,776
937,370
438,907
$4,339,549
$2,397,080
1,466,389
1,366,340
556,689
$5,786,498
$152,360
166,276
170,080
80,858
$569,574
$7,093,018
3,215,909
511,610
1,032,760
$11,853,297
$1,549,183
710,774
1,103,565
390,114
$3,753,636
$2,205,661
1,261,216
1,186,236
578,862
$5,231,975
NM $1,615,475
1,011,329
NM
53,513
NM
NM
453,135
NM $3,133,452
NM $1,520,680
846,882
NM
81,289
NM
NM
441,255
NM $2,890,106
$361,614
239,032
134,319
105,980
$840,945
$349,702
211,280
118,595
125,558
$805,135
$454,770
141,484
153,092
51,651
$800,997
$2,641,726
1,602,723
1,261,756
532,862
$6,039,067
$364,138
133,350
142,432
37,889
$677,809
$2,212,125
1,372,572
1,157,875
604,175
$5,346,747
December 31, 2020
Insurance
Reinsurance
Mortgage
Other
Total
December 31, 2019
Insurance
Reinsurance
Mortgage
Other
Total
December 31, 2018
Insurance
Reinsurance
Mortgage
Other
Total
(1)
(2)
The Company does not manage its assets by segment and, accordingly, net investment income is not allocated to each underwriting segment. See note 4,
“Segment Information,” to our consolidated financial statements in Item 8 for information related to the ‘other’ segment.
Certain other operating expenses relate to the Company’s corporate segment (non-underwriting). Such amounts are not reflected in the table above. See
note 4, “Segment Information,” to our consolidated financial statements in Item 8 for information related to the corporate segment.
ARCH CAPITAL
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Table of Contents
Year Ended December 31, 2020
Premiums Written:
Insurance
Reinsurance
Mortgage
Other
Total
Year Ended December 31, 2019
Premiums Written:
Insurance
Reinsurance
Mortgage
Other
Total
Year Ended December 31, 2018
Premiums Written:
Insurance
Reinsurance
Mortgage
Other
Total
ARCH CAPITAL GROUP LTD. AND SUBSIDIARIES
REINSURANCE
(U.S. dollars in thousands)
SCHEDULE IV
Gross Amount
Ceded to Other
Companies (1)
Assumed From
Other Companies
(1)
Net
Amount
Percentage of
Amount
Assumed to Net
$
$
$
$
$
$
4,659,416 $
305,435
1,192,316
396,743
6,553,910 $
(1,525,655) $
(1,014,716)
(194,149)
(190,957)
(2,650,352) $
29,146 $
3,166,651
281,683
331,803
3,534,158 $
3,879,752 $
238,229
1,224,373
339,169
5,681,523 $
(1,266,267) $
(720,500)
(204,509)
(222,019)
(2,099,893) $
28,241 $
2,084,994
241,892
415,712
2,457,437 $
3,232,234 $
213,809
1,139,099
253,760
4,838,902 $
(1,050,207) $
(539,950)
(202,833)
(130,840)
(1,614,257) $
30,098 $
1,698,713
221,609
481,255
2,122,102 $
3,162,907
2,457,370
1,279,850
537,589
7,437,716
2,641,726
1,602,723
1,261,756
532,862
6,039,067
2,212,125
1,372,572
1,157,875
604,175
5,346,747
0.9 %
128.9 %
22.0 %
61.7 %
47.5 %
1.1 %
130.1 %
19.2 %
78.0 %
40.7 %
1.4 %
123.8 %
19.1 %
79.7 %
39.7 %
(1) Certain amounts included in the gross premiums written of each segment are related to intersegment transactions and are included in the gross premiums
written of each segment. Accordingly, the sum of gross premiums written for each segment does not agree to the total gross premiums written as shown
in the table above due to the elimination of intersegment transactions in the total.
ARCH CAPITAL
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2020 FORM 10-K
Arch Capital Group Ltd.
Directors
John M. Pasquesi
Chairman
Managing Member of Otter Capital LLC
3,4,5,6
2,3,4,5
John L. Bunce, Jr.
Managing Director and Founder of Greyhawk Capital
Management, LLC and Managing Director and Founder
of Steel Box, LLC
2,4,5
Eric W. Doppstadt
Vice President and Chief Investment Officer
of the Ford Foundation
1,5,6
Laurie S. Goodman
Vice President at the Urban Institute and Founder
and Co-Director of its Housing Finance Policy Center
4,5,6
Moira Kilcoyne
Former Managing Director, Co-Chief Information Officer
of Morgan Stanley
2,5,6
Louis J. Paglia
Founder of Oakstone Capital LLC and Former Executive
Vice President of UIL Holdings Corporation
Brian S. Posner
President of Point Rider Group LLC
1,5,6
Officers
Jennifer Centrone
Chief Human Resources Officer
David E. Gansberg
Chief Executive Officer, Mortgage Group
3
Marc Grandisson
Chief Executive Officer
Director
Chris Hovey
Chief Operations Officer
W. Preston Hutchings
Chief Investment Officer
François Morin
Chief Financial Officer and Treasurer
Nicolas Papadopoulo
President and Chief Underwriting Officer
Chief Executive Officer, Insurance Group
Louis T. Petrillo
General Counsel
Maamoun Rajeh
Chief Executive Officer, Reinsurance Group
Eugene S. Sunshine
Former Senior Vice President for Business and Finance
at Northwestern University
1,2,5
Jay Rajendra
Chief Strategy and Innovation Officer
4,6
John D. Vollaro
Senior Advisor
Former Executive Vice President, Chief Financial Officer
and Treasurer
1,4,6
Thomas R. Watjen
Former President and Chief Executive Officer
of Unum Group
1 Audit Committee
2 Compensation Committee
3 Executive Committee
4 Finance, Investment and Risk Committee
5 Nominating and Governance Committee
6 Underwriting Oversight Committee
Shareholder Information
Corporate Address
Waterloo House, Ground Floor
100 Pitts Bay Road
Pembroke HM 08, Bermuda
T: 441 278 9250
F: 441 278 9255
Market Information
The common shares of Arch Capital Group Ltd. are
listed on the NASDAQ Global Select Market under the
symbol ACGL.
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
Shareholder Inquiries
François Morin
Chief Financial Officer and Treasurer
T: 441 278 9250
F: 441 278 9255
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Printed on 100% recyclable paper
manufactured from 30% recycled fibers.
©2021 Arch Capital Group Ltd. All Rights Reserved. 00365-0321
Arch Capital Group Ltd.
2020 Annual Report